By now, investors have gotten used to watching shares pour out of the Infotopia, Inc. treasury, but now the Company has come up with a new twist. This time Infotopia is planning to dispense cash – lots of it.
What’s putting the Infotopia checkbook into overdrive? The story began to unfold with a July 23rd press release announcing that the Company had entered into a Letter of Intent that included an option to acquire 100% of two companies - Infomercial Management Company (IMC) and Modern Interactive Technology, Inc. (MIT) - from their shareholders, David Richmond, Mark Levine and Gary P. Kohn.
The press release contained no details of the proposed transaction. It noted, however, that Infotopia had worked with IMC and MIT to develop several product campaigns, including the Torso Tiger, Total Tiger, Hot Mommies, Body By Jake, Bun and Thigh Rocker and Michael Thurmond’s Six Week Body Makeover. What are IMC and MIT worth? What would Infotopia have to pay to acquire the two companies? The press release did not say.
The value of IMC and MIT remains a mystery, but investors now know what the deal will cost Infotopia. And the numbers are dazzling. On July 27th Infotopia filed a Form 8-K disclosing that the acquisition will cost the Company more than $82 million if it is completed. What is Infotopia getting in return? That’s difficult to say since the Form 8-K contains no financial information, audited or otherwise, for IMC or MIT.
Bye Bye Bucks
There’s a hefty amount of cash that Infotopia will be shelling out. In order to acquire the IMC and MIT stock, Infotopia would deliver:(i) a $1 million down payment (which has already been paid);
(ii) $4 million to be paid when a definitive agreement is signed (with October 15th as the outside target date);
(iii) another $5 million due at closing (contemplated for January 1, 2002);
(iv) yet another $5 million on the earlier of December 1, 2001 or the closing; and
(v) a one year $15 million promissory note that comes due on January 1, 2003. Infotopia would be required to pay off the note at the rate of $1.25 million per month, plus interest, beginning on January 1, 2001.
How does Infotopia propose to make the required payments? Apparently, the process has already begun. The Form 8-K indicates that Messrs. Richmond, Levine and Kohn received a $1 million down payment. Where did Infotopia get the cash? From IMC and MIT, who funded the down payment by increasing an existing inventory and accounts receivable funding loan to Infotopia. How large was that loan before it was increased by $1 million? What are its terms? The Form 8-K does not say.
Why did Infotopia need to borrow $1 million if sales are indeed proceeding at a record pace as reported in the Company’s press releases? And, more important, how can the Company raise sufficient funds to pay the balance of the purchase price? The Form 8-K does not indicate the source of any future payments.
Those payments total $30 million. But that’s not the entire cost. Infotopia also has agreed to pay Messrs. Richmond, Levine and Kohn “6% of all of the gross revenues of Infotopia, its subsidiaries and affiliates” up to $45 million. That’s gross revenues – before deducting any expenses or costs. What does this mean in practical terms? Assume for a moment that this arrangement had been in place during the first three months of 2001. Infotopia’s Form 10-Q for the quarter ended March 31, 2001 reported gross revenues of $23.9 million and net income of $1,562,000. If Infotopia had been required to pay out 6% of those gross revenues (about $1,434,000), net income would have been reduced to just about $118,000. And, of course, that doesn’t include the bottom line impact of the $30 million to be paid for those IMC and MIT shares.
That makes for a total purchase price of $75 million. But that’s not all. The agreement provides that Infotopia will pay Richmond, Levine and Kohn another $2.5 million apiece pursuant to two and one-half year employment agreements.
Now we are up to $82.5 million and there could still be more payments to come. Infotopia has agreed to reimburse Richmond, Levine and Kohn for all deposits previously paid by IMC and MIT. How much does that equate to? The Form 8-K and the accompanying Letter of Intent do not say.
Keeping Enformed
Then there is another contingent payment that could prove even more troublesome – and costly. Infotopia says it will provide a “supplemental indemnity” to Richmond, Levine and MIT against any losses they may incur as the result of a pending Federal Trade Commission Action relating to the marketing of a product called “Enforma.” What is this all about? In August 2000 the FTC charged that several parties, including MIT, Levine, and Richmond engaged in deceptive practices in connection with advertising, marketing and selling a weight loss product called the Enforma System. Also named in the suit were former professional baseball All Star Steve Garvey, and model Lark Kendall.The FTC action charges that Levine, Richmond and MIT and the others allegedly created and produced infomercials for Enforma that contained false and misleading claims for the product. The FTC wants them to refund money they received and disgorge “ill-gotten gains.” Enforma, and at least one other individual, have already settled a separate action, agreeing to pay $10 million in penalties. Enforma has apparently agreed to indemnify MIT, Richmond and Levine, meaning the Infotopia indemnification will only be triggered if Enforma does not honor that indemnity. Does Enforma plan to cover any losses by the MIT group, or will it claim some basis for avoiding that obligation? Only time will tell.
It’s Raining Shares
This is not the first time around for Richmond, Levine and Infotopia. On July 7, 2000, Infotopia filed a Form S-8 registering 8.33 million shares of Infotopia common stock for the two men. Those shares had been issued to Richmond (4,165,000 shares) and Levine (4,165,000 shares) for their services as consultants on the Company’s Torso Tiger campaign. That was in addition to the shares (and of course the ongoing royalties and minimums) that Infotopia had agreed to pay for rights to Torso Tiger.In fact, Infotopia issued quite a few shares in relationship to its Torso Tiger campaign. The Company’s Form 10-Q for the quarter ended August 31, 2000 indicated that four million shares of the Company’s common stock had been given to Modern Media on September 14, 2000 in connection with the Torso Tiger acquisition. Two million of those shares were subsequently registered in October 2000 on a Form SB-2 Registration Statement. That same Form SB-2 registered 425,000 shares for one Gary Kohn – now identified as one of the shareholders of IMC and MIT. Were those shares registered for Kohn actually part of the original issuance to Modern Media? What became of the remaining shares held by Modern Media?
There’s more. On November 9, 2000, Infotopia filed another Form S-8, this time registering 7,690,000 shares of common stock that had been issued to Mark Levine pursuant to a three year agreement “for consulting services, including, but not limited to, the development of advertising campaigns for the products sold by Infotopia through television and the Internet and for the production management of the videotapes and other media used by the Company for the promotion thereof.”
Levine’s consulting agreement has more than two years to run, and he’s already been paid for those services. So why is Infotopia now prepared to give him an Employment Agreement as well, at $1 million a year? Isn’t the Company being extremely generous with its assets – both shares and cash? Will Levine be returning a pro rata portion of those shares once his Employment Agreement goes into effect? The Company’s public filings do not address that issue.
And in Return…
What will Infotopia, and its shareholders, get in return for all these payments, commitments and contingencies? For the time being, investors are left to speculate over the value of IMC and MIT. What is the financial condition of those companies? Are they profitable? What assets do they possess? Can they possibly be worth $82 million- and then some? Until Infotopia provides audited financial statements for the two businesses, nervous investors are left to ponder these questions.IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com