CustomTracks: A Road Map to the Caveats of Internet Craze

TIMES STAFF WRITER

From the outside, CustomTracks Corp. looks like many other Internet companies--stock worth $600 million on the open market, no profit and a business plan that's hard to pin down.

Actually, the Dallas-based firm is far more impressive. With a stock price driven largely by the company's hints of future glory, the comments of a little-known brokerage analyst and the frenzied shouts of Internet chat rooms, CustomTracks provides a powerful lesson in how to become a giant company without having to produce a single thing.

It also serves as an example of how companies with even tenuous connections to the Internet economy can be embraced by small investors entranced by today's day-trading frenzy, where a stock's magical upward momentum provides most of the rationale for the trading.

Some of the whirlwind caught up with CustomTracks last Wednesday, when Chief Executive David Cook held a conference call for investors, declined to detail the threat posed by some of the company's formidable competitors and acknowledged that its key product will debut weeks later than projected.

The resulting $10.31 skid in the stock, to $43.56, still left it with a gain of more than 800% in the last year. The stock closed Friday at $41.94. However, many investors who first bought the stock in April or thereafter, when it experienced a particularly sharp run-up to as much as $90, have gained little or lost considerable portions of their investments.

On the conference call and in a statement issued last week, the company continued its strategy of combining news of delays or changes in direction with optimistic business projections and studied hints of takeover interest.

"I want to state unequivocally that I have not sold and will not sell any CustomTracks stock this year," Cook told the investors. "I will, of course, revisit this issue in the event of a merger or acquisition of CustomTracks."

Cook also said that "it is easy to construct scenarios" in which 10 to 50 million e-mail accounts eventually use the company's encryption service, which he said will be released next month.

On the other hand, there is little evidence thus far that the proposed service, to be called ZixMail, will represent a significant advance over numerous similar services already being widely marketed by other companies.

"I'm curious about what standards they are using. They don't tell us anything about it," Mona Doss, marketing manager for Network Associates Inc.'s encrypted e-mail product Pretty Good Privacy, or PGP, said after reviewing the descriptions of ZixMail posted on CustomTracks' new Web site.

Another e-mail encryption provider, Mountain View, Calif.-based VeriSign Inc., which has $39 million in annual sales, said it is equally perplexed.

"They've changed their business model several times. They have no proven track record," said Richard Yanowitz, executive vice president of marketing at VeriSign. "All we know about CustomTracks is the hype."

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To learn how CustomTracks, which has fewer than 50 employees, turned itself into a hot Internet stock, it is necessary to look at its history.

Cook founded its predecessor, Amtech, more than 10 years ago to develop systems for electronically collecting tolls from cars without their having to stop. He left the company in 1990 to run an investment fund. Cook declined several requests for interviews from The Times.

Amtech had nothing to do with the Internet. That changed after Cook rejoined it and became CEO again last year. He re-christened the company CustomTracks and sold off all the operating businesses.

The company then announced a series of new business plans. Last May, it said it would enter the "digital data distribution business." In August, it said that goal had been "refined" to concentrate on distributing music digitally.

In February, it said it would instead focus on "charging and collecting transaction payments over the Internet." However, the company's most recent annual Securities and Exchange Commission filing, in March, warns that it "may decide to exit the Internet transaction payment business at any time."

Only in recent weeks did the company begin saying that its first product would be e-mail-related. And last week, it said it would change its name again, to ZixIt Corp.

Around the time it announced its transactions strategy, the stock, which had been trading around $8, began moving up along with other Internet-related companies.

Then, on April 13, it soared more than 50%, from $25.88 to $39.94, without any news from the company.

The only apparent spur to the stock was a spate of rumors on such Internet investor message boards as Raging Bull. Investors there were abuzz about company insiders notifying the SEC that they had bought shares. Also mentioned was the optimistic opinion of an analyst at an obscure Boca Raton, Fla., brokerage, Joseph Charles & Associates.

That analyst, David Weinstein, had said the shares were moving on "good speculation" that CustomTracks' Internet payment system would be released in "weeks, not months." (This week, the company pushed the release of the system back to September from August and said it couldn't project when it might have customers paying for it.)

"Up up and away!" one chat-room post crowed, citing Weinstein's comments.

An even wilder swing came five weeks later, when CustomTracks jumped from less than $50 to as high as $90 in two days. Short-term investors who bought at or near the peak, however, were destined to be disappointed: On May 24, the day it hit $90, it closed at $76.

Behind that day's surge was, once again, David Weinstein. He had just issued a news release giving the shares a "price target" of $230.

"The high degree of confidence CustomTracks has in its technology," Weinstein wrote, "is highlighted by a remark made by Douglas H. Kramp, the company's newly appointed and first executive vice president for strategic business development: 'I am looking forward to joining CustomTracks' management team. Their Digital Signature technology, in my opinion, is the most exciting development in the Internet since the browser.' "

Kramp's comment had appeared verbatim in a company news release earlier that month.

"We are all paying for patents here," read a Raging Bull post from an investor identified only as Darwood. "CUST has them, will roll them out, and will propel this one to $230. Momentum players need to understand this." Actually, CustomTracks hasn't been awarded any patents for the new technology.

Not mentioned in Weinstein's frequent releases is that he owns stock in CustomTracks. (Weinstein disclosed his holdings to The Times but declined to say how large they were.) Or that, by his own admission, he doesn't know what technology the company has.

Weinstein was censured by the National Assn. of Securities Dealers and fined $400 plus costs in 1991 after being accused of unfair trading, records show. A 1996 arbitration brought over alleged misrepresentation led to a $4,999 settlement by Weinstein, and two investor complaints 1997 against him and others in 1997 prompted settlements of $9,000 and $2,500.

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Joseph Charles, his brokerage, has been censured three times by the NASD in the last year and a half and agreed in January to stop doing business for two years in Massachusetts, settling a complaint by that state.

Weinstein did not respond to messages about his track record Friday.

How do people without a vested interest feel about the stock? Not so hot.

"I'm surprised that it's public," said William Whyman, an Internet stock analyst at Legg Mason's Precursor Group. "Investors have to evaluate the sustainability of the business--customer switching costs, the intensity of competition, barriers to entry. That's tough with no earnings and no revenue and, it sounds like, no product."

Regulators and mainstream investors say the wild swings in CustomTracks underscore a lesson for stockholders: They shouldn't rely on anyone to do their research for them.

"With the bull market, more and more companies are looking to raise money publicly," said Duncan King, a spokesman for the SEC. "There are also many more first-time investors than there have been in the past, and they need to do their homework."

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Making Tracks or Spinning Its Wheels?

Internet company CustomTracks has seen its stock skyrocket this year to as high as $90. But a recent conference call with investors has dampened the markets enthusiasm. The stock skidded $10.31, to $43.56. While that still leaves it with a gain of more than 800% in the last year, many investors who bought the stock in April or thereafter, when it enjoyed a sharp run-up, have gained little or lost much of their investments. Daily closes and latest:

Friday: $41.94

Source: Bridge Information System

For the Record Los Angeles Times Monday July 19, 1999 Home Edition Business Part C Page 2 Financial Desk 1 inches; 36 words Type of Material: Correction CustomTracks--A story in Monday's Cutting Edge section about Dallas-based CustomTracks misattributed a comment on an Internet message board to a poster known as Darwood. The comment was posted by someone else in support of earlier comments by Darwood.
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