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." Click here to read a letter about this story.