Pressured by strict terms from its lenders, Pre-Paid Legal Services ( PPD) is taking dramatic steps to hold onto its customers. The Oklahoma-based company, which employs the sales and recruiting strategy made famous by Amway, this month severed ties with two of its most productive sales associates because their customers were departing at a rapid rate. The legal services provider is also waiting longer to formally cancel policies that customers no longer want. Short-sellers, who have challenged everything from the company's accounting to the legitimacy of its business, say the moves show the Pre-Paid growth story is running out of steam. The company's strong membership and revenue growth have kept its stock rising, but the shorts -- and there are many investors betting against Pre-Paid -- say those numbers obscure fundamental flaws that will eventually punish shareholders. As a matter of policy, Pre-Paid does not comment for stories published by TheStreet.com because it believes the coverage is unfairly negative.
Pre-Paid has long suffered from a dismal customer retention rate, losing nearly half of all new policyholders within a year of when they sign up for the $26-a-month service. But the company is now under pressure to retain more customers. This year, Pre-Paid sacrificed its debt-free status by taking out a bank loan to help fund an aggressive stock repurchase program and the construction of a new corporate headquarters. The $30 million credit line, extended by Bank of Oklahoma ( BOKF), includes covenants that specifically address customer retention. To avoid default, Pre-Paid must post a customer retention rate of at least 50% on policies that have been in force for less than 12 months. In 2003, that rate will climb to 55%. Alan Weber, a New York analyst and Pre-Paid sales associate, expressed little concern about a potential default. "Pre-Paid could pay the loan off in three to six months," said Weber, whose firm owns 1% of Pre-Paid's stock. "All it would mean is that the company would be buying back less of its own stock."