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| PPD > SEC Filings for PPD > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Overview of the Our Financial Model
We are in one line of business - the marketing of legal expense and other
complimentary plans through a multi-level marketing force to individuals and a
direct sales force to employee groups. Our principal revenues are derived from
Membership fees, and to a much lesser extent, revenues from marketing
associates. Our principal expenses are commissions, Membership benefits,
associate services and direct marketing costs and general and administrative
expense. The following table reflects the changes in these categories of
revenues and expenses in the last three years (dollar amounts in 000's):
% % %
Change Change Change
% of from % of from % of from
Total Prior Total Prior Total Prior
Revenues: 2008 Revenue Year 2007 Revenue Year 2006 Revenue Year
--------- --------- ------ --------- ---------- ------ --------- --------- ---------
Membership fees............ $ 436,778 94.0 2.2 $ 427,428 93.5 3.7 $412,200 92.8 5.9
Associate services......... 23,534 5.1 (6.3) 25,112 5.5 (6.5) 26,857 6.1 (7.3)
Other...................... 4,177 0.9 (8.2) 4,549 1.0 (8.4) 4,967 1.1 (3.8)
--------- --------- ------ --------- ---------- ------ --------- --------- ---------
464,489 100.0 1.6 457,089 100.0 2.9 444,024 100.0 4.9
--------- --------- ------ --------- ---------- ------ --------- --------- ---------
Costs and expenses:
Membership benefits........ 150,318 32.4 1.0 148,792 32.6 2.1 145,771 32.8 6.3
Commissions................ 126,758 27.3 (2.9) 130,593 28.6 3.0 126,762 28.6 (10.5)
Associate services and
direct marketing......... 23,582 5.1 (18.3) 28,875 6.3 (2.1) 29,493 6.6 (3.2)
General and administrative. 53,021 11.4 5.0 50,474 11.0 0.8 50,078 11.3 2.2
Other, net................. 13,413 2.9 (3.1) 13,841 3.0 13.2 12,232 2.8 17.0
--------- --------- ------ --------- ---------- ------ --------- --------- ---------
367,092 79.1 (1.5) 372,575 81.5 2.3 364,336 82.1 (1.2)
--------- --------- ------ --------- ---------- ------ --------- --------- ---------
Provision for income taxes... 37,225 8.0 11.7 33,312 7.3 19.4 27,890 6.3 47.9
--------- --------- ------ --------- ---------- ------ --------- --------- ---------
Net Income................... $ 60,172 12.9 17.5 $ 51,202 11.2 (1.2) $ 51,798 11.6 44.6
--------- --------- ------ --------- ---------- ------ --------- --------- ---------
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The following table reflects certain data concerning our Membership sales and
associate recruiting:
% Change % Change
from from
New Memberships: 2008 Prior Year 2007 Prior Year 2006
---------------- ---------- ---------- ---------- ---------- ----------
New legal service Membership sales.................... 521,522 (8.6) 570,637 (2.4) 584,408
New "stand-alone" IDT Membership sales................ 30,805 (25.7) 41,459 46.4 28,318
---------- ---------- ---------- ---------- ----------
Total new Membership sales................... 552,327 (9.8) 612,096 (0.1) 612,726
---------- ---------- ---------- ---------- ----------
New "add-on" IDT Membership sales..................... 344,869 (9.6) 381,419 (2.0) 389,157
Average annual Membership fee......................... $324.52 1.0 $321.18 (2.2) $328.36
Active Memberships:
Active legal service memberships at end of period..... 1,469,315 (1.5) 1,492,341 1.3 1,473,710
Active "stand-alone" IDT memberships at end of period. 89,839 7.6 83,461 28.3 65,030
---------- ---------- ---------- ---------- ----------
Total active memberships at end of period.... 1,559,154 (1.1) 1,575,802 2.4 1,538,740
---------- ---------- ---------- ---------- ----------
Active "add-on" IDT memberships at end of period...... 680,862 7.7 631,910 17.0 540,253
New Sales Associates:
New sales associates recruited........................ 122,255 (17.8) 148,802 (14.0) 172,999
Average enrollment fee paid by new sales associates... $71.53 26.0 $56.75 14.2 $49.69
Average Membership fee in force:
Average Annual Membership fee......................... $300.80 1.1 $297.62 1.6 $293.00
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The number of active Memberships in force and the average monthly fee will directly determine Membership fees and their impact on total revenues during any period. The two most important variables impacting the number of active Memberships during a period are the number of new Memberships written during the period combined with the retention characteristics of both new and existing Memberships. See "Measures of Member Retention" below for a discussion of our Membership retention. Associate services revenues are a function of the number of new sales associates enrolled and the price of entry during the period, the number of associates subscribing to our eService offering and the amount of sales tools purchased by the sales force.
Membership benefits expense is primarily determined by the number of active Memberships and the per capita contractual rate that exists between us and our benefits providers. During the last five years has been and is expected to continue to be a relatively consistent percentage of Membership revenues of approximately 34%-35%. Commissions paid to associates are primarily dependent on the number and price of new Memberships sold during a period and any special incentives that may be in place during the period. We expense advance commissions ratably over the first month of the related Membership. The level of commission expense in relation to Membership revenues varies depending on the level of new Memberships written and is expected to be higher when we experience increases in new Membership sales. During the last five years this percentage has ranged from approximately 29% to 36% of Membership revenues. Associate services and direct marketing expenses are directly impacted by the number of new associates enrolled during a period due to the cost of materials provided to such new associates, the number of associates subscribing to our eService offering, the amount of sales tools purchased by the sales force as well as the number of those associates who successfully meet the incentive award program qualifications. General and administrative expenses are expected to trend up in terms of dollars, but remain relatively constant as a percent of Membership fees. During the past five years, general and administrative expenses have ranged from 12% to 13% of Membership fees.
The primary benchmarks monitored by us throughout the various periods include the number of active Memberships and their related retention characteristics, the number of new Memberships written and the number of new associates enrolled.
Although we have grown our Membership fees in each of the past 16 years, the rate of growth has not been one we find acceptable. We believe however, that our current product design, pricing parameters and business model are generally appropriate and we have no immediate plans to change these fundamental sectors. Our focus during 2009 will continue to be on improved training of our associates, enhancing the quality of sales tools provided to new and existing associates, providing incentives for associates to write consistent, quality business and continued emphasis on improving the basic retention characteristics of our Memberships.
Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. If these estimates or assumptions are incorrect, there could be a material change in our financial condition or operating results. Many of these "critical accounting policies" are common in the insurance and financial services industries; others are specific to our business and operations. Our critical accounting policies include estimates relating to revenue recognition related to Membership and associate fees, deferral of Membership and associate related costs, expense recognition related to commissions to associates, accrual of incentive awards payable and accounting for legal contingencies.
Revenue recognition - Membership and Associate Fees Our principal revenues are derived from Membership fees, most of which are collected on a monthly basis. Memberships are generally guaranteed renewable and non-cancelable except for fraud, non-payment of Membership fees or upon written request. Membership fees are recognized in income ratably over the related service period in accordance with Membership terms, which generally require the holder of the Membership to remit fees on an annual, semi-annual or monthly basis. Approximately 95% of members remit their Membership fees on a monthly basis. The majority of our Memberships that pay us via credit card or automatic bank draft pay us in advance. At December 31, 2008, approximately 69% of our legal service Memberships and our IDT Memberships were paid in advance and, therefore, those payments are deferred and recognized over their respective periods. At December 31, 2008 the deferred revenue associated with the Membership fees was $21.1 million which is classified as a current liability.
We also charge new members, who are not part of an employee group, a $10 enrollment fee. This enrollment fee and related incremental direct and origination costs are deferred and recognized in income over the estimated life of a Membership in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") as revised by SEC Staff Accounting Bulletin No. 104. At December 31, 2008 the deferred revenue associated with the Membership enrollment fees was $4.8 million, of which $2.0 million was classified as a current liability. We compute the expected Membership life using more than 25 years of actuarial data as explained in more detail in "Measures of Membership Retention" below. At December 31, 2008, management computed the expected Membership life to be approximately three years, which is unchanged from year end 2007. If the expected Membership life were to change significantly, which management does not expect in the short term, the deferred Membership enrollment fee and related costs would be recognized over a longer or shorter period.
We derive revenues from services provided to our marketing sales force including a one-time non-refundable enrollment fee from each new sales associate for which we provide initial sales and marketing supplies and enrollment services to the associate. Average enrollment fees paid by new sales associates were $72, $57 and $50 for 2008, 2007 and 2006, respectively. Revenue from, and costs of, the initial sales and marketing supplies (approximately $13) are recognized when the materials are delivered to the associates. The remaining revenues and related incremental direct and origination costs are deferred and recognized over the estimated average active service period of associates which at December 31, 2008 is estimated to be approximately five months, which is unchanged from year end 2007. At December 31, 2008, the deferred revenue associated with sales associate enrollment fees was $764,000, which is classified as a current liability. Management estimates the active service period of an associate periodically based on the average number of months an associate produces new Memberships including those associates that fail to write any Memberships. If the active service period of associates changes significantly, which management does not expect in the short term, the deferred revenue and related costs would be recognized over the new estimated active service period.
Member and Associate Costs
Deferred costs represent the incremental direct and origination costs we
incur in enrolling new Members and new associates related to the deferred
revenue discussed above, and that portion of payments made to provider law firms
($7.0 million deferred at December 31, 2008 which is classified as a current
asset) and associates related to deferred Membership revenue. Deferred costs for
enrolling new members include the cost of the Membership kit and salary and
benefit costs for employees who process Membership enrollments, and were $4.8
million at December 31, 2008, of which $2.0 million is classified in current
assets. Deferred costs for enrolling new associates include training and success
bonuses paid to individuals involved in recruiting the associate and salary and
benefit costs of employees who process associate enrollments, and were $699,000
at December 31, 2008, and are classified as a current asset. Such costs are
deferred to the extent of the lesser of actual costs incurred or the amount of
the related fee charged for such services. Deferred costs are amortized to
expense over the same period as the related deferred revenue as discussed above.
Deferred costs that will be recognized within one year of the balance sheet date
are classified as current and all remaining deferred costs are considered
noncurrent. Associate related costs are reflected as associate services and
direct marketing, and are expensed as incurred if not related to the deferred
revenue discussed above. These costs include providing materials and services to
associates, associate introduction kits, associate incentive programs, group
marketing and marketing services departments (including costs of related travel,
marketing events, leadership summits and international sales convention).
Commissions to Associates
Prior to March 1, 1995, our commission program provided for advance
commission payments to associates of approximately 70% of first year Membership
fees on new Membership sales and commissions were earned by the associate at a
rate of approximately 16% in all subsequent years. Beginning with new
Memberships written after March 1, 1995, we implemented a level commission
schedule of approximately 27% per annum with up to a three-year advance
commission payment. Effective March 1, 2002, and in order to offer additional
incentives for increased Membership retention rates, we returned to a
differential commission structure with rates of approximately 80% of first year
Membership fees on new Memberships written and variable renewal commission rates
ranging from five to 25% per annum based on the first 12 month Membership
retention rate of the associate's personal sales and those of his organization.
Beginning in August 2003, we allowed the associate to choose between the level
commission structure and up to a three year commission advance or the
differential commission structure with a one year commission advance.
Prior to January 1997 we advanced commissions at the time of sale of all new Memberships. In January 1997, we implemented a policy whereby the associate received only earned commissions on the first three sales unless the associate met specified criteria. For all sales beginning with the fourth Membership or all sales made by an associate who met the specified criteria, advance commission payments were made at the time of sale of a new Membership. Beginning April 1, 2007, we began advancing commissions at the time of sale of all new Memberships. 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 one-year commission earnings. Although the average number of marketing associates receiving an advance commission payment on a new Membership is nine, the overall initial advance may be paid to approximately 30 different individuals, each at a different level within the overall commission structure. The commission advance immediately increases an associate's unearned advance commission balance to us.
Although prior to March 1, 2002, we advanced our sales associates up to three years commission when a Membership was sold and subsequent to March 1, 2002, up to one year commission, the average commission advance paid to our sales associates as a group is actually less than the maximum amount possible because some associates choose to receive less than a full advance and we pay less than a full advance on some of our specialty products. In addition, we may from time to time place associates on a less than full advance basis if there are problems with the quality of the business being submitted or other performance problems with an associate. Additionally, we do not advance commissions on certain categories of group business which have historically demonstrated below average retention characteristics. Also, any residual commissions due an associate (defined as commission on an individual Membership after the advance has been earned) are retained to reduce any remaining unearned commission advance balances prior to being paid to that sales associate. For those associates that have made at least 10 personal sales, opened at least one group and personally write 15% or more of their organizational business, 15% of their commissions are set aside in individual reserve balance accounts, further reducing the amount of advance commissions. The average commission advance paid as a percentage of the maximum advance possible pursuant to our commission structures was approximately 88%, 82% and 78% during 2008, 2007 and 2006, respectively. The commission cost per new Membership sold has increased over the prior year by 8%, 3% and 2% for 2008, 2007 and 2006, respectively, and varies depending on the compensation structure that is in place at the time a new Membership is sold, the monthly Membership fee of the Membership sold and the amount of any charge-backs (recoupment of previous commission advances) that are deducted from amounts that would otherwise be paid to the various sales associates that are compensated for the Membership sale. Should we add additional products, such as the Identity Theft Shield described above or add additional commissions to our compensation plan or reduce the amount of chargebacks collected from our associates, the commission cost per new Membership will increase accordingly.
We expense advance commissions ratably over the first month of the related
Membership. At December 31, 2008, advance commissions deferred were $5.3 million
and included as a current asset. As a result of this accounting policy, our
commission expenses are all recognized over the first month of a Membership and
there is no commission expense recognized for the same Membership during the
remainder of the advance period. We track our unearned advance commission
balances outstanding in order to ensure the advance commissions are recovered
before any renewal commissions are paid and for internal purposes of analyzing
our commission advance program. While not recorded as an asset, unearned advance
commission balances from associates for the following years ended December 31
were:
2008 2007 2006
------------ ------------ -------------
(Amounts in 000's)
Beginning unearned advance commission balances (1)..................$ 184,531 $ 188,647 $ 195,792
Advance commissions, net of chargebacks and other.................... 120,908 126,880 121,737
Earned commissions applied........................................... (127,496) (126,836) (124,983)
Advance commission write-offs........................................ (3,572) (4,160) (3,899)
------------ ------------ -------------
Ending unearned advance commission balances before estimated
unrecoverable balances (1)......................................... 174,371 184,531 188,647
Estimated unrecoverable advance commission balances (1).............. (44,526) (42,850) (40,091)
------------ ------------ -------------
Ending unearned advance commission balances, net (1)............... $ 129,845 $ 141,681 $ 148,556
------------ ------------ -------------
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(1) These amounts do not represent fair value, as they do not take into consideration timing of estimated recoveries.
The ending unearned advance commission balances, net, above includes net unearned advance commission balances of non-vested associates of $62 million, $56 million and $49 million at December 31, 2008, 2007 and 2006, respectively. As such, at December 31, 2008 future commissions and related expense will be reduced as unearned advance commission balances of $68 million are recovered. Commissions are earned by the associate as Membership fees are earned by us, usually on a monthly basis. We reduce unearned advance commission balances or remit payments to associates, as appropriate, when commissions are earned. Should a Membership lapse before the advances have been recovered for each commission level, we, except as described below, generate an immediate "charge-back" to the applicable sales associate to recapture up to 50% of any unearned advance on Memberships written prior to March 1, 2002, and 100% on any Memberships written thereafter. Beginning in August 2003, we allowed the associate to choose between the level commission structure and up to three year commission advance and up to 50% chargebacks or the differential commission structure with a one year commission advance and up to 100% chargebacks. This charge-back is deducted from any future advances that would otherwise be payable to the associate for additional new Memberships. In order to encourage additional Membership sales, we waived chargebacks for associates that met certain criteria in December 2002 and March 2003, which effectively increased our commission expense. Any remaining unearned advance commission balance may be recovered by withholding future residual earned commissions due to an active associate on active Memberships. Additionally, even though a commission advance may have been fully recovered on a particular Membership, no additional commission earnings from any Membership are paid to an associate until all previous advances on all Memberships, both active and lapsed, have been recovered. We also have reduced chargebacks from 100% to 50% for certain senior marketing associates who have demonstrated the ability to maintain certain levels of sales over specified periods and maintain certain Membership retention levels. We may adjust chargebacks from time to time in the future in order to encourage certain production incentives.
We have the contractual right to require associates to repay unearned advance commission balances from sources other than earned commissions including cash (a) from all associates either (i) upon termination of the associate relationship, which includes but is not limited to when an associate becomes non-vested or (ii) when it is ascertained that earned commissions are insufficient to repay the unearned advance commission payments and (b) upon demand, from agencies or associates who are parties to the associate agreements signed between October 1989 and July 1992 or July 1992 to August 1998, respectively. The sources, other than earned commissions, that may be available to recover associate unearned advance commission balances are potentially subject to limitation based on applicable state laws relating to creditors' rights generally. Historically, we have not demanded repayments of the unearned advance commission balances from associates, including terminated associates, because collection efforts would likely increase costs and have the potential to disrupt our relationships with our sales associates. This business decision by us has a significant effect on our cash flow by electing to defer collection of advance payments of which approximately $44.5 million were not expected to be collected from future commissions at December 31, 2008. However, we regularly review the unearned advance commission balance status of associates and will exercise our right to require associates to repay advances when management believes that such action is appropriate.
Non-vested associates are those that are no longer "vested" because they fail to meet our established vesting requirements by selling at least three new Memberships per quarter or retaining a personal Membership. Non-vested associates lose their right to any further commissions earned on Memberships previously sold at the time they become non-vested. As a result we have no continuing obligation to individually account to these associates as we do to active associates and are entitled to retain all commission earnings that would be otherwise payable to these terminated associates. We do continue to reduce the unearned advance commission balances for commissions earned on active Memberships previously sold by those associates. Substantially all individual non-vested associate unearned advance commission balances were less than $1,000 and the average balance was $392 at December 31, 2008.
Although the advance commissions are expensed ratably over the first month of the related Membership, we assess, at the end of each quarter, on an associate-by-associate basis, the recoverability of each associate's unearned advanced commission balance by estimating the associate's future commissions to . . .
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