NetZero Shrugs at Y2K Problem

SEC filings reveal a startling lack of concern for possible network security and software issues.
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SAN FRANCISCO -- While companies scramble to prepare for the Y2K threat, NetZero, an ISP that filed last week to go public, appears to have spent little time fretting. In fact, few publicly traded companies have admitted to doing less to prepare for Y2K than NetZero has.

"We have not assessed the impact that the Year 2000 problem may have on our operations," NetZero states in documents filed with the

Securities and Exchange Commission

July 14. Instead, the company has relied on the due diligence of its suppliers and partners.

In other words, executives haven't tested whether the software and various computers running its network, its payroll database and even the office security system are coded to distinguish 2000 from 1999. The company has five months and ten days to assess its operations, prepare a test plan, implement it and fix potential bugs.

"I've read thousands of

SEC filings over the last year," says Steven Hock, CEO of

Triaxsys Research

, which helps corporations prepare for Y2K. "Some are off to a late start, but I haven't seen any quite like this."

Because of an SEC-enforced "quiet period" prior to its IPO, NetZero executives were unable to comment further on the documents.

NetZero's 116 employees have been busy developing a promising business that will challenge ISPs such as

MindSpring

(MSPG)

and

America Online

(AOL)

. Since launching in October 1998 NetZero has signed up 1.2 million people to its free Internet services, counting on advertisers for revenue. The concept is unproven: From its inception until March, NetZero booked $903,000 in revenue and lost $7.1 million, and the company expects losses to continue for the foreseeable future.

It's very possible NetZero faces zero danger. Incorporated in July 1997, the company spent its early months developing internal systems and software that should work fine. NetZero launched its Internet service and started integrating external products the following year. NetZero uses recent versions of software from

Oracle

(ORCL) - Get Report

, network hardware from

Cisco

(CSCO) - Get Report

and servers from

Sun Microsystems

(SUNW) - Get Report

. It sends data through the networks of

GTE

(GTE) - Get Report

and

Level 3

(LVLT)

.

NetZero might be overstating its risks as a "defense mechanism," according to John Turner, principal with

TCA Consulting

. His London-based firm advises North American and European banks, some of whose suppliers have been instructed by their lawyers to make no promises about Y2K compliance.

In early 1998, SEC regulators published new guidelines about how companies should explain what they know about potential Y2K risk. Based on the little that NetZero has disclosed, the company seems to lag others in its preparation efforts for Y2K, including young ones that seem in the clear.

"We're comfortable," says CEO Scott Kriens of

Juniper Networks

(JNPR) - Get Report

, which went public last month. Kriens started testing one year ago, and intends to finish testing its internal systems in September. Juniper expects to keep the total cost of testing and fixing below $200,000.

When ISP

OneMain.com

(ONEM) - Get Report

went public as a rollup of 17 ISPs in March, it had already received assurances from the owners of each of the acquired companies that it faces no material, unresolved Y2K issues. OneMain.com continues to test.

With so little time for testing, a company such as NetZero should get started on a backup plan in case of outages, says Ralph Johnson, vice president of marketing for

Client/Server Technologies

, which makes software that diagnoses glitches in PC and UNIX systems. Yet, according to SEC documents, NetZero has no contingency plan, and little room for error when it starts investigating.

"It wouldn't surprise me at all to see their assessment turn up problems, in which case they're on a very tight schedule," says Hock.

One attorney who works with small companies says start-ups often are busy with other priorities: "I guess they figure their investors just aren't going to worry about that."

"Many of these deals coming to market are being sold under optimum assumptions," says Dennis Grabow, CEO of

The Millennium Investment Corp.

, who believes that Y2K will create a global recession. His hedge fund has mostly short positions, and wagers that Internet stocks in particular will slip during a recession -- and that they are not Y2K-compliant. "I'm very guarded on what is being said by most companies on this issue."

NetZero, which so far has wagered on the reliability of Oracle, Sun Microsystems and its landlord, will prove an interesting test of the fears of more mainstream investors.