The Four Tops – Its the Same Old Song
Pre–Paid Legal Services – Q3 1999
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An HMO for legal expenses
•The Service
–30 minutes on phone
etc.
–15.75 million individuals enroll
–PPD has 603 thousand, or 3.8% of market
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!)
Commissions
Beginning with new Memberships written after March 1, 1995, the Company
implemented a level commission schedule which results in the Company incurring
commission expense related to the sale of its legal expense plans on a basis
more consistent with the collection of the premiums generated by the sale of
such Memberships. Prior to March 1, 1995, the Company had incurred much higher
commissions (approximately 70%) during the first year of the Membership with
substantially lower commissions (approximately 16%) in all subsequent years. The
level commission structure results in the Company incurring commissions at the
rate of approximately 25% per year for all Membership years.
Membership or all sales made by an associate successfully completing the new
training program, the Company currently advances commissions at the time of sale
of a new Membership. The amount of cash potentially advanced upon the sale of a
new Membership, prior to the recoupment of any charge–backs (described below),
represents an amount equal to up to three years commission earnings. Although
page 16 of 10K
Sales Commissions
Commisions continued
Should a Membership lapse before the advances have been recovered for
each commission level, the Company immediately generates a “charge–back” to the
applicable sales associate to recapture 50% of any unearned advance. This
charge–back is immediately deducted from any future advances that would
otherwise be payable to the associate for additional new Memberships. The
Company historically has been able to immediately recover the majority of such
fully recovered on a particular Membership, no additional commission earnings
from any Membership will be paid to an associate until all previous advances on
all Memberships, both active and lapsed, have been recovered. During 1998, 22%
of all associates submitting new Memberships accounted for 75% of all such new
Memberships produced thereby further enhancing the recovery of commission
advances.
The Company’s commission advance policy exposes the Company to the risk
of uncollectible commission advances particularly for associates who do not
receive commissions on a large number of Memberships or who experience below
average Membership persistency. The Company closely monitors such commission
advances to ensure maximum recoverability and maintains a recoverability reserve
which at December 31, 1998 and 1997, was $4.0 million and $3.7 million,
respectively.
commission advances
PRE–PAID LEGAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in 000’s, except par values)
ASSETS
Cash and cash equivalents…………………………………… $ 8,604 $ 27,722
Available–for–sale investments, at fair value…………………. 2,368 –
Held–to–maturity investments…… ………………………….. – 4,242
Accrued Membership income…………………………………… 3,595 2,399
Inventories……………………………………………….. 2,588 2,116
Prepaid product commissions…………………………………. 1,384 2,136
Available–for–sale investments, at fair value……………………. 36,207 –
Held–to–maturity investments…………………………………… – 650
Investments pledged………………………………………….. 2,922 2,772
Membership commission advances, net……………………………. 60,661 38,038
Property and equipment, net…………………………………… 7,678 5,226
Production costs, net………………………………………… 1,373 1,008
Accounting for the premiums
•accounting for the membership premiums
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