I Bill, You Bill, We All Scream for iBill: Is the check finally in the mail? AVN Online.com By: Dash Hamilton
The Deerfield Beach, Fla., Chamber of Commerce boasts that it's "the pride of Broward County, located on the Atlantic Ocean, just two miles south of the Palm Beaches and 20 miles north of Fort Lauderdale."
Known for its serene beaches, Deerfield Beach was primarily an agricultural village until the late 1940s. Today it's considered a tourist mecca. And it is also the new home and corporate headquarters for Internet Billing Company LLC, better known as the beleaguered credit card processor iBill.
The story of iBill's rise and fall and possible resurrection is a tale so complicated it would take a whole team of SEC lawyers and a couple of round-the-clock paralegals just to make sense of it all.
Without question, the financial and ethical integrity of iBill has been sorely compromised. When Deerfield Beach-based Interactive Brand Development (IBD), formerly Care Concepts I, completed its acquisition of the third-party processor from Penthouse International on January
21, 2005, they were taking on a company with a smoldering history of corporate takeovers, accusations of gross mismanagement, a flurry of lawsuits, and the revocation of the company's merchant account.On September 16, 2004, iBill's contract with First Data Merchant Services -- their bank -- expired and was not renewed. Penthouse International reportedly knew First Data was backing out several months beforehand, yet did not have another bank lined up. First Data subsequently withheld the release of millions of dollars due to webmasters.
That's a large responsibility for IBD to assume, yet a careful examination of the company's chess moves reveals a business strategy based on risk. IBD corporate officers Steven Markley and Gary Spaniak Jr. either enjoy hazard-fraught enterprises or they are engaged in a series of deadly miscalculations that will perhaps remand iBill to the dustbin of corporate history.
"Are we crazy? Probably, but the reality is we bought this thing and took it on when we could of thrown it in bankruptcy and not paid the webmasters," Spaniak said. "We've paid back over $30 million because we believed in the concept and believed we could fix it."
On April 12, 2005, IBD announced that it would begin making long past-due payments to affiliates using iBill, payments that would only represent a portion of what webmasters are owed because IBD does not have the capital to pay everyone in full. Affiliates were asked to log into their merchant accounts and download the note payable for 100 percent on the dollar -- in 50 percent increments over two years with a meager 3 percent interest.
On April 29, 2005, after several webmasters who maintained affiliate programs with iBill complained about not being paid, IBD blamed a temporary accounting glitch. The money, iBill president Gary Spaniak said, had been accidentally diverted to another account.
Still, the question remains. Why would IBD want to buy a company that was obviously in serious trouble to begin with?
Spaniak says IBD essentially didn't have a choice.
On October 5, 2004, IBD announced the purchase of 35 percent of Penthouse Media Group, formerly General Media Inc., an acquisition that had been in the works for some time. The caveat, according to Spaniak, was that IBD also had to buy iBill.
"When we did the financing to buy Penthouse, the bondholders made us use iBill as collateral when we closed on it. I had no choice but to close on iBill. If I didn't close on iBill, I lost the $20 million we borrowed for Penthouse Media Group. All of those notes would have been called if I didn't close on iBill. I had no choice but to close and that's why we got delisted on the American Stock Exchange," Spaniak said.
"It's in the contracts with the people who loaned us the money to buy Penthouse Media Group. They said you have to have that asset in your portfolio or we're going to foreclose."
Sometimes a great notion
The company that would become Interactive Brand Development was originally established in Nevada in July 1988 as Amsterdam Capital Corporation. In November 1992, the company changed its state of incorporation to Delaware. On November 26, 2002, a wholly owned subsidiary of Amsterdam Capital merged with and into iBid America Inc., a Florida corporation, and Care Concepts I was born.
Care Concepts bloomed into a self-dubbed "media and marketing holding company" with assets that included: a controlling interest in Foster Sports Inc., a sports-oriented, multimedia company that produces sports radio talk shows in the Florida marketplace; and its flagship enterprise, iBidUSA.com, a website showcasing products and services in an auction format.
If Care Concepts was attempting to muscle in on eBay's territory with iBidUSA -- which is reasonable to assume -- the most fitting analogy would be an online bookseller offering only 20 unique book titles and hoping to position itself to compete with Amazon. At iBidUSA, consumers bid to acquire gift certificates redeemable for such items as hotel accommodations, restaurant meals, concerts, golf courses, shopping experiences, and personal services. The certificates are provided by regional commercial establishments seeking to promote their businesses, introduce new products and services, develop new customers, and generate consumer awareness.
Indeed, when Care Concepts first made overtures to acquire iBill the company boasted in a press release: "Similar to the combination of PayPal and eBay, the acquisition of iBill provides our auction operations with an exciting strategic solution to vertically integrate online payment services into an auction environment."
After Care Concepts was reborn as Interactive Brand Development with a new business plan to build a presence as a media holding company in the adult entertainment industry, the company licensed its flagship and wholly owned subsidiary iBidUSA to a second party, LTC Group Inc. on March 1, 2005, proclaiming the following in its annual report for 2004:
"The Company believes that the limited revenue generated by this division, which consum[ing] a disproportionate amount of the Company's man-hours in training, advertising, and marketing, will be increased over time by this agreement. The Company receives 20 percent of the gross earnings of the business, while its resources are allocated to other areas of the company growth."
The key words in the statement are "limited revenue."
When the relationship just isn't working ...
Certainly Foster Sports was turning a profit for Care Concepts/IBD but in November 2004, shortly before the ink was dry on the iBill acquisition, the company divested its ownership interest in Foster and discontinued its "pursuits of business combinations with entities involved in radio media."
One month before shedding itself of Foster Sports, IBD consummated a transaction to acquire a 34.7 percent minority equity interest in the post-bankruptcy, reorganized Penthouse Media Group Inc.
A little background on Penthouse is necessary here in order to see not only the strategic blunder of IBD's investment but the incestuous nature of the iBill enterprise.
Founded by Bob Guccione in 1965, the Penthouse trademark became one of the most recognized consumer brands in the world and was widely identified with premium entertainment for adult audiences. The magazine's closest competitors were Playboy and Hustler.
Maxim(um) threat
By 1998, Penthouse publisher Guccione found himself stuck between the widespread saturation of adult product on the Internet and the monumental popularity of nonexplicit men's magazines like Maxim. Penthouse's response to the threat was to change its format and begin featuring sexually explicit photo layouts that included oral and vaginal penetration and female models urinating. The latter taboo firmly put Penthouse's foot on the third rail of the defining limits of illegal obscenity.
The new format for Penthouse cost General Media, the parent company of the magazine, dearly. The magazine lost subscribers and newsstand circulation dropped significantly.
On August 12, 2003, General Media, the publishing and distribution arm of Penthouse, filed for Chapter 11 bankruptcy protection when it could not meet its bond payments. Two months later, it was announced that Penthouse was being put on the auction block as part of a deal with its creditors. Penthouse International, an umbrella company for several business units that include Penthouse magazine, was not involved in the petition.
Crime, drugs, and soft drinks! Soft drinks!
Enter Garrett Bender, former president and CEO of iBill, and Jason Galanis, who described himself to Forbes magazine as "part of the investment banking team" that took Penthouse magazine public in 2002.
Jason Galanis is the son of John Peter Galanis, a convicted and highly prolific white-collar criminal. The Philadelphia Inquirer called the father of Jason Galanis "a brilliant and charming swindler who uses a maze of national and foreign corporations to carry out his deals," a businessman who "has faced law enforcement scrutiny, a six-month jail term, indictments in the United States and Canada, civil suits, and a lengthy fight in U.S. Bankruptcy Court." By his own admission in court, according to the Inquirer, Galanis "plundered a Panamanian investment fund, Armstrong Capital, in 1970, and the investors are still trying to collect $3.5 million in principal and interest."
Jason Galanis has never been convicted of a crime. He was arrested on October 19, 2001, along with his brother and business partner Derek in part of a two-day Drug Enforcement Agency takedown of a methamphetamine and Ecstasy trafficking organization. The DEA found that Jason's involvement in the narcotics operation was "minimal" and charges were dropped. But Derek Galanis was convicted and sentenced to 11 years in jail.
Through a complicated set of maneuvers that would outwit even Donald Trump, former iBill CEO Garrett Bender and Jason Galanis helped form Media Billing LLC and seated Dr. Luis Enrique Molina as one of the principal stockholders of Penthouse.
A Mexican soft drink entrepreneur, Molina reportedly ponied up more than $70 million to pay off Guccione's debts and the liens on his New York mansion. Molina and Penthouse agreed to purchase General Media preferred stock from the sellers for approximately $10.25 million, payable on March 31, 2008, under an 8 percent increasing rate note given by Molina and guaranteed by Penthouse. Molina reportedly also sunk another $107 million into Penthouse in a real estate and equity swap.
Confused yet? It gets more torturous.
Deceit, betrayal
On March 23, 2004, InterCept Payment Solutions -- embattled by investors for not disclosing just how much of iBill's revenue was derived from p*rn processing -- sold iBill to Media Billing LLC, a 99 percent-owned subsidiary of Penthouse International.
When InterCept sold iBill, the processor was a mess. Not only were the company's own shareholders suing it, but iBill also had a substantial debt. Media Billing purchased iBill for a mere $700,000 in cash and an $800,000 short-term note. They agreed to assume a $22 million working capital deficit.
Where _the hell_ did all that money go?
Well, an iBill insider says it went with InterCept, who reportedly rode off into the sunset with nearly $31 million that was owed to iBill clients. On paper, Media Billing essentially paid $23.5 million for iBill.
A few more disastrous bumps occur in the road, and on July 30, 2004, Care Concepts announced it was buying both Media Billing LLC and iBill from Penthouse for $55 million in an all-stock deal.
On October 4, 2004, General Media emerged from bankruptcy protection and was renamed Penthouse Media Group. Boca Raton, Florida, financier Marc Bell, who heads the private equity firm Marc Bell Capital Partners, led an investment group that collected 89 percent of the magazine's approximately $45 million in bonds and announced plans to invest up to $50 million to turn the magazine around.
"We want to realign the magazine and take it to the center," Bell told the Miami Herald in February 2004. "It's got very hardcore and lost a lot of readership because of that."
It's anyone's guess why IBD would consider the purchase of 34.7 percent ownership in Penthouse Media Group "part of a strategic investment that is synergistic" with its desire to become a major player in the "highly-fragmented multibillion-dollar adult market" (according to an April 2005 IBD Press Release,). Penthouse's circulation is down from 5.2 million copies in its heyday to a current circulation of roughly 460,000.
Judging from posts on a July 5, 2005 discussion thread at
"Has anyone seen the newest Penthouse issue?" photographer Holly Randall asks. "The centerfold is blah, and the printing is absolute crap. In fact, every layout in this issue is horrible. The softcore angle on this mag just ain't working. What are they trying to do, a really bad version of Playboy? Just when I thought the magazine couldn't get any worse, it does. Bob may have been a bit nuts, but at least he could put out a decent magazine. This is so amateur looking it blows my mind."
Another poster adds:
"[Penthouse is] running on fumes, I think. If they don't have hot photos, they don't have anything. The articles haven't been much for a long time. They've stuck with such a tired formula, it's antiquated. The only thing it had that was great were some of the photo sets, which were far hotter than Playboy[s] and more classy than Hustler[s].
"They've probably worked out a bottom line budget that allows the mag to run on cruise control and generate a little profit while they work the licensing end," another ads. "But it looks like the glory days are over for good."
In the company's annual report for 2004, IBD notes that "the actual current commercial value of the Penthouse brand name is not determinable at this time, but it will not impact the company's financial position or results of operations except to the extent such value indicates that an impairment has occurred."
On March 31, 2005, IBD acquired a minority equity interest in Interactive Television Networks, Inc (ITVN), formerly XTV Inc., an IPTV broadband video content provider with a strong emphasis on direct-to-consumer adult programming delivery. Aside from its Pay-Per-View revenue sources, ITVN also offers video-phone sex.
IBD acquired 6,250 shares of ITVN common stock from XTV Investments LLC for a 25 percent equity ownership of ITVN, in exchange for 4,000 shares of Convertible Preferred Stock Series H, which will convert into 40,000,000 shares of IBD common stock and $1,700,000 in cash.
On June 15, 2005, Radium Ventures Inc., a public company based in Canada, announced that it had acquired ITVN in a merger. As part of the deal, Radium canceled 750,000 of the outstanding shares of its common stock and issued 22,117,550 shares of its common stock to the existing stockholders of ITVN. IBD received 5,500,000 restricted common shares of Radium.
Ruined reputations?
What is Radium Ventures? Until acquiring ITVN, Radium was a two-man enterprise that provided document-editing services and used an Internet marketing plan and the proprietary software Einscribe. In fiscal year 2005, Radium completely discontinued its editing operations and announced plans to rename itself after the acquired company, Interactive Television Networks.
While IBD doesn't have a controlling interest in ITVN, there is a bit of acrimony between the companies, at least on ITVN's part. Part of that, Spaniak says, is because the relationship to iBill has made XTV's affiliates concerned about getting paid.
Ironically, the CEO of ITVN is Charles Prast, former CEO of Private Media Group and president of iBill during the Media Billing days, who is quick to dismiss any IBD involvement in ITVN.
"We don't have a relationship with IBD. We don't have a bad relationship or a good relationship, we just don't have any relationship whatsoever," Prast says.
"They have no board seats. They have no representation whatsoever in the management or the direction of the company. They are purely a passive investor; We have nada to do with them."
Between iBill, Penthouse International, Media Billing LLC, ITVN, Radium Ventures, and, of course, Interactive Brand Development Inc., nee Care Concepts, at the center of it all, millions of dollars in stock and cash are exchanging hands, and yet there is not a company of established value anywhere in the mix. The reputations of both Penthouse and iBill have been seriously damaged, perhaps permanently, and ITVN is not yet a proven entity.
In its Annual Report for 2004, Interactive Brand Development invokes generalities to predict its future growth, an evasive business ploy that was a favorite of the many now-defunct dot-com boomers. In the dot-com days, an online bookseller, for instance, would cite analyst reports that reflected an upward trend in consumer book buying in the next fiscal year, coupled with another analyst report that reflected a wave of new Internet users on the horizon. Here is an example of how those same overly optimistic forward-looking statements sound like coming direct from IBD's report:
"Demand for adult entertainment products has grown substantially in recent years. According to a 2003 Reuters report, the total worldwide adult entertainment market exceeds $31 billion annually -- The proliferation of easy to use electronic equipment, such as VCRs and DVD players, has boosted demand for adult media content compatible with these formats. Also, the evolution of the Internet as a channel of commerce and content distribution has stimulated additional demand for adult media content. The next generation of mobile devices provides a global opportunity for growth in content distribution."
In the same report, IBD says that it has "depleted the cash resources that it has available." The company currently believes, however, that operating cash flows and borrowings will be adequate to meet the company's operating needs and capital requirements through 2005.
"Such operating needs and capital requirements include short-term commitments, and market penetration of our iBill and ITVN services," the report states.
As for iBill, IBD warns in its report that its "competitors have substantially greater capital and other financial resources than iBill does" and that any sharp competitive change in the credit card processing business can "make it more difficult for iBill to retain and attract customers."
Not to mention the numerous lawsuits filed against iBill in both federal and state circuit courts. From the 2004 report:
"The Company believes that the results of operations from iBill should improve as the Company regains lost customers and increases operating efficiencies. However, the Company must obtain additional financing to permit it to expand its iBill operations and facilitate its business plan."
In the absence of financing, IBD warns, "the Company will be unable to satisfy its past due and other obligations."
Spaniak insists, and recent developments look promising, that IBD will bring iBill back.
"I think we're pretty close to being fixed. We've paid back over $30 million, our processing is up and our clients are getting paid, he said. "We feel good about the direction we're going. We're going to save this thing."
In other words, the check is in the mail.
Note: A former newspaper editor and amateur boxer, Dash Hamilton lives in the Pacific Northwest. He is currently writing a critical study on the works of Jacqueline Susanne.
MJ MacMahon also contributed to this story.
[TELECOM Digest Editor's Note: Ah ... internet p*rn ... what a wonderful business to be in. As we read here, if you did business with a p*rn company over the past three or four years, chances are likely your email address has been spammed internationally; and the webmaster you signed up through has never yet gotten paid for it. PAT]