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Adrift on the Net : McKinley Group's Struggle Illustrates Industry's Volatility

June 27, 1996|MICHELLE V. RAFTER | SPECIAL TO THE TIMES

SAUSALITO, Calif. — When the McKinley Group, publisher of a World Wide Web directory called Magellan, announced plans to acquire Novo Media Group last month, the company marked the occasion with a lavish party, where guests sipped champagne and nibbled smoked salmon at a posh waterside restaurant.

Suddenly, the party's over.

Although co-founders Christine and Isabel Maxwell--the twin daughters of the late publishing magnate Robert Maxwell--and other executives declined to discuss the 3-year-old company's financial condition, former employees, Internet analysts and other sources paint a picture of a company in chaos.

Isabel Maxwell's husband, David Hayden, was abruptly ousted as chairman and chief executive earlier this week. The Novo acquisition is on hold, a critical round of financing is in limbo, half a dozen middle managers have quit and at least one is suing for fraud. Finances are so tight that paychecks bounced and employees had to buy toilet paper and paper towels with their own money, sources said, though a McKinley spokeswoman denied both those reports.

McKinley's troubles offer a cautionary tale on the dangers that lurk in the volatile Internet business. While a few companies--including McKinley competitors such as Yahoo and Infoseek--have already cashed in on lucrative public stock offerings, the fact remains that most companies in the Internet "content" business--as opposed to the business of selling the software and hardware that makes the Internet work--are living on credit and dreams rather than real revenues.

The developments at McKinley are also the latest setback for the star-crossed 45-year-old Maxwell sisters. Their father died mysteriously at sea in 1991, and his publishing empire crumbled immediately amid allegations of fraud and financial mismanagement. This January, their brothers, Kevin and Ian Maxwell, and a business partner were acquitted of conspiring to defraud Maxwell company pension funds in the biggest fraud trial in British history. Kevin Maxwell and several associates face a second trial that's expected to begin next year.

Christine Maxwell, the editorial brains behind McKinley, had worked for her father's Pergamon and MacMillian publishing divisions off and on for 25 years before going into business on her own in 1982. She bought a small electronic database research company in Berkeley called Research on Demand, and that ultimately led her to the Internet.

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After launching McKinley with a successful print directory to the Internet, an online version for the World Wide Web was a logical next step. The Magellan product would be more than a simple directory along the lines of Yahoo: At its September 1995 launch, Magellan included lengthy reviews of close to 30,000 Web sites, a four-star rating system and, later, "green light" icons signifying a Web site contained no adult material.

Within months, McKinley--named after the highest peak in the U.S.--scored licensing agreements and other deals with some of the biggest names in the Internet business, including IBM, AT&T, Microsoft, Netcom On-Line Communications and Europe Online. Partners paid to use the Magellan directory on their own Web sites or hired McKinley's crew of "cyberwriters" for custom work.

The company attracted a number of investors, including Dan Lynch, an Internet veteran and co-founder of CyberCash, who became the family-run company's only outside director. Another investor, Netcom, a San Jose-based Internet services provider, paid an undisclosed sum for a 15% stake in the company. Neither Lynch nor Netcom executives returned calls for comment.

But the bloom didn't last long. McKinley's partnerships generated a lot of press but little cash. According to Hayden, the bulk of the company's revenue comes from ads on Magellan. The Web directory didn't start accepting advertising until February, and in the quarter ended March 31, ad sales totaled just $300,000--compared with $3.1 million for InfoSeek, $2.6 million for Lycos, and $2.2 million for Yahoo, according to WebTrack, a New York-based Web advertising auditor.

According to Hayden, Magellan current ad sales are running at $450,000 a month, mainly due to an increase in traffic resulting from an agreement with Netscape Communications. But McKinley is paying dearly for it, shelling out $5 million for a coveted link from Netscape's "Net Search" Web page. In exchange, Netscape buys ad space on Magellan--and is Magellan's top advertiser.

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When Yahoo kicked off a round of stock offerings of Web directory firms this spring, it appeared McKinley would join the rush. News reports from early 1996 named McKinley as a likely IPO candidate, and Hayden said last week that the company was in a quiet period, which normally precedes an offering. But sources close to the company said McKinley's hopes of an IPO faded months ago, when the company failed to interest Wall Street bankers in underwriting an offering.

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