Only three months ago, Critical Path appeared close to collapse. With its reputation in ruin after an accounting scandal, its shares trading as low as US$0.24 and a debt of US$300 million, the once highflying provider of corporate e-mail systems appeared ready to join the many remains of failed companies strewn along the Internet's trail of busted dreams.
But Critical Path may be on the comeback path. Under a new management team, the company has quietly settled more than 50 shareholder lawsuits, brought in well-respected financiers and nursed its balance sheet closer to health.
The leaders of the revival are David Hayden, the founder and executive chairman, and William McGlashan, a venture capitalist and turnaround specialist who accepted an interim executive role shortly after the scandal broke in February last year. McGlashan was to shed the term ``interim'' from his title yesterday, when the company announces that it has named him full-time chief executive.
"We made it through the valley of the shadow of death," McGlashan, 38, said in a recent interview at the company's headquarters in the South of Market neighborhood of San Francisco, which was once filled with dotcom companies.
Critical Path's quarters, a four-story converted warehouse with exposed brick walls and wood beams, will soon be part of the company's dark history. The company leased the building -- for US$47 a square foot -- only a month before the accounting irregularities became known. Now, as part of its efforts to reduce operating costs to less than US$30 million a quarter, half the rate of last spring, Critical Path will soon move to the sixth floor of a more staid corporate building nearby -- for US$35 a square foot, reducing its rent by US$1.6 million a year.
The move is just one of many ways the company's executives have tried to correct the management mistakes of the past two years. Since March, Critical Path has shed half its work force as it has withdrawn from weak businesses, most of which the company entered through a dozen acquisitions that pulled it further and further from its original vision: running e-mail systems and large data directories for corporations.
"What 2001 was about was re-establishing the company's financial credibility and balance sheet," said William Ford, a new member of the Critical Path board. "This coming year is going to be about growth and market leadership."
But before that happens, Critical Path must continue to convince customers and investors that its business model is strong. More important, it must win back the trust it so badly damaged.
Once a Wall Street darling, with its stock soaring as high as US$119.50 in March 2000, Critical Path screeched to a halt last January when it widely missed its earnings projections. Instead of the profit long promised by the company's management, Critical Path posted a loss of US$0.16 a share.
But the bombshell hit two weeks later. On Feb. 2, the company suspended two top executives and started an internal investigation into its financial practices after questions arose about the way executives reported revenue from several sales contracts. The Securities and Exchange Commission began an investigation, the stock plunged, and Wall Street analysts and investors began accusing Critical Path of deliberately cooking its books under heavy pressure to turn a profit.
Critical Path was eventually forced to restate its financial results from the third and fourth quarters of 2000, lowering its annual revenue 13 percent and widening its loss more than a third. The board forced out the chief executive, the president and the vice president for worldwide sales, then dismissed eight members of the sales team.
Citing the SEC investigation, the company would not describe the questionable transactions. But McGlashan said they were limited to three deals. Referring to the previous management, he said: "For three deals, you went through this as a company? You cheated for three lousy deals?"
The accounting debacle struck as the economy worsened, leaving Critical Path scrambling to reassure existing and potential customers that it would survive. Hayden -- who said he was on a yearlong sabbatical from the company when the scandal occurred -- and McGlashan spent much of last summer visiting customers in the US, Europe and Asia. During the tour they offered confidential information about the company's prospects for financing in exchange for agreements not to trade Critical Path's stock on the insider information.
Some companies balked at the sales pitch, unwilling to become involved with a company sitting under a black cloud. But others, including Morgan Stanley, DuPont and the national postal services of Italy and Germany, signed on.
DuPont uses Lotus Notes for its corporate Web-based e-mail, but hired Critical Path to operate a less sophisticated, and less expensive system for 7,000 workers in some factories and remote offices. "Obviously, one of the concerns we had was, `Will they still be here tomorrow?'" said Irvin Lipp, a spokesman for DuPont. "They answered that question, which is why we went with them."
While software sales for the first nine months of last year fell 40 percent, to about US$22 million, from the year before, Critical Path alleviated some doubts about its survival in November. First it announced that it would pay US$17.5 million and issue warrants on 850,000 shares to settle shareholder lawsuits. The next day, the company said that investors led by General Atlantic Partners, a venture capital firm, had retired US$65 million in Critical Path's debt and invested US$30 million for a 26 percent stake, bringing the debt down to US$38 million.
Ford, a partner with General Atlantic, and Raul Fernandez, chief executive of Dimension Data North America, joined the Critical Path board, restoring more credibility to the turnaround efforts. The stock price has increased moderately with the company's fortunes, closing up US$0.20 cents to US$3.80 on Friday.
Critical Path has "done a remarkable pullback from the abyss," said Matt Cain, an analyst with the Meta Group, a research firm. "It's not necessarily out of danger, but it has been, overall, a remarkable comeback."
But the sting of betrayal will not go away easily for many investors. All 17 Wall Street analysts who followed the company early last year have dropped their coverage. One mutual fund manager who was burned by the falling stock price said he had no confidence in the company; he plans to sell his shares as soon as they rebound enough to offset some of his losses.
"In the end, everything they said about what they had appeared to be false," said the manager, who spoke on the condition that his name not be used. "Every once in a while you get skunked in a fraud, and we got skunked."
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