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Russ Hampshire's VCA - Babenet Goes Public Through Backdoor?

3/24/00

Mark writes Luke: A publicly-traded company just announced a merger with a company called StreamMagic, with a president named Nolan Quan. Speculation is that Quan's business needed to do a funny reverse-merger deal because they are in the porn business and can't go public any other way.

Luke says: A few months ago, I sent Metro's public trading status on NASDAQ up in flames. My coverage on this story will probably blow up StreamMagic and its attempt to take VCA-Babenet public.

It looks like this fancy merger is a backdoor way for Russ Hampshire's VCA and Babenet operations to become publicly traded.

Rob Spallone phoned me Friday morning Australian time and asked to cut, or at least tone down, this story.

Ulmers writes on Yahoo StreamMagic posting board: It looks pretty solid. I'm only doing research at Network Solutions (www.networksolutions.com) and I'm able to cross reference admin. contacts and company names. It looks like Streammagic.com aka Alchemy Communications has connections with White Sands Communications, Inc. and VCA Interactive. Collectively, they run a bunch of porn sites including- MENWITHANIMALS.COM, TRANNIHARDCORE.COM, TEENCORE.COM, ADULTXXXTV.COM, VCAXPLICIT.COM, WETFACES.COM, FUC-KAVISION.COM, GAYTEENCORE.COM, ADULTNEWSSTAND.COM there's quite a few more that aren't as 'colorful' that I didn't list. People at White Sands have VCA email addresses, and people at VCA have Alchemy email addresses. It's all one big happy PORN family.

VKS writes on Yahoo: Okay, let me summarize the speculation I have been hearing for months, and then give my (long!) analysis of the deal: First, I was told that a group of investors in LA who were heavily invested in (highly profitable) porn-related internet businesses were seeking to use Qsound to leverage their way into a public offering. Apparently, every time the stock dropped near 2, they were buying, and when it rose well above, they would sell out and then use the funds to buy more stock when it dropped. I DO NOT KNOW IF THIS GROUP WAS ASSOCIATED WITH STREAMMAGIC, and I can find no list of clients at the StreamMagic site.

Second, there were rumors flying about for the past 60 days or more, that Qsound's president wanted to "spin off" the internet e-commerce business (Qcommerce) because the market did not seem to value it the same way that the market values other internet e-commerce "business to business" ventures. Now, we see a bizarre merger, in which Qsound will MORE THAN DOUBLE its outstanding shares (there are currently 26.5 million outstanding shares, with an identical quantity of shares being used to fund the "purchase" of StreamMagic, PLUS another 5 million being given as options to StreamMagic's option holders). This is a shift of control to the people who own stock in StreamMagic.

What do Qsound shareholders get? If the plan proceeds as announced, each Qsound shareholder would hold shares in THREE separate "publicly-traded" stocks:

- one is essentially Qsound itself (its non-internet 3D audio business, which was the entire company in 1997), including the license fees from stereo and hearing aid companies;

- second is the Qcommerce (e-commerce) business (including Virtual Spin which was acquired a year ago, plus the AffiliateDirect functions which Qsound's internal development project);

- third is StreamingMagic, combined with Qsound's "internet audio" software. Note that the StreamMagic investors don't get the first two stocks, which are spun off to existing Qsound shareholders only (although I assume that some key StreamMagic investors and perhaps the company itself may already hold substantial shares in Qsound). All they get is ONE-HALF of the equity they previously owned in the StreamMagic business, plus one-half equity in the Qsound "internet audio" software.

The question I have is, why would any StreamMagic shareholder want to do this deal? The only answer I can think of: they want to be a public company, and they don't think they can do it any other way. The only "legitimate" reason I can think of for shedding so much equity to get public, is that the company doesn't think the market would buy into an IPO, which brings me back to my initial suspicion that StreamMagic MIGHT be the "porn" company that was rumored to be seeking to take over Qsound earlier this year.

Historically, the stock market has resisted any effort to take any company public if it makes its money from pornography or sex. If this is the case, then there may be some doubt about the market agreeing to value the StreamMagic/Qsound merged stock at any premium. The StreamMagic site lacks any detail such as a client list, and the private company has (quite reasonably) not yet disclosed any data about its source of revenue that could help clarify the issue,

Bottom line: the idea of spinning off Qcommerce may have some "edge" since it would seem to create an opportunity for a "pure internet play" with appropriate market valuations -- though the spinoff will need to disclose its revenues and expenses, which are not currently separated from Qsound's other business units. Also, bringing back a "pure audio technology" stock for "old-time" Qsound shareholders to hold, may allow that business to focus on its technology without the recent distractions of internet business speculation, which might be a good thing.

(I have never held any shares of Qsound stock, and I do not plan to buy any stock, nor to sell it short nor trade any options. This one is way too volatile and speculative for my tastes.)

Ulmer: Streammagic.com is owned by a company called Alchemy Communications. If you go to the Network Solutions web site, and do a domain name look up for Alchemy Communications, they own a number of domains including- ADULTSEXXXMALL.COM

Luke: Here are my notes about Nolan Quan:

Following the 1986 Meese Commission, federal agents traveled to the Bible Belt to seek obscenity convictions against California pornographers like Carriere. The definition of obscenity since the Supreme Court's 1973 Miller ruling has been whether the average person, applying the standards of his community, finds the work lacks serious value and appeals to prurient interests. Rural areas tend to have more conservative values than urban ones. The feds eventually convicted 20 pornographers, sending many to jail, and collecting millions of dollars in fines.

"It's a holocaust," porn attorney John Weston told the LA Times. He accused the government of seeking to destroy "an entire genre" of entertainment.

In September 1991, a federal grand jury in Oxford, MS, indicted the owner of Vivid Video, Steven Hirsch, for Interstate Transportation of Obscenity and conspiracy to avoid taxes. In a plea bargain, Vivid forfeited $500,000 to the government, and toned down their product.

In late 1991, Russell James Hampshire, along with his company VCA and his employees Nolan Quan and Don Diekman were charged with Interstate Transportation of Obscenity. In a plea bargain, Russ served a year in jail and his company forfeited two million dollars.

In 1992, Carriere and his company agreed to pay $3.5 million in his fines, which his lawyer called a record, after an obscenity conviction in Tallahassee, Florida.

Luke: Here's a March 21st press release:

CALGARY--(BUSINESS WIRE)--March 21, 2000-- QSound Labs, Inc. (NASDAQ:QSND - news), the leading provider of enhanced Internet audio solutions announced today that it has signed a letter of agreement to acquire 100% of Los Angeles based StreamMagic, Inc., a leading provider of Internet video streaming, in a stock-for-stock transaction valued today at approximately $100 million.

The combination of QSound's enhanced audio and StreamMagic's broadband video delivery solutions will enable content publishers to deliver rich media via the Internet in a cost effective manner. With access to high speed Internet connectivity on the rise - T1 lines and home-based DSL - end users are being drawn to sites that offer high quality audio and video streaming on a full time basis. QSound will empower clients to capitalize on the ``impulsive'' nature of the Internet by providing ``on demand'' enhanced audio and video, live Webcasts and high end interactive advertising - leading to increased site traffic, enduser satisfaction and increased revenue.

``The formation of this merger could not be more timely,'' stated Nolan Quan, President of StreamMagic. ``Content providers are constantly seeking better ways to present their media rich content on the Web. When we first met with QSound, we were amazed by the high quality sound they could generate from two computer speakers. With demand for audio and video content on the Internet increasing daily we knew immediately this was the perfect match for our world class video and content delivery service.''

Glory writes on a Yahoo message board about Stream Magic: "Who wants to invest in a company which freely associates itself with questionable characters? As previous posts pointed out, Stream Magic's management have ties (worked) in the porn industry. Maybe it's ok with the hardcore (pun intended) qsnd holders on this board but todays action should tell you what the majority of investors think about this association. I'm done with this board. Have a nice life."

Wmf writes: 3213 In the conference call Nolan was asked the following: 1. Who are SM's customers? His reply was he can't disclose them since a disclosure agreement has been signed but he named Warner Bros. 2. Another question was about who own SM? His answer was approx. 100 persons, Employees, Consultants, and some private investors.

Pete writes that QSND will get killed: It's not the porn issue I have no problem with the porn industry The problem is that QSND is misleading the shareholders If they said yesterday that they are acquiring a porn company, I would have doubled my position instead of liquidating my position The stock would probably be 10-15 dollars right now if they would have said. Hey everybody...we're buying a company that specializes in streaming porn, which I'm sure is the most highly viewed streaming content on the internet

Doodoo: The porn thing is hurting. We're down...and the merger is *supposed* to be good news. Sorry, but it looks like the shareholders are deciding for themselves...

Luke says: When I helped break the story about Noal Quan's porn background, it threatened his stock. A host of people rose up to defend Nolan but Pete writes: I didn't want to believe this crazy statement the first time I heard it I figured, just another basher making up rumors But these guys actually posted real information, real links and real articles THERE IS NO DENYING THOSE ARE TRUE check them out yourself If you just try to discredit this information without checking it out, that shows your ignorance I'm a QSND stockholder for over 1 year , but I just sold everything this morning. When this story gets out the stock will get killed I wish I would have known this before I went on the conference call yesterday Good luck to those still holding.

Vks writes Mar 21: Earlier this evening, several posts detailed evidence suggesting that StreamMagic's entire business is built around internet pornography, and that connection was not disclosed but is only very thinly disguised. As soon as these posts were made, a sudden rush of "rah-rah" posts began to appear, in an apparent effort flood the board and hide the earlier content from view (the PR people call it "Flushing the top 40").

Doodoo writes: From the research posted, it appears as though streammagic.com is owned by Alchemy Communications, a company that runs at least one porn site, and who has close ties with two other companies that are heavily involved with the porn industry. This is bad! Marketing defined is how a company views its customers, and how the customers view the company. How are the customers (and shareholders) going to view Qsound when they have a porn moniker attached to their good name? This is a marketing nightmare.

Mark writes Luke: You mention someone named Nolan Quan (as an employee of a porn internet company charged with interstate obscenity) an an article you posted at http://www.4porn.net/index75.html and http://www.4porn.net/a80.html -- now the same name has just come up in a context that you might find intriguing (and which might create some publicity for you and your book).

A publicly-traded company just announced a merger with a company called StreamMagic, with a president named Nolan Quan. Speculation is that Quan's business needed to do a funny reverse-merger deal because they are in the porn business and can't go public any other way. If this is the same Nolan Quan, and StreamMagic is actually in the porn business, then I think the business/financial media might be interested -- if there was some way to confirm it.

See http://biz.yahoo.com/bw/000321/qsound_lab_1.html (press release) and http://post.messages.yahoo.com/bbs?action=m&board=8729390&tid=qsnd&sid=8729390&mid=3090&n=1 (a pseudonymous Yahoo message board post referring to your article)

See also http://messages.yahoo.com/bbs?action=m&board=8729390&tid=qsnd&sid=8729390&mid=3086 and http://messages.yahoo.com/bbs?action=m&board=8729390&tid=qsnd&sid=8729390&mid=3087 (the latter two are message board posts discussing the merger of Qsound and StreamMagic).

[Late 2000 update - The Qsound - Streammagic merger fell through.]

More Vasiloff - Ford Lies

From PornGossip.com:

03/23/00 Posted by INSIDER

Today we read the lies and rumors that "the Christian-Right, Downunder Fairy" and his "Broke" Canadian "wannabe" porn publisher want to tell us.

There they go again attacking a leading adult company in the valley and men who have great reputations in this industry. This company has been there for a lot of people over the years. Their Internet business has prospered because of the great insight of its management team. They invested in technology to stream video and became an Internet leader in this field.

The adult industry has led the way with this technology on the Internet. With the help of a right wing investor (who has been trying to drive down the price of the stock of another well know adult company for years), Ford & Vasiloff are damaging another rep. This right wing investor does not want any adult related companies or people on Wall Street.

This person is now spreading lies about others that have technical connections to this industry. He found Ford and Vasiloff and they began their smear campaign against another company in the valley.

Vasiloff has to print lies to get his stories to be picked up by the wire services for revenue. His company is cash poor and content poor. The Kendra Jade web site has promised content for months now and has nothing except old pictures and promises. The site has no content.

Vasiloff and Ford have had no positive impact on this industry. They have only tried to divide us and spread lies for their own personal gain at this industries' expense...this is just their latest attempt.

Vasiloff magazine is not selling anywhere, he has to give away advertising. This magazine will never see its first anniversary. A.V.N. is superior in every aspect. A.V.N. has a staff of great people and the support of the adult industry. Give up Vasiloff your magazine is not A.V.N., and will never be on that level.

Don't know about you, but if the technical people that set up Babenet are involved with a company that's going public or is public, we should all buy that stock because its a winner, like them.