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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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 June 30, 2002
[ ] 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)
(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 [ ]
The number of shares outstanding of the registrant's common stock as of July 22,
2002 was 19,384,882.
PRE-PAID LEGAL SERVICES, INC.
FORM 10-Q
For the Quarter Ended June 30, 2002
CONTENTS
Part I. Financial Statements
Item 1. Financial Statements of Registrant:
a) Consolidated Balance Sheets
as of June 30, 2002 (Unaudited) and
December 31, 2001
b) Consolidated Statements of Income
(Unaudited) for the three months and six months ended
June 30, 2002 and 2001
c) Consolidated Statements of Comprehensive Income
(Unaudited) for the three months and six months ended
June 30, 2002 and 2001
d) Consolidated Statements of Cash Flows
(Unaudited) for the six months ended
June 30, 2002 and 2001
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
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
ITEM 1. FINANCIAL STATEMENTS OF REGISTRANT
----------------------------------
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except par values)
ASSETS
June 30, December 31,
2002 2001
------------ ------------
Current assets: (Unaudited)
Cash and cash equivalents........................................................ $ 10,190 $ 14,290
Available-for-sale investments, at fair value.................................... 6,098 6,070
Membership income receivable..................................................... 5,607 5,472
Inventories...................................................................... 1,068 922
Income taxes receivable.......................................................... 396 -
Deferred member and associate service costs...................................... 16,499 14,228
Deferred income taxes............................................................ 3,540 3,413
------------ ------------
Total current assets......................................................... 43,398 44,395
Available-for-sale investments, at fair value...................................... 14,087 13,386
Investments pledged................................................................ 4,353 4,315
Property and equipment, net........................................................ 17,061 14,755
Deferred member and associate service costs........................................ 3,157 2,907
Other assets....................................................................... 5,607 5,962
------------ ------------
Total assets............................................................... $ 87,663 $ 85,720
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Membership benefits.............................................................. $ 8,408 $ 7,664
Deferred revenue and fees........................................................ 23,526 20,893
Income taxes payable............................................................. - 1,087
Accounts payable and accrued expenses............................................ 12,609 9,678
------------ ------------
Total current liabilities...................................................... 44,543 39,322
Deferred revenue and fees........................................................ 4,574 4,158
Deferred income taxes ........................................................... 401 16
------------ ------------
Total liabilities............................................................ 49,518 43,496
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 25,017 and
24,806 issued at June 30, 2002 and December 31, 2001, respectively............. 250 248
Capital in excess of par value................................................... 69,686 66,223
Retained earnings................................................................ 71,637 54,240
Accumulated other comprehensive income........................................... 307 186
Treasury stock, at cost; 5,090 and 3,989 shares held at
June 30, 2002 and December 31, 2001, respectively.............................. (103,735) (78,673)
------------ ------------
Total stockholders' equity................................................... 38,145 42,224
------------ ------------
Total liabilities and stockholders' equity................................. $ 87,663 $ 85,720
------------ ------------
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 Six Months Ended
June 30, June 30,
----------------------- ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Membership fees.................................................$ 77,585 $ 67,108 $ 149,479 $ 126,395
Associate services.............................................. 9,117 8,984 18,136 19,121
Other........................................................... 1,242 716 2,360 1,617
----------- ----------- ----------- -----------
87,944 76,808 169,975 147,133
----------- ----------- ----------- -----------
Costs and expenses:
Membership benefits............................................. 26,004 21,782 50,316 41,823
Commissions..................................................... 32,799 31,457 60,607 55,083
Associate services and direct marketing......................... 7,155 7,786 14,723 15,972
General and administrative...................................... 7,538 7,553 15,340 13,875
Other, net...................................................... 1,430 1,090 2,429 2,072
----------- ----------- ----------- -----------
74,926 69,668 143,415 128,825
----------- ----------- ----------- -----------
Income from continuing operations before income taxes............. 13,018 7,140 26,560 18,308
Provision for income taxes........................................ 4,491 2,317 9,163 5,967
----------- ----------- ----------- -----------
Income from continuing operations................................. 8,527 4,823 17,397 12,341
Income (loss) from operations of discontinued UFL segment,
net of applicable income tax - Note 5........................... - (102) - 56
----------- ----------- ----------- -----------
Net income........................................................$ 8,527 $ 4,721 $ 17,397 $ 12,397
----------- ----------- ----------- -----------
Basic earnings per common share from continuing operations........$ .42 $ .22 $ .86 $ .57
Basic earnings per common share from
discontinued operations......................................... - - - -
----------- ----------- ----------- -----------
Basic earnings per common share...................................$ .42 $ .22 $ .86 $ .57
----------- ----------- ----------- -----------
Diluted earnings per common share from continuing operations......$ .42 $ .22 $ .86 $ .57
Diluted earnings per common share from
discontinued operations......................................... - - - -
----------- ----------- ----------- -----------
Diluted earnings per common share.................................$ .42 $ .22 $ .86 $ .57
----------- ----------- ----------- -----------
The acccompanying notes are an integral part of these financials.
PRE-PAID LEGAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in 000's)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income..................................................... $ 8,527 $ 4,721 $ 17,397 $ 12,397
----------- ----------- ----------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment...................... 57 117 99 25
----------- ----------- ----------- -----------
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during period.... 385 (84) 51 332
Reclassification adjustment for realized losses (gains)
included in net income................................... 4 - (29) (12)
----------- ----------- ----------- -----------
389 (84) 22 320
----------- ----------- ----------- -----------
Other comprehensive income, net of income taxes
of $210 and $15 for the three months and $12 and $183 for the
six months ended June 30, 2002 and 2001, respectively........ 446 33 121 345
----------- ----------- ----------- -----------
Comprehensive income........................................... $ 8,973 $ 4,754 $ 17,518 $ 12,742
----------- ----------- ----------- -----------
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)
Six Months Ended
June 30,
-------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 17,397 $ 12,397
Adjustments to reconcile net income to net cash provided
by operating activities:
Income from discontinued operations............................................ - (56)
Provision for deferred income taxes............................................ 246 901
Depreciation and amortization.................................................. 2,497 1,906
Tax benefit on exercise of stock options....................................... 810 -
Compensation expense relating to contribution of stock to ESOP................. 207 162
Increase in income taxes receivable............................................ (396) -
Increase in Membership income receivable....................................... (135) (400)
(Increase) decrease in inventories............................................. (146) 558
Increase in deferred member and associate service costs........................ (2,521) (2,060)
Decrease (increase) in other assets............................................ 355 (110)
Increase in accrued Membership benefits........................................ 744 754
Increase in deferred revenue and fees.......................................... 3,049 3,003
Decrease in income taxes payable............................................... (1,087) (1,901)
Increase (decrease) in accounts payable, accrued expenses and other, net....... 2,514 (1,398)
----------- -----------
Net cash provided by operating activities of continuing operations........... 23,534 13,756
----------- -----------
Cash flows from investing activities:
Additions to property and equipment............................................ (4,803) (4,758)
Purchases of investments - available for sale.................................. (7,779) (2,843)
Maturities and sales of investments - available for sale....................... 7,046 8,771
----------- -----------
Net cash (used in) provided by investing activities of continuing
operations..................................................................... (5,536) 1,170
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common stock options................................. 2,964 14
Decrease in capital lease obligations.......................................... - (141)
Purchases of treasury stock.................................................... (25,062) (15,820)
----------- -----------
Net cash used in financing activities of continuing operations........... (22,098) (15,947)
----------- -----------
Net decrease in cash and cash equivalents........................................ (4,100) (1,021)
Cash and cash equivalents at beginning of period................................. 14,290 10,866
----------- -----------
Cash and cash equivalents at end of period....................................... $ 10,190 $ 9,845
----------- -----------
Supplemental disclosure of cash flow information:
Net cash used in discontinued operations....................................... $ - $ (647)
----------- -----------
Cash paid for interest......................................................... $ - $ 1
----------- -----------
Income taxes paid.............................................................. $ 9,580 $ 8,400
----------- -----------
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 2001 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 June 30, 2002, and for the three months and six months ended
June 30, 2002 and 2001, 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 and six months ended June 30, 2002 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.
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 the Pre-Paid defendants will respond according to the
schedule set by the appellate court. The ultimate outcome of this case is not
determinable.
On June 7, 2001 and August 3, 2001, shareholder derivative actions were
filed by alleged company shareholders, Bruce A. Hansen and Donna L. Hansen, and
Roger Strykowski, respectively, against all of the directors of the Company
seeking unspecified actual and punitive damages on behalf of the Company based
on allegations of breach of fiduciary duty, corporate waste and mismanagement by
the defendant directors. On March 1, 2002, plaintiffs filed a consolidated
amended derivative complaint. The amended complaint alleges that the defendant
directors caused the Company to violate generally accepted accounting principles
and federal securities laws by improperly capitalizing commission expenses,
caused the Company to allegedly pay increased salaries and bonuses based upon
financial performance which was allegedly improperly inflated, and caused the
Company to expend significant dollars in connection with the defense of its
accounting policy, including cost incurred in connection with the defense of the
securities class action described above, and in connection with the repurchase
of its own shares on the open market at allegedly artificially inflated prices.
This derivative action is related to the putative securities class action
described above, which has been dismissed with prejudice. The defendants have
moved to dismiss the consolidated amended derivative complaint. The Company
anticipates that briefing on this motion will be completed in August 2002. The
case is in the preliminary stages and the ultimate outcome is not determinable.
Beginning in the second quarter of 2001 and through June 30, 2002, 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 unspecified actual and punitive damages for
alleged breach of contract, fraud and various other claims in connection with
the sale of memberships. As of June 30, 2002, the Company was aware of 22
separate lawsuits involving approximately 115 plaintiffs that have been filed in
multiple counties in Alabama, and nine separate lawsuits involving approximately
416 plaintiffs in multiple counties in Mississippi. The Mississippi lawsuits
also name the Company's provider attorney in Mississippi as a defendant. A
complaint has also been filed on behalf of the Mississippi plaintiffs and others
with the Attorney General of Mississippi and the Company has responded to a
request for information from the Attorney General. Additional suits of a similar
nature have been threatened. In January 2002, one of the law firms representing
individual plaintiffs in some of those Alabama suits filed a putative class
action on behalf of all Alabama residents purchasing memberships seeking damages
and injunctive relief based on alleged failures to provide coverage under the
memberships. The class action allegations of that suit have been dismissed with
prejudice and the claims of the two individuals are all that remain in that
suit. Another Alabama member suit was dismissed with prejudice by the Pre-Paid
member who brought the suit due to her attorney's assessment of the merits of
the case. In Mississippi, the Company has filed a lawsuit in the United States
District Court for the Southern District 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. These
cases are all in various stages of litigation, and 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 has filed various preliminary motions in
this case, all of which were pending as of June 30, 2002. The case is in the
preliminary stages and the ultimate outcome is not determinable.
On June 29, 2001, an action was filed against the Company in the District
Court of Canadian County, Oklahoma. In the second quarter of 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 and seeks
injunctive and declaratory relief regarding the enforcement of certain contract
provisions with sales associates. The case is in the preliminary stages and the
ultimate outcome 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 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 is required
to be filed on or before August 2, 2002. The Company expects to file a motion to
dismiss on or before September 16, 2002. All discovery in the action is stayed
pending a ruling on this motion, which the Company expects will occur no earlier
than January of 2003. The case is in the preliminary stages and the ultimate
outcome 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. 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.
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 June 30, 2002 of approximately
$4.3 million have been paid from existing resources and cash flow. The Company
continues to consider incurring 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 $7.7 million with the
general contractor pertaining to the new office complex and expects to enter
into similar types of construction contracts for various phases of construction
during the remainder of the construction period. Total remaining costs of
construction from July 1, 2002 are estimated at approximately $25.7 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 5 million shares during subsequent board meetings. At June 30, 2002,
the Company had purchased 4.3 million shares under these authorizations for a
total consideration of $100.0 million, an average price of $23.30 per share.
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 purchase program. The Company has obtained a $10 million line of credit
facility to be used for additional stock purchases. As of July 22, 2002, the
Company had drawn $1 million on this available credit line and may make
additional draws in the future.
Note 4 - Earnings Per Share
Basic earnings per common share are computed by dividing net income
applicable to common shares 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
applicable to common shares 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 Six Months
Ended June 30, Ended June 30,
------------------- -------------------
Basic Earnings Per Share: 2002 2001 2002 2001
--------- --------- --------- ---------
Earnings:
Income from continuing operations applicable to common shares........ $ 8,527 $ 4,823 $ 17,397 $ 12,341
--------- --------- --------- ---------
Shares:
Weighted average shares outstanding.................................. 20,126 21,403 20,215 21,704
--------- --------- --------- ---------
Diluted Earnings Per Share:
Earnings:
Income from continuing operations available to common
stockholders after assumed conversions............................. $ 8,527 $ 4,823 $ 17,397 $ 12,341
--------- --------- --------- ---------
Shares:
Weighted average shares outstanding.................................. 20,126 21,403 20,215 21,704
Assumed exercise of options.......................................... 99 26 118 30
--------- --------- --------- ---------
Weighted average number of shares, as adjusted....................... 20,225 21,429 20,333 21,734
--------- --------- --------- ---------
Note 5 - Discontinued Operations
On December 31, 2001 the Company completed the sale of its wholly owned
subsidiary Universal Fidelity Life Insurance Company ("UFL"). The Company
received a $2.8 million dividend and $1.2 million from the sale of 100% of UFL
stock. The results of operations of the UFL segment have been segregated and
reported as discontinued operations in the Consolidated Statements of Income for
the three months and six months ended June 30, 2001. Cash flow impacts of
discontinued operations have been segregated in the Consolidated Statements of
Cash Flows for the six months ended June 30, 2001. Details of income from
discontinued operations are as follows:
Three Months
Ended Six Months Ended
June 30, 2001 June 30, 2001
-------------- ----------------
Revenues................................................................ $ 267 $ 552
-------------- ----------------
Income (loss) from discontinued operations, net of tax expense of $0.... $ (102) $ 56
-------------- ----------------
Note 6 - Recent Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued new
pronouncements: SFAS 142, "Goodwill and Other Intangible Assets"; and SFAS 143,
"Accounting for Asset Retirement Obligations." SFAS 142 requires that goodwill
as well as other intangible assets be tested annually for impairment. In
addition, the Statement eliminates the previous requirement to amortize goodwill
or intangible assets with indefinite lives, and is effective for fiscal years
beginning after December 15, 2001. SFAS 142 was adopted effective January 1,
2002 and did not have a material impact on the Company's financial position or
results of operations. SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. SFAS 143 is effective for fiscal years beginning after June
15, 2002. The Company does not expect SFAS 143 to materially impact its reported
results.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", (SFAS 144") is effective for the Company for the fiscal year beginning
January 1, 2002, and addresses accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 retains the
fundamental provisions of SFAS No. 121 and expands the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company adopted
SFAS 144 effective January 1, 2002. The new standard did not have a material
impact on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
- ---------------------
First Six Months of 2002 Compared to First Six Months of 2001
-------------------------------------------------------------
The Company reported net income applicable to common shares of $17.4
million, or $.86 per diluted common share, for the six months ended June 30,
2002, up 40% from net income applicable to common shares of $12.4 million, or
$.57 per diluted common share, for the comparable period of the prior year.
Diluted earnings per share increased 51 percent due to increased net income of
40 percent and an approximate 7 percent decrease in the number of outstanding
shares.
Membership fees totaled $149.5 million during 2002 compared to $126.4
million for 2001, an increase of 18%. 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 increased 9%
during the six months ended June 30, 2002 to 406,975 from 371,832 during the
comparable period of 2001. At June 30, 2002, there were 1,360,502 active
Memberships in force compared to 1,179,705 at June 30, 2001, an increase of 15%.
Additionally, the average annual fee per Membership has increased from $249 for
all Memberships in force at June 30, 2001 to $256 for all Memberships in force
at June 30, 2002, a 3% increase. This increase is a result of a higher portion
of active Memberships containing additional benefits at an additional cost.
Associate services revenue decreased 5% from $19.1 million for the first
six months of 2001 to $18.1 million during the same period of 2002 primarily as
a result of a reduced associate entry fee during the months of March through
June of 2002. The associate entry fee ranged from $99 to $199 during these
months compared to the typical associate fee of $249. 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 price may lead to
lower associate services revenues overall, the reduced price 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 part of the 2002 period,
the Fast Start program generated training fees of approximately $6.0 million
during the first six months of 2002 compared to $10.7 million for the comparable
period of 2001. 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, which includes a specified number of
Membership sales, provides for the payment of certain training bonuses. The $6.0
million and $10.7 million for the six month periods ending June 30, 2002 and
2001, respectively, in training fees was collected from approximately 74,422 new
sales associates who elected to participate in Fast Start during the first six
months of 2002 compared to 58,363 that participated during the comparable period
of 2001. Total new associates enrolled during the first six months of 2002 were
79,455 compared to 61,191 for the same period of 2001, an increase of 30%.
Other income increased 46%, to $2.4 million for the six months ended June
30, 2002 from $1.6 million for the comparable period of 2001 primarily due to an
increase in Membership enrollment fees of $600,000.
Primarily as a result of the increase in Membership fees, total revenues
increased to $170.0 million for the six months ended June 30, 2002 from $147.1
million during the comparable period of 2001, an increase of 16%.
Membership benefits totaled $50.3 million for the six months ended June 30,
2002 compared to $41.8 million for the comparable period of 2001, and
represented 34% and 33%, respectively of Membership fees for both the 2002 and
2001 periods. 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.
Commissions to associates increased 10% to $60.6 million for the six months
ended June 30, 2002 compared to $55.1 million for the comparable period of 2001,
and represented 41% and 44% of Membership fees for such periods. These amounts
were reduced by $550,000 and $1.2 million, respectively, representing Membership
lapse fees. Prior to March 1, 2002, these fees were determined by applying the
prime interest rate to the 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 payments
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 commissions. The Company eliminated these fees for
Memberships sold after March 1, 2002 in conjunction with the change in the
commission structure as discussed in "Liquidity and Capital Resources".
Commissions to associates are primarily dependent on the number of new
memberships sold during a period. New memberships sold during the six months
ended June 30, 2002 totaled 406,975, a 9% increase from the 371,832 sold during
the comparable period of 2001. Commissions to associates per new membership sold
were $150 per membership for the six months ended June 30, 2002 compared to $149
for the comparable period of 2001. 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.
Associate services and direct marketing expenses decreased to $14.7 million
for the six months ended June 30, 2002 from $16.0 million for the comparable
period of 2001. Fast Start bonuses incurred were approximately $2.6 million
during the first six months of 2002 compared to $6.2 million in the same period
of 2001. Fast Start bonuses are typically eliminated or reduced during those
times the Company reduces the sales associate entry fee as it did from March to
June 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 marketing costs, other than commissions, that are directly associated
with new Membership sales.
General and administrative expenses during the six months ended June 30,
2002 and 2001 were $15.3 million and $13.9 million, respectively, and
represented 10% and 11%, respectively of Membership fees for each period.
Management expects general and administrative expenses as a percentage of
Membership fees to remain near current levels in the near term but to gradually
decrease as a percentage of Membership fees as a result of certain economies of
scale.
Other expenses, net, which include depreciation and amortization and
premium taxes reduced by interest income, were approximately $2.4 million and
$2.1 million, respectively for the six months ended June 30, 2002 and June 30,
2001. Depreciation and amortization increased to $2.5 million for the first six
months of 2002 from $1.9 million for the comparable period of 2001 but premium
taxes decreased to $900,000 from $1.0 million for the six months ended June 30,
2001 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 $200,000
for the first six months of 2002 to $1.0 million from $1.2 million for the 2001
period due to a decrease in investment balances and a reduction in interest
rates.
The Company has recorded a provision for income taxes of $9.2 million
(34.5% of pretax income) for the first six months of 2002 compared to $6.0
million (32.6% of pretax income) for the same period of 2001. The lower
effective tax rate for the 2001 period was primarily attributable to the
utilization of net operating loss carryforwards and tax credits.
The results of operations of the UFL segment have been segregated and
reported as discontinued operations in the Consolidated Statements of Income.
Income from discontinued operations, net of income tax of $0, was $56,000 for
the six months ended June 30, 2001. UFL was sold on December 31, 2001.
Second Quarter of 2002 compared to the Second Quarter of 2001
- -------------------------------------------------------------
The results of operations in the second quarter of 2002, compared to the
second quarter of 2001, reflect increases in revenues and expenses primarily as
a result of the same factors discussed in the comparison of the first six months
of 2002 to the first six months of 2001.
Total revenues increased 14% or approximately $11.1 million to $87.9
million in the second quarter of 2002 compared to $76.8 million in the second
quarter of 2001, primarily as a result of increases in membership premiums. The
membership premium increase of 16% primarily resulted from an increase in the
number of average active memberships during the second quarter of 2002 compared
to the similar period in 2001.
Membership benefits totaled $26.0 million in the 2002-second quarter
compared to $21.8 million in the 2001-second quarter and resulted in a loss
ratio of 34% and 32%, respectively.
Associate services revenue increased 1% from $9 million for the second
quarter of 2001 to $9.1 million during the same period of 2002 primarily as a
result of more new associates enrolled during the second quarter of 2002 of
45,962 compared to 26,905 enrolled during the comparable period of 2001,
partially offset by a reduced associate entry fee of $99 during part of the
second quarter 2002 compared to the typical associate fee of $249. The associate
entry fee has been reduced periodically in the past and may continue to be
reduced at certain times in future periods. As a result of this lower fee for
part of the 2002 quarter, the Fast Start program generated training fees of
approximately $2.5 million during the second quarter of 2002 compared to $4.3
million for the comparable period of 2001. 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 $4.3 million for
the second quarter 2002 and 2001, respectively, in training fees was collected
from approximately 43,235 new sales associates who elected to participate in
Fast Start during the 2002-second quarter compared to 25,573 that participated
during the comparable quarter of 2001. Total new associates enrolled during the
second quarter of 2002 were 45,962 compared to 26,905 for the same period of
2001, an increase of 71%. The number of new associates recruited in the second
quarter of 2002 represents the highest recruiting quarter in the Company's
history.
Other income increased 73%, to $1.2 million for the three months ended June
30, 2002 from $700,000 for the comparable period of 2001 primarily due to an
increase in enrollment fees of $400,000.
Commissions to associates increased 4% to $32.8 million for the three
months ended June 30, 2002 compared to $31.5 million for the comparable period
of 2001, and represented 42% and 47% of Membership fees for such periods. These
amounts were reduced by $111,000 and $640,000, respectively, representing
Membership lapse fees. Commissions to associates per new membership sold were
$159 per membership for the three months ended June 30, 2002 compared to $165
for the comparable period of 2001.
Associate services and direct marketing expenses decreased to $7.2 million
for the three months ended June 30, 2002 from $7.8 million for the comparable
period of 2001. Fast Start bonuses incurred were approximately $1.0 million
during the second quarter of 2002 compared to $3.6 million in the same period of
2001. Fast Start bonuses are typically eliminated or reduced during those times
the Company reduces the sales associate entry fee as it did in the 2002-second
quarter. 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 marketing costs, other than commissions, that are directly associated
with new Membership sales.
General and administrative expenses during the three months ended June 30,
2002 and 2001 were $7.5 million and $7.6 million, respectively, and represented
10% and 11% of Membership fees, respectively, for each period. Management
expects general and administrative expenses as a percentage of Membership fees
to remain near current levels in the near term but to gradually decrease as a
percentage of Membership fees as a result of certain economies of scale.
Other expenses, net, which include depreciation and amortization and
premium taxes reduced by interest income, were approximately $1.4 million and
$1.1 million for the three-month periods ended June 30, 2002 and 2001,
respectively. Depreciation and amortization increased to $1.3 million for the
three months ended June 30, 2002 from $976,000 for the comparable period of 2001
and premium taxes increased $127,000 from $495,000 for the three months ended
June 30, 2001 to $622,000 for the comparable period of 2002 due to an increase
in membership revenues. Interest income decreased by approximately $78,000 for
the first three months ended June 30, 2002 to $492,000 from $414,000 for the
2001 period due to an increase in investment balances.
The above factors resulted in a 2002 second quarter net income applicable
to common shareholders of $8.5 million, or $.42 per share, diluted, compared to
$4.7 million, or $.22 per share, for the second quarter of 2001.
The results of operations of the UFL segment have been segregated and
reported as discontinued operations in the Consolidated Statements of Income.
Loss from discontinued operations, net of income tax of $0, was $(102,000)for
the three months ended June 30, 2001.
Liquidity and Capital Resources
- -------------------------------
General
Consolidated net cash provided by operating activities of continuing
operations was $23.5 million for the first six months of 2002 compared to cash
provided of $13.8 million for the 2001 period. The increase of $9.8 million
resulted primarily from the increase in net income of $5.0 million, a net
increase in the change in accounts payable and accrued expenses of $3.9 million,
a decrease in the change in income taxes payable of $800,000, an increase of
$600,000 in depreciation and amortization and an increase of $800,000 in the tax
benefit on exercise of stock options, partially offset by an increase in the
provision for deferred taxes of $700,000.
Consolidated net cash used in investing activities of continuing operations
was $5.5 million for the first six months of 2002 compared to net cash provided
by investing activities of $1.2 million for the comparable period of 2001. This
$6.7 million increase in cash used in investing activities resulted primarily
from the $4.9 million increase in the purchases of investments and the $1.7
million decrease in maturities and sales of investments.
Net cash used in financing activities of continuing operations during the
first six months of 2002 was $22.1 million compared to $15.9 million for the
comparable period of 2001. This $6.2 million change was primarily comprised of
the $9.2 million increase in treasury stock purchases during the first six
months of 2002 compared to the first six months of 2001 offset by a $3.0 million
increase in proceeds from the exercise of stock options during the 2002 period
when compared to the comparable period of 2001.
Primarily due to the large amount of treasury stock purchases in the first
six months of 2002 of approximately $25.0 million, the Company had a
consolidated working capital deficit of $1.1 million at June 30, 2002, a
decrease of $6.2 million compared to a consolidated working capital surplus of
$5.1 million at December 31, 2001. The $1.1 million working capital deficit at
June 30, 2002 would have been a $6 million working capital surplus excluding the
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
continuing operations ($23.5 million during the first six months of 2002), the
Company's ability to control the timing of its discretionary treasury stock
purchases and the availability pursuant to its lines of credit, the Company does
not expect any difficulty in meeting its financial obligations in the short term
or the long term.
At June 30, 2002 the Company reported $30.4 million in cash and cash
equivalents and unpledged investments (after utilizing more than $25.0 million
to purchase approximately 1.1 million shares of its common stock during the six
months ended June 30, 2002) compared to $33.7 million at December 31, 2001. 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 six months ended June 30, 2002, the Company
advanced commissions of $61.2 million on new Membership sales compared to $55.1
million for the same period of 2001. Since approximately 95% 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 commissions payable on those Memberships are withheld
to recover the advance. Effective March 1, 2002, and in order to offer
additional incentives for increased Membership retention rates, the Company
returned to a differential commission structure with advance rates of
approximately 80% of first year Membership premiums on new Memberships written
and variable renewal commission rates ranging from zero to 25% per annum based
on the first year Membership retention rate of the associate's sales
organization. This 12-month advance structure replaces the prior compensation
structure utilized by the Company that included up to a 3-year commission
advance based on an average commission rate of approximately 27% for all
membership years.
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 June 30, 2002 were:
(Amounts in 000's)
------------------
Beginning unearned advance commission payments (1)............................... $ 211,609
Advance commission payments, net................................................. 61,156
Earned commissions applied....................................................... (41,101)
Advance commission payment write-offs............................................ (1,056)
-------------
Ending unearned advance commission payments before
estimated unrecoverable payments (1)........................................... 230,608
Estimated unrecoverable advance commission payments (1).......................... (18,797)
Ending unearned advance commission payments, net (1)............................. -------------
$ 211,811
-------------
(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 $23 million. As
such, at June 30, 2002 future commission payments and related expense should be
reduced as unearned advance commission payments of $189 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 June 30, 2002 of $30.4 million. The
Company expects to maintain cash and investment balances, including pledged
investments, on an on-going basis of approximately $25 to $35 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 June 30, 2002 of approximately
$4.3 million have been paid from existing resources and cash flow. The Company
continues to consider incurring 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 $7.7 million with the
general contractor pertaining to the new office complex and expects to enter
into similar types of construction contracts for various phases of construction
during the remainder of the construction period. Total remaining costs of
construction from July 1, 2002 are estimated at approximately $25.7 million.
On June 11, 2002, the Company entered into line of credit agreements
totaling $30 million with commercial lenders providing for a stock repurchase
line and a real estate line for funding of the Company's new corporate office
complex. These arrangements provide for funding of up to $10 million to finance
treasury stock purchases over the period ending March 31, 2003 with scheduled
monthly repayments beginning after the initial advance and ending no later than
March 31, 2004 with interest at the 30 day LIBOR Rate plus two percent, adjusted
monthly. The Company plans to incur indebtedness to finance its new corporate
headquarters in order to allow cash flow from operations to continue to be used
to purchase treasury stock. The real estate term loan portion of up to $20
million may be funded over the period ending December 31, 2003 will be at the 30
day LIBOR Rate plus 2.25%, adjusted monthly, and will be repayable beginning
after the advance period based on a 10 year monthly amortization schedule with a
balloon payment on September 30, 2008. These agreements contain normal reporting
covenants and the loans will be secured by the Company's rights to receive
membership fees on a portion of its memberships and a mortgage on the new
headquarters. The line of credit contains covenants restricting the Company from
various activities, the most significant of which restrict the Company from:
o Pledging any of its assets;
o Selling any assets;
o Incurring additional indebtedness;
o Paying any cash dividends to shareholders;
o Making any loans or advances to other persons, except employees in
connection with the exercise of stock options; and
o Engaging in any merger or acquisition in which the Company is not the
surviving corporation.
The line of credit also contains financial covenants requiring the Company to
maintain:
o Quarterly debt coverage ratio (net income plus depreciation and amorti-
zation for most recent quarter divided by scheduled principal payments on
the line of credit for the next quarter)of at least 125%;
o Rolling 12 month average retention rate of memberships greater than 18
months old of at least 70% calculated quarterly;
o Cancellation rate on contracts less than 12 months old of no more than 50%
for 2002 and 45% thereafter, calculated quarterly; and
o Ratio of total liabilities to tangible net worth of no more than 2.5 to 1.
Subsequent to June 30, the Company accessed $1 million of the $30 million
available to it under previously announced lines of credit, and expects to
access additional amounts in the future.
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. While blended
retention rates have not changed significantly over the past five years, the
Company has recently taken actions that may impact retention rates in the
future. Since December 31, 2001, the Company has implemented several new
initiatives aimed at improving the retention rate of both new and existing
Memberships. Such initiatives include a revised compensation structure,
effective March 1, 2002, featuring variable renewal commission rates ranging
from zero to 25% per annum based on the first year Membership retention rate of
the associate's sales organization; implementation of a "non-taken"
administrative fee to sales associates of $35 for any Membership application
that is processed by the Company after March 1, 2002, but for which a payment is
never received; and, an increase in the amount of the commission "charge-back"
for Memberships written after March 1, 2002 which are subsequently terminated
from 50% of the unearned Membership commission advance balance to 100% of the
unearned Membership commission advance balance. The Company is also in the
process of designing and implementing an enhanced member "life cycle"
communication process aimed at both increasing the overall amount of
communication from the Company to the members as well as more specific target
messaging to members based on the length of their Membership as well as
utilization characteristics. 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 Pre-Paid Legal Casualty,
Inc. ("PPLCI") and Pre-Paid Legal Services, Inc. of Florida ("PPLSIF"). The
ability of PPLCI and PPLSIF to provide funds to the Company is subject to a
number of restrictions under various insurance laws in the jurisdictions in
which PPLCI and PPLSIF conduct business, including limitations on the amount of
dividends and management fees that may be paid and requirements to maintain
specified levels of capital and reserves. In addition PPLCI will be required to
maintain its stockholders' equity at levels sufficient to satisfy various state
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 June 30, 2002, PPLSIF did not have funds available for payment of
substantial dividends without the prior approval of the respective insurance
commissioner. PPLCI had approximately $5 million in surplus funds available for
payment of an ordinary dividend.
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, 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 June 30, 2002 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, including the risks that the Company's
membership persistency or renewal rates may decline, that the Company may not be
able to continue to grow its memberships and earnings, that the Company is
dependent on the continued active participation of its principal executive
officer, that pending litigation may have a material adverse effect on the
Company if resolved unfavorably to the Company, that the Company could be
adversely affected by regulatory developments, that competition could adversely
affect the Company and that the Company is substantially dependent on its
marketing force. See Note 2 - Contingencies and Item 1 - Legal Proceedings.
Please refer to pages 33 and 34 of the Company's 2001 Annual Report on Form 10-K
for a complete description of these 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 June 30, 2002, 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
Hypothetical change value after
in interest hypothetical
rate change in interest
Fair Value (bp=basis points) rate
----------- ------------------- ------------------
Fixed-maturity investments at June 30, 2002 (1)............. $ 20,621 100 bp increase $ 19,132
200 bp increase 17,870
50 bp decrease 21,100
100 bp decrease 21,731
Fixed-maturity investments at December 31, 2001 (1)......... $ 18,983 100 bp increase $ 17,635
200 bp increase 16,437
50 bp decrease 19,575
100 bp decrease 20,167
- --------------------
(1) Excluding short-term investments with a fair value of $3.0 million and $3.3
million at June 30, 2002 and December 31, 2001, respectively.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at June 30, 2002 would reduce the
estimated fair value of the Company's fixed-maturity investments by
approximately $2.8 million at that date. At December 31, 2001, 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 $2.5 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.
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: See Exhibit Index
(b) Reports on Form 8-K: none
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 23, 2002 /s/ Randy Harp
------------------------------------------
Chief Operating Officer
(Duly Authorized Officer)
Date: July 23, 2002 /s/ Steve Williamson
------------------------------------------
Chief Financial Officer
(Principal Accounting Officer)
EXHIBIT INDEX
No. Description
---- ------------
10.1 Loan Agreement between Registrant and Bank of Oklahoma, N.A.
10.2 Security Agreement between Registrant and Bank of Oklahoma, N.A.
10.3 Form of Mortgage between Registrant and Bank of Oklahoma, N.A.
EXHIBIT 10.1
Loan Agreement between Registrant and Bank of Oklahoma, N.A.
LOAN AGREEMENT
Between
PRE-PAID LEGAL SERVICES, INC.
And
BANK OF OKLAHOMA, N.A.
June 11, 2002
TABLE OF CONTENTS
1. CERTAIN DEFINITIONS
1.1 Affiliate
1.2 Advance
1.3 Agreement
1.4 Borrower's Architect
1.5 Collateral
1.6 Code
1.7 Compliance Certificate
1.8 Debt Coverage Ratio
1.9 ERISA
1.10 Events of Default
1.11 Funded Debt
1.12 GAAP
1.13 General Contractor
1.14 Indebtedness
1.15 LIBOR Rate
1.16 Lien
1.17 Loan
1.18 Loan Documents
1.19 Material Adverse Effect
1.20 Mortgage
1.21 Notes
1.22 PBGC
1.23 Person
1.24 Permitted Liens
1.25 Plan
1.26 Plans and Specifications
1.27 Potential Default
1.28 Prime Rate
1.29 Project
1.30 Real Estate Loan
1.31 Real Estate Note
1.32 Real Estate Note Maturity Date
1.33 Real Property
1.34 Reportable Event
1.35 Responsible Officer
1.36 Security Agreement
1.37 Stock Loan
1.38 Stock Loan Commitment
1.39 Stock Note
1.40 Stock Note Maturity Date
1.41 Subsidiary
1.42 Tranche
2. LENDING AGREEMENT
2.1 Stock Loan
2.2 Real Estate Loan
2.3 Payments
2.4 Prepayment and Prepayment Penalty
2.5 Application of Payments
2.6 Default Interest
2.7 Commitment Fee
2.8 Further Assurance
3. COLLATERAL
3.1 Mortgage
3.2 Security Interest
3.3 Construction Security Interest
4. CONDITIONS OF LENDING
4.1 Conditions Precedent to Closing and Advances Pursuant to Stock
Loan
4.2 Conditions Precedent to Each Real Estate Note Advance
5. REPRESENTATIONS AND WARRANTIES
5.1 Organization and Good Standing
5.2 Authorization and Power
5.3 Governmental Authorization
5.4 Binding Effect
5.5 Financial Statements
5.6 Labor Disputes and Acts of God
5.7 Other Agreements
5.8 Title to Real Property
5.9 Litigation
5.10 No Defaults on Outstanding Judgments or Orders
5.11 Debt
5.12 Conflicting Documents or Agreements
5.13 Full Disclosure
5.14 No Default
5.15 Material Agreements
5.16 Principal Office
5.17 ERISA
5.18 Payment of Taxes
5.19 Environment
5.20 Survival Representations and Warranties
6. AFFIRMATIVE COVENANTS
6.1 Applicable Laws
6.2 Annual Financial Statements
6.3 Quarterly Financial Statements
6.4 Notice of Litigation
6.5 Maintenance of Existence
6.6 Books and Records; Inspections
6.7 Taxes
6.8 Title to Assets and Maintenance
6.9 Additional Assurances
6.10 Performance of Obligations
6.11 Expenses
6.12 Payment of Liabilities
6.13 Right to Conduct Business
6.14 Other Information
6.15 Maintenance of Insurance
6.16 Regulation U Compliance
7. NEGATIVE COVENANTS
7.1 Negative Pledge
7.2 Sale of Assets
7.3 Additional Indebtedness
7.4 Environmental Matters
7.5 Name, Fiscal Year and Accounting Method
7.6 Dividends and Distributions
7.7 Loans or Advances
7.8 Discontinuance of Business Lines
7.9 Mergers and Acquisitions
7.10 Transactions With Affiliates
8. CONSTRUCTION COVENANTS
8.1 Construction Standards
8.2 Work Stoppage
8.3 Excess Costs
9. FINANCIAL COVENANTS
9.1 Debt Service Coverage
9.2 Retention Rate
9.3 Cancellation Rate
9.4 Liabilities to Net Worth
10. EVENTS OF DEFAULT
10.1 Nonpayment of Note
10.2 Nonpayment of Interest
10.3 Other Nonpayment
10.4 Breach of Covenants
10.5 Representations and Warranties
10.6 Insolvency
10.7 Voluntary Bankruptcy
10.8 Involuntary Bankruptcy
10.9 Creditor's Proceedings
10.10 Monetary Judgments
10.11 Borrower Dissolution
10.12 Harland Stonecipher
11. REMEDIES
11.1 Immediate Acceleration
11.2 Five Day Notice and Demand
11.3 Thirty Day Notice and Demand
11.4 Other Rights
11.5 Cumulative Remedies
12. GENERAL CONDITIONS
12.1 Previous Loan Transaction
12.2 Cross-Default
12.3 Notices
12.4 Amendment; Waiver
12.5 Governing Law
12.6 Prohibition Against Assignment
12.7 Indemnification
12.8 Entire Agreement
12.9 Severability
12.10 Captions
12.11 Binding Effect
12.12 Contrary Provisions
12.13 Counterpart
12.14 Waiver of Jury Trial
LOAN AGREEMENT
THIS LOAN AGREEMENT is made and entered into this 11th day of June, 2002, by and
between PRE-PAID LEGAL SERVICES, INC., an Oklahoma corporation (the "Borrower")
and BANK OF OKLAHOMA, N.A., a national banking association ("Bank").
W I T N E S S E T H:
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WHEREAS, Borrower and Bank have agreed to an extension of credit in the
principal amount of Thirty Million and No/100 Dollars ($30,000,000.00) from the
Bank to the Borrower consisting of: (i) a $10,000,000 term loan for the primary
purpose of purchasing Borrower's shares of stock in the open market (the "Stock
Loan"), as evidenced by the promissory note described herein; and (ii) a
$20,000,000 term loan for the purpose of financing construction costs attendant
to Borrower's new corporate headquarters in Ada, Oklahoma (the "Real Estate
Loan"), as evidenced by the promissory note described herein; and
WHEREAS, the Borrower desires to secure its obligation under this Agreement and
the promissory notes described herein with (i) a first security interest in
legal contracts issued in states where such contracts are not viewed as
insurance products and (ii) a first real estate mortgage on the Borrower's
headquarters currently under construction located in Ada, Oklahoma; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Bank and Borrower hereby consent and
agree as follows:
1. CERTAIN DEFINITIONS.
As used in this Agreement, "Borrower" and "Bank" shall have the meanings set
forth above and the following terms with their initial letters capitalized shall
have the following meanings except where the context otherwise requires:
1.1 Affiliate. The term "Affiliate" shall mean any Person which, directly or
indirectly, controls, is controlled by or is under common control with the
relevant Person. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlled by" and "under common
control with"), as used with respect to any Person, shall mean a member of
the board of directors, a general partner or an executive officer of such
Person, or any other Person with possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of
such Person, through the ownership (of record, as trustee, or by proxy) of
voting shares, partnership interests or voting rights, through a management
contract or otherwise. Any Person owning or controlling directly or
indirectly ten percent or more of the voting shares, partnership interests
or voting rights, or other equity interest of another Person shall be
deemed to be an Affiliate of such Person.
1.2 Advance. The term "Advance" shall mean the disbursement by Bank of a sum or
sums loaned to Borrower pursuant to this Agreement.
1.3 Agreement. The term "Agreement" shall mean this Loan Agreement, as the same
may from time to time be amended, supplemented or modified.
1.4 Borrower's Architect. MS&R, the architect engaged by Borrower for its
headquarters located in Ada, Oklahoma.
1.5 Collateral. The term "Collateral" shall have that meaning ascribed to such
term as is provided in Section 3 hereof.
1.6 Code. The term "Code" shall mean the Internal Revenue Code of 1986 as
amended from time to time.
1.7 Compliance Certificate. The term "Compliance Certificate" shall mean each
certificate, substantially in the form of Exhibit B attached hereto,
executed by the Responsible Officer on behalf of Borrower and furnished
from time to time in accordance with this Agreement.
1.8 Debt Coverage Ratio. The term "Debt Coverage Ratio" shall mean the ratio
determined by dividing Net Income plus depreciation and amortization minus
unfunded construction costs for the most recent calendar quarter DIVIDED BY
principal payments due on all Funded Debt for the ensuing calendar quarter.
1.9 ERISA. The term "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended, together with all regulations issued pursuant
thereto.
1.10 Events of Default. The term "Events of Default" shall have that meaning
ascribed to such term as is provided in Section 10 hereof.
1.11 Funded Debt. The term "Funded Debt" shall mean debt that is evidenced by
bonds, debentures, notes, or other similar instruments.
1.12 GAAP. The term "GAAP" shall mean generally accepted accounting principals
set forth in the opinions and pronouncements of the Accounting Principles
Board and the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board
or in such other statements by such other entity as may be approved by a
significant segment of the accounting profession, which are applicable to
the circumstances as of the date of determination.
1.13 General Contractor. The term "General Contractor" shall refer to the
general contractor selected by Borrower and approved by Bank to construct
the Project.
1.14 Indebtedness. The term "Indebtedness" shall mean: (i) all obligations of
Borrower as evidenced by the Notes; (ii) all obligations of Borrower
evidenced by this Agreement; (iii) all obligations of the Borrower arising
from any of the Loan Documents or other agreements covering property
secured by a Lien on any asset of Borrower now or hereafter contemplated by
this Agreement, whether direct or indirect, absolute or contingent.
1.15 LIBOR Rate. The term "LIBOR Rate" shall mean the arithmetic average of the
rate at which Dollar deposits in immediately available funds and for a
maturity equal to one-month (30 days) are offered or available in the
London Interbank Market for Eurodollars as of 11:00 a.m. (London time) on
the date of determination, as reported in the "Money Rates" section of The
Wall Street Journal or a substitute source reasonably determined by Lender
in the event such source is no longer available. As of June __, 2002, the
one-month LIBOR Rate was _.__%. If more than one month (30 days) LIBOR Rate
is published in The Wall Street Journal for any particular time period then
the LIBOR Rate shall be the highest of such published rates. Beginning June
1, 2002, such rate shall be adjusted as of the first day of each month
during the term hereof.
1.16 Lien. The term "Lien" shall mean, with respect to any asset of the
Borrowers, any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind in respect of such asset.
1.17 Loan. The term "Loan" or "Loans" shall mean the Stock Loan and the Real
Estate Loan which are evidenced by the Notes, and are evidenced and secured
by the Loan Documents.
1.18 Loan Documents. The term "Loan Documents" shall collectively mean this
Agreement, the Notes, Mortgage, the Security Agreement, all financing
statements and all other security documents and instruments executed and
delivered in connection with the Loan described herein which secure the
obligations of the Borrower to the Bank and any renewals, amendments,
supplements or modifications thereof or thereto.
1.19 Material Adverse Effect. The term "Material Adverse Effect" shall mean any
circumstance or event which could have a material adverse effect on (i) the
Borrower's assets or properties, liabilities, financial condition,
business, operations, affairs or circumstances, or (ii) the ability of
Borrower to repay its debt from ongoing cash flow from operations or cash
reserves; or (iii) the ability of Borrower to carry out its business as of
the date of this Agreement or as proposed at the date of this Agreement to
be conducted or to meet its obligations under the Notes, this Agreement or
the other Loan Documents on a timely basis.
1.20 Mortgage. The term "Mortgage" shall mean the Real Estate Mortgage executed
by Borrower covering the real estate and improvements more particularly
described as the "Real Property," in form and substance acceptable to Bank.
1.21 Notes. The term "Notes" shall mean the Real Estate Note and the Stock Note.
1.22 PBGC. The term "PBGC" shall mean the Pension Benefit Guaranty Corporation,
and any successor to all or any of this entity's functions under ERISA.
1.23 Person. The term "Person" shall include an individual, a corporation, a
joint venture, a general or limited partnership, a limited liability
company, a trust, an unincorporated organization or a government or any
agency or political subdivision thereof.
1.24 Permitted Liens. The term "Permitted Liens" shall refer to those Liens
described in items (a) through (e) in Section 7.1 herein.
1.25 Plan. The term "Plan" shall mean an employee benefit plan or other plan
maintained by either Borrower for employees of either Borrower and covered
by Title IV of ERISA, or subject to the minimum finding standards under
Section 412 of the Internal Revenue Code of 1954, as amended.
1.26 Plans and Specifications. The plans, specifications and drawings utilized
on construction of the Project.
1.27 Potential Default. Any event which with the giving of notice or lapse of
time, or both, would become an Event of Default.
1.28 Prime Rate. The term "Prime Rate" shall mean the rate of interest announced
by Chase Bank from time to time as its prime commercial lending rate of
interest.
1.29 Project. The term "Project" shall refer to Borrower's headquarters in Ada,
Oklahoma to be constructed in accordance with Plans and Specifications.
1.30 Real Estate Loan. The term "Real Estate Loan" shall refer to that loan
described at Section 2.2 below.
1.31 Real Estate Note. The term "Real Estate Note" shall mean that certain
advancing term promissory note in an amount not in excess of $20,000,000.00
in the form of Exhibit "A-2" attached hereto, together with all renewals,
extensions, and modifications thereto.
1.32 Real Estate Note Maturity Date. The term "Real Estate Note Maturity Date"
shall mean September 30, 2008.
1.33 Real Property. The term "Real Property" shall mean all of the real estate,
leases and improvements thereon described as Borrower's corporate
headquarters located in Ada, Oklahoma and more particularly described in
the Mortgage.
1.34 Reportable Event. The term "Reportable Event" shall have that meaning
assigned to such term in Title IV of ERISA
1.35 Responsible Officer. The term "Responsible Officer" shall refer to Steve
Williamson, Borrower's Chief Financial Officer or Randy Harp, Chief
Operating Officer.
1.36 Security Agreement. The term "Security Agreement" shall mean that certain
Security Agreement executed by Borrower covering the Borrower's legal
contracts, in form and substance acceptable to Bank.
1.37 Stock Loan. The term "Stock Loan" shall refer to that loan described at
Section 2.1 below.
1.38 Stock Loan Commitment. The term "Stock Loan Commitment" shall refer to the
amount of $10,000,000.00 which amount represents the maximum amount of
credit available to Borrower pursuant to the Stock Loan.
1.39 Stock Note. The term "Stock Note" shall mean that certain advancing term
promissory note in an amount not in excess of $10,000,000.00 in the form of
Exhibit "A-1" attached hereto, together with all renewals, extensions, and
modifications thereto
1.40 Stock Note Maturity Date. The term "Stock Note Maturity Date" shall mean
the earlier to occur of (i) May 31, 2004 or (ii) a date ending twelve (12)
months from the date of the last Tranche.
1.41 Subsidiary. The term "Subsidiary" shall mean, as to any Person, a
corporation, limited partnership, or limited liability company of which
shares of stock or other ownership interest having ordinary voting power
(other than stock having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors, the general
partner or other managers of such corporation, limited partnership, or
limited liability company are at the time owned, or the management of which
is otherwise controlled, directly or indirectly through one or more
intermediaries, or both, by such Person.
1.42 Tranche. The term "Tranche" shall mean an advance of funds pursuant to the
Stock Loan.
2. LENDING AGREEMENT. Subject to the terms and conditions hereof, and the terms
and conditions of the Loan Documents, and in reliance upon the Borrower's
representations and warranties contained herein, the Bank agrees to extend
credit to the Borrower, and the Borrower agrees to such extensions of credit
from the Bank on the following terms and conditions:
2.1 Stock Loan. The Bank agrees to extend credit to the Borrower as
evidenced by the Stock Note. This Stock Loan is secured by the
Collateral. The Stock Note will be in the form of an amortizing or
term credit upon which, except as set forth in subsection 2.1.4 below,
the Bank shall have no obligation to make additional advances. No
negative amortization will be permitted.
2.1.1Principal. The principal amount of the Stock Loan shall not
exceed $10,000,000.00.
2.1.2Note Interest Rate. Beginning on the date of the first Advance
hereunder, and continuing throughout the life of the Loan, the
outstanding principal amount of the Stock Note shall bear
interest per annum at the LIBOR Rate plus two percent (2%).
Interest shall be calculated on the basis of a year of 360 days
for the actual number of days elapsed. The LIBOR Rate shall be
adjusted on the first day of each month commencing June 1, 2002.
2.1.3Advances and Purpose. Advances not to exceed $10,000,000.00 in
the aggregate will be available to fund Borrower's acquisitions
of its stock on the open market or otherwise (such as private
purchases) or (ii) to fund construction costs on the Project
prior to funding of the Real Estate Loan following receipt by
Bank of written requests for an Advance. This Loan is expressly
not a revolving credit. Once sums are advanced they cannot be
paid back and re-advanced. Advances under the Stock Loan are not
available after May 31, 2003.
2.1.4Advance Procedure. Borrowers shall give Bank two days prior
written notice in the form of a written request for an Advance
for the purpose of stock acquisition which shall specify (a) the
amount of such Advance and (b) any such other information as
Borrower deems necessary for the Bank to review.
2.1.5Repayment. Beginning June 30, 2002 and continuing on the first
day of each quarter thereafter through May 31, 2004, Borrower
shall make, a payment of all accrued but unpaid interest on the
Stock Note together with a payment of one-twelfth (1/12th) of the
face amount of all Tranche's funded as of said point in time. All
outstanding principal plus all accrued but unpaid interest is due
and payable on the Stock Note Maturity Date.
2.1.6Non-Use Fee. Beginning August 31, 2002 and continuing on the
last day of each quarter thereafter through May 31, 2003,
Borrower shall pay Bank a non-use fee equal to one-eighth of one
percent (.125%) per annum on the unused portion of the Stock Loan
(the Stock Loan Commitment less the total amount advanced on the
Stock Loan) for each day of such quarter.
2.2 Real Estate Loan. The Bank agrees to extend credit to the Borrower as
evidenced by the Real Estate Note. This Real Estate Loan is secured by
the Collateral. The Real Estate Note will be in the form of an
amortizing or term credit upon which, except as set forth in
subsection 2.2.3 below, the Bank shall have no obligation to make
additional advances. No negative amortization will be permitted.
2.2.1Principal. The principal amount of the Real Estate Loan shall not
exceed $20,000,000.00.
2.2.2Note Interest Rate. Beginning on the date of the first Advance
hereunder, and continuing throughout the life of the Real Estate
Loan, the outstanding principal amount of the Real Estate Note
shall bear interest per annum at the LIBOR Rate plus two and one
quarter of one percent (2.25%). Interest shall be calculated on
the basis of a year of 360 days for the actual number of days
elapsed. The LIBOR Rate shall be adjusted on the first day of
each month commencing June 1, 2002.
2.2.3Advances and Purpose. Each Advance pursuant to the Real Estate
Term Loan shall be used for the construction of the Project or to
repay Advances under the Stock Loan used for such purpose.
Advances under the Real Estate Note are not available after
December 31, 2003.
2.2.4Repayment. Beginning June 30, 2002 and continuing on the last
day of each month thereafter through November 30, 2003, Borrower
shall make a payment of all accrued but unpaid interest on the
Real Estate Note. Beginning December 31, 2003 and on or before
the last day of each month thereafter through September 30, 2008,
Borrower shall make a payment of all accrued but unpaid interest
on the Real Estate Note together with a principal payment equal
to the then existing outstanding balance of the Real Estate Note
divided by 105. All outstanding principal plus all accrued but
unpaid interest is due and payable in full on the Real Estate
Note Maturity Date.
2.3 Payments. The principal of and interest on the Notes shall be payable
in lawful money of the United States of America, in immediately
available funds, at the principal office of the Bank in Oklahoma City,
Oklahoma. All such payments shall be made not later than 2:00 p.m.,
Oklahoma City time, on the date due, and funds received for principal
payments on the Note after such hour on any day shall be treated for
all purposes of this Agreement as having been received on the next
succeeding business day in Oklahoma City. If any payment made by the
Borrower under this Agreement is to be made on a Saturday, Sunday or
legal holiday in Oklahoma City, Oklahoma, such payment shall be made
on the next succeeding business day.
2.4 Prepayment and Prepayment Penalty. Except as set forth herein, the
Borrower may prepay any or all of the Notes, either in whole or in
part at any time and from time to time, on any date without premium or
penalty. From the date hereof through May 31, 2003, any portion of the
Notes (or either Note) prepaid due to a refinancing with a Person
other than the Bank shall be assessed a penalty of two percent (2%) of
the portion prepaid. From May 31, 2003 through May 31, 2004, any
portion of the Notes (or either Note) prepaid due to a refinancing
with a Person other than the Bank shall be assessed a penalty of one
percent (1%) of the portion prepaid.
2.5 Application of Payments. Borrower hereby agrees that all Note payments
(whether payments on the Stock Note or the Real Estate Note) paid to
Bank shall be applied: (1) to any costs which the Borrower is
obligated to pay, (2) to any accrued but unpaid interest, and (3) to
the principal indebtedness of the Notes, or to any other indebtedness
or obligations due to Bank.
2.6 Default Interest. While any Event of Default exists hereunder or under
either Note or any of the Loan Documents, in lieu of the interest rate
provided in the Notes, all sums owing by Borrower to Bank in
connection with the Loans shall bear interest at the rate equal to
three percent (3%) per annum in excess of the Prime Rate, accrued from
the date of such Event of Default, but after any applicable grace
period to cure certain events of default as provided herein, to the
date on which such default is cured to the reasonable satisfaction of
the Bank.
2.7 Commitment Fee. Borrower shall pay Bank a commitment fee equal to the
amount of $100,000.00 on or before closing.
2.8 Further Assurance. The Borrower shall, from time to time, execute and
deliver, or cause to be executed and delivered, to the Bank such
mortgages, deeds of trust, instruments, agreements, assignments,
financing statements, continuation statements and other documents, and
take or cause to be taken such actions as Bank may reasonably require,
to provide Bank with and to perfect the security interests and
mortgage liens required hereunder and to establish and maintain the
priority of such security interests and liens.
3. COLLATERAL.
The Loans shall be secured by the following Collateral:
3.1 Mortgage. The Bank shall have a first, valid and enforceable mortgage
lien evidenced by the Mortgage covering all of the Real Property and
improvements on or before the first Advance under the Real Estate
Loan.
3.2 Security Interest. The Bank shall have a first, valid and enforceable
security interest evidenced by a security agreement and a UCC-1
financing statement covering and encumbering Borrower's legal
contracts which are issued in states where such contracts are not
viewed or determined to be insurance products.
3.3 Construction Security Interest. The Bank shall have a first and prior
security interest covering all equipment, fixtures, chattels, building
materials, supplies, inventory, general intangibles and other items of
tangible and intangible personal property now owned and hereafter
acquired by the Borrower and used or useful in the construction,
ownership, operation and maintenance of the Project, together with all
proceeds, products and increases thereof, whether or not the funds to
purchase such items are advanced by the Bank.
4. CONDITIONS OF LENDING.
4.1 Conditions Precedent to Closing and Advances Pursuant to Stock Loan.
The obligation of the Bank to perform this Agreement and to extend the
Stock Loan as described herein is subject to the performance of the
following conditions precedent in form satisfactory to the Bank:
4.1.1Loan Documents. This Agreement, the Notes, the Security
Agreement, financing statements, and all other Loan Documents not
specifically mentioned but heretofore required by the Bank shall
have been duly executed, acknowledged (where appropriate) and
delivered to the Bank, all in form and substance satisfactory to
the Bank, and all such applicable documents shall have been
properly recorded in all appropriate recording offices.
4.1.2Resolutions of Borrower. Resolutions of Borrower approving the
execution, delivery and performance of this Agreement, the Notes,
the Mortgage, the Security Agreement and all other Loan Documents
and the transactions contemplated herein and therein, duly
adopted by Borrower's board of directors and accompanied by a
certificate of Borrower's secretary or assistant secretary
stating that such Resolutions are true and correct, have not been
altered or repealed and are in full force and effect shall have
been delivered to the Bank.
4.1.3Incumbency Certificate of Borrower. A signed certificate of
Borrower's secretary or assistant secretary which shall certify
the name of the officers of Borrower authorized to sign the Loan
Document on behalf of Borrower to be executed by such Person and
the other documents or certificates to be delivered by such
Person pursuant to the Loan Documents, together with the true
signatures of each of such Persons shall have been delivered to
the Bank. The Certificate of Incorporation and the Certificate of
Good Standing for Borrower issued by the Secretary of State of
the State of Oklahoma shall have also been delivered to the Bank.
4.1.4Bylaws. A copy of the current bylaws of Borrower, and all
amendments thereto, certified by a Responsible Officer as being
true, correct and complete as of the date of such certification.
4.1.5Financial Statements and other Information. The Borrower shall
have furnished to the Bank such financial statements and other
information and/or documents as the Bank shall have requested.
4.1.6Inspection. Borrower shall have agreed, as evidenced by its
execution hereof, to permit the Bank to conduct at Bank's
reasonable discretion, inspections of the Real Property.
4.1.7No Default. No Events of Default shall have occurred and be
continuing under this Agreement or the Loan Documents and the
representation and warranties set forth herein and in all other
Loan Documents shall be true and correct in all material
respects.
4.1.8Compliance. Borrower shall comply with and shall continue to be
in compliance with all material terms, covenants, warranties, and
conditions of this Agreement and any other loan documents
contemplated herein.
4.1.9No Adverse Effect. As of the date of making such Advance, no
Material Adverse Effect has occurred since the date of the most
recent financial statement submitted to Bank.
4.1.10Commitment Fee. Bank shall have received the Commitment Fee.
4.1.11Borrower's Opinion. Bank shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Bank and
its counsel.
4.2 Conditions Precedent to Each Real Estate Note Advance. The Bank is
under no obligation to make any Advance under the Real Estate Note
until Borrower complies with all the terms and conditions of this
Agreement. Any Advance by the Bank will not bind the Bank to further
Advances until such conditions herein recited and in Section 4.1 above
are met to Bank's satisfaction. In addition to the conditions
precedent stated in Section 4.1, upon completion of the following
conditions precedent and approval of same by Bank, which such approval
shall occur within five (5) business days of the completion of the
referenced conditions precedent, the Bank shall advance the requested
funds within two (2) business days of such approval:
4.2.1Loan Documents. The Mortgage and any financing statements
associated therewith, and all other Loan Documents not
specifically mentioned but heretofore required by the Bank shall
have been duly executed, acknowledged (where appropriate) and
delivered to the Bank, all in form and substance satisfactory to
the Bank, and all such applicable documents shall have been
properly recorded in all appropriate recording offices.
4.2.2Advance Forms. All Advances will be on an approved AIA Form,
substantially in the form of Exhibit "C" attached hereto.
4.2.3Use of Proceeds. All proceeds of each Advance will be used
solely for the payment of all costs of the building materials and
for the payment of labor costs, architectural fees and expenses,
engineering fees and expenses, site preparation, building
permits, and loan fees.
4.2.4Request for Advance. At least five (5) business days prior to
the requested date of disbursement of an Advance, the Borrower
will notify the Bank of the total amount of the requested Advance
under the Real Estate Note and will furnish to the Bank, in a
form satisfactory to the Bank, an itemized list of costs to be
paid from such Advance with the certificate of the Borrower to
the effect that all costs incurred to the date of the preceding
Advance have been paid in full and that all work has been
performed in a good and workmanlike manner in substantial
accordance with the Plans and Specifications. All advance
requests shall be executed by the Responsible Officer and
Borrower's Architect. Advance requests shall be made no more
often than once a month.
4.2.5Mortgage Liens. Bank shall have a first mortgage lien, security
interest, or other interest on or in the Real Property identified
in the Mortgage.
4.2.6Mortgagee Title Insurance. The Bank shall have received, at
Borrower's expense, an ALTA 1970-B, as revised, Title Insurance
Policy satisfactory to Bank covering the Real Property and issued
in the amount of $20,000,000.00 by companies approved by the
Bank, insuring the Bank's first mortgage lien and insuring that
the Notes will be secured by the first lien of the Mortgage,
subject only to such exceptions as are approved by the Bank.
Prior to issuance of such policy, the Bank shall have received a
commitment for such policy, together with copies of all documents
evidencing restrictive covenants, easements, encumbrances, and
other exceptions of record covering the Real Property. The title
policy shall not include an exception based on mechanics' and
materialmen's liens, any exception based on discrepancies,
conflicts in boundary lines, shortage in area or other facts
which would be disclosed by a proper survey, or any exception
based on violations of restrictive covenants of record.
4.2.7Other Insurance. The Bank shall receive satisfactory original
certificates of fire and extended coverage insurance at
replacement cost, together with standard mortgage clauses naming
the Bank as mortgagee or secured party. The Bank shall also have
received satisfactory original certificates of general public
liability insurance as required by the Mortgage, naming the Bank
as an additional insured.
4.2.8Flood Insurance. The Bank shall have received either: (i)
satisfactory evidence that the Real Property is not situated
within an area identified by the Secretary of Housing and Urban
Development or any other governmental agency as an area having
special flood or mud slide hazards and that no flood insurance is
required by any regulations governing the Bank, or (ii) policies
of flood insurance considered satisfactory to the Bank in its
sole discretion.
4.2.9Survey. The Bank shall have received at Borrower's expense, a
current survey of the Real Property prepared and certified by a
registered land surveyor, in form satisfactory to the Bank and
the title insurer, showing the boundary lines of the Real
Property, the area of the Real Property in square feet, building
locations, set-back lines, any encroachments, rights-of-way,
easements, and other matters which affect the Real Property, with
courses and distances so as to locate accurately the legal
description of the Real Property and other matters on the survey.
Immediately following the completion of the Project's foundation,
Bank shall be furnished a current, post-foundation survey
satisfactory to the Bank and showing that no encroachments
exists. Immediately following the completion of construction of
the Project, the Bank shall be furnished a current as-built
survey satisfactory to the Bank and showing that no encroachments
exist. All such surveys should contain a certification by the
surveyor that the Real Property is not located in an area
designated as a flood hazard.
4.2.10Perfection; Recording and Filing. All actions shall have been
taken as are necessary and appropriate for Bank to maintain a
valid and perfected first mortgage lien and security interest in
and to the Real Property and personal property detailed in the
Mortgage and Security Agreement, including without limitation,
the filing and recording of such Loan Documents as may be
necessary and appropriate.
4.2.11Budget for Property Improvements. Borrower shall have furnished
Bank a copy of the construction plan and budget and all work to
be performed on the Real Property.
4.2.12Additional Instruments. Simultaneously with each advance
request, as may reasonably be required by the Bank, the Borrower
will furnish or cause to be furnished to the Bank such invoices,
lien waivers or lien affidavits, surveys, insurance certificates,
title reports, title policy endorsements and other information as
might be reasonably required by the Bank from time to time and
shall advise the title company engaged for this loan transaction
("Title Company") before any Advance is made as to the amount of
such Advance. The Title Company will check the records for any
mechanic and materialmen's liens and certify by endorsement that
there are none. Compliance With Agreement. Borrower shall have
performed and complied in all material respects with all
agreements and conditions contained herein and in each of the
Loan Documents which are required to be performed or complied
with by Borrower before or on the date of such Advance.
4.2.13No Material Adverse Change. As of the date of making such
Advance, no Material Adverse Effect has occurred since the date
of the most recent financial statement submitted to Bank.
5. REPRESENTATIONS AND WARRANTIES.
To induce the Bank to extend the Loan and enter into this Agreement, Borrower
represents and warrants to the Bank as of the date hereof and on any and all
renewals and extensions thereof, as follows:
5.1 Organization and Good Standing. Borrower is a corporation duly
organized and existing in good standing under the laws of the State of
Oklahoma and has the requisite power and authority to own its
properties and assets and to transact the business in which it is
engaged.
5.2 Authorization and Power. Borrower has the requisite power and
authority to execute, deliver and perform the Loan Documents. Borrower
has taken all necessary corporate action to authorize such execution,
delivery and performance of the Loan Documents. Borrower is and will
continue to be duly authorized to perform the Loan Documents.
5.3 Governmental Authorization. The execution, delivery, and performance
by Borrower of this Agreement requires no approval of or filing with
any governmental authorities.
5.4 Binding Effect. This Agreement and the other Loan Documents, when duly
executed and delivered, will constitute legal, valid, and binding
obligations of Borrower, fully enforceable in accordance with their
respective terms (subject to limitations on enforceability resulting
from bankruptcy and other similar laws relating to creditor's rights
and principles of equity) and will secure the payment and performance
of the Loan as described herein.
5.5 Financial Statements. The consolidated balance sheet of the Borrower
and its Subsidiaries as of March 31, 2002 and the related consolidated
statements of income and stockholders equity of the Borrower and its
Subsidiaries for the three months then ended, and the accompanying
footnotes, as included in the Borrower's Quarterly report on Form 10-Q
as filed with the Securities and Exchange Commission, copies of which
have been furnished to the Bank, are complete and correct and fairly
present the consolidated financial condition of the Borrower and its
Subsidiaries at such dates and the consolidated results of the
operations of the Borrower and it Subsidiaries for the periods covered
by such statements, all in accordance with GAAP consistently applied
(subject to year-end adjustments in the case of the interim financial
statements), and since March 31, 2002 there has been no material
adverse change in the consolidated condition (financial or otherwise),
business, or operations of the Borrower and its Subsidiaries. There
are no liabilities of the Borrower or any Subsidiary, fixed or
contingent, which are material but are not reflected in the financial
statements or in the notes thereto, other than liabilities arising in
the ordinary course of business since March 31, 2002
5.6 Labor Disputes and Acts of God. Neither the business nor the
properties of the Borrower or any Subsidiary are affected by any fire,
explosion, accident, strike, lockout, or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy,
or other casualty (whether or not covered by insurance), which
materially and adversely affects the business, properties, or the
operations of the Borrower and its Subsidiaries, taken as a whole.
5.7 Other Agreements. Neither the Borrower nor any Subsidiary of Borrower
is a party to any indenture, loan, or credit agreement, or to any
lease or other agreement or instrument or subject to any charter or
corporate restriction which could have a Material Adverse Effect.
Neither the Borrower nor any Subsidiary is in default in any respect
in the performance, observance, or fulfillment of any of the
obligations, covenants, or conditions contained in any agreement or
instrument material to the Borrower's consolidated business.
5.8 Title to Real Property. Borrower has good and marketable title to all
of the Real Property, including without limitation all real estate
collateral, free and clear of all liens, pledges, restrictions, and
encumbrances except for Permitted Liens.
5.9 Litigation. Excluding the lawsuits disclosed by Borrower in the SEC
reports, there are no pending legal or governmental actions,
proceedings, or investigations to which Borrower is a party or to
which any property of Borrower is subject which Borrower reasonably
expects would result, in a Material Adverse Effect and to the best of
Borrower's knowledge, no such actions or proceedings are threatened,
in writing, or contemplated by governmental authorities or any other
persons.
5.10 No Defaults on Outstanding Judgments or Orders. The Borrower and its
Subsidiaries have satisfied all judgments, and neither the Borrower
nor any Subsidiary is in default with respect to any judgment, writ,
injunction, or decree of any court, arbitrator, or federal, state,
municipal, or other governmental authority, commission, board, bureau,
agency, or instrumentally, domestic or foreign.
5.11 Debt. The financial statements described in Section 4.1.12 contain a
complete and correct list of all credit agreements, indentures,
purchase agreements, guaranties, capital leases, and other
investments, agreements, and arrangements presently in effect
providing for or relating to extensions of credit (including
agreements and arrangements for the issuance of letters of credit or
for acceptance financing) in respect of which the Borrower or any
Subsidiary is in any manner directly or contingently obligated; and
the maximum principal or face amounts of the credit in question,
outstanding or to be outstanding, are correctly stated, and all Liens
of any nature given or agreed to be given as security therefore are
correctly described or indicated in such financial statements.
5.12 Conflicting Documents or Agreements. There are no provisions pursuant
to existing real estate mortgages, indentures, leases, security
agreements, contracts, notes, instruments, or any other agreements or
documents binding on Borrower or affecting its properties, which would
conflict with or in any way prevent the execution, delivery or
performance of the Loan Documents by Borrower.
5.13 Full Disclosure. There is no material fact that Borrower has not
disclosed to Bank which could have a Material Adverse. Neither the
financial statements relied upon by the Bank, nor any certificate or
statement delivered herewith or heretofore by Borrower to Bank in
connection with the negotiations of this Agreement, contain any untrue
statement of a material fact or omits to state any material fact
necessary to keep the statements herein or therein from being
misleading.
5.14 No Default. No event has occurred and is continuing which constitutes
an Event of Default or a Potential Default.
5.15 Material Agreements. Borrower is not in default in any material
respect under any contract, Lease, loan agreement, indenture,
mortgage, security agreement or other material agreement or obligation
to which it is a party or by which any of its properties is bound.
5.16 Principal Office. The principal place of business of Borrower in
Oklahoma is at 321 East Main Street, Ada, Oklahoma 74821.
5.17 ERISA.
(a) No Reportable Event has occurred and is continuing with respect
to any Plan;
(b) PBGC has not instituted proceedings to terminate any Plan;
(c) Neither Borrower nor any duly appointed administrator of a Plan
(i) has incurred any liability to PBGC with respect to any Plan
other than for premiums not yet due or payable, or (ii) has
instituted or intends to institute proceedings to terminate any
Plan under Sections 4041 or 4041A of ERISA or withdraw from any
Multi-Employer Pension Plan (as that term is defined in Section
3(37) of ERISA);
(d) Each Plan of Borrower has been maintained and funded in all
material respects in accordance with its terms and with all
provisions of ERISA and the Code applicable thereto;
(e) Borrower has complied with all applicable minimum funding
requirements of ERISA and the Code with respect to each Plan;
(f) There are no unfunded benefit liabilities (as defined in Section
4001(a)(18) of ERISA) with respect to any Plan of such Borrower
which pose a risk of causing a Lien to be created in the assets
of Borrower; and
(g) No material prohibited transaction under the Code or ERISA has
occurred with respect to any Plan of Borrower.
5.18 Payment of Taxes. Borrower has filed all required federal, state and
local tax returns and have paid all taxes as shown on such returns as
they become due except those being contested in good faith and which
have not resulted in any Liens.
5.19 Environment. The Borrower and each Subsidiary have duly complied in
all material respects with, and their businesses, operations, assets,
equipment, property, leaseholds or other facilities are in compliance
in all material respects with, the provisions of all federal, state
and local environmental, health and safety laws, codes and ordinances,
and all rules and regulations promulgated thereunder. The Borrower and
each Subsidiary have been issued and will maintain all required
federal, state, and local permits, licenses, certificates and
approvals relating to (1) air emissions; (2) discharges to surface
water or groundwater; (3) noise emissions; (4) solid or liquid waste
disposal; (5) the use, generation, storage, transportation, or
disposal of toxic or hazardous substances or wastes (intended hereby
and hereafter to include any and all such materials listed in any
federal, state, or local law, code or ordinance and all rules and
regulations promulgated thereunder as hazardous or potentially
hazardous); or (6) other environmental, health, or safety matters.
Neither Borrower nor any Subsidiary has received notice of, or knows
of, or suspects facts which might constitute any violations of any
federal, state, or local environmental, health, or safety laws, codes
or ordinances and any rules or regulations promulgated thereunder with
respect to its businesses, operations, assets, equipment, property,
leaseholds, or other facilities. For all premises of the Borrower and
its Subsidiaries, there has been no emission, spill, release, or
discharge into or upon (1) the air; (2) soils, or any improvements
located thereon; (3) surface water or groundwater; or (4) the sewer,
septic system or waste treatment, storage or disposal system servicing
the premises of any toxic or hazardous substances or wastes at or from
the premises; and accordingly the premises of Borrower and its
Subsidiaries are free of all such toxic or hazardous substances or
wastes. There has been no complaint, order, directive, claim,
citation, or notice by any governmental authority or any person or
entity against Borrower or any Subsidiary with respect to (1) air
emissions; (2) spills, releases, or discharges to soils or
improvements located thereon, surface water, groundwater or the sewer,
septic system or waste treatment, storage or disposal systems
servicing the premises; (3) noise emissions; (4) solid or liquid waste
disposal; (5) the use, generation, storage, transportation, or
disposal of toxic or hazardous substances or waste; or (6) other
environmental, health, or safety matters affecting the Borrower or its
business, operations, assets, equipment, property, leaseholds, or
other facilities. Neither the Borrower nor its Subsidiaries have any
indebtedness, obligation or liability, absolute or contingent, matured
or not matured, with respect to the storage, treatment, cleanup, or
disposal of any solid wastes, hazardous wastes, or other toxic or
hazardous substances (including without limitation any such
indebtedness, obligation, or liability with respect to any current
regulation, law, or statute regarding such storage, treatment,
cleanup, or disposal).
5.20 Survival Representations and Warranties. All representations and
warranties by Borrower herein shall survive delivery of the Notes and
any investigation at any time made by or on behalf of Bank shall not
diminish Bank's right to rely thereon.
6. AFFIRMATIVE COVENANTS.
Until payment in full of the Notes, and any renewals and extensions thereof,
Borrower agrees, unless the Bank shall otherwise consent in writing, to perform
or cause to be performed the following agreements:
6.1 Applicable Laws. Borrower will comply in all material respects with
all applicable laws, rules, regulations, and orders which are material
to the conduct of its businesses as a whole.
6.2 Annual Financial Statements. Borrower shall deliver annual, audited
financial statements within 90 days of its year-end, current within
twelve months, all prepared in accordance with GAAP, consistently
maintained and applied, and concurrent with the submission of the
financial statements, Borrower shall deliver a Compliance Certificate
executed by a Responsible Officer stating that such person, after due
inquiry, has no knowledge of an Event of Default and containing a
computation of, and demonstrating compliance with, the financial
covenants described in Section 9 below. The financial statements shall
consist of, at least, balance sheets and income statements.
6.3 Quarterly Financial Statements. Borrower shall deliver quarterly,
unaudited financial statements within 45 days after the end of each of
Borrower's fiscal quarters (excluding the last fiscal quarter of
Borrower's fiscal year), prepared in accordance with GAAP,
consistently maintained and applied, and concurrent with the
submission of the financial statements, Borrower shall deliver a
Compliance Certificate executed by a Responsible Officer stating that
such person, after due inquiry, has no knowledge of an Event of
Default and containing a computation of, and demonstrating compliance
with, the financial covenants described in Section 9 below. The
financial statements shall consist of, at least, balance sheets and
income statements.
6.4 Notice of Litigation. Borrower shall deliver within five (5) days
after the occurrence thereof (a) notice of any material developments
associated with any and all actions, suits, and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, affecting Borrower or any
Subsidiary of Borrower in existence on the date hereof which could
reasonably be expected to have a Material Adverse Effect and (b)
notice of any additional actions, suits, and proceedings involving
Borrower or any Subsidiary of Borrower which arise after the date
hereof and which could reasonably be expected to have a Material
Adverse Effect.
6.5 Maintenance of Existence. Borrower shall preserve and maintain its
corporate existence and all of each of its rights, privileges and
franchises necessary or desirable in the normal conduct of its
business, and conduct its business in an orderly and efficient manner
consistent with good business practices.
6.6 Books and Records; Inspections. Accurate books and records shall be
kept by the Borrower, and the Bank will have the right to inspect,
upon reasonable advance notice, any assets of the Borrower, and to
examine and copy such books and records, to discuss the affairs,
finances and accounts of the Borrower, and to be informed as to the
same at such times and intervals as the Bank might reasonably request
under its normal course of business.
6.7 Taxes. All taxes, assessments, governmental charges and levies imposed
on the Borrower and its assets, income and profits will be paid prior
to the date on which penalties attach thereto unless being contested
in accordance with the Mortgage.
6.8 Title to Assets and Maintenance. Borrower shall defend and maintain
title to all its material properties and assets. Borrower shall keep
its assets, both real and personal, in good order and condition
consistent with industry practice and shall make all necessary
repairs, replacements and improvements required by the Leases.
6.9 Additional Assurances. The Borrower agrees to execute, acknowledge and
deliver to the Bank such instruments, documents, and any other items
in a form acceptable to Bank as the Bank may reasonably require in
order to more fully carry out the transactions contemplated herein.
6.10 Performance of Obligations. The Borrower shall pay the Notes according
to the reading, tenor and effect thereof, and Borrower will do and
perform every act and discharge all obligations provided herein to be
performed and discharged or as contemplated hereby, at the time or
times and in the manner specified.
6.11 Expenses. The Borrower covenants and agrees to pay all costs and
expenses required to satisfy the conditions of this Agreement.
Further, the Borrower covenants and agrees to pay all costs and
expenses incurred in preparation for the closing hereof, including but
not limited to attorneys' fees, mortgage taxes, survey costs, Phase I
fees, and title and recording fees, to the extent permitted by law.
6.12 Payment of Liabilities. The Borrower shall pay all liabilities as they
become due unless they are contested in good faith by appropriate
actions or legal proceedings and the Borrower establishes adequate
reserves therefor in accordance with recognized accounting principles
consistently applied.
6.13 Right to Conduct Business. The Borrower shall take all necessary
actions to preserve their right to conduct business in any applicable
jurisdictions and before all regulatory bodies; to obtain and retain
all necessary governmental authorities approvals, consents, permits,
licenses and certificates; to comply in all material respects with all
valid and applicable statutes, rules and regulations; and to continue
to conduct his businesses in substantially the same manner as such
businesses are now conducted.
6.14 Other Information. The Borrower will furnish to the Bank such other
information concerning the financial status of the Borrower as the
Bank may reasonably request.
6.15 Maintenance of Insurance. The Borrower will maintain such insurance as
is required elsewhere herein and in the Loan Documents. The Borrower
shall furnish a certificate of each renewal policy not less than 15
days prior to the expiration of the initial or each succeeding renewal
policy
6.16 Regulation U Compliance. By action of its Board of Directors either
before or as soon as practicable after any purchases, cause any and
all shares of Borrower's common stock purchased with the proceeds of
the Loan to be cancelled and retired to the status of authorized but
unissued common stock.
7. NEGATIVE COVENANTS.
Prior to the payment in full of the Notes and any renewals and extensions
thereof, the Borrower agrees that, unless the Bank otherwise gives its prior
consent in writing, the Borrower will not perform or permit to be performed any
of the following acts:
7.1 Negative Pledge. Except as provided herein, Borrower not shall create,
incur, assume, or permit to exist Lien, or other encumbrances of any
kind upon in, on, or to any of its assets except (a) liens for taxes
or assessments or other governmental charges being contested in good
faith and by appropriate proceedings, (b) liens in connection with
workers compensation, unemployment insurance, or other social security
obligations, (c) mechanic's, workmen's, materialmen's, landlord's,
carrier's, or other like liens arising in the ordinary course of
business with respect to obligations which are not due or which are
being contested in good faith, (d) any lien or other encumbrance
permitted and accepted by Bank and set forth on the ALTA 1970-B, as
revised, title insurance policy, (e) judgment and other similar liens
arising in connection with court proceedings, provided the execution
or other enforcement of such liens is effectively stayed and the
claims secured thereby are being actively contested in good faith and
by appropriate proceedings, and (f) purchase money security interests
in office furnishings and office equipment acquired in the ordinary
course of business, provided that such security interest shall attach
only to the furnishings and equipment so purchased.
7.2 Sale of Assets. Borrower will not sell, enter into sale-lease back
agreements, exchange or transfer title to any or all of its assets,
except in the ordinary or normal course of business operations.
7.3 Additional Indebtedness. Borrower will not incur, create, assume,
suffer to exist or in any manner become or be liable in respect of any
indebtedness, nor will Borrower guarantee or otherwise in any manner
become or be liable in respect of any indebtedness, liabilities or
other obligations of any other person or entity, whether by agreement
to purchase the indebtedness of any other person or entity or
agreement for the furnishing of funds to any other person or entity
through the purchase or lease of goods, supplies or services (or by
way of stock purchase, capital contribution, advance or loan) for the
purpose of paying or discharging the indebtedness of any other person
or entity, or otherwise, except that the foregoing restrictions shall
not apply to: (i) the Notes and any renewal or increase thereof, or
other indebtedness of the Borrower heretofore disclosed to Bank in the
Borrower's Financial Statements or on Schedule "3" hereto; or (ii)
taxes, assessments or other government charges which are not yet due
or are being contested in good faith by appropriate action promptly
initiated and diligently conducted, if such reserve as shall be
required by GAAP shall have been made therefor and levy and execution
thereon have been stayed and continue to be stayed; or (iii)
indebtedness (other than in connection with a loan or lending
transaction) incurred in the ordinary course of business; or; (iv) any
renewals or extensions (but not increases in) of any of the foregoing.
7.4 Environmental Matters. Borrower shall not: (a) cause or permit the
presence, use, generation, manufacture, production, processing,
installation, release, discharge, storage (including above- and
under-ground storage tanks for petroleum or petroleum products, but
excluding small containers of gasoline used for maintenance equipment
or similar purposes and supplies maintained in the ordinary course of
business by maintenance or janitorial personnel or by tenants),
treatment, handling, or disposal of any Hazardous Materials on, under,
in or about the Real Property, or in any way affecting the Real
Property or which may form the basis for any present or future claim,
demand or action seeking cleanup of the Real Property, or the
transportation of any Hazardous Materials to or from the Real
Property, or (b) cause or exacerbate any occurrence or condition on
the Real Property that is or may be in violation of Hazardous
Materials Law. Borrower shall take all appropriate steps to secure
compliance by all tenants and subtenants on the Real Property with the
covenants and agreements in this Section 7.4.
Borrower further agrees at all times to comply fully and in a timely manner
with, and to cause all employees, agents, contractors, and subcontractors of
Borrower and any other persons occupying or present on the Real Property to so
comply with, all applicable federal, state, and local laws, regulations,
guidelines, codes, and other legal requirements relating to the generation, use,
handling, storage, treatment, transport, and disposal of any Hazardous Materials
now or hereafter located or present on or under the Real Property. Borrower
shall conduct and complete all investigations, studies, sampling and testing and
all remedial actions necessary to clean up and remove all Hazardous Materials
from the Real Property in accordance with all applicable federal, state and
local laws, ordinances, rules and regulations. Borrower shall promptly notify
Bank in writing of: (i) any enforcement, cleanup, removal or other governmental
or regulatory action, investigation, or any other proceeding instituted,
completed or threatened in connection with any Hazardous Materials; (ii) any
suit, cause of action, or any other claim made or threatened by any third party
against Borrower or the Real Property relating to damage, contribution, cost
recovery, compensation, loss or injury resulting from any Hazardous Materials;
and (iii) the discovery of any occurrence or condition on any real property
adjoining or in the vicinity of the Real Property that could cause all or any
portion of the Real Property to be subject to any restrictions on the ownership,
occupancy, transferability or use of the Real Property under Hazardous Materials
Law. The provisions of the preceding sentence shall be in addition to any and
all other obligations and liabilities that Borrower may have to Bank under
applicable law.
The term "Hazardous Materials," for purposes of this Section 7.4, includes
petroleum and petroleum products (excluding a small quantity of motor fuel used
in maintenance equipment on the Real Property), flammable explosives,
radioactive materials (excluding radioactive materials in smoke detectors),
polychlorinated biphenyls, asbestos in any form that is or could become friable,
hazardous waste, toxic or hazardous substances or other related materials
whether in the form of a chemical, element, compound, solution, mixture or
otherwise including, but not limited to, those materials defined as "hazardous
substances," "extremely hazardous substances," "hazardous chemicals," "hazardous
materials," "toxic substances," "toxic chemicals," "air pollutants," "toxic
pollutants," "hazardous wastes," "extremely hazardous waste," or "restricted
hazardous waste" by Hazardous Materials Law.
The term "Hazardous Materials Law" for the purposes of this Section 7.4, means
any federal, state, or local law, ordinance or regulation or any court judgment
applicable to Borrower or to the Real Property relating to industrial hygiene or
to environmental or unsafe conditions including, but not limited to, those
relating to the generation, manufacture, storage, handling, transportation,
disposal, release, emission or discharge of Hazardous Materials, those in
connection with the construction, fuel supply, power generation and
transmission, waste disposal or any other operations or processes relating to
the Real Property, and those relating to the atmosphere, soil, surface and
ground water, wetlands, stream sediments and vegetation on, under, in or about
the Real Property. "Hazardous Materials Law" also shall include, but not be
limited to, the Comprehensive Environmental Response, Compensation and Liability
Act, the Emergency Planning and Community Right-To-Know Act of 1986, the
Hazardous Materials Transportation Act, the Resource Conservation and Recovery
Act, the Solid Waste Disposal act, the Clean Water Act, the Clean Air Act, the
Toxic Substance Control Act, the Safe Drinking Water Act and the Occupational
Safety and Health Act, and all regulations adopted in respect to the foregoing
laws. The obligations and liabilities of Borrower under this Section 7.4 pertain
to any of the events set forth herein occurring during the Borrower's possession
of the Real Property and shall survive any entry of a judgment of foreclosure,
any exercise of a power of sale or the delivery of a deed in lieu of foreclosure
on the Real Property.
7.5 Name, Fiscal Year and Accounting Method. Borrower shall not change its
name or its method of accounting without providing Bank with three (3)
month's prior written notice. Further, in regard to a name change,
Borrower shall have taken such action as Bank deems necessary to
continue the perfection of any Liens securing payment of the
Indebtedness.
7.6 Dividends and Distributions. Borrower shall not declare, pay or make,
whether in cash or property, or set aside or apply any money or assets
to pay or make any dividend or distribution during any fiscal year
without the Bank's prior written consent. Provided, however, this
provisions shall not be construed to prohibit or prevent in any manner
Borrower's purchases of its own stock from the open market or
otherwise, nor shall it prohibit stock dividends.
7.7 Loans or Advances. Borrower shall not make or permit to remain
outstanding any loans or advances made by it to or in any person or
entity, except that the foregoing restriction shall not apply to: (i)
loans or advances the material details of which have been set forth in
the Financial Statements of the Borrower heretofore furnished to
Banks; or (ii) advances made in the ordinary course of Borrower's
business to any Subsidiary or sales associate or employees for travel
or similar expenses; or (iii) loans to employees for option exercises;
provided, however, such loans for option exercises shall not involve
an actual advance of cash to any such employee.
7.8 Discontinuance of Business Lines. Borrower shall not discontinuance
any line of business which would have a Material Adverse Effect.
7.9 Mergers and Acquisitions. Borrower will not: (i) consolidate or merge
with or into any other Person, except that Borrower may merge with
another Person if such Borrower is the surviving entity in such merger
and if, after giving effect thereto, no Default or Event of Default
shall have occurred and be continuing or (ii) acquire or create any
additional subsidiaries, without the Bank's prior written consent.
7.10 Transactions With Affiliates. Borrower shall not enter into any
transaction, including, without limitation, the purchase, sale, or
exchange of property or the rendering of any service, with any
Affiliate, or permit any Subsidiary to enter into any transaction,
including, without limitation, the purchase, sale, or exchange of
property or the rendering of any service, with any Affiliate, except
in the ordinary course of and pursuant to the reasonable requirements
of the Borrower's or such Subsidiary's business and upon fair and
reasonable terms no less favorable to the Borrower or such Subsidiary
than would be obtained in a comparable arm's-length transaction with a
Person not an Affiliate.
8. CONSTRUCTION COVENANTS
Prior to the payment in full of the Real Estate Note and any renewals and
extensions thereof, the Borrower agrees that, unless the Bank otherwise gives
its prior consent in writing, the Borrower will not perform or permit to be
performed (or not perform or not permit to be performed, as the case may be) any
of the following acts:
8.1 Construction Standards. The Borrower will construct its headquarters
of first class quality and in compliance with the Plans and
Specifications and all applicable ordinances, building codes, fire
codes, and zoning regulations and free from encroachment on building
lines, easements, and property lines.
8.2 Work Stoppage. Except for notifications due to weather, the Borrower
will notify the Bank of any cessation of construction on the Project
for any period of thirty (30) or more successive business days.
8.3 Excess Costs. The Borrower represents that the total cost of
completing the headquarters shall not require additional borrowed
monies in excess of the face amount of the Real Estate Note. If the
costs of such completion and the satisfaction of the terms of this
Agreement will exceed such amount, Borrower will pay such excess costs
needed to complete the Project.
9. FINANCIAL COVENANTS
Prior to the payment in full of the Notes and any renewals and extensions
thereof, the Borrower agrees that, unless the Bank otherwise gives its prior
consent in writing, the Borrower will perform or permit to be performed (or not
perform or not permit to be performed, as the case may be) any of the following
acts:
9.1 Debt Service Coverage. Borrower's quarterly Debt Coverage Ratio shall
not be less than 125%, calculated on a quarterly basis.
9.2 Retention Rate. Borrower shall maintain a rolling twelve (12) month
average retention rate of membership contracts in place for greater
than eighteen (18) months of not less than seventy percent (70%),
calculated on a calendar quarterly basis.
9.3 Cancellation Rate. Borrower's cancellation rate on contracts less than
or equal to twelve (12) months old shall not exceed 50% for fiscal
year 2002 and 45% for each fiscal year thereafter, on a trailing
twelve (12) month basis, measured on a calendar quarter basis.
9.4 Liabilities to Net Worth. Borrower 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. For the purposes hereof,
the terms Tangible Net Worth and Total Liabilities shall be defined
pursuant to GAAP.
10. EVENTS OF DEFAULT.
The following shall constitute Events of Default hereunder and under each of the
Loan Documents:
10.1 Nonpayment of Note. Failure to make any payment when due of any
principal due and owing on the Notes.
10.2 Nonpayment of Interest. Failure to make any payment when due of any
interest on the Notes.
10.3 Other Nonpayment. Failure to make any payment when due, other than as
set forth in Sections 10.1 and 10.2 above, of any amount payable to
the Bank under the terms of this Agreement, the Notes, the Loan
Documents or any other obligation or agreement between the Borrower
and the Bank.
10.4 Breach of Covenants. Default by Borrower in the performance or
observance of any covenant or agreement contained in this Agreement,
the Note, the Mortgage, the Security Agreement, any of the other Loan
Documents not specifically set forth in this paragraph, or any
agreement in connection therewith, or under the terms of any other
instrument delivered to the Bank in connection with this Agreement.
10.5 Representations and Warranties. Any representation or warranty herein,
or any representation, statement, certificate, schedule or report made
or furnished to the Bank on behalf of Borrower, proves to be false or
erroneous in any material respect at the time of making thereof.
10.6 Insolvency. Borrower: (i) applies for or consents to the appointment
of a receiver, trustee or liquidator of the properties of Borrower;
(ii) admits in writing the inability to pay debts as they mature;
(iii) makes a general assignment for the benefit of creditors; or (iv)
has any significant portion of its assets or property placed in the
hands of a receiver, trustee or other officers or representatives of a
court or of creditors.
10.7 Voluntary Bankruptcy. Borrower shall be adjudged bankrupt, or any
voluntary proceeding shall be instituted by Borrower in insolvency or
bankruptcy, or for readjustment, extension or composition of debts or
for any other relief of debtors.
10.8 Involuntary Bankruptcy. Any involuntary proceeding shall be instituted
against Borrower in insolvency or for readjustment, extension, or
composition of debts, which proceeding is not dismissed within ninety
(90) days from the filing of the commencement of the same.
10.9 Creditor's Proceedings. The institution of any levy or attachment
against the Real Property of Borrower and such levy or attachment
shall continue in place and in effect for a period of 60 consecutive
days without being vacated, discharged, satisfied, stayed, or removed.
10.10Monetary Judgments. One or more judgments, decrees, or orders for the
payment of money in excess of $500,000.00 in the aggregate shall be
rendered against Borrower and such judgments, decrees, or orders shall
continue unsatisfied and in effect for a period of 30 consecutive days
without being vacated, discharged, satisfied, or stayed or bonded
pending appeal.
10.11Borrower Dissolution. The occurrence of any act causing a dissolution
or loss of legal existence of
Borrower.
10.12Harland Stonecipher. Harland Stonecipher shall ever cease to hold the
title of Chairman and Chief Executive Officer or comparable title and
position with Borrower for a period of 90 consecutive days.
11. REMEDIES.
11.1 Immediate Acceleration. Upon the occurrence of an Event of Default
specified in Sections 10.6, 10.7, 10.8, 10.9 and 10.10 immediately and
without notice, (i) all obligations hereunder and under the Note shall
automatically become immediately due and payable, without presentment,
demand, protest, notice of protest, default or dishonor, notice of
intent to accelerate maturity, notice of acceleration of maturity or
other notice of any kind, except as may be provided to the contrary
elsewhere herein, all of which are expressly waived by the Borrowers,
and (ii) the Bank is hereby authorized at any time and from time to
time, without notice to the Borrowers (and any such notice being
expressly waived by the Borrowers), to set-off and apply any and all
deposits of the Borrowers (general or special, time or demand,
provision or final) held by the Bank owing by the Bank to or for the
credit or account of the Borrowers against any and all of the debt
evidenced by the Note or other obligations set forth in any Loan
Document.
11.2 Five Day Notice and Demand. Upon the occurrence of an Event of Default
specified in Sections 10.1, 10.2, 10.3, and 10.5 Borrower shall have
five (5) business days to cure after receipt of written notification.
In the event Borrower shall fail to effectuate such a cure, Bank may
declare all debt evidenced by any and all Loan Documents to be
immediately due and payable without presentment, demand, protest,
notice of protest, default or dishonor, notice of intent to accelerate
maturity, notice of acceleration of maturity or other notice of any
kind, except as may be provided to the contrary elsewhere herein, all
of which are hereby expressly waived by the Borrower, and in such
event, the Bank is hereby authorized at any time and from time to
time, without notice to the Borrowers (any such notice being expressly
waived by the Borrower), to set-off and apply any and all deposits
containing funds of the Borrower (general or special, time or demand,
provision or final) held by the Bank, and any and all other
indebtedness at any time owing by the Bank or to or for credit or
account of the Borrower against any and all of the debt evidenced by
any Loan Document. In the event Borrower is diligently pursuing a cure
to any Event of Default but such cure cannot be accomplished within
the time periods set forth herein, Bank may, in its sole discretion,
extend any such cure period.
11.3 Thirty Day Notice and Demand. Upon the occurrence of an Event of
Default other than those specified in the sections referenced in
Section 11.1 and 11.2 above, Borrower shall have thirty (30) days
after receiving written notification of the Event of Default to cure
such default. In the event Borrower shall fail to effectuate such a
cure, Bank may declare all debt evidenced by any and all Loan
Documents to be immediately due and payable without presentment,
demand, protest, notice of protest, default or dishonor, notice of
intent to accelerate maturity, notice of acceleration of maturity or
other notice of any kind, except as may be provided to the contrary
elsewhere herein, all of which are hereby expressly waived by the
Borrower, and in such event, the Bank is hereby authorized at any time
and from time to time, without notice to the Borrower (any such notice
being expressly waived by the Borrower), to set-off and apply any and
all deposits containing funds of the Borrower (general or special,
time or demand, provision or final) held by the Bank, and any and all
other indebtedness at any time owing by the Bank or to or for credit
or account of the Borrower against any and all of the debt evidenced
by any Loan Document. In the event Borrower is diligently pursuing a
cure to any Event of Default but such cure cannot be accomplished
within the time periods set forth herein, Bank may, in its sole
discretion, extend any such cure period.
11.4 Other Rights. Subject to the provisions of this Agreement and after
the giving of any required notice and the expiration of any applicable
cure period, upon the occurrence of any Event of Default the Bank may,
in addition to the foregoing, exercise any or all of its rights and
remedies provided by law or pursuant to any other Loan Document.
11.5 Cumulative Remedies. No failure on the part of the Bank to exercise
and no delay in exercising any right hereunder shall operate as a
waiver hereof, nor shall any single or partial exercise by Bank of any
right hereunder preclude any other or further right of exercise
thereof or the exercise of any other right. The remedies herein
provided are cumulative and not alternative.
12. GENERAL CONDITIONS.
The following conditions shall be applicable throughout the term of this
Agreement:
12.1 Previous Loan Transaction. The parties hereto agree that the
$17,500,000.00 loan referenced in that certain Loan Agreement by and
between Borrower and Bank dated as of November 6, 2001 has never been
funded and is hereby cancelled. The Note executed in conjunction
therewith will be returned to Borrower.
12.2 Cross-Default. A default by Borrower in this Agreement shall
constitute a default under the Notes and other Loan Documents, and any
other instrument given by Borrower to Bank pursuant to this Agreement.
A default under the Notes or other Loan Documents shall constitute an
Event of Default by Borrower under the terms of this Agreement and the
Notes and Loan Documents.
12.3 Notices. All notices hereunder shall be in writing and shall be deemed
to have been sufficiently given or served for all purposes when
presented as set forth below to any party hereto at the following
address:
To Borrower: Pre-Paid Legal Services, Inc.
321 East Main Street
Ada, Oklahoma 74821
Telecopier number: 580/436-7410
Attn: Steve Williamson, Chief Financial Officer
To Bank: BANK OF OKLAHOMA, N.A.
201 Robert S. Kerr
P.O. Box 24128
Oklahoma City, Oklahoma 73124
Telecopier number: 405/272-2588
Attn:Laura Christofferson, Senior Vice President
or at such other address of which it shall have notified the party giving such
notice in writing. Any notice, demand or communication under or in connection
with this Loan Agreement shall be deemed effective when received by the party to
whom addressed in the case of personal delivery, telefax, or by telex wire, or
if sent by mail shall be deemed effective three business days after deposited in
any post office of the United States Post Office Department, registered or
certified mail, postage fully prepaid, return receipt requested.
12.4 Amendment; Waiver. This Agreement may not be amended, modified,
waived, discharged or terminated in any way, except by an instrument
in writing executed by all parties hereto.
12.5 Governing Law. This Agreement, the Notes, the Loan Documents and all
other documents issued and executed hereunder shall be deemed to be a
contract made under the laws of the State of Oklahoma and shall be
construed by and governed in accordance with the laws of the State of
Oklahoma.
12.6 Prohibition Against Assignment. Borrower shall not assign nor transfer
voluntarily or by operation of law, or otherwise dispose of this
Agreement or any rights hereunder, however the Bank shall have full
right and power to assign this Agreement. An assignment or transfer in
violation of this provision shall be invalid, and an assignment or
transfer by operation of law shall be deemed to be an invalid
transfer.
12.7 Indemnification. In the event any action, protest, proceeding or
litigation is commenced to challenge the validity of or set aside any
Lease or which could affect the ability of the Borrower to perform
under any Lease, then the Borrower agree to take any and all actions
necessary to enforce the Lease and shall indemnify and hold the Bank
harmless from any and all such actions, proceedings, protests, or
litigation of any kind or, if Bank is named as a party thereto and
shall defend the Bank therefor, including without limitation, the
payment of all costs, expenses and reasonable attorney fees of the
Bank or, if acceptable to the Bank, the providing of joint counsel for
such defense and payment of any and all losses of or claims or
expenses asserted against the Bank arising from such actions,
proceedings, protests, or litigation.
12.8 Entire Agreement. This Agreement, the Notes, the Loan Documents and
the other instruments, statements or documents described herein
constitute the entire agreement between Borrower and Bank, with any
and all prior agreements and understandings being canceled and merged
herein.
12.9 Severability. In case any one or more of the provisions contained in
this Agreement, the Note or any other Loan Documents should be deemed
invalid, illegal or unenforceable in any respect in any jurisdiction,
the validity, legality and enforceability of such provision or
provisions will not in any way be affected or impaired thereby in any
other jurisdiction and the validity, legality and enforceability of
the remaining provisions contained herein and therein will not in any
way be affected or impaired thereby.
12.10Captions. The captions and headings of this loan agreement are for
convenience only and in no way define, limit or describe the scope or
intent of any provision of this Agreement.
12.11Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns.
12.12Contrary Provisions. The terms and conditions of this Agreement shall
govern and control any and all contrary provisions of the Loan
Documents.
12.13Counterpart. This Agreement may be executed in one or more
counterpart and all such counterparts shall be construed together as
the Agreement.
12.14Waiver of Jury Trial. Borrower waives trial by jury in any action or
proceeding to which Borrower and Bank may be parties, arising out of,
in connection with or in any way pertaining to, this Agreement, the
mortgage or any of the other Loan Documents. It is agreed and
understood that this waiver constitutes a waiver of trial by jury of
all claims against all parties to such action or proceedings,
including claims against parties who are not parties to this note.
This waiver is knowingly, willingly and voluntarily made by Borrower,
and Borrower hereby represents that no representations of fact or
opinion have been made by any individual to induce this waiver of
trial by jury or to in any way modify or nullify its effect. Borrower
further represents and warrants that it has been represented in the
signing of this Agreement and in the making of this waiver by
independent legal counsel, or has had the opportunity to be
represented by independent legal counsel selected of its own free
will, and that it has had the opportunity to discuss this waiver with
counsel.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
PRE-PAID LEGAL SERVICES, INC.
an Oklahoma corporation
/s/ Harland C. Stonecipher
-------------------------------
By: Harland C. Stonecipher
Title: Chairman and CEO
BANK OF OKLAHOMA, N.A.
/s/ Laura Christofferson
-------------------------------
By: Laura Christofferson
Title: Senior Vice President
EXHIBIT 10.2
Security Agreement between Registrant and Bank of Oklahoma, N.A.
SECURITY AGREEMENT
SECURITY AGREEMENT dated June 11, 2002, made by Pre-Paid Legal Services, Inc.,
an Oklahoma corporation (the "Company"), and Bank of Oklahoma, N.A. (the "Bank")
in connection with the Loan Agreement (as hereinafter defined).
BACKGROUND: The Company and the Bank have entered into a Loan Agreement of even
date herewith (said Agreement, as it may hereafter be amended or otherwise
modified from time to time, being the "Loan Agreement"). It is a material
condition precedent to the making of advances by the Bank under the Loan
Agreement that the Company make the pledge and grant the assignment and security
interest contemplated by this Agreement. In the ordinary course of its business,
the Borrower enters into legal service contracts with customers whereby the
customer pays periodic membership fees and the Borrower provides certain
specified legal services if and to the extent the customer needs such services.
In approximately sixteen (16) states, the Borrower's contracts are regulated as
insurance instruments and/or pursuant to special statutory provisions relating
to legal services programs. In other jurisdictions, there is no such
governmental regulation of the contracts. All of the Borrower's contracts, which
are not regulated, are referred to herein as the "Contracts".
THEREFORE, in order to induce the Bank to make advances under the Loan
Agreement, the Company agrees with the Bank as follows:
Section 1. Definitions. All capitalized terms used herein without definitions
shall have the respective meanings provided therefor in the Loan Agreement. The
term "State," as used herein, means the State of Oklahoma. All terms defined in
Article 9 of the Uniform Commercial Code of the State and used herein shall have
the same definitions herein as specified therein. The term "Obligations," as
used herein, means all of the indebtedness, obligations, and liabilities of the
Company to the Bank, individually or collectively, whether direct or indirect,
joint or several, absolute or contingent, due or to become due, now existing or
hereafter arising under or in respect of the Loan Agreement, and any promissory
notes or other instruments or agreements executed and delivered pursuant thereto
or in connection therewith or this Agreement, and the term "Event of Default,"
as used herein, means the failure of the Company to pay or perform any of the
Obligations as and when due to be paid or performed under the terms of the Loan
Agreement, or the occurrence of any Default or Event of Default, as those terms
are defined in the Loan Agreement.
Section 2. Grant of Security Interest. The Company hereby grants to the Bank, to
secure the payment and performance in full of all of the Obligations, a security
interest in and so pledges and assigns to the Bank the following properties,
assets, and rights of the Company, wherever located, whether now owned or
hereafter acquired or arising, and all proceeds and products thereof (all of the
same being hereinafter called the "Collateral"): all rights to receive payments
from members and/or to receive any other payments or revenues of any nature
whatsoever pursuant to the terms of the Contracts or otherwise associated with
the Contracts.
Section 3. Authorization to File Financing Statements. The Company hereby
irrevocably authorizes the Bank at any time and from time to time to file in any
Uniform Commercial Code jurisdiction any initial financing statements and
amendments thereto that describe the Collateral and contain any other
information required by Article 9 of the Uniform Commercial Code of the State
for the sufficiency or filing office acceptance of any financing statement or
amendment, including whether the Company is an organization, the type of
organization and any organization identification number issued to the Company.
The Company agrees to furnish any such information to the Bank promptly upon
request. The Company also ratifies its authorization for the Bank to have filed
in any Uniform Commercial Code jurisdiction any like initial financing
statements or amendments thereto if filed prior to the date hereof.
Section 4. Representations and Warranties Concerning Company's Legal Status. The
Company has previously delivered to the Bank a certificate signed by the Company
and entitled "Perfection Certificate" (the "Perfection Certificate"). The
Company represents and warrants to the Bank as follows: (a) the Company's exact
legal name is that indicated on the Perfection Certificate and on the signature
page hereof, (b) the Company is an organization of the type and organized in the
jurisdiction set forth in the Perfection Certificate, (C) the Perfection
Certificate accurately sets forth the Company's organizational identification
number or accurately states that the Company has none, (d) the Perfection
Certificate accurately sets forth the Company's place of business or, if more
than one, its chief executive office as well as the Company's mailing address if
different, and (e) all other information set forth on the Perfection Certificate
pertaining to the Company is accurate and complete.
Section 5. Covenants Concerning Company's Legal Status. The Company covenants
with the Bank as follows: (a) without providing at least 30 days prior written
notice to the Bank, the Company will not change its name, its place of business
or, if more than one, chief executive office, or its mailing address or
organizational identification number if it has one, (b) if the Company does not
have an organizational identification number and later obtains one, the Company
shall forthwith notify the Bank of such organizational identification number,
and (c) the Company will not change its type of organization, jurisdiction of
organization, or other legal structure.
Section 6. Representations and Warranties Concerning Collateral, Etc. The
Company further represents and warrants to the Bank as follows: (a) the Company
is the owner of the Collateral, free from any adverse lien, security interest,
or other encumbrance, except for the security interest created by this
Agreement, (b) all lists and other supporting documentation furnished to Bank
with respect to the Contracts is true and correct in all material respects; and
(c) all other information set forth on the Perfection Certificate pertaining to
the Collateral is accurate and complete.
Section 7. Covenants Concerning Collateral, Etc. The Company further covenants
with the Bank as follows: (a) except for the security interest herein granted,
the Company shall be the owner of the Collateral free from any lien, security
interest, or other encumbrance, and the Company shall defend the same against
all claims and demands of all persons at any time claiming the same or any
interests therein adverse to the Bank, (b) the Company shall not pledge,
mortgage, or create, or suffer to exist a security interest in the Collateral in
favor of any person other than the Bank, (c) the Company will fully perform all
of its obligations under the Contracts, (d) as provided in the Loan Agreement,
the Company will permit the Bank, or its designee, to inspect the books and
records associated with the Collateral at any reasonable time, wherever located,
(e) the Company will pay promptly when due all taxes, assessments, governmental
charges, and levies upon the Collateral or incurred in connection with the
Contracts or incurred in connection with this Agreement, (f) the Company will
continue to operate its business in compliance with all applicable provisions of
the federal Fair Labor Standards Act, as amended, and with all applicable
provisions of federal, state, and local statutes and ordinances, and (g) the
Company will not sell or otherwise dispose, or offer to sell or otherwise
dispose, of the Collateral or any interest therein.
7.1 Expenses Incurred by Bank. In its discretion, the Bank may discharge
taxes and other encumbrances at any time levied or placed on any of the
Collateral, and pay any necessary filing fees or other amounts necessary to
preserve the value associated with the Contracts. The Company agrees to
reimburse the Bank on demand for any and all expenditures so made. The Bank
shall have no obligation to the Company to make any such expenditures, nor
shall the making thereof relieve the Company of any default.
7.2 Bank's Obligations and Duties. Anything herein to the contrary
notwithstanding, the Company shall remain liable under all Contracts and
shall perform all obligations to be observed or performed by the Company
thereunder. The Bank shall not have any obligation or liability under any
such contract or agreement by reason of or arising out of this Agreement or
the receipt by the Bank of any payment relating to any of the Collateral,
nor shall the Bank be obligated in any manner to perform any of the
obligations of the Company under or pursuant to any such contract or
agreement, to make inquiry as to the nature or sufficiency of any payment
received by the Bank in respect of the Collateral or as to the sufficiency
of any performance by any party under any such contract or agreement, to
present or file any claim, to take any action to enforce any performance,
or to collect the payment of any amounts which may have been assigned to
the Bank or to which the Bank may be entitled at any time or times. The
Bank's sole duty with respect to the custody, safe keeping, and physical
preservation of the Collateral in its possession, shall be to deal with
such Collateral in the same manner as the Bank deals with similar property
for its own account.
Section 8. Contracts and Deposits. The Bank may at any time following and during
the continuance of an Event of Default, at its option, transfer to itself or any
nominee the Collateral, receive any income thereon, and hold such income as
additional Collateral or apply it to the Obligations. Whether or not any
Obligations are due, the Bank may following and during the continuance of an
Event of Default demand, sue for, collect, or make any settlement or compromise
which it deems desirable with respect to the Collateral. Regardless of the
adequacy of Collateral or any other security for the Obligations, any deposits
or other sums at any time credited by or due from the Bank to the Company may at
any time be applied to or set off against any of the Obligations.
Section 9. Control of Collateral Proceeds. If an Event of Default shall have
occurred and be continuing, the Company shall, at the request of the Bank, take
any action requested by the Bank to ensure that the Bank obtains the full and
immediate control of the Collateral. After the making of such a request or the
giving of any such notification, the Company shall hold any proceeds associated
with the Contracts as trustee for the Bank without commingling the same with
other funds of the Company and shall turn the same over to the Bank in the
identical form received, together with any necessary endorsements or
assignments. The Bank shall apply the proceeds associated with the Contracts to
the Obligations, such proceeds to be immediately entered after final payment in
cash or other immediately available funds of the items giving rise to them.
Section 10. Power of Attorney.
10.1 Appointment and Powers of Bank. The Company hereby irrevocably
constitutes and appoints the Bank and any officer or agent thereof, with
full power of substitution as its true and lawful attorneys-in-fact with
full irrevocable power and authority in the place and stead of the Company
or in the Bank's own name, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any
and all documents and instruments that may be necessary or desirable to
accomplish the purposes of this Agreement and, without limiting the
generality of the foregoing, hereby gives said attorneys the power and
right, on behalf of the Company, without notice to or assent by the
Company, to do the following:
(a) upon the occurrence and during the continuance of an Event of
Default, to sell, transfer, pledge, make any agreement with respect
to, or otherwise deal with any of the Collateral in such manner as is
consistent with the Uniform Commercial Code of the State of Oklahoma
and as fully and completely as though the Bank were the absolute owner
thereof for all purposes, and to do at the Company's expense, at any
time, or from time to time, all acts and things which the Bank deems
necessary to protect, preserve, or realize upon the Collateral and the
Bank's security interest therein, in order to effect the intent of
this Agreement, all as fully and effectively as the Company might do;
and
(b) to the extent that the Company's authorization given in Section 3
is not sufficient, to file such financing statements with respect
hereto, with or without the Company's signature, or a photocopy of
this Agreement in substitution for a financing statement, as the Bank
may deem appropriate and to execute in the Company's name such
financing statements and amendments thereto and continuation
statements which may require the Company's signature.
10.2 Ratification by Company. To the extent permitted by law, the Company
hereby ratifies all that said attorneys shall lawfully do or cause to be
done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
10.3 No Duty on Bank. The powers conferred on the Bank hereunder are solely
to protect its interests in the Collateral and shall not impose any duty
upon it to exercise any such powers. The Bank shall be accountable only for
the amounts that it actually receives as a result of the exercise of such
powers, and neither it nor any of its officers, directors, employees or
agents shall be responsible to the Company for any act or failure to act,
except for the Bank's own gross negligence or willful misconduct.
Section 11. Remedies. If an Event of Default shall have occurred and be
continuing, the Bank may, without notice to or demand upon the Company, declare
this Agreement to be in default, and the Bank shall thereafter have in any
jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code of the State of Oklahoma. The Bank may in its discretion
require the Company to assemble all or any part of the Collateral at such
location or locations within the jurisdiction(s) of the Company's principal
office(s) or at such other locations as the Bank may reasonably designate.
Unless the Collateral is perishable or threatens to decline speedily in value or
is of a type customarily sold on a recognized market, the Bank shall give to the
Company at least five business days prior written notice of the time and place
of any public sale of Collateral or of the time after which any private sale or
any other intended disposition is to be made. The Company hereby acknowledges
that five business days prior written notice of such sale or sales shall be
reasonable notice. In addition, the Company waives any and all rights that it
may have to a judicial hearing in advance of the enforcement of any of the
Bank's rights hereunder, including, without limitation, its right following an
Event of Default to take immediate possession of the Collateral and to exercise
its rights with respect thereto.
Section 12. Standards for Exercising Remedies. To the extent that applicable law
imposes duties on the Bank to exercise remedies in a commercially reasonable
manner, the Company acknowledges and agrees that it is not commercially
unreasonable for the Bank (a) to fail to incur expenses reasonably deemed
significant by the Bank to prepare Collateral for disposition or otherwise to
complete raw material or work in process into finished goods or other finished
products for disposition, (b) to fail to obtain third-party consents for access
to Collateral to be disposed of, or to obtain or, if not required by other law,
to fail to obtain governmental or third-party consents for the collection or
disposition of Collateral to be collected or disposed of, (c) to fail to
exercise collection remedies against account debtors or other persons obligated
on Collateral or to remove liens or encumbrances on or any adverse claims
against Collateral, (d) to exercise collection remedies against account debtors
and other persons obligated on Collateral directly or through the use of
collection agencies and other collection specialists, (e) to advertise
dispositions of Collateral through publications or media of general circulation,
whether or not the Collateral is of a specialized nature, (f) to contact other
persons, whether or not in the same business as the Company, for expressions of
interest in acquiring all or any portion of the Collateral, (9) to hire one or
more professional auctioneers to assist in the disposition of Collateral,
whether or not the collateral is of a specialized nature, (h) to dispose of
Collateral by utilizing Internet sites that provide for the auction of assets of
the types included in the Collateral or that have the reasonable capability of
doing so, or that match buyers and sellers of assets, (i) to dispose of assets
in wholesale rather than retail markets, (j) to disclaim disposition warranties,
(k) to purchase insurance or credit enhancements to insure the Bank against
risks of loss, collection, or disposition of Collateral or to provide to the
Bank a guaranteed return from the collection or disposition of Collateral, or
(I) to the extent deemed appropriate by the Bank, to obtain the services of
other brokers, investment bankers, consultants, and other professionals to
assist the Bank in the collection or disposition of any of the Collateral. The
Company acknowledges that the purpose of this Section 12 is to provide
nonexhaustive indications of what actions or omissions by the Bank would not be
commercially unreasonable in the Bank's exercise of remedies against the
Collateral and that other actions or omissions by the Bank shall not be deemed
commercially unreasonable solely on account of not being indicated in this
Section 12. Without limitation upon the foregoing, nothing contained in this
Section 12 shall be construed to grant any rights to the Company or to impose
any duties on the Bank that would not have been granted or imposed by this
Agreement or by applicable law in the absence of this Section 12.
Section 13. No Waiver by Bank, Etc. The Bank shall not be deemed to have waived
any of its rights upon or under the Obligations or the Collateral unless such
waiver shall be in writing and signed by the Bank. No delay or omission on the
part of the Bank in exercising any right shall operate as a waiver of such right
or any other right. A waiver on any one occasion shall not be construed as a bar
to or waiver of any right on any future occasion. All rights and remedies of the
Bank with respect to the Obligations or the Collateral, whether evidenced hereby
or by any other instrument or papers, shall be cumulative and may be exercised
singularly, alternatively, successively, or concurrently at such time or at such
times as the Bank deems expedient.
Section 14. Marshalling. The Bank shall not be required to marshal any present
or future collateral security (including but not limited to this Agreement and
the Collateral) for, or other assurances of payment of, the Obligations or any
of them or to resort to such collateral security or other assurances of payment
in any particular order, and all of its rights hereunder and in respect of such
collateral security and other assurances of payment shall be cumulative and in
addition to all other rights, however existing or arising. To the extent that it
lawfully may, the Company hereby agrees that it will not invoke any law relating
to the marshalling of collateral which might cause delay in or impede the
enforcement of the Bank's rights under this Agreement or under any other
instrument creating or evidencing any of the Obligations or under which any of
the Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise assured, and, to the extent that it lawfully may,
the Company hereby irrevocably waives the benefits of all such laws.
Section 15. Proceeds of Dispositions; Expenses. The Company shall pay to the
Bank on demand any and all expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Bank in protecting, preserving, or
enforcing the Bank's rights under or in respect of any of the Obligations or any
of the Collateral. After deducting all of said expenses, the residue of any
proceeds of collection or sale of the Obligations or Collateral shall, to the
extent actually received in cash, be applied to the payment of the Obligations
in such order or preference as the Bank may determine or in such order or
preference as is provided in the Loan Agreement, proper allowance and provision
being made for any Obligations not then due. Upon the final payment and
satisfaction in full of all of the Obligations and after making any payments
required by the Uniform Commercial Code of the State, any excess shall be
returned to the Company, and the Company shall remain liable for any deficiency
in the payment of the Obligations.
Section 16. Overdue Amounts. Until paid, all amounts due and payable by the
Company hereunder shall be a debt secured by the Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Loan Agreement.
Section 17. Governing Law; Consent to Jurisdiction. This Agreement will be
construed in accordance with the laws of the State of Oklahoma. The Company
agrees that any suit for the enforcement of this Agreement may be brought in the
courts of the State of Oklahoma or any federal court sitting therein and
consents to the nonexclusive jurisdiction of such court and to service of
process in any such suit being made upon the Company by mail at the address
specified in the Loan Agreement. The Company hereby waives any objection that it
may now or hereafter have to the venue of any such suit or any such court or
that such suit is brought in an inconvenient court.
Section 18. Waiver of Jury Trial. THE COMPANY WAIVES ITS RIGHT TO A JURY TRIAL
WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR THE PERFORMANCE OF
ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Company waives
any right which it may have to claim or recover in any litigation referred to in
the preceding sentence any special, exemplary, punitive, or consequential
damages or any damages other than, or in addition to, actual damages.
Section 19. Miscellaneous. The headings of each section of this Agreement are
for convenience only and shall not define or limit the provisions thereof. This
Agreement and all rights and obligations hereunder shall be binding upon the
Company and its respective successors and assigns, and shall inure to the
benefit of the Bank and its successors and assigns. If any term of this
Agreement shall be held to be invalid, illegal, or unenforceable, the validity
of all other terms hereof shall in no way be affected thereby, and this
Agreement shall be construed and be enforceable as if such invalid, illegal, or
unenforceable term had not been included herein.
DATED as of the date shown above.
PRE-PAID LEGAL SERVICES, INC.,
an Oklahoma corporation
/s/ Harland C. Stonecipher
-------------------------------
By: Harland C. Stonecipher
Title: Chairman and Chief Executive Officer
BANK OF OKLAHOMA, N.A.,
a national banking association
/s/ Laura Christofferson
-------------------------------
By: Laura Christofferson
Title: Senior Vice President
EXHIBIT 10.3
Mortgage between Registrant and Bank of Oklahoma, N.A.
A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF SALE MAY ALLOW THE
MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURT IN A
FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE
CONSTRUCTION MORTGAGE WITH POWER OF SALE AND SECURITY AGREEMENT
THIS CONSTRUCTION MORTGAGE WITH POWER OF SALE AND SECURITY AGREEMENT (the
"Mortgage") is made as of the 23 day of July, 2002, between PRE-PAID LEGAL
SERVICES, INC., an Oklahoma corporation (the "Mortgagor") and BANK OF OKLAHOMA,
N.A., having a mailing address at 201 Robert S. Kerr Ave., P.O. Box 24128,
Oklahoma City, Oklahoma 73124 (the "Mortgagee").
WHEREAS, the Mortgagor has heretofore entered into that certain Loan Agreement
with Mortgagee of even date herewith (the "Loan Agreement") wherein Mortgagor
agreed to borrow and Mortgagee agreed to lend the sum of $30,000,000 for the
purpose of (i) constructing a structure on the Real Property (defined below) and
(ii) purchasing Borrower's common stock on the open market (the "Loan");
WHEREAS, in conjunction with the execution of the Loan Agreement, Mortgagor
executed and delivered its promissory note of even date herewith payable to the
order of the Mortgagee in the principal sum of Twenty Million and No/100's
Dollars ($20,000,000.00), with interest thereon (hereinafter called the "Real
Estate Note"), which Real Estate Note matures on September 30, 2009 and its
promissory note of even date herewith payable to the order of the Mortgagee in
the principal sum of Ten Million and No/100's Dollars ($10,000,000.00), with
interest thereon (hereinafter called the "Stock Note"), which Stock Note matures
no later than May 31, 2004 (the Real Estate Note and the Stock Note are
collectively referred to herein as the Notes.
NOW, THEREFORE, to secure to the Mortgagee the payment of the aforesaid
indebtedness, with interest thereon, the payment of all other moneys secured
hereby or advanced hereunder and the performance of the covenants and agreements
herein contained, the Mortgagor does hereby grant, bargain, sell, convey and
mortgage unto the Mortgagee and to its successors and assigns the real property
located in the County of Pontotoc, State of Oklahoma, described at Schedule "A"
attached hereto, together with all and singular the tenements, hereditaments and
appurtenances thereof; all buildings and improvements now or hereafter
constructed thereon; and all fixtures, equipment, machinery, apparatus and
articles of personal property of every kind and character now owned or hereafter
acquired by the Mortgagor and now or hereafter located in or used for the
operation and maintenance of the aforesaid buildings and improvements (all of
which property is herein called the "Collateral"), which shall include, but not
be limited to: (a) all signs, draperies, screens, awnings, storm windows and
doors, window shades, cabinets, partitions, floor coverings, escalators,
elevators and motors, ranges, refrigerators, boilers, tanks, furnaces, radiators
and all heating, lighting, plumbing, gas, electric, ventilating, refrigerating,
air conditioning, laundry, cleaning, fire prevention, fire extinguishing,
communications, kitchen and incinerating equipment of whatsoever kind and
character; (b) all of the right, title and interest of the Mortgagor in and to
any items of personal property which may be subject to a title retention or
security agreement superior in lien to the lien of this Mortgage; (c) all of the
items described at Schedule "B" attached as a part hereof; and (d) proceeds and
products thereof; provided that the Collateral shall not include fixtures and
furnishings owned by bona fide tenants of the improvements. The above described
real estate, appurtenances, improvements and Collateral are hereinafter
collectively called the "Mortgaged Premises" and are hereby declared to be
subject to the lien of this Mortgage as security for the payment of the
indebtedness herein described.
TO HAVE AND TO HOLD the Mortgaged Premises with all the rights, improvements and
appurtenances thereunto belonging, or in anywise appertaining unto the
Mortgagee, its successors and assigns, forever. The Mortgagor covenants that,
except as stated at Schedule "C" attached as a part hereof, the Mortgagor is
seized of an indefeasible estate in fee simple in the Mortgaged Premises, that
the Mortgagor has a good right to sell, convey and mortgage the same, that the
Mortgaged Premises are free and clear of all general and special taxes, liens,
charges and encumbrances of every kind and character, and that the Mortgagor
hereby warrants and will forever defend the title thereto against the claims of
all persons whomsoever.
1. Payment of Debt. If the Mortgagor shall pay the indebtedness herein described
and shall in all things do and perform all other acts and agreements herein
contained to be done, then, in that event only, this Mortgage shall be and
become null and void.
2. Maintenance; Waste. With respect to the Mortgaged Premises, the Mortgagor
covenants and agrees: (i) to keep the same in good condition and repair; (ii) to
pay all general and special taxes and assessments and other charges that may be
levied or assessed upon or against the same as they become due and payable and
to furnish to the Mortgagee receipts showing payment of any such taxes and
assessments, if demanded; (iii) to pay all debts for repair or improvements now
existing or hereafter arising which may become liens upon or charges against the
Mortgaged Premises; (iv) to comply with or cause to be complied with all
requirements of any governmental authority relating to the Mortgaged Premises;
(v) to promptly repair, restore, replace or rebuild any part of the Mortgaged
Premises which may be damaged or destroyed by any casualty whatsoever or which
may be affected by any condemnation proceeding or exercise of eminent domain;
and (vi) to promptly notify the Mortgagee of any damage to the Mortgaged
Premises in excess of Fifty Thousand Dollars ($50,000.00). The Mortgagor further
covenants and agrees that the Mortgagor will not: (i) commit or suffer to be
committed any waste of the Mortgaged Premises; (ii) initiate, join in or consent
to any change in any private restrictive covenant, zoning ordinance or other
public or private restrictions limiting or defining the uses which may be made
of the Mortgaged Premises or any part thereof; or (iv) permit any lien or
encumbrance of any kind or character to accrue or remain on the Mortgaged
Premises or any part thereof which might take precedence over the lien of this
Mortgage, except the matters described at Schedule "C".
3. Insurance. The Mortgagor will keep the Mortgaged Premises insured for the
benefit of the Mortgagee against loss or damage by fire, lightning, windstorm,
hail, explosion, riot, riot attending a strike, civil commotion, aircraft,
vehicles, smoke, vandalism and malicious mischief and (as, when and to the
extent insurance against war risks is obtainable from the United States of
America or any agency thereof) against war risks, all in amounts approved by the
Mortgagee, and shall provide the Mortgagee with policies of liability insurance
in amounts approved by Mortgagee, and flood insurance in an amount equal to the
lesser of the outstanding principal balance of the indebtedness secured hereby
or the maximum amount of coverage made available with respect to the Mortgaged
Premises under the National Flood Insurance Program (or evidence satisfactory to
Mortgagee that the Mortgaged Premises are not located in an area designated by
the Federal Emergency Management Agency or any other governmental agency as an
area having special flood or mudslide hazards and that flood insurance is not
required for this loan under the terms of any law, regulation or rule governing
Mortgagee's activities), and when and to the extent required by the Mortgagee,
against any other risk insured against by persons operating like properties in
the locality of the Mortgaged Premises. All insurance herein provided for shall
be in form approved by the Mortgagee. Regardless of the types or amounts of
insurance required and approved by the Mortgagee, the Mortgagor will assign and
deliver to the Mortgagee all policies of insurance which insure against any loss
or damage to the Mortgaged Premises, as collateral and further security for the
payment of the money secured by this Mortgage, with loss payable to the
Mortgagee pursuant to a mortgage clause satisfactory to Mortgagee. If the
Mortgagee by reason of such insurance receives any money for loss or damage,
such amount may, at the option of the Mortgagee, be retained and applied by the
Mortgagee toward payment of the moneys secured by this Mortgage, or be paid over
wholly or in part to the Mortgagor for the repair of said buildings or for the
erection of new buildings in their place, or for any other purpose or object
satisfactory to the Mortgagee, but the Mortgagee shall not be obligated to see
to the proper application of any amount paid over to the Mortgagor. Not less
than fifteen (15) days prior to the expiration dates of each policy required of
the Mortgagor pursuant to this paragraph, the Mortgagor will deliver to the
Mortgagee a renewal policy or policies marked "premium paid" or accompanied by
other evidence of payment satisfactory to the Mortgagee, and in the event of a
foreclosure of this Mortgage, the purchaser of the Mortgaged Premises shall
succeed to all the rights of the Mortgagor, including any right to unearned
premiums, in and to all policies of insurance assigned and delivered to the
Mortgagee pursuant to the provisions of this paragraph. Mortgagor specifically
covenants and agrees that in the event Mortgagor has provided Mortgagee with
evidence satisfactory to Mortgagee that flood insurance covering the Mortgaged
Premises should not be required at time of execution of this Mortgage and the
Mortgaged Premises should thereafter become eligible for flood insurance under
the National Flood Insurance Program, or under any subsequent Act of Congress of
the United States, and should the Mortgaged Premises be located in an area now
or thereafter designated by the Federal Emergency Management Agency or any other
governmental agency as an area having special flood or mudslide hazards,
Mortgagor and Mortgagor's successors in title shall maintain at their sole cost
and expense flood insurance available under the National Flood Insurance
Program, in such amounts and in such form as may be required by Mortgagee.
4. Alterations. No building or other property now or hereafter subject to the
lien of this Mortgage shall be removed, demolished or materially altered,
without the prior written consent of the Mortgagee, except that the Mortgagor
shall have the right, without such consent, to remove and dispose of, free from
the lien of this Mortgage, such Collateral as from time to time may become worn
or obsolete, provided that either: (i) simultaneously with or prior to such
removal, any such Collateral shall be replaced with other Collateral of a value
at least equal to that of the replaced Collateral and free from any title
retention device, security agreement or other encumbrance, and by such removal
or replacement, the Mortgagor shall be deemed to have subjected such Collateral
to the lien of this Mortgage; or (ii) any net cash proceeds received from such
disposition shall be paid over promptly to the Mortgagee to be applied to the
last installments due on the indebtedness hereby secured, without any charge for
prepayment.
5. Default; Remedies. Upon the failure of the Mortgagor to pay any of the taxes,
assessments, debts, liens or other charges as the same become due and payable,
or to insure the Mortgaged Premises or deliver the policies of insurance as
herein provided, or to perform any of the Mortgagor's covenants and agreements
herein, the Mortgagee is hereby authorized, at its option, to insure the
Mortgaged Premises, or any part thereof, and pay the costs of such insurance,
and to pay such taxes, assessments, debts, liens or other charges herein
described, or any part thereof, and to remedy the Mortgagor's failure to perform
hereunder and pay the costs associated therewith, and the Mortgagor hereby
agrees to refund on demand all sum or sums so paid, with interest thereon at a
rate equal to five percent (5%) per annum in excess of the interest rate stated
in the Notes; and any such sum or sums so paid together with interest thereon
shall become a part of the indebtedness hereby secured; provided, however, that
the retention of a lien hereunder for any sum so paid shall not be a waiver of
subrogation or substitution which the Mortgagee might otherwise have. In the
event of the failure of the Mortgagor to pay any of the taxes, assessments,
debts, liens or other charges herein described as the same become due and
payable or to keep the Mortgaged Premises insured in the manner and time herein
provided, or the failure to deliver renewal policies in the manner and time
herein provided, or if any installment of principal or interest is not paid at
or within the time required by the terms of the Notes, or in the case of the
actual or threatened destruction, demolition, removal, condemnation or taking of
all or any part of the Mortgaged Premises, or the failure to do any of the
things herein agreed to be done, or on the breach of any of the terms of the
Notes, this Mortgage or any other instrument securing or evidencing the
indebtedness hereby secured, then, in any of such events, whether the Mortgagee
has paid any of the taxes, liens or other charges, or procured the insurance, or
remedied the Mortgagor's failure to perform, all as above mentioned, or not, the
Mortgagor shall be in default hereunder. In the event of default, the Mortgagee
may either: (i) declare the principal of the Notes, all interest accrued thereon
and all other sums hereby secured, without deduction and without notice, to be
immediately due and payable, and the Mortgagee will be entitled to foreclose
this Mortgage by judicial proceeding, or (ii) after any notice to the Mortgagor
required by the Oklahoma Power of Sale Mortgage Foreclosure Act, 46 Okla. Stat.
ss. 41 et seq. (1991), as amended from time to time (the "Act") declare the
principal of the Notes, all interest accrued thereon and all other sums hereby
secured, without deduction, to be immediately due and payable, and the Mortgagee
will be entitled to foreclose this Mortgage by power of sale pursuant to the
provisions of the Act. The Mortgagor hereby confers upon the Mortgagee and
grants to the Mortgagee the power to sell the Mortgaged Premises pursuant to the
Act or any other applicable authority. On default, the Mortgagee will be
entitled to exercise all further and additional remedies as might now or
hereafter be accorded to the Mortgagee at law or in equity. Whether the
Mortgagee elects to foreclose this Mortgage by judicial proceeding or by power
of sale, the Mortgagee shall, immediately on default, be entitled to the
possession of the Mortgaged Premises and the rents and profits thereof, and
shall be entitled to have a receiver appointed to take possession of the
Mortgaged Premises without notice, which notice the Mortgagor hereby waives,
notwithstanding anything contained in this Mortgage or any law heretofore or
hereafter enacted. No action of the Mortgagee based upon the provisions
contained herein or contained in the Act, including, without limitation, the
giving of any of the notices provided for in the Act shall constitute an
election of remedies which would preclude the Mortgagee from pursuing judicial
foreclosure before or at any time after commencement of the power of sale
foreclosure procedure.
6. Taxes; Expenses. The Mortgagor agrees to pay any and all taxes which may be
levied or assessed directly or indirectly upon the Notes, this Mortgage and the
indebtedness hereby secured, and further agrees to pay all expenses incurred in
connection with the creation of the indebtedness hereby secured, including,
without limitation, all broker's fees, real estate commissions, attorney's fees,
title guaranty fees, survey expenses, appraiser's fees, abstracting expenses,
recording costs and lien indemnification fees, without regard to any law which
may be hereafter enacted imposing payment of the whole or any part thereof upon
the Mortgagee; and, upon violation of this agreement, or upon the rendering by
any court of competent jurisdiction of a decision that such an agreement by a
Mortgagor is legally inoperative, or if the rate of said taxes and expenses
added to the rate of interest provided for in the Notes shall exceed the then
legal rate of interest, then, and in any such event, the indebtedness hereby
secured, without deduction, shall, at the option of the Mortgagee become
immediately due and payable, anything contained in this Mortgage or in the Notes
notwithstanding. The additional amounts which may become due and payable
hereunder shall be regarded as part of the indebtedness secured by this
Mortgage.
7. Expenses of Collection. It is agreed that if, and as often as, this Mortgage
or the Notes is placed in the hands of an attorney for collection, or to protect
the priority or validity of this Mortgage, or to prosecute or defend any suit
affecting the Mortgaged Premises, or to enforce or defend any of the Mortgagee's
rights hereunder, the Mortgagor shall pay to the Mortgagee its reasonable
attorney's fees, together with all court costs, expenses for title examination,
title insurance or other disbursements relating to the Mortgaged Premises, which
sums shall be secured hereby.
8. Appraisement. Appraisement of the Mortgaged Premises is hereby expressly
waived, or not, at the option of the Mortgagee, such option to be exercised at
the time judgment is rendered in any foreclosure hereof, or at any time prior
thereto.
9. Condemnation Awards. The Mortgagor covenants and agrees that if at any time
all or any portion of the Mortgaged Premises shall be taken or damaged under the
power of eminent domain, the award received by condemnation proceedings for any
property so taken or any payment received in lieu of such condemnation
proceedings shall be paid directly to the Mortgagee and all or any portion of
such award or payment, at the option of the Mortgagee, shall be applied to the
indebtedness hereby secured in payment of the last maturing installments of the
indebtedness or paid over, wholly or in part, to the Mortgagor for the purpose
of altering, restoring or rebuilding any part of the Mortgaged Premises which
may have been altered, damaged or destroyed as a result of any such taking or
damage, or for any other purpose or object satisfactory to Mortgagee; provided
that the Mortgagee shall not be obligated to see to the application of any
amount paid over to the Mortgagor. The Mortgagor immediately upon obtaining
knowledge of the institution of any proceedings or negotiations for the
condemnation of the Mortgaged Premises, or any portion thereof, will notify the
Mortgagee of the pendency of such negotiations or proceedings. The Mortgagee may
participate in any such negotiations or proceedings, and the Mortgagor from time
to time will execute and deliver to the Mortgagee all instruments requested by
the Mortgagee to permit such participation.
10. Sale in Parcels. In case of any sale under this Mortgage by virtue of
judicial proceedings or otherwise, the Mortgaged Premises may be sold in one
parcel and as an entirety or in such parcels, manner or order as the Mortgagee
in its sole discretion may elect, and the Mortgagor waives any and all rights
which the Mortgagor may have to insist upon the sale of the Mortgaged Premises
in one parcel or in separate parcels.
11. Certificate. The Mortgagor, upon request, made either personally or by mail,
shall certify, by a writing duly acknowledged, to the Mortgagee or to any
proposed assignee of this Mortgage, the amount of principal and interest then
owing on this Mortgage and whether any offsets or defenses exist against the
indebtedness hereby secured, within ten (10) days after the mailing of such
request.
12. Notice. Except as otherwise provided herein, any and all notices, elections,
demands, requests and responses thereto permitted or required to be given under
this Mortgage shall be made pursuant to Section 12.3 of the Loan Agreement.
13. Future Advancements. This Mortgage shall secure the payment of the Notes,
including any and all advancements made by the Mortgagee thereunder, and any and
all additional indebtedness of the Mortgagor to the Mortgagee incurred in
connection with the Mortgaged Premises or any improvements now or hereafter
located thereon, whether or not incurred or becoming payable under the
provisions hereof and whether as future advancements or otherwise, together with
any renewals, modifications, rearrangements, consolidations or extensions of the
Notes or other indebtedness.
14. Inspection; Management. The Mortgagee and any persons authorized by the
Mortgagee shall have the right to enter and inspect the Mortgaged Premises at
all reasonable times. If, at any time after default by the Mortgagor in the
performance of any of the terms, covenants or provisions of this Mortgage or the
Notes, the management or maintenance of the Mortgaged Premises shall be
determined by the Mortgagee to be unsatisfactory, the Mortgagor shall employ,
for the duration of such default, as managing agent of the Mortgaged Premises,
any person from time to time designated or approved by the Mortgagee.
15. Payment by Others. Any payment made in accordance with the terms of this
Mortgage by any person at any time liable for the payment of the whole or any
part of the indebtedness now or hereafter secured by this Mortgage, or by any
subsequent owner of the Mortgaged Premises, or by any other person whose
interest in the Mortgaged Premises might be prejudiced in the event of a failure
to make such payment, or by any stockholder, officer or director of a
corporation or any partner of a partnership or trustee or beneficial owner of a
trust which at any time may be liable for such payment or may own or have such
an interest in the Mortgaged Premises, shall be deemed, as between the Mortgagee
and all persons who at any time may be liable as aforesaid or may own the
Mortgaged Premises, to have been made on behalf of the Mortgagor.
16. No Waiver. Any failure by the Mortgagee to insist upon the strict
performance by the Mortgagor of any of the terms and provisions hereof shall not
be deemed to be a waiver of any of the terms and provisions hereof, and the
Mortgagee, notwithstanding any such failure, shall have the right thereafter to
insist upon the strict performance by the Mortgagor of any and all of the terms
and provisions of this Mortgage to be performed by the Mortgagor. Neither the
Mortgagor nor any other person now or hereafter obligated for the payment of the
whole or any part of the indebtedness now or hereafter secured by this Mortgage
shall be relieved of such obligation by reason of the failure of the Mortgagee
to comply with any request of the Mortgagor or of any other person so obligated
to take action to foreclose this Mortgage or otherwise enforce any of the
provisions of this Mortgage or of any obligations secured by this Mortgage, or
by reason of the release, regardless of consideration, of the whole or any part
of the security held for the indebtedness secured by this Mortgage, or by reason
of any agreement or stipulation between any subsequent owner or owners of the
Mortgaged Premises and the Mortgagee extending, from time to time, the time of
payment or modifying the terms of the Notes or this Mortgage without first
having obtained the consent of the Mortgagor or such other person, and in the
latter event, the Mortgagor and all such other persons shall continue liable to
make such payments according to the terms of any such agreement of extension or
modification unless expressly released and discharged in writing by the
Mortgagee. Regardless of consideration, and without the necessity for any notice
to or consent by the holder of any subordinate lien on the Mortgaged Premises,
the Mortgagee may release the obligation of anyone at any time liable for any of
the indebtedness secured by this Mortgage or any part of the security held for
such indebtedness and may from time to time extend the time of payment or
otherwise modify the terms of the Notes and/or this Mortgage without, as to the
security for the remainder thereof, in any way impairing or affecting the lien
of this Mortgage or the priority of such lien, as security for the payment of
the indebtedness as it may be so extended or modified, over any subordinate
lien. The holder of any subordinate lien shall have no right to terminate any
lease affecting the Mortgaged Premises whether or not such lease be subordinate
to this Mortgage. The Mortgagee may resort for the payment of indebtedness
hereby secured to any other security therefor held by the Mortgagee in such
order and manner as the Mortgagee may elect.
17. Cumulative Remedies. The rights of the Mortgagee arising under the clauses
and covenants contained in this Mortgage shall be separate, distinct and
cumulative and none of them shall be in exclusion of the other. No act of the
Mortgagee shall be construed as an election to proceed under any one provision
herein to the exclusion of any other provision, anything herein or otherwise to
the contrary notwithstanding.
18. Security Interest. This Mortgage shall also be considered to be and shall be
construed as a security agreement with respect to any property described herein
which is not a part of the real property described herein.
18.1 Assembly of Collateral. Upon default hereunder and acceleration of the
indebtedness pursuant to the provisions hereof, the Mortgagee may at its
discretion require the Mortgagor to assemble the Collateral and make it
available to the Mortgagee at a place reasonably convenient to both parties
to be designated by the Mortgagee.
18.2 Notice of Sale. The Mortgagee shall give the Mortgagor written notice
of the time and place of any public sale of any of the Collateral or of the
time after which any private sale or other intended disposition thereof is
to be made by sending notice to the Mortgagor at least five (5) days before
the time of the sale or other disposition, which provisions for notice the
Mortgagor agrees are reasonable.
18.3 Additional Documents. The Mortgagor will from time to time within ten
(10) days after request by the Mortgagee, execute (if requested or if
otherwise required by law), acknowledge and deliver any financing
statement, renewal affidavit, certificate, continuation statement,
inventory or other documents that the Mortgagee may request in order to
protect, preserve, continue, extend or maintain the security interest under
and the priority of this Mortgage and will, upon demand, pay any expenses
incurred by the Mortgagee in the preparation, execution and filing of any
such documents.
19. Bankruptcy. The entire indebtedness secured by this Mortgage shall become
and immediately be due at the option of the Mortgagee if by order of a court of
competent jurisdiction a receiver or liquidator or trustee of the Mortgagor, any
guarantor of the Notes or of all or any part of the Mortgaged Premises, shall be
appointed and shall not have been discharged within sixty (60) days; or, if by
decree of such court, the Mortgagor or any guarantor of the Notes shall be
adjudicated bankrupt or insolvent or the Mortgaged Premises shall have been
sequestered and such decree shall have continued undischarged and unstayed for
sixty (60) days after the entry thereof; or if the Mortgagor or any guarantor of
the Notes shall file a petition in voluntary bankruptcy or seeking relief under
any provision of any bankruptcy or insolvency law or shall consent to the filing
of any bankruptcy petition against the Mortgagor or any guarantor of the Notes
under any such law; or if the Mortgagor or any guarantor of the Notes shall file
a petition or answer seeking reorganization or an arrangement with creditors; or
if (without limitation of the generality of the foregoing) the Mortgagor or any
guarantor of the Notes shall make an assignment for the benefit of creditors, or
shall admit in writing an inability to pay debts generally as they become due,
or shall consent to the appointment of a receiver, or trustee or liquidator of
the Mortgagor, any guarantor of the Notes or of all or any part of the Mortgaged
Premises.
20. Mineral Interests. The Mortgagor agrees that the making of any oil, gas or
mineral lease or the sale or conveyance of any mineral interest or right to
explore for minerals under, through or upon the Mortgaged Premises would impair
the value of the Mortgaged Premises as security for payment of the indebtedness
and that the Mortgagor shall have no right, power or authority to lease the
Mortgaged Premises, or any part thereof, for oil, gas or other mineral purposes,
or to grant, assign or convey any mineral interest of any nature, or the right
to explore for oil, gas and other minerals, without first obtaining from the
Mortgagee express written permission, which permission shall not be valid until
recorded. The Mortgagor further agrees that if the Mortgagor shall make any such
lease or attempt to grant any such mineral rights without such prior written
permission, then the Mortgagee shall have the option, without notice, to declare
the same to be a default hereunder and to declare the indebtedness hereby
secured immediately due and payable. Whether or not the Mortgagee shall consent
to such lease or grant of mineral rights, the Mortgagee shall receive the entire
consideration to be paid for such lease or grant of mineral rights, with the
same to be applied upon the indebtedness hereby secured; provided, however, that
the acceptance of such consideration shall in no way impair the lien of this
Mortgage on the entire Mortgaged Premises and all rights therein, including all
mineral rights.
21. Prohibited Acts. The Mortgagor will not: (a) sell, convey, mortgage or
otherwise transfer or encumber all or any part of the Mortgaged Premises except
as may otherwise be permitted the Agreement; or (b) sell, convey, pledge or
encumber or permit the sale, conveyance, pledge or encumbrance of any of the
interests in the entity owning the Mortgaged Premises, or change or dissolve
such entity except as may otherwise be permitted by the Agreement. The
occurrence of any of the aforesaid events without the Mortgagee's prior written
approval, at the Mortgagee's option, shall constitute an event of default
hereunder, and the Mortgagee may declare the indebtedness hereby secured
immediately due and payable and exercise any or all of the Mortgagee's rights
herein provided. This provision shall apply to each and every sale, conveyance,
transfer or encumbrance, regardless of whether or not the Mortgagee has
consented to or waived its rights hereunder, whether by action or inaction, in
connection with any previous sale, conveyance, transfer or encumbrance, whether
one or more.
22. Rules, Regulations, Environmental Laws. The Mortgagor hereby represents,
warrants and covenants: (i) that the location, construction, occupancy,
operation and use of the Mortgaged Premises do not violate any applicable law,
statute, ordinance, rule, regulation, order or determination of any governmental
authority or any board of fire underwriters (or other body exercising similar
functions), or any restrictive covenant or deed restriction (recorded or
otherwise) affecting the Mortgaged Premises, including without limitation all
applicable zoning ordinances and building codes, flood disaster laws and health
and environmental laws and regulations (hereinafter sometimes collectively
called "Applicable Regulations"); (ii) without limitation of (i) above, that the
Mortgaged Premises and the Mortgagor are not in violation of or subject to any
existing, pending or threatened investigation or inquiry by any governmental
authority or to any remedial obligations under any Applicable Regulations
pertaining to health or the environment (hereinafter sometimes collectively
called "Applicable Environmental Laws"), including without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of 1986 (as
amended, hereinafter called "CERCLA"), the Resource Conservation and Recovery
Act of 1976, as amended (as amended, hereinafter called "RCRA"), and the
Oklahoma laws covering Water and Water Rights, the Oklahoma Solid Waste
Management Act, the Oklahoma Controlled Industrial Waste Disposal Act and the
Oklahoma Clean Air Act, and this representation and warranty would continue to
be true and correct following disclosure to the applicable governmental
authorities of all relevant facts, conditions and circumstances, if any,
pertaining to the Mortgaged Premises; (iii) that the Mortgagor has not obtained
and is not required to obtain any permits, licenses or similar authorizations to
construct, occupy, operate or use any buildings, improvements, fixtures and
equipment forming a part of the Mortgaged Premises by reason of any Applicable
Environmental Laws; (iv) that the Mortgagor has taken all steps necessary to
determine and has determined that no hazardous substances, solid wastes or other
substances known or suspected to pose a threat to health or the environment
("Hazards") have been disposed of or otherwise released on or to the Mortgaged
Premises; (v) that the use which the Mortgagor makes and intends to make of the
Mortgaged Premises will not result in the disposal or other release of any
hazardous substance or solid waste on or to the Mortgaged Premises; (vi) that
the Mortgagor will not cause or permit the Mortgaged Premises or the Mortgagor
to be in violation of, or do anything or permit anything to be done which will
subject the Mortgaged Premises to any remedial obligations under the Applicable
Regulations; (vii) that the Mortgagor will promptly notify the Mortgagee in
writing of any existing, pending, or to the best knowledge of the Mortgagor,
threatened investigation or inquiry by any governmental authority in connection
with any Applicable Regulations; and (viii) that Mortgagor will not cause or
permit the disposal or other release of any hazardous substance, solid waste or
Hazards on the Mortgaged Premises and covenants and agrees to keep or cause the
Mortgaged Premises to be kept free of any hazardous substances, solid wastes or
Hazards and to remove the same (or if removal is prohibited by law, to take
whatever action is required by law) promptly upon discovery at the Mortgagor's
sole expense. The terms (as used in this Mortgage) "hazardous substance" and
"release" shall have the meanings specified in CERCLA, and the terms "solid
waste" and "disposal" (or "disposed") shall have the meanings specified in RCRA;
provided, in the event either CERCLA or RCRA is amended so as to broaden the
meaning of any term defined thereby, such broader meaning shall apply subsequent
to the effective date of such amendment and provided further, to the extent that
the laws of the State of Oklahoma establish a meaning for "hazardous substance",
"release", "solid waste", or "disposal" which is broader than that specified in
either CERCLA or RCRA, such broader meaning shall apply.
23. Indemnity. The Mortgagor agrees to indemnify and hold the Mortgagee harmless
from and against and to reimburse the Mortgagee with respect to, any and all
claims, demands, causes of action, loss, damage, liabilities, costs and expenses
(including attorneys' fees and court costs) of any and every kind or character,
known or unknown, fixed or contingent, asserted against or incurred by the
Mortgagee at any time and from time to time by reason of or arising out of: (i)
the breach of any representation or warranty of the Mortgagor set forth in this
Mortgage; (ii) the failure of the Mortgagor to perform any obligation herein
required to be performed by the Mortgagor; (iii) the presence, disposal,
release, threatened release, removal or production of any hazardous substances,
solid wastes or Hazards which are on, in, from or affecting any portion of the
Mortgaged Premises; (iv) any personal injury (including wrongful death) or
property damage (real or personal) arising out of or related to such hazardous
substances, solid wastes or Hazards; (v) any lawsuit brought or threatened,
settlement reached, or order by any governmental authority relating to such
hazardous substances, solid wastes or Hazards; and/or (vi) any violation of any
Applicable Regulations or Applicable Environmental Laws or demands of any
governmental authorities, or violation of any policies or requirements of the
Mortgagee which are based upon or in any way related to such hazardous
substances, solid wastes or Hazards, regardless of whether or not any of the
conditions described under any of the foregoing subsections was or is caused by
or within the control of the Mortgagor. All of the foregoing covenants,
representations, warranties and indemnities made by the Mortgagor shall be
continuing and shall survive the funding and payment in full of the indebtedness
secured by this Mortgage, as well as any foreclosure of this Mortgage or
granting of any deed in lieu of foreclosure of this Mortgage and/or the
recordation of any release of the lien of this Mortgage.
24. Subrogation. To the extent funds are advanced under the Notes hereby secured
for the purpose of paying the indebtedness secured by any mortgage lien having
priority over the lien of this Mortgage, the Mortgagee shall be subrogated to
any and all rights, superior titles, liens and equities owned or claimed by the
holder of such prior mortgage. Except with respect to the priority of any
mortgage to which the Mortgagee is subrogated pursuant to the provisions hereof,
the terms and provisions of this Mortgage shall govern the rights and remedies
of the Mortgagee and shall supersede the rights and remedies provided under any
mortgage to which the Mortgagee is subrogated.
25. Construction Mortgage. This is a "construction mortgage" within the meaning
of Section 9.313(1)(c) of the Uniform Commercial Code of the State of Oklahoma.
This instrument secures an obligation for the construction of improvements on
land.
26. Fixture Filing. Certain of the Mortgaged Premises is or will become fixtures
on the real estate described herein and this Mortgage, on being recorded in the
real estate records of the county in which the Mortgaged Premises are located,
shall be effective as a financing statement on such Mortgaged Premises which is
or may become fixtures.
27. Governing Law. The Mortgagor and the Mortgagee are residents of the State of
Oklahoma. This Mortgage and the Notes secured hereby were negotiated, executed
and delivered in Oklahoma City, Oklahoma County, Oklahoma, and the parties
hereto agree that this Mortgage shall be construed according to the laws of the
State of Oklahoma.
28. Construction. Wherever used in this Mortgage, unless the context clearly
indicates a contrary intent or unless otherwise specifically provided herein,
the word "Mortgagor" shall mean "Mortgagor and/or any subsequent owner or owners
of the Mortgaged Premises", the word "Mortgagee" shall mean "Mortgagee or any
subsequent holder or holders of this Mortgage", the word "Notes" shall mean
"notes secured by this Mortgage" and the word "person" shall mean "an
individual, corporation, partnership or unincorporated association." The
paragraph headings contained herein are included as a matter of convenience and
are not intended to define, limit or modify the terms of this Mortgage. This
Mortgage shall be binding on the Mortgagor and all heirs, personal
representatives, successors and assigns of the Mortgagor and inure to the
benefit of the Mortgagee and all heirs, personal representatives, successors and
assigns of the Mortgagee.
29. Severability. If any provision of this Mortgage is held to be illegal,
invalid, or unenforceable under present or future laws, such provision shall be
fully severable and shall not invalidate this Mortgage, and the remaining
provision of this Mortgage shall remain in full force and effect and shall not
be affected by the illegal, invalid or unenforceable provision or by its
severance from this Mortgage.
30. Amendment. This Mortgage cannot be changed except by an agreement in writing
signed by the party against whom enforcement of the change is sought.
IN WITNESS WHEREOF, the Mortgagor has duly executed this instrument as of the
date first above written.
PRE-PAID LEGAL SERVICES, INC.
an Oklahoma corporation
/s/ Harland C. Stonecipher
-------------------------------
By: Harland C. Stonecipher
Title: Chairman and CEO