PurchasePro

PurchasePro was a business-to-business Internet startup founded in Las Vegas in 1997 by Charles E. Johnson Jr. Its original proposition was to help hotels, casinos, and other hospitality buyers combine their purchasing power through an online exchange. The company focused on routine operating supplies such as towels, linens, soap, and related goods, arguing that Internet-based procurement could reduce costs and make purchasing faster and more efficient. Its commercial model combined recurring and transactional revenue. Buyers and vendors were charged a flat monthly fee to use the platform, while PurchasePro also took commissions on completed sales. The company sought to build scale by attracting a large network of suppliers and by forming marketing and distribution relationships with established Internet and business-services companies. During 1999 and 2000, it entered agreements involving companies including AOL and Office Depot. It also pursued preferred arrangements with vendors and other partners, sometimes exchanging stock or services for commercial commitments. PurchasePro went public on NASDAQ in September 1999. Its share price doubled on the first day of trading, and investor enthusiasm around Internet commerce helped the company reach a reported peak market capitalization of more than $4 billion. At its height, the business employed approximately 1,000 people and claimed more than 140,000 vendors, most of them small or medium-sized businesses. The scale and valuation reflected the late-1990s market enthusiasm for online marketplaces rather than sustained profitability; PurchasePro never achieved profitability. The underlying business model weakened as customers discovered that online purchases were not always cheaper or more convenient than traditional wholesale procurement. The company discounted subscriptions heavily, operated with low margins, and made deals that generated limited cash returns. Some preferred arrangements involved stock transfers or free services, creating losses and complicating the company’s financial reporting. In April 2001, PurchasePro warned that it would miss revenue projections, causing its stock to fall sharply and prompting investors to question earlier financial statements and revenue claims. Johnson was forced to resign as chief executive by the board in May 2001. PurchasePro’s commercial failure became intertwined with a major accounting and securities-fraud investigation. In 2008, a federal court found that PurchasePro had conspired with AOL executives to overstate revenue connected with software licenses sold by AOL for PurchasePro. The arrangement allegedly failed to disclose that many license transactions were tied to commitments to purchase products from the licensees, making the transactions appear more valuable and more cash-generative than they were. The company was also found to have backdated and forged contracts to support revenue projections. The alleged practices overstated revenue by 37 percent in the first quarter of 2001 and helped sustain investor confidence in the company’s reported performance. AOL and several of its executives entered settlements, including a reported $210 million payment, to resolve related criminal and civil exposure. Johnson and other PurchasePro executives faced stock-fraud charges. Johnson’s first trial ended in a mistrial after his attorneys withdrew when they discovered that he had forged email messages intended to support his defense. His second trial ended in November 2008 with convictions for stock fraud and obstruction of justice, followed by an eight-year prison sentence. PurchasePro filed for bankruptcy in September 2002, and its assets were sold for $2.5 million in January 2003. The company is now defunct and is principally remembered as a failed electronic-procurement venture and as a case study in Internet-era accounting misconduct.

PurchasePro emerged in 1997 in Las Vegas as an early electronic-procurement venture founded by Charles E. Johnson Jr. The company targeted hotels, casinos, and related businesses whose purchasing operations involved large volumes of standardized supplies. Its proposed online exchange would allow buyers to aggregate demand and connect directly with vendors for products including linens, towels, soap, and other routine operating goods. The company charged users a fixed monthly fee and collected commissions on transactions. This model was intended to combine predictable subscription revenue with growth in marketplace activity. PurchasePro expanded rapidly during the late-1990s Internet boom, building a substantial vendor network and signing marketing or distribution agreements with companies such as AOL and Office Depot. It also promoted preferred commercial arrangements designed to expand participation and strengthen the marketplace. PurchasePro became a public company on NASDAQ in September 1999. Its stock doubled on the first trading day, and the company’s valuation increased dramatically as investors rewarded Internet marketplaces with high growth expectations. At its reported peak, PurchasePro had approximately 1,000 employees, more than 140,000 primarily small and medium-sized vendors, and a market capitalization exceeding $4 billion. The company’s operating economics did not support that valuation. PurchasePro was never profitable. It offered heavily discounted subscription fees, earned low margins, and entered agreements in which stock or partner services substituted for cash. Customers also found that Internet purchasing could be more expensive or less convenient than established wholesale channels. These weaknesses limited repeat economic value despite the size of the network. In April 2001, the company disclosed that it would miss revenue expectations. Its stock declined rapidly, and investors began examining whether previous revenue reports accurately represented cash-generating sales. The company’s board removed founder and chief executive Charles E. Johnson Jr. in May 2001. PurchasePro later entered bankruptcy in September 2002. Its remaining assets were sold for $2.5 million in January 2003. The company’s collapse was followed by extensive legal proceedings concerning its accounting practices and relationships with AOL. In 2008, a United States court found that PurchasePro had worked with AOL executives to overstate revenue from software licenses sold by AOL on PurchasePro’s behalf. Many of those apparent license sales were connected to commitments by licensees to buy products, a fact that allegedly was not properly disclosed. The arrangement made the transactions appear to be genuine, paid license sales even where only a small portion of customers actually paid for the licenses. The proceedings also involved allegations that PurchasePro backdated and forged contracts to satisfy revenue targets. The reported result was a 37 percent overstatement of revenue in the first quarter of 2001. AOL and several of its executives reached settlements, including a reported $210 million payment, avoiding criminal and civil prosecution connected with the matter. Johnson faced stock-fraud charges. His first prosecution ended in a mistrial after his defense attorneys resigned when they discovered that he had forged email messages intended to be introduced as evidence. At a second trial in November 2008, Johnson was convicted of stock fraud and obstruction of justice and sentenced to eight years in prison. PurchasePro’s history therefore combines the rapid expansion and speculative valuation of the first Internet boom with the operational limitations, accounting failures, and governance breakdowns that contributed to its bankruptcy.

• 2008

  Accounting-fraud findings and founder conviction

  [1]PurchaseProen.wikipedia.org

  A court found accounting misconduct involving PurchasePro and AOL executives, while Johnson was convicted of stock fraud and obstruction of justice.

• 2003

  Assets sold

  [1]PurchaseProen.wikipedia.org

  PurchasePro’s assets were sold for $2.5 million in January.

• 2002

  Bankruptcy filing

  [1]PurchaseProen.wikipedia.org

  PurchasePro filed for bankruptcy in September after failing to become profitable.

• 2001

  Revenue outlook deteriorates

  [1]PurchaseProen.wikipedia.org

  PurchasePro announced that it would miss revenue predictions, leading to a sharp stock decline and increased questions about its accounting.

• 2001

  Founder leaves the company

  [1]PurchaseProen.wikipedia.org

  The board forced founder and chief executive Charles E. Johnson Jr. to resign in May.

• 1999

  PurchasePro lists on NASDAQ

  [1]PurchaseProen.wikipedia.org

  The company went public in September 1999, and its stock price doubled during its first day of trading.

• 1997

  PurchasePro is founded in Las Vegas

  [1]PurchaseProen.wikipedia.org

  Charles E. Johnson Jr. founded PurchasePro as an online business-to-business purchasing exchange intended initially for hotels and casinos.

PurchasePro positioned itself as an online purchasing exchange for hotels, casinos, and other businesses, promising that pooled buying power and electronic transactions would reduce procurement costs and improve purchasing speed.

• Business-to-business procurement platform · 1997

  PurchasePro online exchange

  PurchasePro’s central offering was an online marketplace connecting business purchasers with vendors. It was designed especially for hotels, casinos, and related hospitality operators, allowing them to source routine supplies such as towels, linens, soap, and other operating goods. The company charged monthly access fees and commissions on sales, promoting pooled purchasing power as a way to reduce costs and accelerate procurement.

• 2008

  PurchasePro-AOL revenue overstatement case

  A United States court found that PurchasePro had conspired with AOL executives to overstate revenue from software-license transactions. The transactions allegedly concealed that many license sales were tied to commitments to purchase products, while PurchasePro also backdated and forged contracts to support revenue projections. Revenue was reported as overstated by 37 percent in the first quarter of 2001.

  Source

• 2008

  Founder convicted of stock fraud and obstruction

  Charles E. Johnson Jr. was convicted in his second trial of stock fraud and obstruction of justice and sentenced to eight years in prison. His first trial had ended in a mistrial after defense lawyers withdrew upon discovering that he had forged email messages intended to support his case.

  Source

Read more

• 1999Internet and business-services marketing partnerships

  United States

  PurchasePro entered marketing agreements with large Internet companies and business-service providers, including AOL and Office Depot, to increase awareness and participation in its electronic procurement model.

  Outcome. The partnerships supported rapid expansion and investor enthusiasm but did not make the company profitable.

  Source

• 2002

  File for bankruptcyOther

  Background

  PurchasePro remained unprofitable, its stock had collapsed after the 2001 revenue warning, and confidence in its business and accounting had deteriorated.

  Action taken

  The company filed for bankruptcy in September 2002.

  Aftermath

  Its assets were sold for $2.5 million in January 2003, and the operating business ceased to exist.

  Asset sale proceeds. $2.5 million (January 2003)

  Source

• 1999

  Expand through preferred deals and strategic partnershipsStrategy

  Background

  PurchasePro needed to increase marketplace scale and attract both buyers and suppliers during the rapid growth of Internet commerce.

  Action taken

  The company pursued preferred arrangements with vendors and entered marketing agreements involving AOL, Office Depot, and other business-service providers. Some arrangements involved stock or free services rather than straightforward cash payments.

  Aftermath

  The arrangements helped expand the network but contributed to losses and later scrutiny of how transactions and revenue were recorded.

  Source

• 1997

  Launch an online hospitality procurement exchangeStrategy

  Background

  Hotels and casinos purchased large volumes of standardized operating supplies, creating an opportunity to aggregate demand through an electronic marketplace.

  Action taken

  PurchasePro built a business-to-business exchange connecting hospitality buyers with vendors and monetized the platform through monthly fees and transaction commissions.

  Aftermath

  The model attracted a large vendor network but failed to achieve profitability because of discounted fees, low margins, and limited customer savings.

  Source

1. 1PurchaseProen.wikipedia.org