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1. 11/25/2011
2. 11/25/2011
3. 11/25/2011 Key Issues Is the capitalization of commission advances accounting distortion or is it justifiable?
Is an advanced commission an asset or an expense?
Is PPLSI portraying a realistic financial picture for its investors?
Is PPLSI’s estimated cancellation rate reasonable?
Is PPLSI’s allowance for uncollectable advanced commissions reasonable?
4. 11/25/2011 Business Strategy Analysis
Liu Yang
5. 11/25/2011 Business Strategy Analysis Industry Analysis
1 Legal service industry overview
2 Porter’s five forces model
Competitive Strategy Analysis
Differentiation
Corporate Strategy Analysis
1 Expand through acquisition and alliance
2 Key success factors
3 Key risk factors
6. 11/25/2011 Industry Analysis Legal Service Industry Overview
1 History of LS industry
started late 1960s, grew 25 times1981--1997
2 Four segments of LS industry
Free plans 50% (As Percentage of Total Market)
Employee assistance plans 29%
& Employer paid plans 6%
* Individual enrollment plans 15%
3 Pre-paid Legal Service’s position--* &
open panel and closed panel
7. 11/25/2011 Industry Analysis Porter’s Five Analysis
1 High barrier of entry
States regulation and approval
2 High buyer bargaining power
Buyers can cancel or change plan without cost/penalty
3 High supplier bargaining power
Sales associates and law firms are influential suppliers
4 Low threat of substitutes
5 Medium industry rivalry
21% small firms, 79% large insurance companies
8. 11/25/2011 Competitive Strategy Analysis Differentiation ?
1 Diverse legal service plans to meet the needs of diverse market including individuals, families and specialized groups like commercial drivers and small business owners etc
2 Bilingual staff for both customer service and marketing service
3 Develop legal service plans for different ethnic groups
Cost Leadership?
Offer qualified legal service to middle-income Americans at a reasonable cost
9. 11/25/2011 Corporate Strategy Expand through Acquisition and alliance
1 Acquisition of TPN
Increase sales force and provide a powerful communication tool--TPN satellite channel
2 Acquisition of UFL
Widen service to life and health insurance.
Create an alliance opportunity with Conseco insurance company, gain Conseco’s 160,000 sales agent to market
10. 11/25/2011 Corporate Strategy Analysis Key Success Factors
1 Pioneer position in industry
2 Relatively low capital investment resulting in no heavy overhead expense
3 Extensive sales force and multilevel marketing program
4 Well established network of lawyers hardly duplicated by competitors.
11. 11/25/2011 Corporate Strategy Analysis Key Risk Factors
1 Cancellation risk
Customers can cancel policies anytime without penalty
2 Adverse selection risk
People with higher potential legal service needs will have a greater tendency to purchase the plan
3 Sales associate non-performing risk
4 Advanced commission fees collection risk
12. 11/25/2011 Accounting Analysis
Yoshiro Mishina
13. 11/25/2011 Accounting Analysis How PPLS recognizes revenue and expenses?
The old accounting method (pre-1995)
The new accounting method
How PPLS treats the unrecoverable commission advances?
Charge-backs
Allowance for unrecoverable commission advances
Uncertainty of the current accounting method
14. 11/25/2011 How PPLS recognizes revenue and expenses? <The old method (pre-1995)> Revenue
Premiums $229
Expenses
Commissions $160 ($229*70%)
Claims $ 68 ($229*30%) Other expenses $ 23 ($229*10%)
Net Income <$ 22>
15. 11/25/2011 How PPLS recognizes revenue and expenses? <The new method> Revenue
Premiums $229
Expenses
Commissions $ 57 ($229*25%)
Claims $ 68 ($229*30%) Other expenses $ 23 ($229*10%)
Net Income $ 81
Assets
Cash <$172> ($229*75%)
Commission Advances - current $57 ($229*25%)
Commission Advances - non-current $57 ($229*25%)
16. 11/25/2011 Advantage of the new method for PPLS Shows higher net income
$81(new method) vs. <$22>(old method)
Capitalizes commission advances
Boosts associates’ motivation to increase sales and maintain existing customers
17. 11/25/2011 How PPLS treats the unrecoverable commission advances? Charge-backs
Half the charge back out of an associates’ future commissions
Half from the associates’ commissions on renewals of policies that were more than 3 years
Allowance for unrecoverable commission advances
18. 11/25/2011 Allowance for unrecoverable commissions
19. 11/25/2011 Uncertainty of the new method Pro
In conformity with the matching concept (GAAP)
Unqualified opinion by “Deloitte & Touche”
Cons
No guarantee that customers keep the month-to -month policies for 3 years
Disregard of the concept of conservatism (GAAP)
20. 11/25/2011 Assumption - Net Income per contract - Revenue
Premiums $229
Expenses
Commissions $172 ($229*75%)
Claims $ 68 ($229*30%) Other expenses $ 23 ($229*10%)
Net Income <$ 33>
21. 11/25/2011 Assumption- Adjusted expenses -
22. 11/25/2011 Assumption- Income Statements & Balance Sheet-
23. 11/25/2011 Conclusion
“QUESTIONABLE”
24. 11/25/2011 Hindsight The Wall Street Journal, January 17, 2001
questionable accounting method
overstated earning figures
undisclosed overstated earning figures
financial info.
Class Actions