Turmoil just beginning for PurchasePro

Kevin Ferguson

Tuesday, May 22, 2001 | 11:06 a.m.

The day after its founder was either fired or quit, a new round of turmoil erupted at Las Vegas technology company PurchasePro today when it restated its first quarter loss further downward.

The earnings, even before the restatement, had been an extreme disappointment and caused PurchasePro to be sued by numerous law firms seeking to represent shareholder.

PurchasePro said this morning its first quarter net loss was $32.4 million, or 47 cents per share. On April 26, the company had reported a loss of $18.1 million, or 26 cents a share. Revenue restated today was $17.1 million -- down from the originally reported $29.8 million.

A spokesman today declined comment when asked why the earnings were restated.

The April 26 earnings report came in far below average analyst estimates of a profit of 8 cents per share, which was prompted by then-Chief Executive Charles Johnson Jr.'s touting of expected revenues of $42 million for the quarter, ended March 31.

Accounting problems and issues, largely due to stock warrant deals with PurchasePro's strategic partners, could lead to an investigation by the Securities and Exchange Commission, said one analyst.

"I think there is a strong chance there will be an SEC investigation over these warrants, because (the SEC) took FreeMarkets to task over the same issue," said George Santana, an analyst with Wedbush Morgan Securities.

FreeMarkets, a business-to-business auctioneer, was ordered to restate its earnings because of warrants deal it had with a partner.

PurchasePro and AOL Time Warner have similar warrant deals.

PurchasePro, which employs a staff of 500-plus, develops marketplaces for companies to buy and sell products online.

"If the SEC is driving PurchasePro to restate these earnings, then there's a possibility that it will (also) have to restate its fourth quarter earnings," Santana said.

Financial news site The Street.com reported that Johnson was fired following a Sunday night emergency meeting by the PurchasePro board. Monday morning, the company issued a statement that said that Johnson "relinquished his executive authority" to a more "seasoned operational team."

PurchasePro officials aren't commenting on whether Johnson was fired, forced or out or left on his own.

Analysts say PurchasePro's necessity to restate its earnings probably led to the pressure for Johnson to leave the company he founded 4 1/2 years ago.

"I think that played a role. I think they knew they would have to restate earnings Sunday night (the night of the emergency board meeting)," said Pawan Malhotra, an analyst with SG Cowen Securities.

Johnson's departure leaves two executives and a new chairman heading the company. None of the three have any more than eight months of PurhasePro tenure. In addition, it also leaves a vacancy in the chief executive slot, which analysts say may take more than six months to fill.

Chief financial officer Richard Clemmer, 49, has been with the company barely long enough to organize his office. The former CFO of Quantum Corp. and Texas Instrument's Semiconductor Group came on board last week.

He is the company's fifth CFO during its brief history.

Shawn McGhee has served as the chief operating officer since November. The company added president to his title three months ago, with the departure of Christopher Carton. The company said the 42-year-old Carton retired.

Carton, a former executive of a country club in Johnson's native town of Lexington, Ky., had served as PurchasePro's president since its inception.

McGhee, 38, came from Home Depot, where he served as president of its North American operation.

R. Todd Bradley, who replaced Johnson on Monday as chairman, had just joined the PurchasePro board in December. Bradley is a former executive vice president at Gateway Inc.

When analyst Malhotra was asked if PurchasePro was going to seek an outsider to become the next chief executive, he offered a blunt response.

"I would hope so," he said. "Unless its Shawn McGhee. It's not going to be easy to recruit somebody with lawsuits that are hanging over them. Its going take a while. It's going to have to be somebody who sees the value in the company.

Analyst say Johnson's departure erases part of the company's credibility issues.

"I think from a fundamental basis, the company has some opportunity. McGhee and Clemmer can help the company," Malhotra added. "But for investors, (the executives) need to show some solid execution.

PurchasePro shares rose 39 cents Monday, closing at $2.97 on news of Johnson's departure. But this morning, its shares had lost that entire gain, trading at $2.57.

Some had speculated that the company had not named a new chief executive because it was hoping to sell itself.

Malhotra said potential bidders include AOL Time Warner, or service companies like Southwestern Bell or software companies like Computer Associates.

"AOL is the most likely candidate," Malhotra said.

AOL and PurchasePro have co-developed the Netscape Netbusiness Marketplace, designed to cross-market their business clients. "If AOL can generate the subscriber-revenue, it is better off taking 100 percent of that revenue. So it would definitely make sense for AOL to buy the company," Malhotra said.

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