USATalks has walked a fine line but still looks ahead
DON BAUDER
January 23, 1999
When a stock has zoomed from $3 to $50 in three months, then announces a 4-for-1 stock split, it's time to look for cautionary flags.
And on San Diego's USATalks.com, there are plenty of warning signals. One is market capitalization: Yesterday, the stock closed at $50, down $4. There are 17 million shares outstanding; options and warrants add an additional 9 million, for 26 million shares, fully diluted.
Thus, the company is capitalized at $1.3 billion. The most recent quarterly statement, for the quarter ended Sept. 30, reveals a cumulative deficit of $5 million and total shareholders' deficit of almost $700,000.
Since then, the company has raised a lot of money, says Allen J. Portnoy, chairman and chief executive, adding that book value and shareholders equity are now both about $20 million. That's better, but still a long, long way from $1.3 billion.
The company, which is developing an Internet-based long-distance telephone service to be sold for a flat monthly fee, will market this service through multi-level marketing.
Indeed, USATalks shelled out 2.75 million common shares to buy its Memphis-based multi-level marketing firm, TrendMark International. TrendMark is now gearing up to peddle the telephone service through 30,000 salespeople in the so-called downline.
USATalks announced its intention to purchase TrendMark on Sept. 14 of last year. On Oct. 6, just a few weeks later, the Federal Trade Commission announced a consent agreement with TrendMark and its owners, William McCormack and E. Robert Gates.
According to records of the Memphis Better Business Bureau, without admitting any violation of the law, the company and its owners agreed to settle charges that they "made a host of unsubstantiated weight loss and health-related claims about their 'Thin-Thin' diet program."
The FTC said TrendMark did not have adequate substantiation for ad claims that consumers using the program would lose significant amounts of weight. The settlement prohibited the company and its owners -- veterans of other multi-level marketing programs -- from misrepresenting the results of any weight-loss program or product. It required them to have scientific data to back up claims for any food, drug or device.
But the FTC action was not a deterrent to USATalks, Portnoy says.
"Their (TrendMark's) present practices are absolutely clean. They cleaned up everything," he says. TrendMark has dropped the nutritional products it sold, including one that was said to have "anti-aging properties."
USATalks will also be marketing its telephone service through telemarketing, Portnoy says.
Portnoy has previously had problems in telephony-related enterprises. From 1979 through 1985, he was president of Clayton, Mo.-based Spartech Corp. In 1987, Spartech spun off Digitech, a maker of telecommunications equipment.
The stock was initially hot. Portnoy became Digitech's president. But the stock eventually crashed and the company was liquidated. Portnoy left Spartech in 1992, he says.
During that period, Portnoy and his associates were doing research and development into telecom products through a company named Alfine. In February of last year, Alfine's accounting firm said there was "substantial doubt about (Alfine's) ability to continue as a going concern," a warning, in fairness, that is issued for many developing firms.
Last July, the company went public by back-dooring into a corporate shell, essentially a blind pool, and the next month sold stock to the public at $7.50 a share.
"The securities offered hereby are highly speculative and involve a high degree of risk, and should not be purchased by anyone who cannot afford the loss of his or her entire investment," warned the prospectus.
This was before the Internet craze really took hold, propelling stocks heavenward.
Everything depends on whether the company's highly touted Internet phone technology is really so revolutionary. Last month, the company got UCSD Connect's award for most innovative new telecommunications product.
California service is up and running, Portnoy says. There are 7,000 people who have used it on an experimental basis since October. They have not been charged for the service, but soon will be.
"The rest of the country is coming online the first week of February," Portnoy says. It appears that the stock's price has anticipated that blessed event -- and perhaps then some.
But watch those cautionary flags.
Union-Tribune library researcher Michelle Gilchrist assisted with this column. Don Bauder's email address is don.bauder@uniontrib.com
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