Incentium's road to riches ends in court

How Incentium made money• Step 1: Incentium brings on a client such as General Motors• Step 2: Incentium provides gift or debit cards to clients, employees or customers that GM wishes to reward• Step 3: Clients, employees or customers access a special website designed by Incentium to redeem gift cards• Step 4: Incentium charges GM and other clients for gift card fulfillment

After only a few months on the job, Christian Chevalier suspected the end was near for what was once one of Chattanooga's most successful Internet companies.

Chevalier and the 88 other remaining employees of Incentium nervously filed into the company production room in early February to hear Chief Operating Officer Greg Jones read a short prepared statement.

"Due to difficult business and economic conditions, Incentium was forced to permanently cease all business operations," Jones told the workers.

Chevalier recalls Jones asked employees not to talk to anyone, telling the employees, "I have a family I have to take care of."

As the displaced Incentium workers somberly filed out of the building, a few were kept on to deactivate the tens of thousands of gift cards that had been distributed to clients as recently as two days before.

The Chattanooga-based Incentium, formerly VIPGift, grew in its first eight years to a $115 million-a-year business providing gift or debit cards to some of America's biggest corporate clients.

But according to former Incentium employees and attorneys sorting out the remnants of the failed business, the gift card company collapsed after the private investment firms Summit Partners and Bridgescale Partners bought the business in 2008.

"It just looks like it was poorly managed at this point," said Richard Jahn, the bankruptcy trustee responsible for the assets of the shuttered business. "They could have done things much better and much differently, and everything would be going fine right now."

Jahn said top management took generous bonuses totaling $500,000 just before employees were told to pack their things. The company also continued to sell gift cards until two days before it closed - gift cards that it never would allow to be redeemed, Jahn said.

He estimates that in its final days, the company distributed more than 50,000 useless gift cards to individuals from 653 companies, who likely will file claims worth nearly $6 million on outstanding debit and gift cards.

Rise and fall of Incentium• 2000 - Hamid Andalib founds VIPGift in The Loft restaurant on Cherokee Boulevard.• 2001 - Andalib's company has revenue of $428,225 for its first full year.• 2008 - Revenue hits $115 million, after multiple years of double- and triple-digit growth.• October 2008 - Private equity firms Summit and Bridgescale buy the company for an undisclosed amount, bring in CEO Richard Char.• September 2009 - Summit and Bridgescale change company name to Incentium.• January 2010 - Char claims the company has quadrupled its sales force, and doubled in size overall.• February 2010 - Incentium loses its biggest contract with AT&T, its biggest client.• February 2010 - Incentium lays off two dozen employees "due to the soft economy," Char says.• March 2010 - Char is replaced by Rich Phillips, who has signed a non-compete agreement with competitor Maritz and soon leaves.• September 2010 - Summit and Bridgescale decide to close or sell company.• February 2011 - Former owner Hamid Andalib briefly considers buying back company to save it.• Feb. 9, 2011 - Incentium shuts doors, lays off work force, "due to difficult business and economic conditions."Source: Incentium company documents, news reports, interviews with insiders

"The board or senior management knew the doors were going to be closed, and yet within 48 hours, they were accepting orders and money for passes that clearly would never be able to be redeemed," said Jodi Keeter, the company's former vice president of sales.

Representatives for Summit and Bridgescale declined repeated requests for interviews.

But former employees say the new owners struggled to find the right management team, computer software and product mix.

On Monday, Incentium attorneys will meet in Chattanooga to discuss how to divvy up Incentium's remaining assets, which are only a fraction of the company's outstanding debts.

PATH to success and failure

Hamid Andalib founded VIPGift in 2000, selling it eight years later for a small fortune.

But it wasn't that easy.

He had arrived in the U.S. from his native Iran as a refugee from the 1979 revolution, working his way up from a dishwasher in the kitchen of The Loft restaurant on Cherokee Boulevard.

Andalib spoke little English, but eventually got enough money together to purchase The Loft. After founding VIPGift in a back room at the restaurant, he built it into a $115 million-per-year company with the force of his personality and a keen sense for sales, associates say. As VIPGift expanded, the space available for the restaurant slowly disappeared until it was gone.

In its place was a gift card company that worked with individual Fortune 500 companies to deliver gift cards to selected consumers on their behalf.

Described as VIPGift's "secret sauce," Andalib was warm and outgoing with clients and customers alike, former associates say.

Then in 2008 he decided to sell VIPGift to a private equity group, led by Summit Partners and Bridgescale Partners.

When Summit and Bridgescale bought Incentium from Andalib in October 2008, the new owners brought in co-investors Richard Char, a lawyer whose resume included advising Amazon on its initial stock offering, and accountant Patrick Gildea as Char's top assistant.

Neither Char nor Andalib agreed to comment for this story, and Gildea could not be contacted.

When Summit and Bridge-scale took control, they immediately took out a $10 million loan through Incentium to help pay themselves back for the acquisition of the company, according to Jahn.

"The first thing they did was saddle this debt-free company with $10 million in debt," he said.

Summit's business plan was to transform what formerly had been a boutique company, selling gift card redemption services to a few high-end clients, and grow it into a mass-market juggernaut that could challenge industry giants.

Their business model was "recession proof," Char said at the time, because companies often turn to morale-building incentives when they cannot grant raises or are in the midst of layoffs.

Both Char and Gildea hailed from California and supervised operations by shuttling back and forth to Chattanooga, according to Brad Smrcina, former director of IT.

Incentium's notable creditors:• American Express• Atlanta Braves• BlueCross BlueShield of Tennessee• Ben & Jerry's• The Coca-Cola Bottling Company• Convergys• Dell Computer Corp• Exxon-Mobil• First Bank• First Tennessee• Ford Motor Company• Fox Networks Group• Georgia Power• General Motors• Google• HCA• Kmart• Kohl's• Lockheed-Martin• Lowe's• McDonald's• Medium• Miller & Martin• Mitsubishi Motors• Outback Steakhouse• Paypal• Pepsi• Philadelphia Phillies• Pier 1 Imports• Regions Bank• Sam's Club• San Francisco Symphony• Time Warner Cable• UPS• Whirlpool• XeroxSource: Bankruptcy documents

Andalib had been hands-on and won over clients with his outgoing personality. But Char and Gildea's management approach was more subdued and analytical, employees said.

"They kind of had bad priorities," Smrcina said. "They're Harvard and Stanford grads, so they automatically thought that anybody in Chattanooga didn't know what they were talking about."

The new management approach didn't make them popular with the Chattanooga staff, and didn't endear them to some clients, employees said.

Days after Char was interviewed for an article in which he extolled the company's recent success and talked of doubling in size, the company announced it laid off 30 employees because of the loss of business with AT&T, its biggest client.

"That hurt, but Incentium had lots of other clients; that should not have killed them," Jahn said. "They just didn't reduce their costs."

Coloring books

Instead of reducing costs, the company kept changing its back-office software, eventually spending $3 million to purchase and integrate a noncompatible piece of code from an Australian company, the former IT director said.

The company took over a year to get the new software up and running, Smrcina said.

"We'd sit there and talk till we're blue in the face, and they'd give me four reasons why I was wrong," he said.

The company also worked out a deal with Amazon to integrate gift card redemption into the online retailer's website, but Amazon broke off the deal, according to Keeter.

"It looks like large amounts of capital were spent on things that never came to fruition. We didn't have the products to sell, and didn't have the strategic direction required to keep the company profitable and growing," Keeter said

During the period of internal turmoil, the company kept dozens of salespeople on payroll who had little if anything to do, employees say.

"We had a call center of 70 people who spoke on the phone maybe 14 minutes per hour," said Curtis Shelton, former chief information officer.

The employees turned to video games to pass the time, so the computers were removed to increase productivity.

With no computer and no one to call, "some of them brought in coloring books," Shelton said. "They'd sit there and color, their walls were covered with coloring books."

Keeter described it as "a comedy of errors nonstop from 2008."

Char is now senior managing director at Regent Pacific, a turnaround and performance improvement firm based in San Francisco.

Shifting managers

In March 2010, Incentium's owners replaced Char as president and CEO with Rich Phillips, former executive for competitor Maritz Loyalty Marketing.

His tenure started out with what Shelton called "a nightmare."

"We had to go through a round of layoffs, then the second round of layoffs, then they asked me for the third," Shelton said. "I was down to seven developers, from 20 to 30 developers, so I went on vacation."

When he returned, he was fired.

Around the same time, Phillips was forced to leave after Incentium lost a noncompete lawsuit brought by Maritz.

The lawsuit cost the company $1 million, Shelton said.

Jahn called it "just absurd expenses with other people's money, just paying these guys who did nothing."

Phillips could not be reached for comment.

"He left, then there was nobody running the ship," Shelton said. "What they did was bring in a board member from Canada once a month, and they would not allow him to make a decision."

Jones, chief operating officer, was running the company day-to-day, but had no authority to make the sweeping changes to bring the company back to profitability, Shelton said.

Jones declined to comment for the story for legal reasons, except to say that "it was a sad day to see such a great business go away, and the negative impact it had with the employees and families."

The End

When Summit and Bridge-scale decided in September to stop supporting Incentium's losses, the end was near.

"I think that the main control and support was coming from the owner," said Jahn. "[Summit] did not give support when they could have, and they made the decisions to put people in place or keep people in place. "

From its peak of $115 million in 2008, receipts fell in 2010 to $67.3 million, leading to a net loss of $11.4 million last year, according to bankruptcy filings.

"They were spending $500,000 a month more than they were earning from real income, so to make that up they would just eat into the new monies that were coming in from customers," Jahn said. "So if you stop a business one day, you will have this deficit. And cards that cannot be funded."

Summit and Bridgescale tried since last fall to sell Incentium without success, Shelton said.

Employees continued selling gift cards to customers, Keeter said, unaware that the board planned to close Incentium if it could not sell it. In fact, product was sold even as managers were busy taking personal belongings out to the parking lot, Keeter said.

She believes the company had "the intent of closing the doors and never giving [customers] what they paid for," she said.

New York resident Bob Chaffee was among those who tried unsuccessfully to activate one of his two $50 Incentium gift cards.

He had been awarded the gift cards for buying new tires at Healey Chevrolet Buick in Goshen, N.Y.

"I really just bought the tires so I could give the cards to my kids," Chaffee said. "I kept calling the number on the card," but nobody answered.

He contacted General Motors, Incentium's client and the issuer of the card, to see what was wrong. Last week, he received two new $50 gift cards in the mail from GM, but still no word from Incentium.

GM is one of several hundred large companies that are now pressing what's left of Incentium to pay up on behalf of its customers - in court.

As Incentium was about to cease operations forever, Andalib came back to take another look at the company he founded in his former restaurant.

He invested an additional $200,000 in the company to keep it running long enough to look at the books and see if Incentium was worth saving, according to Shelton.

"I told him, 'I think you need to save your money,'" Shelton said of a conversation with Andalib.

He did.