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Pre-Paid Legal Services

Essay by   •  September 26, 2011  •  Essay  •  525 Words (3 Pages)  •  1,635 Views

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1. Pre-Paid Legal Services, Inc. was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. Key Elements of PPD's business strategy: (1) Memberships: The Company's memberships provide for a portion of legal fees associated with variety of legal services. (2) Associates: The Company encourages individuals to sell memberships and allows individuals to recruit and develop their own sales organizations. (3) Provider Attorneys: Closed panel memberships allow members to access legal services through network of independent attorneys under contract with company generally referred to as "provider attorneys". They are paid fixed fee on a per capita basis to render services to plan members residing within state in which provider attorney is licensed to practice. (4) Multi-Level Marketing: The company markets memberships through a multi-level marketing program which encourages individuals to sell memberships and allows individuals to recruit and develop their own sales organizations.

2. Problems revealed by third-quarter earnings announcement that resulted in PPDs stock price drop are: (1) Increase in commission advances: Company recruited 22,493 sales associates in 3rd quarter and 134,725 new members. Thus collective effect of these numbers of associates and members lead to increase in liability in form of commission advances to $9.2million. The Company's commission advance policy exposes the Company to the risk of uncollectible commission advances. (2) Decrease in Cash flows: The cash flow for third quarter was $5.1 million, down $379,000 from the same period in 1998. A significant cash flow deficit is created at the time a Membership is sold. This deficit is reduced as monthly Membership fees are remitted and no additional commissions are paid on the Membership until all previous commission advances have been fully recovered.

3. The alternative method is to eliminate the commission advance receivables as assets and the related deferred tax liability that the company had previously reported. (1) Considering the balance sheet, the EPS for third-quarter, 1999 was $0.43(2) If we eliminate the commission advances receivables from assets, the assets will be reduced. Thus the EPS from reduced income will be less than $0.43.

4. Earnings per share serve as an indicator of a company's profitability. The reduced EPS after eliminating the cash advances from assets is a worse indicator PPD's actual performance. Commissions look like ordinary costs that prepaid should be expensing fully each quarter, because there isn't any guarantee that the customers will keep the month-to-month policies for three years. If we compare the reduction in assets and income, conveys that PPD was actually not doing well and was dependent on recruitment of associates for continuing cash flows.

5. Advise for PPD's management in response to investor's

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