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CORPORATE FOCUS—NetZero Remains Upbeat As Earnings Report Nears

Summary Business: Internet access provider Headquarters: Westlake Village CEO: Mark Goldston Market Cap: $94 million Dividend Yield: N/A* Total Liabilities: $40.2 million P/E: N/A Long-Term Debt: $10.3 million * NetZero does not pay dividends Mark Goldston says everything is fine. NetZero Inc.’s situation only looks bad if you’re not looking closely. Two weeks ago, a federal judge lifted a temporary restraining order against one of its last remaining competitors, Juno Online Services Inc., that prohibited Juno from displaying third-party ads in a pop-up banner that subscribers to its free service get. (Westlake Village-based NetZero had filed suit against Juno in December, claiming Juno had infringed on a NetZero patent.) “That’s irrelevant,” Goldston said last week. “It’s part of the legal process.” He said NetZero and Juno will meet in court this summer over the issue anyway. “We’re so close to that, it doesn’t affect us at all.” Then there’s the softening in the advertising industry that has led to the legendary “dot-bomb” phenomenon, as well as layoffs and cutbacks in the traditional media. NetZero started out life offering free Internet access in return for the opportunity to give advertisers access to millions of eyeballs. Still, Goldston said, “It’s not an Internet problem. When capital markets are challenged, we all feel it equally.” And any thoughts Goldston might have about being chairman and CEO of perhaps the last free Internet access provider left standing will not be revealed for at least a week or two, until NetZero announces its third quarter earnings. “We have not given out any public information on that and we won’t until our conference call,” he said. NetZero has begun marketing an ad-free service, called NZPlatinum for $9.95 a month. That follows by a few months the introduction of NZPro, available to its heaviest-use subscribers. Earlier, Goldston had said about 30,000 signed up for NZPro in the last part of January, subscribers who had been online for more than 40 hours that month. The introduction of NZPlatinum and NZPro followed by just months the Nov. 13, 2000 announcement that Yahoo was getting out of the free-Internet access business. Within a short time, only BlueLight.com, Juno and NetZero remained on the scene. BlueLight has phased out its free service and Juno started offering an ad-free service some time ago. In fact, it recently raised its price for the service from $9.95 to $14.95 a month. Now, the end of the free-Internet-access era seems inevitable to most. “It is very hard,” said Paige Hayes, a business strategy partner with Arthur Andersen LLP, referring to NetZero. “When you give something away, it’s very hard to find advertisers who want to spend money.” Nevertheless, Goldston said of NetZero’s situation, “We’re not in denial. It is what it is.” And undeniably, the growth of NetZero has, by some measures, been phenomenal. But other measures tell another story. Revenues in the 1999 fiscal year were $4.6 million. In 2000, they were $55.5 million. But operating expenses also grew from $7.4 million in 1999 to $78.2 million in 2000. Net loss in the quarter ending Dec. 31, 2000 was $43.4 million on $16 million in revenue, compared to $24.9 million in losses on $12.2 million in revenue in the quarter ending Dec. 31, 1999. NetZero’s stock was trading Friday at 73 cents a share. On the same day a year ago it was trading at $12.06; its 52-week high was $17. Still, no worries, apparently. According to NetZero’s most recently quarterly report, filed Feb. 14, the company has $172 million in capital available, enough to fund operating activities for another year. “We are without capital constraints right now,” Goldston said. “And we’re not looking at a capital-raising event in the near future.” However, litigation not capital may be NetZero’s next problem. Last Thursday a class action lawsuit was filed against the company, alleging improprieties having to do with an IPO in September 1999. According to the suit filed in New York by Milberg Weiss Bershad Hynes & Lerach LLP, the SEC is investigating underwriting practices in connection with that and several other NetZero IPOs.

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