July 22, 1999 Corrected

InterNOT Companies
by Yi-Hsin Chang (TMF Puck)

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What's Here

  • Introduction
  • AT&T & Broadband
  • Pharmaceutical Unrest
  • Online Financial Svcs.
  • Internet Stocks
  • InterNOT Stocks
  • See You Later, CEOs
  • Big Winners
  • Big Losers
  • Market Returns
  • Fool Portfolio Returns
  • With the ongoing proliferation of upstart Internet ventures, it's not surprising that some of these companies have shaky business models and that some are simply weak in light of the competition. After all, as in any industry, not all companies can succeed; many will fall by the wayside, and some will likely suffer a painful demise. Here we offer a review of companies we call "InterNOT" companies -- companies we believe aren't likely to dominate or even leave much of a mark on the Internet.

    Zapata Corp. (NYSE: ZAP)
    1998 Revenues: $133.6 million
    1998 Earnings: $70 million (before charges)
    The Lowdown: Don't be fooled by the revenue and income figures, which are largely unrelated to the Internet. In fact, this oil-and-gas-company-turned-marine-protein-producer is no Internet business. You might recall that the company made an unsolicited and laughable bid to acquire Excite last May (way before @Home made its offer), which, of course, was rebuked. So instead, Zapata set its sights on other smaller Internet companies and acquired the nearly defunct operations of online magazines Word and Charged from Icon CMT. Then Zapata decided to bag its so-called Internet strategy, only to reverse course again at the end of last year. It's enough to leave your head spinning. Let's face it: fish oil and the Internet just don't mix.

    K-tel International (Nasdaq: KTEL)
    1998 Revenues: $85.6 million
    1998 Earnings: Loss of $2.4 million (before charges)
    The Lowdown: As a rule, it's good to stay away from companies that are in danger of being delisted from the national market by Nasdaq. Last October, K-tel received a warning letter saying that the company didn't meet Nasdaq's $4 million tangible net assets requirement. A slew of shareholder lawsuits then followed, alleging that the company and certain of its executives and directors artificially inflated the company's stock price by issuing "false and misleading" statements concealing the Nasdaq warning. Shareholder lawsuits aside, K-tel's website itself leaves much to be desired. Not only does it display cheesy '70s-looking logos, it features an odd mish-mash of offerings -- I mean, music, customized CDs, and videos can be thrown together in the same store, but auctions would be better organized elsewhere, as would "As Seen on TV" products such as the Veg-O-Matic, Bacon Krisper, and Kleen Silver. Like Zapata, K-tel isn't much of an Internet business.

    Books-A-Million (Nasdaq: BAMM)
    1998 Revenues: $347.9 million
    1998 Earnings: $4.5 million
    The Lowdown: It's not that Books-A-Million isn't a decent bricks-and-mortar enterprise, it's just that it qualifies as an InterNOT company, not an Internet company. The company saw its shares soar to a 52-week high of $47 after last November's announcement of the launch of an improved website. The stock now trades at around $12. Certainly, the company scored a coup by winning a deal to be the exclusive book seller on mega-discounter Wal-Mart's website, but Books-A-Million has a long way to go before attaining heavyweight status among Internet players.

    Evans Systems (Nasdaq: EVSI)
    1998 Revenues: $104.1 million
    1998 Earnings: Loss of $3.3 million (before charges)
    The Lowdown: This is yet another example of a non-Internet company looking for a "get rich" shortcut to the World Wide Web. The company is primarily involved in selling gasoline and operating convenience stores, but it grabbed some headlines in April when it announced plans to unveil its "Internet marketing program" on July 1. The company then said it would acquire A Free Gift.com, which it wants to use as part of a "reverse marketing" strategy aimed at driving traditional retail customers online by distributing flyers at convenience stores. I'm not sure how this "reverse marketing" strategy is supposed to work or if it will work. I do know that Evans Systems later filed to restate earnings for the past five quarters, causing its stock to plunge and drawing a flurry of class-action lawsuits. The company was featured as a Daily Double in May and a Daily Trouble in June. 'Nuff said.

    CustomTracks Corp. (Nasdaq: CUST)
    1998 Revenues: $0
    1998 Earnings: Loss of $1.5 million (from continuing operations)
    The Lowdown: This Dallas-based company originally sold off its Electronic Security (Cardkey), Interactive Data, and Transportation Systems groups and changed its name to CustomTracks from Amtech to focus on selling customized music online. But the company ran into problems getting rights to distribute music and is now developing what it calls the ZixIt Digital Signature and encryption technology designed to create products such as a secure Internet-messaging system and ZixCharge, an Internet transaction system. It's still early for this revamped company, and therefore pretty risky for the faint at heart.

    ImaginOn (Nasdaq: IMON)
    1998 Revenues: $0
    1998 Earnings: Loss of $3.5 million
    The Lowdown: Formerly a sporting goods distributor, that merged into a software startup -- need I say more? -- ImaginOn (previously California Pro Sports) went from hawking in-line skates to producing and selling computer software. Although the company's management is experienced in software and was not involved in the sporting goods company, as a rule, the idea of a reverse shell company generally throws up a red flag to investors. Its products include WebZinger, a Web research assistant the company calls a "supra-search engine''; sellONstream, an e-commerce software solution; and iNow, an Internet service provider serving the San Francisco Bay area. I'm sorry, but I'm a little wary of a company that puts out a press release headlined "ImaginOn Strikes E-Commerce Gold for Trashy Lingerie, Inc." And the company's website needs work -- especially for an Internet software firm. ImaginOn shares, which have reached as high as $15 1/4 and as low as $0.40, now trade around $3 a pop.

    eMeringue (FOOL: HAFD)
    1998 Revenues: $11.3 million (doubtful)
    1998 Earnings: Loss of $89.5 million
    The Lowdown: The Motley Fool took this fluffy online seller of meringues public on April 1 with the Gardner brothers calling it "the Ultimate Rule Breaker... a technological force that is rapidly changing how food is served over the Internet." eMeringue was priced at $22 a share, double the expected price of $11, and opened at $84. By 11:00 a.m., the company declared a 3-for-1 stock split, and around noon, the company initiated a hostile bid to acquire rival Cyber Crust. Before the day was out, eMeringue was hit with allegations of food poisoning and fraudulent accounting practices, and its CEO was arrested for hijacking a cruise ship. The stock closed at $0.25 a share, following a 1-for-5 reverse stock split. I had the misfortune of interviewing Larry McCloskey, the CEO of eMeringue, and came to the conclusion that he's a nitwit and his company is a complete joke.

    Next -- CEOs Who've Hit the Road