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This is additional commentary on PPD from Robert Fitzpatrick: Fitzpatrick PPD Q-1'09Update 2009-04-07 13:09:57.

We have run a scenario analysis to check the impact of falling membership sales, the share buyback behavior and the repayment of borrowings on the weighted fair value of PPD and its impact on the cash balance of the company. We understand that the management is in buyback spree mode to lower the shock on the falling share price as its key metrics (membership sales) continued to decline at a faster pace.

Please note that this is being done in the existent Base Case scenario of our assumptions regarding the company's growth. The sensitivity to share buybacks, borrowings and cash balances varies significantly in the active scenarios of a Deep Downturn and an Early Economic Recovery.

• In the base case scenario, we have assumed that the company would buyback shares worth 60% of the average in the last 13 quarters. This seems inevitable in the light of maturing debt in 2009 amounting to US$26.6 million. Besides, operating cash flow would be adversely impacted due to the falling membership sales and higher members leaving the company. In all the three scenarios, we have assumed that the share buyback would be at 10% over the current market price and PPD would continue to repay debt of US$4 million in each quarter until 2010 (average debt repayment witnessed in last two years). Accordingly, we have computed the number of shares that the company would buyback, thereby diluting the outstanding shares. Though dilution of shares would increase the earnings per share, the company's cash balance will likely go down. Additionally, to continue the buyback program, the company would have to resort to debt financing in the event of an "overdraft effect". Under these conditions, we arrived at a weighted fair value of US$21.84 per share, which is still 24.2% lower than the current levels of US$28.8 per share. (Please notice that the share price has already corrected 14.3% since we first released our valuation on March 18, 2009 when the stock was trading at US$33.6 per share).
• In the optimistic and pessimistic cases, we have assumed that PPD would buyback shares amounting to 40% and 80% respectively of the average of last 13 quarters. In the pessimistic case scenario, we arrived at a weighted fair value of US$21.69, having downside risk of 24.7% from the current levels of US$28.8 per share. While under the optimistic scenario, the weighted fair value of PPD was US$21.99 per share, having a downside risk of 23.7% from the current level.
• We looked at various scenarios and its impact on the company's cash balances. The cash balance at the end of FY 2010 ranges from an deficit of US$16.3 million to a positive cash balance of US$26.6 million. In the base case scenario, we see that the company is just able to maintain its share buyback (though much lower than historical trend) and immediate loan repayment. We understand here that increasing the share buyback activity even to the 80% level of historical buyback can happen only at the cost of increasing debt. In the pessimistic case scenario, we see that the PPD cash balance turns negative at the end of FY 2010. This makes us belief that leveraging is the only option left with the company to keep the share price higher as the earnings continued to decline due to falling membership sales.

In the base case, the enterprise value of PPD is US$248.5 million while the aggregate equity value would be US$235 million. In the pessimistic scenario, the enterprise value of PPD falls to US$179.1 million while the aggregate equity value declines to US$165.7 million. In the optimistic scenario, the enterprise value of PPD rises to US$353.8 million while the aggregate equity value increases to US$340.4 million.

I have highlighted the same in the attached valuation spreadsheet output below. What is not shown explicitly in the numbers is the threat this company faces as a going concern if management continues on this suicide run. If debt is used to facilitate the share buyback as aggregate equity is eaten up and operating metrics continue to deteriorate, this company will be on course for implosion. It doesn't have to be this way, but it appears as if management will have it no other way.

For those who haven't been following my research on PPD, I am continuing to release this research for free because I am really that negative on this company's ethics. For all of those that moan and groan about the research prices, this is your opportunity to potentially have the research pay for itself:

1. A Scheme Here, a Gimmick There, a Racket to be Found Damn Near Everywhere!
2. Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to Scram?
3. Cash Shortage in the Flim Flam Scam?
4. The Flim Flam Scam is reporting soon, and still buying back stock!

We have incorporated the changes as provided in the latest earnings release pre-announcement. After incorporating the latest membership details and the latest earnings estimates of the peer group as well, the weighted fair value of PPD actually increased to US$19.87 per share from our earlier valuation (but wait, there's a catch - there always is - which I will get to further down the page). Nonetheless, at the new levels, the stock still has a downside risk of 32.8% from the current level of US$29.55.

Following are some of the key highlights of the latest quarter result:

• New legal membership sales declined 10.8% year-on-year. Total active membership sales declined by 32,091 (the worst metric ever in this company's history) to 1,527,063 in Q1 09 from 1,559,154 in Q4 08. The fall in the active membership would have impacted the membership fees significantly. However, the company increased the membership fees (again, remember they did this last quarter as well, by about the same amount) by 66.6% to US$119.2, from an average of US$71.5 in 2008. While the fee increase has quelled, to some extent, the compression of the membership roll rate, it is destroying the business. As you can see, they are raising prices in the face of shrinking demand. Econ 101 says this is a No-No! It is apparent that although the membership demand is inelastic and demand is dwindling (see A Scheme Here, a Gimmick There, a Racket to be Found Damn Near Everywhere!), management has decided to raise prices (several times) anyway, most likely in an attempt to sugarcoat a dying business.This cannot go on for but so long, and in my opinion may very well be the death knell for this company. I am obviously not the only one with knowledge of this company's operations who thinks so (see share buyback data below).
• The sharp rise in the membership fees shielded the impact on revenue (membership fees), which still fell by 1.8%.

• New associates sales declined by 7.5% year-on-year to 23,871 in Q1 08, sequentially down 26.6%. PPD has not disclosed the total active associates, so we have not changed this in the model. If time and resources permit, I may update the forensic model further when earnings are officially released with the 8K.

Please note that we have not considered the share buyback into the valuation model due to insufficient data.

By the way, another interesting development that we came across during the quarter was that PPD bought back 422,505 shares @ US$$32.05, repaying (and overpaying with shareholder capital - there goes that Ponzi scheme thing again) a total of US$13.5 million. However, during the same time directors sold 207,600 shares directly into the board authorized company share buyback program (a full 49.1% of the total buyback) at an average price of US$36.21 per share (a full $6.66 over the latest closing price). The directors recovered US$7.5 million from these transactions, essentially an insiders-only special dividend provided off of the backs of shareholders and sales associates.

Now, it should be no surprise that I don't particularly favor this company, and I am effectively heavily short it (yes, by more than a couple of shares). The kicker is that the insiders are considerably more bearish than I am, having sold a whole lot more than I have. I am going to see if I can try and catch up to them! Just wait until the next non-sense M2M, bust bank mark up rally. Just think about it!

As I stated clearly in the analysis written, if you hold this stock long after reading my analysis, you are a fool...

1. A Scheme Here, a Gimmick There, a Racket to be Found Damn Near Everywhere!
2. Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to Scram?
3. Cash Shortage in the Flim Flam Scam?

From Yahoo/PRNewsire :

Pre-Paid Legal Services Announces 2009 1st Quarter Membership and Recruiting Results

During the 1st quarter of 2009, new sales associates enrolled decreased 7.5% compared to the first quarter of 2008. Memberships produced decreased by 12.6% while new membership fees written decreased by 13.0% and our active membership base decreased 2.5% compared to the comparable period of the previous year.

On a sequential quarterly basis, new associates enrolled decreased 26.6%, new memberships produced decreased 7.6%, new membership fees written decreased 7.9% and our active membership base decreased by 32,091 memberships.

Our total active membership fees in force decreased approximately 1.8% during the last twelve months. Membership persistency rate (defined as the number of memberships in force at the end of a 12 month period as a percentage of the total of memberships in force at the beginning of such period, plus new memberships sold during such period) was 72.7% for the 12 month period ended March 31, 2009 a decrease from the 73.2% for the 12 month period ended March 31, 2008.

Our first quarter 2009 corporate finance focus has again been on share repurchases. Because we are relying on the fact that shareholders who are not privvy enough to churn our stock are stupid enough to believe that we are doing the right thing in wasting money buying back shares at extremely high prices in lieu of investing the money back into out pyramid scheme! During the 1st quarter, we returned $13.5 million to shareholders through the repurchase of 422,505 shares of common stock, at an average per share price of $32.05. In other words we lost money for our shareholders on this deal because the stock is trading below that price now, and we have debt coming due at the same time that our business is rapidly dwindling!. Since April 1999, we have returned $420.7 million to shareholders through the purchase of 14.2 million shares, average price of $29.69 per share, and $17.1 million in dividends for a combined total of $437.8 million representing more than 110% of our net earnings during the same timeframe.

And they bragging about this! They are borrowing to buy back more shares than they have actually earned, at an average share price above the current stock price (or close to it, as the stock price declines in a bear market) while their business dwindles, debt is coming due and their aggregage equity value and enterprise value shrank by 60%!!!?? I really don't see how anybody can argue that this is not a Ponzi Scheme. Suckers...

From the 10Q Detective :

Shorts Do Battle with PrePaid Legal Services

PrePaid principally derives the bulk of its revenue through the multi-level marketing of membership fees and enrollment costs slapped on new sales associates. The 10Q Detective notes that key metrics slipped year-on-year, with the volume of total new membership subscriptions and the number of new sales associates recruited in 2008 falling 9.8% and 17.8 percent, respectively, to 552,327 and 122,225.

Is the company involved with a tug-of-war with short-sellers? Although retention characteristics continue to disappoint, the board authorized an additional one million share repurchase last month. PrePaid has spent more than $110 million on stock buybacks in the last two years—or about 82 percent of total cash generated from operating activities! In 2008, the company spent $44.7 million alone, retiring one-million (+) shares at an average price of $42.44 a share. Given the stock’s [three-month] average volume of 86,496 shares traded per day, it would take about 20 days to cover total shares [known] shorted.

Could a cash shortage be on the event horizon? Reggie Middleton, another well known short-seller certainly thinks so. The company must report first-quarter 2009 earnings by May 15—just in time for May option expirations….

Before I get started, I would like to make clear that all comments and written material in this post, and previous posts concerning Prepaid Legal Services are my opinion, unless expressly indicated otherwise. As I understand the concept, it is not libelous if I state the following as my opinion as opposed to stating it as fact. With that being said, my opinion is that Prepaid Legal is a SCAM! In addition, it is a scam that is a public company that deserves scrutiny. To add to that, it is a scam who is a scrutiny deserving public company whose fundamentals are collapsing. Long story short, price has significantly diverged from value, and that price has diverged significantly to the upside. When comes the reversion to the mean, or the discovery of the truth, I foresee signficant downside movement.

My PPD opinion has garnered significant interest. We shall see what comes of it. Let me posit this - Bernie Madoff was able to attract a lot of investors by basically giving them what they wanted vs. the truth. He gave them a steady return, year after year, despite the fact that the market became highly volatile and produced losses. He delivered this until the volatile markets caused his Ponzi scheme participants to call him on his bluff. Well, PPD has produced steadily increasing EPS, quarter after quarter. They even have a relatively low risk stock (on the surface and at first glance). Look below (this was pointed out to me by a financial reporter):

Hmmm! PPD seems to be quite the safe stock in that it is less volatile than the broad market, its market sector AND its industry. It seems almost tailor made, if you know what I mean (wink, wink!). If I didn't know any better, I would believe that their share price has actually been managed on a relatively small float, you know as in periodic share buybacks! It appears as if this blogger is calling them on their EPS bluff. EPS goes up, economic value and aggregate equity value goes down along with shareholder wealth. Hmmm!

Here is an excerpt from the Professional Forensic Report:

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 rates at a significant benefit to themselves. PPD used
the money collected as membership fees for the purpose of share buyback,
instead of investing those monies into growth opportunities to replace their stagnating
membership base and sales. From 2004 onwards, PPD has utilized US$237.98
million for share repurchase, out of which a full 28.9%(or nearly 1/3^rd)
has gone directly to the insiders. This
begs the question of the prudent use of shareholder capital, and the prudent
man rule. 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 we have reached - basically, the "Jig is Up!"

In the last ten years,
the company's market capitalization has eroded even after considering the share
buybacks and the dividends paid during the same time. PPD distributed US$423
million through share buybacks and dividend payments. Adding back the total
buybacks and dividends payment (on a nominal basis, the negative effect would
be greater on a real, inflation adjusted basis) along with the current market
capitalization shows that the company's market value still fell 8.9% in the
last ten years.

For those of you who may be angered by reading such, well, damn skippy you should be angry. This is blatant manipulation of the accounting system. Now, you are armed with the information and knowledge, let's see what you are going to do about it. We shall see what comes of it.

If you have not read it already, I suggest you read my free summary on PPD: 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: 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:

• From Barry Minkow and the Fraud Detection Institute: A compilation of information linking PPD to being a Ponzi scheme. Mr. Minkow is the individual who brought the PPD "Ponzi" perspective to my attention. I believe this man is knowledgeable in terms of fraud and Ponzi schemes. As far as I am aware, the following reports are credible and objective.
• From Robert Fitzpatrick at FalseProfits.com: A report issued to the aforementioned, which seems to corroborate our indepentenly achieved conclusions.
• From Professor Benjamin Fine, PhD and director of the MS program in mathematics at Fairfield University: Explains the concept of market saturation. His numbers are very realistic and plausible, but nonetheless considerably more aggressive than the numbers plugged into our models and calculations. If we were to use numbers similar to the good professor's, we would probably see PPD end as a going concern.

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

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:

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...

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 1/3^rd) 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: 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: 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: 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:

• From Barry Minkow and the Fraud Detection Institute: A compilation of information linking PPD to being a Ponzi scheme. Mr. Minkow is the individual who brought the PPD "Ponzi" perspective to my attention. I believe this man is knowledgeable in terms of fraud and Ponzi schemes. As far as I am aware, the following reports are credible and objective.
• From Robert Fitzpatrick at FalseProfits.com: A report issued to the aforementioned, which seems to corroborate our indepentenly achieved conclusions.
• From Professor Benjamin Fine, PhD and director of the MS program in mathematics at Fairfield University: Explains the concept of market saturation. His numbers are very realistic and plausible, but nonetheless considerably more aggressive than the numbers plugged into our models and calculations. If we were to use numbers similar to the good professor's, we would probably see PPD end as a going concern.

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

A few weeks ago I released and an Intelligence Note to all of my subscribers on a company that I really, really had to hold myself back from describing as a fraud. Well, I had a few members of my team do some additional digging and, well,,,, I'm really trying to hold back....

As a public service, I will release the 31 page research report to the public this one time, free of charge. It has come to my attention that a few people can, and probably have, had their financial situations hampered in connection with company. This brings me to my next point: What are our government watchdogs doing? If a mere blogger can dig this deep and find this evidence, what is the SEC doing?

First we had Bernie Madoff, then Allen Stanford, and now... Well, I don't want to outright accuse this company of any legal wrongdoing, but from an investors perspective, and that of an astute laymen, the terms Ponzi scheme and pyramid scheme are just screaming at me. Hey, I even looked them up and posted them right in the analysis so readers can make up their own minds.

For those who are not regulars to my site, yes, I am short the company. Would you have shorted Madoff's operation if you researched it and found out what was going on? Download the report for free here: PrePaid Legal Services Actionable Intelligence Report - Pro 2009-03-13 16:58:17 675.63 Kb

This gives non-pro subscribers the opportunity to see the level of analysis and research available to pro subscribers. This is not a full forensic analysis, but an extended intelligence note - akin to a super summary of my opinion and findings. If you like what you see, you are welcome to subscribe to more. I have covered over 90 companies with a nearly 100% hit rate, and there are many more in the pipeline. Look here for performance figures for last year and this year to date (as of last week).