Re: 4/26/02 - [IFTA/JSHT/Kernaghan] Stock Patrol: Zero Degrees of Separation, the Next Generation - Part 2
ZERO DEGREES OF SEPARATION, THE NEXT GENERATION
INFOTOPIA, INC (OTCBB: IFTAE) AND JOSHUA TREE CONSTRUCTION, INC. (OTCBB: JSHT) PART II - A TREE GROWS IN CANFIELD
April 26, 2002
There has been little news from Infotopia, Inc. (OTCBB: IFTAE) in recent months, and share prices have faded to a fraction of a cent. That, however, does not mean that members of Infotopia’s management team have been idle. As we discovered in our first installment of this series, Infotopia’s Chairman and CEO, Daniel Hoyng, and its Senior Vice President and Secretary, Marek Lozowicki, now occupy those same positions at another OTC Bulletin Board Company, Joshua Tree Construction, Inc. (OTCBB: JSHT).
Joshua Tree is already announcing acquisitions, sending out optimistic press releases, and issuing stock, options and warrants. And Joshua Tree is now controlled by Canadian investment house, Thomson Kernaghan (a frequent recipient of Infotopia shares) and a pair of offshore companies controlled by Thomson Kernhagan’s Chief Executive Officer, Mark Valentine.
The Valentine-controlled entities, Canadian Advantage Limited Partnership (CALP) and Advantage [Bermuda] Fund, Ltd. (ABFL), acquired about 64% of the outstanding Joshua Tree from its former majority stockholder, First Capital Partners MM, Inc. in January 2002. Since then, the Valentine group (including Thomson Kernhagan) has increased its interest in the Company. By March 20, 2002, they controlled over 86% of the voting securities.
Since then, the new Joshua Tree team has been busy.
The Boys Are Back In Town
When First Capital Partners MM turned control of Joshua Tree over to the Valentine group, First Capital’s President, Vincent Hesser resigned from his positions as President and sole director of Joshua Tree. After that, the majority shareholder – apparently CALP – appointed Infotopia’s Daniel Hoyng and Marek Lozowicki as the Company’s new directors. Hoyng and Lozowicki then proceeded to appoint themselves as CEO and President, and Senior Vice President and Secretary, respectively. Under Nevada corporate law, the Company did not have to seek approval from its public shareholders before making these various appointments.
Business wise, Joshua Tree began moving in a new direction even before the Hoyng and Lozowicki appointments were announced. On January 23, 2002, one week before the duo started running the Company, Joshua Tree said that it had signed a Letter of Intent to acquire a private company called American Health and Diet Centers, Inc. (AHDC). Less than a month later, on February 13th, the Company announced that the deal had been completed - although a Form 8-K said it actually closed on March 22nd.
The Joshua Tree press releases described AHDC as “a multi-channel marketer of high quality nutraceuticals and natural health product solutions” that operated 22 retail locations under the names “Vitamin Healthcenters” and “The Nutritionary.” It also claimed that AHDC had more than $10.6 million in net sales in 2000. So far, however, Joshua Tree has not filed any audited financial statements for AHDC.
Joshua Tree’s January 23rd press release also had this nugget for investors:
American Health and Diet Centers, Inc. is planning an aggressive growth strategy for 2002 and plans to open 150 new locations, with further plans to expand to over 1,500 locations by the end of 2005. The new locations will be both Company Stores and Franchised locations.
That level of growth would be unprecedented for AHDC, which began business in 1979 and now has 22 stores – an average of one new store for each year it has been in business. It is unclear whether any of the existing stores – most based in kiosks located in shopping malls – are owned by individual franchisees, or whether all are owned by the Company. In any event, franchising is a complex business, with rigorous legal restrictions, a steep learning curve, and strong competition for franchisees. There is nothing that would indicate that AHDC is positioned or prepared to sell hundreds of franchises from what seems to be an almost standing start.
A Form 8-K filed on April 16, 2002 summarized the transaction. Joshua Tree disclosed that it paid $3 million for the AHDC stock by giving seven year promissory notes to the former AHDC shareholders. In general terms, Joshua Tree’s obligation to pay the promissory notes is secured by all of the assets of AHDC and Joshua Tree, the AHDC stock, and a mortgage on Daniel Hoyng’s home. That means the former AHSC owners stand to get back their business, everything belonging to Joshua Tree, and Hoyng’s residence, if the Company fails to pay the $3 million notes as they come due.
The Form 8-K does not indicate when the Company must begin paying off those promissory notes. Although the Form 8-K initially states that the transaction documents are attached, it later indicates that they will be provided in a subsequent amendment.
In addition to the promise to pay $3 million, Joshua Tree has given the former AHDC owners, Melvin Simon and Keith Frankel, a total of 2.2 million warrants to purchase Joshua Tree common stock at $0.25 per share. The warrants are exercisable at any time until March 2007.
Chances are it will not take that long for the warrants to be exercised; Joshua Tree has promised to file a Registration Statement for the stock underlying those warrants by May 21, 2002. That means the Company will be registering those 2.2 million shares in addition to the 3,250,000 shares that it has agreed to register for CALP and ABFL. And that does not even include nearly 10 million shares that could be registered for Thomson Kernhagan.
There’s more. Frankel initially will have the right to choose three out of five members of the Company’s Board of Directors – but Joshua Tree does not say how long he will enjoy that privilege. Frankel also entered into a two year consulting agreement with Joshua Tree in exchange for options to buy an additional 3.5 million shares. And yes, the Company has agreed to register those 3.5 million shares by May 21st as well. That means that Joshua Tree will be registering somewhere between 9 million and 20 million shares - that we know of - within the next month.
As part of the acquisition, Joshua Tree also agreed to provide AHDC with at least $300,000 in working capital and “to pay down outstanding debt owed by AHDC to Hudson United Bank in the amount of $3.35 million and outstanding receivables to Vitaquest International, Inc. ("Vitaquest"), an entity controlled by Mr. Frankel, in the amount of $1.8 million.”
The relationship with Vitaquest apparently will be ongoing. AHDC entered into an exclusive manufacturing agreement with Vitaquest for an initial period of five years to fulfill its vitamin and nutraceutical requirements.
Where will Joshua Tree get the funds to pay its obligations under the AHDC promissory note, provide working capital, and satisfy the $1.8 million in “outstanding receivables to Vitaquest”? The Company says it has sold, and will continue to sell, stock. Presumably, that could signal more transactions with Thomson Kernaghan and other offshore investors.
Still, there could be immediate cause for concern. According to Simon and Frankel, Joshua Tree was already in default on April 3, 2002. The Company says it expects to cure that default, as required, within thirty days. It has not said how.
Issuing, and registering, 20 million shares poses one other obstacle for Joshua Tree. The Company is only authorized to issue 20 million common shares. As of December 31, 2001, it had already issued more than 3.1 million shares, so it is due to run out of common stock before all of those options and warrants are exercised. That means it will have to amend the Certificate of Incorporation. Then again, Hoyng and Lozowicki are familiar with that process, having amended the Infotopia Certificate of Incorporation on more than one occasion to satisfy that Company’s hunger for more shares to dispense.
“It Seems We’ve Stood and Talked Like This Before”
Those Infotopia connections just will not go away. The AHDC transaction is not the first business deal between Hoyng and a business controlled by Frankel. On January 2, 2002, Infotopia announced that its wholly-owned subsidiary, TrenDirect Marketing, Inc., had acquired the right to purchase certain assets of a bankrupt entity called Danmark, Inc. from Frankel’s company, Vitaquest International. At the time it filed its Chapter 11 petition, Danmark owed Vitaquest more than $5 million - and Vitaquest had a lien on all of the Danmark assets.
Infotopia agreed to purchase that lien for $3,575,000, by paying $500,000 at closing, and signing a promissory note that provided for the payment of another $500,000 before December 31, 2001, $1 million by February 18, 2002, and $500,000 every month thereafter until the balance was satisfied. As collateral for those payments, Vitaquest was given a lien on assets of Infotopia and TrenDirect.
The relationships get even more intriguing. Infotopia loaned the $500,000 down payment to TrenDirect, but only after it obtained that money from Thomson Kernaghan. On January 3, 2002 Infotopia sold 38 million shares of common stock to Thomson Kernaghan for $950,000.
That took care of the down payment, but the balance due on the promissory note could pose a problem for TrenDirect and Infotopia. On January 2nd, Infotopia said it was considering spinning-off TrenDirect as a separate public entity. Although Infotopia said it anticipated making a final decision on the spin-off during the first quarter of 2002, there is no indication that it has moved forward with that plan – or that TrenDirect is doing business and generating revenues.
That would leave Infotopia obligated to pay the balance due to Vitaquest. Without current financial statements it is not possible to determine whether Infotopia is in a position to make those payments, but the Company’s most recent Form 10-Q is not encouraging. At the end of September 2001, Infotopia had about $900,000 in cash and receivables of $5 million, while its current liabilities included payables of almost $10 million.
So did Infotopia make those December 31, 2001 and February 18, 2002 payments? If not, has Vitaquest seized any assets of Infotopia or TrenDirect? Or have the two companies revised their relationship? Is there any relationship between Infotopia’s obligation to Vitaquest and that $1.8 million in “outstanding receivables to Vitaquest” that Joshua Tree has agreed to pay? If Infotopia files its Form 10-K for the year 2001, investors may get answers to those questions.
We’ve Only Just Begun
What can investors expect from Joshua Tree? Will the Company be issuing lofty releases, publishing Chairman’s messages, signaling acquisitions and dispensing shares at a breathtaking pace á la Infotopia? Will there be promises of an imminent move to NASDAQ, the American Stock Exchange or even the New York Stock Exchange? Will Joshua Tree become a haven for boatloads of consultants, attorneys and offshore investors? Will Hoyng and Lozowicki – who said they owned no shares of Joshua Tree as of April 16, 2002 – be given generous employment agreements, option packages and discount-priced shares?
In other words, are we looking at Infotopia redux? One thing seems certain. It will be another year before Joshua Tree is obligated to file audited financial statements. Until then, investors will have to rely upon unaudited quarterly reports, statements from the Company, lofty press releases, and recommendations from promoters.
Just like they did with Infotopia.
©2002 Stock Patrol.com. All rights reserved.
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