Pre-Paid Legal Services

Topics: Balance sheet, Income statement, Cash flow Pages: 20 (5565 words) Published: March 2, 2011
REV: JULY 2, 2003


Pre-Paid Legal Services, Inc.
Pre-Paid Legal plans are designed to help middle-income Americans have affordable access to quality legal assistance. — Pre-Paid Legal Services Corporate Vision Harland C. Stonecipher founded the Pre-Paid Legal Services, Inc. (PPLS) in 1972 after an expensive encounter with lawyers stemming from an automobile accident. PPLS sold legal expense insurance that provided for partial payment of legal fees in connection with the defense of certain civil and criminal actions. The company went public in 1979 and grew rapidly throughout the 1980s as an increasing number of Americans subscribed to legal service insurance (see Exhibit 1). In 1998 the company had membership revenues of $110 million, earnings of $30.2 million, and end–of-year book equity of $101.1 million. In May 1999 it began trading on the New York Stock Exchange and in August 1999 its market capitalization reached $738 million, an increase of 101% over the previous year. Despite its strong financial performance, opinions about the future of Pre-Paid Legal Services (PPLS) varied widely among U.S. equity analysts in the period late-1997 to mid-1999. The company was highly recommended by a number of analysts, but there was also persistent short selling of the stock.1 Short sellers’ primary concern about the company was outlined in a Fortune article in late 1997. The business publication alleged that the company was using an inappropriate method of accounting for sales commissions. As a result of this uncertainty, the company’s stock price fluctuated widely from a high of $40.50 to a low of $13.50 between late 1997 and mid-1999 (see Exhibit 2).

Business Description2
PPLS offered its customers (termed members) a wide range of legal insurance. The most popular plan, The Family Plan, accounted for 94% of all memberships in 1998. This plan provided reimbursement for a broad range of legal expenses incurred by members and their spouses, including will and testament preparation, document review and letter writing, and some of the legal costs associated with employment-related trial defense, traffic violations, and Internal Revenue Service 1 Short sellers borrow stock certificates from a brokerage firm and sell the stocks on the open market. If the stock price declines,

short sellers can buy back stock, cover their loan from the brokerage firm, and earn a profit. Of course, if the price increases, short sellers make a loss. 2 The material in this section is from Pre-Paid Legal Services, Inc.’s 1998 10-K Statement.


Professor Paul Healy and Teaching Fellow Jacob Cohen J.D. prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. This is an abridged version of “Pre-Paid Legal Services, Inc. (A),” HBS No. 100-029 and “Pre-Paid Legal Services, Inc. (B),” HBS No. 100-030, prepared by Professor Paul Healy and Teaching Fellow Jacob Cohen J.D. Copyright © 1999 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.


Pre-Paid Legal Services, Inc.

audits. 3 The Family Plan specified limits on the number of hours of attorney time that a member was entitled to receive for many of these services. It also provided a 25% discount on attorney rates for the purchase of any legal services over and above...
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