Part 2......................
SHORT OF ADS
For an industry that is centred on advertising, SI appears to be
lacking in that regard, in spite of its claims to primacy in stock
chat forums. For the year to Dec. 31, only $1 out of every $6
of SI's revenues came from the coveted ranks of ad revenues.
A total of $479,410 came from subscriber user fees while a
mere $78,681 in revenues resulted from ads in fiscal 1997.
A visit to the SI site now indicates a bigger push towards
advertising, with an ad-information link that boasts
remarkable viewership demographics. Among the highlights:
62 per cent of SI users (as opposed to members) have an
on-line trading account, 29 per cent are professionals, 80 per
cent travel at least once a month, while the median income
range is between $80,000 and $89,000.
go2net was established in February 1996 by Mr. Horowitz
and John Keister - six months after SI's founding by the Dryer
brothers.
In contrast to go2net's self-promotional hoopla, its balance
sheet does not present the kind of financial picture that usually
excites the market. In the year to Sept. 30, 1997 - the most
recent full year of reporting - go2net posted revenues of
$254,389 and a net loss of $1.7-million. In its first two years
of operation, to March 31, 1998, go2net generated a total of
$1.18-million in revenues.
Administration is go2net's biggest expense. At Sept. 30, 1997,
the company boasted 26 full-time employees and 10
independent contractors. (By May 1998 it numbered 43
full-time employees.)
In an Aug. 14, 1998 Form 10-Q disclosure, the combined
go2net-SI revenues for the nine months to June 1998 totalled
$2.8-million (separated as $1.8-million for go2net and
$1-million for SI). Net loss for the same period totalled
$2.1-million (a loss of $2.4-million for go2net and income of
$290,000 for SI).
As of June 30, 1998, go2net's accumulated deficit stood at
$4.5-million and the company warns that further deficits can
be expected. In its Aug. 14, 1998 filing, go2net states: "The
company currently intends to increase substantially its
operating expenses in order to, among other things, expand and
improve its Internet operations, fund increased advertising and
marketing efforts, expand and improve its Internet user support
capabilities and develop new Internet technologies,
applications and other products and services."
With around $10-million in cash remaining, go2net, like many
startups, may be in a race against time to secure convincing
market share and advertising revenues before its available
capital runs dry.
It was against this backdrop that investors greeted go2net with
rapture when it completed its IPO and listed on the Nasdaq
SmallCap Market in April 1997 at a price of $8 a share (it
switched to the Nasdaq National Market on Oct. 1, 1998).
With an initial 1.6 million shares issued, plus 240,000 shares
issued the next month, also at $8, the company took in around
$12.8-million after offering costs.
From $8, the stock soared, apparently fuelled by the euphoric
sentiment toward practically all Internet companies, peaking at
$39 in April 1998 soon after the SI merger was announced. It
has since retreated in line with a somewhat cooler Internet
market and at $21 is capitalized at just over $124-million.
INTERESTS POOLED
Immediately following the share transfer, the former
shareholders of SI would then hold 21.5 per cent of the issued
and outstanding shares of go2net. SI and its three employees
were to relocate into go2net's downtown Seattle offices.
As part of the purchase agreement, the Dryers plus SI
webmistress McKinney each signed three-year employment
agreements with go2net. The agreements ensured these key
personnel remained on board to serve the amalgamated
company during and after the transition.
go2net's financial adviser on the SI merger was regional
brokerage and investment banker Tucker Anthony Inc. of
Boston. Tucker Anthony is a member of the New York Stock
Exchange, the American Stock Exchange, and the NASD. The
brokerage's brief was to deliver a "fairness opinion"
regarding the terms of the proposed buyout.
According to Tucker Anthony, SI was fairly priced at
$37-million even though it is a company with revenues of only
around half a million dollars. "It is our opinion that the
consideration to be paid by the company pursuant to the
agreement is fair to the company's stockholders, from a
financial point of view, as of the date hereof," the brokerage
stated to the board in its April 22, 1998 opinion.
Based on the above valuation analysis, including historical
trading prices plus a number of other yard sticks that indicated
profitable "synergies", Tucker Anthony blessed the merger,
and was remunerated $125,000 for its efforts.
Tucker Anthony's brief did not include interviewing
management of the target firm - SI.
EXPERIENCE
go2net's three top officers are notably lacking in formal
technical expertise and experience. Only one has a formal
background in computer training. In addition, none of go2net's
senior management has any experience in selling advertising
on the Internet - or any other medium.
go2net's president Horowitz, 32, moved to Seattle after
serving as investor relations officer with his family's
company, the New York-based apparel supplier Active
Apparel Group. (His uncle, George Horowitz, is Active's
CEO.) Earlier, between 1992 and 1994, Mr. Horowitz was
Active's chief financial officer. Active, with annual revenues
of around $16-million, is listed on Nasdaq, where it trades at
a little under $1.
Mr. Horowitz does not appear to have any formal computer
training or experience working in the technology sector. In
March 1996, Mr. Horowitz established Xanthus Capital, a
Seattle-based merchant bank that focuses primarily on
developing companies in "emerging growth industries or
special situations." According to go2net's disclosures, Mr.
Horowitz's formal education includes a bachelor of arts in
economics from Columbia University's Columbia College, in
1988.
Mr. Horowitz owns 1.62-million shares of go2net. A May
1998 disclosure statement indicated management owned at
least 2.2 million shares of the company, which now has 5.9
million shares outstanding.
Cofounder John Keister, 31, go2net's chief operating officer
since its establishment, has some technical experience. After
graduating from Occidental College in 1989, Mr. Keister says
he managed the European marketing operations for a White
Plains, N.Y.-based export management company between
1992 and 1994. That year he made the leap to president, CEO
and director of Seattle-based software developer ViewCom
Technology International. Following that post he helped
establish go2net in 1996.
go2net's chief technology officer, Paul Phillips, 25, has a
technical background but not a great deal of experience. After
graduating from the University of Southern California at San
Diego in 1996 with a bachelor degree in computer science, he
stepped in as go2net's vice-president of technology in July that
year. Twelve months later he was named to his current post.
BIG-GUN RIVALS
Perhaps more worrying for those who back smaller players
such as go2net is that they exist in a market dominated by some
extremely large players with the resources to preserve and
even extend their domination. Internet companies with which
go2net compete include Microsoft, America Online, MGM
Interactive, Compuserve, Prodigy, Netscape Communications,
Time Warner, Yahoo!, Sportsline, Red Herring Direct, Wall
Street Journal Online and Wired Ventures. A go2net filing
indicates the company believes "many, if not all, of these
corporations also offer a wider range of products and
services" than its own.
On the other side are smaller start-ups that can launch
websites from basement operations with very little capital.
Raging Bull is one such example, which apparently came from
nowhere to a stock-discussion player in around a year by
word of mouth. (Raging Bull was established in September
1997 as a part-time hobby for three New Jersey college
students; full-time operations began in June, when its traffic
stood at a humble 100 unique visitors a day. Traffic now is a
reported 15,000 unique visitors a day.)
Further, a competent computer programmer can custom build
the heart of such a financial-information website - its
discussion forum - in a week or two. Give it a design, add
some news feeds and quotes, and the Internet's latest financial
attraction is ready to roll out on the information superhighway.
Another note of caution can be added about the Internet itself
as a medium that must compete with more traditional
advertising media. The Internet industry and its supporters say
the medium should ultimately be able to secure between three
and four per cent of the total U.S. ad revenue stream of
$100-billion, or between $3-billion and $4-billion.
While that may prove true, many others say such figures will
be difficult to maintain in a market that has so far disappointed
those who believed people would easily take to shopping by
mouse in virtual shopping malls. Consumers generally have
proved resistant to consuming via the computer except for
speciality items. Similarly, advertising on the Internet may be
limited to such speciality items as sales of compact discs,
rubber sunglasses, and (currently found on Yahoo!), an on-line
auction of Courtney Love's guitar.
In a disclosure, go2net itself concedes the acceptance of the
Internet among advertisers and advertising agencies is "highly
uncertain." Many such organizations have interests in
traditional advertising methods and have a built-in reluctance
to even try the new medium, it adds.
Further, many Internet users quickly tire of the flashing
advertising attractions of consumer-products companies
hawking their wares on the computer screen. As a result, many
Internet users instinctively block out these non-essential
viewings.
In response, website hosts are becoming more and more
creative in getting their ads onto computer screens. On Oct. 5,
go2net announced a deal with Conducent Techologies, Inc.
that will see the website host distribute familiar banner ads
for placement within financial applications for PCs. Called
"beyond the browser," the technology is said to be the first
time ads will appear incorporated into Windows applications.
Annoying ads will appear on a user's screen before, during
and after the application is used. The user can then click on the
banner to take him or her to the advertiser's website.
If all that is not enough to concern investors, consider that for
the year to Sept. 30, 1997, around 31 per cent of go2net's
revenues were generated from non-cash barter transactions.
The irony here is that many of these barter transactions are ad
swaps between competitors such as Yahoo!.
In a September report on U.S. Internet IPOs, the London-based
Economist newsmagazine expresses scepticism about the trend
in companies being launched without adequate preparation.
The Economist recalls a Doonsbury cartoon in which an
Internet entrepreneur explains to his astonished daughter that
profitability is for wimps. "It means your business plan wasn't
aggressive enough," he tells her.
The magazine sees more than a grain of truth in the man's
irony. "A sound business model, strong market position, good
management and a low cost of attracting and keeping
customers might sound like the least that firms should offer
potential investors," it comments. "But it is a tall order for
most of the dozen or so other Internet start-ups preparing for
an offering."
(c) Copyright 1998 Canjex Publishing Ltd.
canada-stockwatch.com
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