RealMoney.com's DAILY BULLETIN

December 6, 2000

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Market Data as of Close, 12/5/00:

o Dow Jones Industrial Average: 10,898.72 up 338.62, 3.21%
o Nasdaq Composite Index: 2,889.80 up 274.05, 10.48%
o S&P 500: 1,376.54 up 51.57, 3.89%
o TSC Internet: 413.24 up 41.72, 11.23%
o Russell 2000: 471.17 up 20.78, 4.61%
o 30-Year Treasury: 109 18/32 up 1 18/32, yield 5.590%

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Companies in Today's Bulletin:

Apple (AAPL:Nasdaq)
Gateway (GTW: NYSE)
Dell (DELL:Nasdaq)
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In Today's Bulletin:

o Herb on TheStreet: Why Short-Sellers Are Still Courting Pre-Paid
Legal Services

Hardware & PCs: The Small Apple: Falling Far From the Expectations

The personal computer maker says sales will come in $600 million less
than anticipated and it will report a loss.

 http://www.thestreet.com/tech/hardware/1200338.html
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Preopen Trading: Preopen Trading: Futures in the Red, but Off Earlier
Lows

A day after record gains, the Nasdaq faces a rally hangover and another
warning from Apple.

 http://www.thestreet.com/markets/offhourstrading/1200624.html
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The Meehan Notes: Easy to Say

Greenspan's comments about a slowing economy sure were a tonic -- but
will he be willing to follow through with action?

 http://www.thestreet.com/p/comment/themeehannotes/1199684.html
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Tech Savvy: Intel's Longshot Run at the Texans on DSPs

Plus, wishing Cramer well on his hedge fund retirement.

 http://www.thestreet.com/p/comment/techsavvy/1200055.html
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Detox: The Bad News: Greenspan Lends Wall Street an Ear

If he's truly a seer, why is the Fed chairman quoting perpetually
behind-the-curve Wall Street analysts?

 http://www.thestreet.com/p/comment/detox/1200042.html
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Herb on TheStreet: Why Short-Sellers Are Still Courting Pre-Paid Legal
Services

By Herb Greenberg
Senior Columnist
12/6/00 6:31 AM ET

For the better part of two years, this column has, in one form or
another, pointed out accounting and growth-related issues with Pre-Paid
Legal Services(PPD:NYSE), a multilevel marketing company that sells the
legal equivalent of HMOs. (LMOs?) Yet, even taking into account a brief
stumble in its stock price a year ago, after its cash flow had taken a
dip, Pre-Paid has always come through with higher earnings.

The company has gone so far as to trumpet those higher earnings with a
reminder, in a recent press release, that it has landed on lists of
best companies and fast growers compiled by Forbes, Bloomberg and
Investors Business Daily. Never mind that short-sellers often mine
those very lists for new ideas. (You can't help but wonder how some of
them created such high growth!) Never mind that the metrics used by
those publications don't look at the quality of those earnings. (Those
kinds of lists generally look at the raw numbers that are spit out by a
computer.)

Earnings quality (or lack thereof) has always been the main attraction,
among short-sellers, to the Pre-Paid story. There are a number of
reasons, but perhaps the most simple: Pre-Paid operates on what I like
to call the going-up-the-down-escalator type of business model; it has
to run faster and faster just to keep up. Or, as is the case with
Pre-Paid, it has to write more and more new policies to compensate for
commissions owed by salespeople. Commissions owed by salespeople? Read
on.

Most of Pre-Paid's salespeople are paid three years' worth of
commissions at the time a contract is sold. Members can drop a contract
after the first month and, according to the company, 40% drop out
within the first year. To counter each cancellation -- and not lose on
commissions they've already received -- salespeople must sell
additional memberships against those commissions (or pay interest on
the outstanding balance.) In order for those commissions not to come
back and haunt the company, it would seem membership growth would have
to be constantly accelerating, in order to rise faster than the
commission advances on previous policies sold.

However, just the opposite is happening; and while commission advances
continue to grow, new membership growth is slowing: On an annual basis
it leapt by 27% last quarter -- impressive until you see that it rose
by 40% in the same quarter a year earlier. More to the point: New
membership growth has been falling every quarter for the last four,
barely budging last quarter at 1.4% after peaking at 10.5% in last
year's fourth quarter.



Yet, talk to Pre-Paid's loquacious CEO Harland Stonecipher about
slowing membership growth and it's almost as if he didn't hear the
question. He talks about the 27% growth rate as if it's impressive. "We
think it can be up 50% or better," he says.

So, I ask, what about the falling sequential growth rate? "I hadn't
really looked at that," he says. (The CEO hadn't looked at the
sequential growth rate?!) "But on an annual basis," he continues, "it's
a good growth rate, and we feel good about that. We've been able to
have 30 quarters of increased revenues and increased earnings; we think
we will be able to continue that."

But the company hasn't changed its allowance for doubtful accounts --
the amount it reserves against uncollected commissions on cancelled
policies -- for five quarters despite a rise in commission advances.
Chief Operating Officer Randy Harp explains that the company has seen
no need to do so, because 20% of the salesforce does 80% of the sales,
"and where 80% of the production comes from 20% of the salesforce," he
says, "collectibility becomes better; it's a component of not how much
business he writes, but who writes it."

Maybe, but it's hard to tell just by looking at Pre-Paid's financial
statements just how good the company really is at collecting
commissions on canceled policies from its own agents. It claims it has
a less-than-5% default rate, but short-sellers believe the risk is much
higher as membership growth falls -- especially if the economy slows.

How much is currently at risk? Hard to say. The company merely breaks
the commission advances shown on its balance sheet into two categories:
current and long-term. Current reflects the first of three years' worth
of commission advances. Long term is the balance. If collections were
never a problem, one short-seller argues, the long-term advance should
never be more than twice the amount of the short-term. Pre-Paid's
long-term commission advances, however, are more like 2.6 times the
short-term.

Still, some analysts argue that Pre-Paid, at 13 times this year's
expected earnings of $2.32 per share, is cheap. That depends, of
course, on which earnings you're looking at. If Pre-Paid were
ultraconservative, some short-sellers argue, it would immediately take
a hit against earnings on all commissions, as they've paid them out
rather than amortizing them over three years as fees are collected. If
they were expensed when they were paid, earnings for the nine months
would've been 58% lighter, or roughly 72 cents a share. And instead of
trading at 13.5 times this year's expected earnings, it would trade at
more like 32 times -- arguably high, the short-sellers say, considering
the risk.

And from the red flag file: Any time a company touts the price of its
stock, to the point of using its stock to legitimize its "story," be on
guard. I've written about one of Stonecipher's previous attempts to
tout his stock before. Well, on Oct. 31, in response to a New York
Stock Exchange inquiry into increased activity in its stock, Pre-Paid
issued a press release.

Instead of merely saying that it doesn't know why its stock has been
active, as most companies do, Pre-Paid touts that its market cap had
passed the "financial milestone" of $1 billion, and that its policies
are now in 1 million households. "We've been referred to as 'one of the
best kept secrets in America,' " Stonecipher was quoted as saying. "And
I believe these two announcements indicate that we're reaching a point
of familiarity and acceptance in the market." Since then, the market
cap has fallen back to $686 million. So much for milestones.

(Note: After two interviews in recent weeks, the company has apparently
stopped returning my calls.)

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's
editorial policy, he doesn't own or short individual stocks, though he
owns stock in TheStreet.com. He also doesn't invest in hedge funds or
other private investment partnerships. He welcomes your feedback and
invites you to send any to Herb Greenberg. Greenberg also writes a
monthly column for Fortune.

Brian Harris assisted with the reporting of this column.
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