-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O7Q1II54W7ttGcwgL1vYp67SCj/DJrwynDOfCrui9TG5ikJ3iY4EnnAl3zHr99iY KUOnFSOezFv80nm/izw/AA== 0001116502-05-001747.txt : 20050801 0001116502-05-001747.hdr.sgml : 20050801 20050801121201 ACCESSION NUMBER: 0001116502-05-001747 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050801 DATE AS OF CHANGE: 20050801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Interactive Brand Development Inc. CENTRAL INDEX KEY: 0000842927 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 860519152 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-31992 FILM NUMBER: 05987179 BUSINESS ADDRESS: STREET 1: 2200 SW 10TH STREET STREET 2: - CITY: DEERFIELD BEACH STATE: FL ZIP: 33442 BUSINESS PHONE: 954-363-4797 MAIL ADDRESS: STREET 1: 2200 SW 10TH STREET STREET 2: - CITY: DEERFIELD BEACH STATE: FL ZIP: 33442 FORMER COMPANY: FORMER CONFORMED NAME: CARE CONCEPTS I INC /FL/ DATE OF NAME CHANGE: 20030606 FORMER COMPANY: FORMER CONFORMED NAME: CARE CONCEPTS INC /FL/ DATE OF NAME CHANGE: 20030606 FORMER COMPANY: FORMER CONFORMED NAME: CARE CONCEPTS INC DATE OF NAME CHANGE: 19920703 10KSB/A 1 interactive-10ksba.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________ Commission file number: 0-20958 INTERACTIVE BRAND DEVELOPMENT, INC. (Name of small business issuer specified in its charter) Delaware 86-0519152 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 2200 SW 10TH STREET DEERFIELD BEACH, FLORIDA 33442 (Address of principal executive offices, including zip code) (954) 363-4400 (Issuer's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: (Title of Class) Common Stock, $0.001 par value per share Check whether the issuer: (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ended December 31, 2004 were $0. The number of shares outstanding of the issuer's common stock as of July 25, 2005 was 104,800,620 shares. The aggregate market value of the common stock ( 11,256,906 shares) held by non affiliates, based on the closing price ($0.20) of the common stock as of July 25, 2005 was $21,169,725. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] PART I This Report includes forward-looking statements. Statements other than statements of historical fact included in this Report, including the statements under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Report regarding future events or prospects, are forward-looking statements. The words "May," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend," "should" or variations of these words, as well as other statements regarding matters that are not historical fact, constitute forward-looking statements. We have based these forward-looking statements on our current view with respect to future events and financial performance. These views involve a number of risks and uncertainties which could cause actual results to differ materially from those we predict in our forward-looking statements and from our past performance Although we believe that the estimates and projections reflected in our forward-looking statements are reasonable, they may prove incorrect, and our actual results may differ, as a result of the following uncertainties and assumptions: o our business development, operating development and financial condition; o our expectations of growth in demand for our products and services; o our expansion and acquisition plans; o the impact of expansion on our revenue potential, cost basis and margins; o the effects of regulatory developments and legal proceedings on our business; o the impact of exchange rate fluctuations; and o Our ability to obtain additional financing. We do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except to the extent required by law. You should interpret all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf as being expressly qualified by the cautionary statements in this Report. As a result, you should not place undue reliance on these forward-looking statements. ITEM 1: DESCRIPTION OF THE BUSINESS OUR HISTORY Interactive Brand Development, Inc is a Delaware corporation. In November 2002, we consummated a reverse merger with iBid America, Inc. ("iBid"), a Florida corporation, which was organized on February 2, 2001, whereby iBid merged with our wholly-owned subsidiary. In a reverse acquisition, since iBid is considered to be the acquirer, its financial statements are subsequently reported as our financial statements. Each of the common shares of iBid was converted into an equivalent number of our common shares. Each of the three series of preferred stock of iBid was converted into an equivalent number and on the same terms and conditions of a series of our preferred stock. iBid shareholders received an aggregate of 12,080,867 shares of our common stock and 68,553 shares of our convertible preferred stock and we received a 100% wholly-owned interest in iBid. In connection with the merger, the holders of the newly issued classes of preferred stock converted their shares into 2,242,194 shares of our common stock. From November 2002 through December 31, 2004 Interactive Brand Development, Inc., was principally engaged in online auctions and classic animation art libraries. 1 On February 11, 2004 we were accepted by and began trading on the American Stock Exchange under the symbol IBD. On November 29, 2004, we changed our corporate name to Interactive Brand Development Inc. In April 2004, we acquired Foster Sports, Inc. a company that primarily broadcasts a sports talk show on two radio stations in South and Central Florida. In November 2004 the Company elected to divest its ownership interest in Foster Sports. The transaction was accounted for as discontinued operations On October 2004, we purchased 347,138 shares of class B non-voting stock which represents a 34.7% nonvoting interest in Penthouse Media Group. The investment was financed through a private placement of 35,000 shares of Series E Convertible Preferred for net proceeds of $3,500,000, 34,500 shares of Series 10% Cumulative Convertible Preferred F for net proceed of $3,450,000, 10% Convertible Subordinated Secured Notes for net proceeds of $9,525,000 and the issuance. 45,000 shares of Series G Convertible Preferred The Company recorded its investment at $ 43,220,939. In November 2004, we purchased 26,261 pieces of cel art from American Collectors Exchange, Inc. valued at $1,380,000 in consideration of 3,000,000 shares of our common stock. The cel art is produced by Filmation, including She-Ra Princess of Power, He-Man and the Masters of the Universe, Flash Gordon, and Bravestarr; Sony/Columbia's The Real Ghostbusters; MCA/Universal's Back to the Future, Beethoven, and Shelley Duvall's Bedtime Stories; and Lucasfilm's Star Wars Ewoks. In December 2004, we purchased an additional 33,739 pieces of cel art valued at $ 1,686,950 in consideration of 3,700,000 shares of our common stock from Original Cartoon Cels, Inc. The cel art is similar to the pieces described above. SUBSEQUENT EVENTS On January 21, 2005, the Company completed its acquisition of 100% of the equity of Media Billing Company LLC and its subsidiary iBill the acquisition was financed through the issuance of 330,000 shares Series D Convertible Preferred Stock. On January 31, 2005, our board of directors and a majority of shareholders approved a proposal to amend our amended and restated certificate of incorporation to increase the number of authorized shares of common stock from 30,000,000 shares to 400,000,000 shares. The amendment is effective as of March 31, 2005. On March 31, 2005, we acquired a minority equity interest in Interactive Television Networks, Inc. Our investment represented a 25% equity ownership of ITVN, in exchange for 4,000 shares of Convertible Preferred Stock Series H and $1,700,000 in cash. On June 30, 2005, Interactive Television Networks, Inc. merged with Radium Ventures, a public company RDIU. Pursuant to the merger agreement, IBD is receiving 5,529,222 restricted common shares of Radium. 2 OUR BUSINESS GENERAL The Company's operations consisted of (i) an online auction website http://ibidusa.com, and (ii) investments in an animation library. During the fourth quarter of 2004 the Company revised its business plan to focus on building a presence as a marketing and media holding company in the adult entertainment industry. The Company made several strategic investments in connection with its revised business plan to become a successful marketing and media company in the adult entertainment industry. These investments include: o A 34.7% equity interest in Penthouse Media Group, Inc., an established global adult media, entertainment and licensing company founded in 1965 that publishes Penthouse Magazine, and owns and licenses the PENTHOUSE trademarks and other intellectual property. o Subsequent to December 31, 2004, on January 21, 2005, we acquired 100% of the membership interests of Media Billing LLC and its wholly owned subsidiary, Internet Billing Company LLC, an online payment processing provider (http://www.ibill.com). o Additionally, on March 31, 2005 we purchased a minority interest in Interactive Television Networks, Inc., formerly XTV, Inc., http://www.itvn.com. Interactive Television Networks (ITVN) is an emerging provider of Internet Protocol Television (IPTV) hardware, programming software and interactive networks ONLINE AUCTION WEBSITE In connection with the Company's revised business plan at December 31, 2004, the Company discontinued operations and on March 1, 2005, the Company entered into a two-year management agreement with LTC Group, Inc., ("LTC") in which LTC will assume responsibility for the operations of iBidUSA.com, including sales, customer service, maintenance and administration of the website. The Company believes that the limited revenue generated by this division, which consumes a disproportionate amount of the Company's man-hours in training, advertising and marketing, will be increased over time under this Agreement. The Company receives 20% of the gross earnings of the business, while its resources are allocated to other areas of Company growth. As a result of revised business plan the Company's financial statements are presented as if the license agreement with LTC had occurred at December 31, 2004. The Company has recorded the auction website line of business as discontinued; see accompanying financial statement footnote 5 THE PENTHOUSE MEDIA GROUP INVESTMENT On October 19, 2004, the Company purchased 347,138 Class B shares of Penthouse Media Group, Inc. (formerly, General Media, Inc.) ("PMG"), representing a nonvoting equity interest of approximately 34.7%. PMG is a brand driven global entertainment business founded by Robert C. Guccione in 1965 whose flagship PENTHOUSE TM brand is one of the most recognized consumer brands in the world and is widely identified with premium entertainment for adult audiences. PMG 3 caters to men's' interests through various trademarked publications, movies, the Internet, location based live entertainment clubs and consumer product licenses. The Company purchased its equity interest in PMG from PET Capital Partners, LLC. In connection with its investment in PMG, the Company issued preferred stock and notes that are convertible into an aggregate of 68,000,000 shares of the Company's common stock. In addition, the Company issued warrants to purchase an additional 4,216,280 shares of the Company's common stock to the holders of the convertible preferred stock and convertible notes. The Company reports its investment in PMG under the cost method of accounting. Accordingly, the investment is reflected on the balance sheet at its initial cost, and the Company will recognize income only to the extent it receives cash distributions from PMG. The Company's strategy is to participate directly in the commercial use, subject to definitive licensing agreements granted by PMG, of the PENTHOUSE brand name and indirectly through the passive investment in PMG. PMG and its affiliates have recorded historical estimated gross sales of $3.0 billion since inception and, as a result, the PENTHOUSE brand has developed a prominent awareness in the mind of consumers. We believe that it would be financially impractical for competitors to recreate this level of public recognition for a similar brand and therefore the brand has substantial commercial value. In addition to the prohibitive cost of developing similar brand value, the estimated future cash flows derived from the licensing of the PENTHOUSE brand name in exchange for recurring royalty payments is a factor in determining the fair value of the intellectual property represented by the brands. The actual current commercial market 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 impairment has occurred. As a result of this investment, the Company is the largest single beneficial owner of PMG. PMG is controlled by affiliates of Marc Bell Capital Partners. Marc Bell Capital Partners and its affiliates are currently the largest holders of PMG debt and equity securities. The Company has certain rights set forth in it shareholder agreement intended to enable it to participate with the other equity holders of PMG in certain significant transactions, including a future initial public offering. IBILL BUSINESS ACQUSITION On July 21, 2004, PHSL Worldwide, Inc. ("PHSL") and Interactive Brand Development, Inc. ("IBD"), entered into an agreement whereby IBD would acquire all of the membership interests in Media Billing, LLC, which owns 100% of the membership interests in Internet Billing Company, LLC ("iBill" or "Company"), from PHSL in exchange for 330,000 shares of IBD's Series D convertible preferred stock, the conversion of which would result in PHSL owning 49.9% of IBD's fully diluted common stock outstanding. The transaction closed January 21, 2005. In July 2005 the Company Media Billing LLC and Internet Billing Company LLC were amalgamated into iBill Corporation. 4 iBill provides payment processing services and client portfolio management services primarily to domestic and international clients in the adult entertainment industry. Service offerings consist of credit card processing, debit card processing and telephone billing processing. o Credit card processing provides payment services to merchants that sell goods and services through the Internet, and as an intermediary "aggregator" in that it aggregates the consumer credit card transactions of thousands of such merchants and arranges for the processing of the aggregated transactions. o Debit card processing provides payment services to merchants that sell goods and services through the Internet. iBill's Web Merchants offer consumers to pay by authorizing a direct debit via the Automated Clearing House System, (referred to as "ACH") to the consumer's checking account. o Telephone billing provides payment services to merchants that sell goods and services through the Internet. iBill's Web Merchants offer consumers to pay by authorizing a charge to be made on their telephone bill for their internet purchase. INTERACTIVE TELEVISION NETWORKS, INC. INVESTMENT In March 2005, the Company purchased a minority interest in Interactive Television Networks, Inc. (ITVN), an emerging provider of Internet Protocol Television (IPTV) hardware, programming software and interactive networks IPTV is the highly-anticipated provision of interactive television to home television over standard Internet home broadband connections. ITVN addresses this market with a complete product solution that will provide a range of affordable content on demand including news, music, broadcast entertainment and web media, as well as on-screen viewing and management of personal media including photos and videos. Consumers simply connect ITVN's small, sleek set top box to their existing home broadband/DSL router, cable modem router or wireless LAN and plug in the set top connector to their television set and subscribe to the services that best meet their needs. MARKET OPPORTUNITY Demand for adult entertainment products has grown substantially in recent years. We believe that the total worldwide adult entertainment market exceeds $56 billion annually. We believe that two principal factors are driving growth in our industry: the relaxation of social and legal restrictions on distribution of adult entertainment products and new technologies that facilitate the distribution of high quality adult media content to consumers in the privacy of their own homes. We expect this liberalizing trend to continue, which should expand our potential markets further in the future. Also, the evolution of the Internet as a channel of commerce and content distribution has stimulated additional demand for adult media content. In addition, advances in cable, satellite and hotel communications systems furnish another relatively new channel for the delivery of media content, including adult entertainment, into private homes, hotels and businesses. This provides an additional and exciting new source of potential revenues for us as one of the principal providers of adult content. 5 We expect these regulatory and technological developments to fuel increasing demand worldwide for adult media content, and for our products. In addition, we believe that market demand for content to fill new media outlets will lead mainstream media content providers to seek still more adult media content in the future. We expect that the high quality standards of the mainstream media, technological demands of multiple delivery formats and global marketing and distribution costs will increase capital requirements for providers of adult media content. While the adult entertainment industry is currently characterized by a large number of relatively small producers and distributors, we believe that the factors discussed above will cause smaller, thinly capitalized producers to seek partners or exit the adult entertainment business, leading to a consolidation of the adult entertainment industry. OUR COMPETITIVE STRENGTHS We believe the following strengths, among others, will enable us to exploit the growing global market for on-line payment processing and adult entertainment: Recognized brand name: iBill(TM) is a provider of eCommerce solutions for businesses selling products and services over the Internet. iBill provides secure Internet payment processing solutions and transaction services that enable Web Merchants to accept and process real-time payments for goods and services purchased on the Internet. Established market position and client network: iBill(TM) is a well-established worldwide provider of on-line payment processing which has been built up over the past eight years. iBill(TM) differentiates itself from its competition through its proprietary real-time Internet based merchant interface software technology that incorporates multiple payment options not available from other similar payment processors, anti-identity theft mechanisms, fraud screening and automated customer service and support functionality The client network provides an effective channel to introduce new products and services. OUR STRATEGY Our vision is to be the world's preferred online payment processor for the adult entertainment consumers and leverage our established relationships to gain a foothold in the households of the consumer to introduce new and exciting products. We have developed the strategies described below to increase sales and operating margins while maintaining the quality of our products and services and the integrity of our brand name. Develop strategic alliances and joint ventures with businesses outside of the adult entertainment industry to broaden our distribution channels . Increase market share through strategic acquisitions. The adult entertainment industry is currently fragmented and consolidating. We expect this trend to continue as small, privately owned companies seek to exit from the business. We plan to expand our market presence and increase our market share. Continue to increase and strengthen brand awareness. 6 INDUSTRY OVERVIEW The adult entertainment industry has evolved rapidly in recent years. In spite of often intense political campaigning, there has been a general trend towards wider acceptance of adult entertainment content among the general public and mainstream media channels. New technologies have lowered costs and changed the way in which adult content is produced, distributed and viewed. Lower costs, in particular, have lowered barriers to entry and increased competition in the adult entertainment industry. The trend toward wider acceptance of sexually explicit material and ongoing technological developments has created a large and growing global market for adult content. Historically, the adult entertainment industry has attracted a considerable level of government and regulatory attention primarily due to obscenity, which has led to limitations on either the explicitness of content or the availability. Traditionally, to view adult material, consumers were required to purchase movies in a public environment or to go to an adult movie theatre or peepshow. New technologies have helped to legitimize the industry and increase the size of the market. During the 1980s, the introduction of adult movies on video cassette and through broadcasting on cable and satellite television increased acceptance of adult media content by confining it to the privacy of the consumer's home. More recently, the Internet has become a primary distribution platform for both suppliers and consumers of adult media content providing low-cost delivery and increased privacy. Although currently underexploited, third generation mobile and handheld devices are likely to increase the market even further in the future, making adult media content viewing mobile. INTERNET The adult entertainment industry was among the first to commercially exploit the Internet as a distribution channel and is, together with gambling and online games, among the few industries which generate profit on the Internet. The Internet offers relative privacy for users, a seemingly endless selection of adult media content and can provide immediate delivery. The use of the Internet for viewing adult media content is expected to increase significantly. Broadband Internet access is transforming the way that millions of consumers use and pay for news, entertainment, music and other media. Consumers will use their Internet high-speed, always on broadband connections to access and pay for entertainment content, including adult content, and services. According to analysis and forecasts, global broadband subscriptions were estimated to have grown by 50% to 150 million(1) during 2004 and by 2009 the number of broadband subscribers is expected to grow to more than 287 million(2). Although VOD online is still in its absolute infancy and VOD via cable is the default delivery pipe at the moment, it is interesting to note that forecasts2 - ---------- (1) Point Topic Ltd's (UK) World broadband market analysis of 16 December 2004. (2) Forecasted by RHK, Inc (USA) 7 see global VOD online consumer spend going from US$ 70 million in 2003 to US$ 2.34 billion in 2007, representing a CAGR of 142%. COMPETITION GENERAL CONSIDERATIONS The online payment processing industry is highly competitive. Many small companies compete with us in providing payment processing services to the adult entertainment merchants. These competitors consist of CCBill and Paycom. We believe that the principal competitive factors in our market include: - - Quality of service; - - Reliability of service; - - Ability to evaluate, undertake and manage risk; - - Speed in implementing payment processes; - - Price and other financial terms; and - - Multichannel payment capability. We believe that our specific focus on providing integrated payment processing solutions to merchants, in addition to our understanding of the needs and risks associated with providing payment processing services electronically, gives us a competitive advantage over other competitors, which have a narrower market perspective, and over competitors of a similar size that may lack our experience in the electronic payments industry. Furthermore, we believe we present a competitive distinction through the use of our internal technology to provide a single integrated payment storage or warehouse that consolidates, processes, tracks and reports all payments regardless of payment source or channel. GOVERNMENT REGULATION We operate in a highly regulated industry. This requires us to be socially aware and sensitive to government strictures, including laws and regulations designed to protect minors or which prohibit the distribution of obscene material. We take great care to comply with all applicable governmental laws and regulations in each jurisdiction where we conduct business. Moreover, we do not knowingly engage the services of any business or individual that does not adhere to the same standards. INTERNET REGULATION Government regulation of the Internet is a rapidly developing area and, therefore, adds additional uncertainty to our business. New laws or regulations relating to the Internet, or more aggressive application of existing laws, could decrease the growth of our websites, prevent us from making our content available in various jurisdictions or otherwise have a material adverse effect on our business, financial condition and operating results. These new laws or regulations could relate to liability for information retrieved from or transmitted over the Internet, taxation, user privacy and other matters relating to our products and services. For example, the U.S. government has recently enacted laws regarding website privacy, copyrights and taxation. Moreover, the 8 application to the Internet of other existing laws governing issues such as intellectual property ownership and infringement, pornography, obscenity, libel, employment and personal privacy is uncertain and developing. EMPLOYEES At March 31, 2005, we had 48 full time employees, including: 21 in marketing and customer service; 5 in sales; 10 in information technologies; 6 in administrative positions; and in 6 management. None of our employees is represented by a labor union, nor governed by any collective bargaining agreements. We consider relations with our employees as satisfactory. ITEM 2: DESCRIPTION OF PROPERTIES Our executive offices are located at 2200 SW 10th Ave., Deerfield Beach, Florida 33443. The 50,000 square feet of office space is leased on a monthly basis at a rent of $ 76,000 per month, which is an obligation of iBill, LLC, a Company that we subsequently acquired. This space is adequate to maintain our current and future operations. ITEM 3: LEGAL PROCEEDINGS On January 21, 2005, Castlerigg Master Investments Limited, purchaser of the Company's Series F Preferred Stock, wrote to the Company that it had come to the attention of Castlerigg that the Company and/or others may be claiming that it or they did not receive the December 15, 2004 Notice regarding the Company's alleged default under the Subscription Agreement. In the Company's Form 8-K dated January 18, 2005, the Company disclosed the Notice and why the Company believes that the basis for the Notice is without merit. Notwithstanding the Company's position, Castlerigg transmitted again to the Company the earlier notice. On January 22, 2005, Castlerigg sent to the Company another Notice of Redemption alleging that, because the Company has not withdrawn from the American Stock Exchange or sought to re-list its common stock on another national securities exchange, the Company has breached a covenant under the subscription agreement. On January 24, 2005, Castlerigg sent to the Company another notice that the failure to withdraw from the American Stock Exchange and seek to re-list its common stock on another national securities exchange, continues to be an event of default that is not subject to cure. The Company disagrees with both the substance and logic of Castlerigg's position in that the Company's decision to appeal the American Stock Exchange's notice of delisting and attempt to remain trading on that exchange, pending its appeal and preparation to apply to list on another exchange should the American Stock Exchange appeal fail, is in the best interests of the Company's common and preferred shareholders, including Castlerigg. Furthermore, the Company subsequently dropped its appeal and the Company's common stock will be officially de-listed from the American Stock Exchange on March 7, 2005. The Company's common stock traded on the Pink Sheets from March 8, 2005 until June 27, 2005 when the Company's application made for quotation on the Over the Counter Bulletin board was approved. The Company believes that by delisting from the American Stock Exchange it satisfies its obligations to Castlerigg and accordingly, there should be no liability. 9 On January 24, 2005, Castlerigg notified the Company that, in Castlerigg's view, the Company's prior characterization of Sandell Asset Management Corp. as an investment advisor registered under the Investment Advisor's Act of 1940 and that Castlerigg would not, under any circumstances, consent to the execution of a termination agreement or consent to an extension of the January 21, 2005 closing date for the iBill agreement were incorrect. The Company clarifies its prior disclosure that Sandell Asset Management Corp. is not an investment advisor registered under the Investment Advisor's Act of 1940. With respect to the representation that Castlerigg would not, under any circumstances, consent to the execution of a termination agreement or consent to an extension, the Company relied on information received about Castlerigg's position from the former owners of iBill, and their counsel, who represented to the Company, the position that Castlerigg communicated to them. The Company does not view either of these corrections as material, but makes the corrections at the request of Castlerigg. Subsequent to our January 21, 2005 acquisition of iBill, the Company anticipated extensive litigation by former iBill clients pursuant to payments owed for credit card processing at the time FirstData terminated its banking and processing relationship with iBill. Numerous lawsuits have been filed against iBill in both federal and state circuit court. The amount of damages sought ranges from $1.1 million as the largest individual client to an estimated aggregate amount of up to $4.0 million. The Company is aggressively negotiating settlement agreements for all lawsuits filed and anticipated. There can be no guarantee that all of the plaintiffs will agree to settlements, but to date, we have reached agreement with some of the parties. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On Monday, November 29, 2004 a special meeting of the shareholders of our company was held to act upon the following proposals which were unanimously approved by our board of directors on September 30, 2004: 1. Amend our certificate of incorporation to require a majority shareholder vote to affirm any amendment to the certificates of incorporation as opposed to 66 2/3 % shareholder votes. o Shares For: 11,252,885 o Shares Against: 91,854 o Abstain: 3,127 2. Amend our certificate of incorporation and bylaws to permit any shareholder action to be taken without a meeting of shareholders if written consents setting forth such actions are signed by a majority of shareholders of our company o Shares For: 11,275,987 o Shares Against: 61,754 o Abstain: 3,127 3. Amend our certificate of incorporation to change our name to Interactive Brand Development Inc. o Shares For: 11,286,489 o Shares Against: 57,500 o Abstain: 3,130 As all proposals were approved by the requisite shareholder vote, such proposals were effectuated on November 29, 2004. 10 PART II ITEM 5: MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES MARKET FOR COMMON EQUITY Our common stock traded on the American Stock Exchange under the symbol "IBD" from February 11, 2004 through February 18, 2005 at which time the Company began trading on the Pink Sheets under the symbol "IBDI", until it received approval to trade on the Over the Counter Bulletin Board on June 27, 2005. The closing sale price per share of our common stock on March 18, 2005 was $0.38. MARKET FOR COMMON EQUITY The following table sets forth high and low bid quotations for our common stock for the periods indicated. These quotations do not include retail mark-ups, mark-downs, and commissions and may not necessarily represent actual transactions. PERIOD HIGH LOW ------ ---- --- January 1, 2003-March 31, 2003 $8.00 $6.00 April 1, 2003-June 30, 2003 $8.50 $5.00 July 1, 2003-September 30, 2003 $12.25 $7.50 October 1, 2003- December 31, 2003 $12.50 $7.81 January 1, 2004-March 31, 2004 $8.00 $5.05 April 1, 2004-June 30, 2004 $8.25 $5.41 July 1, 2004-September 30, 2004 $6.85 $1.00 October 1, 2004- December 31, 2004 $1.15 $0.40 As of March 21, 2005 there were approximately 631 holders of record of our common stock. We estimate there are approximately 1,200 shareholders of our common stock. Holders of our common stock are entitled to cash dividends when, as may be declared by the board of directors. We do not intend to pay any dividends in the foreseeable future and investors should not rely on an investment in us if they require dividend income. We intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy will be subject to the discretion of our board of directors and will be based upon future earnings, if any, our financial condition, capital requirements, general business conditions and other factors. There can be no assurance that cash dividends of any kind will ever be paid. 11 DIVIDENDS ON PREFERRED STOCK On November 16, 2004 the holders of the 1,000 shares outstanding of Series B Convertible Preferred stock converted into 198,020 shares of IBD common stock, which included accrued and unpaid dividends. Series F Preferred stock has accrued dividends paid one half in cash and one half in common stock. The Company paid $76,667 in cash for dividends on Series F in 2004 and 25,556 shares of its common stock, valued at $.50 per share, in dividends in 2004. In computing net income applicable to common stock, the Company has incorporated the preferred stock dividend expense in fiscal year 2003 of $8,000 and $76,667 cash accrual and 25,556 in common stock for fiscal year 2004. RECENT SALE OF UNREGISTERED SECURITIES On October 19, 2004, in order to finance our investment in Penthouse Media Group, we sold, in a series of private placement transactions, certain securities, represented by $9.525 million principal amount of 10% promissory notes due September 15, 2009, 35,000 shares of our Series E convertible preferred stock and up to 54,500 shares of our Series F convertible redeemable senior secured preferred stock to certain investors who provided us with $16.475 million in financing. In addition, we issued 45,000 shares of our Series G convertible preferred stock to GMI Investment Partners and warrants to purchase up to 4,216,280 shares of our common stock. The collective securities were issued to an aggregate of approximately 22 investors, all of which were deemed accredited as defined under the Securities Act. The securities were issued under the exemption from registration provided by Regulation D, Rule 506 of the Securities Act. The investors received current information concerning our company and had the opportunity to ask questions about our company. The securities issued contain a legend restricting their transferability absent registration or applicable exemption. On April 14, 2004 we issued 480,000 shares of our common stock to Foster Sports, Inc. pursuant to a stock purchase agreement dated April 14, 2004, as amended. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. On July 14, 2004, we approved the issuance of 4,000,000 shares of our common stock to Oak Street Ventures, Inc. in connection with a Settlement and Termination Agreement dated July 14, 2004. Oak Street Ventures, Inc., a third party consultant, participated in the acquisition of iBill. The 4,000,000 shares are subject to a one-year lock up agreement. Gary Spaniak, Sr. is a principal of Oak Street Ventures, Inc. Gary Spaniak; Sr. is the father of Gary Spaniak, Jr. (an officer and director of our company). Gary Spaniak, Jr. disclaims any beneficial interest in securities owned by his father. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. 12 In August and October 2004, we agreed to issue Catspaw Corporate Consultants, Inc., Oak Street Ventures, and CCD Financial, Inc 746,680 shares of our common stock in consideration for business consulting services relating to our iBid America operations. The services were valued at $106,269. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. On August 26, 2004 we agreed to issue 40,000 shares of common stock to. Northbound, Inc in consideration for business consulting services provided to our company during 2004. These consulting services included services related to our insurance coverage. The services were valued at $5,800. The principal of Northbound is the son of Gilbert Singerman, a director of our company. Gilbert Singerman disclaims beneficial ownership of any securities held by his son. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. On October 5, 2004, we also approved the issuance of 503,680 shares of common stock to Corporation First, Inc. for certain business consulting services valued at $73,034. The shares were issued on December 3, 2004. Voting control of Corporation First is held by the mother of Gary Spaniak, Jr. He disclaims any beneficial ownership in the shares. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. On October 27, 2004, we approved the issuance of 3,000,000 shares of our common stock to American Collectors' Exchange, Inc. pursuant to an agreement dated October 27, 2004 to acquire certain animation cel art library and related intellectual property. Under the agreement we purchased an aggregate of 26,261 pieces of cartoon animation cel art. Pursuant to an independent appraisal, we determined the purchase price for each piece of cel art to be $50.00 per piece. We valued the common stock issued under the agreement at $.45 per share. Under the agreement we also provided American Collectors' Exchange, Inc. piggyback registration rights on the shares of common stock. The shares were issued on December 3, 2004 pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. During November 2004 and December 2004, we agreed to issue 510,000 shares of common stock to Adorno & Yoss, LLP in consideration for legal services provided to our company during 2003 and 2004. The services were valued at $147,900. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our 13 company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. On December 20, 2004 we approved the issuance of 200,000 shares of our common stock to Children's Academy of Pompano Beach, Inc. The shares were issued to Children's Academy of Pompano Beach, Inc. in consideration for the termination of our lease agreement for our former executive offices and release of any potential claims under the lease agreement. The lease agreement was through December 2007 and the remaining obligations under the lease were approximately $307,500. The principal of Children's Academy of Pompano Beach, Inc. is the mother of Gary Spaniak, Jr. He disclaims any beneficial ownership in the shares. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. On December 6, 2004 we approved the issuance of 3,700,000 shares of common stock to Original Cartoon Cels, Inc. pursuant to an agreement dated December 6, 2004 to acquire certain animation cel art library and related intellectual property. Under the agreement we purchased an aggregate of 33,739 pieces of cartoon animation cel art. Pursuant to an independent appraisal, we determined the purchase price for each piece of cel art to be $50.00 per piece. We valued the common stock issued under the agreement at $.45 per share. Under the agreement we also provided Original Cartoon Cels, Inc. piggyback registration rights on the shares of common stock. The shares were issued on December 3, 2004 pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. On November 16, 2004 we issued an aggregate of 198,020 shares of our common stock to Charles Trapp pursuant to conversion of our series B preferred stock. The shares were converted pursuant to our series B preferred stock designation. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. Subsequent to our fiscal year ended 2004, on January 10, 2005; we issued an aggregate of 1,000,000 shares of our common stock to Charles Trapp pursuant to conversion of our series C preferred stock. The shares were converted pursuant to our series C preferred stock designation. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The shareholder had access to information concerning our company and had the opportunity to ask questions about our company. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. 14 SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES None. ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS You should read this section together with the consolidated financial statements and the notes and the other financial data in this Report. The matters that we discuss in this section, with the exception of historical information, are forward-looking statements within the meaning of the Private Securities Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties relate to factors such as: (1) the timing of the introduction of new products and services and the extent of their acceptance in the market; (2) our expectations of growth in demand for our products and services; (3) our ability to successfully implement expansion and acquisition plans; (4) the impact of expansion on our revenue, cost basis and margins; (5) our ability to respond to changing technology and market conditions; (6) the effects of regulatory developments and legal proceedings with respect to our business; (7) the impact of exchange rate fluctuations; and (8) our ability to obtain additional financing. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 During 2004 the Company revised its business plan to be in line with the Company's focus on building a presence as a media holding company in the adult entertainment industry. Accordingly, the Company decided to discontinue its operations related to auction sales and on March 1, 2005 entered into a licensing agreement with LTC Group, Inc., whereby LTC will pay the Company a license fee for the right to use the auction software developed and patented by the Company. Such licensing fee is equal to 20 percent of the gross auction profits. The pro forma presentation in the accompanying consolidated balance sheets and statements of operations for 2004 reflects the effects on those statements, assuming that the licensing agreement with LTC had been executed on December 31, 2004. The Company recognized $0 revenue for cel art sales for the year ended December 31, 2004, compared to $52,250 for the year ended December 31, 2003. The Company owns approximately 137,000 cel art pieces and occasionally has an opportunity to sell series to collectors at a substantial profit, revenue for the year ended December 31, 2003 consisted entirely of sales of cel art. Although the Company is not a dealer of cel art it does have a significant inventory of cel art and occasionally capitalizes on an opportunity to sell directly to collectors. Selling, General and Administrative Expenses increased $600,793, to $1,241,776, in 2004, when compared to $161,464 in 2003. The increase was principally due to indirect nonrecurring expenses related to the Company's acquisition of an equity interest in PMG, and the Company's acquisition of iBill. Cost of Sales decreased to $0 for the year ended December 31, 2004 from $22,500 for the same period in 2003, a decrease of $22,500. Cost of Sales relates only to the sales of the Company's cel art, during 2004 no cel art was sold. As stated above the Company sold certain cel art during 2003 and recognized a 57% gross profit on the sale. 15 Although the Company is not a dealer of cel art it does occasionally capitalize on opportunities to sell directly to collectors where it can recognize a sizable gross profit margin. RECENT ACQUISITIONS AND CHANGE IN BUSINESS PLAN Management has taken steps to during 2004 to improve the Company's financial position. In evaluating the business plan and recent acquisitions, the Company determined that it was better situated to leverage its strategic position within the adult entertainment industry and focus on improving the operations of iBill, an on-line payment processor, which it acquired on January 21, 2005. The results of managements focus during the first quarter of 2005 produced revenue of approximately $14 million and an operating loss of approximately $557 thousand. Management has initiated plans to improve profitability in the upcoming year. LIQUIDITY AND CAPITAL RESOURCES The Company has historically satisfied its capital needs primarily by issuing equity securities to its officers, directors, employees and a small group of investors, and from short-term bridge loans from members of management. The financial statements for 2004 and 2003 reflect management's decision to discharge the assets, certain liabilities and businesses of IBD. Accordingly, the corresponding assets and liabilities of IBD have been classified as assets and liabilities of discontinued operations and the operating results have been classified as income(loss) from discontinued operations. As a result of the above transactions, we only operated the IbidUSA.com in 2004 as a discontinued operation until its licensing agreement was completed in 2005. The Company intends to fund its obligations from operating its iBill subsidiary and continuing operations for the longer-term will be supported through anticipated growth in revenues and through additional short-term financing or the sale of the Company's securities. We continue to pursue external equity financing arrangements that could enhance our liquidity position. Nonetheless, our future capital requirements may vary materially from those now planned including the need for additional working capital to accommodate infrastructure needs. There can be no assurances that our working capital requirements will not exceed our ability to generate sufficient cash internally to support our requirements and that external financing will be available or that, if available, such financing can be obtained on terms favorable to us and our shareholders. For the year ending December 31, 2004, the Company posted a net loss of $3,458,378 compared to $464,768 for the year ended December 31, 2003, a change of $2,993,610. Basic and diluted net income (loss) per Common Share for 2004 was net loss per common share of $0.19 as compared to a net loss per common share of 0.03 for 2003. 16 Net cash used in operating activities was $2,106,601 in the year ended December 31, 2004. Net cash used in operating activities in the year ended December 31, 2003 was $285,770. This was a net change of $1,820,831. Net cash used by investing activities was $ 9,529,000 during 2004, compared to net cash used of $887 during 2003, the amount used to purchase fixed assets. The Company used $9,525,000 provided by the issuance of 10% convertible notes in conjunction with other stock issuances to acquire it's investment in PMG. Net cash provide by financing activities was $11,634,457 in 2004 compared cash used of $15,956 during 2003. This was the result of the payment on notes payable of $15,956 in 2003. The Company issued $9,525,000 in 10% convertible notes in to raise the needed capital to purchase it's investment in PMG. Other borrowings were used to support continuing operations. GOING CONCERN In connection with their audit report on the Company's financial statements as of December 31, 2004, the Company's independent public accountants, expressed substantial doubt about the Company's ability to continue as a going concern as such continuance is dependent upon the Company's ability to raise sufficient capital. Management's plans regarding these matters, with the objective of improving liquidity and sustaining profitability in future years encompass the following: o Maintaining service levels for existing clients above expectations to promote recurring and incremental revenues from these clients; o Development of new payment processing products utilizing a fee-based service model with the potential for additional revenues from selling these programs to the end user; o Teaming with other product and service providers in the adult entertainment industry order to develop new revenue streams; o Providing strategic marketing services to clients; o Settling outstanding obligations at a discount with payments to be made over time; o Continued review of all expenditures in order to minimize costs; and o Raising additional equity capital as necessary. Management believes that the actions presently being taken by the Company provide the opportunity for the Company to improve liquidity and sustain profitability. However, there are no assurances that management's plans will be achieved. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty Ultimately, the Company must achieve profitable operations if the Company is to be a viable entity. Although the Company believes that there is a reasonable 17 basis to believe that the Company will successfully raise the needed funds to continue, the Company cannot assure the reader that the Company will be able to raise sufficient capital to continue market penetration. RISK FACTORS WE HAVE A HISTORY OF OPERATING LOSSES AND THIS MAY CONTINUE TO BE THE CASE. Our expenses are currently greater than our revenues. At December 31, 2004 our company had an accumulated deficit of $4,376,752 and posted a net loss of $464,768 in fiscal year 2003. Our ability to operate profitably depends on increasing our sales and achieving sufficient gross profit margins. We cannot assure you that we will operate profitably. WE MAY NOT REALIZE THE ANTICIPATED BENEFITS OF OUR RECENT INVESTMENT AND ACQUISITIONS. Our board of directors believes that an investment in Penthouse Media Group, and acquisition of iBill and other acquisitions will permit us to achieve a greater level of success than is possible with our online auction. However, there can be no assurance that, following the investment and acquisitions, Interactive Brand Development will ever be successful. ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the financial statements commencing on page F-1. ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective October 30, 2003, we dismissed the firm of William J. Hadaway ("WJH") as the principal accountants to audit our financial statements. The dismissal was approved by our board of directors. The reports of WJH on the financial statements of our Company for the past year contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. Effective October 30, 2003, we engaged the accounting firm of Jewett, Schwartz & Associates as our new independent accountants to audit our financial statements for the fiscal year ending December 31, 2003. ITEM 8A: CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. 18 In connection with the review our consolidated financial statements for the year ended December 31, 2004, we discovered certain significant internal control deficiencies that we consider to be reportable conditions and material weaknesses. These consist of inadequate communication and supervision leading to the untimely identification and resolution of certain accounting and disclosure matters; failure to address and properly account for certain complex transactions; and lack of policy and procedure to adequately store and retrieve material information. A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes our internal controls from reducing to an appropriately low level of risk that material misstatements in our financial statements will not be prevented or detected on a timely basis. As required by the SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. This evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our controls and procedures were not effective as of the end of the period covered by this report due to the deficiencies discussed above. Our restructuring and financial position has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and proper procedures within our internal control system. We will use our best efforts to implement necessary policies and procedures within the Company to provide adequate disclosure controls and procedures. Inherent Limitations on Effectiveness of Controls We do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 19 CHANGES IN INTERNAL CONTROLS No change in the Company's internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 8B: OTHER INFORMATION None. PART III ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Our current directors and executive officers are as follows: NAME AGE POSITION ---- --- -------- Steve Markley 59 Chief Executive Officer, Principal Financial Officer, Secretary, Director Gary Spaniak Jr. 40 President, Director Steve Robinson 56 Director Gilbert Singerman 70 Director Robert Dolin 83 Director STEVE MARKLEY. Since February 15, 2001, Mr. Markley has served as Chief Executive Officer and Director of iBid, and since August (November???) 2002 he has served as Principal Financial Officer, CEO and Secretary for the Company. From 1997 through January 2001, Mr. Markley served as President and CEO of Value Dining Incorporated, a franchise restaurant company in Southeast Florida doing business as Golden Corral Buffet and Grill. GARY SPANIAK JR. Since February 15, 2001, Mr. Spaniak has served as President and as Director of iBid and since November 2002 he has served as President of the Company. From 1998 until his position with iBid, Mr. Spaniak was the Director of Site Acquisitions for Retail Site Development, Inc., a commercial real estate acquisition company that negotiates build-to-suit locations for retail establishments across the U.S. From 1997 until 1998, Mr. Spaniak was a marketing consultant in Florida for AutoNation USA, an automobile sales franchise company. STEVEN ROBINSON. Since February 2002, Mr. Robinson has served as a Director of the Company. In February 2003 he established Lifestyle Vacation Incentives, a travel consulting business, for which he is President and CEO. From January 1998 until February 2003, he was the President and CEO of WorldChem, a chemical manufacturing and marketing company. From October 1996 to January 1998 he served as Executive Vice President and was a co-founder of American Access Technologies, Inc., a public company that manufactures zone cabling enclosures for fiber optic, wireless and data networks systems. 20 GILBERT SINGERMAN. Since December 30, 2003, Mr. Singerman has served as a Director of the Company. At present he is vice president of Management Associates, a contracting firm specializing in hotel and nursing home construction worldwide. He is a licensed contractor. From 1995 to the present, he has served as a consultant to Ellis-Don, a $1 billion per year contracting firm. From 1985 to the present, he has served as New York Life Chairman Council Member and is licensed with more than 20 companies to conduct insurance and securities sales. He has also served as president of both Air Cleveland, Inc. from 1979-1984 and Wright Airlines, Inc. in 1984. ROBERT DOLIN. Since December 2002, Mr. Dolin has served as a Director of the Company. Mr. Dolin founded Telcoa, Inc. in 1963 and has served as its CEO and as a director since it began trading as a public company 20 years ago. Telcoa has owned a venture capital company, a pay telephone company, a marketing development company and an alarm system company. Mr. Dolin has served as a director for numerous public companies over his long career. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Based solely on our review of Forms 3, 4 and 5 received by our company, or written representations from certain reporting persons that during the fiscal year ended December 31, 2004, all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 applicable to officers, directors and 10% shareholders were satisfied. COMMITTEES OF THE BOARD OF DIRECTORS The board of directors met 26 times during 2004. All directors serve until the next annual shareholders meeting and until the election and qualification of their successors, Directors do not receive any compensation for serving on the board or any committees of the board. We have established an Audit Committee, a Compensation Committee and a Nominating Committee. The Audit Committee, comprised of independent directors Steve Robinson, Robert Dolin, and Gilbert Singerman, is directly responsible for appointment, compensation and oversight of the independent auditor, including resolving any disagreements between the auditor and management. The auditor reports directly to the committee, which has met twice since inception to adopt its by-laws and to establish procedures to receive and address complaints concerning accounting and auditing matters, including procedures for employees' anonymous submission of issues regarding these matters. The Audit Committee is composed solely of three unaffiliated, independent directors who accept no consulting or other fees from the company. Mr. Singerman is considered a "Financial Expert" as defined under Item 401 of Regulation S-B. The Compensation Committee is composed entirely of our three independent directors, who are responsible for setting our chief executive officer's salary and who will approve salaries for other executives based on the chief executive 21 officer's recommendation after consulting with the Committee. The Compensation Committee intends to meet on an as-needed basis. The committee met formally once in 2004. The Nominating Committee is composed entirely of our three independent directors, who will approve board nominations in the future on as as-needed basis. The Nominating Committee did not formally meet in 2004. CODE OF ETHICS During the year ended December 31, 2003, we adopted a Code of Ethics. The code applies to our officers and directors. The code provides written standards that are designed to deter wrongdoing and promote: (1) honest and ethical conduct; (2) full, fair , accurate, timely and understandable disclosure; (3) compliance with applicable laws and regulations; (4) prompt reporting of internal violations of the code; and (5) accountability for the adherence to the code. ITEM 10: EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the total compensation paid to our chief executive officer and president for the last three completed fiscal years and to any officer who earned $100,000 or more per year ("Named Executives"). - -------------------------------------------------------------------------------- OTHER ANNUAL OTHER ANNUAL NAME AND POSITION YEAR TOTAL INCOME BONUS COMPENSATION - -------------------------------------------------------------------------------- Steve Markley, 2002 -0- -0- -0- CEO - -------------------------------------------------------------------------------- Steve Markley, 2003 -0- -0- -0- CEO - -------------------------------------------------------------------------------- Steve Markley, 2004 $7,583* -0- -0- CEO - -------------------------------------------------------------------------------- Gary Spaniak, Jr. 2002 -0- -0- -0- Pres - -------------------------------------------------------------------------------- Gary Spaniak, Jr. 2003 -0- -0- -0- Pres - -------------------------------------------------------------------------------- Gary Spaniak, Jr. 2004 $7,583* -0- -0- Pres - -------------------------------------------------------------------------------- * By the terms of their Employment Agreements, Messrs. Markley and Spaniak Jr. are each to be paid salaries of $125,000 annually. In 2004, compensation of $117,417 was deferred. 22 OPTIONS/SAR GRANTS IN LAST FISCAL YEAR The following information sets forth the individual grants of stock options and freestanding SARs to the Named Executives in the last fiscal year. - -------------------------------------------------------------------------------- NUMBER OF SECURITIES PERCENT OF TOTAL UNDERLYING OPTIONS/SARS GRANTED OPTIONS/SARS TO EMPLOYEES IN FISCAL EXERCISE EXPIRATION NAME GRANTED YEAR PRICE DATE - -------------------------------------------------------------------------------- Steve Markley, -0- -0- N/A N/A CEO - -------------------------------------------------------------------------------- Gary Spaniak -0- -0- N/A N/A Jr., Pres - -------------------------------------------------------------------------------- AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/SAR VALUES The following table sets forth the number of stock options and freestanding SARs exercised by the Named Executives during the last completed fiscal year.
- ------------------------------------------------------------------------------------------------------------------- SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED ACQUIRED ON VALUE SECURITIES UNDERLYING IN-THE-MONEY NAME EXERCISE REALIZED OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END - ------------------------------------------------------------------------------------------------------------------- Steve Markley, CEO -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------- Gary Spaniak Jr. -0- -0- -0- -0- Pres - -------------------------------------------------------------------------------------------------------------------
DIRECTOR COMPENSATION Directors are not paid for meetings attended at our corporate headquarters or for telephonic meetings. All travel and lodging expenses associated with directors' meeting(s) are reimbursed by our company. EMPLOYMENT AGREEMENTS The Company to date has entered into two employment agreements with its executive officers and two consulting agreements pursuant to management of the company. Each of the two employment agreements the Company has entered into with CEO Steve Markley and President Gary Spaniak Jr. stipulate an annual salary of $125,000 in exchange for continued management services. Each of the two consulting agreements the Company has entered into with Gary Spaniak Sr. and Bobby Story stipulate an annual payment of $125,000 in exchange for services related to business management, financing, and mergers and acquisitions. Messrs. Spaniak Sr. and Story are independent contractors. 23 ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS As of March 15, 2005, there were 29,620,805 shares of our common stock outstanding. The following table sets forth certain information regarding (1) each person known by our company to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (2) each director and named executive officer of our company and (3) all officers and directors as a group. Beneficial ownership has been determined based upon information made available to us or otherwise contained in public filings. The percentage of common stock owned is calculated based on the number of shares of common stock outstanding, plus in the case of each person the number of shares of common stock issuable only to such person upon the exercise of warrants and the conversion of preferred stock. As such, the table also gives effect to, (1) conversion at an effective assumed conversion price of $0.50 per share of all 10% convertible notes, shares of Series E preferred stock, Series F preferred stock, Series G preferred stock and warrants (convertible up to an aggregate of 72,216,280 shares of common stock) issued in connection with our Penthouse media Group investment; and (2) conversion of our Series D preferred stock (convertible into 49.9% of our fully diluted common stock on the date of conversion). As such, on a pro forma basis for calculating the number of shares issuable as of March 15, 2005, pursuant to the conversion of our Series D preferred Stock, there were approximately 202,264,871 shares of our common stock issued and outstanding. APPROXIMATE NUMBER OF SHARES PERCENTAGE OF NAME AND ADDRESS BENEFICIALLY OWNED COMMON STOCK - ---------------- ------------------ ------------- Granite Management Company, LLC(1)(3) 15,000,000 33.6% Summit Trading Limited(2)(3) 15,000,000 33.6% Monarch Pointe Fund LP(3)(4) 10,680,280 26.5% CCI II, L.L.C.(3)(5) 12,030,417 28.9% Steve Markley 517,117 1.7% Gary Spaniak, Jr. 1,701,667 5.7% Steven Robinson 500,000 1.7% Gilbert Singerman 2,000 * Robert Dolin 62,500 * PHSL Worldwide, Inc.(6)(10) 100,930,171 49.9% Luis Enrique Fernando Molina Galeana(6) 100,930,171 49.9% Jason Galanis(6)(7)(8)(10) 39,037,120 19.3% Charles Samel(6)(7)(9)(10) 54,004,720 26.7% All Officers and directors as a group, (5 individuals) 2,783,284 9.3% - ---------- * Less than 1% EQUITY COMPENSATION PLAN INFORMATION There are no outstanding options or warrants issued under equity compensation plans. We currently have no stock option plan. 24 ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The amount due to stockholders at December 31, 2004 and December 31, 2003 was $1,151,970 and $7,316. These amounts represented advances from shareholders and corporate expenses paid personally by stockholders. We were party to a lease agreement for our former executive offices with Children's Academy of Pompano Beach, Inc., an entity controlled by the mother of Gary Spaniak, our president. The lease agreement was through December 2007. On December 20, 2004 we agreed to terminate the lease. The remaining obligations under the lease on the date of termination were approximately $307,500. Children's Academy of Pompano Beach, Inc. accepted 200,000 shares of our common stock in consideration of forgiving all outstanding obligations under the lease and release of any potential claims under the lease agreement. Gary Spaniak, Jr. disclaims any beneficial ownership in the shares. On July 14, 2004 we entered into a Settlement and Termination Agreement with Oak Street Ventures, Inc. under which Oak Street Ventures received 4,000,000 shares of our common stock in consideration of consulting services provided in connection with our introduction to iBill and subsequent acquisition negotiations with iBill. On August 26, 2004, we approved the issuance of 503,680 shares of common stock to Oak Street Ventures in consideration of additional business consulting services provided to our company valued at $73,034. Gary Spaniak, Sr. is a stockholder of Oak Street Ventures, Inc. He's the father of Gary Spaniak, Jr. (an officer and director of our company). Gary Spaniak, Jr. disclaims any beneficial interest in securities owned by his father. On August 26, 2004, we also approved the issuance of 503,680 shares of common stock to Corporation First, Inc. for certain business consulting services valued at $73,034. Voting control of Corporation First is held by the mother of Gary Spaniak, Jr. He disclaims any beneficial ownership in the shares. 25 On August 26, 2004 we entered into a business consulting services agreement with Northbound, Inc. for services related to our insurance coverage. In consideration of services provided under the agreement we issued Northbound 40,000 shares of our common stock. The services were valued at $5,800. The principal of Northbound is the son of Gilbert Singerman, a director of our company. Gilbert Singerman disclaims beneficial ownership of any securities held by his son. On October 1, 2004, we entered into a business consulting services agreement with Gary Spaniak Sr., valued at $125,000 annually for a term of three years, in addition to health insurance benefits. Mr. Spaniak is the father of the president. ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 2.1 Settlement and Securities Purchase Agreement, dated as of September 21, 2004 with PET Capital Partners LLC, Absolute Return Europe Fund, Susan Devine, NAFT Ventures I LLC, Marc H. Bell, Daniel Staton (collectively, the "Bell/Staton Group"), Penthouse International, Inc., The Molina Vector Investment, and Milberg Weiss Bershad & Schulman LLP, as escrow agent(1). 2.2 Stockholders Agreement, dated October 19, 2004 among the Bell/Staton Group and the Company(1). 2.3 August 22, 2004 Securities Purchase Agreement, as amended, between the Company and Penthouse International, Inc(1). 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Schedule 14A Proxy Statement filed with SEC on November 1, 2004). 3.2 Amended and Restated By-Laws (incorporated by reference to Form 10-KSB filed March 26, 2001). 3.3 Amendment to Bylaws (incorporated by reference to Schedule 14A Proxy Statement filed with SEC on November 1, 2004). 3.4 Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Schedule 14C Information Statement filed with the SEC on March 10, 2005). 3.5 Designation of Series D Preferred Stock (incorporated by reference to Form 8-K dated January 21, 2005). 3.6 Designation of Series E Preferred Stock(1). 3.7 Designation of Series F Preferred Stock(1). 3.8 Designation of Series G. Preferred Stock(1). 3.9 Designation of Series H Preferred Stock 3.10 Designation of .50 Warrants 8.1 Agreement and Plan of Merger (incorporated by reference to Form 8-K filed November 19, 2002.) 10.1 Form of Subscription Agreement, dated as of September 20, 2004, between the Company and holders of 10% convertible subordinated secured notes of the Company due 2009(1). 26 10.2 Form of 10% Note(1). 10.3 Form of Security Agreement between the Company and holders of 10% Notes (1). 10.4 Form of Pledge Agreement among the Company, the holders of 10% Notes and holders of Series F preferred stock(1). 10.5 Form of Subscription Agreement, dated as of September 20, 2004, between the Company and Monarch Pointe Fund, Ltd., as holder of 35,000 shares of Series E convertible preferred stock(1). 10.6 Form of Subscription Agreement, dated as of September 28, 2004, between the Company and Castlerigg Master Investments Limited and Vestcap International Management Limited, as holders of 34,500 shares of Series F convertible senior secured preferred stock(1). 10.7 Form of Security Agreement between the Company and holders of Series F Preferred Stock(1). 10.8 September 23, 2004 Stock Purchase Agreement among GMI Investment Partners, Penthouse International, Inc. and the Company(1). 10.9 Form of Registration Rights agreement between the Company and holders of Preferred Stock and Notes(1). 10.10 iBill Securities Purchase Agreement dated July 22, 2004 (filed on Form 8-K Current Report dated July 30, 2004). 10.11 iBill Securities Closing Agreement dated January 21, 2005 (filed on Form 8-K Current Report dated January 21, 2005). 10.12 Employment Agreement dated October1, 2004 between the Company and Steve Markley. (incorporated by reference to Form 10-KSB filed on April 15, 2005) 10.13 Employment Agreement dated October 1, 2004 between the Company and Gary Spaniak Jr. (incorporated by reference to Form 10-KSB filed on April 15, 2005) 10.14 Consulting Agreement dated October 1, 2004 between the Company and Bobby Story. (incorporated by reference to Form 10-KSB filed on April 15, 2005) 10.15 Consulting Agreement dated October 1, 2004 between the Company and Gary Spaniak Sr. (incorporated by reference to Form 10-KSB filed on April 15, 2005) 10.16 Termination Agreement dated November 4, 2004 between the Company and Foster Sports Inc. and Carl Foster. (incorporated by reference to Form 10-KSB filed on April 15, 2005) 10.17 Management Agreement dated March 1, 2005 between the Company and LTC Group, Inc., for the management of our online auction business and website, iBidUSA.com. (incorporated by reference to Form 10-KSB filed on April 15, 2005) 10.18 XTV Acquisition Agreement dated March 31, 2005. 14 Code of Ethics (incorporated by reference to Form 10-KSB filed on March 29, 2004). 27 16.1 Letter from former Auditor (incorporated by reference to Form 8-K/A filed January 21, 2003.) 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. 32.2 Certification of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. - ---------- (1) Filed on Form 8-K Current Report dated October 19, 2004. (b) Form 8-K During the last quarter of the period covered by this annual report the following reports on Form 8-K were filed by our company: On October 26, 2004 a Form 8-K was filed to disclose events under items 1.01, 2.01, 2.03 and 3.02 of Form 8-K. On December 12, 2004 a Form 8-K was filed to disclose events under items 1.02 and 9.01 of Form 8-K. ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES Year ended December 31, 2003 Audit Fees: The aggregate fees, including expenses, billed by the Company's principal accountant in connection with the audit of our consolidated financial statements for the most recent fiscal year and for the review of our financial information included in our Annual Report on Form 10-KSB; and our quarterly reports on Form 10-QSB during the fiscal year ending December 31, 2003 was $30,000. Audit Related Fees: The aggregate fees, including expenses, billed by the Company's principal accountant for services reasonably related to the audit for the year ended December 31, 2003 were none. All Other Fees: The aggregate fees, including expenses, billed for all other services rendered to the Company by its principal accountant during year 2003 was none. 28 Year ended December 31, 2004 Audit Fees: The aggregate fees, including expenses, billed by the Company's principal accountant in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2004 and for the review of our financial information included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003; and our quarterly reports on Form 10-QSB during the fiscal year ending December 31, 2004 was $15,000. Audit Related Fees: The aggregate fees, including expenses, billed by the Company's principal accountant for services reasonably related to the audit for the year ended December 31, 2004 were $44,000. All Other Fees: The aggregate fees, including expenses, billed for all other services rendered to the Company by its principal accountant during year 2004 was none. The Board of Directors has considered whether the provisions of the services covered above under the captions "Financial Information Systems Design and Implementation Fees" and "All Other Fees" is compatible with maintaining the auditor's independence. 29 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERACTIVE BRAND DEVELOPMENT, INC. By /s/ Steven Markley --------------------- Chief Executive Officer and Principal Financial Officer Date: April 15, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, This report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Steve Markley Chief Executive Officer, April 15, 2005 - ----------------------- Secretary/Treasurer, Principal Steve Markley Financial Officer, Director /s/ Gary Spaniak Jr. President, Director April 15, 2005 - ----------------------- Gary Spaniak Jr. /s/ Steve Robinson Director April 15, 2005 - ----------------------- Steve Robinson /s/ Gilbert Singerman Director April 15, 2005 - ----------------------- Gilbert Singerman /s/ Robert Dolan Director April 15, 2005 - ----------------------- Robert Dolin 30 FINANCIAL STATEMENTS INTERACTIVE BRAND DEVELOPMENT, INC. Table of Contents Report of Independent Certified Public Accountants................. F-2 Consolidated Balance Sheet as of December 31, 2004................. F-3 Consolidated Statements of Operations for the years ended December 31, 2004 and 2003..................... F-4 Consolidated Statements of Changes in Shareholders' Equity for the year ended December 31, 2004 and 2003...................... F-5 Consolidated Statements of Cash Flows for the year ended December 31, 2004 and 2003...................... F-6 Notes to Consolidated Financial Statements......................... F-7 - F-24 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the board of directors and shareholders of Interactive Brand Development, Inc. We have audited the accompanying consolidated balance sheet of Interactive Brand Development, Inc. as of December 31, 2004 and the related consolidated statements of operations, changes in shareholders' deficiency and cash flows for the years ended December 31, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provided a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interactive Brand Development, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the year then ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1 to the financial statements, the Company has incurred recurring operating losses and has a working capital deficit at December 31, 2004. The Company is working on various alternatives to improve the Company's financial resources which are also described in Note 1. Absent the successful completion of one of these alternatives, the Company's operating results will increasingly become uncertain. These conditions raise substantial doubt about the Company's ability to continue as a going concern; however, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Jewett, Schwartz, & Associates Hollywood, Florida April 11, 2005 F-2 INTERACTIVE BRAND DEVELOPMENT CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004 ----------------- ASSETS Cash and cash equivalents $ -- Accounts receivable 453 Other assets -- ------------ Total current assets 453 ------------ Furniture and fixtures, net of accumulated depreciation of $56,116 26,593 Cel Art inventory 6,848,950 Investment in PMG 43,220,939 Prepaid Acquisition Costs 4,000 Patent 12,500 ------------ Total assets $ 50,113,435 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 148,706 Notes payable - related party 1,048,248 Due to affiliate 593,525 Accrued payroll and related payables 432,400 ------------ Total current liabilities 2,222,879 ------------ 10% Convertible notes 9,525,000 Other long term liabilities 475,000 ------------ Total long term liabilities 10,000,000 Total liabilities 12,222,879 ------------ Shareholders' equity: Common Stock, Par Value $.001, 30,000,000 Shares authorized, and 28,312,569 shares issued Dec 31, 2004 28,312 Preferred C, Par Value, $001, 45,000 Shares authorized, 10,000 issued 10 Preferred E, Par Value, $001, 35,000 Shares authorized, 35,000 issued 35 Preferred F, Par Value, $001, 87,000 Shares authorized, 34,500 issued 35 Preferred G, Par Value, $001, 45,000 Shares authorized, 45,000 issued 45 Additional paid-in-capital 42,238,872 Accumulated deficit (4,376,752) ------------ Total shareholders' equity 37,890,556 Total liabilities & shareholders' deficit $ 50,113,435 ============
The accompanying notes are an integral part of these financial statements. F-3 INTERACTIVE BRAND DEVELOPMENT CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2004 2003 ------------ ------------ Revenues: Cel Art Sales $ -- $ 52,250 Other -- (5,883) ------------ ------------ Total Revenue -- 46,367 Operating expenses: Cost of sales -- 22,500 Selling, general and administrative 1,153,610 161,464 Depreciation and amortization 16,172 16,196 ------------ ------------ Total operating expenses 1,169,782 177,660 ------------ ------------ Operating loss (1,169,782) (131,293) Other income (expense): Loss on disposal of fixed assets (42,860) -- Interest expense (92,893) (361) ------------ ------------ Total other expense (135,753) (361) ------------ ------------ Net operating loss (1,305,535) (131,654) Income taxes -- -- ------------ ------------ Net loss from continuing operations (1,305,535) (131,654) ------------ ------------ Discontinued operations, net of income tax Loss on disposal of discontinued operations, (657,885) -- Loss from operations for discontinued Foster Sports & Ibid Auction (1,494,958) (333,114) ------------ ------------ Loss from discontinued operations (2,152,843) (333,114) Net loss $ (3,458,378) $ (464,768) Dividends on preferred stock (6,000) (8,000) ------------ ------------ Net loss applicable to common stock $ (3,464,378) $ (472,768) ============ ============ Basic and diluted earnings (loss) per common share: Continuing operations (0.07) (0.01) Discontinued operations (0.12) (0.02) ------------ ------------ Total $ (0.19) $ (0.03) ============ ============ Weighted average number shares outstanding - basic and diluted 18,023,018 15,192,425 ============ ============
The accompanying notes are an integral part of these financial statements. F-4 INTERACTIVE BRAND DEVELOPMENT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 2003 AND 2004
Series B Series C Series E Series F Series G Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock --------------- --------------- --------------- --------------- --------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Balance December 31, 2002 1,000 100 10,000 1,000 ===== === ====== ===== Reclassification of preferred stock to paid in capital (99) (990) Net Loss Balance December 31, 2003 1,000 1 10,000 10 ----- --- ------ ----- Purchase of Foster Sports, Inc Issue Stock for services Issue Stock for services Issued Stock for M & A work Issued Stock for Cel Art @ $0.45 Conversion of Series B (1,000) (1) Record Purchase of Penthouse Media Group, net of acquisition cost net of acquisition cost 35,000 35 34,500 35 45,000 45 Foster Adjustment Net Loss Balance December 31, 2004 -- -- 10,000 10 35,000 35 34,500 35 45,000 45 ====== === ====== ===== ====== == ====== == ====== ==
[RESTUB]
Common Stock Paid-in Retained ------------ Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- Balance December 31, 2002 15,192,425 15,192 6,088,038 (453,606) 5,650,724 ========== ====== ========= ========= ========= Reclassification of preferred stock to paid in capital 1,089 -- -- Net Loss (464,768) (464,768) Balance December 31, 2003 15,192,425 15,192 6,089,127 (918,374) 5,185,956 ---------- ------ --------- --------- --------- Purchase of Foster Sports, Inc 480,000 480 3,095,520 3,096,000 Issue Stock for services 2,050,360 2,050 202,986 205,036 Issue Stock for services 111,764 112 69,182 69,294 Issued Stock for M & A work 4,000,000 4,000 4,000 Issued Stock for Cel Art @ $0.45 6,700,000 6,700 3,008,300 3,015,000 Conversion of Series B 198,020 198 (197) -- Record Purchase of Penthouse Media Group, net of acquisition cost net of acquisition cost 32,482,534 32,482,648 Foster Adjustment (420,000) (420) (2,708,580) (2,709,000) Net Loss (3,458,378) (3,458,378) Balance December 31, 2004 28,312,569 28,312 42,238,871 (4,376,752) 37,890,556 ========== ====== ========== =========== ==========
The accompanying notes are an integral part of these financial statements. F-5 INTERACTIVE BRAND DEVELOPMENT CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2004 2003 ------------ ------------ Net (Loss) $ (3,458,378) $ (464,768) Adjustments to reconcile net loss to net Cash used in operating activities: Depreciation and amortization 16,172 16,196 Net impairment loss from discontinued operations 468,410 -- Issuance of stock for services 278,330 -- Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 22,772 137,779 Auction content inventory -- 22,500 Increase (decrease) in: Accounts payable and accrued expenses 133,693 2,523 Accrued payroll 432,400 -- ------------ ------------ Net cash used in operating activities (2,106,601) (285,770) ------------ ------------ Cash Flows from Investing Activities: Acquisition of PMG investment (9,525,000) -- Prepaid acquisition costs (4,000) -- Purchase of equipment & leasehold improvements -- (887) ------------ ------------ Net cash used by investing activities (9,529,000) (887) ------------ ------------ Cash Flows from Financing Activities: Proceeds from convertible notes 9,525,000 20,000 Principal payment of notes payable -- (15,956) Proceeds from long-term loan payable 750,000 -- Payments long-term loan payable (275,000) -- Net advances from related party 586,209 (82,799) Proceeds from related party notes payable 1,048,248 Repayments of notes payable-related party -- (120,833) Proceeds from sale of stock -- 183,632 Net cash provided by financing activities 11,634,457 (15,956) ------------ ------------ Net Increase in Cash and Cash Equivalents (1,144) (302,613) Cash and Cash Equivalents, Beginning 1,144 122,044 ------------ ------------ Cash and Cash Equivalents, Ending $ -- $ (180,569) ============ ============ Supplemental disclosures: Cash paid during the year for interest $ 92,893 $ 361 ============ ============ Cash paid during the year for taxes $ -- $ -- ============ ============ Non-cash investing and financing activities: Stock issued for services $ 278,330 $ -- ============ ============ Stock issued for the purchase of auction content inventory $ 3,015,000 $ -- ============ ============ Stock issued for the acquisition of PMG stock $ 32,482,648 $ -- ============ ============
The accompanying notes are an integral part of these financial statements. F-6 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 1: ORGANIZATION AND CAPITALIZATION Interactive Brand Development, Inc. ("IBD", the "Company" or the "Corporation"), a Delaware corporation, is authorized under its Articles of Incorporation to issue and have outstanding at any one time 30,000,000 shares of common stock par value $.001 per share. As a subsequent event to fiscal year 2004, a majority of the Company's shareholders by written consent dated January 31, 2005 voted to increase the number of authorized shares to 400,000,000 shares of common stock, par value $.001 per share, effective March 31, 2005. Historically, the Company's operations have consisted of an online auction website and investments in an animation library. In April 2004, the Company acquired Foster Sports, Inc., a company that primarily broadcasts a sports talk show on two radio stations in South and Central Florida. During the fourth quarter of 2004 the Company revised its business plan to focus on its new strategy of building a presence as a marketing and media holding company in the adult entertainment industry. Accordingly, the Company discontinued operations of both IBID Auction and Foster Sports, Inc. during the fourth quarter of 2004. On October 19, 2004, the Company finalized the acquisition of a 34.7% non-voting equity interest in Penthouse Media Group, Inc. ("PMG"), an established global adult media, entertainment, and licensing company. Investment in PMG - ----------------- On November 29, 2004, the Company changed its name to Interactive Brand Development, Inc. from Care Concepts I, Inc. to better define its emerging role as a media holding company after consummating a transaction on October 19, 2004, to acquire a minority equity non-voting interest in the post-bankruptcy, reorganized Penthouse Media Group, Inc. (formerly known as General Media, Inc.). Such amount of equity held is 34.7%. Penthouse Media Group emerged from bankruptcy reorganization on October 5, 2004. In order to finance the purchase price for this equity investment in the reorganized Penthouse Media Group, IBD sold $9.525 million principal amount of its 10% Promissory Notes, due September 15, 2009, 35,000 shares of its Series E convertible preferred stock, 34,500 shares of its Series F convertible redeemable senior secured preferred stock and 45,000 shares of its Series G convertible preferred stock to 22 investors for $16.475 million of gross proceeds. Currently, such convertible securities, together with 3-year warrants to purchase up to 4,216,280 additional shares of the Company's common stock at $3.00 per share, may be converted or exercised for up to 72,216,280 shares of IBD common stock. F-7 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 1: ORGANIZATION AND CAPITALIZATION - (CONTINUED) Subsequent Acquisitions - ----------------------- Effective January 21, 2005, IBD completed the acquisition of all of the equity interests in iBill Corporation, which owns 100% of the membership interests in Media Billing Company, LLC, which owns 100% of the membership interests in Internet Billing Company LLC , from PHSL. In connection with the acquisition of iBill in January 2005, IBD issued to PHSL 330,000 shares of its Series D Preferred Stock, which PHSL is entitled to convert into the number of shares of IBD common stock as shall represent 49.9% of the fully-diluted shares of the Company's common stock on the date of conversion. If PHSL had converted on the date of issuance, 100,733,244 shares of IBD common stock would have been issued. In March 2005, IBD completed the purchase of a minority interest in Interactive Television Network Inc. The investment represented a 25% equity ownership of ITVN, in exchange for 4,000 shares of Convertible Preferred Stock Series H and $1,700,000 in cash. On June 30, 2005, Interactive Television Networks, Inc. merged with Radium Ventures, a public company RDIU. Pursuant to the merger agreement, IBD is receiving 5,529,222 restricted common shares of Radium. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material inter-company accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. F-8 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. CASH AND CASH EQUIVALENTS The Company maintains deposit balances at financial institutions that, from time to time, may exceed federally insured limits. At December 31, 2004, the Company had no deposits in excess of federally insured limits. The Company maintains its cash with high quality financial institutions, which the Company believes limits these risks. MARKETABLE SECURITIES The Company accounts for investments under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investment securities are classified into one of three categories: held-to-maturity, available-for-sale, or trading. Securities are considered held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. These securities are recorded as either short-term investments or long-term marketable securities on the balance sheet depending upon their original contractual maturity dates. Held-to-maturity securities are stated at amortized cost, including adjustments for amortization of premiums and accretion of discounts. Securities are considered trading when bought principally for the purpose of selling in the near term. Trading securities are recorded as short-term investments and are carried at market value. Unrealized holding gains and losses on trading securities are included in operating income. Securities not classified as held-to-maturity or as trading are considered available-for-sale. Available-for-sale securities are recorded as either short-term investments or long-term marketable securities and are carried at market value with unrealized gains and losses included in other comprehensive income in stockholders' equity. ACCOUNTS RECEIVABLE Accounts receivable arise from credit card payments for auctions. Concentrations of credit risk related to credit card payments are limited to the processors who remit the cash to the Company along with the Company's allocable share of fees. The Company believes these processors are financially stable and no significant credit risk exists with respect to accounts receivable arising from credit card payments. No allowance was considered necessary at December 31, 2004. F-9 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) FURNITURE AND FIXTURES Furniture and fixtures is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization of furniture and fixtures is computed using the straight-line method based on the estimated useful lives of the related assets. Leasehold improvements are amortized over their estimated useful lives, or the term of the lease, whichever is shorter. Maintenance and repair costs are expensed as incurred. IMPAIRMENT OF LONG LIVED ASSETS The Company follows Statement of Financial Accounting Standards No. 121 (Statement 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The carrying value of long-lived assets (tangible, identifiable intangible, and goodwill) is reviewed if the facts and circumstances suggest that they may be impaired. For purposes of this review, assets are grouped at the lowest levels for which there are identifiable cash flows. If this review indicates that an asset's carrying value will not be recoverable, as determined based on future expected, undiscounted cash flows, the carrying value is reduced to fair market value. At December 31, 2004, the Company's management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company's products and services will continue, which could result in impairment of long-lived assets in the future. INTANGIBLE ASSETS The Company accounts for intangible assets in accordance with SFAS 142. Generally, intangible assets with indefinite lives, and goodwill, are no longer amortized; they are carried at lower of cost or market and subject to annual impairment evaluation, or interim impairment evaluation if an interim triggering event occurs, using a new fair market value method. Intangible assets with finite lives are amortized over those lives, with no stipulated maximum, and an impairment test is performed only when a triggering event occurs. Such assets are amortized on a straight-line basis over the estimated useful life of the asset. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of the asset, an impairment loss is then recognized. F-10 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) REVENUE RECOGNITION Prior to the Company's discontinuation of operations of IBID Auction and Foster Sports, Inc. during the fourth quarter of 2004, the Company recognized revenues from internet auction sales, charity auction sales where the Company acted as an agent and recognized a processing fee associated with the charity auction sales, barter transactions, and cel art sales. o Internet auction sales were recognized upon at the time the auction was completed. The Company did not generally grant return privileges to customers. The Company retained all of the proceeds of the auction. o Charity auction processing fees were recognized net. Under the guidance provided by the Securities Exchange Commission Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" and the Emerging Issues Task Force ("EITF") Abstract No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" ("EITF 99-19"), the Company was, in substance, acting as an agent for the charities and therefore recognized as revenue only the net fees realized on the transactions. The Company recognized revenues on a per-transaction basis when the auction was completed and collection from the customer was probable. o The Company accounted for revenue on barter transactions in accordance with the Emerging Issues Task Force ("EITF") Issue No. 99-17, "Accounting for Advertising Barter Transactions," which provides standards for determining the amount of revenue which may be recognized in barter transactions involving the exchange of advertising services. Advertising barter revenue is recognized only if the fair value of the advertising given is determinable based upon past transactions involving similar advertising exchanged for cash. A past cash transaction can only support the recognition of revenue on advertising barter transactions up to the dollar amount of the specific cash transaction and that cash transaction can only be used once to value barter advertising. If the fair value of the advertising surrendered in the barter transaction is not determinable, the barter transaction is recorded based on the carrying amount of the advertising surrendered, which is zero. ADVERTISING COSTS Advertising costs are charged to expense as incurred. Advertising expense was approximately $31,410 and $86,000 for the years ended December 31, 2004 and 2003, respectively. F-11 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Pursuant to SFAS No. 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts receivable and prepaid expenses, as well as accounts payable, accrued expenses and short-term deferred revenue, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. BASIC AND DILUTED NET LOSS PER SHARE The Company computes basic and diluted earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic EPS excludes the dilutive effects of options, warrants and other convertible securities. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company. All convertible debt and equities were excluded from the computations of diluted net loss per common share for the year ended December 31, 2004, as their effect is anti-dilutive ISSUANCE COSTS Issuance costs include amounts paid and the estimated value of warrants or options issued to placement agents or financial consultants to obtain equity financing. The Company allocates issuance costs for equity financing on the relative fair value of the individual elements at the time of issuance. Equity issuance costs are deducted from the proceeds of the related equity securities. F-12 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) SEGEMENT INFORMATION The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. The Company operates in one segment for management reporting purposes. RECLASSIFICATIONS Certain amounts in prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. RECENT ACCOUNTING PRONOUNCEMENTS Other-Than-Temporary Impairment of Investments In March 2004, the EITF of the FASB reached a consensus on Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-01"). EITF 03-01 addresses the meaning of other-than-temporary impairment and its application to debt and equity securities within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method of accounting. As of December 31, 2004, the Company determined that EITF 03-01 had no impact on its consolidated financial statements. Contingently Convertible Instruments In September 2004, the EITF reached a consensus on Issue No. 04-08, "The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share" ("EITF 04-08"), which is effective for reporting periods ending after December 15, 2004. EITF 04-08 requires companies to include shares issuable under convertible instruments in diluted earnings per share computations (if dilutive) regardless of whether the market price trigger (or other contingent feature) has been met. In addition, prior period earnings per share amounts presented for comparative purposes must be restated. EITF 04-08 did not impact earnings per share in 2004. F-13 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS - (CONTINUED) Share-Based Payment In December 2004, the FASB issued a revision of SFAS 123 ("SFAS 123(R)") that will require compensation costs related to share-based payment transactions to be recognized in the statement of operations. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS 123(R) replaces SFAS 123 and is effective as of the first interim period beginning after June 15, 2005. Based on the number of shares and awards outstanding as of December 31, 2004 (and without giving effect to any awards which may be granted in 2005), we expect that the adoption of SFAS 123(R) will have no material impact to the financial statements. In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 151, "Inventory Costs." The new statement amends Accounting Research Bulletin ("APB") No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. The Company does not expect adoption of this statement to have a material impact on its financial condition or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS 123(R)"), "Share-Based Payment." This statement replaces SFAS No. 123 "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. The statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. The adoption of SFAS 123(R) will impact the Company by requiring it to use the fair-value based method of accounting for future and unvested employee stock transactions rather than the intrinsic method the Company currently uses. The Company will adopt this SFAS as of January 1, 2006. The Company does not expect the adoption of this SFAS 123(R) to have a material impact its financial statements. F-14 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 3: FURNITURE AND FIXTURES ESTIMATED USEFUL LIVES AT DECEMBER (YEARS) 31, 2004 ---------------- ----------- Office furniture and equipment 5-7 $82,709 --- ------- Less accumulated depreciation & amortization (56,116) ------- Total $26,593 ======= Depreciation and amortization expense for the years ended December 31, 2004 and 2003 was $206,137 and $197,909, of which $189,165 and $181,713 pertained to assets utilized in the discontinued operations. NOTE 4: CEL ART INVENTORY Cel Art: The Company acquired a portion of it's the cel art from an unrelated third party. The Company issued series "C" preferred stock for the inventory, which as a subsequent event to fiscal year 2004 was converted in January 2005 into 1,000,000 shares of the Company's common stock. On October 27, 2004, the Company approved the issuance of 3,000,000 shares of common stock to acquire an additional 26,261 pieces of animation cel art and related intellectual property, valued at $1,350,000 from an unrelated third party. In December 2004, the Company purchased an additional 33,739 pieces of cel art valued at $1,665,000 in consideration of 3,700,000 shares of common stock from a related party. The Company adopted FASB 123 "Accounting for Stock Based Compensation" in accounting for these transactions. Paragraph 8 states that when goods or services are received for the issuance of equity instruments they should be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Management felt the fair value of the inventory was more reliably measurable. The inventory is stated at lower of cost or market using the first in, first out (FIFO) method of valuation. These cel art pieces are used in a program established by the Company with local and national charities to increase its databases of potential bidders and buyers on their auction website. The cel art inventory at December 31, 2004 was $6,848,950. F-15 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 4: CEL ART INVENTORY - (CONTINUED) Company management believes this asset will be converted into cash or equivalents within the next two years. Management does not believe a need for a provision for loss is necessary nor write-down of the cel art value is necessary, because recent sales reflect that there are no indications of impairment. The cost of insuring these cels was not financially feasible. The Company has created a secure designated area in Deerfield Beach to store the inventory. The Company has taken many measures to fireproof this area. A monitored fire and security system and surveillance cameras have been installed. NOTE 5: DISCONTINUED OPERATIONS - FOSTER SPORTS, INC. ("FOSTER") & IBID ONLINE AUCTION During 2004 the Company revised its business plan to be in line with the Company's focus on building a presence as a media holding company in the adult entertainment industry. Accordingly, the Company decided to discontinue its operations related to auction sales and on March 1, 2005 entered into a licensing agreement with LTC Group, Inc., whereby LTC will pay the Company a license fee for the right to use the auction software developed and patented by the Company. Such licensing fee is equal to 20 percent of the gross auction profits. In keeping with the Company's amended business strategy, the Company divested its ownership interest in Foster Sports, Inc. in November 2004 and discontinued its pursuit of business combinations with entities engaged in radio media. Upon further review, the Company determined that Foster had not fully met the contingent consideration requirements specified in the Company's stock purchase agreement. According to the stock purchase agreement, Foster would receive a total of 480,000 shares of the Company's common stock if Foster met certain revenue requirements. Based on the Company's review, it was determined that Foster met revenue requirements sufficient to earn only 60,000 shares of IBD common stock. Accordingly, the Company issued 60,000 shares of its common stock to Foster. F-16 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 5: DISCONTINUED OPERATIONS - FOSTER SPORTS, INC. ("FOSTER") & IBID ONLINE AUCTION - (CONTINUED) As a result of divesting its ownership interest in Foster Sports and online auction sales, the Company recognized a loss from disposition of $657,885. Such loss is reported on the consolidated condensed statements of operations as part of the "Loss from disposal of discontinued operations." 2004 ----------- Current assets $ 528,788 Property and equipment (Foster), net 62,276 Auction software, net 1,112,988 Goodwill 387,000 Other assets 208,004 ----------- 2,299,056 Current liabilities (444,650) Long term liabilities (1,196,521) ----------- (1,641,171) Net assets of discontinued operations $ 657,885 =========== Operating results for discontinued operations were as follows: 2004 2003 ----------- ----------- Revenue $ 793,160 $ 307,010 ----------- ----------- Operating expenses -- 458,411 Depreciation and amortization 189,165 181,713 ----------- ----------- Loss before income tax benefit (1,494,958) (333,144) ----------- ----------- Income tax benefit 598,000 133,250 ----------- ----------- Net loss $ (896,858) $ (199,864) =========== =========== F-17 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 6: INCOME TAXES The Company accounts for income taxes using the asset and liability method prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying the enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of the existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent any deferred tax asset may not be realized. As of December 31, 2004, a valuation allowance for the full amount of the net deferred tax asset resulting from the tax net operating losses and other items was utilized because of uncertainty regarding its realization. In accordance with Internal Revenue code section 382, a change in ownership of greater than 50% of a corporation within a three-year period will place an annual limitation on the corporation's ability to utilize its existing tax benefit carryforwards. Under such circumstances, the potential benefits from utilization of the tax loss carryforwards as of that date may be substantially limited or reduced on an annual basis. At December 31, 2004, the Company was unable to determine its net operating loss carryforwards for Federal income tax purposes due to the recent capital transaction which has materially changed the ownership of the Company. The net income tax provision for the years ended December 31, 2004 and 2003 was zero. However, because the presentations of the accompanying statements of operations include the results of operations from both continuing operations and discontinued operations, the Company is required to present an allocation of an income tax provision between such elements. The following is a reconciliation of the income tax provision as allocated to the various elements of the accompanying statements of operations: 2004 2003 --------- --------- Income Tax Benefit (Expense) Continuing Operations Current $ -- $ -- Deferred (861,150) (133,250) Discontinued Operations: Loss from discontinued operations 598,000 133,250 Loss from disposition 263,150 -- --------- --------- 861,150 -- Net Income Tax Provision $ -- $ -- ========= ========= F-18 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 7: CONVERTIBLE NOTES PAYABLE AND PREFERRED STOCK The Company issued an aggregate of $9,525,000 of 10% Convertible Notes ("10 % Notes") to 18 investors (the "Note Holder"), none of whom were previously affiliated with the Company. The note holders also received warrants to purchase 3,175,000 additional shares of common stock at an exercise price of $3.00 per share. Interest is payable semi-annually on June 30th and December 31st, at the rate of 10% per annum, payable at the option of the Company of either 100% in cash, 50% in cash and the balance in common stock. The notes are convertible, at the option of the holder, into common stock at the lesser of $3.00 ("Floor Price") or 50% of the average of the closing bid price in the over the counter market during the five business days ending on the day before the holder gives notice of conversion. In the event the Note Conversion Price is less than the Floor Price, the holders are entitled to receive additional shares of common stock equal to an adjusted floor price of $0.50. The notes are secured by (i) a lien on the assets of Internet Billing Company LLC ("iBill") subordinated to the lien granted to holders of the Series F Preferred Stock, and (ii) the pledge by the Company of a portion (pro rated with the Series F Senior Preferred Stock) of its 34.7% equity interest in PMG. The 10% Notes convert to a maximum of 19,050,000 shares of common stock plus any unpaid interest or accrued stock. The Company raised $3.5 million from the sale of 35,000 shares of its Series E 6% Convertible Preferred Stock ("Series E") to Monarch Pointe Fund LP ("Monarch"). The Series E stock holders were also issued warrants to purchase approximately 430,000 shares of common stock at an exercise price equal of $3.00 per share. The Series E shares rank senior to the Company's common shares, Series C Preferred Stock and Series G Preferred Stock; and are entitled to 6% dividends when and as declared by the Board of Directors. Series E are convertible, at the option of the holder, into common stock at the lesser of $3.00 ("Floor Price") or 50% of the average of the closing bid price in the over the counter market during the five business days ending on the day before the holder gives notice of conversion. In the event the Series E Conversion Price is less than the Floor Price, the holders are entitled to receive additional shares of common stock equal to an adjusted floor price of $0.50. Series E convert to a maximum of 7,000,000 shares of common stock. F-19 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 7: CONVERTIBLE NOTES PAYABLE AND PREFERRED STOCK - (CONTINUED) The Company raised $3.45 million from the sale of 34,500 shares of its Series F 10% Convertible Preferred Stock ("Series F") to Castlerigg Master Investments Limited ("Castlerigg"). The Series F stock holders were also issued warrants to purchase approximately 610,776 shares of common stock at an exercise price equal of $3.00 per share. The Series F shares rank senior to the Company's common shares, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series G Preferred Stock; and are entitled to 10% dividends payable semi-annually on June 30th and December 31st, payable at the option of the Company of either 100% in cash, 50% in cash and the balance in common stock. Series F are convertible, at the option of the holder, into common stock at the lesser of $3.00 ("Floor Price") or 50% of the average of the closing bid price in the over the counter market during the five business days ending on the day before the holder gives notice of conversion. In the event the Series F Conversion Price is less than the Floor Price, the holders are entitled to receive additional shares of common stock equal to an adjusted floor price of $0.50. Series F are secured by (i) a lien on the assets of Internet Billing Company LLC ("iBill") subordinated only to a first priority lien that may be granted to one or more senior lender providing up to $10.0 million of working capital financing to iBill and (ii) the pledge by the Company of a portion (pro rated with the 10% Notes) of its 34.7% equity interest in PMG. Series F convert to a maximum of 6,900,000 shares of common stock plus any unpaid interest accrued in stock. The Company issued Series G Convertible Preferred Stock ("Series G") in connection with its acquisition of PMG. Series G is junior on liquidation and sale of control of the Company to the Series E and Series F; does not pay any dividend and is not secured by any assets or securities; and is not subject to mandatory redemption. Series G shall convert upon the earlier to occur of December 31, 2004 or the Company obtaining stockholder approval, and the aggregate number of shares of Company common stock as shall equal 68.0 million shares of common stock, less a maximum of 27,458,333 Conversion Shares issuable at the adjusted Floor conversion price of $0.50 applicable to 10% Notes, Series E, and Series F Securities. This conversion provision represents a beneficial conversion feature, the value of which is calculated by subtracting the conversion price of $0.50 from the market price of the common stock on the date the preferred shares were issued. On November 26, 2002 the Company was authorized by the Board of Directors to issue three series of preferred stock. Series A Convertible Preferred Stock, 100,000 shares authorized, was converted in 2003. Series B Convertible Preferred Stock, 10,000 shares authorized, was converted in accordance with the Series preferences in 2004 for 198,020 shares of Common Stock Subsequent to December 31, 2004, Series C Convertible Preferred Stock was converted in accordance with its preferences in January 2005 for 1,00,000 shares of Common Stock. F-20 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 8: WARRANTS The Company had no outstanding warrants to purchase common stock at the beginning of year 2004. In October, 2004 4,215,776 additional warrants were issued at $3.00 in conjunction with the Company's efforts to raise capital for its investment in Penthouse Media Group. The Company accounts for these transactions under the provisions of SFAS No.123 "Accounting for Stock Based Compensation," and APB No.25 "Accounting for Stock Issued to Employees." The company is relying on both APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" and EITF 00-19, "Accounting for Derivative Financial Instruments Accounting for Derivative Financial Instruments Indexed to or Potentially Settled in Indexed to or Potentially Settled in a Company's Own Stock" for treatment of the convertible stock. They require the company to expense the "Beneficial Conversion Feature" in the current year. This means the difference between the fair value of the common stock and the conversion price will be amortized over the term of the note (years). Should the lender(s) convert some or all of their notes prior to the term expiring or at a different price; the accrued amounts will be adjusted accordingly. The fair value of each warrant that was granted in conjunction with equity and debt issuances was estimated on the grant date using the Black-Scholes option pricing model, the results of which were deemed immaterial. NOTE 9: RELATED PARTY TRANSACTIONS The amount due to stockholders at December 31, 2004 and December 31, 2003 was $1,048,248 and $7,316. These amounts represented advances from shareholders and corporate expenses paid personally by stockholders. The Company was a party to a lease agreement for its former executive offices with Children's Academy of Pompano Beach, Inc., an entity controlled by a family member of the Company's president. The lease agreement was through December 2007. On December 20, 2004 the Company agreed to terminate the lease. The remaining obligations under the lease on the date of termination were approximately $307,500. Children's Academy of Pompano Beach, Inc. accepted 200,000 shares of IBD common stock, valued at the date of issuance at approximately $80,000, in consideration of forgiving all outstanding obligations under the lease and release of any potential claims under the lease agreement. The Company's president disclaims any beneficial ownership in the shares. F-21 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 9: RELATED PARTY TRANSACTIONS - (CONTINUED) On July 14, 2004 the Company entered into a Settlement and Termination Agreement with Oak Street Ventures, Inc. under which Oak Street Ventures received 4,000,000 shares of IBD common stock in consideration of consulting services provided in connection with the Company's introduction to iBill and subsequent acquisition negotiations with iBill. The 4,000,000 shares are subject to a one-year lock up agreement. On October 5, 2004, the Company approved the issuance of 503,680 shares of common stock to Oak Street Ventures, issued on December 3, 2004, in consideration of additional business consulting services provided. A principal of Oak Street Ventures, Inc. is a family member of an officer and director of the Company. On October 5, 2004, the Company also approved the issuance of 503,680 shares of common stock to Corporation First, Inc., issued on December 3, 2004, for certain business consulting services. Voting control of Corporation First is held by a family member of the Company's president. The Company's president disclaims any beneficial ownership in the shares. On October 5, 2004 the Company entered into a business consulting services agreement with Northbound, Inc., issued December 3, 2004, for services related to insurance coverage. In consideration of services provided under the agreement the Company issued Northbound 40,000 shares of its common stock. The principal of Northbound is a family member of a director of the Company. The director disclaims beneficial ownership of any securities held by the family member. On October 27, 2004, the Company approved the issuance of 3,000,000 shares of common stock to American Collectors' Exchange, Inc. pursuant to an agreement to acquire 26,261 pieces of cel art valued at $1,350,000. American Collectors' Exchange, Inc. is owned by a family member of an officer and director of the Company. In December 2004, the Company purchased an additional 33,739 pieces of cel art valued at $1,665,000 in consideration of 3,700,000 shares of common stock from a company which is owned by family member of an officer and director of the Company. F-22 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 10: PREFERRED STOCK DIVIDENDS Series B Convertible Preferred stock was converted on November 16, 2004, for which the Holder received 198,020 shares of IBD common stock, which included payment of accrued dividends. Dividends that were cumulative from date of issuance and were declared upon the conversion of series B shares in 2004. Series F Preferred stock has accrued dividends paid one half in cash and one half in common stock. The Company paid $77,778 in cash for dividends on Series F in 2004 and 25,926 shares of its common stock, valued at $.50 per share, in dividends in 2004. In computing net income applicable to common stock, the Company has incorporated the preferred stock dividend expense in fiscal year 2003 of $8,000 and $77,778 cash accrual and 25,926 in common stock for fiscal year 2004. NOTE 11: SUBSEQUENT EVENTS Effective January 21, 2005, IBD completed the acquisition of 100% of the equity interests in iBill Corporation, Inc., which owns all of the membership interest in Media Billing Company, LLC, which owns 100% of the membership interests in Internet Billing Company LLC , from PHSL. In connection with the acquisition of iBill in January 2005, IBD issued to PHSL 330,000 shares of its Series D Preferred Stock, which PHSL is entitled to convert into the number of shares of IBD common stock as shall represent 49.9% of the fully-diluted shares of the Company's common stock on the date of conversion. If PHSL had converted on the date of issuance, 100,733,244 shares of IBD common stock would have been issued. The transaction will be recorded as a reverse acquisition. F-23 INTERACTIVE BRAND DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 11: SUBSEQUENT EVENTS - (CONTINUED) The following condensed financial statements shows the fair value of the assets acquired and the liabilities assumed as of the date of the acquisition. The pro forma information is based on the assumption that the acquisition took place on January 1, 2004: Pro Forma Condensed Balance Sheet
(UNAUDITED) INTERACTIVE INTERNET PRO BRAND BILLING FORMA DEVELOPMENT, INC. COMPANY, LLC COMBINED CONDENSED CONDENSED ------------ ------------ Current Assets $ 453 $ 22,354,428 $ 22,354,881 ------------ ------------ ------------ Total Assets $ 50,113,435 $ 71,100,616 $121,214,051 Current liabilities $ 2,222,879 $ 48,906,283 $ 51,129,162 Total liabilities $ 12,222,879 $ 51,684,992 $ 63,907,871 Equity $ 37,890,556 $ 19,415,624 $ 57,306,180 Total liabilities and Equity $ 50,113,435 $ 71,100,616 $121,214,051
On December 31, 2004, iBill obtained a line of credit for $2,000,000 from International Investment Group ("IIG"), a non-affiliated lender, to improve its liquidity. The line of credit has matured and is currently payable in full. The parties are negotiating the terms of an agreement to provide for an extension of the credit facilitate. There can be no assurance that terms are reached and, if they are not, there could be serious negative consequences to iBill since the loan is secured by the assets of iBill. Subsequent to fiscal year-end 2004, on March 31, 2005, the Company acquired approximately 25% of XTV, Inc., ("XTV") from XTV Investments LLC. XTV is a development stage interactive video-on-demand company that intends to broadcast video content to standard television sets using the Internet (video over IP; or IPTV). The Company purchased 6,250 of the 25,000 common shares outstanding in XTV. A portion of the shares (2,083) are subject to an escrow agreement in which the Company must sign up at least 10,000 subscribers to the service to facilitate the release of 1,042 shares from escrow, and an additional 10,000 subscribers to facilitate the release of the balance of the escrowed shares on or before October 31, 2006. Shares remaining in escrow at that date will be returned to XTV for cancellation. As consideration for the acquisition, the Company paid $1,700,000 in cash and issued 4,000 shares of a newly created preferred stock, Series H, which converts to 40,000,000 shares of IBD common stock upon a 10-day post-closing document exchange. Warrants that convert into 40 million shares at $0.50 of IBD common stock were also issued in conjunction with this transaction, the terms of which are detailed below. F-24 EX-31.1 2 ex311.txt CERTIFICATION EXHIBIT 31.1 I, Steve Markley, certify that: 1. I have reviewed this annual report on Form 10-KSB of Interactive Brand Development, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 20, 2005 /s/ Steve Markley - ----------------------- Steve Markley Chief Executive Officer EX-31.2 3 ex312.txt CERTIFICATION EXHIBIT 31.2 I, Steve Markley, certify that: 1. I have reviewed this annual report on Form 10-KSB of Interactive Brand Development, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 20, 2005 /s/Steve Markley - --------------------------- Steve Markley Principal Financial Officer EX-32.1 4 ex321.txt CERTIFICATION EXHIBIT 32.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2001. In connection with the Annual Report of Interactive Brand Development, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steve Markley, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: July 20, 2005 /s/ Steve Markley - -------------------------------------- Steve Markley, Chief Executive Officer Dated: July 20, 2005 /s/ Gary Spaniak, Jr. - ---------------------------- Gary Spaniak, Jr., President EX-32.2 5 ex322.txt CERTIFICATION EXHIBIT 32.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2001. In connection with the Annual Report of Interactive Brand Development, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steve Markley, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: July 20, 2005 /s/ Steve Markley - ------------------------------------------ Steve Markley, Principal Financial Officer Dated: July 20, 2005 /s/ Gary Spaniak, Jr. - ---------------------------- Gary Spaniak, Jr., President -----END PRIVACY-ENHANCED MESSAGE-----