Wellfleet Partners, inc.

Over the past two months, we have seen a precipitous fall from previous peaks for the majority of Internet stock. Since closing at a record 318.32 on April 13th, the 40 stock Dow Jones Internet Index has fallen approximately 40% although it still retains an approximate 40% appreciation from the beginning of the year. The question has arisen as to whether the sector is pulling back, has entered into a prolonged bear market or whether the "bloom is off the rose" for good! Analysts compare and contrast the drops in this sector such as the one that occurred several months ago in one day vs. this slow, elongated decline. Some of the more popular stocks such as Amazon.com are receiving unflattering profiles (Baron’s, June 1st edition - "Amazon.Bomb"). In addition, previous high flying IPO's are becoming less frequent and those that do, like TheStreet.com and eToys, quickly settle back with a more modest appreciation from its initial price gains. To further complicate matters, a wave of interest-rate worries exasperate the already mercurial financial markets. Without the customary yard sticks to gage valuations (e.g. book value, current and future earnings...), what possible parallels are there to guide investors through this internet stock craze and current pullback?

Recently several renown financial periodicals including the Wall Street Journal comically compared internet-mania to the Dutch Tulip craze of the 1600s. During the late 1500s, the demand for the now common flower swept from Turkey across Europe. One variety of bulb, Tulip Brasserie, was actually exchanged for a successful brewery in France while many Dutch families mortgaged their houses to enter the bulb market. By the late 1630s, the demand for the flower "withered" and finally the prices collapsed. Fortunes were lost and lives ruined The human race certainly has an amazing capacity for speculative insanity. History is filled with Tulip-like manias in both the financial communities and society at large: bowling company stocks in the 1960s, cabbage patch dolls and bio-tech stocks in the 1980s, beanie babies in the 1990s and internet stocks today.

Perhaps the closet example was the recent biotechnology craze from 1990-1992. Enthusiasm for potential blockbuster drugs fueled investor mania. The sector’s demise as an "investor darling" occurred as numerous companies failed to deliver as promised and the rising supply of new issues diffused the sector’s demand. The outcome for internet stocks appear to have better long-term prospects because the Net has transformed commerce in fundamental ways and many bellwether companies such as AOL, eBay and Yahoo! are generating enormous revenues and achieving profitability sooner. Their burn rate, as compared to biotech companies, is simply less dramatic and their access to capital markets - much greater! So why are we so surprised with the levels of interest and commitment investors have towards the internet as the latter has no less than changed the way we live in almost every way.

Today, an estimated 160 million people surf the web and projections are that 500 million will do so by the year 2003. In addition, over 50 billion was spent online in 1998. When the estimated numbers come in for the year ending 1999, do we even dare guess what number that will be? Thus, the "growth drivers", as they are now being commonly referred to, has clearly become Wall Street favorites (e.g. America Online, Yahoo, eBay, Amazon.com, E*Trade...). Their lofty valuations seem to indicate that they trade based upon a wholly different set of facts, almost a stock market parallel universe!

There are many explanations for the past year's terrific appreciation in the sector: First, the tremendous revenue growth in numerous e-Commerce areas (e.g. online trading, shopping, information resources...) certainly proves the model; and Second, many institutional investors, money managers and individual investors as well decided to finally get off the sidelines after patiently watching the insane returns of the early money. Even traditional companies are now scrambling to transform themselves to be "internet friendly", to join the sector and benefit from the greater valuations! Perhaps the current pullback is less the end of a faze but more likely a reduction in the previous hyper valuations received due to their uniqueness and an imbalance in the supply and demand. As more internet companies go public, the more successful ones announce secondary offerings and traditional companies incorporate net related resources, the supply and demand will balance out and more reasonable and historical valuation models will probably become the norm. This represents the proper maturation of a sector.

As venture capitalist, we at Wellfleet Partners, Inc. ("WPs") don't apply lofty, unrealistic valuation models to potential investments. Rather, we concentrate on the potential market size, what number the company will be in its’ indigenous market niche, will its internet application offer a superior buying or service related experience and the depth, quality and passion of management. We believe that at some point in the future, the two parallel universes will converge and the investing public will demand valuations closer to the same historical indicators as the rest of the market. Thus, in return for optimum flexibility offered to management as part of our affiliation and financing, we ask for reasonable and historically provable valuations for ourselves and clientele. Interesting, one of our corporate clients, Synergy Brands, Inc. (NASDAQ Symbol "SYBR", see previous newsletters), is a typical example of a small cap, Internet based company that is a current trading anomaly. When the company announced its internet applications in the fall of 1998, the stock tripled on gigantic volume. Recently it announced record earnings, double digit sales growth, and online agreements with Yahoo! and Warner Brothers for its BeautyBuys.com and NetCigar.com web sites. The stock continues to drift. It is as if the investing public is penalizing management for the continued profits it shows per quarter from its total operations. Management remains committed to gaining market share but has also, under the advice of its investment banker, kept a watchful eye on overhead and earnings per share. They believe it’s equally important to advertize and market efficiently (the amount of revenues and potential revenues created per marketing dollar) than it is to remain profitable in the core business, distribution of food, beauty, health and cigar related products.

Our model, is to build a holding company of Internet and E-Commerce related equity assets through our merchant and investment banking and consultation related activities. With the introduction of each new corporate client our business base is broadened and cross opportunities and strategic alliances should hopefully continue to materialize. Thus, our clients, generally high net worth individuals, can participate in the financing and nurturing of technology and Net companies in their embryonic stage while we continue to accumulate minority equity assets.

During the course of the past financial quarter, a major announcement was made by Merrill Lynch & Co., America’s largest retail-based financial service company. It plans to offer inexpensive online trading for its clientele. The last major holdout among the majors, this represents an enormous change from its business model and reconfirms the internet’s pervasive online technology and demand. Companies like Internet Financial Services, Inc. (NASDAQ symbol "IFSX") and LivePrint.com, a company in which WPs recently invested, show how by connecting sellers and service providers directly with the consumers, entire prior distribution channels and historical professions like stockbrokers and printers will inevitably change. Not all established companies will be able to make the transition to the Net; nor will all the companies that receive venture capital financing thrive or even survive. We recommend you invest prudently and diversify your private, speculative investments.

As per our prior newsletter, we are in the process of preparing a private placement memorandum for Dormont Technology, Ltd. and hope to market the transaction shortly. We are also extremely pleased to announce the agreement of a Term Sheet for a Private Placement for Arvee Systems, Inc., a Long Island based company that specializes in integrated document management software. Its flagship proprietary software product, millennium:: OMS, which incorporates advanced technology features including imaging, electronic document management speech recognition and computer output to laser disk, is expandable and has numerous applications to the internet, video teleconferencing, set-top boxes and video-on-demand. We hope to bring both transactions to our clients by mid-summer. Please note all brokerage and investment banking transactions are rendered through M.S. Farrell & Co., Inc., an NASD member broker-dealer. For more information on either company, please do not hesitate to contact our office.

Finally, we gratefully acknowledge and thank so many of you that offered kind wishes on our recent move to One Penn Plaza and at our office opening party. Your support and friendship is greatly appreciated. Enjoy the summer and continued best of luck with all your investments. I have enclosed our new brochure and our revised business cards for your records.