For Pre-Paid Legal Services ( PPD), Plan A is to soundly defeat the mounting wave of lawsuits it faces from customers, shareholders and its own sales force.

Plan B apparently doesn't exist.

The Oklahoma-based company -- which markets legal insurance as "essential" to its customers -- has no liability coverage of its own. Nor has it established any reserves to pay potential losses associated with lawsuits, dozens of which pose a material threat and could outstrip the company's bank account.

Pre-Paid's once-solid balance sheet could easily teeter. Last year the Securities and Exchange Commission ordered a dramatic accounting change that wiped out roughly three-quarters of Pre-Paid's assets, which now exceed liabilities by less than $40 million. That number threatens to shrink further, even without courtroom losses.

Recently, Pre-Paid sacrificed its debt-free status to accelerate an aggressive stock repurchase program with debatable returns. Although the company has reduced its share count by roughly 20% since 1999, it has often paid much more than its current $20 stock price to do so.

"Pre-Paid's stock buyback program can't just be considered brash or questionable corporate governance," one critic said. "These guys are one jury decision away from being insolvent -- and they won't be able to raise money or borrow money after that happens."

Already, 10% of shareholders' equity is tied up in loans to executives and unnamed "marketing consultants," whose balances rarely diminish. And Pre-Paid could use the cash. The company burned through every excess dollar -- posting working capital deficits the last two quarters -- to fund stock repurchases before finally turning to the bank.

Pre-Paid bulls have applauded the buybacks. They claim the stock is sorely undervalued, offering a rare growth investment in a miserable down market. Some have even circulated newsletters that place the "intrinsic value" of Pre-Paid's stock at $953.28 a share, based on a formula supposedly devised by billionaire value investor Warren Buffett.

Pre-Paid itself has described the stock as the best investment available for the company. Although the company has issued a blanket refusal to comment for any story published by TheStreet.com, it defended its aggressive stock buybacks in a recent press release.

"By continuing our stock repurchases," said Chief Executive Harland Stonecipher, "we are sending a strong and positive message to the market regarding our confidence in the company's fundamental value and its prospects for the future.

"We continue to believe very strongly the best is yet to come."

Going in Debt

In addition to $10 million for stock buybacks, Pre-Paid plans to borrow $20 million for construction of a new corporate headquarters, heralded as the "first skyscraper" in Ada, the rural Oklahoma town where the company is based.

To avoid default on these loans, Pre-Paid must comply with a variety of boilerplate covenants and one that could prove particularly challenging. It must retain at least half of all new customers for at least a year. In 2001, the company would have just scraped by with a 52.7% first-year customer retention rate.

Critics attribute Pre-Paid's massive turnover rate to a product that, they say, is worth only a fraction of the $25 it costs per month. Pre-Paid describes itself as a "legal HMO," charging a low fixed rate for a variety of legal services provided by designated law firms across North America. But some dismiss this comparison as nonsense.

They say medical HMOs pay the lion's share of their premiums -- more than 80% -- to the health care providers who service their customers. In contrast, Pre-Paid pays its "provider law firms" one-third of every premium dollar, roughly the same amount it pays its network marketers to sell the legal policies.

"At best, you're getting 34 cents of service for every $1 you pay," one said. "And you're probably not even getting that because the lawyers have to be making a profit."

Rebelling in the South

Judging from the rising stack of lawsuits, Pre-Paid customers increasingly believe the product provides a less attractive deal for themselves.

In Mississippi and Alabama alone -- two states known for runaway jury awards -- Pre-Paid faces 31 material lawsuits filed by more than 500 disgruntled customers who accuse the company of promising far more service than it delivers. Pre-Paid's list of exclusions -- including common legal needs like divorce and bankruptcy representation -- far exceeds its actual coverage, despite sales pitches that claim "everything is covered."

The company has faced legal defeats already. Some of the current lawsuits resemble complaints, seeking $745 million in total damages, that Pre-Paid disclosed only after settling the cases last year for $1.5 million.

Pre-Paid also disclosed in its latest quarterly report that it's being questioned by the Mississippi attorney general, ending consistent denials of regulatory problems despite a settlement last year with the attorney general's office in Wyoming.

And Justice for All

Oklahoma City attorney John Dexter, who's waging a legal battle on behalf of Pre-Paid associates, said he may be 180 days away from concluding the case he filed against the company more than a year ago.

Dexter's is the less publicized of two class-action lawsuits filed by Pre-Paid associates. The other, filed by a nationally recognized class-action law firm, accuses Pre-Paid of being an illegal pyramid scheme. In contrast, Dexter's lawsuit charges Pre-Paid with executing illegal loans that require sales associates to repay advanced commissions, with interest, when their customers cancel early. He describes his complaint, based entirely on contract law, as the simpler one to argue and win. Pre-Paid has said it would vigorously contest all pending legal actions.

"It's like taking Al Capone down for tax evasion as opposed to organized crime," Dexter said. "It's much simpler, but the end result is the same."

Short-sellers continue to bet heavily on the company's downfall. Although they've picked up some profits along the way, nearly 60% of the stock still remains shorted.

"We'll cover our position somewhere in the neighborhood of zero," one short said.

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