Financial Analysis - Pre-Paid Legal Services - Assignment Example

Financial Analysis: Pre-Paid Legal Services Student’s Name: Instructor’s Name: Subject: Date: Financial analysis: Prepaid Legal Service (PPD) 1. Some of the PPD’S business strategies are for instance; (a) Membership plan. In the prepaid legal services legal expense plan, there is provision for or reimbursement of some legal fees that are charged to members. This is in relation to the various kinds of legal services that prepaid legal services offer to their clientele. In this regard, it is important to identify the two kinds of membership at PPD. Open panel and chased panel. As noted in the company’s form 10-k of 1998, at least ninety-four percent of the memberships consisted of chased panel. It is the company’s policy that chased panel members has access to any kind of legal service via networking with autonomous attorneys but who have contracted with PPD. On the other hand, open panel members are allowed to find attorneys of their own choice in provision of legal services. However, the attorney who is chosen is reimbursed for any legal service he/she provides to the open panel member by PPD (Pre-Paid Legal Services, Inc, 1998). (b) Provider attorneys As aforementioned, it is possible for members belonging to the chosen panel to find attorneys of their own choice in provision of legal services. However, the company’s policy requires such attorneys to be in a valid legal contract with PPD and they are preferred called “Provider attorneys”. Furthermore, as indicate in form 10-k of 1998, provider attorneys are pond a constant fee based on per capital so as to offer legal services to chosen panel members. However, the independent attorney is required by the company’s regulations to be within the particular state the plan member(s) resides in. As evident from Form 10-K of 1998, as at 1997, PPD had entered into a contract with thirty-five law firms with a total of up to thirty independent attorneys (Pre-Paid Legal Services, Inc, 1998). (c) Associates The company has a strategy for encouraging the general public to become members indirectly. Reasons being legitimate members can sell membership hence forming their own sales and marketing organizations with PPD. This results in formation of associate companies. On the other hand, PPD generates revenue from the fees that members pay upfront as well as from other supplies. (d) Multi-level Marketing The company has a multi-level marketing program (MLM) that encourages individuals to market and sell membership to others. This is like a pyramid system of membership which guarantees continuity of PPD’S popularity. Besides MLM works well for marketing of products dependent on individual states because it facilitates group or individual face-to-face meetings with potential buyers of the products. It also increases the probability of attracting a significant number of salesmen/ salesladies within that period of time (Pre-Paid Legal Services, Inc, 1998). (e) Cooperative Marketing The company works in coordination with service and insurance companies which have an already established sales force to develop a cooperative marketing strategy. In such case, the personnel of the cooperative marketing partner sell PPD’S products alongside theirs with the sole aim being to enhance the existing customer distribution channels and relationship. Some of PPD’S cooperative marketing partners are for instance Atlanta-based Primerica Financial services and Chicago (Pre-Paid Legal Services, Inc, 1998). (f) Employee Groups PPD’S marketing programs towards its employee groups, majorly on a payroll deduction payment basis, are designed to facilitate PPD’S sales associates to reach more potential members. Besides, the programs put emphasis on employers increasing interest in importance of provision of legal services to their employees (Pre-Paid Legal Services, Inc, 1998). 2. There are three major problems that were revealed by announcement of third-quarter earnings that also resulted in stock price drop. (a) Decrease in product sales In the year 1999, overall product sales decreased by 79% equivalent to $ 5.9 million as compared to $ 27.8 million that were recorded in the year 1998. One of the major cause contributed to this is the company’s emphasis on the declining TPN. In the same note, the declining trend of product sales was expected to continue in the later years as the assortment of goods and services that were previously available for sale via TPN narrowed gradually. Besides, the sales efforts emphasized more on the sale of new memberships as well as recruitment of new sales personnel (Pre-Paid Legal Services, Inc, 1998). (b) Decrease in Cash flows In the third-quarter report, a massive cash flow deficit was revealed when the company’s membership was regarded to be solid. The cash flow deficit declined despite the fact that remittance of monthly membership fees continued and there was no extra commissions being paid on any membership till all past commission advanced had been totally recovered. It is also worth noting that the increase in memberships during the third quarter lead to a reduction in cash flow derived from company’s operations. This was a record decrease of 7% equivalent to 5,119,000. (c) Increase in Commission advances It is notable that, the company advanced commissions at the time of sale of any new membership. The amount of money advanced during such new membership sale, prior to recovery of any change-backs, represented amount equivalent of up to three years commission earnings. Therefore, PPD’S commission advance policy exposed it to risk of experiencing uncollectable commission advances. This is particular for associates who are normally not given commissions on large number of memberships or else they experience a membership persistency which is below average. Also, in the third quarter, PPD recruited 22493 salespersons alongside 134,725 new members. In that case, the collective effect of these two (22493 associates and 134,725 members) increased the company’s liability in the form of commission advances that amounted to $ 9.2 million. The Cause of the Problems Upon carrying out closer evaluation of PPD’S policy with respect to commission advance receivables, this seemed to be the reason behind all the aforementioned problems. Besides, recruitment of new associates, the company was forced to pay the sales personnel a three-year advance commission on sales after which it claimed such advance payments as assets rather than expenses. On the other hand, PPD experience significant liability as a result of customer cancellations. As this happened, PPD tried to recover advance commission payments through ‘charge backs’. However, almost half of the company’s associates quit business in less than a year without any sale commission to charge. In that case, PPD claimed the money for such non – recoverable charge backs which was covered by ‘lost’ commissions from those associates who quit (Pre-Paid Legal Services, Inc, 1998). 3. Another alternative method would be to eliminate commission advance receivable as assets and account for the related deferred tax liability as PPD had earlier reported. a. As per the balance sheet, Earning per share (EPS) in the year 1999 can be calculated as follows; EPS = 38953 = 1.68 23099 b. In case, commission advances receivable are eliminated from the assets, this will result is reduction of assets to 77,766. Hence giving an EPS = 20489 = 0.97 23099 4. It is worth nothing that Earning per share in a company’s financial analysis, depict it profitability. In the above case, the reduced Earnings per share after doing away with cash advances from the assets indicates poor financial performance of PPD. 5. Recommendations to PPD’S management a. The company should buy back its shares- reason being the price has significantly reduced. However, the company should sell them when the market price increases. b. The company should eliminate the commission advances in the balance sheet as assets besides treating deferred tax liability as previously reported. c. There should be a balance treatment between lost commission and unrecoverable commission advance. d. The company should also depend less on associates with regard to continuing advances. 6. Relevant information that one would seek from PPD include; a. Whether there has been any extra stock repurchase. b. Reasons for paying cash advances on all commission for a 3 – year period. c. Reasons as to why PPD paid cash advances as treated them as assets in the balance sheet thus increasing revenues on book value. d. The rate of retention of associates that relate directly to advances commission that was paid. Reference Pre-Paid Legal Services, Inc. (1998). Form 10-K. for the year ended December 31, 1998. Oklahoma. Read More