An American Dream Gone Bad

SAN FRANCISCO (08/28/2000) - For better or for worse, Value America Inc. always was a pioneer. Born in Nevada in 1996, the company was one of the first to spot the promise of the Internet to streamline retail delivery.

Last December, it broke ground again - this time as one of the first big e-retailers to fall on hard times, laying off half its 600-person staff.

Now Value America is forging into new territory again. Just as the company was early to explore e-commerce, it's now one of the first to mine federal bankruptcy law as a strategy to save lucrative portions of the business, hoping to resurrect itself or get acquired.

On Aug. 11, the company, now based in Charlottesville, Va., filed for Chapter 11 bankruptcy protection and also laid off 185 of its remaining staff.

It's at all what founder Craig Winn had in mind four years ago when he set up the company as an "inventoryless" virtual middleman. Value America was modeled after the Price Club, the general merchandise chain founded by Sol Price that in the 1970s revolutionized "big box" retailing, ordering products in bulk and cutting out resellers whenever possible. Value America promised to go one better: Customers placed orders through its site but received their products directly from manufacturers.

Winn pitched Value America's inventoryless model as a strength - the company would be nimble and efficient because it wouldn't be saddled with the overhead of warehouse stock and property taxes, and wouldn't have to anticipate demand.

Physical order fulfillment and returns, too, would be somebody else's problem.

Value America was simply the means to make the purchase happen.

The idea was novel enough to draw the attention - and the pocketbooks - of some notable investors. FedEx titan Frederick Smith kicked in US$5 million of his company's cash along with $5 million of his own, and took a seat on the company's board alongside Bill Savoy, president of Vulcan Ventures, who pitched in $65 million of Microsoft co-founder Paul Allen's money.

FedEx's involvement, in particular, seemed to prove that the company was onto something good. Things grew fast - too fast. Soon, Value America's product lines had mushroomed to include everything from computers to cheesecake to barbecued spareribs. And some of Winn's side deals seemed spurious, as if he hadn't thought through the broader ramifications.

In one gambit, for example, the company set up a Web link for Visa cardholders that had Value America accounts offering 100 "value dollars" for the first $200 spent on Value America's site. But the deal was scrapped after cardholders opened multiple Value America accounts and attempted to sell the link to cardholders who didn't yet know about the deal.

By last November, Winn followed the path of many startup founders; he was pulled from the CEO position. Taking his place was Value America executive Glenda Dorchak, a former IBM manager charged with streamlining the overgrown company and improving its delivery system.

Dorchak acted fast: She slashed the company's staff and whittled down its product lines to computer hardware, electronics and office supplies. Some of the moves worked. By all accounts, Value America improved its back-end support system, which was once so shoddy that the company had pallets of returned merchandise scattered around Charlottsville. But Value America couldn't come up with a marketing plan to lure jaded customers back to its site. And aside from a $30 million infusion in May from Smith, FedEx and Vulcan Ventures among others, Dorchak's mission to raise critically needed capital bore little fruit.

"The management for Value America speaks for itself," Smith said in a statement. Savoy didn't return telephone calls seeking comment, nor did Value America return telephone calls and e-mail messages seeking comment for this story.

By early August, things had turned desperate. Value America shuttered its online retail operation and tersely announced that it had filed for bankruptcy and would concentrate on hawking its back-end infrastructure of order fulfillment and payment systems to other e-commerce companies. That may be wishful thinking. Former Value America employees say that the technical support staff that built that infrastructure has either quit or was let go.

In a statement issued after the company shut down its site, Dorchak didn't sound very enthusiastic about the future. "The decision to shut down our Internet retailing business was difficult," she said. "Despite tremendous efforts on the part of our employees and the loyalty of our vendors and customers, it has become apparent that the prospect for near-term profitability of a company engaged exclusively in the retail side of the electronic commerce industry is not assured."

Winn's original vision looked good on paper. But many of Value America's vendors weren't geared to ship just one computer or cheesecake, and naturally gave individual orders a low priority. Customers shunned the Web site after encountering billing and fulfillment errors. Ironically, computer hardware proved to be one of the most reliable product lines because it was often shipped by middlemen resellers.

In the past year, Value America's business practices have been investigated by both the Federal Trade Commission and the Marin County, Calif., district attorney's office, and the company also has been hit with shareholder class-action lawsuits. In June, the company settled FTC charges of deceptive advertising related to computer hardware sales.

Value America is fighting its creditors in a Lynchburg, Va., federal bankruptcy court so that it can survive in truncated form or sell off its assets. Value America's creditors include local utility companies and staffing firm InService America, which says Value America owes it $100,000 in employee compensation.

On the Web site, a short message declares that retail operations have closed, and that orders that were not shipped by Aug. 11 won't be fulfilled.

The Nasdaq has suspended Value America's shares, pending a request for "additional information" from the company. By Aug. 11, the shares were trading at around 70 cents, down from a high of $74 on the first day of Value America's April 1999 initial public offering.

The timing of Value America's Aug. 11 filing wasn't random: The company had been scheduled to unveil on Aug. 14 what former employees say are disastrous second-quarter sales figures. Now that it has filed for bankruptcy, those numbers may never see the light of day.

Value America showed early promise, but stumbled plenty in its four years.

Feb. 1998: Value America, founded in 1996 in Nevada, opens its virtual doors in Charlottesville, Va.

Sept. 1998: Announces delay in planned IPO.

Nov. 1998: Founder Craig Winn hires Glenda Dorchak away from IBM to head the company's sales and marketing efforts.

Jan. 1999: Files for IPO.

April 1999: IPO; company shares hit high of $74 on first day of trading.

May 1999: Announces 1999 first-quarter revenues of $28 million, up from $2.2 million in the first quarter of 1998; becomes an "authorized dealer" of Compaq computers.

June 1999: Fred Smith and Bill Savoy join the company's board of directors.

Nov. 1999: Dorchak becomes CEO, Winn resigns as chairman of board.

Dec. 1999: Announces a 47 percent staff reduction, cutting about 300 positions.

Feb. 2000: Winn resigns from board of directors.

March 2000: Meets with Cendant in a vain attempt to raise additional capital.

May 2000: Announces additional $30 million investment from Smith, Savoy and others; Dorchak becomes chairman of the board of directors.

Aug. 2000: Files for Chapter 11 bankruptcy, shutters retail operations and fires 185 employees. Nasdaq suspends share trading.

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