Melissa Davis

Pre-Paid Faces Day in Court

05/10/04 - 11:53 AM EDT

PPD


To be fair, Pre-Paid generates considerable cash flow from its business operations. But the company has been spending most of it -- and even borrowing more -- to buy its own stock and finance a fancy new $30 million headquarters in the small town of Ada, Okla.

As a matter of policy, Pre-Paid refuses to comment for stories by TheStreet.com because it believes the coverage is negatively biased. At this point, however, some short-sellers estimate that just a $15 million legal hit could be enough to bankrupt the company.

Pre-Paid's stock fell 47 cents Friday to end at $24.53 ahead of this week's trial. More than 70% of the float is sold short by investors betting against the company.

Poverty Row

For its part, Pre-Paid has portrayed the Mississippi cases as baseless and -- just as important -- called the estimated damages outlandish. In its regulatory filings, the company has repeated pointed out that plaintiffs in the Mississippi cases have spent only "$500,000 or less" on their legal policies despite their huge damage claims.

But half a million bucks, even divvied up, is a whole lot of cash in a place like Holmes County. Pre-Paid likes to tout its flagship $26 legal policy as cheaper than a daily cup of coffee. But most people in Holmes County -- the poorest county in the poorest state in America -- can't afford much.

Numbers tell the story. All told, 41% of the county's residents live in poverty. Blacks, who make up nearly 80% of the population, are even poorer than most. Per capita, they earn just $8,165 annually -- less than half their white counterparts. Local residents own houses that are worth about one-third of the national average. Those who rent pay about $150 a month.

So a $26 legal policy -- costing as much as two months' rent a year -- looks a whole lot more expensive in Holmes County than in just about any place else. And it seems even costlier when customers wind up with limited services instead of the full legal coverage some of them had expected.

"What is the real value of Pre-Paid's policy for people in Holmes County?" one short-seller questioned. "For them, this is an inappropriate -- almost worthless -- product."

Mississippi Jackpot

Two years ago, a Mississippi jury in Hinds County -- where Pre-Paid also faces trial -- actually issued a $30 million judgment against a company for selling a couple an unsuitable insurance product. Holmes County has made even larger awards. Most notably, a jury there three years ago awarded $150 million to six plaintiffs who were simply exposed to asbestos but never really fell sick.


Melissa Davis


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