Thursday, 19 March 2009 00:00

Cash Shortage in the Flim Flam Scam?

Shaunsnoll posed an interesting question in the comment section of the last Flim, Flam Scam article and I want to address it as its own post so I can include exhibits and charts. Shaun asked,

"Reggie, in your previous analysis you said this company has "38% or $22.4M of the total debt outstanding accure in less than one year" when i look through the financials though its not clear to me exactly when that debt will come due. it seems like with 26M$ in cash currently, this 22.4M$ debt coming due could really be what breaks this company, so would be good to know when exactly that is coming due.

PS: it just blows my mind everytime i see this stock rally....."

Well, Shaun, sharp rallies such as the one we just had are opportunities for the dispassionate fundamental investor. Price and value have significantly diverged in terms of this company and significant opportunity is at hand. Let me walk you through it a I see it.

The following table was derived from page 5 of my forensic analysis:

Year Share buyback Average price Total amount (US$) Most recent close Gain/(loss) per share Net average shareholder gain/(loss)
2004 1,453,318 $ 25.71 $ 37,358,071.00 $ 30.89 $5.18 $7,528,187
2005 457,362 $ 35.04 $ 16,025,809.00 $ 30.89 ($4.15) ($1,898,052)
2006 1959487 $ 37.47 $ 73,422,956.00 $ 30.89 ($6.58) ($12,893,424)
2007 1,318,724 $ 50.40 $ 66,457,372.00 $ 30.89 ($19.51) ($25,728,305)
2008 1,053,614 $ 42.44 $ 44,718,000.00 $ 30.89 ($11.55) ($12,169,242)
Total/Average 6,242,505 $ 38.12 $ 237,982,208.00 $30.89 ($7.23) ($45,133,311)

As you can see, the share buyback program is literally gutting the shareholder, thus far to the tune of nearly $33 million. Wealth destruction on a grand level, at least percentage wise. Wait, there's more...

Insider Sales of Stock (US$)
2004 $532,079
2005 $2,620,030
2006 $34,066,205
2007 $10,818,727
2008 $14,121,708
2009 as of Feb 17 $6,714,000
$68,872,749

A large portion of PPD shares were held by the board of directors and the management of the company which, apparently, incentivized the management to continue to buyback shares at higher prices and negative rates of return, producing significant benefit to themselves. I really do mean significant benefit at the expense of shareholders. Management has netted over $68 million from the sale of the stock into the corporate buyback program. This is over 150% of the shareholder wealth destroyed by the share buyback program! PPD used the money collected as membership fees from those who lack the analytical skills to determine what was going on for the purpose of overpriced share buybacks. From 2004 onwards, PPD has utilized US$237.98 million for share repurchase, out of which a full 28.9% (nearly 1/3rd) has gone directly to the insiders while the shareholders are getting burned by overpaying for the privilege of enriching the management and the board. In addition, the rate of insider sales this year has eclipsed that of all previous years since 2004! It appears as if management has come to the same conclusion that Reggie has reached - basically, the "Jig is Up!". Securities regulators, where art thou???!!! The Flim Flam Scam! I have made this very simple for any regulator to follow through. This begs to be investigated. If you are a shareholder of this company and continue to hold those shares after reading my research (which I have made available for free as a public service, see my subscription rates), I believe you to be a fool and you know the saying, "A fool and his money are soon to be parted". If you are short the company, remember, save your money and do something charitable with the profits. The monies were made by shorting a company which literally fleeced others who didn't know any better. Give back! It's the right thing to do. If you are a regulator and you ignore what you have read here, you are doing a disservice to your country. These may be strong, or unpopular statements, but hey, its how I feel and its from the heart!

I have even more stuff to make you love this company, for I haven't even addressed Shaunsnoll's question yet. Now, Shaun, they ended 2008 (last quarter) with roughly $26.528 million in cash. Look on page 37 of their annual report (the debt due line is highlighted in yellow: pdf PPD annual_report_2008 20/03/2009,02:51 749.07 Kb) and you will find contractual purchase obligations of $26.6 million due within one year. Of those obligations, $22.408 million is long term debt due. This would be a problem even if their business was humming along smoothly, which we all know it is not. So, you see, even without being a Ponzi scheme (which I feel they are) or a pyramid scheme (which I feel they are as well), they are probably going to implode for fundamental reasons. Of course, it would be sweet justice if they imploded for being a Flim Flam Scam, but hey, we should take whatever we can get.

More on my earlier takes on Prepaid Legal Services if you are new to this conversation:

My free summary on PPD: pdf PrePaid Legal Services Actionable Intelligence Report - Pro 2009-03-14 06:51:32 675.65 Kb.

I have decided to make it free as a consumer service, thus to that end I will release the Professional Forensic Analysis as well (this one time). Enjoy: pdf Prepaid Legal Services Forensic Analysis - Pro 2009-03-19 14:20:00 288.45 Kb . This latest report is from the perspectice of an investor or shareholder while the previous report was a summary intelligence note, suitable for a broader audience, ex. regulators, politicians, etc. I obviously believe this is a no-brainer short proposition, but there is risk entailed so reader beware. There has been a bit of research, or shall I say whistle blowing, in regards to this company. It would be a shame if it were to all be ignored. For your entertainment, here is additional commentary and research from:

A refresh of my recent REIT analysis should be about within 24 to 36 hours, with special addendums for Pro susbscribers.

Last modified on Thursday, 19 March 2009 00:00

52 comments

  • Comment Link Reggie Middleton Friday, 20 March 2009 15:23 posted by Reggie Middleton

    In case anybody missed the concept amonst all of the text, PPD has borrowed money to buy back stock at a loss while the management is selling into the stock buyback program. .

    Ok, I'll leave this point alone for now and get to work on producing the REIT report. I also have a new reinsurer on tap as well

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  • Comment Link Reggie Middleton Friday, 20 March 2009 15:03 posted by Reggie Middleton

    From the portion of the Annual Report that you pointed out:
    Note 6 - Notes Payable
    [b]During 2006, we received $80 million of senior, secured financing (the
    "Senior Loan") from Wells Fargo Foothill, Inc. ("Wells Fargo") consisting of a
    $75 million five year term loan facility (the "Term Facility") and a $5 million
    five year revolving credit facility (the "Revolving Facility"). At December 31,
    2008, we had the full Revolving Facility available to us. After payment of an
    origination fee of 1%, lender costs and retirement of $15.3 million of existing
    bank indebtedness, [u]the net proceeds of the Term Facility we received were $58.8
    million and were used to purchase treasury stock.[/b][/u] [i]You see we know have leveraged destruction of shareholder value. Reference the performance of the stock buyback program in the table in the post above.[/i]

    The Term Facility provides for a five-year maturity and amortizes in
    monthly installments of $1.25 million commencing August 1, 2006, with interest
    on the outstanding balances under the Term Facility and the Revolving Facility
    payable, at our option, at a rate equal to Wells Fargo base rate or at the 30
    day LIBOR rate plus 150 basis points. The interest rate at December 31, 2008 was
    2.93%, but decreased to 1.95% effective January 1, 2009. [b]We are also obligated
    to make additional quarterly payments equal to 50% of our "excess cash flow" (as
    defined in the Senior Loan agreement) if our Leverage Ratio is greater than or
    equal to 1 to 1 at the end of a quarter. Our Leverage Ratio was 0.55 to 1 at
    December 31, 2008. We expect to be able to repay the facilities with cash flow
    from operations.[/b] We have the right to prepay the Term Facility in whole or in
    part without penalty.

    The Senior Loan is guaranteed by our non-regulated wholly owned
    subsidiaries and is secured by all of our tangible and intangible personal

    [b]In addition to customary covenants for loans of a similar type, the
    principal covenants for the Senior Loan are:[/b]
    * a limitation on incurring any indebtedness in excess of the remaining
    existing bank indebtedness outstanding and $2.3 million in permitted
    capitalized leases or purchase money debt;
    [b]* a limitation on our ability to pay dividends or make stock purchases,
    other than with the net proceeds of the Term Loan, unless we meet
    certain cash flow tests;[/b]
    * a prohibition on prepayment of other debt;
    [b]* a requirement to maintain consolidated EBITDA (Earnings before
    Interest, Taxes, Depreciation and Amortization) for the twelve month
    period ending December 31, 2006 and each quarter thereafter of at
    least $80 million ($75 million for us and our top tier direct
    subsidiaries);[/b]
    [b]* a requirement to maintain a quarterly fixed charge coverage ratio
    (EBITDA (with certain adjustments) divided by the sum of interest
    expense, income taxes and scheduled principal payments) of at least
    1.1 to 1;[/b] [i]If LIBOR ticks up, they will get hurt pretty bad. They are gambling![/i]
    [b]* a requirement to maintain at least 1.3 million members;[/b][i] Uh Oh![/i]
    * a requirement to maintain a Leverage Ratio (funded indebtedness as of
    the end of each quarter divided by EBITDA for the trailing twelve
    months) of no more than 1.5 to 1;
    * we must have availability (unused portion of the Revolving Facility)
    plus Qualified Cash (the amount of unrestricted cash and cash
    equivalents) greater than or equal to $12,500,000; and
    [b]* an event of default occurs if Harland Stonecipher ceases to be our
    Chairman and Chief Executive Officer for a period of 120 days unless
    replaced with a person approved by Wells Fargo.[/b] [i]May be a risk if regulators step in[/i]
    We were in compliance with these covenants at December 31, 2008.

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  • Comment Link Reggie Middleton Friday, 20 March 2009 14:51 posted by Reggie Middleton

    The AFS category is non-descript, but we can back into it with a few assumptions. The financials and insurers that hold AFS securities have either marked, or face marks between 3 to 100% depending in the type of fixed income it was. Remember, even ARS were sold as cash have become extremely illiquid and are being withheld from their investors.
    ***I just finished reading the breakdown, so have to edit my comment****
    They have purchased AFS out of cash flow in the same years amounting to $180, $270, and $65 million. This is significant for a company of this size and in this industry, and I would be willing to wager (given the apparent behavior of management) that if one were to dig deeper one would find something quite embarrassing as an answer.
    On page 51, you can see that they only have $ 6,167,000 of AFS with a 1 year maturity (assuming a perfect Asset/liability match, which is doubtful). If they were to sell any of the other AFS with maturities between 2 and 10 years, they would realized losses on the investment (see the current breakdown of the difference between fair value and amortized cost). This simply does not leave the cash to fund the share buybacks at the pace that they have been going - AND it begs the question of whether they will be able to retire the debt coming due. They are effectively running out of Ponzi scheme money. This means they have to make a decision: go out on a limb and strain available cash and AFS inventory to buy back shares in a bear market, or fail to buy back shares and watch the EPS plunge! There is no upside here that I can see.
    In addition, how much would you like to bet that their fair value is rather optimistic when compared to actual market pricing.
    Another question is did PPD management use leverage (the proceeds from their long term debt) to buy these securities? This is likely, and if so, we can expect the effect a leveraged effect of the losses taken.
    This is just speculation, but whatever the actual answer is, I don't see it being a positive.
    I will have the analyst that worked on the report dig a little deeper to see what he can find.

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  • Comment Link yhong71 Friday, 20 March 2009 14:43 posted by yhong71

    reggie thanks for the prompt reply. Furthermore, interesting to note that PPD is now financing stock purchases from loans. On pg 53, PPD utilised $4.1m of unsecured loan facility for the repurchases. Cannot imaging the interest they will be paying for an unsecured facility.

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  • Comment Link yhong71 Friday, 20 March 2009 14:02 posted by yhong71

    hi reggie, in addition to the $26.5m in cash, PPD also has $12.8m + $20.6m in Available For Sale Investment (pf 41-42 annual report). I would have thought that the cash + investment would be enough to satisfy the current liabilities. However on pg 50, there is a breakdown of these Investments. I was hoping if you can shed some light on the "Obligations of state and political subdivisions" investments. Of interest, there does not seemed to be any writedown on this investment.

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  • Comment Link Reggie Middleton Friday, 20 March 2009 13:20 posted by Reggie Middleton

    I just received a flier from a contact concerning PPD’s potentially true yet definitely misleading statements – again designed to fool those who don’t know any better.
    From the flier:

    YOUR COMPANY IS FINANCIALLY VERY STRONG!! – [i]Well this part is not true. As a matter of fact, if the company does collapse, I am sure there is a shareholder lawsuit in their somewhere. They have less cash then liabilities coming due, with a withering revenue stream.[/i]

    Production up 9% over the same week of 2008. [i]Whatttt???? A 9% increase over this [b]same WEEK[/b] last year? ‘Nuff said[/i]

    Recruiting up 67% [b]over same week of 2008[/b].[i] – and they actually did it again[/i].

    126 new Directors in the month of February 2009. Each earning a $500.00 expansion bonus, - Whoa!!! [i]Here comes the Big Money![/i]

    Since April of 1999, we have re-invested $420 Million in buying back stock and reduced our shares outstanding by more than half; from 22 million to less than 11 million - [u][b]WE BELIEVE IN THIS COMPANY AND ITS FUTURE![/b][/u] [i]We must be defined as the shareholders, because the management hasn’t invested one thin dime in over two years. As a matter of fact all they did was sell! What would the members think if they found out about this?[/i]

    Pre-Paid Legal Corporate Headquar¬ters resides in a $35 million state-of-the-art facility. [i]Go figure. That is about 2/3rds what they cost their shareholders in the stock buybacks[/i]


    73% of memberships are stand alone...members who do not also market the product - AND - $383,000 paid in Expansion Bonuses in February 2009. [i]Hmmm… 1.56 million members in 2008, down from the year before by more than 16,000. Subtract the 73% standalone (non-marketing members) and you get 421,000 sales people. So, of nearly half a million sales people only 126 became new directors earning a whopping $500 each. That means for the month of February, you had a 0.00029928741092636579572446555819477% chance of winning that $500 bonus. As I said, here comes that BIG MONEY! To take this even further, if you divide the expansion bonuses by the amount of active sales people, you get roughly $0.91 (that’s right, 91 pennies) per person. I wonder, what will happened if the members all decided to sit down with a calculator and analyze the Bullsh!t they are being fed.[/i]

    [i]There is plenty more to discuss on the sheet. You [url=http://prepaidlegal.typepad.com/files/good-news.pdf]can find it here[/url].[/i]

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  • Comment Link YAYANKEE Friday, 20 March 2009 12:14 posted by YAYANKEE

    Ruling to 'materially, adversely' impact Pre-Paid, Fraud Discovery reports 03/20 05:32 AM



    According to network marketing expert Robert FitzPatrick, a new 9th Circuit Court of Appeals ruling on bogus income claims will materially, adversely impact Pre-Paid Legal (PPD). FitzPatrick believes that misrepresentations by the company call for an immediate investigation by the Federal Trade Commission, or FTC. FitzPatrick also outlines the similarities between the Stefanchik/Beringer business model, which has been denounced by the FTC, and PrePaid's compensation plan. Fraud Discovery Institute co-founder Barry Minkow says: ?The time has finally arrived when the general public will realize the real impact and devastation of the PrePaid Legal, Inc business opportunity and that it has claimed over 1.6 million people as victims.? [Reference Link]:[http://(http://www.pyramidplusponziequalsprepaid.com]

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  • Comment Link shaunsnoll Friday, 20 March 2009 11:32 posted by shaunsnoll

    thanks Reggie! i think the trouble shorting these companies is not wether they will implode but just a matter of when, like Einhorn and Allied Capital, these shady bastards always seem to be able to hold together their slow motion train wreck much longer than seems possible.

    I don't know how i missed that liability line so THANK YOU for making this post. Also, we should all make calls to the big banks that would refinance their debt so this company can no longer steal from poor people to ponzi their money into buybacks.

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  • Comment Link Reggie Middleton Friday, 20 March 2009 11:27 posted by Reggie Middleton

    I haven't found a date for the debt, but it matters little. Honestly, I think their biggest risk is going to come from regulators looking into their practices - more so than the debt coming due.

    As for expanding nationally, there is no evidence of them doing so thus far, and retained earnings are going into share buybacks, and NOT being reinvested into the company. That pretty much is the root of their problem. This is what makes them a Ponzi scheme. They are paying investors and members with their own monies.

    If you haven't noticed, since the Asset Securitization Crisis has picked up steam, Ponzi schemes have been falling on their heads. The reason is that investors are taking critical looks at their investments and many of them are calling their investments in. Well, if everybody calls their investment in at the same time, you actually need an investment to give them. Hence, Ponzi puncture!

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  • Comment Link NeumeierS Friday, 20 March 2009 11:22 posted by NeumeierS

    Other multi-level marketing companies have expanded internationally to deal with the market saturation problem. Is there any evidence that PPD could do this as well and put off the day of reckoning?

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  • Comment Link Anthony Friday, 20 March 2009 09:57 posted by Anthony

    Reggie,

    So the date(s) the debt is due is (are) not known, just that it is sometime this year?

    Thanks

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  • Comment Link NDbadger Friday, 20 March 2009 08:20 posted by NDbadger

    Thanks for the good discussion Reggie, you are really helping me improve my fundamental analysis skills. And I do look forward to being in the position to give back someday (hopefully now that I have found your site, that day will come sooner rather than later.)

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