Melissa Davis

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Pre-Paid Plunges as Growth Evaporates

Melissa Davis

Pre-Paid Legal Services (PPD Quote), once known for its phenomenal growth story, is officially shrinking.

The company's shares dropped 23% Monday morning after a Friday evening press release revealed that Pre-Paid's long-running string of customer growth had finally ended. The shares failed to recover even after the company issued a surprisingly strong earnings outlook Monday morning.

On Friday Pre-Paid revealed that during the fourth quarter, it actually lost more customers than it added. The company ended the quarter with 7,000 fewer customers than it began with -- even after writing nearly 170,000 new policies.

Pre-Paid's dismal fourth-quarter recruitment results, coupled with the resignation of longtime president Wilburn Smith, sent the company's stock plunging $6 Monday morning, to $20.18. The same stock fetched more than $30 last month, following a strong endorsement from New York hedge fund Gotham Partners.

The legal services provider has for years relied on the controversial sales and recruiting strategy engineered by Amway to fuel its explosive growth. But short-sellers, likening Pre-Paid to an illegal pyramid scheme, have long warned of a collapse.

"It's only a matter of time before a pyramid based on misleading people begins to collapse," one short-seller said. "The tragedy is that some insiders were able to escape before that started to happen."

Randy Harp, Pre-Paid's operating chief, cashed in more than $1.3 million in company stock last month to repay an insider loan. Gotham Partners itself also profited, selling 200,000 of its 1 million shares even as the firm continued to tout the stock as undervalued on its Web site.

Gotham Partners dismantled the site immediately after a Dec. 22 New York Times article examined the fund's trading in Pre-Paid shares. The site remains "under construction" nearly two weeks later.

In the meantime, Pre-Paid is clearly struggling to grow its business. The company's fourth-quarter results reveal a sharp slowdown in recruiting as well as a loss of customers. The company added only 29,555 new sales associates -- down 24% from a year earlier -- during its final quarter of 2002.

The company said Monday that the losses in customers and recruits would drive down commission payments in coming periods, allowing earnings and cash flow to rise from year-ago levels. The company scheduled a Tuesday morning conference call to discuss its outlook and said it would post fourth-quarter results Feb. 18.

Pre-Paid is now turning to Smith, who's vacating his position as president, to return to the field and turn the company around.

"Wilburn Smith has been with Pre-Paid for more than 22 years and has been both top producer and top recruiter for the company over the years," said CEO Harland Stonecipher, who will assume Smith's responsibilities as president. "No one is better qualified or has a more proven track record in this area."

Last year, Smith earned $2 million -- $400,000 more than Stonecipher -- as president of the company.