Anyone that may be remotely interested in ZULU, May want to read this.
March 25, 1998
Zulu-tek (OTC Bulletin Bound: NETZ)
3/25/98 close: $0.54
Zulu-tek: What's in a Name?
by Lynn N. Duke, staff writer
Internet advertising firm's insipid trademark
is consistent with company's varied history.
As Internet advertising takes off, the industry is ripe not only for wise investments,
but perilous ones as well. The Stock Detective has found one such stock that's
probably headed for the compost heap.
Zulu-tek (OTC Bulletin Board: NETZ) and its subsidiaries develop and sell
advertising for the Internet. It was a sleepy company until lately, when a series of
press releases, rumors and innuendo helped spike the stock.
Although Zulu-tek meets Stinky Stock criteria on several levels - numerous name
and industry changes, non-reporting to the SEC, excessive self-promotion - more
alarming are recent exchanges of stock and personnel between it and
Houston-based Enhanced Services Company Inc. (NASDAQ SmallCap: ESVS),
which repairs and upgrades computers and provides multi-media services. Add to
that the phantom presence of penny stock-vandal Pattinson Hayton, and the mix
gets a little rank.
In February, Enhanced Services was on the verge of being
delisted from the NASDAQ SmallCap Market for failure to
meet minimum equity requirements of $2 million. Within two
weeks, ESVS and Zulu-tek had put together a stock swap
that secured Enhanced Services' spot on NASDAQ.
According to documents filed with the U.S. Securities and
Exchange Commission, ESVS exchanged 220,000 shares
of its common stock and one million shares of preferred
stock for 12 million shares of Zulu-tek common stock and
one million shares of preferred stock held by NetVest
Capital Partners LP, a Delaware firm. This rescued ESVS
from being delisted, and gave Zulu-tek a new angle to pitch
in the market.
The companies' press releases were a little misleading on
this transaction. Without spelling out the terms of the stock
swap - that can only be found in ESVS's SEC filings - the companies started
crowing about a $50 million private placement that was due to commence in
mid-March that would "provide the financial strength to position the group as the
premier Internet solution provider," according to a March 9 press release.
Bob Smith, ESVS's CFO, said the private placement is still a ways off, and the
company's own SEC filings suggest it may never happen: "...no assurance can be
given that [ESVS] will be successful in arranging for this private placement," an 8K
filed March 6 said.
Perhaps even more interesting was Smith's reaction when told by a reporter that his
boss, Kevin Rogers, had been promoted to president and chief operating officer of
Zulu-tek.
Smith didn't know. Smith had only been told that Rogers was being promoted to
president and COO of Enhanced Services from his position as president and COO
of Laptop Solutions, an ESVS subsidiary. Smith was elevated to executive
vice-president and will report to Rogers, who is now working out of Zulu-tek's
California office. Rogers did not return phone calls.
Zulu-tek is the fourth incarnation of a Utah-based company that started out in 1985
as Premium Inc. Two years later, it changed its name to Star Medical Corp. and
claimed to work in drug and alcohol rehab until last August, when it became
NetMaster Group. Star Medical had no Internet background but it bought out
echoMedia, a small Rhode Island-based firm that was producing advertising for
computer software. In January, NetMaster changed its name again, to Zulu-tek, and
the dog-and-pony show began.
A Match Made Under the Table
Zulu-tek's tightening bonds with Enhanced Services is the latest in a series of
moves. Some were legit, others went up in smoke.
First, in December, Zulu-tek acquired SoftBank Interactive Marketing, the ailing arm
of Japan's SoftBank Holdings Inc., for a reported $12 million. A bloodletting at
SoftBank since then has left the company with virtually none of its top management,
which some considered its biggest asset. The company closed its European office
after the entire staff quit and started their own firm last month. Also in February, a
rumor surfaced that Zulu-tek was the focus of merger talks with DoubleClick, which
both companies denied. But that didn't stop Zulu-tek's stock from soaring, from 37
cents to more than $1.47. On March 25, Zulu-tek stock closed at 54 cents per
share.
No sooner did Zulu-tek squash the merger rumor than it issued a press release
claiming revenues of $39 million, 20 percent more than DoubleClick's sales.
However, there are no financial statements to back up this claim, nor is it easy to
confirm Zulu-tek's client list, which runs the gamut from Disney to Dow Jones.
But even before the big push in 1998, NetMaster had pulled a couple of
hype-oriented stunts. In December, the company announced an agreement with
Bellcore, a telecommunications company, to develop Web advertising solutions.
The deal, in fact, was with a BellCore subsidiary, Soliant Advertiser, and later fell
through. But NetMaster "forgot" to issue that press release. A similarly misleading
press release about an alliance with computer giant Digital Equipment
subsequently was corrected - at Digital's request - to reflect an agreement with
AltaVista Personal Search, a Digital spin-off. And a previously announced takeover
of Universal Commerce Inc., which develops transaction software for the Internet,
was revamped earlier this month to a "strategic alliance."
But this type of smoke and mirrors is not uncommon when dealing with Hayton.
Thunder from Down Under
Australian-born Pattinson Hayton - sometimes Jr., sometimes III - has a lengthy
history of financing failures and problems with the financial community, both here
and abroad. He was sanctioned and fined $60,000 by the SEC in 1988 for failing to
file the proper financial reports, and faced more serious charges in Great Britain.
He's also faced deportation proceedings (which he reportedly sidestepped by
marrying an U.S. citizen) and has been the target of numerous lawsuits by former
business partners, the latest resulting in a multi-million dollar judgment against him
in a Colorado court. People who have been burned by Hayton call him "poison" and
suggest potential business partners "run as fast as they can to get away from him."
Hayton could not be reached for comment.
There are conflicting reports about Hayton's
involvement with Zulu-tek and Enhanced Services. A
lawsuit filed last month in Los Angeles Superior Court
refers to Hayton as "de facto Chief Financial Officer,
Chairman of the Board and President" of Softbank
Interactive. The suit alleges that Robert Colvin, one of
Softbank Interactive's founders, was defrauded
$200,000 after Hayton took over. According to a
report in Wired magazine, Hayton came on the scene when the Softbank deal was
negotiated and has been working his puppets ever since. The recent stock
swapping between Zulu-tek and Enhanced Services is reminiscent of some other
Hayton deals that ended in disaster for the companies he courted.
For example, Apogee Robotics swapped six million shares of its common stock for
six million shares of preferred stock in Conagher & Company, where Hayton served
as an officer, director and shareholder. Conagher was supposed to redeem all or
part of its preferred shares for $2 million during a three-month period, according to
documents filed with the SEC. Apogee could use any unredeemed shares to
reacquire some its stock. Conagher never redeemed any of the shares. But it sold
the Apogee common stock it held to a Nicaraguan firm, which later distributed the
shares to investors through a Reg S offering, making them unavailable for Apogee
to recoup. During this time Hayton also controlled Apogee's board of directors,
which came in handy when an amended stock subscription agreement was up for a
vote.
"As a consequence of Apogee's association with Conagher and Hayton...and
Apogee's inability to maintain listing requirements, the Company was delisted by
NASDAQ on Feb. 7, 1995," according to SEC documents. This came barely two
months after Apogee had filed for bankruptcy, due in part to its association with
Hayton, which came crashing down after an Oct. 13, 1994 Wall Street Journal
article detailed the financier's seedy background. The article "revealed allegations
regarding Hayton's character, integrity, and business practices that effectively
terminated Apogee's access to public financial markets and damaged Apogee's
reputation such it could not execute its business plan," the company's 1996 10K
reads in part.
Another company that was rocked by its dealings with Hayton is Quadrax
Corporation, a Rhode Island company that last month filed for bankruptcy.
Like Apogee Robotics, Quadrax hooked up with Hayton via Conagher because it
was in need of a quick infusion of cash. The deal was decidedly in favor of
Conagher and Quadrax's founder, Richard A. Fisher: Conagher bought a controlling
interest in Qudrax by purchasing convertible preferred stock from Fisher. This
allowed Conagher to elect three-fifths of Quadrax's board, and it quickly elected
Hayton as a director and nominated him as chairman. In addition to the preferred
shares, through Conagher, Hayton agreed to buy 1.5 million newly issued shares of
Quadrax common stock for $3 million, and later 2.25 million shares for $4.5 million.
In both instances, shares were exchanged for promissory notes from Conagher,
neither of which was ever fully paid.
In February 1995, Quadrax regained control of the board and the preferred stock,
but at a price. Quadrax assumed responsibility for the money Conagher still owed
Fisher, released Conagher and Hayton from all claims and canceled what remained
on Conagher's promissory note in return for a new $620,000 note from Allied-Asian
Consolidated Limited, another of Hayton's companies. This note also went into
default, but Quadrax agreed in April 1995 to call it quits after a third note, for
$311,000, was paid. During a review of bank records from this period, Quadrax
officials discovered that Hayton had used more than $1 million in company funds to
write checks to his wife, attorneys unrelated to Quadrax, and Apogee Robotics, as
well as for undocumented travel expenses. Quadrax later said it was square with
Hayton regarding to these funds.
But Quadrax wasn't completely fleeced yet. Through either cash payments,
forgiveness of debt or stock, Quadrax gave Fisher, its founder and former CEO (he
resigned in September 1994), almost $2 million during a two-and-one-half-year
period.
Also during this time, the SEC started an investigation into Quadrax. SEC policy is
not to comment on investigations. James Palermo, Qudrax's new CEO, also
declined to comment, but said the issues have been resolved.
And now it appears Richard A. Fisher has surfaced again, this time as trustee of 97
percent of Enhanced Services' outstanding common stock. According to
documents filed this month with the SEC, Fisher is acting as trustee on behalf of
NetVest Capital Partners LP, and two former Enhanced Services officers. Could
NetVest be Hayton's new cover? As a limited partnership registered in Delaware,
NetVest Capital does not have to disclose any of its officers. And its parent
company, NetVest Capital Funding Inc., won't have to report who makes up its
corporate team until next year, when it files its first annual report with the Delaware
Department of State. On documents filed with the SEC, NetVest lists a Los Angeles
address, but directory assistance has no phone listing for the company. Fisher
could not be reached for comment.
Internet advertising revenue more than doubled during the first nine months of 1997
to $571 million compared to all of 1996, according to a study by Coopers &
Lybrand. And the industry is poised to take off exponentially in the next five years.
Analysts predict predict sales will hit $5 billion by 2002, a mark cable television
took 20 years to crack. Already the Internet has reached user levels of 50 million
that took radio, television and cable 38, 25 and 15 years, respectively, to reach. So
there's no argument that there's a huge pie in the oven almost ready for advertisers
to carve up. The question is who will serve it up ala mode, and who will lick the
crumbs up off the floor?
For further reading on the Zulu-tek melee, check out Wired:
wired.com.
Source: The Stock Detective, stockdetective.com
Phil |
