San Diego Business Journal


Metabolife Continues Its Search for Buyer
By MIKE ALLEN - 10/17/2005
San Diego Business Journal Staff

Metabolife International Inc., whose diet tablets containing ephedra generated hundreds of millions of dollars in annual sales before the government outlawed the ingredient, is still looking for a buyer after a New York firm backed out of an arranged sale late last month.

Metabolife bankruptcy attorney David Osias said despite the termination of a July contract with Ideasphere, a maker of herbal supplements, Metabolife’s sale will likely happen this year. He said the first step in a planned auction is lining up a baseline buyer, known as a stalking horse. Osias said he is in discussions with three potential buyers.

Ideasphere agreed in July to buy Metabolife for $23 million, but in a Sept. 20 filing, it terminated its contract, citing misrepresentations by Metabolife, including failure to spend $900,000 on advertising its herbal products in a two-month span.

Osias said Ideasphere’s claims are more about trying to negotiate a lower price and is simply a case of the company having “buyer’s remorse.”

Instead of its original bid, Ideasphere offered to buy Metabolife for $14 million and requested a return of its $2 million deposit in a court filing Sept. 21.

Ideasphere President Mark Fox, in a press statement, said his firm terminated the contract because Metabolife didn’t meet its obligations under the agreement, citing lost sales to key retailers, expired inventory and failure to adhere to agreed-upon advertising expenditures.

“We remain interested in acquiring these assets and plan to file a new offer to purchase the assets for $14 million at a price that more accurately reflects the value of the assets today,” said Fox, who did not return a phone call for this story.

Osias said that isn’t possible.

“We said, ‘No, you breached (the contract), and you owe us the difference between what you promised to buy the company for, and what we will ultimately sell the company for,’ ” Osias said.

As another layer of litigation in the bankruptcy case develops, federal prosecutors arranged felony plea bargains with the company itself and with one of its owners earlier this month.

In separate pleadings, Metabolife International and William Bradley, one of the company’s three owners, pleaded guilty in U.S. District Court in San Diego to multiple counts of felony tax evasion.

According to plea agreements, Bradley diverted Metabolife funds into four “off-the-books” accounts he set up at two banks. In the course of about a year, from 1997 to 1998, Bradley deposited more than $4 million in checks into the accounts. In addition to writing checks on those accounts for his towing and other businesses, Bradley also took the diverted cash and “split it up among himself, and the other two principals of Metabolife,” according to prosecutors.

According to a separate federal court document filed Sept. 30, Michael Blevins, another Metabolife owner, pleaded guilty to one count of possessing a firearm. Blevins is prohibited from owning or possessing a gun following his January 1991 conviction of conspiracy to manufacture and possess methamphetamine with intent to distribute, a crime that resulted in a five-year prison sentence.

According to the filing, on Oct. 14, 2001, Blevins directed a “straw purchaser” to buy a Weatherby ultra light rifle, a Remington shotgun and ammunition from an El Cajon gun shop. While picking the weapons, Blevins’ associate also purchased a Ruger .357-caliber Magnum pistol, according to the plea agreement.

Michael Ellis, the third Metabolife owner and a former National City police officer, has also been indicted on federal gun charges. According to an indictment filed in February, in July 2002, Ellis allegedly was found to be in possession of a Smith & Wesson .44-caliber Magnum handgun and a North American Arms .22-caliber handgun. The case is scheduled to go to trial in December.

Ellis was also convicted of manufacturing and possession of methamphetamine, stemming from the same case as Blevins, his high school friend, but he was able to arrange a supervised probation.

Ellis also is facing federal criminal charges related to making false statements to the Food and Drug Administration about the effects of Metabolife 356, the company’s hugely successful weight loss pill that contained an ephedrine alkaloid called ma huang. The ingredient has been linked to strokes, heart attacks and deaths of users. Last year, the federal government banned the use of ephedra.

According to a July 22 federal indictment, Ellis told FDA investigators in April 1998 that “Metabolife has never received one notice from a consumer that any serious adverse health event has occurred because of the ingestion of Metabolife 356.”

While Metabolife’s owners deal with their legal issues, the disposition of some 362 civil lawsuits filed by users of Metabolife 356 have been stayed while the company deals with Chapter 11 bankruptcy. The number and the size of the damages alleged in the suits are among the key reasons why Metabolife owners decided to exit the business earlier this year and file for bankrupty protection.

In a June filing, Metabolife said it has settled 182 ephedra-related suits in the past five years for more than $11.3 million, with an average settlement of $62,000.

Sales Way Off

As the embattled company and its owners deal with its legal problems, the sale of the company’s herbal and dietary supplements continues. According to federal bankruptcy court documents, through the end of May, the company’s sales were about $11.4 million, down from total sales of $46 million in 2004.

It’s a far cry from the late 1990s, when Metabolife 356 was regularly generating annual sales in the hundreds of millions of dollars. In a recent filing in the bankruptcy case, in 1999, sales hit $350 million.

For a good part of Metabolife’s history, which began in 1995, the company operated as a sub S corporation, allowing the owners to declare the income through their personal taxes.

The tax evasion of the owners led federal authorities to check other aspects of Metabolife’s operations, and additional felony charges against its owners and the company, said Assistant U.S. Attorney Philip Halpern.

“The tax evasion is what we initially examined, and as a result of the tax evasion, we brought charges on the gun possession, and charges related to the FDA,” Halpern said.

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