Dirks & Company,Inc. Toll: 1-800-774-0778
18 East 53rd Street 6th Floor Phone: 212-832-6700
New York, N.Y. 10022 Fax: 212-832-5623
September 19, 2001 Ray Dirks 212-832-2294
Strong Buy Recommendation Stevens R. Monte, CFA 212-832-4198
Reliant Interactive Media Corp.
OTCBB – RIMC
Price Range: $2.06-$0.22 Cal. FD P/E Sales
Current Price: $0.85 Year E.P.S. Ratio (millions)
2 yr. Price Target: $25.00
Shares Outstanding: 11,289,621 1999 $ (0.25) NM $ 22
Floating Supply: 4,428,420 2000 0.22 3.9x 100
True Float: 2,500,000 2001E 0.30 2.8 150- 160
2002E 0.60 1.4 225-275
Market Capitalization $ 9,600,00 2003E 1.25 0.7 350-450
Current Ratio 3 to 1
Long Term Debt None
Summary of Strong Buy Recommendation
Sales and earnings of Reliant Interactive Media Corp. are in a powerful uptrend.
We think earnings will reach 30 cents per share this year (calendar 2001) and 60 cents per share next year (2002) on revenues of $150 million - $160 million this year and $225 million - $275 million in 2002. Based on management’s 17-year track record of success in the direct marketing arena, we think that management’s goal of $500 million in sales could be reached in 2004. On such a growth trend, earnings should reach $15 million, or $1.25 per share in 2003. Our target price for RIMC is $25.00,or 20 times earnings within 24 months.
RIMC recently obtained access to a $5 million line of credit on very favorable terms which will substantially reduce its interest costs, thereby increasing profit margins. RIMC has no long term debt, and management owns over 50% of the stock outstanding.
Reliant qualifies for listing on the American Stock Exchange provided its stock price exceeds $3.00 per share, which is likely to happen soon in light of its strong track record, bright growth prospects, and likely discovery by the broad investment community.
No statement or expression of opinion or any other matter herein contained is, or is deemed to be directly, an offer or a solicitation of an offer to buy or sell the security referred to above. The information contained herein is taken from sources believed to be reliable, but its accuracy cannot be guaranteed. There can be no assurance that future recommendations by these sources will prove profitable or will equal the performance of past recommendations. The principals and employees of the Company may trade in securities mentioned herein subject to self-imposed restrictions: such affiliated persons may at any time hold positions in issues recommended within this publication. The Company may be a market maker in the securities referred to herein.
Reliant sells directly to consumers a variety of products including computers, kitchen appliances, household items, etc. by means of electronic and multi-media marketing methods in the U.S.and overseas. These television infomercials, which are internally produced, are supplemented in a major way by RIMC’s well known internet web sites www.AsSeenOnTVpc.com and www.RIMC.com, which carry a broad line of proprietary products advertised by RIMC together with products from other manufacturers and distributors who advertise and market consumer products on TV,
Because of its low overhead costs, its sophisticated buying techniques, and its expertise in selecting merchandise suitable for offering on TV, at favorable prices to the consumer, profit margins can be greater than for many other television internet and catalog retailers. As volume continues to grow, profit margins will increase handsomely.
Management possesses a wealth of experience in selling products outside the U.S., particularly in Europe, Asia and South America, having spent several years with Home Shopping Network, the second largest TV shopping network, directing its international operations.
RIMC spent nearly $150,000 in the 2nd quarter opening a branch office in London and expensed a total of $800,000 so far on its international development. Operations in South America and Asia and continental Europe are also getting underway.
RIMC has obtained an exclusive contract with QVC, which is the largest home shopping network with over several billion in sales, to develop and market a number of products together. This arrangement includes RIMC’s websites, where some QVC merchandise is now being displayed.
An exceptionally strong and powerful relationship has been developed with Advance Micro Devices, Intel’s principal competitor, which makes the micro-processors that are components of many of the computer that are marketed by RIMC. AMD, in conjunction with RIMC’s computer manufacturers, provides a wealth of support both internationally and domestically to RIMC in keeping its computer products ahead of the curve in the computer retailing area. This has enabled RIMC’s sales to keep growing strongly in the face of a computer sales slump generally.
Business / Investment Rationale
Reliant Interactive Media Corp. is engaged in the business of electronic and multi-media marketing of a wide range of consumer products. While the company’s primary focus has been upon the utilization of direct response transactional television programming (better know as “infomercials”), it also makes use of print, radio, and the internet.
There are two important aspects of Reliant’s television retailing activities that should enhance company profitability going forward:
1. The company’s infomercials are profitable on a stand alone basis, which enables it, at no effective cost to steer customers to its web sites where they can make additional purchases. This is in sharp contrast to many of the so-called dot coms that failed because of the high cost of attracting customers, and
2. Since Reliant either owns or has exclusive marketing rights to all of the products that it sells via television retailing, it is entitled to royalties when those products are sold by other entities through other distribution channels (e.g. wholesale, retail, catalog, etc), or international markets.
In July 1998, Reliant’s management took control of a publicly traded “shell” company by means of a reverse merger. In hindsight, this strategy may have been “penny wise, but pound foolish” because the company has thus far not attracted any “Wall Street” sponsorship. From our standpoint, however, this has created a potentially very exciting investment opportunity.
Reliant is headed by a management team whose members were pioneers in the electronic and multi-media marketing field and who rank among the most successful marketing managers in the industry. During their respective careers they have sold merchandise having an aggregate value in excess of $3 billion.
Management’s talents have been clearly on display since they assumed control of RIMC.
More specifically, Reliant’s sales have grown from $120,234 in the year ended December 31, 1998, to $21.4 million in 1999 and to $100.1 million in the year 2000. During this period, the company’s bottom line improved from a loss of $(0.42) per share in 1998, to a loss of $(0.25) per share in 1999 , and then jumped up to a profit of $1.6 million, or $0.22 per fully diluted share (on 7.2 million fully diluted shares) in the year 2000.
Interestingly, the company’s profitability could have been even greater (management believes by perhaps an additional $2 million - $3 million) had it not been for the high costs that it incurred to borrow funds to pay in advance for television time and to carry inventory. We understand that the company was being charged a percentage of sales as opposed to a more normal interest rate on the funds it borrowed.
Looking beyond last year and this year as well, RIMC’s need to secure funds on such an expensive basis will disappear. Going forward, the company’s cash position should build up ( a normal function of its rapidly growing sales and wider profit margins), and it is gaining access to lines of credit on much more favorable terms. Accordingly, net profit margins will expand considerably.
Reliant is presently on track to achieve sales of $150 million - $160 million this year and, excluding a non-recurring bonus compensation charge of $2.4 million, will likely attain a net profit of about $3.4 million. This would be the equivalent of $0.30 per fully diluted share on about 53% more shares (11 million versus 7.2 million) than in the year 2000.
Looking into next year, the year ending December 31, 2002, we think that RIMC’s sales could increase to the $225 million - $275 million range benefiting from:
· An expanded number of new product offerings that will be shown via infomercials on domestic TV.
· The utilization of additional marketing channels (retail, wholesale, catalogue, etc.) for the sale of proprietary products,
· The introduction of several television home shopping productions in a number of overseas markets in which RIMC’s management has long-standing relationships,
· The driving of more infomercial watchers to the company’s two web sites www.AsSeenOnTVpc.com (on which over 40,000 computer related products are advertised) and www.rimc.com (which offers a host of consumer products), and
· Utilization of a toll free telephone number, 1-800 – As Seen On TV, to develop a clearing house from which any product that is advertised on television can be located and purchased, with RIMC receiving a fee for its services.
On a $225 million to- $275 million sales level in 2002, we think the company could earn some $7 million, or $0.60 per fully diluted share (on an estimated 11.7 million fully diluted shares).
We would note that management’s goal is for RIMC to achieve annual sales of $500 million in the year 2004, which we think is attainable.
At current price levels, Reliant has a market capitalization of less then $10 million, which is equal to 0.096 times sales recorded in the year 2000, 0.077 times trailing 12 month sales ($125.4 million), 0.064 times estimated sales for 2001, and only 0.043 times projected sales in the year 2002.
Reliant’s stock is presently selling at only 3.9 times reported earnings for the year 2000, at 2.8 times estimated earnings for this year, and at only 1.4 times projected earnings in the year 2002.
To determine a proper valuation for RIMC, we think it is appropriate to take a look at the valuation that is currently being accorded another company we have been following for some 10 years, ValueVision International. VVTV, which has developed into the third largest television home shopping network ( behind QVC and HSN), also sells merchandise via a companion internet site. VVTV’s sales totaled $53.9 million in its fiscal year ended January 31, 1995. Subsequently, its sales rose to $88.9 million in fiscal 1996, to $159.5 million in fiscal year 1997, reached $$385.9 million in the fiscal year ended January 31, 2001, and may approximate the $480 million level in the current fiscal year ending January 31, 2002. At present, VVTV has a market capitalization of $600 million, which is equal to 1.4 times trailing 12 month sales ($427.5 million) and 1.3 times this fiscal year’s estimated sales.
Given VVTV’s present valuation, we believe that a company with the accomplishments and prospects for growth that Reliant possesses is deserving of a much higher valuation.
When RIMC gets “discovered” by the investment community, we can visualize it commanding multiples of at least 0.8 times sales and perhaps 20 times earnings.
A multiple of 0.8 times projected sales of $350 million-$450 million in the year 2003 would suggest a market capitalization of $280 million- $360 million, or $24.00-$31.00 per share. A multiple of 20 times projected earnings of $1.25 per fully diluted share in the year 2003 would suggest a stock price of $25.00 per share.
Accordingly, we are establishing a two-year price target of $25.00 per share for RIMC.
We strongly recommend purchase by very aggressive, long-term growth oriented investors who are seeking the possibility of substantial capital appreciation and who recognize and can tolerate the risks associated with investing in the shares of a relatively small company.
Background
Prior to the year 1984, the maximum amount of television commercials was limited to 16 minutes per hour by the Federal Communication Commission (FCC). In 1984, the FCC rescinded this limitation, which gave rise to the electronic retailing industry, including television home shopping, infomercials, and multi-media marketing.
Reliant’s top three executive officers (Kevin Harrington, Tim Harrington, and Mel Arthur) were pioneers in the electronic retailing industry, and as described in greater detail later in this report, have been responsible for the sale of diverse merchandise valued in excess of $3 billion during their careers.
Management
As can be seen in the following brief biographies, RIMC’s management team is young, aggressive, foresighted, and quite successful.
Kevin Harrington (44) – Chairman and Chief Executive Officer
Mr. Harrington produced his first infomercial in 1985 and then founded Quantum International, which is considered to be one of the most successful companies in the direct response field. Within two years, Kevin and his brother Tim built a $140 million sales organization. In 1991, the Harringtons sold Quantum International to a NYSE listed firm, National Media and Kevin Harrington became its President. During his association with National Media, its stock price rose from $1.25 per share to more than $20.00 per share. In 1994, Kevin Harrington left National Media to form a joint venture company with The Home Shopping Network called HSN Direct International. The objective of this new company was to develop infomercials that could take products that had performed successfully on the HSN television home shopping channels in the United States and make them available around the world. While with HSN Direct, Mr. Harrington forged relationships with marketing organizations in some 70 countries around the world. Mr. Harrington and his brother took control of Reliant in August 1998. Kevin Harrington is a founding Board member of the Electronic Retailing Association, which holds its annual convention in Las Vegas next month. Reliant has a very large booth at this show, which should help RIMC develop substantially greater sales in 2002.
Tim Harrington (35) – Director, President
Tim Harrington has worked closely with his brother Kevin in pioneering the infomercial industry. Early on his primary focus was upon legal, contractual, and production activities. When Quantum International was acquired by National Media, Tim became its Executive Vice President and had executive responsibility for its marketing and sales departments. He then became a co-founder and Executive Vice President of HSN Direct where he oversaw product development. In August 1998 Tim moved on to a controlling position at Reliant along with his brother Kevin.
Mel Arthur (57) – Director, Executive Vice President
Prior to joining Reliant, Mr. Arthur was the “Top Producing show host” at Home Shopping Network. During an eight year career with HSN, Mr. Arthur was responsible for the sale of about a billion dollars worth of merchandise. Among the products for which he has expertise are computers, exercise equipment, fine jewelry, health products, home electronics, oriental rugs, and vitamins. Mr. Arthur also had a six-year career as a sportscaster and color announcer for the USFL, NASL, and the Jacksonville University basketball team. Earlier in his career (in the 1970-1972 period), Mr. Arthur was one of the top sales producers for Honeywell’s EDP division, where he sold large scale, multi-million-dollar mainframe computers.
Karl E. Rodriguez (53) – Director, Secretary
Mr. Rodriguez received his Juris Doctor degree in 1972 from Louisiana State University Law School and has practiced business and corporate law ever since. During his career, Mr. Rodriguez has been active in real estate development, was involved in the sale of business and franchises, was the project manager for the development of an Arnold Palmer design Golf Course, and was the managing director for MedAmerica, LLC., which operated children’s medical clinics. Mr. Rodriguez has also been a director, corporate secretary and general counsel for Telco Communications (a long distance reseller) and was President of an organization (Healthcare Financial and Management Services, Inc.) that provided billing services for three Louisiana hospitals.
Products launched/ Selling Successes
As noted earlier, the executives at Reliant have been responsible for the sale of merchandise having an aggregate value in excess of $3 billion. The following table lists some of the products that they have launched as well as the approximate sales generated by those products which occurred over various time spans.
Year Product Estimated Sales
1986 V-Slicer $ 150 million
1987 Foodsaver 100 million
1988 Ginsu/Blade Knife Set 30 million
1989 Great Wok of China 100 million
1989 Jet Stream Oven 150 million
1989 Daily Mixer 80 million
1989 Mega Memory/Kevin Trudeau 48 million
1990 Wolfman Jack Records 10 million
1991 Flying Lure 120million
1991 Bruce Jenner SuperStep 50 million
1992 Bruce Jenner Stair Climber 60 million
1992 Target Training / Tony Little 65 million
1993 Color Cote Car Wax 80 million
1993 Medicus Golf Club 30 million
1994 Power Walk 75 million
1995 AB Isolator/Tony Little 85 million
1995 Microsteamer 30 million
1996 Sweet Simplicity 70 million
1997 Kathy Smith AirTech Glider 30 million
1998 Body Flex 50 million
1999 Computers (IBM, Gateway, Systemax) 125 million
1999 Pest Offense 31 million
1999 Wonder Steamer 12 million
1999 Sobakawa Insoles 5 million
1999 Trash or Treasure 4 million
2000 Thunder Stick 14 million
2001 Flavorwave Oven NA
2001 Thunderstick Pro NA
Based on statistics complied by Infomercial Monitoring Service, Inc. a trade publication, many of Reliant’s products have often been ranked in the Top 10 Weekly Rankings.
From time to time we have seen a television commercial in which world famous golfer Arnold Palmer referring to some pro golfers says “these guys are good”. We think that the same description applies to the pros at Reliant Interactive Media Corp.
Operating Results/Projections
As shown in the table on the next page, the accomplishments of the Reliant “professionals” have been outstanding.
In the 1998 – 2000 period Reliant’s sales vaulted from $120,000 to $100.1 million, while its bottom line moved up from a loss of $1.1 million, or $(0.42) per share, to a net profit of $1.6 million, or $0.22 per fully diluted share.
During the six months ended June 30, 2001, Reliant’s sales increased by 65.1% to $64.3 million from $38.9 million in the year ago period. In this year’s six month period, Reliant reported a net loss of $647,554, or $(0.06) per fully diluted share (on 10.9 million shares) compared with a net profit of $381,667, or $0.06 per full diluted share (on 6.9 million shares). However, during this year’s first quarter, the company incurred a non-recurring expense of $2.4 million. This was in accordance with a management performance bonus agreement under which 3.9 million shares were issued when the company’s sales subsequent to January 1, 1999 aggregated more than $125 million. If one were to exclude that non-recurring $2.4 million charge and utilize a 32% tax rate, Reliant would have reported a six month net profit of $974,000, or $0.09 per fully diluted share.
During the 12 month ended June 30, 2001, Reliant’s sales (as shown in the next table) totaled $125.4 million. By our calculation, excluding the $2.4 million bonus charge and
Selected Income Statement Statistics
(000)
Year End December 31 12 mos Year Ending Dec 31
1998 1999 2000 6/30/01 2001E 2002E
Net Sales $ 120 $ 21,442 $100,076 $125,413 $150,000 $225,000
Gross Profit 54 5,775 17,675 21,692 29,000 40,500
Operating Expenses 1,229 7,072 15,997 18,939 23,900 30,000
Operating Income(Loss) (1,175) (1,297) 1,678 2,753 5,100 10,500
Other Income (Expenses) 40 (37) (87) (114) (100) (200)
Pre-Tax Income (Loss) (1,135) (1,334) 1,592 2,640 5,000 10,300
Income Taxes 0 0 34 842 1,600 3,300
Net Income (Loss) $(1,135) $(1,334) $1,558 $1,798 $3,400 $7,000
Per Share $(0.42) $(0.25) $0.22 $0.21 $0.30 $0.60
Average FD Shares 2,673 5,419 7,189 8,492 11,000 11,700
using a 32% tax rate, Reliant would have had a net profit of $1.8 million, or $0.21 per fully diluted share (on 8.5 million shares).
We would note that since 1999 about 65% of Reliant’s sales have been derived from computers and computer related products. To eliminate the risk of inventory price volatility, Reliant typically obtains delivery from its computer suppliers (IBM, Gateway, Systemax) to match orders.
At present, computer products are generating about 60% of sales. Management is targeting a 50/50 split between computers and other potentially higher profit margined consumer products. Additionally, as noted earlier in this report, we would look for the company’s costs to finance television time and product inventory to be substantially less going forward.
Based upon our analysis of the company and our conversations with management, we think that Reliant is on track to attain sales of about $150 million - $160 million this year. Moreover, we think that the momentum has been built that will enable sales to rise to the $225 million-$275 million range in the year 2002. On these sales levels, we think that Reliant could realize a net profit of $3.4 million, or $0.30 per fully diluted share, and then $7 million, or $0.60 per fully diluted share.
Financial Condition
The following table presents pertinent balance sheet statistics for RIMC at December 31, 1999 at December 21, 2000, and at June 30, 2001.
Balance Sheet Data at
12/31/99 12/31/00 6/30/01
- - - - - - - - - - - 000 - - - - - - - - - - -
Cash $26 $299 $544
Restricted Cash 984 1,869 2,171
Accounts Receivable 0 394 561
Other Receivables 800 1,505 2,295
Total Current Assets 2,108 5,097 6,568
Total Assets 2,863 6,466 7,571
Total Current Liabilities 2,179 2,756 2,104
Working Capital (71) 2,341 4,464
Current Ratio 0.97 to 1 1.85 to 1 3.12 to 1
Long term Liabilities 0 0 0
Shareholders Equity $683 $3,710 $5,467
Per Share $0.11 $0.50 $0.48
Common Shares Outst. 6,310 7,349 11,274
Reliant utilizes the services of an independent fulfillment center to receive and process orders. The center also collects payments for such orders from charge cards and/or checks. To be on the conservative side, the center has established a cash reserve for potential credit card charge backs and refunds for product returns approximating 3% of sales, which is based upon historical patterns. At June 30, 2001, some $2.2 million was reserved for this purpose and is classified as restricted cash.
Other receivables of $2.3 million at June 30, 2001 represent the net amount that the fulfillment center owes RIMC after collecting payment on products sold, less its fee for its services.
As can be seen in the table, RIMC’s balance sheet has gained considerable substance since coming under the control of the present management team. From December 31, 1999 through June 30, 2001, the company’s working capital has risen from a deficit of $71,000 to nearly $4.5 million and its shareholders’ equity has grown from $683,000 to $5.5 million. The company presently has a current ratio of 3.1 to 1 and has no long-term debt.
The nearly 5 million additional outstanding common shares reflects the issuance of 3.9 million shares to management in accordance with a performance bonus agreement negotiated when management took over a shell corporation (earned in this year’s first quarter when RIMC’s sales subsequent to January 1, 1999 aggregated more than $125 million), the issuance of 500,000 shares at $2.00 per share for cash proceeds of $1 million, with the balance of the new shares having been issued for services rendered.
Reliant also has some 420,00 outstanding options that are exercisable at prices ranging from $2.50 - $7.50 per share (an average of $5.00 per share).
According to the most recent SEC filings, Reliant’s four man executive team owns 6,861,201 of the company’s presently outstanding 11,289,621 shares. Thus, the floating supply stands at 4,428,420 shares. However, according to management, “close friends of the company own nearly two-million shares so that the “true floating supply” probably approximates 2.5 million shares. |
