UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____ to _____
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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)
(Registrants' telephone number, including area code): (580) 436-1234
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No [ ]
The number of shares outstanding of the registrant's common stock as of
April 25, 2003 was 17,838,776.
PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended March 31, 2003
CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
a) Consolidated Balance Sheets
as of March 31, 2003 (Unaudited) and
December 31, 2002
b) Consolidated Statements of Income
(Unaudited) for the three months ended
March 31, 2003 and 2002
c) Consolidated Statements of Comprehensive Income
(Unaudited) for the three months
March 31, 2003 and 2002
d) Consolidated Statements of Cash Flows
(Unaudited) for the three months ended
March 31, 2003 and 2002
e) Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
ITEM 1. FINANCIAL STATEMENTS OF REGISTRANT
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
March 31, December 31,
2003 2002
------------ ------------
Current assets: (Unaudited)
Cash and cash equivalents........................................................ $ 17,067 $ 20,858
Available-for-sale investments, at fair value.................................... 4,479 3,970
Membership income receivable..................................................... 5,300 5,247
Inventories...................................................................... 1,067 1,212
Deferred member and associate service costs...................................... 14,405 13,639
Deferred income taxes............................................................ 4,479 4,603
Other current assets............................................................. 1,000 275
------------ ------------
Total current assets......................................................... 47,797 49,804
Available-for-sale investments, at fair value...................................... 11,302 11,560
Investments pledged................................................................ 4,200 4,160
Property and equipment, net........................................................ 32,121 25,593
Deferred member and associate service costs........................................ 2,909 2,991
Other assets....................................................................... 3,336 2,728
------------ ------------
Total assets............................................................... $ 101,665 $ 96,836
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.............................................................. $ 8,653 $ 8,610
Deferred revenue and fees........................................................ 23,276 22,612
Current portion of capital leases payable........................................ 808 14
Current portion of notes payable................................................. 1,787 2,412
Income taxes payable............................................................. 5,896 -
Accounts payable and accrued expenses............................................ 15,252 13,498
------------ ------------
Total current liabilities...................................................... 55,672 47,146
Capital leases payable........................................................... 1,696 912
Notes payable.................................................................... 11,446 8,221
Deferred revenue and fees........................................................ 4,144 4,266
Deferred income taxes ........................................................... 1,410 1,319
------------ ------------
Total liabilities............................................................ 74,368 61,864
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 22,691 and
23,688 issued at March 31, 2003 and December 31, 2002, respectively............ 227 237
Capital in excess of par value................................................... 23,364 43,219
Retained earnings................................................................ 102,288 90,254
Accumulated other comprehensive income........................................... 446 290
Treasury stock, at cost; 4,852 shares held at
March 31, 2003 and December 31, 2002........................................... (99,028) (99,028)
------------ ------------
Total stockholders' equity................................................... 27,297 34,972
------------ ------------
Total liabilities and stockholders' equity................................. $ 101,665 $ 96,836
------------ ------------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in 000's, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
Revenues:
Membership fees................................................................ $ 81,547 $ 71,894
Associate services............................................................. 7,537 9,019
Other.......................................................................... 1,236 1,118
----------- -----------
90,320 82,031
----------- -----------
Costs and expenses:
Membership benefits............................................................ 26,725 24,312
Commissions.................................................................... 28,178 27,808
Associate services and direct marketing........................................ 7,059 7,568
General and administrative..................................................... 7,993 7,802
Other, net..................................................................... 1,993 999
----------- -----------
71,948 68,489
----------- -----------
Income before income taxes....................................................... 18,372 13,542
Provision for income taxes....................................................... 6,338 4,672
----------- -----------
Net income....................................................................... $ 12,034 $ 8,870
----------- -----------
Basic earnings per common share.................................................. $ .67 $ .44
----------- -----------
Diluted earnings per common share................................................ $ .67 $ .43
----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended March
31,
2003 2002
----------- -----------
Net income....................................................................... $ 12,034 $ 8,870
----------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment........................................ 68 42
----------- -----------
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during period...................... 88 (334)
Less: reclassification adjustment for realized gains included in net income - (33)
----------- -----------
88 (367)
----------- -----------
Other comprehensive income, net of income taxes of $47 and ($198)................ 156 (325)
----------- -----------
Comprehensive income............................................................. $ 12,190 $ 8,545
----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 12,034 $ 8,870
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for deferred income taxes............................................ 167 189
Depreciation and amortization.................................................. 1,693 1,197
Tax benefit on exercise of stock options....................................... - 164
(Increase) decrease in Membership income receivable............................ (53) 172
Decrease (increase) decrease in inventories.................................... 145 (87)
Increase in deferred member and associate service costs........................ (684) (1,049)
Increase in other assets....................................................... (1,333) (262)
Increase in accrued Membership benefits........................................ 43 143
Increase in deferred revenue and fees.......................................... 542 1,502
Increase in income taxes payable............................................... 5,896 3,232
Increase in accounts payable and accrued expenses.............................. 1,822 3,992
----------- -----------
Net cash provided by operating activities.................................... 20,272 18,063
----------- -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (5,846) (2,704)
Purchases of investments - available for sale.................................. (155) (5,867)
Maturities and sales of investments - available for sale....................... - 5,067
----------- -----------
Net cash used in investing activities.................................... (6,001) (3,504)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common stock options................................. 55 983
Decrease in capital lease obligations.......................................... (797) -
Proceeds from issuance of debt................................................. 3,600 -
Repayments of debt............................................................. (1,000) -
Purchases of treasury stock.................................................... (19,920) (20,355)
----------- -----------
Net cash used in financing activities ................................... (18,062) (19,372)
----------- -----------
Net decrease in cash and cash equivalents........................................ (3,791) (4,813)
Cash and cash equivalents at beginning of period................................. 20,858 14,290
----------- -----------
Cash and cash equivalents at end of period....................................... $ 17,067 $ 9,477
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 106 $ -
----------- -----------
Income taxes paid.............................................................. $ - $ 1,087
----------- -----------
The accompanying notes are an integral part of these financial statements.
PRE-PAID LEGAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Except for per share amounts, dollar amounts in tables are in
thousands unless otherwise indicated)
(Unaudited)
Note 1 - Basis Of Presentation
The accompanying consolidated financial statements and notes thereto have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been omitted. The
accompanying consolidated financial statements and notes thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's 2002 Annual Report on Form 10-K.
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited financial
statements as of March 31, 2003, and for the three months ended March 31, 2003
and 2002, reflect adjustments (which were normal and recurring) which, in the
opinion of management, are necessary for a fair statement of the financial
position and results of operations of the interim periods presented. Results for
the three months ended March 31, 2003 are not necessarily indicative of results
expected for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Stock-Based Compensation
At March 31, 2003, the Company had a stock-based employee compensation
plan. The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended
March 31,
---------------------
2003 2002
--------- ---------
Net income, as reported................................................... $ 12,034 $ 8,870
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects........ (296) (701)
--------- ---------
Pro forma net income...................................................... $ 11,738 $ 8,169
--------- ---------
Earnings per share:
Basic - as reported................................................... $ .67 $ .44
Basic - pro forma..................................................... $ .65 $ .40
Diluted - as reported................................................. $ .67 $ .43
Diluted - pro forma................................................... $ .65 $ .40
Note 2 - Contingencies
The Company and various of its executive officers have been named as
defendants in a putative securities class action originally filed in the United
States District Court for the Western District of Oklahoma in early 2001 seeking
unspecified damages on the basis of allegations that the Company issued false
and misleading financial information, primarily related to the method the
Company used to account for commission advance receivables from sales
associates. On March 5, 2002, the Court granted the Company's motion to dismiss
the complaint, with prejudice, and entered a judgment in favor of the
defendants. Plaintiffs thereafter filed a motion requesting reconsideration of
the dismissal which was denied. The plaintiffs have appealed the judgment and
the order denying their motion to reconsider the judgment to the Tenth Circuit
Court of Appeals, and as of March 31, 2003, the case was in the briefing stage.
The Company is unable to predict when a decision will be made on this appeal. In
August 2002, the lead institutional plaintiff withdrew from the case, leaving
two individual plaintiffs as lead plaintiffs on behalf of the putative class.
The ultimate outcome of this case is not determinable.
Beginning in the second quarter of 2001 multiple lawsuits were filed
against the Company, certain officers, employees, sales associates and other
defendants in various Alabama and Mississippi state courts by current or former
members seeking actual and punitive damages for alleged breach of contract,
fraud and various other claims in connection with the sale of memberships. As of
March 31, 2003, the Company was aware of 28 separate lawsuits involving
approximately 298 plaintiffs that have been filed in multiple counties in
Alabama. One suit involving two plaintiffs which was filed as a class action has
been dismissed with prejudice as to the class allegations and without prejudice
as to the individual claims. As of March 31, 2003, the Company was aware of 14
separate lawsuits involving approximately 428 plaintiffs in multiple counties in
Mississippi. Certain of the Mississippi lawsuits also name the Company's
provider attorney in Mississippi as a defendant. Proceedings in eleven cases
which name the Company's provider attorney as a defendant have been stayed for
at least 90 days as to the provider attorney (and as to all defendants in some
cases) due to the rehabilitation proceeding involving the provider law firm's
insurer. In addition, two cases have been stayed by the Mississippi Supreme
Court pending its ruling on the Pre-Paid defendants' appeal of the trial court's
granting of a partial summary judgment that the action is not required to be
submitted to arbitration. At least two complaints have been filed on behalf of
certain of the Mississippi plaintiffs and others with the Attorney General of
Mississippi in March 2002 and December 2002. The Company has responded to the
Attorney General's requests for information with respect to both complaints, and
as of March 31, 2003, the Company was not aware of any further actions being
taken by the Attorney General. In Mississippi, the Company has filed lawsuits in
the United States District Court for the Southern and Northern Districts of
Mississippi in which the Company seeks to compel arbitration of the various
Mississippi claims under the Federal Arbitration Act and the terms of the
Company's membership agreements, and has appealed the state court rulings in
favor of certain of the plaintiffs on the arbitration issue to the Mississippi
Supreme Court. These cases are all in various stages of litigation, including
trial settings beginning in Alabama in May, 2003, and seek varying amounts of
actual and punitive damages. While the amount of membership fees paid by the
plaintiffs in the Mississippi cases is $500,000 or less, certain of the cases
seek damages of $90 million. Additional suits of a similar nature have been
threatened. The ultimate outcome of any particular case is not determinable.
On April 19, 2002, counsel in certain of the above-referenced Alabama suits
also filed a similar suit against the Company and certain of its officers in the
District Court of Creek County, Oklahoma on behalf of Jeff and Jana Weller
individually and doing business as Hi-Tech Auto making similar allegations
relating to the Company's memberships and seeking unspecified damages on behalf
of a "nationwide" class. The Company's preliminary motions in this case have
been denied, and, as of March 31, 2003, the Company's appeal of the denial of
its motion to compel arbitration is pending before the Oklahoma Supreme Court.
The ultimate outcome of this case is not determinable.
On June 29, 2001, an action was filed against the Company in the District
Court of Canadian County, Oklahoma. In 2002, the petition was amended to add
five additional named plaintiffs and to add and drop certain claims. This action
is a putative class action brought by Gina Kotwitz, George Kotwitz, Rick Coker,
Richard Starke, Jeff Turnipseed and Aaron Bouren on behalf of all sales
associates of the Company. The amended petition seeks injunctive and declaratory
relief, with such other damages as the court deems appropriate, for alleged
violations of the Oklahoma Uniform Consumer Credit Code in connection with the
Company's commission advances, and seeks injunctive and declaratory relief
regarding the enforcement of certain contract provisions with sales associates.
The impact of the claims alleged under the Consumer Credit Code and the
assertion of entitlement to injunctive relief could exceed $315 million if
plaintiffs are successful both in their request for class certification and on
the merits, but plaintiffs have stated that they no longer seek class
certification on the Consumer Credit Code claims. The impact of the remaining
claims as to which plaintiffs currently seek class certification could exceed
$218 million if plaintiffs are successful both in their request for class
certification and on the merits. The plaintiffs' request for class certification
is set for hearing on July 22, 2003. The ultimate outcome of this case is not
determinable.
On March 1, 2002, an action was filed in the United States District Court
for the Western District of Oklahoma by Caroline Sandler, Robert Schweikert, Sal
Corrente, Richard Jarvis and Vincent Jefferson against the Company and certain
executive officers. This action is a putative class action seeking unspecified
damages filed on behalf of all sales associates of the Company and alleges that
the marketing plan offered by the Company constitutes a security under the
Securities Act of 1933 and seeks remedies for failure to register the marketing
plan as a security and for violations of the anti-fraud provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934 in connection
with representations alleged to have been made in connection with the marketing
plan. The complaint also alleges violations of the Oklahoma Securities Act, the
Oklahoma Business Opportunities Sales Act, breach of contract, breach of duty of
good faith and fair dealing and unjust enrichment and violation of the Oklahoma
Consumer Protection Act and negligent supervision. This case is subject to the
Private Litigation Securities Reform Act. Pursuant to the Act, the Court has
approved the named plaintiffs and counsel and an amended complaint was filed in
August 2002. The Company filed motions to dismiss the complaint and to strike
the class action allegations on September 19, 2002. All discovery in the action
is stayed pending a ruling on the motion to dismiss. As of March 31, 2003, all
briefs had been filed by the parties on the motion to dismiss and a decision on
the motion will be made by the Court. The Company is unable to predict when a
decision will be made. The ultimate outcome of this case is not determinable.
In December 2002, the West Virginia Supreme Court reversed a summary
judgment which had been granted by the Circuit Court of Monangalia County, West
Virginia in favor of the Company in connection with the claims of a former
member, Georgia Poling and her daughters against the Company and a referral
lawyer with respect to a 1995 referral. That action was originally filed in
March 2000, and alleges breach of contract and fraud against the Company in
connection with the referral. The case is now scheduled for trial in August
2003, and plaintiffs seek actual and punitive damages in unspecified amounts.
The ultimate outcome of this case is not determinable.
On January 30, 2003, the Company announced that it had received a subpoena
from the office of the United States Attorney for the Southern District of New
York requesting information relating to trading activities in the Company's
stock in advance of the January 2003 announcement of recruiting and membership
production results for the fourth quarter of 2002. The Company also received
notice from the Securities and Exchange Commission that it is conducting an
informal inquiry into the same subject and requesting that the Company
voluntarily provide certain information. The Company has responded to these
requests and, as of March 31, 2003, there had been no further developments in
these matters. The ultimate outcome of these matters is not determinable.
The Company is a defendant in various other legal proceedings that are
routine and incidental to its business. The Company will vigorously defend its
interests in all proceedings in which it is named as a defendant. The Company
also receives periodic complaints or requests for information from various state
and federal agencies relating to its business or the activities of its marketing
force. The Company promptly responds to any such matters and provides any
information requested.
While the ultimate outcome of these proceedings is not determinable, the
Company does not currently anticipate that these contingencies will result in
any material adverse effect to its financial condition or results of operation,
unless an unexpected result occurs in one of the cases. The Company has
established an accrued liability it believes will be sufficient to cover
estimated damages in connection with various cases, which at March 31, 2003 was
$3.3 million. If an unexpected result were to occur in one or more of the
pending cases, the amount of damages awarded could differ significantly from
management's estimates. The Company believes it has meritorious defenses in all
pending cases and will vigorously defend against the plaintiffs' claims.
The Company is constructing a new corporate office complex with an
estimated completion during the third quarter of 2003 at an estimated cost of
approximately $30 million. Costs incurred through March 31, 2003 of
approximately $17.5 million, including approximately $222,000 of capitalized
interest costs, have been paid from existing resources and the real estate line
of credit. The Company expects to incur additional indebtedness in order to
finance the remaining costs of its new corporate headquarters in order to allow
cash flow from operations to continue to be used to purchase treasury stock. The
Company has entered into construction contracts in the amount of $28.2 million
with the general contractor pertaining to the new office complex. Total
remaining costs of construction from April 1, 2003 are estimated at
approximately $12.5 million.
Note 3 - Treasury Stock Purchases
The Company announced on April 6, 1999, a treasury stock purchase program
authorizing management to acquire up to 500,000 shares of the Company's common
stock. The Board of Directors has increased such authorization from 500,000
shares to 7,000,000 shares during subsequent board meetings. At March 31, 2003,
the Company had purchased 6.5 million treasury shares under these authorizations
for a total consideration of $145.0 million, an average price of $22.32 per
share. During the quarter ended March 31, 2003, the Company purchased and
formally retired 1 million shares of treasury shares reducing its common stock
by $10,000 and its capital in excess of par by $19.9 million. Treasury stock
purchases will be made at prices that are considered attractive by management
and at such times that management believes will not unduly impact the Company's
liquidity. No time limit has been set for completion of the treasury stock
purchase program. Given the current interest rate environment, the nature of
other investments available and the Company's expected cash flows, management
believes that purchasing treasury shares enhances shareholder value. The Company
expects to continue its treasury stock program and may seek alternative sources
of financing to continue or accelerate the program.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
respective periods.
Diluted earnings per common share are computed by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the respective periods. The weighted average
number of common shares is increased by the number of shares issuable on the
exercise of options less the number of common shares assumed to have been
purchased with the proceeds from the exercise of the options pursuant to the
treasury stock method; those purchases are assumed to have been made at the
average price of the common stock during the respective period.
Three Months Ended
March 31,
-------------------
Basic Earnings Per Share: 2003 2002
--------- ---------
Net income.................................................................................. $ 12,034 $ 8,870
--------- ---------
Shares:
Weighted average shares outstanding......................................................... 18,039 20,304
--------- ---------
Diluted Earnings Per Share:
Earnings:
Net income.................................................................................. $ 12,034 $ 8,870
--------- ---------
Shares:
Weighted average shares outstanding......................................................... 18,039 20,304
Assumed exercise of options................................................................. 16 140
--------- ---------
Weighted average number of shares, as adjusted.............................................. 18,055 20,444
--------- ---------
Note 5 - Recent Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). Subject to certain criteria defined in the
Interpretation, FIN 46 will require consolidation by business enterprises of
variable interest entities if the enterprise has a variable interest that will
absorb the majority of the entity's expected losses, receives a majority of its
expected returns, or both. The provisions of FIN 46 are effective immediately
for interests acquired in variable interest entities after January 31, 2003, and
at the beginning of the first interim or annual period beginning after June 15,
2003, for interests acquired in variable interest entities before February 1,
2003 (for the Company in the third quarter of 2003). The Company is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 will have upon its financial condition or results of operations. Certain
transitional disclosures required by FIN 46 in all financial statements
initially issued after January 31, 2003, have been included in the accompanying
financial statements.
Note 6 - Notes Payable and Capital Leases
On June 11, 2002, the Company entered into two line of credit agreements
totaling $30 million with a commercial lender providing for a treasury stock
purchase line and a real estate line for funding of the Company's new corporate
office complex. The treasury stock line of credit provides for funding of up to
$10 million to finance treasury stock purchases through May 31, 2003 with
scheduled monthly repayments beginning after the initial advance and ending no
later than May 31, 2004 with interest at the 30 day LIBOR Rate plus two percent,
adjusted monthly. The real estate line of up to $20 million may be funded over
the period ending December 31, 2003 with interest at the 30 day LIBOR Rate plus
2.25%, adjusted monthly, and will be repayable beginning December 31, 2003 in
monthly principal payments equal to the principal balance outstanding at
December 31, 2003 divided by 105 plus interest with a balloon payment on
September 30, 2008. Additionally, interest on the outstanding balance of the
real estate line is payable monthly through November 30, 2003.
As of March 31, 2003, the Company had accessed $4 million of the $10
million treasury stock purchase line and made repayments of $2.7 million and had
accessed $11.9 million of the $20 million real estate line. The interest rates
as of March 31, 2003 are 3.30% and 3.55% for the treasury stock loan and the
real estate loan, respectively. The $1.3 million used to purchase treasury
stock, net of repayments of $2.7 million, is scheduled to be paid off by July
30, 2003 and therefore has been classified as short term. Monthly principal
payments on the treasury stock line are $333,333. The Company is scheduled to
begin principal payments on the real estate line on December 31, 2003. As of
March 31, 2003, interest capitalized related to construction in progress was
$222,000.
These lending agreements contain the following financial covenants: (a) the
Company's quarterly Debt Coverage Ratio shall not be less than 125%; (b) the
Company shall not permit the ratio of its Total Liabilities to its Tangible Net
Worth to exceed 3.75 to 1.00, measured at the end of each calendar quarter; (c)
the Company's cancellation rate on contracts less than or equal to twelve months
old shall not exceed 50% for fiscal year 2002 and 45% for each fiscal year
thereafter, on a trailing twelve months basis, (d) the Company shall maintain a
rolling twelve month average retention rate of membership contracts in place for
greater than eighteen months of not less than 70%, calculated on a calendar
quarter basis, and (e) the Company shall maintain tangible net worth of at least
$15 million at the end of each calendar quarter.
A schedule of outstanding balances and future maturities as of March 31,
2003 follows:
Real estate line of credit................. $ 11,900
Stock purchase line of credit.............. 1,333
Total notes payable........................ 13,233
Less: Current portion of notes payable..... (1,787)
Long term portion.......................... ----------------
$ 11,446
----------------
Repayment Schedule commencing
April 2003:
Year 1..................................... $ 1,787
Year 2..................................... 1,360
Year 3..................................... 1,360
Year 4..................................... 1,360
Year 5..................................... 1,360
Thereafter................................. 6,006
Total notes payable........................ ----------------
$ 13,233
----------------
During the three months ended March 31, 2003, the Company entered into a
capital lease in the amount of $2.4 million to acquire significant new computer
hardware to supplement its current information technology platform and provide
redundancy for its critical business systems. The capital lease requires the
Company to make annual payments of $792,000 beginning January 2003 through
January 2005. Pursuant to this lease, the Company received a $1 million vendor
rebate during April 2003, which is recorded as a receivable in other current
assets and a reduction in property and equipment at March 31, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The Company reported net income of $12.0 million, or $.67 per diluted
common share, for the three months ended March 31, 2003, up 36% from net income
of $8.9 million, or $.43 per diluted common share, for the comparable period of
the prior year. Diluted earnings per share increased 56% due to increased net
income of 36 percent and an approximate 12 percent decrease in the weighted
average number of outstanding shares.
Membership fees totaled $81.5 million during 2003 compared to $71.9 million
for 2002, an increase of 13%. Membership fees 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 renewal
rate of existing Memberships. New Membership sales decreased 11% during the
three months ended March 31, 2003 to 178,820 from 200,780 during the comparable
period of 2002. At March 31, 2003, there were 1,394,569 active Memberships in
force compared to 1,287,199 at March 31, 2002, an increase of 8%. Additionally,
the average annual fee per Membership has increased from $253 for all
Memberships in force at March 31, 2002 to $256 for all Memberships in force at
March 31, 2003, a 1% 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, a larger number of Legal Shield subscribers and increased
sales of the Company's business oriented memberships.
Associate services revenue decreased 16% from $9.0 million for the first
three months of 2002 to $7.5 million during the same period of 2003 primarily as
a result of a reduced associate entry fee of $149 during the first three months
of March 2003 compared to the typical associate fee of $249 charged during
January and February of 2002 and the reduced fee of $149 during March of 2002
and due to fewer new associates recruited. The associate entry fee has been
reduced periodically in the past and may continue to be reduced at certain times
in future periods. Although the reduction in the associate fee may lead to lower
associate services revenues overall, the reduced fee typically increases the
number of new associates that join and to a great extent offsets the overall
reduction in revenue. As a result of this lower fee for the 2003 quarter, the
Fast Start program generated training fees of approximately $2.5 million during
the first three months of 2003 compared to $3.6 million for the comparable
period of 2002. The field training program, titled Fast Start to Success ("Fast
Start") is aimed at increasing the level of new Membership sales per associate.
Fast Start typically requires a training fee of $184 per new associate, except
for special promotions the Company implements from time to time, and upon
successful completion of the program provides for the payment of certain
training bonuses. The $2.5 million and $3.6 million for the three month periods
ending March 31, 2003 and 2002, respectively, in training fees was collected
from approximately 29,525 new sales associates who elected to participate in
Fast Start during the first three months of 2003 compared to 31,187 that
participated during the comparable quarter of 2002. Total new associates
enrolled during the first three months of 2003 were 29,755 compared to 33,493
for the same period of 2002, a decrease of 11%. 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 (including training bonuses
paid), providing associate services and other direct marketing expenses.
Other revenue increased 11%, to $1.2 million for the three months ended
March 31, 2003 from $1.1 million for the comparable period of 2002 primarily due
to an increase in enrollment fees of $130,000. Enrollment fee revenue increased
for the three months ended March 31, 2003 despite a lower number of Memberships
being written during the period compared to the 2002 period due to the
amortization of previously deferred revenue.
Primarily as a result of the increase in Membership fees, total revenues
increased to $90.3 million for the three months ended March 31, 2003 from $82.0
million during the comparable period of 2002, an increase of 10%.
Membership benefits totaled $26.7 million for the three months ended March
31, 2003 compared to $24.3 million for the comparable period of 2002, and
represented 33% and 34% of Membership fees for the 2003 and 2002 periods,
respectively. This Membership benefit ratio (Membership benefits as a percentage
of Membership fees) should remain near current levels as substantially all
active Memberships provide for a capitated cost in the absence of any changes in
the capitated benefit level, which has not changed significantly since 1993.
Commissions to associates increased 1% to $28.2 million for the three
months ended March 31, 2003 compared to $27.8 million for the comparable period
of 2002, and represented 35% and 39% of Membership fees for such periods. These
amounts were reduced by $65,000 and $438,000, respectively, representing
Membership lapse fees. These fees were determined by applying the prime interest
rate to the unearned advance commission balance pertaining to lapsed
Memberships. The Company realizes and recognizes this fee only when the amount
of the calculated fee is collected by withholding from cash commissions due the
associate, because the Company's ability to recover fees in excess of current
payments is primarily dependent on the associate selling new Memberships which
qualify for advance commission payments. These fees were eliminated for
Memberships sold after March 1, 2002. Commissions to associates are primarily
dependent on the number of new memberships sold during a period. New memberships
sold during the three months ended March 31, 2003 totaled 178,820, an 11%
decrease from the 200,780 sold during the comparable period of 2002. Commissions
to associates per new membership sold were $158 per membership for the three
months ended March 31, 2003 compared to $138 for the comparable period of 2002.
The average commission per new membership sold varies depending on the
compensation structure that is in place at the time a new membership is sold and
the amount of any charge-backs (recoupment of previous commission advances) that
are deducted from amounts that would otherwise be paid to the various sales
associates that are compensated for the membership sale. Should the Company add
additional commissions to its compensation plan or reduce the amount of
chargebacks collected from its associates as it did in March 2003, the
commission cost per new Membership will increase accordingly.
Associate services and direct marketing expenses decreased to $7.1 million
for the three months ended March 31, 2003 from $7.6 million for the comparable
period of 2002. Fast Start training bonuses incurred were approximately $725,000
during the first three months of 2003 compared to $1.6 million in the same
period of 2002. These Fast Start training bonuses are also affected by the
number of new sales associates that successfully meet the qualification criteria
established by the Company, i.e. more training bonuses will be paid when a
higher number of new sales associates meet such criteria. These expenses also
include the costs of providing associate services and marketing expenses.
General and administrative expenses during the three months ended March 31,
2003 and 2002 were $8.0 million and $7.8 million, respectively, and represented
10% and 11%, respectively, of Membership fees for each period. Management
expects general and administrative expenses when expressed as a percentage of
Membership fees to remain relatively consistent over the near term. The Company
should experience cost efficiencies as a result of certain economies of scale in
some areas but expects such cost savings for the remainder of 2003 to be largely
offset by higher levels of expenses related to legal fees and expenses related
to moving its corporate headquarters to its new facilities.
Other expenses, net, which include depreciation and amortization and
premium taxes reduced by interest income, was $2.0 million for the period ended
March 31, 2003 compared to $1.0 million for the 2002 comparable period.
Depreciation and amortization increased to $1.7 million for the first three
months of 2003 from $1.2 million for the comparable period of 2002. Premium
taxes increased from $285,000 for the three months ended March 31, 2002 to
$655,000 for the comparable period of 2003. The increase in 2003 was due to a
change in the tax structure of one of the states in which the Company pays
premium taxes. Interest income decreased by approximately $126,000 for the first
three months of 2003 to $357,000 from $483,000 for the 2002 period due to a
decrease in balances of interest bearing notes.
The Company has recorded a provision for income taxes of $6.3 million
(34.5% of pretax income) for the first three months of 2003 compared to $4.7
million (34.5% of pretax income) for the same period of 2002.
Liquidity and Capital Resources
General
Consolidated net cash provided by operating activities was $20.3 million
for the first three months of 2003 compared to cash provided of $18.1 million
for the 2002 period. The increase of $3.2 million resulted primarily from the
increase in net income of $3.2 million, a net increase in the change in income
taxes payable of $2.7 million partially offset by a change in accounts payable
and accrued expenses of $2.2 million and a decrease in deferred revenue and fees
of $1.0 million.
Consolidated net cash used in investing activities was $6.0 million for the
first three months of 2003 compared to $3.5 million for the comparable period of
2002. This $2.5 million increase in cash used in investing activities resulted
primarily from the $3.1 million increase in additions to property and equipment,
primarily additional costs of the Company's new corporate office complex.
Net cash used in financing activities during the first three months of 2003
was $18.1 million compared to $19.4 million for the comparable period of 2002,
in each case primarily for treasury stock purchases. This $1.3 million change
was primarily comprised of the $2.6 million increase in net proceeds from
issuance of debt offset by the $797,000 payments on capital lease obligations.
During the quarter ended March 31, 2003, the Company purchased and formally
retired 1 million shares of treasury shares reducing its common stock accounts
by $10,000 and reduced its capital in excess of par accounts by $19.9 million.
Primarily due to the large amount of treasury stock purchases in the first three
months of 2003 of approximately $19.9 million, the Company had a consolidated
working capital deficit of $7.9 million at March 31, 2003, a decrease of $10.5
million compared to a consolidated working capital surplus of $2.7 million at
December 31, 2002. Approximately $8.9 million of the working capital deficit at
March 31, 2003 is related to deferred revenue and fees in excess of deferred
member and associate service costs. These amounts will be eliminated by the
passage of time without the utilization of other current assets or the Company
incurring other current liabilities. Additionally, at the current rate of cash
flow provided by operations ($20.3 million during the first quarter of 2003),
the Company's ability to control the timing of its discretionary treasury stock
purchases and the availability pursuant to its line of credit, the Company does
not expect any difficulty in meeting its financial obligations in the short term
or the long term.
At March 31, 2003 the Company reported $32.8 million in cash and cash
equivalents and unpledged investments compared to $36.4 million at December 31,
2002. The Company's investments consist of common stocks, investment grade
(rated Baa or higher) preferred stocks and investment grade bonds primarily
issued by corporations, 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 March 31, 2003, the Company
advanced commissions of $27.7 million on new Membership sales compared to $29.3
million for the same period of 2002. Since approximately 95% of Membership fees
are collected on a monthly basis, a significant cash flow deficit is created on
a per Membership basis at the time a Membership is sold. Since there are no
further commissions paid on a Membership during the advance period, the Company
typically derives significant positive cash flow from the Membership over its
remaining life.
The Company expenses advance commissions ratably over the first month of
the related membership. As a result of this accounting policy, the Company's
commission expenses are all recognized over the first month of a Membership and
there is no commission expense recognized for the same Membership during the
remainder of the advance period. The Company tracks its unearned advance
commission balances outstanding in order to ensure the advance commissions are
recovered before any renewal commissions are paid and for internal purposes of
analyzing its commission advance program. While not recorded as an asset,
unearned advance commission balances from associates as of March 31, 2003 were:
(Amounts in 000's)
Beginning unearned advance commission payments (1)............................... $ 227,084
Advance commission payments, net................................................. 27,662
Earned commissions applied....................................................... (35,367)
Advance commission payment write-offs............................................ (793)
-------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 218,586
Estimated unrecoverable advance commission payments (1).......................... (24,422)
-------------
Ending unearned advance commission payments, net (1)............................. $ 194,164
-------------
(1) These amounts do not represent fair value, as they do not take into
consideration timing of estimated recoveries.
The ending unearned advance commission payments, net, above includes net
unearned advance commission payments to non-vested associates of $29.0 million.
As such, at March 31, 2003 future commission payments and related expense should
be reduced as unearned advance commission payments of $165 million are
recovered. Commissions are earned by the associate as Membership premiums are
earned by the Company, usually on a monthly basis. For additional information
concerning these commission advances, see the Company's Annual report on Form
10-K under the heading Commissions to Associates in Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The Company believes that it has significant ability to finance expected
future growth in Membership sales based on its existing amount of cash and cash
equivalents and unpledged investments at March 31, 2003 of $32.8 million. The
Company expects to maintain cash and investment balances, including pledged
investments, on an on-going basis of approximately $20 to $30 million in order
to meet expected working capital needs and regulatory capital requirements. Cash
balances in excess of this amount would be used for discretionary purposes such
as treasury stock purchases.
The Company is constructing a new corporate office complex with an
estimated completion during the third quarter of 2003 at an estimated cost of
approximately $30 million. Costs incurred through March 31, 2003 of
approximately $17.5 million, including approximately $222,000 of capitalized
interest costs, have been paid from existing resources and the real estate line
of credit. The Company expects to incur additional indebtedness in order to
finance the remaining costs of its new corporate headquarters in order to allow
cash flow from operations to continue to be used to purchase treasury stock. The
Company has entered into construction contracts in the amount of $28.2 million
with the general contractor pertaining to the new office complex. Total
remaining costs of construction from April 1, 2003 are estimated at
approximately $12.5 million.
On June 11, 2002, the Company entered into two line of credit agreements
totaling $30 million with a commercial lender providing for a treasury stock
purchase line and a real estate line for funding of the Company's new corporate
office complex. The treasury stock line of credit provides for funding of up to
$10 million to finance treasury stock purchases through May 31, 2003 with
scheduled monthly repayments beginning after the initial advance and ending no
later than May 31, 2004 with interest at the 30 day LIBOR Rate plus two percent,
adjusted monthly. The real estate line of up to $20 million may be funded over
the period ending December 31, 2003 with interest at the 30 day LIBOR Rate plus
2.25%, adjusted monthly, and will be repayable beginning after the advance
period in monthly principal payments equal to the principal balance outstanding
at December 31, 2003 divided by 105 plus interest with a balloon payment on
September 30, 2008. These credit agreements contain, among others, a financial
covenant that the Company shall not permit the ratio of its total liabilities to
its tangible net worth to exceed 2.50 to 1.00, measured at the end of each
calendar quarter. This financial covenant has been relaxed to 3.75 to 1.00, and
a new financial covenant was added prohibiting the Company's tangible net worth
to fall below $15 million effective March 31, 2003 and each quarter thereafter.
These modifications will allow the Company to continue and possibly increase its
borrowings for treasury stock purchases.
As of March 31, 2003, the Company had accessed $4 million of the $10
million treasury stock purchase line and made repayments of $2.7 million and had
accessed $11.9 million of the $20 million real estate line. The interest rates
as of March 31, 2003 are 3.30% and 3.55% for the treasury stock loan and the
real estate loan, respectively. The $1.3 million used to purchase treasury
stock, net of repayments of $2.7 million, is scheduled to be paid off by July
30, 2003 and therefore has been classified as short term. Monthly principal
payments on the treasury stock line are $333,333. The Company is scheduled to
begin payments on the real estate line on December 31, 2003.
During the three months ended March 31, 2003, the Company entered into a
capital lease in the amount of $2.4 million to acquire significant new computer
hardware to supplement its current information technology platform and provide
redundancy for its critical business systems. The capital lease requires the
Company to make annual payments of $792,000 beginning January 2003 through
January 2005. Pursuant to this lease, the Company received a $1 million vendor
rebate during April 2003, which is recorded as a receivable in other current
assets and a reduction in property and equipment at March 31, 2003.
Actions that May Impact Retention in the Future
The potential impact on the Company's future profitability and cash flow
due to future changes in Membership retention can be significant. For additional
information concerning Membership retention, see the Company's Annual report on
Form 10-K under the heading Measures of Member Retention in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations. While blended retention rates have not changed significantly over
the past five years, the Company continues to take actions that it expects to
favorably impact retention rates in the future. Since December 31, 2002, the
Company has implemented several new initiatives aimed at improving the retention
rate of both new and existing Memberships. Such initiatives include newly
designed marketing tools and Fast Start training materials as well as a
completely redesigned membership contract kit. The Company believes that such
efforts may increase the utilization by members and therefore lead to higher
retention rates.
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 that
regulate Memberships as insurance or specialized legal expense products. The
most significant of these wholly owned subsidiaries are PPLCI and PPLSIF. The
ability of PPLCI and PPLSIF to provide funds to the Company is subject to a
number of restrictions under various insurance laws in the jurisdictions in
which PPLCI and PPLSIF conduct business, including limitations on the amount of
dividends and management fees that may be paid and requirements to maintain
specified levels of capital and reserves. In addition PPLCI will be required to
maintain its stockholders' equity at levels sufficient to satisfy various state
or provincial regulatory requirements, the most restrictive of which is
currently $3 million. Additional capital requirements of PPLCI or PPLSIF will be
funded by the Company in the form of capital contributions or surplus
debentures. At March 31, 2003, PPLSIF did not have funds available for payment
of substantial dividends without the prior approval of the insurance
commissioner. PPLCI had approximately $3.5 million in surplus funds available
for payment of an ordinary dividend during December 2003.
Forward-Looking Statements
All statements in this report concerning Pre-Paid Legal Services, Inc. (the
"Company") other than purely historical information, including but not limited
to, statements relating to the Company's future plans and objectives,
discussions with the staff of the SEC, expected operating results, and the
assumptions on which such forward-looking statements are based, constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are based
on the Company's historical operating trends and financial condition as of March
31, 2003 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
described below. 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. The Company assumes no
obligation to update the Forward-Looking Statements to reflect events or
circumstances occurring after the date of the statement.
Risk Factors
There are a number of risk factors that could affect our financial
condition or results of operations. See Note 2 - Contingencies and Item 1 -
Legal Proceedings. Please refer to page 37 and 38 of the Company's 2002 Annual
Report on Form 10-K for a description of other risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's consolidated balance sheets include a certain amount of
assets and liabilities whose fair values are subject to market risk. Due to the
Company's significant investment in fixed-maturity investments, interest rate
risk represents the largest market risk factor affecting the Company's
consolidated financial position. Increases and decreases in prevailing interest
rates generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, liquidity of the instrument and
other general market conditions.
As of March 31, 2003, substantially all of the Company's investments were
in investment grade (rated Baa or higher) fixed-maturity investments,
interest-bearing money market accounts and a collateralized repurchase
agreement. The Company does not hold any investments classified as trading
account assets or derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on the Company's fixed-maturity investment
portfolio. It is assumed that the changes occur immediately and uniformly, with
no effect given to any steps that management might take to counteract that
change. The hypothetical changes in market interest rates reflect what could be
deemed best and worst case scenarios. The fair values shown in the following
table are based on contractual maturities. Significant variations in market
interest rates could produce changes in the timing of repayments due to
prepayment options available. The fair value of such instruments could be
affected and, therefore, actual results might differ from those reflected in the
following table (dollars in 000's):
Estimated fair value
Hypothetical change after hypothetical
in interest rate change in interest
Fair Value (bp=basis points) rate
------------ ------------------- --------------------
Fixed-maturity investments at March 31, 2003 (1)............ $ 17,222 100 bp increase $ 15,198
200 bp increase 14,157
50 bp decrease 17,161
100 bp decrease 17,446
Fixed-maturity investments at December 31, 2002 (1)......... $ 16,111 100 bp increase $ 14,740
200 bp increase 13,806
50 bp decrease 16,310
100 bp decrease 16,794
--------------------
(1) Excluding short-term investments with a fair value of $2.7 million at March
31, 2003 and December 31, 2002, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2003 would reduce the
estimated fair value of the Company's fixed-maturity investments by
approximately $3.1 million at that date. At December 31, 2002, an
instantaneous 200 basis point increase in market interest rates would have
reduced the estimated fair value of the Company's fixed-maturity
investments by approximately $2.3 million at that date. The definitive
extent of the interest rate risk is not quantifiable or predictable due to
the variability of future interest rates, but the Company does not believe
such risk is material.
The Company primarily manages its exposure to interest rate risk by
purchasing investments that can be readily liquidated should the interest rate
environment begin to significantly change.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
Principal Executive Officer and Principal Financial Officer have
reviewed and evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule
240.13a-14(c)) as of a date within ninety days before the filing date
of this quarterly report. Based on that evaluation, the Principal
Executive Officer and the Principal Financial Officer have concluded
that the Company's current disclosure controls and procedures are
effective, providing them with material information relating to the
Company as required to be disclosed in the reports the Company files
or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could
significantly affect those controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 2 of the Notes to Consolidated Financial Statements included in
Part I, Item 1 of this report for information with respect to legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: none
Exhibit No. Description
10.1 Letter agreement re: Loan Agreement between Registrant and Bank of
Oklahoma, N.A.
99.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K: none
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRE-PAID LEGAL SERVICES, INC.
Date: April 28, 2003 /s/ Harland C. Stonecipher
------------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: April 28, 2003 /s/ Randy Harp
------------------------------------------
Randy Harp
Chief Operating Officer
(Duly Authorized Officer)
Date: April 28, 2003 /s/ Steve Williamson
------------------------------------------
Steve Williamson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, Harland C. Stonecipher, Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 28, 2003 /s/ Harland C. Stonecipher
------------------------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
CERTIFICATIONS, continued
I, Steve Williamson, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Pre-Paid Legal
Services, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 28, 2003 /s/ Steve Williamson
------------------------------------------
Steve Williamson
Chief Financial Officer
Exhibit 10.1
Letter agreement re: Loan Agreement between Registrant
and Bank of Oklahoma, N.A.
Bank of Oklahoma N.A. Laura Christofferson
Oklahoma City Senior Vice President
201 Robert S. Kerr 405/272-2327
PO Box 24128
Oklahoma City, Oklahoma 73124
March 24, 2003
Mr. Steve Williamson
Chief Financial Officer
Pre-Paid Legal Services, Inc.
321 East Main
Ada, OK 74821-0145
Dear Steve:
Reference is made to that certain Loan Agreement dated June 11, 2002 between
Pre-Paid Legal Services, Inc. (the "Borrower") and Bank of Oklahoma, N.A. (the
"Bank"), as amended from time to time (the "Loan Agreement"). The Borrower has
requested that the maximum allowed ratio of Liabilities to Net Worth under
section 9.4 be increased from 2.50 to 1.00 to 3.75 to 1.00 effective with the
calculation date of March 31, 2003 and each quarter thereafter. The Bank has
approved this request on the condition that a new Section 9.5 be added to the
Loan Agreement. Section 9.5 shall read: "Borrower shall not permit its Tangible
Net Worth to fall below $15,000,000 effective with the calculation date of March
31, 2003 and each quarter thereafter".
By the Borrower's signature below, the Borrower hereby restates and remakes to
the Bank all of the representations and warranties contained in the Loan
Agreement and adopts and remakes to the Bank all of its respective agreements
and covenants contained in the Loan Agreement and/or in the other Loan
Documents, effective as of the effective date of this Letter.
Except as modified herein, the terms and conditions of the Loan Agreement shall
remain unchanged, and the Loan Agreement shall continue in full force and effect
in accordance with its terms.
Sincerely,
Bank of Oklahoma, N.A.
/s/ Laura Christofferson
------------------------
Laura Christofferson
Senior Vice President
PRE-PAID LEGAL SERVIES, INC., an Oklahoma corporation
By: /s/ Harland C. Stonecipher
--------------------------
Harland C. Stonecipher
Chairman and Chief Executive Officer
Exhibit 99.1
CERTIFICATION
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 28, 2003 /s/ Harland C. Stonecipher
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Harland C. Stonecipher
Chairman and Chief Executive Officer
The foregoing certification is being furnished solely pursuant
to 18 U.S.C.ss.1350.
Exhibit 99.2
CERTIFICATION
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of Pre-Paid Legal
Services, Inc. (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: April 28, 2003 /s/ Steve Williamson
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Steve Williamson
Chief Financial Officer
The foregoing certification is being furnished solely pursuant
to 18 U.S.C.ss.1350.