There is no mystery surrounding one of the reasons why Infosentials went into administration. They had extremely dodgy sales practices of their GSTme product and failed to tackle the issue early enough.
The 2000 Infosentials annual report states that the company’s values are as follows:
“Servicing our customers. Developing and rewarding our people. Enriching our shareholders. Innovation, integrity, honesty. The drive to succeed as a team. Respect.”
Auditors PKF signed the accounts for June 30, 2000, without qualification although they did point out the $12.85 million in goodwill on the books was sustainable only with successful future trading.
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At about the same time as the audit was taking place, a couple of Infosential contracted sales teams were running amok racking up very healthy sales of Infosential’s GST product ‘GSTMe’. Problem is, these were no ordinary sales. The teams were invoicing Infosentials, and Infosentials were delivering the product to many who omitted the not-so-minor detail of actually ordering the goods. Most boomeranged back to Infosentials head office, or were dispatched to ‘ mom and pops’ low-tech recycler (otherwise referred to as ‘the bin’).
But Infosentials continued to badger these valued ‘customers’ to cough up whilst simultaneously forking out huge sales commissions for what can be best described as ‘Claytons’ sales. One can only speculate as to why. ‘Customer’ complaints were running white-hot at the Infosentials coal-face, not to mention the ACCC. It even registered a complaint in the Tasmanian Parliament.
But Infosentials muddled along as if nothing was wrong – and continue to do so if more recent comments by founder and chief executive Michael Schildberger are any guide.
The Melbourne Age picked up the issue on the day the company called in Andrew Home from Spencer & Co as voluntary administrator. Reporter Eli Greenblat reported the following shortly before Christmas.
“Michael Schildberger’s media group Infosentials has been placed in voluntary administration, with mystery surrounding the whereabouts of $2 million in cash from the sale of its products. Speculation has been growing for weeks that Infosentials had overestimated salesof its GSTme product, with one former employee claiming most of the sales were eventually returned by customers. Mr Schildberger, Infosential’s managing director, has consistently denied the accusations, but conceded last night that sales of GSTme had been well below initial expectations.”I still haven’t got to the bottom of that (claim), but I still don’t believe it,” Mr Schildberger told The Age last night. In an Australian Stock Exchange announcement late yesterday, chairman Ian Ferres said: “At the beginning of this financial year, the company delivered its first profit but for various reasons a substantial amount (more than $2 million) of the cash from those sales has not been received.”
Since then, Ferres, Schildberger and the administrator have all expressed high hopes of recovering the money. However, this flies in the face of what appears to be extremely dodgy sales practices of the people flogging GSTme, and the very low probability of obtaining recompense for commisions paid to those with such questionable practices and nebulous mode of operation. Well, was Infosentials an innocent party expertly dudded by a few sharp operators, or is there more to the story?
Crikey has sighted an early October 2000 resignation letter to Schildberger by obviously concerned and frustrated GSTMe staff members. It appears to draw attention to the conduct of middle management, in particular a “serious breach of ethics” over management directives to “demand payment for GSTme products despite a very obvious high percentage of non-legitimate sales”.
It goes on: “These also include a very high percentage of ‘customers’ who specifically told Infosentials agents they were not interested in the product,or Infosentials agents who represented themselves as ATO officers, or ‘customers’ that had no recollection of having ever purchased the goods – or even meeting a sales person representing Infosentials or Infosentials agents.
This is confirmed by the nature of many so-called ‘sales’ – many with irregularities. It is also clear many of the ‘sales’ were targeted at ‘customers’ who have little or no English skills, making them relatively easy to exploit.”
The letter points out that at the time 11,000 sales had been recorded but only 700 paid for by customers. Given that they retailed for $200, there is your ‘missing’ $2million.!! The ACCC were called in after receiving dozens of complaints, but for some reason Schildberger appears not to have taken action against the executive/s specifically responsible for the GSTMe debacle. So whilst the missing money is no great mystery, how it was permitted to occur is certain to fully exercise the collective minds of a number of interested parties in the near future. Chances are heads will roll – but that alone will not recoup one cent of the ‘missing’ money. Crikey suspects we can kiss that goodbye.
And that will leave those poor mug punters who hang off every precious word uttered at AGM’s scratching their scones, and just wondering which famous children’s author wrote Chairman Ferres’s script at the recent Infosentials AGM.
Try these for size from chairman Ian:
“After producing the accounting profit in the months of June, July and August of this year, combined with the prospects I have outlined we are confident we will move to profitability in the second half.” He said that the company was “on the cusp of significant success” in offshore markets and concluded by saying that “we all look forward to exciting months ahead”.
At the time of these statements, the company’s shares were trading at 19.5c which gave Infosentials a market capitalisation of $25 million. Ferres reported revenue of $5.7 million in the September quarter but how much of this was from dodgy GSTme sales ? The appointment of an administrator appears to coincide with the due diligence conducted by the billionaire Liberman family which perhaps treads more warily these days after getting badly burnt in failed e-tailer ‘dstore’.
On November 15 Infosentials told the ASX that JGL (the investment vehicle of the Liberman family) would take up 2.5 million convertible notes at 20c and 12.5million options at 20c. It also agreed to commence due diligence to take a private placement of up to 15 per cent of the company at 20c. This would have equated to 19.275 million shares and injected $3.85 million if it proceeded. .JGL was given an exclusive 30 days to take up this offer and a further 60 days to participate in a private placement on the same terms as anyone else.
So, whilst this due diligence process was in progress, it suddenly dawned on the Infosentials board to call in an administrator. But just five days before they did this, Schildberger sold 25 per cent of his personal shareholding – 2.5million shares – at 15c a share on market. At this point it is worth quoting from an article by Katrina Nicholas in the Sydney Morning Herald on January 2.
“Mr Michael Schildberger, the founder of Infosentials and a former host of the Nine Network’s A Current Affair program, sold close to 25 per cent of his shareholding in the company just five days before it was placed in voluntary administration. Documents lodged with the stock exchange show Mr Schildberger sold around 2.3 million shares on December 15, netting him around $350,000 and cutting his interest from 9.4 million shares to 7.1 million shares. Less than a week later, Infosentials was placed in the hands of corporate insolvency group Spencer & Co, owing more than 320 creditors around $4 million. According to the documents, however, the money was used by Mr Schildberger to convert some of his options which were due to expire on December 31. Mr Schildberger had 6 million options exercisable at 25c each, all of which expired at the end of 2000. Spending the entire proceeds on converting the options would have given Mr Schildberger 1.4 million shares, leaving 4.6 million to expire and increasing his own interest to 8.5 million shares – which is the current stated holding. The company secretary, Mr James Dix, said yesterday the proceeds of the sale were passed to the company upon the exercise of the options and that the money was being used for working capital. He also said that Mr Schildberger – who yesterday was unavailable for comment -was advised by Infosentials’s lawyers and his fellow directors not to sell any more shares because “it might look wrong to the market”.
Spencer & Co’s Mr Andrew Home said he did not think there was anything sinister about Mr Schildberger’s dealings. He also said Infosentials, which held its first creditors meeting last week, was considering taking legal action over its “couple of million worth of bad debts”. Mr Home said he was contemplating suing one debtor in particular for around $1million.”
These dealings had the effect of injecting $350,000 into Infosentials from the person that bought Schildberger’s shares. However, the market was clearly uninformed at the time and we would presume that ASIC is now moving to reverse the transaction, just like it did with trades by Malaysia Mining Corp during the Ashton Mining takeover. It is surprising that Schildberger was able to shift such a large slab of shares. Maybe they went to friendly hands? Who knows?
A story by Penny Brown in The Weekend Australian on December 30 continued to carry an overly positive spin from Schildberger which blamed its cash flow “hiccup” on bad luck. Check out these quotes:
“We spent probably too much on developing our products. We just had bad luck in terms of people who didn’t pay their debts and the stock exchange numbers going down in our area, which meant we didn’t get $5 million worth of options exercised ”
“I’ve always said you don’t put all your eggs in one basket. In this case, there were about six different baskets where I knew there was money that was coming in. All those six baskets collapsed. I was just unlucky. But we are far from dead.”
Crikey is not in the business of beating up on small companies, especially those run by former journalists who are having a go in the business world. Schildberger was a terrific journalist who once hosted A Current Affair. He carved out a nice little business through his original Business Essentials and we even received one of his well-packaged CDs in the mail the other day as a customer of Commonwealth Securities. We only met him once back in 1995 when he was doing some PR for then Coles Myer chairman Solomon Lew explaining the $1.3 billion buy back of Kmart’s 22 per cent stake in the retailing giant. However, we have also lost about $300 in the company through our small shareholding and are being sued for defamation by two executives of Infosentials, David and Tony Webster, who were together paid $300,000 by Infosentials last year.
From what we can tell, the Websters sold their business, Webster Publishing, to Infosentials for $2.2 million 18 months ago but at the time had not paid what was owing to a well-known wild animal documentary maker David Ireland, known as the Crocman. Ireland is suing the Websters for $3 million in the NSW Supreme Court and the case has been set down for four weeks of hearings in April. Schildberger refused to get involved and hung up on Ireland when he rang threatening to bring the full force of the law onto him. Ireland and his lawyer are very confident of success. We are pleading truth in our defence to the defo matter and believe any payments from the Infosential administrators to Websters should be held in trust until the court case is played out.
We certainly would not have taken such an interest in the affairs of Infosentials if two of their executives hadn’t sued us. Private Eye magazine in the UK talks about the curse of Private Eye that afflicts anyone who sues them. Maybe a similar phenomenon is evident with Crikey given the demise of Infosentials. Steve Price should take note. We’ve maintained from the outset that we have very little money and will not be silenced by a writ. So why on earth would anyone in their right mind bother taking expensive litigation against us?