Red flags were all over the place, said branding expert Rob Frankel, but no one seemed to see them.
Frankel is among a large group of industry analysts that cast a cynical gaze upon the acquisition of Media Billing Company LLC and its subsidiary Internet Billing Company LLC by Care Concepts I Inc. of Pompano Beach, Fla., in the waning days of August.
The fledgling Care Concepts, through its subsidiary iBidAmerica Inc., showcases local and national businesses on its website www.ibidusa.com. Products and services are featured in an auction format where consumers can bid to acquire gift certificates redeemable for such items as hotel accommodations, restaurant meals, concerts, golf course packages, shopping experiences, and personal services provided by businesses. To many industry analysts, the $55 million all-stock sale of one of the largest third-party payment processors for the online adult community to a relatively unknown media and marketing holding company with 14 employees and less cash on hand than a banana republic insurrection should have been flagged by the Securities and Exchange Commission.
"Strange valuations, bizarre terms and seemingly mismatched agendas were the legitimate warning signs," said Frankel, leading many to believe that the convoluted business dealings involving the purchase of iBill played an integral part in getting Penthouse publisher General Media Inc.'s Chapter 11 reorganization plan approved earlier this year by a U.S. Bankruptcy Court.
However, the ink was barely dry on the agreement between Penthouse International and Care Concepts when the company announced on Sept. 24 that it had rescinded the closing and would delay its acquisition of the beleaguered Internet billing company. Both parties, however, remain subject to the terms of the stock purchase as Care Concepts teeters on the brink of being delisted by the American Stock Exchange, known as Amex, for complications resulting from the sale.
In another confusing surprise, Care Concepts turned around and announced that it had agreed to purchase a little under half of the nonvoting stock in General Media. The purchase would clear all of now-bankrupt General Media's debt, according to reports. As part of the deal, General Media would be renamed Penthouse Media Group Inc. Florida financier Marc H. Bell, leader of the investors in PET Capital Partners LLC — the company that currently owns all of General Media's debt — would assume day-to-day operations of Penthouse magazine.
"These latest turns of the screw arrived on the heels of iBill's warning of "catastrophic consequences" if First Data Corp., iBill's credit card processor since 1998, refused to process its accounts — valued at $800,000 per day — past Sept. 15, when First Data's contract with iBill expired.
According to First Data, working with iBill was taking the credit card processor in a direction it didn't want to move in.
"We have determined that processing payments of the adult entertainment marketplace is inconsistent with our core values," a First Data spokesman stated.
IBill, though, was apparently under the impression that First Data would continue to process its credit card transactions until it was able to set up shop with another bank. IBill filed an appeal with the New York State Supreme Court for a preliminary injunction against First Data on Sept. 17 — two days after the expiration of its contract — but the court denied that request on Sept. 22.
"Banks should have been stumbling over each other for the opportunity to partner with iBill," said Bruce Cundiff, an analyst for Jupiter Research. Studies by Jupiter indicate the adult pay content will continue to remain in the top two e-commerce slots for many years to come.
"There must have been a management issue within iBill that created this problem," said Cundiff. First Data claimed that iBill had been given "multiple notices" that there would be no extension beyond the Sept. 15 cutoff date.
"Waiting until August 2004 to find another processor to replace one that is expiring in September 2004 doesn't seem like a smart business move when dealing with millions," grumbled one webmaster on a popular adult industry message board.
In their Sept. 17 court pleading for injunctive relief, iBill claimed that Merrick Bank, a top-50 issuer of Visa cards with more than $400 million in assets, sent a letter to First Data on September 15 affirming their commitment to iBill as an approved merchant account and that Merrick would begin processing iBill's credit card accounts in November.
However, in a statement referenced in a Forbes.com article on Sept. 27, Merrick claimed it is "not now processing credit card transactions for iBill," and "has no signed agreement to process credit card transactions for iBill."
According to iBill, the company "has an agreement" with a bank but "due to confidentiality agreements, we can't disclose the name of our processor at this time."
The shoe dropped on Sept. 20 when Amex sent a notice to Care Concepts containing a laundry list of public interest concerns about the impending acquisition, mainly failure to comply with listing standards and "material omissions and inconsistencies" in Care Concepts' disclosures. This action resulted in Care Concepts rescinding the close while they attempt to satisfactorily resolve all listing eligibility issues, including whether Care Concepts issued 20 percent or more of its common stock without prior shareholder approval.
"There's a lot of hocus-pocus here," Cundiff said, adding that the under-the-table-deal like the iBill/Care Concepts one is going to be greeted with intense scrutiny by Amex.
Care Concepts has said that it intends to furnish Amex with the requested information in a timely manner and is hopeful that the staff of Amex will, upon receipt and review of the information, "provide all necessary approvals for the iBill acquisition to be completed."
The $55 million change of ownership is a substantial bump up from Penthouse International's $23.5 million purchase of iBill in March 2004, but markedly less than the $112 million price tag that InterCept paid for the company in 2002.
The Miami Herald snorted that the wildly fluctuating sales prices "reflect the risky rather than risqué nature of its [core] business."
"The difference in price is a difference in objectives," said Cathy Beardsley, senior vice president of iBill. "InterCept wanted to divest the iBill asset and Penthouse International bought it at a bargain basement price."
Care Concepts, Beardsley told XBiz in August, understands the long-term value of iBill and how it can be a growth engine for the company.
"We believe Care Concepts got a very good deal at the price it paid for the company," Beardsley said.
Care Concepts President Gary Spaniak Jr. said the acquisition of iBill was "comparable to the combination of PayPal and eBay" but even with iBill's impressive revenue from adult — in 2003, iBill averaged 1.2 million transactions per month and completed approximately $330 million in gross transactions — there is a tough road ahead if Care Concepts attempts to leverage its stake in the troubled billing company to become a major player in the booming online auction business.
In their quarterly report for the period ending March 31, Care Concepts reports that it will need approximately $1 million for operations in fiscal 2004, assuming that they open seven to 10 new Internet auction markets through December 2004.
For the quarter ending June 30, Care Concepts revenues were a meager $126,184 and the company recorded a net loss of $900,257.
Aside from acquiring all of the assets of Media Billing and iBill, Care Concepts also presumably assumed all liabilities, including $22 million in debt that was in place when Penthouse/ Media Billing acquired iBill.
Debt-plagued Penthouse International also had a compelling interest in seeing the iBill/Care Concepts acquisition succeed.
When the acquisition completed on Aug. 30, Care Concepts had paid Penthouse 333,000 shares of preferred common stock and 3.89 million common shares.
The End Result
Many analysts speculate that the Penthouse sale of iBill to a business concern such as Care Concepts was, in effect, an end run around iBill's reputation as a leading processor of online payments for adult content. By attaching iBill to a company with such a diversified revenue base, the reasoning goes, the search for a new bank would be a more agreeable chore.
If Care Concepts does not receive Amex approval by Jan. 21, 2005, the company said it will close the acquisition anyway, withdraw from Amex and seek to re-list its common stock on an alternate stock exchange.
When the dust from the latest flap finally settles, Cundiff believes that iBill will retain its status as a power player in the lucrative business of online adult content.
"From a processing point, iBill has been simply fantastic," Cundiff said. "I don't know why anyone wouldn't want to stand by them."