Varsity Group Inc. had only been public a month when founder Eric J. Kuhn walked into a March 2000 board meeting with a doomsday declaration.
"Unless we make radical changes we're going to be out of business in six months," Kuhn told the assembled board members.
The Internet textbook seller had gone public at $10 a share, but by the end of the month it was trading at less than half that, with most of its $207 million market value wiped out.
Kuhn did not know it then, but Varsity Group's debut came at the peak of the Nasdaq Stock Market's composite index, which hit 5,060 three years ago today. As the market slid to its dramatic crash April 14, Varsity found itself rocketing down the same curve.
The company managed to transform itself and survive, unlike many of its Internet and technology brethren. While others were gobbled up by competitors or failed spectacularly, those that endured did so by taking dramatic action: They abandoned business models, hoarded cash and cut workforces to the bone.
The tech firms still standing are hobbled by business conditions that would have been unthinkable three years ago: Venture capital is scarce, business customers are not spending and the economic outlook remains uncertain. Industry analysts cautiously predict more consolidation in telecommunications, and there's still not much customer demand for software. But after the past three years, survival counts.
Founded as VarsityBooks.com in 1997, Kuhn's company initially sold discounted textbooks to college students. But it shifted to marketing to students through large companies. When that didn't work, Kuhn changed direction again, this time turning the company into a virtual bookstore for private high schools. Most of the firm's 200 employees were laid off as its stock price fell to 6 cents.
To save the firm, Kuhn said he had to "rebuild our airplane in midair."
"It was definitely scary in the context of the uncertainty," he said. But he said the metamorphosis is paying off. During its fiscal third quarter, Varsity Group reported a $2 million profit on $14 million in revenue, and it expects to report its first annual profit later this month.
But business never stands still. Now that Varsity Group has settled on a business model targeting private schools, it's attracting "deep-pocketed" competitors, Kuhn said.
One of the most surprising survivors of the past three years is MicroStrategy Corp. A classic highflier of the "new economy" with a stock price that topped out at $313, MicroStrategy suffered not just a loss, but a scandal. Just as the Internet bubble burst, the business software maker announced it had inflated its financial results for the previous three years. It settled Securities and Exchange Commission civil charges for $11 million and class-action lawsuits for $55 million.
And that was just the beginning. MicroStrategy's Internet-focused business plan was no longer in vogue, and the company restructured five times over the next two years. It eventually stripped down to its original focus of selling business software.
"We have obviously done a lot of work to turn around MicroStrategy," said Sanju K. Bansal, the company's executive vice president and chief operating officer.
The firm's survival plan included a more muted role for chief executive Michael J. Saylor. He had once represented the public face of the firm but is hardly seen in Washington social circles now.
"When they went public, they were just a software company. Then in 2000 they were a little of everything, and now they have come full circle and they are focused once again on just being a software vendor," said David M. Hilal, an analyst at Friedman Billings, Ramsey Group Inc. "They have changed their model a number of times and I think learned their lesson."
MicroStrategy's difficulties remain. The company reported a profit for the past four quarters, but three out of four were at least partially based on one-time gains. It has not been able to sell two money-losing units. And the software market remains troublesome, Hilal said; the company is struggling to attract customers.
Bansal sees the company's challenge as one of public relations.
"We have been a bit quiet, but now that we have our fiscal house in order we can begin to communicate more," he said. "Our challenge over the next year or two is to make sure people are broadly aware of us and that we get the message out."
The path for telecommunications companies has been much tougher. Almost all of the once well-regarded telecom companies are losing money, with the exception of Reston-based Nextel Communications Inc. Nextel, whose mobile phones with walkie-talkie features will soon see more competition, reported its third consecutive quarter of profitability last month. Bankers had told the company to go to bankruptcy court. Instead it focused on its business users, retired millions in debt, and avoided the expensive and unproven "third generation" technologies that cost competitors millions.
The gutsier telecom turnaround strategy belongs to McLean-based Primus Telecommunications Group Inc. Three years ago it had a spotty balance sheet: $1.2 billion in revenue, $1.3 billion in debt and about $300 million in cash.
"The advice we received at the time was to sit on your cash," said John F. DePodesta, co-founder and executive vice president.
The firm, which sells business and residential long-distance and Internet services, deemed that approach too passive, DePodesta said. So it launched a campaign to buy back its mountain of debt to reduce future interest payments.
"With the existing cash we had, we could survive for 18 months. If the world changed in 18 months and the capital markets opened again, we would be okay," DePodesta said. But if it remained difficult to raise capital, as it did, Primus would be a better investment with less debt. Primus also dumped its money-losing ventures, such as calling cards and Web design services, to concentrate on its core business, he said.
Since 2001, Primus has reduced its debt to $550 million, buying back most of it for 20 cents on the dollar, DePodesta said. But the company is not out of the woods; it lost $18.4 million (28 cents per share) on revenue of $267.6 million in the fourth quarter and had $104 million in cash as of Dec. 31.
Three years after the peak of the tech boom, the surviving companies hope their transformations can carry them until customers return, money starts to flow and the national economy bounces back.
Moving on requires leaving the past behind, Varsity Group's Kuhn said. His firm, like so many others, is not likely to return to the days of having 200 employees and a market capitalization of more than $200 million. But he said it doesn't need to.
"We don't need to have 50 people in the marketing department like we did in the old model," he said. "The focus now is executing on the model we created."