May 1, 2001
Be careful what you wish for. You just may get it. That’s what a lot of Infotopia, Inc. shareholders are probably thinking these days. For months, many of those shareholders had been clamoring for the Company to move from the OTC Bulletin Board to a national stock exchange. On April 26th, Infotopia announced that it was doing just that – sort of.
Actually, Infotopia, Inc., the Nevada corporation that trades on the OTC Bulletin Board, isn’t going anywhere – but its assets have a ticket to ride. Infotopia says it has entered into a letter of intent to transfer all of its business to an American Stock Exchange listed company called EntrePort, Inc. At the end of the day EntrePort (whose name is slated to be changed to Infotopia once the deal is done) will own all of the Infotopia assets (and liabilities), and the Nevada company will be little more than a shell.
For more on Infotopia, see Infotopia, Inc. Part I, - Is This A Limited Time Offer; Part II, - For A Few Products More; Part III – Bye Bye Shares and Part IV – Predictions, Projections and Plans for the Future; and Updates dated March 26, April 2 and April 5, 2001.
Left Holding the Shell
How will this work? The deal calls for all of the assets of Infotopia to be transferred to EntrePort, the American Stock Exchange company. They will become the only assets of the AMEX company because EntrePort will spin off its existing business - training real-estate professionals - to a new company that will be owned by the current EntrePort shareholders. And that spin-off is being given a gala bon voyage. Infotopia has agreed to give that new entity a parting gift - $2 million.Where will that $2 million come from? Its last Form 10-K Annual Report indicated that Infotopia had just $787,150 in cash at the end of December 2000. So far, the Company has not filed any more recent financial statements.
What does this mean for current Infotopia shareholders? It does not mean that they will be swapping their shares in the OTC Bulletin Board company for stock in the AMEX-listed company. Instead, the current Infotopia shareholders will continue to own stock in the OTC Bulletin Board company. The name of that company will be changed and, for now at least, its sole asset will apparently consist of 13.1 million units of EntrePort securities that the Bulletin Board company (Infotopia, Nevada) will receive in exchange for all its assets and liabilities. Infotopia says that those units will each consist of (i) one share of EntrePort common stock; (ii) one warrant to purchase 1/2 share of EntrePort stock at $10 per full share and; (iii) one warrant to purchase 1/4 share of EntrePort common stock at $15 per full share.
Sharing the Wealth
Who will ultimately receive those 13.1 million units? Infotopia states that it “intends that its current shareholders will receive a liquidating distribution of all of the equity securities of the new company, upon completion of the registration.” What exactly does that mean? Is this good news? Right now, Infotopia has as many as 463 million shares of common stock outstanding (assuming that all of the outstanding Series A and Series B preferred shares were, or have been, converted into common stock). In that case, if all of the EntrePort shares were distributed on a pro rata basis, the owners of those 463 million shares would receive one EntrePort share for every 35 or so Infotopia shares they now own.Could there be other Infotopia shareholders who would share in that distribution?
Consider one possible scenario. Infotopia (the Nevada company that trades on the Bulletin Board) will have to get shareholder approval for the deal with EntrePort. The Company could ask its existing shareholders to ratify the transaction. Or it could do something it has done before – create a new class of preferred stock, and give each preferred share enough votes to guarantee approval. The Company still has 20 million preferred shares waiting to be issued. Assume that each of those shares is given 26 or more votes – making for a total of 520 million votes - more votes than all of the outstanding common stock combined. Those preferred shares could then be placed in the hands of management, or persons friendly to management. Under Nevada corporate law those preferred shareholders could then approve the EntrePort transaction, without the participation or consent of any of Infotopia’s existing common shareholders.
The potential nightmare scenario could get even worse for current Infotopia stockholders. What if those newly issued preferred shares were also given preferential liquidation rights? Say, for example, that each preferred share was also to be treated as if it were the equivalent of 26 or more common shares upon liquidation. In that case, the preferred shareholders might hold the equivalent of 520 million shares, while the common shareholders would hold about 463 million shares. When it came time to distribute those 13.1 million EntrePort shares, less than one half would go to the present common shareholders.
Such a scenario may never come to pass, but there are other reasons why current Infotopia common shareholders might not receive the full benefit of those EntrePort shares. If Infotopia “liquidates” those EntrePort shares as it promises, it seems that the Company will be handing out its only meaningful asset. Aren’t the Company’s creditors likely to be looking for their share? Generally, a business that is liquidating assets must first pay anything due to the government (like taxes), then satisfy secured creditors, and then meet obligations to unsecured creditors. Shareholders are at the end of the line. They get to divvy up whatever is left – if anything.
Current Infotopia shareholders may also wonder who will control the surviving American Stock Exchange company. Right now EntrePort has about 17.8 million shares outstanding, but Infotopia says there will be a 1 for 30 reverse stock split of EntrePort stock before the closing. That would leave approximately 593,000 shares owned by the current EntrePort shareholders and 13.1 million shares owned by the OTC Bulletin company (and eventually distributed in some fashion). But will other shares be issued before, at, or after the closing, and if so to whom? Is Infotopia’s current management team slated to receive any EntrePort shares or options? Not surprisingly, the Company press releases announcing the deal do not address these questions.
Passing Muster
The deal faces serious hurdles, including American Stock Exchange review. When an unlisted company (Infotopia) gains control of an AMEX-listed company (EntrePort), Section 341 of the AMEX Constitution requires the surviving company to comply with the AMEX original listing criteria. These require the company to have (i) stockholders equity of at least $4 million and (ii) pre-tax income of at least $750,000 in the last fiscal year or two out of three preceding fiscal years. Will the surviving company meet these thresholds? Infotopia had pre-tax losses of $26.7 million for the ten months ended December 2000.As an alternative, the AMEX will consider listing a company that has had two years of operations, stockholders equity of at least $4 million, and publicly held shares having an aggregate market value of $15 million. Infotopia would appear to fall short here since it has not been in business as an independent entity for two years.
Before a company can be listed on the AMEX, it must first demonstrate a $3 minimum market price and at least $3 million market value - for a reasonable time before listing. That means, even with a reverse split, the AMEX may take a wait and see attitude before giving approval to the continued listing of the surviving company.
One more thing to keep in mind. The AMEX frowns on super-voting stock. AMEX rules seek to protect all classes of shareholders from being disenfranchised or diluted without their consent. How then will the American Stock Exchange view Infotopia’s past practices in this regard?
All this considered, the eventual fate of this transaction remains an open question. So does the extent of its potential benefit for existing Infotopia shareholders. For the time being they can only sit back and wait to see whether they will soon be kissing their assets goodbye.
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