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The Four Tops - Its the Same Old Song

The Four Tops - Its the Same Old Song. Pre-Paid Legal Services - Q3 1999. ?. An HMO for legal expenses. The Service 30 minutes on phone 2.5 hours of auto-related court time other misc. trial time, EXCLUDING domestic acts, bankruptcy, criminal acts, alcohol or drug-related… The Industry

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The Four Tops - Its the Same Old Song

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  1. The Four Tops - Its the Same Old Song

  2. Pre-Paid Legal Services - Q3 1999 ?

  3. An HMO for legal expenses • The Service • 30 minutes on phone • 2.5 hours of auto-related court time • other misc. trial time, EXCLUDING domestic acts, bankruptcy, criminal acts, alcohol or drug-related… • The Industry • 105 million have some type of coverage thru work etc. • 15.75 million individuals enroll • PPD has 603 thousand, or 3.8% of market

  4. The Business Model • Sell through multilevel marketing plan • membership costs $10-25/month • 22% of sales associates generate 75% of sales • 25% commission paid to salesforce (11 layers!) • Cost to provide service • 36 law firms around country paid based on number of members in area • get 35% of member fees

  5. Sales Commissions page 16 of 10K

  6. page 16 of 10K

  7. commission advances

  8. Accounting for the premiums • accounting for the membership premiums is easy: cash (+) xx revenue (+) xx • it’s the asset – expense accounting that is more complicated.

  9. Accounting for the commissions • when new member signs up, get 3 years worth commission advance (+ asset) xx cash (-) xx • as member makes payments during first 3 years commission expense (+) xx commission advance (- asset) xx • as member makes payments beyond 3 years commission expense (+) xx cash (-) xx

  10. What happens if the member quits before 3 years are up? • could account for as a write-off commission expense (+) xx commission advance (-) xx • or could do nothing!

  11. So what’s the big accounting issue in the press release? “Even though commission advances increased $9.2 million as a result of increasing membership sales during the third quarter of 1999, cash flow from operations was $5,199,000, a decrease of $379,000, or 7 percent…”

  12. An accounting alternative • expense commissions immediately when paid. commission advances beg. balance originating expensed ending balance So, originating = expensed + change in balance. (i.e. cash paid out) 19019 = 9819 + 9200

  13. profit margin .20 .08

  14. membership persistency (old + new – quit)/(old + new) = .75 If persistence is .75 per year then expected participation of member = 1/(1-.75) = 4 years

  15. Suppose every dollar of advertising generated $3 in current year and $3 in next year.

  16. announce large new memberships, release revised 2000 annual report, shorts must cover news articles and research reports questioning accounting SEC final ruling: accounting still isn’t GAAP WSJ article questioning accounting, and summarizing previous research reports Q3 1999 press release in case 10b5 lawsuits announced every day for weeks SEC announces inquiry analyst upgrades announce 30-50% NI growth each quarter and stock repurchases file 8-K detailing membership retentions over 20 years drop auditors

  17. and the verdict is… The Court denied the plantiffs' motion yesterday, stating that the Court found, and continues to find, that the Plaintiffs did not sufficiently plead scienter as to the Pre-Paid Defendants." The Court went on to note: "A review of these documents ... shows that even with the estimated (now actual) restatement of net income, Pre-Paid was, and continues to be, a successful, profit-making venture." The Court added that, " ... even after the restatement of, and resultant reduction to, net income over several years, Pre-Paid shows net income profits of $11.4 million, $12.9 million and $20.5 million for the years 1998, 1999, and 2000, respectively ... "

  18. buy buy buy sell sell sell The Paton Center Money Pump

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