SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 1-15863
IA GLOBAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-4037641
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
533 AIRPORT BOULEVARD, SUITE 400
BURLINGAME, CA 94010
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(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 685-2403
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
COMMON STOCK PURCHASE WARRANTS, EXPIRATION DATE APRIL 12, 2004
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(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes...X.... No........
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes........ No...X.....
The aggregate market value of the common equity held by non-affiliates
of the registrant as of March 25, 2004 was approximately $3,885,000.
The number of shares of the registrant's common stock outstanding as of
March 25, 2004: 71,894,324 shares of Common Stock.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business ............................................................3
Item 2. Properties .........................................................10
Item 3. Legal Proceedings ..................................................10
Item 4. Submission of Matters to a Vote of Security Holders ................11
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters ........................................11
Item 6. Selected Financial Data ............................................14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .........36
Item 8. Financial Statements and Supplementary Data ........................36
Item 9. Changes in and Disagreements With Accountants On Accounting
and Financial Disclosure ...........................................36
Item 9A. Controls and Procedures ............................................37
PART III
Item 10. Directors and Executive Officers of the Registrant .................37
Item 11. Executive Compensation .............................................37
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters .....................37
Item 13. Certain Relationships and Related Transactions .....................38
Item 14. Controls and Procedures ............................................38
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....38
SIGNATURES
2
PART I
The following discussion, in addition to the other information contained in this
report, should be considered carefully in evaluating us and our prospects. This
report (including without limitation the following factors that may affect
operating results) contains forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) regarding us and our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this report. Additionally, statements concerning future matters such as the
development of new products, enhancements or technologies, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Forward-looking statements in this report reflect the good faith judgment of our
management and the statements are based on facts and factors as we currently
know them. Forward-looking statements are subject to risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, but are not
limited to, those discussed below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as those discussed
elsewhere in this report. Readers are urged not to place undue reliance on these
forward-looking statements which speak only as of the date of this report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of the
report.
Item 1. Business
GENERAL DEVELOPMENT OF BUSINESS AND PRODUCT STATUS
We were incorporated in Delaware on November 12, 1998 under the name
foreignTV.com, Inc. In December 1999, we changed our name to Medium4.com, Inc.
On January 3, 2003, we changed our name to IA Global, Inc. We have also acquired
the domain name iaglobalinc.com for non-product use. Our executive offices are
located at 533 Airport Blvd. Suite 400 Burlingame, CA 94010. Our telephone
number is (650) 685-2403 and our primary website is located at
www.iaglobalinc.com. The information on our website is not a part of this
report.
We have incurred net losses of $2.1 million, $1.5 million and $6.2 million for
the years ended December 31, 2003, 2002 and 2001, respectively. We had revenues
of $1.1 million, $.4 million and $.7 million for the years ended December 31,
2003, 2002 and 2001, respectively. Our losses have been financed primarily by
the sale of equity in our company, by loans from related parties, and through
the issuance of equity for services. We expect our net losses to continue for
the foreseeable future.
Our business model has changed substantially over the last several years. During
2002 and 2003, we shifted our business model from being a provider of broadband
entertainment channels with revenues derived from advertising, to a developer of
media, entertainment and technology products and services. This shift in focus
was implemented primarily through acquisitions, as described below. Through our
merger and acquisition program, we intend to further increase the number of
majority owned companies within IA Global and expect that these will focus on
the media, entertainment and technology areas. We may also expand further our
licensing business. To this end, we may develop such media, entertainment and
technology products and services internally, or acquire them from other parties.
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Internet Data Acceleration Products
On February 10, 2003, we acquired a 76.9% equity interest in iAccele Co. Ltd.
("iAccele"), a privately held Japanese corporation engaged in the business of
providing an Internet data transmission acceleration product that targets
narrowband users, as well as broadband users, for 100.0 million Japanese Yen, or
approximately $830,000 based on the Japanese Yen/US dollar exchange rate on that
date. On December 29, 2003, we sold this 76.9% ownership interest in iAccele to
GM2 Co. Ltd., a Japanese-based private company, for approximately $280,000 in
cash. As part of the transaction, we forgave approximately $300,000 of
inter-company debt owed to us by iAccele.
We acquired iAccele with the intent to become a wholesale distributor of an
Internet acceleration product. However, we subsequently determined that we would
prefer to be a developer and licensor of the core Internet acceleration
technology, rather than a wholesale distributor of such products. Therefore, we
sold our interest in iAccele, and have instead been developing our own
proprietary Internet accelerator product in conjunction with QuikCAT.com, Inc.
("QuikCAT"), an Ohio based private company, that was the core technology
provider to iAccele. We have licensed the core technology from QuikCAT, as
described below, and have also developed a user interface for this Internet
acceleration product, which we believe will enhance the commercial reception of
the product.
On October 6, 2003, we acquired an exclusive reseller license from QuikCAT for
its Internet acceleration software ("iNet Client") for the territories of
Australia, New Zealand and Japan. This license was approved by the United States
Bankruptcy Court, Northern District of Ohio on December 15, 2003. The cost of
the license was $110,000, of which $10,000 was paid on September 3, 2003, and
$100,000 was paid on January 15, 2004. The license term is for three years, with
one year annual automatic renewals if the product is commercially deployed. The
license requires a 5% royalty on net revenues, which is to be paid monthly. In
addition, QuikCAT is to be granted (at their option) either a 10% net interest
in the profits, which is to be paid every six months, or a 10% equity share of
the entity that markets the iNet Client Software in the local marketplace. The
license can be terminated under certain conditions. Given QuikCAT's financial
position, the license agreement required QuikCAT to place in independent escrow
the source code for the software. This source code may be released to us under
certain conditions.
On October 31, 2003, we completed a joint venture agreement with London Wall
Investments Pty. Ltd., a privately held corporation located in Perth, Australia,
whereby we acquired a 50% equity stake in a newly formed company to be called
QuikCAT Australia Pty Ltd ("QuikCAT Australia") for a nominal value, which was
subsequently reduced to 47.26% following the issuance of shares to consultants.
On March 31, 2004, QuikCAT Australia was recapitalized by a subscription for
common shares totaling $100,000, with our contribution being $50,000. After this
recapitalization, our ownership percentage increased to 47.54%.
We have appointed QuikCAT Australia to market the services, products and
intellectual property under the iNet Client software license from QuikCAT. In
addition, we have advised QuikCAT that QuikCAT Australia will be the entity that
markets the iNet Client software in Australia and New Zealand, and therefore,
that QuikCAT Australia will have the obligation to pay the 5% royalty on net
revenues, which is to be paid monthly, and 10% of its net profits from this
business, which is to be paid every six months.
We own the client interface software that was developed to work with the iNet
Client software, and receive a 5% royalty from QuikCAT Australia on their net
profits from the sales of their services that incorporate the client interface.
We have no other contracts or agreements with other companies at this time for
the client interface software. The Internet acceleration service is software
based and uses a combination of highly advanced and proven compression and
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caching technologies to increase substantially the speed of delivery of Internet
and email data to the end-user. We believe that our client interface software
substantially enhances the core technology licensed to us by QuikCAT and is
critical to the commercial development and acceptance of the service.
QuikCAT Australia launched the product in Australia and New Zealand in March,
2004. QuikCAT Australia's Internet and email acceleration service accelerates
the delivery of data (I.E., web based content and email) over the Internet, in
particular, over the "last mile" where the transmission of data is typically the
slowest for a dial-up connection to the Internet. QuikCAT Australia's solution
transforms data into a highly compressed, proprietary format that is optimised
for accelerated delivery. The transformed data transverses the Internet faster
and requires fewer network resources than the original message, thereby reducing
the overall load and utilisation of network devices which results in faster
delivery of web content (text and images) and email over the existing network
infrastructure. Their product website is http://www.quikcat.au.com.
In addition to the equity capital described above, we have loaned a total of
$74,060 to QuikCat Australia for business development and working capital
purposes. These loans are unsecured, but are redeemable by QuikCAT Australia at
any time after one year if there are sufficient surplus assets. Interest accrues
at 3.5% after certain profit targets are achieved.
As part of our strategy to develop our Internet data acceleration products, on
February 5, 2004, we entered into an agreement with QuikCAT to acquire
substantially all of its assets of QuikCAT for $700,000, plus the assumption of
certain contracts, agreements and liabilities. QuikCAT has filed for bankruptcy
in the United States Bankruptcy Court, Northern District of Ohio, and therefore,
our acquisition is subject to approval by the Bankruptcy Court. Notwithstanding
our signed purchase agreement, there can be no assurance that the Bankruptcy
Court will approve our bid or that the Bankruptcy Court will not award the
assets to another bidder.
In addition, we are in discussions with the parent company of QuikCAT,
Innovative Computing Group, Inc. ("ICG"), to acquire certain assets of ICG that
are related to the technology that we intend to acquire from QuikCAT. As part of
these discussions, on February 5, 2004, we agreed to loan ICG up to $150,000
secured by source code for the Miliki SuperCompressor, which is a software
product that compresses electronic documents and images and allows a user to
email large files much faster and to save these files using much less storage
space. We have advanced $100,000 to ICG under this loan agreement. The note is
due May 5, 2004 and accrues interest at 4% annually. Completion of the ICG and
QuikCAT asset acquisitions are subject to further approvals, including approval
of the Bankruptcy Court in the case of QuikCAT, and there is no assurance that
these transactions will be closed.
Fan Club Entertainment Co. Ltd.
In August 2003, we executed a Share Purchase Agreement to acquire from Cyber
Holdings Co. Ltd. ("Cyber Holdings") a 67% equity interest in Fan Club
Entertainment Co. Ltd. ("Fan Club"), a privately-held Japanese company. Fan Club
provides advertising, merchandising, publishing, website and data management
services to Cyberbred Co. Ltd. ("Cyberbred"). The purchase price for our equity
interest in Fan Club was 134,000,000 Japanese Yen, or $1,112,960 (based on the
Japanese Yen/US dollar exchange rate on August 5, 2003), as well as 350,000
shares of our common stock at $.472 per share, which is the average closing
price for the five days prior to closing of the acquisition of Fan Club.
The Share Purchase Agreement provides that we will receive 67% equity interest
or 268,000 shares in Fan Club. Cyber Holdings, which already held 20,000 shares
in Fan Club, following the share purchase would have a 33% equity interest in
Fan Club by paying 56 million Japanese Yen to Fan Club for an additional 112,000
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shares. Cyber Holdings' obligation was not paid as of December 31, 2003. A
receivable was not booked due to the lack of certainty over the receipt of the
funds as of December 31, 2003.
On February 5, 2004, we executed a share purchase agreement to sell 75,040
shares of Fan Club for approximately $354,000 in cash to Cyber Holdings. Upon
completion of this sale, we owned a 67% interest in Fan Club and Cyber Holdings
owned the remaining 33%. The sale of shares on February 5, 2004, was conducted
to maintain the initially agreed balance of share holdings between the two
companies at 67% and 33%, respectively.
On June 4, 2003, Cyberbred signed a five year agreement with Marvel to manage
their fan club in Japan. Marvel holds the rights to well known characters such
as Spider Man, The Hulk, X-Men, Daredevil, Captain America, The Punisher and
many others. Cyberbred also currently holds the rights to manage the Universal
Studios fan club in Japan.
On July 28, 2003, Fan Club signed a subcontract with Cyberbred to exclusively
manage the Marvel Fan Club in Japan in accordance with the agreement between
Cyberbred and Marvel that is discussed above. This subcontract expires May 31,
2008, and is cancelable under certain conditions. The proceeds from our
investment in Fan Club were used to fund a 100,000,000 Yen payment by Cyberbred
to Marvel under their agreement and to provide working capital for Fan Club.
During the quarter ending December 31, 2003, Fan Club's main source of revenue
was derived from the activities associated with Marvel, as received from
Cyberbred and other companies. These activities include the following:
o Website development - By utilizing the knowledge of the staff and
management, websites will be established to increase the number of members
of the Marvel Fan Club, distribute a mail magazine, and data mine the
member database.
o Marvel Fan Club Magazine - Create and produce a monthly magazine for
members of the Marvel Fan Club.
o Marvel Fan Club Merchandising - Create and sale of Marvel merchandise to
fan club members.
o Event Planning - Assist in the planning and running of an events for
Marvel Fan Club. For example, an exhibition was held at the end of this
year in a major Japanese department store, Parco. This was the first
official event for the Marvel Fan Club in Japan. The event planning work
included ticket sales and pamphlet production.
In order to strengthen the Fan Club management team, three personnel were hired
in November 2003. Fan Club's objective is to increase sales orders and to
continue outsourcing most of the work received. As sales increase, management
will look to further increase Fan Club's staff.
Rex Tokyo Co. Ltd.
On March 18, 2004, we executed separate share purchase agreements with Rex Tokyo
Co. Ltd. ("Rex Tokyo") and its management, pursuant to which we acquired, in
aggregate, a 60.5% ownership interest in Rex Tokyo. We purchased 1,000 shares of
Rex Tokyo stock from the company for 100 million Yen, or approximately $942,000
based on the Japanese Yen/US dollar exchange rate on March 25 2004, the date we
funded the payment. In addition, we purchased 150 Rex Tokyo shares from Mr.
Ejima, the CEO of Rex Tokyo, for 462,000 shares of our common stock, issued at
$.30 per share, which is the average closing price for the five days prior to
closing.
6
Rex Tokyo is a supplier and re-fitter of equipment for the Pachinko industry in
Japan. Pachinko is a gambling game that is similar to pinball and is very
popular in Japan. Rex Tokyo supplies items such as automatic medal dispensing
machines, automatic cigarette butt disposal systems, as well as new Pachinko
gaming machines. In addition, Rex Tokyo also contracts to carry out the
maintenance of the machinery within the Pachinko gaming parlors.
The Pachinko industry has experienced significant consolidation since the late
1990s, with small parlor operators being replaced by large mega-parlor owners.
Rex Tokyo's business expansion focus is to provide support and services to these
mega-parlor owners.
Rex Tokyo is a member of the Pachinko Chain Store Association and the East Japan
Gaming Machinery Association. As a member of this Association, they are
authorized to certify second hand machines. Also, they are registered as a
Gaming Machinery Sales Operation with the Japan Gaming Related Business
Association. The Japan Gaming Related Business Association conducts training and
qualification testing. Its objective is to ensure that members uphold the rules
and teachings of the association in their everyday work. Once a member passes
the test of the Association, it receives the Gaming Machine Handling Manager
Certificate. Approximately half of Rex Tokyo's staff and related contractors
have achieved this qualification.
The acquisition of Fan Club and Rex Tokyo and the development of the Internet
acceleration technology business with QuikCAT and QuikCAT Australia are key
components of our strategy to shift our business model to the development of
media, entertainment and technology products and services.
STRATEGY
Our strategy and business model have changed substantially over the last several
years. During 2002 and 2003, we shifted our business model from being a provider
of broadband entertainment channels with revenues derived from advertising, to a
developer of media, entertainment and technology products and services. We
intend to operate primarily as a holding company with a concentrated focus on
acquiring companies that operate in the three primary areas of media,
entertainment, and technology. The cross-over synergies between these areas are
of great interest to us, particularly with respect to the connection between the
Japanese and US markets. We have an active merger and acquisition program and
intend to further leverage our asset base to grow the company through
acquisition. We may also develop such media, entertainment and technology
products and services internally. Our acquisitions of Fan Club and Rex Tokyo and
our joint venture company, QuikCAT Australia reflect our new business strategy.
DISTRIBUTION METHODS
Internet Acceleration Client Software
In November 2003, we appointed QuikCAT Australia to market the services,
products and intellectual property that we licensed from QuikCAT, in the
territories of Australia and New Zealand. We have not contracted with any other
parties as yet for other territories.
QuikCAT Australia operates as a wholesaler of the data acceleration service
offering. It will license its software to ISPs, resellers and joint venture
partners, who in turn will be responsible for marketing and support to end
customers. Its main distribution channels are made up of the following:
o Interet Service Providers (ISP) - Australia and New Zealand have a number
of major ISP's. QuikCAT Australia plans to distribute the acceleration
service through these ISP's.
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o Governmental Departments - QuikCAT Australia is planning to introduce the
data acceleration service to state and local government departments.
Trials are expected to precede sales in these channels.
o Joint Venture Entities - QuikCAT Australia expects that a customized
version of the data acceleration service can be produced where a business
model presents itself in a market outside of the typical ISP model. To
this end, they may enter into a joint venture arrangement with other
companies to distribute such a service.
o Agents - An agent network may be established by QuikCAT Australia to
further expand its ability to reach a wide customer base. Agents may
further distribute the service offering by any of the above described
channels.
COMPETITION
Internet Acceleration Client Software
The market for our Internet acceleration products is competitive and is subject
to rapid technological change, frequent product introductions with improved
performance, competitive pricing and changing industry standards.
We believe that the principal factors on which QuikCAT Australia will compete
include:
- Product performance,
- Product quality,
- Product reliability,
- Value,
- Customer service and support and
- Length of operating history, industry experience and name recognition.
Our direct competitors in the data acceleration market for the Internet include
Propel, Artera and Slipstream. We are aware that other companies are currently
providing an Internet data transmission acceleration service that targets
Internet users. We can give no assurance that those companies will accept the
software created by us over the acceleration services provided by other
companies or created by themselves, or that these or other companies will not
develop technology that surpasses the technology of ours.
Due to our lack of operating history and limited experience in the data
acceleration business, it may be possible for a competitor to enter the market
and compete directly against us.
We compete not only against companies in the broadband marketplace, but also
against those companies offering various forms of Internet access. This may
include, but is not limited to DSL, ISDN, broadband and dial-up access. It may
also be possible for competitors to package our data acceleration service into
their current Internet access product, and therefore, become resellers for us.
This situation may lead to our competitors becoming allies.
The market for data acceleration products is still at an early stage in
Australia and New Zealand. We anticipate that the consumer will become better
educated as to the merits of data acceleration over time. Currently, many
consumers are unaware as to the differences between the various Internet
connection services provided. It may appear to consumers as if our product is in
competition with other vendors, when in fact the two products may be
complimentary. This perceived competition may limit our ability to make sales.
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Many of our competitors and certain prospective competitors have significantly
longer operating histories, larger installed bases, greater name recognition and
significantly greater technical, financial, manufacturing and marketing
resources. A number of these competitors have long established relationships
with our customers and potential customers.
Fan Club Entertainment
Cyberbred's license in respect of Marvel, and accordingly our subcontract with
Cyberbred, is not exclusive and Marvel can contract with other operators of
Marvel fan clubs in Japan and elsewhere. There can be no assurance that
competitors will not emerge who will be larger and better funded than Fan Club.
GEOGRAPHICAL MARKETS
Internet Acceleration Client Software
On October 6, 2003, we were granted an exclusive reseller license by QuikCAT for
the iNet Client software for the territories of Australia, New Zealand and
Japan. This license was approved by the United States Bankruptcy Court, Northern
District of Ohio on December 15, 2003. In November 2003, we appointed QuikCAT
Australia to market the services, products and intellectual property that we
licensed from QuikCAT, in the territories of Australia and New Zealand. We have
the right within our reseller license to submit a formal business plan to
QuikCAT for territories beyond Australia, New Zealand and Japan.
Fan Club Entertainment
The terms of Cyberbred's contract with Marvel restrict the operation of the
Marvel fan club to the territory of Japan. Given the limited resources of Fan
Club and its current contract obligations with Cyberbred, we anticipate that at
present Fan Club will operate primarily in Japan.
INTELLECTUAL PROPERTY
We regard our copyrights, trademarks, trade secrets, domain name rights and
similar intellectual property as significant to our growth and success. We rely
upon a combination of copyright and trademark laws, trade secret protection,
domain name registration agreements confidentiality and non-disclosure
agreements and contractual provisions with our employees and with third parties
to establish and protect our proprietary rights.
Internet Acceleration Client
We were granted an exclusive license by QuikCAT for the iNet Client software on
October 6, 2003 for the territories of Australia, New Zealand and Japan. This
license was approved by the United States Bankruptcy Court, Northern District of
Ohio on December 15, 2003. In addition, QuikCAT has placed the source code in
escrow to secure their obligations to us under the license.
We have made an offer to purchase substantially all of QuikCAT's assets,
including the iNet Client software and several patents relating to its
intellectual property. We are also in the process of making an offer for
substantially all of ICG's assets. Completion of the ICG and QuikCAT asset
acquisitions are subject to further approvals, including approval of the
Bankruptcy Court in the case of QuikCAT, and there is no assurance that these
transactions will be closed.
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Fan Club Entertainment
On June 4, 2003, Cyberbred signed a five year agreement with Marvel to manage
their fan club in Japan. On July 28, 2003, Fan Club signed a Subcontract
Agreement with Cyberbred to exclusively manage the entire Marvel Fan Club in
Japan in accordance with the agreement between Cyberbred and Marvel.
Under the July 28, 2003 agreement, Cyberbred will make "best efforts" to
transfer the rights under their agreement with Marvel, directly to Fan Club
Entertainment. At this time, this transfer has not taken place.
EMPLOYEES
As of March 15, 2004, we had three full-time employees. In addition, two of our
executive officers worked approximately thirty hours per week on our business.
Accordingly, conflicts of interest may arise in the allocation of management
time among their various business activities. Our chief operating officer
resigned effective March 31, 2004.
ITEM 2. PROPERTIES
Our executive offices are located at 533 Airport Blvd. Suite 400, Burlingame, CA
94010. We pay approximately $1,000 per month in rent for our executive offices.
The lease for our executive offices may be cancelled on thirty days prior
notice. As of October 1, 2003, Fan Club Entertainment Co. Ltd. leased offices
from Cyberbred Co. Ltd, an affiliated company, for approximately $2,000 per
month. The term of the lease began October 1, 2003 and continues through
September 30, 2005, but may be cancelled on six months prior notice.
We believe our offices and operating facilities are adequate for our current
purposes.
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed, on September 26, 2003, Andzej Krakowski, a former
employee of foreignTV.com, Inc., filed a civil action seeking damages and
injunctive relief for (i) statutory damages, costs and attorney fees resulting
from our alleged willful copyright infringement, (ii) monetary damages in the
amount of $436,477 for alleged breach of an employment agreement with
foreignTV.com, (iii) the issuance of 180,000 shares of common stock in IA
Global, (iv) monetary damages for alleged fraud, (v) monetary damages of at
least $1,200,000, and (vi) punitive damages, costs and attorney fees. On January
10, 2004, the United States District Court for the Southern District of New York
dismissed without prejudice the complaint filed by Andzej Krakowski. In February
9, 2004, Mr. Krakowski filed for arbitration with the American Arbitration
Association in East Providence, Rhode Island.
We are a successor corporation to foreignTV.com, Inc. and Medium4.com, Inc.
("Medium"). As part of the September 25, 2002 Agreement and Assignment between
Medium, IAJ and David Badner, a major stockholder and former consultant to us,
Mr. Badner has agreed to indemnify and hold us harmless against any expenses,
obligations and liabilities related to any breach of the representations and
warranties made to us in those agreements,and any creditor claims arising from
those agreements which facilitated our financial restructuring.
While there can be no guarantee that we will be successful in resolving this
claim with Mr. Krakowski, we doe believe that we are appropriately indemnified
by Mr. Badner for Mr. Krakowski's claims.
We believe there are no other pending legal proceedings that, if adversely
determined, would have a material adverse effect on our business or financial
condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During 2003, no matters were submitted to a vote of stockholders through the
solicitation of proxies or otherwise. Our Annual Shareholder Meeting is
currently scheduled for May 14, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the American Stock Exchange ("Amex") under
the symbol IAO. The following table sets forth the range of the high and low
sales prices of the common stock for the periods indicated:
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 2002 $0.500 $0.260
June 30, 2002 $0.540 $0.200
September 30, 2002 $0.130 $0.060
December 31, 2002 $0.140 $0.060
March 31, 2003 $0.250 $0.040
June 30, 2003 $0.500 $0.100
September 30, 2003 $1.250 $0.240
December 31, 2003 $0.540 $0.250
As of March 25, 2004, the closing price of the company's common stock was $.35
per share. As of March 25, 2004, there were approximately 188 stockholder's of
record of our common stock. The number of stockholders does not include
beneficial owners holding shares through nominee names.
As of December 31, 2003, we have 1,678,433 common stock purchase warrants
outstanding (the "warrants"), which are listed on Amex under the symbol IAO.WS.
Their has been virtually no trading activity for the warrants during the past
two fiscal years. On March 31, 2003, we announced that the expiration date of
the warrants was extended to April 12, 2004 and the exercise price of the
warrants was reduced to $3.50 per share. On March 26, 2004, we again announced
that the warrants would expire April 12, 2004.
DIVIDEND POLICY
We have never paid any cash dividends and intend, for the foreseeable future, to
retain any future earnings for the development of our business. Our future
dividend policy will be determined by the board of directors on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2003 about our
common stock that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans.
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NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE -
ISSUED UPON EXERCISE OF EXERCISE PRICE OF NUMBER OF SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE FOR
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FUTURE ISSUANCE
------------- ----------------------- -------------------- -----------------------
Equity compensation plans
approved by security
holders .................... 2,550,000(1) $5.70 0(2)
Equity compensation plans
not approved by
security holders ........... 0 0 0
--------- ----- -
TOTAL ......................... 2,550,000(1) $5.70 0(2)
(1) Does not reflect the grant of options to purchase 7,000,000 shares of
common stock, at an average exercise price of $.19, which grant is subject
to stockholder approval of the amendment to the 1999 and 2000 Plans.
(2) Does not give effect to the amendment of the 1999 and 2000 Plans pursuant
to which the number of shares authorized will be increased from 1,500,000
to 12,000,000, subject to stockholder approval of the amendment to the
1999 and 2000 Plans.
RECENT SALES OF UNREGISTERED SECURITIES
On February 5, 2003, we granted 1,500,000 incentive stock options at $0.08 per
share to two executives of the company, exercisable immediately, and which
expire on February 5, 2013.
In April 2003, the board of directors voted to amend the conversion price for
the 1,678,433 warrants outstanding from our public offering from an exercise
price of $9.00 per share to an exercise price of $3.50 per share. On March 26,
2004, we announced that the warrants would expire April 12, 2004.
On June 15, 2003, the board of directors, subject to shareholder approval at the
forthcoming 2003 annual meeting of shareholders, approved an increase in the
number of shares available for issuance under the 1999 and 2000 stock options
plans from 1,500,000 to 11,500,000 shares.
On June 15, 2003, we granted 4,975,000 stock options, subject to shareholder
approval at the forthcoming 2003 annual meeting of shareholders, with an
exercise price of $.20 per share. Four million five hundred thousand of the
stock options were issued to the directors and officers of the company, and
these options vest over three years. Four hundred and seventy five thousand
options are performance based stock options and none of the performance based
stock options were earned The 4,500,000 stock options issued to the officers and
directors expire on June 15, 2013.
On June 30, 2003, we agreed to sell to PBAA Fund Ltd ("PBAA"),an affiliate of
our major shareholder, 13,333,333 shares of our common stock at an average price
of $0.15 per share, for a total of $2.0 million, representing an approximate 25%
discount to the trailing five-day average closing price of our common stock
ending June 15, 2003, the date PBAA made its investment commitment. As PBAA's
purchase price per share was at a discount to market, our stockholders will be
asked to ratify and approve this transaction at our forthcoming 2003 annual
meeting of stockholders, as required by the applicable rules of the American
Stock Exchange. We recorded a deemed dividend of $693,333 in connection with
this transaction.
12
On June 30, 2003, Inter Asset Japan LBO Fund, an affiliate of our major
shareholder, converted the principal amount of a convertible promissory note, as
well as approximately $95,000 of accrued interest thereon, into 1,158 shares of
our Series B convertible preferred stock. The 1,158 shares of Series B
Convertible Preferred Stock are convertible into 11,580,000 shares of common
stock, subject to the approval by our shareholders of an amendment to our
Certificate of Incorporation increasing our authorized common stock to at least
100,000,000 shares.
On August 5, 2003, we committed to issue 350,000 shares of our common stock at
$.472 per share in conjunction with the acquisition of Fan Club Entertainment
Co. Ltd. which is the average closing price for the five days prior to closing
of the acquisition of Fan Club.
On November 11, 2003, we agreed to sell to Inter Asset Japan Co Ltd, an
affiliate of our major shareholder, 1,666,666 shares of our common stock at an
average price of $0.30 per share, for a total of $500,000, representing an
approximate 17% discount to the trailing five-day average closing price of our
common stock ending November 6, 2003, the date IAJ made its investment
commitment. We recorded a deemed dividend of $106,667 in connection with this
transaction.
On November 11, 2003, the board of directors, subject to shareholder approval at
the forthcoming 2003 annual meeting of shareholders, approved an increase in the
number of shares available for grant under the 1999 and 2000 stock options plans
from 11,500,000 to 12,000,000 shares.
On December 2, 2003, we reached agreement with PBAA to convert approximately
$834,000 in outstanding convertible debt plus interest of approximately $33,000
into our common stock. PBAA, an affiliate of our majority shareholder, plans to
convert the remainder of its outstanding debt under a revised agreement from its
original contract dated January 31, 2003.
Under the conversion terms, we plan to issue 3,163,436 shares of common stock to
PBAA at a conversion rate of $0.30, representing an approximate 15% discount to
the trailing twenty day average closing price of the our common stock ending
November 21, 2003, the date PBAA made its investment commitment. As the
conversion purchase price per share was at a discount to market, our
shareholders will be asked to ratify and approve this transaction, as required
by the applicable rules of the American Stock Exchange at the company's
forthcoming 2003 annual meeting of shareholders. We recorded a deemed dividend
of $177,152 in connection with this transaction and a foreign exchange
adjustment of approximately $85,000.
On December 29, 2003, we agreed to sell to PBAA, an affiliate of our majority
shareholder, 1,333,333 shares of our common stock at an average price of $0.30
per share, for a total of $400,000, representing no discount to the trailing
five-day average closing price of our common stock ending December 29, 2003, the
date PBAA made its investment commitment. The funds were received January 16,
2004.
On December 31, 2003, we issued 250,000 shares of common stock for settlement of
accounts payable at a price of $.32 per share.
On January 12, 2004, we granted 400,000 stock options, subject to shareholder
approval at the forthcoming 2003 annual meeting of shareholders, at an exercise
price of $.30 per share to an executive of the company. These options vest over
three years and expire on January 12, 2014.
On February 25, 2004, we granted 1,000,000 stock options, subject to shareholder
approval at the forthcoming 2003 annual meeting of shareholders, at an exercise
price of $.30 per share to employees of Fan Club. These options vest over three
years and expire on February 25, 2014.
13
On March 18, 2004, we purchased 150 Rex Tokyo Co Ltd shares from Mr. Ejima, the
CEO of Rex Tokyo, as part of the acquisition of Rex Tokyo, for 462,000 shares of
our common stock issued at $.30 per share, which is the average closing price
for the five days prior to closing.
On March 21, 2004, we announced that PBAA, an affiliate of the company's
majority shareholder, has invested an additional $1.5 million into the company
in a private placement. Under the financing terms, the company has issued a $1.5
million convertible note, convertible into approximately 5 million shares of our
common stock, representing a conversion price per share of $0.30, which was the
fair-market value of the trailing five-day average closing price of our common
stock ending March 5, 2004, the date PBAA committed to make the investment. The
conversion of this note is subject to approval by our shareholders of an
amendment to our Certificate of Incorporation increasing its authorized common
stock to at least 150,000,000 shares.
On March 18, 2004, we granted 1,500,000 stock options, subject to shareholder
approval at the forthcoming 2003 annual meeting of shareholders, at an exercise
price of $.30 per share to employees of Rex Tokyo. These options vest over three
years and expire on March 18, 2014.
The company's stockholders will be requested to approve an amendment to our
certificate of incorporation to increase the number of shares of common stock
which we shall be authorized to issue from 75,000,000 to 150,000,000 at the
company's forthcoming 2003 annual meeting of its stockholders.
ITEM 6. SELECTED FINANCIAL DATA
In the following table, we provide you with our selected consolidated historical
financial and other data. We have prepared the consolidated selected financial
information using our consolidated financial statements for the five years ended
December 31, 2003. When you read this selected consolidated historical financial
and other data, it is important that you read along with it the historical
financial statements and related notes in our consolidated financial statements
included in this report, as well as Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Years Ended December 31,
-------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue ........................... $ 1,145 $ 406 $ 709 $ 390 $ 46
Net loss .......................... (2,148) (1,493) (6,239) (9,531) (3,760)
Net loss to common shareholders ... (3,125) (1,493) (7,239) (9,531) (3,760)
Net loss per share ................ (0.05) (0.04) (0.39) (0.91) (0.41)
BALANCE SHEET DATA:
Total assets ...................... 4,217 451 240 2,132 6,482
Long-term liabilities/deferred
revenues/minority interests ..... 45 - 305 785 -
Stockholder's equity (deficiency) . 2,685 (891) (864) 429 5,992
14
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended, (in Thousands)
---------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Year ended December 31, 2003
Net revenues ............... $ 5 $ 99 $ 127 $ 914
Gross profit (loss) ........ (104) (92) (26) 239
Net income (loss) .......... (719) (807) (697) 75
Net income (loss) to common
shareholders .............. (719) (804) (694) (908)
Net income (loss) per share
to common shareholders .... (0.01) (0.02) (0.01) (0.01)
Year ended December 31, 2002
Net revenues ............... $ 138 $ 88 $ 180 $ -
Gross profit (loss) ........ 103 64 180 (25)
Net income (loss) .......... (170) (260) 258 (1,321)
Net income (loss) to common
shareholders .............. (170) (260) 258 (1,321)
Net income (loss) per share
to common shareholders .... (0.01) (0.01) 0.01 (0.03)
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We have incurred net losses of $2.1 million, $1.5 million and $6.2 million for
the years ended December 31, 2003, 2002 and 2001, respectively. We had revenues
of $1.1 million, $.4 million and $.7 million for the years ended December 31,
2003, 2002 and 2001, respectively. Our losses have been financed primarily by
the issuance of related party loans, the sale of equity in our company and
through the issuance of equity for services. We expect our net losses to
continue for the foreseeable future.
Our business model has changed substantially over the last several years. During
2002 and 2003, we shifted our business model from being a provider of broadband
entertainment channels with revenues derived from advertising, to a developer of
media, entertainment and technology products and services. This shift in focus
was implemented primarily through acquisitions, as described below. We intend to
grow our business by acquiring additional companies, with a focus on media,
entertainment and technology businesses, as well as by developing our own media
and technology products.
The acquisition of Fan Club and Rex Tokyo and the development of the Internet
acceleration technology with QuikCAT and QuikCAT Australia are key components of
our strategy to shift our revenue model from broadband entertainment channels
and revenues derived from advertising to a renewed focus on developing media
technology products and services and on licensing revenues. We may develop such
media technology products and services internally, or acquire them from other
parties.
We received $280,000 from the sale of iAccele on January 16, 2004, $400,000 from
a subscription agreement from an affiliated party on January 12, 2004, $354,000
from the sale of our Fan Club shares on February 10, 2004 and $1,500,000 from a
convertible note from an affiliated party on March 17, 2004. We may need to
obtain additional financing in order to continue our current operations,
including the cash flow needs of Fan Club, Rex Tokyo and QuikCAT Australia and
to acquire businesses. Our major shareholder has indicated a willingness to
support our financing efforts. However, there can be no assurance that the we
will be able to secure additional funding, or that if such funding is available,
whether the terms or conditions would be acceptable to us, from our major
shareholder or otherwise. Moreover, if we raise additional capital through
borrowing or other debt financing, we would incur substantial interest expense.
Sales of additional equity securities will dilute on a pro rata basis the
percentage ownership of all holders of common stock. If we do raise more equity
capital in the future, it is likely that it will result in substantial dilution
to our current stockholders.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
information and presentation of that data as a percentage of change from
period-to-period.
16
(dollars in thousands)
Year Ended December 31,
---------------------------------------------
2003 2002 $ Variance % Variance
------- ------- ---------- ----------
Revenue ......................... $ 1,145 $ 406 $ 739 182.0%
Cost of sales ................... 1,128 84 1,044 1242.9%
------- ------- ------- ------
Gross profit .................... 17 322 (305) 94.7%
------- ------- ------- ------
Expenses:
Selling, general and
adminstrative expenses ........ 2,383 903 1,480 163.9%
Writedown of fixed assets ....... - 38 (38) *
------- ------- ------- ------
Total expenses .................. 2,383 941 1,442 153.2%
------- ------- ------- ------
Operating loss .................. (2,366) (619) (1,747) 282.2%
------- ------- ------- ------
Other Income (Expense):
Interest income ................. 13 - 13 *
Interest expense ................ (374) (1,085) 711 -65.5%
Other Income .................... 11 211 (200) -94.8%
Gain on sale of personal
computer business ............. 104 - 104 *
Loss in equity investment in
iAccele Australia Pty Ltd ..... (1) - (1) *
Gain on sale of iAccele Co. Ltd. 674 - 674 *
Foreign currency translation
adjustments ................... (172) - (172) *
------- ------- ------- ------
Total other income (expense) .... 255 (874) 1,129 129.2%
------- ------- ------- ------
Loss before minority interests .. (2,111) (1,493) (618) 41.4%
and income taxes
Minority interests .............. 22 - 22 *
------- ------- ------- ------
Loss before income taxes
taxes ......................... (2,133) (1,493) (640) 42.9%
Income taxes:
Current ......................... (8) - (8) *
Deferred ........................ 23 - 23 *
------- ------- ------- ------
Net loss ........................ $(2,148) $(1,493) $ (655) 43.9%
======= ======= ======= ======
17
(dollars in thousands)
Year Ended December 31,
---------------------------------------------
2002 2001 $ Variance % Variance
------- ------- ---------- ----------
Revenue ......................... $ 406 $ 709 (303) -42.7%
Cost of sales ................... 84 701 (617) -88.0%
------- ------- ------- --------
Gross profit .................... 322 8 314 3925.0%
------- ------- ------- --------
Expenses:
Selling, general and
adminstrative expenses ........ 903 5,420 (4,517) -83.3%
Writedown of fixed assets ....... 38 250 (212) -84.8%
Writedown of capitalized
development costs ............. - 535 (535) *
------- ------- ------- --------
Total expenses .................. 941 6,205 (4,729) -76.2%
------- ------- ------- --------
Operating loss .................. (619) (6,197) 5,043 -81.4%
------- ------- ------- --------
Other Income (Expense):
Interest income ................. - 1 (1) *
Interest expense ................ (1,085) - (1,085) *
Other Income .................... 211 16 195 1218.8%
Write down of investments ....... - (59) 59 *
------- ------- ------- --------
Total other income (expense) .... (874) (42) (832) -1981.0%
------- ------- ------- --------
Loss before minority interests .. (1,493) (6,239) 4,211 -67.5%
and income taxes
Minority interests .............. - - - *
------- ------- ------- --------
Loss before income taxes
taxes ......................... (1,493) (6,239) 4,211 -67.5%
Income taxes:
Current ......................... - - - *
Deferred ........................ - - - *
------- ------- ------- --------
Net loss ........................ $(1,493) $(6,239) $ 4,211 -67.5%
======= ======= ======= ========
18
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenue
Net revenue for the year ended December 31, 2003 increased $739,000 to
$1,145,000, as compared to the year ended December 31, 2002. This increase was
due to revenue from our 2003 acquisitions. Fan Club recorded revenue of $744,000
and iAccele recorded revenue of $401,000. The iAccele revenue primarily related
to the amortization of deferred revenue and the sale of new iAccele software
licenses sold to value added resellers (VARs), internet service providers (ISPs)
or directly to end-users. Revenues for the year ended December 31, 2002 resulted
from earned license fees and these sales were not repeated in 2003.
As of December 31, 2003, we had deferred revenues of $463,000. This is an
increase of $463,000 from December 31, 2002. The increase in deferred revenues
relates to products and service (Fan Club) that were completed as of December
31, 2003 but not accepted by the end-user until after December 31, 2003.
Cost of Sales
Cost of sales for the year ended December 31, 2003 increased $1,044,000 to
$1,128,000, as compared to the year ended December 31, 2002. This increase was
due to Fan Club expenses of $565,000, primarily related to outsourced website
development for customers and outsourced expenses related to a December, 2003
fan club exhibition. In addition, this increase related to iAccele expenses of
$564,000, primarily due to license fees on iAccele software, other iAccele costs
and depreciation on computer leases for which we deferred revenues.
Cost of sales for the year ended December 31, 2002 resulted from depreciation
and amortization of software and equipment used in the production of the website
of $49,000 and production costs for the development of our original content of
$22,000. These costs were not repeated in 2003.
Expenses
Selling, general and administrative expenses for the year ended December 31,
2003 increased $1,442,000 to $2,383,000, as compared to the year ended December
31, 2002. This was due to increased operating expenses of $1,310,000 related to
the iAccele and $115,000 related the Fan Club acquisitions.
For 2003 and 2002, the selling, general and administrative expenses consisted
primarily of employee and independent contractor expense, rent, overhead,
equipment and depreciation, amortization of identifiable intangible assets and
intellectual property, professional and consulting fees, sales and marketing
costs, and other general and administrative costs. The difference in the current
periods compared to the prior periods is primarily due to the acquisition of
iAccele on February 10, 2003, the sales and marketing expenses related to the
sale of iAccele software licenses and the acquisition of Fan Club on August 5,
2003.
Selling general and administrative expenses for the year ending December 31,
2002 included a write down of fixed assets of $38,000. This write down was not
repeated in 2003.
Other Income (Expense)
Other income for the year ended December 31, 2003 was $255,000 as compared to
other expense of $874,000 year ended December 31, 2002. This increase was due a
gain on sale of iAccele of $674,000 and a gain on the sale of the computer
business of $104,000, offset by interest and beneficial conversion rights on
related party loans of $374,000 and a foreign currency translation adjustment
from the sale of iAccele of $172,000.
19
Other expense for the year ended December 31, 2002 included approximately
$211,000 of other income during the year ended December 31, 2002 relating to the
forgiveness of indebtedness due to negotiated settlements with several
creditors, offset by interest and beneficial conversion rights on related party
loans of $1,085,000.
Net Income (Loss)
Net loss was $2,148,000 for the year ended December 31, 2003 as compared to a
net loss of $1,493,000 for the year ended December 31, 2002. The reasons for the
increased loss were discussed above.
Deemed Dividends
Deemed dividends for the year ended December 31, 2003 were $977,000. This
expense related to common stock issued to related parties at a discount to the
market price. There was no deemed dividend for the year ended December 31, 2002.
Grant of Stock Options
On February 5, 2003, we granted 1,500,000 incentive stock options at $.08 per
Share to two executives of the company, exercisable immediately and which expire
on February 5, 2013.
On June 15, 2003, we granted 4,975,000 stock options, subject to shareholder
approval at the forthcoming 2003 annual meeting of shareholders, with an
exercise price of $.20 per share. Four million five hundred thousand of the
stock options were issued to the directors and officers of the company, and
these options vest over three years. Four hundred and seventy five thousand
options are performance based stock options and none of the performance based
stock options were earned. These 4,500,000 stock options expire on June 15,
2013.
We have not recorded any compensation expense for stock options granted to
employees during the year ended December 31, 2003.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenue
Net revenue for the year ended December 31, 2002 decreased $303,000 to $406,000,
as compared to the year ended December 31, 2001. Revenue for the year ended
December 31, 2002 resulted from earned license fees. Revenue for the year ended
December 31, 2001 resulted from earned license fees of $500,000 and the sale of
encoding mechanisms of approximately $200,000. The sale of the encoding
mechanisms was a one-time sale arrangement with a licensee.
Cost of Sales
Cost of sales for the year ended December 31, 2002 decreased $617,000 to
$84,000, as compared to the year ended December 31, 2001. Cost of sales for the
year ended December 31, 2002 resulted from depreciation and amortization of
software and equipment used in the production of the website of $49,000 and
production costs for the development of our original content of $22,000. Cost of
sales for the year ended December 31, 2001 resulted from depreciation and
amortization of software and equipment used in the production of the website of
$561,000 and production costs for the development of our original content of
$81,000.
20
The production costs incurred in 2002 were residual costs incurred after the
cessation of our own content production efforts during the year ended December
31, 2001. Depreciation and amortization were reduced significantly for 2002 from
2001 due to the write down of assets used for content production written off
during the year ended December 31, 2001 and the relocation of our executive
offices from Miami, Florida to Burlingame, California, in the amounts of
approximately $38,000 and $250,000 for the years ended December 31, 2002 and
2001, respectively. We wrote down capitalized development expenses in the amount
of approximately $535,000 during the year ending December 31, 2001 as the direct
result of our not producing content.
Expenses
Selling, general and administrative expenses for the year ended December 31,
2002 decreased $4,729,000 to $941,000, as compared to the year ended December
31, 2001. Selling, general and administrative expenses for the year ended
December 31, 2002, consisted primarily of approximately $6,000 of depreciation
and amortization, $526,000 in personnel costs, $90,000 in professional and
consulting fees and $281,000 for rent, travel, and telephone.
Selling, general and administrative expenses for the year ended December 31,
2001 consisted primarily of approximately $4.1 million in personnel costs
(including $2.2 million of equity compensation), $340,000 in professional and
consulting fees, $366,000 of depreciation and amortization and $535,000 of rent,
travel and telephone. The reduction in personnel costs, professional and
consulting fees and other general and administrative costs from the year ended
December 31, 2001 is direct result of our not producing content.
Selling general and administrative expenses for the year ending December 31,
2002 included a write down of fixed assets of $38,000. Selling general and
administrative expenses for the year ending December 31, 2001 included a write
down of fixed assets of $250,000 related to the relocation of our executive
offices from Miami, Florida to Burlingame, California. In addition, selling
general and administrative expenses for the year ending December 31, 2001
included a write down of capitalized development costs of $535,000 is the direct
result of our not producing content.
Other Income (Expense)
Other expense for the year ended December 31, 2002 was $874,000 as compared to
other expense of $42,000 year ended December 31, 2001. Other expense for the
year ended December 31, 2002 included approximately $211,000 of other income
during the year ended December 31, 2002 relating to the forgiveness of
indebtedness due to negotiated settlements with several creditors, offset by
interest and beneficial conversion rights on related party loans of $1,085,000.
Other expense for the year ended December 31, 2001 included approximately
$59,000 related to the write down of investments, offset by other income of
$15,000.
Net Income (Loss)
Net loss was $1,493,000 for the year ended December 31, 2002 as compared to a
net loss of $6,239,000 for the year ended December 31, 2001. The reasons for the
decreased loss were discussed above.
Deemed Dividends
There was no deemed dividend for the year ended December 31, 2002. Deemed
dividends for the year ended December 31, 2001 was $1,000,000. This expense
related to common stock issued to related parties at a discount to the market
price.
21
LIQUIDITY AND CAPITAL RESOURCES
We had cash of approximately $.7 million and net working capital of
approximately $1.6 million as of December 31, 2003. We had a net loss of $2.1
million for the year ended December 31, 2003 and we expect to incur operating
losses through 2004.
We received $280,000 from the sale of iAccele on January 16, 2004, $400,000 from
a subscription agreement from an affiliated party on January 12, 2004, $354,000
from the sale of our Fan Club shares on February 10, 2004 and $1,500,000 from a
convertible note from an affiliated party on March 17, 2004. We may need to
obtain additional financing in order to continue our current operations,
including the cash flow needs of Fan Club, Rex Tokyo and QuikCAT Australia and
to acquire businesses. Our major shareholder has indicated a willingness to
support our financing efforts. However, there can be no assurance that the we
will be able to secure additional funding, or that if such funding is available,
whether the terms or conditions would be acceptable to us, from our major
shareholder or otherwise. Moreover, if we raise additional capital through
borrowing or other debt financing, we would incur substantial interest expense.
Sales of additional equity securities will dilute on a pro rata basis the
percentage ownership of all holders of common stock. If we do raise more equity
capital in the future, it is likely that it will result in substantial dilution
to our current stockholders.
Since inception, we have financed our operations primarily through sales of our
equity securities in our initial public offering and from several private
placements, loans and capital contributions, primarily from related parties. Net
cash proceeds from these items have totaled approximately $17.4 million as of
December 31, 2003, with approximately $8.8 million raised in the initial public
offering, $6.4 million raised in private placements, $2.1 million raised in the
conversion of debt and $.1 million raised from a capital contribution. In
addition, we have issued equity for non-cash items totaling $9.4 million,
including $6.9 million issued for services, $2.3 million related to a beneficial
conversion feature and $.2 million related to the Fan Club acquisition.
Operating Activities
Net cash used in operations for the year ended December 31, 2003 was $499,000.
This amount was primarily related to a net loss of $2,148,000, the gain of sale
of iAccele of $674,000 and increases in accounts receivable of $1,266,000 and
prepaid costs of $438,000. This was offset by depreciation and amortization of
$558,000, amortization of beneficial conversion feature of $277,000 and
increases in accounts payable of $2,612,000 and deferred revenue of $463,000.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2003 was
$1,874,000. This amount related to the acquisitions of $1,938,000 discussed
below, purchase of capital expenditures of $598,000, offset by proceeds from the
sale of equipment of $702,000.
On February 10, 2003, we acquired an approximately 76.9% equity interest in
iAccele, a privately held Japanese corporation engaged in the business of
providing an Internet data transmission acceleration service that targets
narrowband users, as well as broadband users, for 100.0 million Japanese Yen, or
approximately $830,000 based on the Japanese Yen/US dollar exchange rate on that
date. On December 29, 2003, we completed the sale of this 76.9% ownership
interest in iAccele to GM2 Co. Ltd., a Japanese-based private company. Under the
agreement, we received approximately $280,000 in cash on January 16, 2004. As
part of the transaction, we forgave approximately $300,000 of inter-company debt
owed by iAccele to the company.
22
On August 5, 2003, we executed a Share Purchase Agreement to acquire from Cyber
Holdings a 67% equity interest in Fan Club. Fan Club provides advertising,
merchandising, publishing, website and data management services to Cyberbred Co.
Ltd. ("Cyberbred"). The purchase price for our equity interest in Fan Club was
134,000,000 Japanese Yen, or $1,112,960 (based on the Japanese Yen/US dollar
exchange rate on August 5, 2003), as well as 350,000 shares of our common stock.
In February 2004, we executed a share purchase agreement to sell 75,040 shares
of Fan Club for approximately $354,000 in cash to Cyber Holdings. Upon
completion of this sale, we owned a 67% interest in Fan Club and Cyber Holdings
owned the remaining 33%. The sale of shares on February 5, 2004, was conducted
to maintain the initially agreed balance of share holdings between the two
companies at 67% and 33%, respectively.
We purchased and subsequently leased 600 computers to an investee of the major
shareholder of the company, foreignTV Japan Co Ltd, a Japanese limited liability
company ("foreignTV"). We previously held a minority ownership in foreignTV, but
sold its interest in 2002. IAJ, a principal stockholder of the company,
currently owns approximately 66% of the outstanding shares of foreignTV. These
computers cost approximately $1,000 per machine or approximately $600,000. The
company expects to receive about $1,200,000 over the term of these leases for
the equipment under lease. The terms of the leases are as follows;
o Lease 1 dated June 10, 2003 for 100 computers. The monthly rental is
950,000 Yen or approximately $8,000 per month.
o Lease 2 dated June 20, 2003 for 200 computers. The monthly rental is
1,900,000 Yen or approximately $17,000 per month.
o Lease 3 dated August 1, 2003 for 300 computers. The monthly rental is
2,850,000 Yen or approximately $25,000 per month.
o The rental period for each lease is for 2 years.
o The lease contract shall be automatically extended for six months if
foreignTV does not object at least one month prior to the contract's
termination date.
o These computers are to be returned to the company upon termination of the
leases.
These leases were not recorded as a financing lease, because these leasing
transactions are between related parties under common control. As a result,
revenues are not being recognized on any cash receipts. In addition, since the
lessee of these computers is not sufficiently capitalized, the company's ability
to collect the lease payments is not certain. The company has received 3,429,749
Yen or approximately $31,000 during the quarter ending September 30, 2003 and
this amount has been booked as deferred revenue on the balance sheet.
These computers are being depreciated over three years.
On November 17, 2003, the company assigned to IAJ (a) the lease with foreignTV
Japan for the 600 personal computers, (b) unpaid invoices totaling 18,947,500
Yen, or approximately $166,000, from foreignTV Japan, (c) and rights to cash
received of 3,429,749 Yen, or approximately $31,000, in exchange for (a)
cancellation of a 34,000,000 Yen, or approximately $298,000, loan from IAJ and
related accrued interest, and (b) 34,000,000 Yen, or approximately $298,000 that
was received by the company on December 18, 2003. In connection with the sale of
iAccele, the company sold these computers to the purchaser and recorded an gain
of $103,785.
23
On March 18, 2004, we executed separate share purchase agreements with Rex Tokyo
Co. Ltd. ("Rex Tokyo") and its management, pursuant to which we acquired, in
aggregate, a 60.5% ownership interest in Rex Tokyo. We purchased 1,000 shares of
Rex Tokyo stock from the company for 100 million Yen, or approximately $942,000
based on the Japanese Yen/US dollar exchange rate on March 17, 2004. In
addition, we purchased 150 Rex Tokyo shares from Mr. Ejima, the CEO of Rex
Tokyo, for 462,000 shares of our common stock.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2003
was $2,433,000. This amount related to loans from related parties of $1,288,000
and the proceeds from the sale of stock of $2,500,000, offset by a loan to
QuikCAT Pty Ltd. of $75,000 and the repayment of loans payable-related party of
$1,281,000.
In order to finance the purchase of iAccele, we borrowed 100.0 million Japanese
Yen, or approximately $830,000 based on the Japanese Yen/US dollar exchange rate
on that date, from PBAA Fund Ltd., a British Virgin Islands limited liability
company. The principal amount of this loan, together with interest thereon at
4.50% per annum, is due and payable on January 31, 2004. We may defer payment of
the principal amount of this loan, but not accrued interest, for one additional
year with the consent of PBAA. We may prepay all or specified minimum portions
of this loan at any time after March 31, 2003 upon payment of certain prepayment
penalties.
iAccele used 70.0 million of the 100.0 million Japanese Yen that it received
from the company to partially repay a contractual obligation of 150.0 million
Japanese Yen, since reduced by iAccele's payment of 30.0 million Japanese Yen,
that it owes to InfoShowerX, a Japanese public company, which was incurred by
iAccele in connection with a December 2002 reorganization by which iAccele,
previously an unincorporated operating division of InfoShowerX, acquired the
division's assets from InfoShowerX and became a stand-alone corporation. iAccele
was required to repay this contractual obligation to InfoShowerX in its entirety
by the end of April 2003. Further, 42.0 million Japanese Yen was paid by iAccele
between February 10, 2003 and June 30, 2003 and the balance of 8.0 million
Japanese Yen in August 2003.
During the quarter ended June 30, 2003, iAccele borrowed 52,500,000 Yen, or
approximately $454,000, from IAJ. This financing was made in four separate
advances. These advances bear interest at rates ranging from 3.5% to 6.7% per
annum. These advances matured during the following dates: 5,500,000 Yen or
approximately $45,000 on July 25, 2003, 7,000,000 Yen, or approximately $62,000,
on July 27, 2003, 10,000,000 Yen, or approximately $89,000, on August 1, 2003
and 30,000,000 Yen, or approximately $258,000, on December 1, 2003. The company
repaid 18,500,000 Yen, or approximately $160,000, on July 25, 2003. The
remaining 4,000,000 Yen which was due on August 1, 2003 was deferred with a new
note until the end of 2003. Therefore, the total outstanding amount to IAJ due
in December, 2003 and bearing interest at 3.5% per annum is 34,000,000 Yen, or
approximately $ 290,000. As part of the sale of iAccele to GM2 on December 29,
2003, we forgave approximately $300,000 of inter-company debt owed by iAccele to
the company.
On June 30, 2003, we agreed to sell to PBAA Fund Ltd ("PBAA"), an affiliate of
our major shareholder, 13,333,333 shares of its common stock at an average price
of $0.15 per share, for a total of $2.0 million, representing an approximate 25%
discount to the trailing five-day average closing price of our common stock
ending June 15, 2003, the date PBAA made its investment commitment. As PBAA's
purchase price per share was at a discount to market, our stockholders will be
asked to ratify and approve this transaction, as required by the applicable
rules of the American Stock Exchange at the our forthcoming 2003 annual meeting
of its stockholders.
24
On October 31, 2003, we completed a joint venture agreement with London Wall
Investments Pty. Ltd., a privately held corporation located in Perth, Australia,
whereby we acquired a 50% equity stake in a newly formed company to be called
QuikCAT Australia Pty Ltd ("QuikCAT Australia") for a nominal value, which was
subsequently reduced to 47.25% following the issuance of shares to a consultant.
On March 31, 2004, QuikCAT Australia was recapitalized by a subscription for
common shares totaling $100,000, with our contribution being $50,000. After this
recapitalization, our ownership percentage increased to 47.54%.
In addition to the equity capital described above, we have loaned a total of
$74,060 to QuikCat Australia for business development and working capital
purposes. These loans are unsecured, but are redeemable, by QuikCAT Australia at
any time after one year if there are sufficient surplus assets. Interest accrues
at 3.5% after certain profit targets are achieved.
On November 11, 2003, we agreed to sell to Inter Asset Japan Co Ltd, an
affiliate of our major shareholder, 1,666,666 shares of our common stock at an
average price of $0.30 per share, for a total of $500,000, representing an
approximate 17% discount to the trailing five-day average closing price of our
common stock ending November 6, 2003, the date IAJ made its investment
commitment.
On December 29, 2003, we agreed to sell to PBAA, an affiliate of our majority
shareholder, 1,333,333 shares of our common stock at an average price of $0.30
per share, for a total of $400,000, representing no discount to the trailing
five-day average closing price of our common stock ending December 29, 2003, the
date PBAA made its investment commitment. The funds were received January 16,
2004.
On March 21, 2004, we announced that PBAA, an affiliate of the company's
majority shareholder, has invested an additional $1.5 million into the company
in a private placement. Under the financing terms, the company has issued at
$1.5 million convertible note, that is convertible into approximately 5 million
shares of our common stock representing a conversion price per share of $0.30,
which was the fair-market value of the trailing five-day average closing price
of our common stock ending March 5, 2004, the date PBAA committed to make the
investment. This subject to approval by our shareholders of an amendment to our
Certificate of Incorporation increasing its authorized common stock to at least
150,000,000 shares.
Other Material Commitments. The company's contractual cash obligations as of
December 31, 2003 are summarized in the table below.
Less Than Greater Than
Contractual Cash Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
---------------------------- ---------- ---------- --------- --------- ------------
Operating leases ........... $ 15,706 $ 15,706 $ - $ - $ -
Capital lease obligations .. - - - - -
Long term debt repayment ... - - - - -
Capital expenditures ....... - - - - -
Acquisitions ............... 1,305,000 1,305,000 - - -
25
Non-Cash Financing Activities
On June 30, 2003, Inter Asset Japan LBO No.1 Fund ("IAJ"), elected to convert
its $1,064,000 Mezzanine Finance Loan Note due from the company, plus accrued
interest of $95,000 into Series B Preferred Stock at the conversion rate of
$1,000 per share. We issued 1,158 shares of Series B Preferred Stock in exchange
for the note and accrued interest.
On August 5, 2003, we committed to issue 350,000 shares of our common stock at
$.472 per share in conjunction with the acquisition of Fan Club Entertainment
Co. Ltd. which is the average closing price for the five days prior to closing.
On December 2, 2003, we reached agreement with PBAA to convert approximately
$834,000 in outstanding convertible debt plus interest of approximately $33,000
in exchange for our common stock. PBAA, an affiliate of our majority
shareholder, plans to convert the remainder of its outstanding debt under a
revised agreement from its original contract dated January 31, 2003.
Under the conversion terms, we plan to issue 3,163,436 shares of common stock to
PBAA at a conversion rate of $0.30, representing an approximate 15% discount to
the trailing twenty day average closing price of the our common stock ending
November 21, 2003, the date PBAA made its investment commitment. As the
conversion purchase price per share was at a discount to market, our
shareholders will be asked to ratify and approve this transaction, as required
by the applicable rules of the American Stock Exchange at the company's
forthcoming 2003 annual meeting of shareholders.
On December 29, 2003, we agreed to sell to PBAA, an affiliate of our majority
shareholder, 1,333,333 shares of our common stock at an average price of $0.30
per share, for a total of $400,000, representing no discount to the trailing
five-day average closing price of our common stock ending December 29, 2003, the
date PBAA made its investment commitment. The funds were received January 16,
2004.
On December 31, 2003, we issued 250,000 shares of common stock for settlement of
accounts payable at a price of $.32 per share.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The application of GAAP involves the exercise of varying degrees of judgment. On
an ongoing basis, the company evaluates its estimates and judgments based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe that of our
significant accounting policies (see summary of significant accounting policies
more fully described in Note 2 of notes to consolidated financial statements),
the following policies involve a higher degree of judgment and/or complexity:
Income Taxes
The company is subject to income taxes in both the U.S. and foreign (Japan)
jurisdictions. Significant judgment is required in determining the provision for
income taxes. We recorded a valuation for the deferred tax assets from our net
operating losses carried forward due to us not demonstrating any consistent
profitable operations. In the event that the actual results differ from these
estimates or we adjust these estimates in future periods, we may need to adjust
such valuation recorded.
26
Stock-Based Compensation
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by SFAS 148,
ACCOUNTING FOR STOCK-BASED COMPENSATION-- TRANSITION AND DISCLOSURE, encourages,
but does not require, companies to record compensation cost for stock based
employee compensation plans at fair value. We have chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, AND RELATED INTERPRETATIONS. Accordingly,
compensation cost for stock options granted to employees is measured as the
excess, if any, of the quoted market price of our stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Intangible Assets
CAPITALIZED SOFTWARE--Software development costs are capitalized upon the
establishment of technological feasibility, in accordance with SFAS No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE
MARKETED. Software development costs are capitalized based upon an assessment of
their recoverability. This assessment requires considerable judgment by
management with respect to various factors, including, but not limited to,
anticipated future gross margins, estimated economic lives, and changes in
software and hardware technology. Amortization is based on the straight-line
method over the remaining estimated economic life of the product which is two
years.
Other Intangible Assets--Other intangible assets primarily relate to acquired
software, trademarks and customer lists acquired in our purchase of Fan Club and
iAccele. On January 1, 2003, we adopted the provisions of SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which generally
requires impairment losses to be recorded on long-lived assets (excluding
goodwill) used in operations, such as property, equipment and improvements, and
intangible assets, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of the assets. Amortization was based on the straight-line
method over two years for iAccele. The company is amortizing the intangible
assets and intellectual property for Fan Club over sixty months on a straight -
line basis, which is the life of the Marvel Enterprises, Inc. agreement.
Revenue Recognition
We recognize revenue when it is realized. We consider revenue realized when the
product has been shipped or the services have been provided to the customer, and
collectiility is reasonably assured. Deferred revenue includes amounts billed to
customers for which revenue has not been recognized that generally results from
products completed by the company prior to year-end but not accepted by end
users until after year-end.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists primarily of amounts due us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected non-collection of accounts receivable based on past collection
history and specific risks identified within our portfolio. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.
Debt and Equity financing of Capital Transactions - Beneficial Conversion
Features
27
We have adopted EITF issues 98-5, ACCOUNTING FOR CONVERTIBLES SECURITIES WITH
BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, and
00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE SECURITIES in
accounting for the convertible debt. EITF 98-5 recognition of a conversion
feature that is in-the-money at issuance as additional paid-in-capital, measured
by allocating a portion of the proceeds equal to the intrinsic value of that
feature. The intrinsic value of the feature is the difference between the
conversion price and the fair value of the stock into which the security is
convertible, multiplied by the number of shares. According to EITF 00-27, the
issuance proceeds should not be reduced by issuance costs when calculating the
intrinsic value of the conversion feature. These beneficial conversion features
of debt or equity instruments, depending on the specific facts and circumstances
will determine whether such beneficial conversion feature is to be recorded as
an expense to be amortized over a period of time, expensed immediately or
recorded as a deemed dividend.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which addresses consolidation by business enterprises of VIEs that
either: (i) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (ii) have equity investors that lack an essential characteristic of
a controlling financial interest.
Throughout 2003, the FASB released numerous proposed and final FASB Staff
Positions (FSPs) regarding FIN 46, which both clarified and modified FIN 46's
provisions. In December 2003, the FASB issued Interpretation No. 46 (FIN 46-R),
which will replace FIN 46 upon its effective date. FIN 46-R retains many of the
basic concepts introduced in FIN 46; however, it also introduces a new scope
exception for certain types of entities that qualify as a "business" as defined
in FIN 46-R, revises the method of calculating expected losses and residual
returns for determination of the primary beneficiary, includes new guidance for
assessing variable interests, and codifies certain FSPs on FIN 46. FIN 46-R did
not have a material impact on our Consolidated Financial Statements.
In 2003, the Emerging Issues Task Force (EITF) reached a consensus on two issues
relating to the accounting for multiple-element arrangements: Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," and Issue No.
03-05, "Applicability of AICPA SOP 97-2 to Non- Software Deliverables in an
Arrangement Containing More Than Incidental Software." The consensus opinion in
EITF No. 03-05 clarifies the scope of both EITF 00-21 and Statement of Financial
Position (SOP) 97-2, "Software Revenue Recognition," and was reached on July 31,
2003. The transition provisions allow either prospective application or a
cumulative effect adjustment upon adoption. EITF Nos. 00-21 and 03-05 did not
have a material impact on our Consolidated Financial Statements.
In December 2003, the FASB revised SFAS No.132, "Employers' Disclosures about
Pensions and other Post-retirement Benefits, an amendment of FASB Statements No.
87, 88 and 106." This new SFAS No. 132 retains all of the disclosure
requirements of SFAS No. 132; however, it also requires additional annual
disclosures describing types of plan assets, investment strategy, measurement
date(s), expected employer contributions, plan obligations, and expected benefit
payments of defined benefit pension plans and other defined benefit
postretirement plans. SFAS No. 132 did not have a material impact on our
Consolidated Financial Statements.
28
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and develops
a single accounting model, based on the framework established in SFAS No. 121
for long-lived assets to be disposed of by sale, whether such assets are or are
not deemed to be a business. SFAS No. 144 also modifies the accounting and
disclosure rules for discontinued operations. The standard was adopted on
January 1, 2003, and did not have a material impact on our consolidated
financial statements. The sale of iAccele operations are presented in the
Consolidated Financial Statements in accordance with SFAS No. 144.
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. It also specifies
when a derivative contains a financing component that requires special reporting
in the Consolidated Statement of Cash Flows. SFAS No. 149 amends certain other
existing pronouncements in order to improve consistency in reporting these types
of transactions. The new guidance is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. SFAS No. 149 did not have a material effect on our Consolidated
Financial Statements.
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. It establishes
classification and measurement standards for three types of freestanding
financial instruments that have characteristics of both liabilities and equity.
The provisions of SFAS No. 150 are effective for (i) instruments entered into or
modified after May 31, 2003, and (ii) pre-existing instruments as of July 1,
2003. In November 2003, through the issuance of FSP 150-3, the FASB indefinitely
deferred the effective date of certain provisions of SFAS No. 150, including
mandatory redeemable instruments as they relate to minority interests in
consolidated finite-lived entities. The adoption of SFAS No. 150, as modified by
FSP 150-3, did not have a material effect on our Consolidated Financial
Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, in addition to the other information contained in this
report, should be considered carefully in evaluating us and our prospects. This
report (including without limitation the following factors that may affect
operating results) contains forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) regarding us and our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this report. Additionally, statements concerning future matters such as the
development of new products, enhancements or technologies, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
29
Forward-looking statements in this report reflect the good faith judgment of our
management and the statements are based on facts and factors as we currently
know them. Forward-looking statements are subject to risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, but are not
limited to, those discussed below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as those discussed
elsewhere in this report. Readers are urged not to place undue reliance on these
forward-looking statements which speak only as of the date of this report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of the
report.
- - WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history on which to base an evaluation of our
business and prospects, having only commenced our initial business operations in
April 1999. In addition, we have shifted our revenue model from broadband
entertainment channels and revenues derived from advertising, to a renewed focus
on developing media technology products and services and on licensing revenues.
Our prospects must be considered in light of the risks, difficulties and
uncertainties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets such as
the market for media technology products and services.
As we have such a limited history of operations, investors will be unable to
assess our future operating performance or our future financial results or
condition by comparing these criteria against their past or present equivalents.
- - WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE
We have only recently recognized revenues from services and we have experienced
net losses since inception. We expect to incur losses on both a quarterly and an
annual basis for the foreseeable future. There can be no assurance that we will
ever achieve profitability.
- - WE REVISED OUR BUSINESS PLAN
At the beginning of 2003, we revised our business plan to expand into other
areas of media entertainment and technology. We have shifted the revenue model
from broadband entertainment channels and revenues derived predominantly from
advertising, to a renewed focus on developing media technology products and
services, and on generating licensing revenues. To this end, we may develop such
media entertainment and technology products and services internally, or acquire
them from other parties.
- - WE MAY NEED ADDITIONAL FINANCING TO SUPPORT OUR OPERATIONS AND ACQUIRE
BUSINESSES
We may need to obtain additional financing in order to continue our current
operations, including the cash flow needs of Fan Club, Rex Tokyo and QuikCAT
Australia and to acquire businesses. Our major shareholder has indicated a
willingness to support our financing efforts. However, there can be no assurance
that the we will be able to secure additional funding, or that if such funding
is available, whether the terms or conditions would be acceptable to us, from
our major shareholder or otherwise. Moreover, if we raise additional capital
30
through borrowing or other debt financing, we would incur substantial interest
expense. Sales of additional equity securities will dilute on a pro rata basis
the percentage ownership of all holders of common stock. If we do raise more
equity capital in the future, it is likely that it will result in substantial
dilution to our current stockholders. Any inability to obtain additional
financing may materially effect our business, financial condition and results of
operations.
- - OUR COMMON STOCK COULD BE DELISTED FROM THE AMERICAN STOCK EXCHANGE ("AMEX")
In May 2003, we received notice from the AMEX Staff indicating that we were
below certain of AMEX's continued listing standards, due to losses in two of our
most recent fiscal years with shareholder equity below $2 million, and had
sustained losses so substantial in our overall operations that it appeared
questionable, in the opinion of the Exchange, as to whether we would be able to
continue operations, as set forth in Section 1003(a)(i) and Section 1003(a)(iv)
of the AMEX "company Guide." We were afforded the opportunity to submit a plan
of compliance to AMEX and on July 7, 2003 presented our plan, with a further
amended submission on September 8, 2003.
On September 30, 2003, AMEX notified us that it accepted our plan of compliance
and granted us an extension until November 27, 2004 to regain compliance with
the continued listing standards. We will be subject to periodic review by AMEX
Staff during the extension period, during which we will be required to make
progress consistent with the plan and to regain compliance with the continued
listing standards.
Failure by our stockholders to approve or ratify the proposals we are presenting
at our 2003 annual stockholder meeting or not achieving our plan of compliance
accepted by AMEX could result in our common stock being delisted from AMEX,
which could materially affect the ability of our stockholders to dispose of
their shares and reduce the liquidity of their investment. In addition,
delisting could affect our ability to obtain financing to support future
operations and acquisitions.
- - WE MAY ENGAGE IN ACQUISITIONS, MERGERS, STRATEGIC ALLIANCES, JOINT VENTURES
AND DIVESTITURES THAT COULD RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT
THAN EXPECTED.
In the normal course of business, we may engage in discussions relating to
possible acquisitions, mergers, strategic alliances, joint ventures and
divestitures. As part of our business strategy, we completed one acquisition
during early 2003, one acquisition in August, 2003 and one acquisition in March
2004, invested in a joint venture in July, 2003 and sold a business in December,
2003. Such transactions are accompanied by a number of risks, including:
- Use of significant amounts of cash,
- Potentially dilutive issuances of equity securities on potentially
unfavorable terms,
- Incurrence of debt on potentially unfavorable terms as well as
amortization expenses related to goodwill and other intangible assets, and
- The possibility that we may pay too much cash or issue too much of our
stock as the purchase price for an acquisition relative to the economic
benefits that we ultimately derive from such acquisition.
31
The process of integrating any acquisition may create unforeseen operating
difficulties and expenditures and is itself risky. The areas where we may face
difficulties include:
- Diversion of management time (at both companies) during the period of
negotiation through closing and further diversion of such time after
closing from focus on operating the businesses to issues of integration
and future products,
- Decline in employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects or the direction
of the business,
- The need to integrate each company's accounting, management information,
human resource and other Administrative systems to permit effective
management, and the lack of control if such integration is delayed or not
implemented,
- The need to implement controls, procedures and policies appropriate for a
larger public company at companies that prior to acquisition had been
smaller, private companies,
- The need to incorporate acquired technology, content or rights into our
products and unanticipated expenses related to such integration, and
- The need to successfully develop an acquired in-process technology to
achieve the value currently capitalized as intangible assets.
From time to time, we have also engaged in discussions with candidates regarding
the potential acquisitions of our product lines, technologies and businesses. If
divestiture such as this does occur, we cannot be certain that our business,
operating results and financial condition will not be materially and adversely
affected. A successful divestiture depends on various factors, including our
ability to:
- Effectively transfer liabilities, contracts, facilities and employees to
the purchaser,
- Identify and separate the intellectual property to be divested from the
intellectual property that we wish to keep, and
- Reduce fixed costs previously associated with the divested assets or
business.
In addition, if customers of the divested business do not receive the same level
of service from the new owners, this may adversely affect our other businesses
to the extent that these customers also purchase other products offered by us.
All of these efforts require varying levels of management resources, which may
divert our attention from other business operations. Further, if market
conditions or other factors lead us to change our strategic direction, we may
not realize the expected value from such transactions.
If we do not realize the expected benefits or synergies of such transactions,
our consolidated financial position, results of operations, cash flows and stock
price could be negatively impacted.
- - WE ARE DEPENDENT ON CERTAIN THIRD PARTY LICENSES AND AGREEMENTS
We rely on certain agreements and technologies we license from third parties to
operate our business. We have been developing our own proprietary Internet
accelerator product in conjunction with QuikCAT Technologies, Inc. ("QuikCAT")
an Ohio based private company. Development of the interface for this product was
outsourced, with the core patent based technology being licensed from QuikCAT.
32
We own the client interface software that was developed to work with the iNet
Client software, and receive a 5% royalty from QuikCAT Australia on their net
profits from the sales of their services that incorporate the client interface.
We have no other contracts or agreements with other companies at this time for
the client interface software. The Internet acceleration service is software
based and uses a combination of highly advanced and proven compression and
caching technologies to increase substantially the speed of delivery of Internet
and email data to the end-user. We believe that our client interface software
substantially enhances the core technology licensed to us by QuikCAT and is
critical to the commercial development and acceptance of the service.
We were granted an exclusive Reseller License Agreement by QuikCAT for the iNet
Client Software on October 6, 2003 for the territories of Australia, New Zealand
and Japan. This license was approved by the United States Bankruptcy Court,
Northern District of Ohio on December 15, 2003. The cost of the license was
$110,000, of which $10,000 was paid on September 3, 2003 and the balance was
paid on January 15, 2004. The license term is for three years, with one year
annual automatic renewals if the product is commercially deployed. The license
requires a 5% royalty on net revenues, which is to be paid monthly, and a 10%
net interest in the profits of QuikCAT Australia, which is to be paid every six
months. The license can be terminated under certain conditions.
QuikCAT has licensed the IP from Innovative Computing Group ("ICG"), a private
US company owned substantially by Dr Olu Lafe. Dr Lafe, the inventor of the IP,
holds the underlying patents to the IP and has assigned these to ICG.
QuikCAT itself is in US chapter 11 bankruptcy. Our position is protected by US
court endorsement of the license. As part of the agreement to license the
Internet Accelerator, we protected our access to the QuikCAT source code via an
escrow agreement and the deposit of the source code with an escrow agent.
As part of our strategy to develop our Internet data acceleration products, on
February 5, 2004, we entered into an agreement with QuikCAT to acquire
substantially all of its assets of QuikCAT for $700,000, plus the assumption of
certain contracts, agreements and liabilities. QuikCAT has filed for bankruptcy
in the United States Bankruptcy Court, Northern District of Ohio, and therefore,
our acquisition is subject to approval by the Bankruptcy Court. Notwithstanding
our signed purchase agreement, there can be no assurance that the Bankruptcy
Court will approve our bid or that the Bankruptcy Court will not award the
assets to another bidder.
In addition, we are in discussions with the parent company of QuikCAT,
Innovative Computing Group, Inc. ("ICG"), to acquire certain assets of ICG that
are related to the technology that we intend to acquire from QuikCAT. As part of
these discussions, on February 5, 2004, we agreed to loan ICG up to $150,000
secured by source code for the Miliki SuperCompressor, which is a software
product that compresses electronic documents and images and allows a user to
email large files much faster and to save these files using much less storage
space. We have advanced $100,000 to ICG under this loan agreement. The note is
due May 5, 2004 and accrues interest at 4% annually. Completion of the ICG and
QuikCAT asset acquisitions are subject to further approvals, including approval
of the Bankruptcy Court in the case of QuikCAT, and there is no assurance that
these transactions will be closed.
On June 4, 2003, Cyberbred signed a five year agreement with Marvel Enterprises,
Inc. to manage their fan club in Japan. On July 28, 2003, Fan Club signed a
Subcontract Agreement with Cyberbred to exclusively manage the entire Marvel Fan
Club in Japan in accordance with the agreement between Cyberbred and Marvel.
Under the July 28, 2003 agreement, Cyberbred will make "best efforts" to
transfer the rights under their agreement with Marvel, directly to Fan Club
Entertainment. At this time, this transfer has not taken place.
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The company currently is not a party to the agreement between Cyberbred and
Marvel. However, this contract is material to the company since the company
would be materially adversely affected by a termination of the relationship
between Cyberbred and Marvel. The company cannot make any assurances about the
relationship between Cyberbred and Marvel.
- - WE ARE SUBJECT TO COMPETITIVE PRESSURES
While we are not aware of any organization that is providing the complete suite
of services under the same business model we are utilizing, in general, we face
competition from other providers of services to entities that provide Internet
data transmission acceleration products or which provide advertising,
merchandising, publishing, website and data management services. Certain of our
competitors may be able to devote greater resources to marketing, adopt more
aggressive pricing policies and devote substantially more resources to
developing their services and products. We may be unable to compete successfully
against current and future competitors, and competitive pressures may have a
material adverse effect on our business. Further, as a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
In addition to the foregoing, some of our key customers or potential customers
might decide to build their own Internet data transmission acceleration product
or company's which provide advertising, merchandising, publishing, website and
data management services. Although this has not been the industry trend over the
past year, if this were to happen, we might be adversely impacted thereby.
- - WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS
We regard our copyrights, trade secrets, trademarks, patents, and similar
intellectual property as significant to our growth and success. We rely upon a
combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
our employees and with third parties to establish and protect our proprietary
rights. Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving. We are unable to assure investors as to the future
viability or value of any of our proprietary rights or those of other companies
within the industry. We are also unable to assure investors that the steps taken
by us to protect our proprietary rights will be adequate. Furthermore, we can
give no assurance that our business activities will not infringe upon the
proprietary rights of others, or that other parties will not assert infringement
claims against us.
- - THE COMPANY IS EXPOSED TO LEGAL CLAIMS
We have been, currently are, or in the future may be involved in legal
proceedings or claims. Such claims are detailed in Part 1, Item 3, Legal
Proceedings. Such claims, whether with or without merit, could be time-consuming
and expensive to defend and could divert management's time and attention. There
can be no guarantee that we will be successful in resolving such claims.
- - WE ARE DEPENDENT ON KEY PERSONNEL
Our success depends to a significant degree upon the continued contributions of
key management and other personnel, some of whom could be difficult to replace.
We do not maintain key man life insurance covering our officers. Our success
will depend on the performance of our officers, our ability to retain and
34
motivate our officers, our ability to integrate new officers into our operations
and the ability of all personnel to work together effectively as a team. Our
failure to retain and recruit officers and other key personnel could have a
material adverse effect on our business, financial condition and results of
operations.
- - THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of our common stock has been and is likely in the future to be
highly volatile. Our common stock price may fluctuate significantly in response
to factors such as:
- Quarterly variations in our operating results,
- Announcements of technological innovations,
- New product introductions by us or our competitors,
- Competitive activities,
- Announcements by us regarding significant acquisitions, strategic
relationships, capital expenditure commitments, liquidity and our AMEX
listing,
- Additions or departures of key personnel,
- Issuance of convertible or equity securities for general or merger and
acquisition purposes,
- Issuance of debt or convertible debt for general or merger and acquisition
purposes,
- General market and economic conditions,
- Defending significant litigation, and
- Foreign exchange gains and losses.
The stocks of technology companies have experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. These broad market and industry
factors may have a material adverse effect on the market price of our common
stock, regardless of our actual operating performance. Factors like this could
have a material adverse effect on our business, financial condition and results
of operations.
- - OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY
As of March 25, 2004,Inter Asset Japan LBO No. 1 Fund ("IAJ LBO Fund"), PBAA
Fund Ltd. ("PBAA"),Terra Firma Fund Ltd. ("Terra Firma") and Inter Asset Japan
Co. Ltd. ("IAJ") collectively hold approximately 82.7% of our common stock. Such
entities stated in a Schedule 13D that they may be deemed to constitute a
"group" for the purposes of Rule 13d-3 under the Exchange Act. Mr. Margerison,
one of our Directors, and our President and Chief Executive Officer, currently
serves as the Chairman of IAJ, a Japanese venture capital company.
IAJ has the ability to cause a change of control of the board of directors of
the company by electing candidates of its choice to the board at a stockholder
meeting, and approve or disapprove any matter requiring stockholder approval,
regardless of how our other stockholders may vote. Further, under Delaware law,
IAJ has significant influence over our affairs, including the power to cause,
delay or prevent a change in control or sale of the company, which in turn could
adversely affect the market price of our common stock.
35
- - THE SALE OF A SIGNIFICANT NUMBER OF OUR SHARES COULD DEPRESS THE PRICE OF OUR
STOCK.
Sales or issuances of a large number of shares of common stock in the public
market or the perception that sales may occur could cause the market price of
our common stock to decline. As of March 25, 2004, 71.9 million shares of common
stock were outstanding. Significant shares were held by our principal
stockholder and other company insiders. As an "affiliate" (as defined under Rule
144 of the Securities Act ("Rule 144") of the company, they may only sell their
shares of common stock in the public market in compliance with the volume
limitations of Rule 144.
- - WE ARE EXPOSED TO FOREIGN CURRENCY RISKS
The majority of our operations are located in Japan. We do not trade in hedging
instruments or "other than trading" instruments and a significant change in the
foreign currency exchange rate between the Japanese Yen and US Dollar would have
a material adverse effect on our business, financial condition and results of
operations.
- -WE HAVE LIMITED INSURANCE
We have limited director and officer insurance and no commercial insurance
policies. Any significant insurance claims would have a material adverse effect
on our business, financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
We were exposed to foreign currency risks due to the acquisition Fan Club on
August 5, 2003 and iAccele on February 10, 2003. The iAccele acquisition was
financed by a 100.0 million Japanese Yen loan, or appr