The world is changing rapidly. The economy is bursting at the seams. Opportunity is everywhere. The Internet beckons. Should we invest or should we not invest? Billions have already been made on the Internet. It's definitely a ground floor opportunity. Is it too late for you to get a piece of the action? After all, no one wants to be left behind.

If you're having these thoughts, my counsel would be to proceed cautiously. In truth, many internet companies have "clicks," but no "bricks." That is to say they are "shells" with very little substance. To be sure, thousands of investors have made billions of dollars investing in Internet companies, but many of their earnings have gone up in smoke in the past few months and even more are forecasted to follow suit. The reason? Very few are profitable! Many - in fact, most - are running out of money. They were able to attract investors when they first went public. They had sexy, high-tech, awesome ideas, but they never figured out how to make a profit. Wall-Street is already starting to fall out of love with these high-tech fairy-tales. The stock value of the publicly traded Internet companies has plunged to 50% of what they were valued at just four months ago.

That doesn't mean that the Internet is not here to stay. It will not only stay, it will become a part of our daily lives. It will change how we shop, how we do business, how we communicate and perhaps even what we eat and how we sleep. It will definitely change our lives. It will ultimately affect almost everything we do. But that does not mean that every Internet company will prosper. To the contrary, most will fail. When they fail it will be because they did not plan properly. Many will have had great ideas and perhaps will have offered the public something that the public really wanted, but it takes a lot more than great ideas to operate a successful business venture. It takes planning, leadership, management, strategy and money. Money is what a lot of Internet companies are running out of.

According to several recent articles in Barron's (written by Dow Jones and Company), the vast majority (74%) of all public Internet companies currently have negative cash flows. Sixty-six companies (29%) are predicted to run out of cash in the next twelve months. And now, even the most avid supporters of the Internet marketplace are forecasting that at least 75% of all public Internet companies will no longer exist in five years! Some are anxious to point out that it is no worse than the average failure rate of other types of new ventures. That, of course, is true, but normally the innocent, vulnerable public does not invest substantially in new ventures. Unfortunately, thousands of innocent families have invested substantial portions of their life savings into Internet companies. A 50% decline in their stock price is only the beginning for many of these companies. Eventually, countless numbers of them will run out of cash and the investors will be left holding the bag ... the empty bag! When there is a frenzy in the marketplace, opportunists often stand ready to take advantage of those who are willing or even anxious to invest - especially when people don't understand exactly what they are investing in. Many of the Internet companies began with exactly that in mind. Let me give you an example.

Earlier this year we were contacted by a company that was already doing some business on the Internet and was planning to go public with its stock in just a few months. They were being guided and underwritten by a very reputable investment banking firm who had already taken several Internet companies public and who estimated that this new company would be worth at least 400 million dollars once it went public. That surprised us because their financial statements revealed that they were a tiny company doing only a few million dollars per year and were far from being profitable. Their underwriting "experts" explained to us that it was very acceptable that publicly traded Internet companies not be profitable. In fact, it was explained, a profitable company may even be frowned upon as not being aggressive enough! It seems that the investors in today's hot stock market actually prefer companies that are "pouring their cash into growth strategies" as opposed to even trying to make a profit.

Okay, now on with the story .... The "experts" wanted us to throw in with this little company and we would all make millions of dollars by taking the company public. They went on to explain how it would all work. Although potential investors do not expect a company to show a profit, they do expect a company to show revenues. That is where Melaleuca would come in. The company's strategy was to set up fulfillment centers around the country to fill orders created by the Internet. They had visited Melaleuca's distribution centers and were impressed by the fact that if we receive an order by 3:00 p.m. it will be shipped by 5:00 p.m. the same day (except for the last day of the month). In effect, they wanted to "lease" or "borrow" our distribution center. We responded that we were not interested in that since having control over our own operation is an important part of our plan to provide superior customer service. They explained that would not be a problem because we could lease both the facilities and the employees to them. In turn, Melaleuca would still manage the operation. They would pay us a fee for using our facilities and our employees, and for having us manage the operations. They would in turn charge us a service fee for "handling" our shipping for us. Orders that Melaleuca received on our toll-free line would be communicated via the Internet to the shipping facility and could therefore be counted as "e-commerce" or "Internet sales." The "Internet company" would bill Melaleuca approximately five million dollars per month for their "service" and then pay us approximately the same amount for our facilities, people and management fee. In essence, it would cost us nothing and cost them nothing. There would be no actual increase in goods sold or value added, but they would book sixty million dollars a year as "revenue" and show that to investors. Needless to say, it would show them having tremendous growth compared to the previous year of two or three million dollars in sales!

Venture capatalists and other investors love growth companies! With this kind of growth in annual revenues they thought that the "market cap" (market value) of their company would be about 400 million dollars. That is a lot of money for absolutely nothing happening except for a lot of fancy paperwork! There would be no increase in real sales and no value added; just a new company with lots of sales but no profit. Best of all, this transaction would be entirely legal, and in their minds, quite ethical. It is done every day in the marketplace.

The entire proposal reminded me of the story of two farmers. Each had one cow. With such small operations they were having trouble getting loans from the bank, so they made a deal with each other. Each promised to buy the other's cow for one million dollars. Then they went to the bank to show their new financial statement. They each showed sales of a million dollars that month and they each also showed a profit of a million dollars. Better than that, they each showed that they now owned a cow worth one million dollars so each of their net worths had gone up one million dollars. If that wasn't enough, their story to the bank was that since the cow was worth one million dollars, her calf would also be worth a million dollars. Since she would have one calf each year they forecasted sales and profits for the next ten years to be one million dollars per year.

I don't know if the bank fell for this transaction but evidently the public is falling for Internet stories based on the same concept that these farmers had. Somebody is going to get burned! It is just a matter of time! The scary thing is that there are thousands of investors that are ready to invest big bucks in these types of companies who are just processing revenue on paper with no real future. Their scheme is to sell these "shells" for big dollars on the stock market. Although the analysts are catching on and driving the stock price down, many stand to gain from future Internet deals - and many stand to lose!

Why would I bring all of this to your attention? Because I know that many of you are looking for a safe place to invest profits from your Melaleuca business. I'm not saying not to invest in Internet companies, I'm just suggesting you choose carefully where you put your money and realize that although some Internet companies will prosper, according to the experts, 75% will be out of business in five years. Without question, the Internet has tremendous potential for good. It would appear that those with real profits and positive cash flows have a tremendous advantage and are the most likely to survive.

That is my hot stock tip for the month!

Sincerely,

Frank

P.S. The Direct Sales Association is very concerned about many scams that have recently emerged as pyramid schemes using the Internet "product line." These companies represent themselves as direct-sales companies or multi-level companies and are likely to be challenged by state attorney generals across the nation. The association is concerned that their unethical activities will give the entire industry a "black eye." Melaleuca has volunteered to participate in an industry watch to help police the industry and protect the DSA's good name. If you become aware of any "multilevel" firm that suggests that you can make money on the Internet, please call Nikki Bowden at 1-800-522-3165. We will forward your information to the Direct Selling Association.