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Searching for Value America's lost value

Since its IPO in April, the e-tailer has seen its stock drop from $74.25 to $5--making it a case study in the difficulties of surviving the chaos of online commerce.

special feature Only last spring, Value America appeared well on its way to becoming an IPO superstar.

Funded by the likes of billionaire financier Paul Allen's Vulcan Ventures and Federal Express founder Frederick Smith, the online retail company saw its share price soar as high as $74.25 from its initial public offering of $23 on its first day of trading.

Since then, it has dropped like a rock--yesterday, the shares were selling for a relatively paltry $5. So drastically has the stock fallen that Value America has become a poster child of 1999 public offerings that went awry, capturing the title of worst-performing Net IPO for last year, according to Thomson Financial Securities Data.

Today, with a new chairman and a new chief executive, the company is in the midst of a drastic reorganization that may nearly halve its 600 employees.

All this has left many wondering what happened to the value in Value America, whose fortunes can serve as case study in the difficulties of surviving the tumultuous seas of online commerce.

In interviews with former employees, investors and other sources, one name emerges repeatedly: that of Craig Winn, the founder and former chairman of Value America, who ascended from the ashes of an earlier business that filed for reorganization under Chapter 11 bankruptcy laws in 1993.

The 44-year-old Winn is described as a sharply dressed, dynamic visionary but a micro-manager whose interference frustrated the executives he hired to handle the daily operations of the company.

"Even though he gave up the CEO title upon the IPO, he was in the office everyday and doing deals. It was impossible to get into a discussion or healthy debate with Craig," one executive said. "There are some people who win arguments based on the logic of the argument and some by the force of their personality. Craig won them with his personality."

Winn, who maintains a seat on the board but resigned from any executive Click or miss duties after a company restructuring announcement last month, rejects the micro-management criticism and says he relinquished his CEO responsibilities upon the closure of the IPO.

"I wish I had micro-managed the company," said Winn, who still holds a 35 percent stake in Value America. "I privately advised the CEO on major decisions but did not assert myself."

Former chief executive Tom Morgan, who resigned in November, offers a markedly different view. "I did not have full control of the company. You can't have two captains on the ship."

Morgan was the second top executive to leave Value America last fall. The other was its chief financial officer, who resigned to take a job at a start-up.

Company executives were not the only ones frustrated with Winn. Wall Street brokerages and investors said he was unwilling to share some company data with analysts to help them develop financial models for Value America.

"We were concerned that the company was not getting their message out to the Street," said Hal Brown, vice president of private capital for Union Labor Life Insurance Company, which holds an 8.2 percent stake in Value America. "When a company hits or exceeds Wall Street's projection for sales each quarter, one would think Value America's stock would climb--but clearly that hasn't happened."

Concern over core "focus"
Although Winn said he gave up his responsibility for talking to Wall Street shortly after the IPO, he continued to give speeches at investment conferences and participated in the company's quarterly earnings conference calls for the first two quarters.

"At some of these conferences, I thought he was getting off from the focus of the company's core strategy and not communicating enough about the company's business-to-business strategy," Brown said.

Winn assembled a 250-page business plan that one investor described as the most comprehensive he had ever seen, but sources said it fell short on details in some key aspects of building the company.

"The problems had escalated since the summer...He was someone who never met a deal he didn't like," one executive said of Winn, citing a particular agreement with Visa International.

Under that deal, Value America members could get a discount of up to $100 on some purchases exceeding $200. But the company soon found that it could not adequately monitor the use of these "Value dollars" and, in some cases, customers were opening multiple accounts to make purchases or reselling their Value dollars to others, the executive said.

Dispute over "loopholes"
Winn said the company was in the midst of developing a fraud-detection system when loopholes were discovered in the discount program. "I found out the CEO knew about the loopholes and did nothing about them," he said.

Former CEO Morgan denied that he was ever informed that the discount program had gone "live" and said he canceled it upon learning of the loopholes.

Other executives and former employees questioned Winn's grandiose plans for the company--despite $97.9 million in losses posted for the first nine months ended September 30. At one time, according to a company executive, Winn discussed the idea of developing a corporate campus with a three-hole golf course and hiking trials.

Along with cofounder and vice chairman Rex Scatena, Winn sought and received board approval to maintain a corporate jet, said one former employee, who added that Winn had sought upgrades to the plane.

One portfolio manager who saw the company's presentation to prospective investors recalled that Winn--who named his Virginia estate Winndom--seemed pre-occupied with how much money he would be worth after the IPO.

"It was embarrassing and a pretty major turn-off," said the portfolio manager, who opted out of investing in the company.

Winn rejects such comments and says any benefit he stands to gain from the company's stock is good for investors as well.

Most executives and other company insiders are typically prohibited from selling any shares until 180 days after an IPO, but exceptions are made in the sale of shares to the underwriter to handle over-allotments of stock. In Value America's case, Winn was able to sell 577,500 shares to the underwriter at the IPO price, giving him a windfall of $13.3 million within 30 days of the offering.

Not all have fared so well. Vulcan Ventures, for example, is down on its investment of $60 million, one source said.

Vulcan holds an 18.9 percent stake in the company, which is valued at $42.4 million, based on yesterday's price at the end of regular trading. A Vulcan spokeswoman said the company was not able to comment because the representative for its Value America investment is on vacation.

Union Labor Life Insurance Company, an early investor that funded the company with $15 million, is still in the black with its stake valued at $17.8 million. "We're disappointed with the current value of the stock today, but with the reorganization, we think this company is poised for growth," Brown said.

Cutting workforce by 47 percent
Last month, Value America announced a major restructuring to cut costs. The company plans to reduce 47 percent of its workforce, pare its operations from dozens of product categories (including shoes) to its original core of five categories: PCs, peripherals, software, consumer electronics and office supplies.

Analysts predict that the company has enough cash to last at least through the end of the year, with $115 million at the end of the third quarter.

"We're not worried about having enough cash to make it through," company spokesman David Kuo said. "We have an extremely powerful board and will make the decisions we need to make to run the business."

Board members Smith, William Savoy of Vulcan Ventures and Michael Steed of Pacific Capital Group are some of the directors appointed to a special committee seeking funding sources. They are working with Glenda Dorchak, who was appointed chief executive last month after serving as president of Value America since 1998, and newly appointed chairman Wolf Schmitt.

Analysts have largely applauded the company's move to streamline its operations, but concerns remain.

Value America will not only lose 5 percent of its revenues from cutting the other product categories, but analysts also worry that revenues may shrink further if fewer customers are drawn to the site as it shifts from traditional to online marketing.

"A mile wide and an inch deep"
And as the company reduces its product categories, analysts wonder if the company will no longer be able to differentiate itself. Value America will be focusing on an arena where price competition runs steep.

Kuo defended the restructuring as a necessary step. "We were a mile wide on our product offerings and an inch deep, and now we'll be five categories and a mile deep," he said.

On Wall Street, four analysts rate the stock as a "hold" and are taking a wait-and-see approach.

"Their glaring tactical error was over-spending on the sales and marketing of the company and under-spending on the consumer side," said David Trossman, an analyst with First Union Securities. "They spent a lot on the trial dollar but haven't had much success in the repeat purchase."

Analysts note that the company, though increasing revenues each quarter, has been spending heavily on advertising and marketing to acquire customers at a far higher rate than its competitors. The company has been paying almost $500 per customer in the third quarter, compared with Amazon, which spent less than $15, according to a report by Tom Courtney, an analyst with Banc America Securities.

Regardless of its immediate course, some speculate that it might be best to sell the company in the long run. Winn himself believes that an acquisition by a large Internet, telecommunications or retail brick-and-mortar company would make sense.

And if that happens, he will be ready to dive into the new business.

"I would be glad to give my time to the acquiring company," he said. "I would like to see that company maximize the benefits from its acquisition, and it would be in the interest of Value America shareholders if I'm involved."