Wellfleet Partners, inc.

"Focus on what you need, and be generous about the rest."

Isadore Sharp,
Founder & Chairman,
Four Seasons Hotels and Resorts

Over the past six months, a popular topic in the economic news is that of corporate Chief Executive Officers, their integrity and ethics in business or lack thereof. This is in direct contrast to the Founder, Chairman and CEO of the Four Seasons Hotel and Resort. The chain which currently manages and operates 51 luxury hotels and resorts in 22 countries, lives by the CEO’s "Golden Rule," "Treat others as you wish to be treated." Isadore Sharp, who emigrated from Israel to Canada, built motels in Toronto in the 50’s. In 1961, he built his first Hotel in downtown Toronto and a second in London in 1970. After a successful conference center built as a joint project with ITT, he turned down an offer to be acquired by the aforementioned conglomerate as the contrast in operational styles and his desire to remain independent eventually won out. Over the next decade, he led the Company through enormous growth opening or operating new Hotels in Canada (4) and America (3). Finally in the 90’s the Four Seasons expanded internationally, went public on the Toronto Stock Exchange, switched to the NYSE (’97) and was named by Fortune Magazine as one of the "100 Best Companies to work for in America". While the Hotel chain remains one of the world’s best and this author’s personal favorite (a recent trip to its Las Vegas location only solidified my opinion), its founder and Chairman continues to stress excellence of service, the chains’ corporate philosophy of putting the customer’s needs and interests always first and carefully screens the quality of all his employees to ensure it.

"Our big challenge in the future is finding people who will immerse themselves in our corporate culture. I am sure wherever we go, we’ll find the right people. In every city in the world, you will find people whose only desires are to show you what they can do, and to be treated fairly and with respect."

Isadore Sharp,
Founder & Chairman,
Four Seasons Hotels and Resorts

The Venture Capital industry is going through an unprecedented downturn. There is an oversupply of capital raised over the past 3 to 4 years with little of it expected to be deployed in new projects. Surviving the current bloodbath and continuing the pattern of triage (keeping those few worthwhile companies IN business) makes it indeed a period of great uncertainty for venture capitalists. To compound matters, may high net worth investors or "Angels" that jumped headfirst into venture capital funds during the 90’s are now reengaging on promises to put more capital into these funds. Called "Nouveau Deadbeats", they mean to avoid the further deployment of their promised capital into VC investments. They are suing VCs, the General Partners and their funds alleging negligence and/or excessive management fees to accomplish their goals. A very public example is the largest investor in the publicly traded OneVC, Draper Fisher Investor Fund I suing to get whatever capital left returned to the investors. A new arena, the secondary market for private equity has cropped up but many of the investments are simply not worth buying even at pennies on the dollar because of the quality, or lack thereof, of the investment and/or the fact that commitments for additional funding has dissipated. Thus, offers are often for negative value, simply releasing investors or assumption of future funding obligations. Most industry experts see a massive default on the $100 Billion in uncalled commitments by the aforementioned Angels, insurance companies,
pensions and others. In light of the current and, for the near future, dismal venture capital returns, it is indeed an industry in disarray. Today, with capital at such a premium and the foreseeable lack of new capital, VCs are putting intense pressure on new entrepreneurs. Negotiations are long, brutal with lawyers involved at all stages extracting extraordinary draconian terms. What a difference a mere year and half makes!

"The reason history is by turns gripping, boring and threatening is that it is a play in which the characters make up their lines as they go along."

Dero Ames Sanders
Former Executive Editor
Forbes Magazine

The financial world is in turmoil as a result of numerous factors, including, but certainly not limited to, incredibly poor, greedy and conflicted leadership. CEO’s from Kenneth Lay to Arthur Anderson’s former CEO, from Dennis Kozlowski to Garry Winnick, from Bernie Ebbers and George Wendt, from Martha Stewart to Dr. Sam Waksal and even the illustrious Jack Welsh, the recently departed CEO of GE, have all recently received notoriety of the worst kind! Furthermore, financial service companies have likewise lost the trust of the public by blurring the lines of analytic research and investment advice with the need to generate investment banking fees. Merrill Lynch’s recent $100M settlement spearheaded by New York’s Attorney General Elliot Spitzer originated a wave of triage and will open a wellspring of reparation lawsuits. Although conflicts of interests in such matters are natural, it is always a question of the integrity and professionalism of managing them. Note, this past month we lost one of the good ones, Daniel Case III, the former CEO of the high tech investment banking boutique Hambrecht & Quist. Case died at the tender age of 44 after a short but intense battle with brain cancer. His reputation was one of honor and integrity in business and he was truly one of the "nice guys" that occasionally rise to the level of CEO and then make a real difference. His company’s employees and shareholders, now known as J.P. Morgan H&Q, brother Steve, CEO of AOL Time Warner, and the business community at large has lost a really good man.

"Even though you speak fluent English, you still must be careful with it in England. For example, you may think the British like their beer sour, flat and warm. But ask them and they will assure you that they like it bitter, still and served with a chill off."

The stock market likewise has been extremely volatile, up or down 1% on the Dow/NASDAQ on any particular day depending on the seemingly endless array of bad economic, corporate, political or international news. Whether it’s the dollar, employment numbers, federal interest rates, World com/Xerox type of related disasters, war and terrorist attacks abroad..., there seems to be no end in sight. Even the infrequent, spectacular rallies peter out in days on the inevitable downturns. Money managers whom have built complex charting systems and computer models have found that these days are without precedent. Those who practice "sector rotation", a thematic strategy based upon the macro economic/political conditions have enjoyed some modest success. They have been bullish on consumer goods, retailers, homebuilders which benefit from low interest rates. IPO’s almost unheard of in 2001, have recently enjoyed some renewed , albeit limited success and activity as well. Investors simply lack the appetite for IPO’s and their relative liquidity risk. Until there is more balance and confidence in the public equity markets, there will continue to be the general malaise that has plagued the markets these past months.

Many stocks, previous high-fliers and "blue chips’ such as Oracle, Sun, EMC Gateway, Quest, E*Trade, CMGI, US Airways, Conseco, Kmart, Enron and Bethlehem Steel (the latter 3 bankruptcies) are now trading below $10 per share. Many are even below $5 which makes them considered "Penny Stocks" and by definition can’t be margined, can’t be included in certain stock indexes and many White Shoe firms such as Merrill Lynch won’t even let its brokers solicit trades in them. Although history is dotted with select instances of major blue chip stocks falling below $10 per share and recovering to great heights (e.g. Citigroup in 1991 and Chrysler before that in 1982), in both situations the government was instrumental in their recovery and each was led by a dynamic CEO, Sandy Weil and Lee Iococa respectively. No such luck here so, "caveat emptor", "Let the Buyer beware."

"We are not interested in the possibilities of defeat; they do not exist."

Queen Victoria

This past quarter has been an active one for both WPs and our bridge loan entity, Spider Financial, Inc. ("Spider"). We want to welcome to WPs the following new corporate clientele to our burgeoning Consulting Business: Frontline Education, Inc. in NYC, NY, Vista Optical in Anaheim, California, Net Wolves ("WOLV") in Tampa, Florida and 4 MyChild in Detroit, Michigan; In addition, the following companies retained Spider to evaluate the feasibility, and coordinate the formation of a short term bridge loan: Med Order in Seattle, Washington, Boots & Coots ("WEL") in Houston, Texas, Fundraising.com, Inc. in Madison, Wisconsin, Urbani Holdings ("URBI") in Long Island City, NY and Mr. Rent/Déjà vu, Inc. in Las Vegas, Nevada. As you can see, we did a lot of traveling and long distance due diligence in the past 90 days!

In addition to the aforementioned new corporate clients, we are pleased to welcome our summer intern David Simahaee and congratulate our Managing Director Mark I. Lev who coached the WPs’ sponsored Young Israel of Great Neck/Great Neck Synagogue Senior Basketball Team to another National Council of Young Israel championship this past year, our firms’ second coached and sponsored team championship in the past three years. The trophies are really starting to accumulate in our office.

"Do not permit what you cannot do to interfere with what you can do."

John Wooden
Former Head Coach,
UCLA

In this beautiful summer season, those of you, like myself, with many of our children safely tucked away in camp, have more time to reflect on matters outside of our immediate families and indigenous financial situations. Today, independence day 2002, a mere few months until the first anniversary of the most egregious and tragic event ever suffered on our home soil, is a wonderful time to reflect on those great gifts our forefathers bestowed on us, "Life, Liberty and the Pursuit of Freedom." G-d bless America and enjoy the summer.

NOTE: This report was produced by Wellfleet Partners, Inc. ("WPs") from various public research sources, for the sole purpose of general information. WPs makes no warranties to its factual content and is not a brokerage firm, registered Investment Advisor nor securities dealer; therefore, nothing contained in this report shall constitute an offer to sell, solicit or buy any securities or investment advice. Investment in these securities mentioned here involves risk and should not be considered without first reading the target Company’s most recent financial statements, 10Q and 10K, its Private Placement, Offering Memorandum or Business Plan, if applicable, and discussing the investment with your registered representative or professional financial advisor. Venture capital is inherently extremely risky. Mark I. Lev, Managing Director of WPs and the author of this newsletter, is a registered representative of KSH Investment Group, Inc. a NASD member broker-dealer.