For those who haven't been reading me, I am of the belief that Pre-Paid Legal (NYSE:PPD), a publicly traded company, is actually running a pyramid scheme (legal, but not my cup of tea) and a ponzi scheme (potentially illegal, but arguably legal due to the current laws of the land). They are also employing a self-destructive business model and instead of revamping that model and reinvesting heavily in marketing, they spend money on share buybacks to enrich management who are compensated in stock that is sold directly into the share buyback scheme.
They are currently being investigated by the FTC and the SEC, but they are a slippery company. I would hope that the SEC takes notice of the third to the last chart of this review that shows the company, if whose shares are indexed to a fixed point in time, has made absolutely no material gain in value despite using company resources to enrich corporate insiders. As Senator Kaufman said in his recent speech and as excerpted from When the Patina Fades... The Rise and Fall of Goldman Sachs???:
"...fraud and potential criminal conduct were at the heart of the financial crisis".
"transactions as “window dressing,” a nice way of saying they were designed to mislead the public."
... Mr. President, it is high time that we return the rule of law to Wall Street, which has been seriously eroded by the deregulatory mindset that captured our regulatory agencies over the past 30 years...
we must help regulators and other gatekeepers not only by demanding transparency but also by providing clear, enforceable “rules of the road” wherever possible. That includes studying conduct that may not be illegal now, but that we should nonetheless consider banning or curtailing because it provides too ready a cover for financial wrongdoing." [BINGO!]
I addressed this issue when I first wrote about this company last year, see Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to Scram? and A Demonstration of How PPD Management is Destroying the Company.
A Review of Pre-Paid Legal's last fiscal quarter falling membership revenues and share buyback remains a key concern for the company. Total membership revenues in 2009 declined for the first time in the last 17 years, despite an increase in average annual membership fees.
Membership revenues declined to $426.4 million from $436.8 million in 2009 primarily off a decline in total memberships, partially offset by an increase in average annual membership fees to $303 from $301 in 2008. This has been done several times in an apparent effort to boost revenues in what appears to be a failing business model.
Click images to enlarge
Total memberships continue to fall despite an increase in new memberships.
Though the company was able to increase total new members that joined in 2009, higher membership cancellations lead to an overall decline in total number of memberships outstanding at the end of 2009.
Total memberships at the end of 2009 declined 0.7% to 1,547,585 from 1,559,154 at the end of 2008, primarily off a 1.9% increase in membership cancellations to 579,664 from 568,975 in 2008. However, the decline in total memberships was partially offset by a 2.9% increase in new memberships to 568,095 from 552,327 in 2008.
Consequently, total revenues and net income declined for 2009
Total revenues for the company declined 1.3% Y-o-Y to $458.5 million from $464.5 million in 2008, primarily off a 2.4% decline in membership revenues partially offset by a 20.5% increase in revenues from associate services.
Associate services revenues increased 20.5% to $28.4million from $23.5 million in 2008, primarily owing to an increase in associates recruited and higher average associate fee paid (charged).
Source: Company filings
Total cost and expenses increased a meager 0.2% to $367.8 million from $367.1 million in 2008 as an increase in associate services and direct marketing expenses and commissions was offset by a decline in membership benefits, general administrative and other expenses.
Consequently, net income for the year declined 8.4% to $55.1 million from $60.2 million in 2008. However, diluted EPS per share remained constant at $5.04, as the company continued to buy back shares, thus the 8% decline in net income was netted off by 8% decline in shares outstanding (which, of course, served to deplete usable cash even more). It is here that I have a problem. Management should be investing cash into the company to either make the business model more sustainable or to alter the model, but instead is buying back shares, a temporary stopgap at best. What happens when they get to the end of the road? Issue more shares - wash, rinse repeat?
Source: Company filings
Although continuous share buybacks have helped PPD push up its share price, actual equity returns haven't been so lucky, as reflected by a lesser gain in market capitalization, reflecting the fact that the company has actually lost intrinsic value over the last few years.
In essence, PPD is eating itself to to enrich those in the share buyback program. I don't know if this is illegal, but it is definitely not in the best interests of the company. I would think this would be obvious, but maybe I'm just different. Is there anyone at the SEC who is different like me?
Over the years the company has been successful in keeping its share price within a certain trading range - not allowing it to fall much despite what we consider to be a dismal outlook. The Company's share price has increased sharply, considerably more than its total market capitalization. Currently, the price of the shares is trading at 99.74% of their value as of January 3, 2007, while the company's market capitalization is at 69.02% of the market capitalization as of the same date. When adding total returns to shareholders (including any share buy-backs and dividends) there is no notable difference in this observation (see chart below). This reflects a loss in the Company's intrinsic value as illustrated by its total market capitalization (this is my being very, very nice and politically correct, may I add - there definitely is a more direct way of saying it).
Moreover, management and insiders had a vested interest in manipulating price through share buy-backs since the majority share holdings of the company is held by key management members.
According to company's latest 13 D filed, "Based on the 10,045,068 shares of Common Stock reported as outstanding as of February 12, 2010, the aggregate number and percentage of shares of Common Stock beneficially owned by each of the Reporting Persons is as follows: Mr. Smith - 2,579,115 shares (25.7%); Mr. Vassalluzzo - 1,629,515 shares (16.2%); Mr. Fischer - 1,544,415 shares (15.4%); Idoya Partners - 488,434 shares (4.9%); and Prescott Associates - 1,014,675 shares (10.1%)".
Since the company has such thin public float, its share price is easily manipluated through the share buyback program which apparently has served to boost and manage the share price through times of turmoil. So, is the company in the business of selling prepaid legal services or trading stock?
Moreover, the company's management has been liquidating their shareholdings by opting for sale in the share-buyback program. The same can be seen in the related party transactions that the company has disclosed in their 2009 10K. The numbers and amounts are not insignificant! If only the sales associates could be thusly compensated.
Very recently there appears to have been at least one (possibly more) big block sales of shares as well. One must wonder if the insiders doing these trades know something that we outsiders do not. After all, if they do, that would be tantamount to securities fraud. I'm not saying that they do, but if they did.... As stated earlier the company is being investigated by the SEC and the FTC. The ball is in your court, Mr. and Mrs. Regulator.
For those who have not been following my comments on this company, see:
10. PPPPDPPW: Put Purchasing on the PPD Ponzi, Pyramid, or Whatever It's Called...
Disclosure: Short PPD