________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
COMMISSION FILE NUMBER: 1-15863
___________________________
IA GLOBAL, INC.
(Exact name of Registrant as specified in its charter)
___________________________
DELAWARE 13-4037641
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
533 AIRPORT BOULEVARD, SUITE 400
BURLINGAME, CA 94010
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (650) 685-2403
___________________________
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 whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of November 9, 2004 there were issued and outstanding 82,400,181
shares of the Registrant's Common Stock.
________________________________________________________________________________
IA GLOBAL, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I.
Item 1. Financial Statements......................................... 3
Consolidated Balance Sheet................................... 3
Consolidated Statements of Operations........................ 4
Consolidated Statement of Cash Flows......................... 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 30
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 50
Item 4. Controls and Procedures...................................... 50
PART II.
Item 1. Legal Proceedings............................................ 51
Item 2. Changes in Securities and Use of Proceeds.................... 51
Item 3. Defaults Upon Senior Securities.............................. 52
Item 4. Submission of Matters to a Vote of Security Holders.......... 52
Item 5. Other Information............................................ 52
Item 6. Exhibits and Reports on Form 8-K............................. 52
Signatures.................................................................. 54
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2004 2003
------------- ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 2,327,401 $ 676,782
Accounts receivable, net of allowance for doubtful accounts of $88,907
and $0, respectively .................................................... 3,493,512 1,266,335
Consumption and deferred tax receivable .................................. 114,212 49,482
Notes receivable ......................................................... 200,436 -
Inventories .............................................................. 65,653 -
Prepaid costs ............................................................ 144,587 438,142
Subscription receivable .................................................. - 400,000
Other current assets ..................................................... 697,497 296,163
------------ ------------
Total current assets ................................................... 7,043,298 3,126,904
EQUIPMENT, NET ............................................................. 359,864 812
OTHER ASSETS
Intangible assets, net ................................................... 2,030,784 1,014,685
Deferred tax asset ....................................................... 274,606 -
Loan to QuikCAT Australia Pty Ltd ........................................ 101,654 74,849
Investment in QuikCAT Australia Pty Ltd .................................. 5,634 -
Other assets ............................................................. 221,559 -
------------ ------------
$ 10,037,399 $ 4,217,250
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ................................................. $ 3,922,514 $ 861,149
Accrued liabilities ...................................................... 485,671 138,580
Convertible loan payable - related party ................................. - -
Deferred revenue ......................................................... - 463,119
Investment in QuikCAT Australia Pty Ltd .................................. - 1,137
Consumption taxes received ............................................... 148,147 -
Income taxes payable ..................................................... 197,227 23,754
Current portion of long term debt-affiliated party ....................... 461,636 -
------------ ------------
Total current liabilities .............................................. 5,215,195 1,487,739
------------ ------------
LONG TERM LIABILITIES:
Long term debt-affiliated party .......................................... 327,210 -
Retirement benefits ...................................................... 27,577 -
------------ ------------
354,787 -
------------ ------------
MINORITY INTERESTS ......................................................... 1,288,773 44,706
------------ ------------
STOCKHOLDER'S EQUITY:
Series B Preferred stock, $.01 par value, 5,000 shares authorized 1,158
issued and outstanding, respectively (liquidation value $1,158,000) ..... 12 12
Common stock, $.01 par value, 150,000,000 shares authorized,
77,951,361 and 71,894,324, issued and outstanding, respectively ......... 779,513 718,943
Paid in capital .......................................................... 27,700,327 26,049,286
Accumulated deficit ...................................................... (25,196,750) (24,147,785)
Treasury stock ........................................................... (50,000) (50,000)
Foreign currency translation adjustment .................................. (54,458) 114,349
------------ ------------
Total stockholder's equity ............................................. 3,178,644 2,684,805
------------ ------------
$ 10,037,399 $ 4,217,250
============ ============
See notes to consolidated financial statements.
3
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE ........................................ $ 8,448,424 $ 126,070 $ 19,861,664 $ 230,793
COST OF SALES .................................. 7,074,988 152,821 16,502,479 453,174
------------ ------------ ------------ ------------
GROSS PROFIT ................................... 1,373,436 (26,751) 3,359,185 (222,381)
------------ ------------ ------------ ------------
EXPENSES:
Selling, general and administrative expenses . 1,592,408 606,437 4,113,842 1,563,301
Writedown of fixed assets .................... 14,067 - 95,719 -
------------ ------------ ------------ ------------
Total expenses .............................. 1,606,475 606,437 4,209,561 1,563,301
------------ ------------ ------------ ------------
OPERATING LOSS ................................. (233,039) (633,188) (850,376) (1,785,682)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income .............................. 2,014 661 9,867 2,357
Interest expense ............................. (21,361) (78,789) (40,886) (274,924)
Other income (expense) ....................... 82,119 24,965 230,972 865
Foreign currency translation adjustment ...... - 2,805 2,255 2,616
Loss on equity investment in QuikCAT
Australia Pty Ltd ..................... (27,956) - (43,229) -
------------ ------------ ------------ ------------
Total other income (expense) ................ 34,816 (50,358) 158,979 (269,086)
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTERESTS
AND INCOME TAXES ............................. (198,223) (683,546) (691,397) (2,054,768)
MINORITY INTERESTS ............................. (1,087) 10,914 67,480 10,914
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ....................... (197,136) (694,460) (758,877) (2,065,682)
INCOME TAXES:
Current ...................................... 58,774 - 237,195 334
Deferred ..................................... 28,613 - 52,894 -
------------ ------------ ------------ ------------
NET LOSS ....................................... (284,523) (694,460) (1,048,966) (2,066,016)
Deemed dividend ................................ - - - (693,333)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS ................................. $ (284,523) $ (694,460) $ (1,048,966) $ (2,759,349)
============ ============ ============ ============
Per share of Common-
Basic net loss per share ..................... $ (0.00) $ (0.01) $ (0.01) $ (0.05)
============ ============ ============ ============
Diluted net loss per share ................... $ (0.00) $ (0.01) $ (0.01) $ (0.05)
============ ============ ============ ============
Weighted average shares of common
stock outstanding ........................... 77,947,122 65,343,932 74,369,554 56,362,635
Weighted average shares of common stock
and common equivalent shares
outstanding ................................. 77,947,122 65,343,932 74,369,554 56,362,635
See notes to consolidated financial statements.
4
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
---------------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $(1,048,966) $(2,068,632)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................. 384,446 518,556
Loss on disposal of leasehold improvement ...................... 14,103 -
Amortization of beneficial conversion feature .................. - 168,124
Equity based compensation ...................................... - 80,000
Equity gain from investment in QuickCAT Australia Pty Ltd. ..... 43,229 -
Minority interests ............................................. 476,959 10,914
Accrued interest on notes/loans payable ........................ 16,077 -
Accounts receivable ............................................ 740,614 -
Notes receivable - trade ....................................... (152,786) -
Consumption and deferred tax receivable ........................ 83,417 -
Inventory ...................................................... 762,562 -
Prepaid costs .................................................. 293,555 -
Deferred license fee receivable ................................ - (31,384)
Other current assets ........................................... (168,323) (67,681)
Deferred tax assets ............................................ 48,670 -
Other assets ................................................... (98,816) 3
Accounts payable ............................................... (1,080,664) 164,440
Accrued liabilites ............................................. (138,486) 264,261
Other liabilities-retirement benefits .......................... 27,577 -
Income taxes payable - foreign ................................. 173,473 18,981
Deferred revenue ............................................... (463,120) 755,276
----------- -----------
NET CASH USED IN OPERATIONS ........................................ (86,479) (187,142)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in QuikCAT Australia Pty Ltd ........................ (50,000) -
Cash of Rex Tokyo Co Ltd immediately following acquisition ..... 1,934,839 -
Purchase of Rex Tokyo Co Ltd ................................... (941,000) -
Purchase of IA Global Acquisition Co., Inc. .................... (700,000) -
Purchases of intangibles ....................................... (540,930) (2,221,414)
Purchases of capital expenditures .............................. (506,594) (666,512)
Other assets ................................................... - 5,477
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .............................. (803,685) (2,882,449)
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from loan payable - related party ..................... 1,500,000 1,432,419
Repayments of related party loans .............................. - (160,000)
Loan to Innovative Computing Group, Inc. ....................... (100,000) -
Loan to QuikCAT Australia Pty Ltd. ............................. (25,000) (34,060)
Proceeds from issuance of common stock ......................... 400,000 -
Proceeds from long term debt - affiliated party ................ 788,846 -
Proceeds from exercise of options .............................. 40,000 -
Proceeds from sale of stock .................................... - 2,000,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 2,603,846 3,238,359
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 1,713,682 168,768
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................ (63,063) -
CASH AND CASH EQUIVALENTS, beginning of the period ................. 676,782 444,383
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period ....................... $ 2,327,401 $ 613,151
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid .................................................. $ 21,361 $ -
Taxes paid ..................................................... $ 210,966 $ 334
Non-cash investing and financing activities:
Common stock issued for Rex Tokyo Co Ltd ....................... $ 138,600 $ -
Conversion of debt to equity ................................... $ 1,533,011 $ 1,157,988
Contribution of note to capital ................................ $ 101,629 $ -
Conversion of liability to common stock ........................ $ 13,500 $ -
Common stock issued for Fan Club Entertainment Co Ltd .......... $ - $ 165,200
See notes to consolidated financial statements.
5
IA GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited CONSOLIDATED financial statements of IA Global,
Inc. and SUBSIDIARIES (the "company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to prepare them for inclusion as part of the Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements for the periods ended September 30, 2004
and 2003 are unaudited and include all adjustments necessary to a fair statement
of the results of operations for the periods then ended. All such adjustments
are of a normal recurring nature. The results of the company's operations for
any interim period are not necessarily indicative of the results of the
company's operations for a full fiscal year. For further information, refer to
the financial statements and footnotes thereto included in the company's annual
report on Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 2003.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the company and its majority-owned subsidiaries. The company fully
consolidated the results of operations of the majority owned IA Global
Acquisition Co. in the Consolidated Statements of Operations for the period June
10, 2004 to September 30, 2004 because the subsidiary incurred losses for this
period and we do not expect to recover these losses from the minority owner.
QuikCAT Australia Pty Ltd ("QuikCAT Australia") is accounted for on an equity
basis based on our 47.54% equity ownership as of September 30, 2004.
Inter-company items and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The company classifies highly liquid temporary
investments with an original maturity of three months or less when purchased as
cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable
consists primarily of amounts due to the company from our normal business
activities. The company maintains 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.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out)
or market. The company records a provision for excess and obsolete inventory
whenever an impairment has been identified.
EQUIPMENT - Equipment represents machinery, equipment and software, which are
stated at cost less accumulated depreciation. Depreciation of machinery and
equipment is computed by the declining or straight-line methods over the
estimated useful lives of the related assets (approximately 3-15 years).
Software developed or obtained for internal use is depreciated using the
straight-line method over the estimated useful life of the software, generally
not in excess of two years.
INTANGIBLE ASSETS / INTELLECTUAL PROPERTY - The company amortized the intangible
assets and intellectual property acquired in connection with the acquisition of
Fan Club Entertainment over sixty months on a straight - line basis, which is
the life of the Marvel Enterprises, Inc. agreement. The company amortized the
intangible assets and intellectual property acquired from QuikCAT.com, Inc.
("QuikCAT") over sixty months on a straight - line basis, which is the expected
life of the technology.
6
LONG - LIVED ASSETS - The company reviews its long-lived assets for impairment
when changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets under certain circumstances are reported
at the lower of carrying amount or fair value. Assets to be disposed of and
assets not expected to provide any future service potential to the company are
recorded at the lower of carrying amount or fair value less cost to sell. To the
extent carrying values exceed fair values, an impairment loss is recognized in
operating results.
SOFTWARE DEVELOPMENT COSTS - The company capitalizes software license and
development costs, subject to net realizable value considerations. These costs
are included in the balance sheet in property and equipment and are amortized
over 24 months using the higher of the straight line method or the ratio of
current gross revenues to the total of the current and expected future revenues
of the product. Costs capitalized in 2003 of $145,802 were sold as part of the
iAccele sale on December 29, 2003 and included expenses to adopt licensed
internet acceleration software to the Japanese Market.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts receivable, notes
receivable, accounts payable and current portion of long term debt- affiliated
party approximate fair value based on the short-term maturity of these
instruments.
DEBT AND EQUITY FINANCING OF CAPITAL TRANSACTIONS - BENEFICIAL CONVERSION
FEATURES - The company has 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
requires 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. The
beneficial conversion feature 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.
FAN CLUB REVENUE RECOGNITION - Fan Club's has been refocused as a creative
design studio focused on web and traditional print media, including providing
services to the official Fan Club in Japan for Marvel Entertainment Inc. and
Marvel Characters Inc. Revenue was derived from the activities associated with
Marvel and other services, primarily received from Cyberbred. These activities
include the following:
o Website development- Fan Club develops websites.
o Marvel Fan Club Magazine - Fan Club creates and produces a magazine
for the Marvel Fan Club.
o Marvel Fan Club Merchandising - Fan Club creates and sells Marvel
merchandise for the Marvel Fan Club to fan club members.
o Event Planning - Fan Club assists in the planning and running of
events for Marvel Fan Club and other organizations.
The company recognizes Fan Club revenue when it is realized. We consider
revenue realized when the product has been shipped or the services have been
provided to the customer, the work has been accepted and collectibility is
reasonably assured. Deferred revenue includes amounts billed to customers for
whom 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.
7
REX TOKYO REVENUE RECOGNITION - Rex Tokyo's revenue was derived from the
following:
o Sale of equipment to major stores.
o Installation of machines and fittings to major stores.
o Maintenance of machines and other equipment in major stores.
The company recognizes Rex Tokyo revenue when it is realized. We consider
revenue realized when the product has been shipped or the services have been
provided to the customer, the work has been accepted by the customer and
collectibility is reasonably assured. The company accounts for certain
construction contracts/projects on the percentage-of-completion method and under
this method, income is recognized as work on contracts progresses, but estimated
losses on contracts in progress are charged to operations immediately.
IA GLOBAL ACQUISITION CO REVENUE RECOGNITION - IA Global Acquisition Co.'s
revenue was derived from providing data acceleration services to customers. The
company recognizes IA Global Acquisition Co. revenue when it is realized. We
consider revenue realized when the product has been shipped or the services have
been provided to the customer, the work has been accepted by the customer and
collectibility is reasonably assured.
ADVERTISING COSTS - Advertising costs are expensed as incurred. There were no
advertising costs incurred for the three and nine months ended September 30,
2004 and 2003.
FOREIGN CURRENCY TRANSLATION - Foreign entities whose functional currency is the
local currency translate net assets at the end of period rates and income and
expense accounts at average exchange rates for the three and nine month periods.
Adjustments resulting from these translations are reflected in the consolidated
balance sheet under unrealized foreign currency exchange and the statement of
operations under other income (expense).
STOCK BASED COMPENSATION - The company has stock-based employee compensation
plans. The company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. No stock-based employee compensation
cost is reflected in the net loss, as all stock options granted under the plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net loss and
earnings per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
to stock-based employee compensation. The company accounts for non-employee
stock transactions in accordance with SFAS No. 123 and EITF 96-18.
For the three months ending For the nine months ending
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss available to common
shareholders, as reported ............. $ (284,523) $ (694,460) $(1,048,966) $(2,759,349)
Deduct: total stock-based employee
compensation determined under fair
value based method for all awards, net
of related tax effects ................ (71,290) (12,846) (154,111) (119,692)
----------- ----------- ----------- -----------
Pro-forma net loss available to common
shareholders .......................... $ (355,813) $ (707,306) $(1,203,077) $(2,879,041)
=========== =========== =========== ===========
Earnings per share:
Basic and diluted- as reported ........ $ - $ (0.01) $ (0.01) $ (0.05)
Basic and diluted- pro-forma .......... $ - $ (0.01) $ (0.02) $ (0.05)
8
The above stock-based employee compensation expense has been determined
utilizing a fair value method, the Black-Scholes option-pricing model.
In accordance with SFAS 123, the fair value of each option grant has been
estimated as of the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
For the Nine Months Ended
September 30,
-------------------
2004 2003
---- ----
Risk free interest rate .......... 3.75% 3.75%
Expected life .................... 10 years 10 years
Dividend rate .................... 0.00% 0.00%
Expected volatility .............. 65% 65%
MANAGEMENT SERVICES AGREEMENT - The company and Rex Tokyo implemented a
Management Services Agreement during the three months ended September 30, 2004.
Under this agreement, the company provides financial, management and capital
markets support. This agreement was effective April 1 2004. Thereafter, this
agreement will be automatically renewed for successive one year periods starting
on October 1st in the absence of written notice of termination by either party
delivered no less than three months prior to the date on which this agreement
would otherwise terminate. Rex Tokyo paid the company $164,000 during the three
months ending September 30, 2004 under this agreement and is required to pay
approximately $82,000 every six months.
COMPREHENSIVE INCOME - The company has adopted SFAS No. 130 Reporting
Comprehensive Income. This statement establishes rules for the reporting of
comprehensive income and its components. Comprehensive income consists of net
loss to common shareholders and foreign currency translation adjustments and is
presented in the Statements of Operations.
INCOME TAXES - Income tax expense is based on reported income before income
taxes. Deferred income taxes reflect the effect of temporary differences between
asset and liability amounts that are recognized for financial reporting purposes
and the amounts that are recognized for income tax purposes. These deferred
taxes are measured by applying currently enacted tax laws. Valuation allowances
are recognized to reduce the deferred tax assets to the amount that is more
likely than not to be realized. In assessing the likelihood of realization,
management considers estimates of future taxable income.
NET LOSS PER SHARE - The company has adopted SFAS 128, "Earnings per Share."
Loss per common share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. The common stock equivalents have not been included as they are
anti-dilutive.
DIVIDEND POLICY - The company has never paid any cash dividends and intends, 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. Rex
Tokyo is restricted from paying dividends to its stockholders under the terms of
its loan with Nihon Shinko Bank Co Ltd.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
9
RECENTLY ISSUED 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 the company's 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 the company's 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 the
company's Consolidated Financial Statements.
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 the company's
Consolidated Financial Statements. The sale of iAccele operations on December
29, 2003 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 the company's
Consolidated Financial Statements.
10
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 the company's Consolidated
Financial Statements.
NOTE 3. ACQUISITIONS AND DIVESTITURE
The acquisition of Rex Tokyo Co. Ltd. ("Rex Tokyo") and QuikCAT.com, Inc.
("QuikCAT") are key components of our strategy to shift our business model to
the development of media, entertainment and technology products and services.
REX TOKYO CO LTD
On March 18, 2004, the company executed Share Purchase Agreements and a
Stockholders Agreement with Rex Tokyo and certain of its management, pursuant to
which we acquired a 60.5% ownership interest in Rex Tokyo. The company purchased
1,000 shares of Rex Tokyo stock for 100 million Yen, or approximately $941,000
based on the Japanese Yen/US dollar exchange rate on March 25, 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 issued at $.30 per share which is
the average closing price five days before closing. The Stockholder's Agreement
places restrictions on the sale of Rex Tokyo stock in the future, requires
existing management to operate the business and places conditions on the board
of director composition. This agreement can be terminated under certain
conditions. The company used working capital to fund the cash portion of the
purchase price.
Rex Tokyo is a supplier and maintenance contractor of parts to the Pachinko
and machine gaming industry in Japan. Rex Tokyo is a supplier and fitter of
installations for both new Pachinko parlors and stores that are carrying out
re-fittings. It supplies items such as automatic medal dispensing machines,
automatic cigarette butt disposal systems, lighting systems and Pachinko balls
and other Pachinko accessory products as well as numerous new Pachinko slot
machines.
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, it is
authorized to certify second hand machines. Also, it is 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 company expanded this business during the second and third quarters of
2004 by acquiring new sales offices in Kyushu and West Tokyo, Japan. In
addition, Rex Tokyo closed a joint venture agreement with Kyushu Tesco Co Ltd.
for the supply of lighting fixtures to the Pachinko industry in October, 2004.
11
The cost to acquire these assets has been preliminarily allocated to the
assets acquired according to estimated fair values and is subject to adjustment
when additional information concerning asset valuations is finalized. The
preliminary allocation is as follows:
Purchase price:
Cash ...................................................... $ 941,000
Stock ..................................................... 138,600
-----------
1,079,600
-----------
Net Assets Acquired (3/18/04):
Total Assets .............................................. 5,549,826
Liabilities ............................................... (4,618,949)
-----------
Net Assets at 3/18/04 ..................................... 930,877
Reserve ................................................... (22,159)
Plus 10 million Yen contributed by other .................. 92,328
Plus cash paid by IA Global ............................... 941,000
-----------
1,942,046
% Acquired ................................................ 60.5%
-----------
1,174,938
-----------
Negative goodwill allocated to property and equipment..... $ (95,338)
===========
The results of operations of Rex Tokyo are included in the Consolidated
Statements of Operations for the period March 18, 2004 to September 30, 2004.
The pro-forma financial data on the acquisition is included in this section
below:
As Reported, Pre-Acquisition Pro Forma,
Nine Months Operations of Nine Months
Ended Rex Tokyo Ended
September 30, January 1- September 30,
2004 March 18, 2004 2004
------------ -------------- -------------
Revenues ........................ $ 19,861,664 $ 5,639,384 $ 25,501,048
Loss before extraordinary items . (1,048,966) 111,505 (937,461)
Net loss ........................ (1,048,966) 111,505 (937,461)
Loss per common share ........... (0.01)
There were no material, nonrecurring items included in the reported the
pro-forma results.
IA GLOBAL ACQUISITION CO / QUIKCAT.COM, INC.
The company had been developing its own proprietary Internet accelerator
product in conjunction with QuikCAT, an Ohio based private company. Development
of the interface for this product was outsourced, with the core patented
technology being licensed from QuikCAT.
12
The company owns the client interface software that was developed to work
with the iNet Client software, and receives a 5% royalty from QuikCAT Australia
on their net profits from the sales of their services that incorporate the
client interface. The company has 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.
The company was 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. In
addition, QuikCAT was 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. The license agreement
required QuikCAT to place the source code for the software in independent escrow
and the source code may be released to us under certain conditions. This license
was acquired by the company as part of the acquisition of QuikCat's assets
described below. As part of the company's strategy to develop our multi-media
compression technology and Internet data acceleration products, the company is
in discussions with the parent company of QuikCAT, Innovative Computing Group,
Inc., to acquire certain assets of ICG that relate to the technology that the
company acquired from QuikCAT on June 10, 2004. There is no assurance that the
ICG asset acquisition will be closed.
On June 10, 2004, the company closed the acquisition of the intellectual
property and other assets of QuikCAT. The purchase price was $700,000 in cash,
plus the assumption of certain contracts, agreements and liabilities. QuikCAT
had filed for bankruptcy in the United States Bankruptcy Court, Northern
District of Ohio and the company had submitted a bid on February 5, 2004. The
acquisition was funded from working capital.
QuikCAT is a leading multi-media compression technology company, which has
developed several patented video, picture and audio compression algorithms
(codecs). By utilizing a part of this technology, the company developed a
proprietary Internet acceleration product called, ("iNet").
The company contributed the assets of QuikCAT and a loan to Innovative
Computing Group, Inc., parent company of QuikCAT, of $101,629 to IA Global
Acquisition Co. on June 30, 2004 in exchange for a 90.5% equity interest in IA
Global Acquisition Co. The founding shareholder, the wife of the Chief Executive
Officer of our 47.54% owned affiliate, QuikCAT Australia, acquired 9.5% of IA
Global Acquisition Co. for $500 on June 30, 2004.
On September 15, 2004, the company announced the refocusing of its holdings
related to QuikCAT and QuikCAT Australia. The company's focus will be on the
development of its multi-media compression technologies for use in video,
picture and audio products and it will pursue licensing contracts with third
party vendors. The company has decided to divest the iNet business outside of
North America to its joint venture partner QuikCAT Australia.
As part of this transaction, the company is assigning its intellectual
property rights in the iNet business outside of North America and its 47.54%
interest in QuikCAT Australia to QuikCAT Australia, for notes totaling $150,000
that are due from December 2004 thru June 2005. The notes are secured by the
assets of QuikCAT Australia until QuikCAT Australia raises $100,000 in capital.
Notes issued to the company by QuikCAT Australia in 2003 and 2004 totaling
approximately $102,000 and shares acquired for $50,000 were cancelled as part of
this transaction.
13
The company also granted QuikCAT Australia an exclusive option to acquire
the North American iNet business for $213,000 in cash. This option expires on
February 28, 2005. On October 8, 2004, the company announced that the
transaction with QuikCAT Australia closed.
There is no guarantee that QuikCAT Australia will be successful in raising
the capital it needs to pay off the $150,000 of notes to the company and to
exercise its option to acquire the North America iNet business. There is no
guarantee that the company will be successful in closing licensing agreements
necessary to the development of its multi-media compression technology business.
The cost to acquire these assets has been preliminarily allocated to the
assets acquired according to estimated fair values and is subject to adjustment
when additional information concerning asset valuations is finalized. The
preliminary allocation is as follows:
Purchase Price:
Cash ............................... $ 700,000
---------
Net Assets Acquired (6/10/04):
Accounts receivable ................ 34,506
Fixed assets ....................... 5,000
---------
Total assets ....................... 39,506
---------
Identifiable intangible assets ..... $ 660,494
=========
The company fully consolidated the results of operations of the majority
owned IA Global Acquisition Co. in the Consolidated Statements of Operations for
the period June 10, 2004 to September 30, 2004 because the subsidiary incurred
losses for this period and we do not expect to recover these losses from the
minority owner.
Historical financial statements of QuikCAT and pro forma financial
information relating to this transaction, as prescribed by Regulation S-X,
promulgated by the Securities and Exchange Commission, are not required.
NOTE 4. ACCOUNTS RECEIVABLE/ CUSTOMER CONCENTRATION
Accounts receivable was $3,493,512 and $1,266,335 as of September 30, 2004
and December 31, 2003, respectively. The company had the following customers
with sales in excess of 10% for the nine months ended September 30, 2004 and
2003:
2004 2003
---- ----
Dynam, Inc. 50.9% 0.0%
Quest Co Ltd 0.0% 78.0%
ITCA Co Ltd 0.0% 20.0%
Dynam is a Rex Tokyo customer. Quest and ITCA were iAccele customers and
this business was sold on December 29, 2003. There were no other customers in
excess of 10% in the respective periods.
The company anticipates that significant customer concentration will
continue for the foreseeable future.
NOTE 5. INVENTORIES
Inventories were $65,653 and $0 as of September 30, 2004 and December 31,
2003, respectively. The inventory consisted of raw materials.
14
NOTE 6. PREPAID COSTS
Prepaid costs were $144,587 and $438,142 as of September 30, 2004 and
December 31, 2003, respectively. Such costs as of September 30, 2004 consisted
of prepaid insurance costs incurred by the company and prepaid Fan Club expenses
related to future revenue. Such costs as of December 31, 2003 consisted of costs
incurred by Fan Club for revenue that was deferred as of December 31, 2003.
NOTE 7. OTHER CURRENT ASSETS
Other current assets were $697,497 and $296,163 as of September 30, 2004
and December 31, 2003, respectively. Such assets as of September 30, 2004
included marketable securities, a production cost advance and other assets held
by Rex Tokyo. Such assets as of December 31, 2003 consisted of a receivable from
GM2 of $279,356 related to the sale of iAccele on December 29, 2003. This cash
was received on January 16, 2004.
NOTE 8. EQUIPMENT
Equipment was $359,864 and $812 as of September 30, 2004 and December 31,
2003, respectively, net of accumulated depreciation of $217,339 and $0. The
equipment consisted of leasehold improvements, capitalized software licenses,
vehicles and equipment. Total depreciation expenses were $46,936 and $133,008
for the three and nine months ended September 30, 2004, respectively.
NOTE 9. INTANGIBLE ASSETS
Intangible assets as of September 30, 2004 consisted of the following:
Amount Estimated Life
------ --------------
Licensing fee ...................... $ 1,442,481 2-5 years
Other intangible ................... 950,239 5 years
-----------
2,392,720
Less: accumulated amortization ..... (361,936)
-----------
Intangible Assets, net .... $ 2,030,784
===========
Total amortization expense for the three and nine months ended September
30, 2004 amounted to $141,760 and $251,438, respectively. The license fee
amortization was $182,723 and the amortization of other intangibles was $68,715
for the nine months ended September 30, 2004.
The fair value of the Fan Club intellectual property acquired was estimated
using a discounted cash flow approach based on future economic benefits
associated with the Marvel Enterprises contract. The fair value of the QuikCAT
intellectual property acquired was estimated using a discounted cash flow
approach based on future economic benefits associated with the intellectual
property.
Management's evaluation of the fair value allocated to the aforementioned
Fan Club and QuikCAT assets and liabilities acquired did not result in any
excess values for goodwill being acquired.
NOTE 10. LOAN TO/INVESTMENT IN QUIKCAT AUSTRALIA PTY LTD
During the nine months ended September 30, 2004, the company made unsecured
loans totaling $26,062 to QuikCAT Australia. During the year ended December 31,
2003, the company made loans to QuikCAT Australia in the aggregate amount of
$74,849. Interest on these loans accrues at 3% after certain profit targets are
achieved. The company acquired 47.5% of QuikCAT Australia in 2003.
15
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%. This
investment has been reduced to $5,634 as of September 30, 2004 due to losses
incurred by QuikCAT Australia.
On October 8, 2004, the company assigned its intellectual property rights
in the iNet business outside of North America and its 47.54% interest in QuikCAT
Australia to QuikCAT Australia, for notes totaling $150,000 that are due from
December 2004 thru June 2005. The notes are secured by the assets of QuikCAT
Australia until QuikCAT Australia raises $100,000 in capital. Notes issued to
the company by QuikCAT Australia in 2003 and 2004 totaling approximately
$102,000 and shares acquired for $50,000 were cancelled as part of this
transaction. There is no guarantee that QuikCAT Australia will be successful in
raising the capital it needs to pay off the $150,000 of notes to the company and
to exercise its option to acquire the North America iNet business.
NOTE 11. DEBT - AFFILIATED PARTY
Debt was $788,846 and $0 as of September 30, 2004 and December 31, 2003,
respectively.
On June 30, 2004, Rex Tokyo entered into a 100,000,000 Yen or $923,275
working capital loan with Nihon Shinko Bank Co for use as operating capital. The
loan requires twenty three monthly payments of 4,167,000 Yen or approximately
$37,500 at the current exchange rate plus interest starting July 29, 2004, with
a final payment of 4,159,000 Yen, or $37,500 at the current exchange rate plus
interest due on June 29, 2006. The loan accrues interest at 9.75% based on the
Japanese Yen TIBOR rate, which is adjustable quarterly. The loan is cosigned by
the CEO of Rex Tokyo and has certain covenants, including interest coverage,
minimum assets and minimum equity. Certain activities are prohibited without
consent, including distribution of profits to stockholders, entry into new
businesses and leases in excess of certain targets. The loan is not secured.
Inter Asset Japan and Terra Firma, significant shareholders in the company,
collectively own approximately 14.5% of Nihon Shinko Bank Co. However, IAJ does
not control Nihon Shinko Bank Co and the transaction and terms were established
on an arms-length basis.
NOTE 12. RELATED PARTY RELATIONSHIPS WITH INTER ASSET JAPAN
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" and
together with IAJ LBO Fund, PBAA, and Terra Firma, our "Controlling
Stockholders") collectively hold approximately 81.8% of the common shares of the
company as of September 30, 2004. Our Controlling Stockholders (other than IAJ
which was not a stockholder at the time) stated in a Schedule 13D filed with the
Securities and Exchange Commission ("SEC") on July 6, 2004, and have
subsequently confirmed orally, that they may be deemed to constitute a "group"
for the purposes of Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"). Mr. Alan Margerison, our Director, President and Chief
Executive Officer, currently serves as the Chairman of IAJ, and together with
his business partner, Mr. Hiroki Isobe, they control each of our Controlling
Stockholders.
The following table provides details on the affiliated parties owned or
controlled by each of the company's controlling stockholders and certain other
entities, as of September 30, 2004, that are relevant for purposes of
understanding the related party transactions that have taken place:
16
Ownership:
Inter Asset Japan LBO No. 1 Fund owns:
InfoshowerX Co., Ltd...............42.7%
IA Global, Inc.....................35.3%
PBAA Fund Ltd. owns:
IA Global, Inc.....................30.1%
Terra Firma Fund Ltd. owns:
IA Global, Inc.....................14.6%
Nihon Shinko Bank Co................6.0% (6)
Inter Asset Japan Co., Ltd. owns:
IA Global, Inc......................1.9%
Cyberbred Co., Ltd..................0.0% (1)
Nihon Shinko Bank Co................8.5% (6)
IA Global, Inc. owns:
iAccele Co. Ltd.....................0.0% (2)
QuikCAT Australia Pty Ltd..........47.54% (5)
Fan Club Entertainment Co., Ltd. ..67.0%
Rex Tokyo Co. Ltd..................60.5% (3)
IA Global Acquisition Co...........95.0% (4)
InfoshowerX Co. Ltd. owns:
iAccele Co. Ltd....................23.1%
Mr. Kazunari Ito (CEO of Fan Club Entertainment Co. Ltd., Cyberbred Co.
Ltd, and Cyberholdings Co. Ltd)
Cyber Holdings Co. Ltd............100.0%
Cyberbred Co. Ltd..................69.0% (1)
Cyber Holdings Co. Ltd. owns:
Fan Club Entertainment Co. Ltd.....33.0%
(1) Mr. Kazunari Ito, Chief Executive Officer of Fan Club Entertainment Co.,
Ltd., Cyberbred Co., Ltd. and Cyberholdings Co. Ltd., repurchased the 27.1%
ownership interest in Cyberbred from IAJ on September 29, 2003.
(2) The company sold its 76.9% interest in iAccele Co. Ltd on December 29, 2003.
(3) The company acquired its 60.5% interest in Rex Tokyo Co Ltd on March 18,
2004.
(4) The company acquired its 90.5% interest when it contributed the assets of
QuikCAT and a loan to Innovative Computing Group, Inc. of $101,629 to IA Global
Acquisition Co on June 30, 2004 in exchange for a 90.5% in this corporation. the
company increased its ownership in IA Global Acquisition Co on October 8, 2004
to 95% by acquiring 4.5% for $250 from the wife of the Chief Executive Officer
of QuikCAT Australia.
(5) The company sold its 47.54% interest to QuikCAT Australia Pty Ltd on October
8, 2004.
(6) Inter Asset Japan effectively owns 8.5% thru its 70% ownership of PBA
Financial Co Ltd.
17
DEBT TO PREFERRED B SHARES CONVERSION
The company owed David Badner, a stockholder and a former consultant of the
company, $563,857, as of September 25, 2002, pursuant to a convertible
promissory note, dated May 31, 2002 (the "Convertible Promissory Note"). The
company has been informed by IAJ that, as of September 25, 2002, IAJ LBO Fund,
our largest stockholder, acquired the Convertible Promissory Note from Mr.
Badner. The interest rate under the Convertible Promissory Note was 10% per
annum.
During the three months ended December 31, 2002, IAJ LBO Fund loaned the
company an additional $500,000 under the Convertible Promissory Note, thereby
increasing the principal amount to $1,063,857. The proceeds from this additional
loan were used for working capital purposes.
The Convertible Promissory Note was convertible into the company's Series B
convertible preferred stock. Each share of Series B convertible preferred stock
is convertible into 10,000 shares of the company's common stock. On June 30,
2003, IAJ LBO Fund converted the principal amount of the Convertible Promissory
Note, as well as approximately $95,000 of accrued interest thereon, into 1,158
shares of the company's 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.
ACQUISITION OF IACCELE CO LTD
On February 10, 2003, the company 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 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.
iAccele was engaged in the business of providing an Internet data
transmission acceleration service. Its main product offering is named after the
company, iAccele. This service allowed narrow band users, as well as broadband
users, to accelerate their access to the Internet, enabling them to increase the
speed of downloading and uploading data from their local machine to the
Internet. This speeds up web browsing and network services and accelerates email
services. There was no need for the user to change his network provider
connection. The iAccele product was based on a repeat subscriber business model.
Subscribers to the service signed up for a 3 month or 1 year license, which
provided them with a copy of the iAccele software and full access to the
acceleration server.
In order to finance this purchase, the company borrowed 100.0 million
Japanese Yen from PBAA Fund Ltd. Mr. Alan Margerison, our Director, President
and Chief Executive Officer, currently serves as the Chairman of IAJ, and
together with his business partner, Mr. Hiroki Isobe, they control PBAA.
The principal amount of this loan, together with interest thereon at 4.50%
per annum, was due and payable on January 31, 2004. Pursuant to the terms of the
loan, the company deferred payment of the principal amount of this loan, but not
accrued interest, for one additional year with the consent of PBAA.
If this loan was not repaid by January 31, 2004, PBAA would be afforded the
right to convert any portion of the then unpaid principal amount of the loan, as
well as any then accrued but unpaid interest thereon, into shares of the
company's common stock at a per share conversion price equal to the Japanese Yen
equivalent of 80% of the average of the US dollar closing price of the common
stock on the American Stock Exchange in the 20 consecutive trading days
immediately prior to the date upon which PBAA gave the company notice of
conversion, or, if the common stock is not then traded on the American Stock
Exchange, the closing bid price for the common stock as reported by the Nasdaq
Stock Market or such other primary exchange or stock bulletin board on which the
common stock is then traded. By way of illustration, had such conversion
occurred on February 10, 2003, PBAA would have received 7,335,145 shares of
common stock which, when added to those shares currently beneficially owned by
PBAA and its affiliates would increase their collective ownership of the
company's common stock to approximately 78.9%.
18
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 private 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. InfoShowerX has agreed
to indemnify the company for any damages that may result from representations
and warranties made to the company by iAccele to acquire the company's equity
interest thereon.
IAJ and its affiliates own an aggregate of 42.7% and Hiroshi Kubori, who
became a director of the company after the acquisition and functions as CEO of
iAccele, owns approximately 5% of the capital stock of InfoShowerX. InfoShowerX
owns the balance of the capital stock of iAccele, or 23.1%.
InfoShowerX had indebtedness owed to IAJ. A portion of the payments that
InfoShowerX received from iAccele, noted above, were used to repay some of its
indebtedness to IAJ and its affiliates.
Pursuant to a one-year outsourcing agreement, dated as of December 20,
2002, iAccele had provided business services to InfoShowerX and InfoShowerX had
provided technology services and office space to iAccele. A new agreement was
signed between the two companies for the term April 1, 2003 to July 31, 2003.
The primary factors that resulted in $1,178,000 being allocated to the
intangibles for the purchase of iAccele is due to the company acquiring $348,000
of potential liabilities in excess of the $569,000 of identifiable assets in
addition to the $830,000 of cash paid at closing. Although the company acquired
76.9% of iAccele there can be no assurance the minority interest holder would
ever pay their portion of any cash shortfalls.
The results of operations of iAccele are included in the Consolidated
Statements of Operations for the period February 11, 2003 to December 29, 2003.
The company 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"), IAJ owns approximately 66% of foreignTV
Japan. The company 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
expected to receive about $1,200,000 over the term of these leases for the
equipment under lease. The terms of the leases were 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 was 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 were to be returned to the company upon termination of
the leases.
19
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 were depreciated over three years.
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.
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.
On December 2, 2003, the company 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, the company issued 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.
The company 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, the company executed a share purchase agreement to
sell our 76.9% interest in iAccele for approximately $280,000 to GM2 Co. Ltd., a
private Japanese corporation ("GM2"). In addition, iAccele had approximately
$700,000 of liabilities that had previously been reflected in the consolidated
balance sheet of our company. In connection with the sale, we agreed to cancel
approximately $300,000 of inter-company debt owed by iAccele to us. The company
received the funds from GM2 on January 16, 2004.
IAJ, our majority shareholder, holds a warrant to purchase a 25% equity
interest in GM2 and has loaned GM2 approximately $500,000. However, IAJ does not
control GM2. The transaction price and terms were established on an arms-length
basis and this was the only offer the company received for iAccele.
The company acquired iAccele with the intent to become a wholesale
distributor of an Internet acceleration product. However, the company
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, the company sold its interest in iAccele, and has
instead been developing its own proprietary Internet accelerator product in
conjunction with QuikCAT, an Ohio based private company, that was the core
technology provider to iAccele. The company licensed the core technology from
QuikCAT and has also developed a user interface for this Internet acceleration
product, which the company believes will enhance the commercial reception of the
product.
20
$2.0M FINANCING
On June 30, 2003, the company agreed to sell to PBAA, 13,333,333 shares of
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. The company recorded a deemed dividend of
$693,333 in connection with this transaction.
ACQUISITION OF FAN CLUB ENTERTAINMENT CO LTD
On August 5, 2003, the company executed a Share Purchase Agreement to
acquire from Cyber Holdings Co Ltd ("Cyber Holdings") a 67% equity interest in
Fan Club 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 the
company's 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 the company's common stock issued at $.472
per share, which is the average closing price for the five days prior to
closing.
The terms of the Share Purchase Agreement require Cyber Holdings to
transfer the rights under the Marvel agreement (described below) to Fan Club
within five months or make its best efforts to fully cooperate in any
commercially reasonable arrangement designed to provide the benefit of the
Marvel agreement to Fan Club. At this time, this transfer has not taken place.
The company used its working capital to fund the cash portion of the purchase
price.
The Share Purchase Agreement provides that the company will receive a 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 shares. Cyber Holdings' obligation had not been paid as of
December 31, 2003. A receivable was not booked as of December 31, 2003 due to
the lack of certainty over the receipt of the funds.
On February 5, 2004, the company 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
Enterprises, Inc. ("Marvel Enterprises") and Marvel Characters, Inc. ("Marvel
Characters" and collectively with Marvel Enterprises, "Marvel") to manage their
fan club in Japan. The Marvel Characters hold the rights to well known
characters such as Spider Man, The Hulk, X-Men, Daredevil, Captain America, The
Punisher and many others. Cyberbred currently holds the rights to manage the
Universal Studio 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 that is discussed above. This Subcontract
Agreement expires May 31, 2008, and is cancelable under certain conditions. The
134,000,000 Yen payment was advanced to Cyberbred in late July, 2003 to fund the
100,000,000 Yen payment to Marvel under this agreement and to provide working
capital for Fan Club. There were no repayment requirements.
Mr. Kazunori Ito, CEO of Fan Club, has been CEO of both Cyberbred and Cyber
Holdings. As of June 30, 2003, Mr. Ito owned equity interests of 41.9% in
Cyberbred and 100% in Cyber Holdings.
21
There was no prior material relationship between the company (and any of
its affiliates) and Fan Club. However, an affiliate of IAJ LBO Fund, the
company's largest stockholder, owned approximately 27% of the equity in
Cyberbred. This interest was sold to Mr. Ito on September 29, 2003.
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.
The results of operations of Fan Club are included in the Consolidated
Statements of Operations for the period August 5, 2003 to September 30, 2004.
During the quarter ending September 30, 2004, this business was
repositioned by creating a creative design studio focusing on web and
traditional print media delivery, including the Marvel characters through its
work in providing services to the official Fan Club in Japan for Marvel
Entertainment Inc. and Marvel Characters Inc.
$500,000 FINANCING
On November 11, 2003, the company agreed to sell to IAJ, 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. The company recorded a deemed dividend of
$106,667 in connection with this transaction.
$400,000 FINANCING
On December 29, 2003, the company agreed to sell to PBAA, a related party,
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.
$1,500,000 CONVERTIBLE NOTE
On March 21, 2004, PBAA, an affiliate of the company's majority
shareholder, 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 5 million shares of our common stock by July
31, 2004, 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 price was at market value and an allocation was not required for a
beneficial conversion feature under EIFT 98-5 or EITF 00-27.
On June 18, 2004, the company announced that it reached agreement with PBAA
to convert the $1,500,000 Note, plus accrued interest of approximately $20,000,
into 5,065,037 shares of our common stock in accordance with the terms of the
Note.
NOTE 13. EQUITY TRANSACTIONS
During the nine months ended September 30, 2004, the following stockholder
equity events occurred:
In connection with the company's initial public offering, 167,843 units
were issued to the underwriter with each unit consisting of one share of common
stock and a warrant to purchase one share of common stock with an exercise price
of $9.00 per share. The warrants expired in May 2004.
22
On June 15, 2003, the company granted 4,975,000 stock options 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 annually over three years. Two million of these options
expired on April 3, 2004 when three directors resigned from the board of
directors. Four hundred and seventy five thousand options are performance based
stock options and none of the performance based stock options were earned. The
remaining 2,500,000 stock options issued to the officers and directors expire on
June 15, 2013.
On January 12, 2004, the company granted 400,000 stock options at an
exercise price of $.30 per share to an executive of the company. These options
vest annually over three years and expire on January 12, 2014.
On January 12, 2004, the company entered into an employment agreement with
Mark Scott to serve, for a term of two years, as our Chief Financial Officer at
an annual salary of $150,000. Mr. Scott is eligible to receive compensation,
including options, bonuses and benefits, at the discretion of our compensation
committee. Mr. Scott works full time for the company. This employment agreement
also contain provisions for confidentiality for the term of the agreement and
thereafter. The employment agreement also provides for a severance payment in
the amount of 20% of the executive's annual base salary in the event that the
employee is terminated by us without cause.
On February 25, 2004, the company granted 1,000,000 stock options at an
exercise price of $.30 per share to employees of Fan Club. These options vest
annually over three years and expire on February 25, 2014. On August 1, 2004,
400,000 of these stock options expired.
On March 18, 2004, the company 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, PBAA, an affiliate of the company's majority
shareholder, invested an additional $1.5 million into the company in a private
placement. Under the financing terms, the company issued a $1.5 million
convertible note, convertible into approximately 5 million shares of our common
stock by July 31, 2004, representing a conversion price per share of $0.30,
which was the fair-market value of the trailing five-day average closing price
of the company's common stock ending March 5, 2004, the date PBAA committed to
make the investment.
On March 18, 2004, the company granted 1,500,000 stock options at an
exercise price of $.30 per share to employees of Rex Tokyo. These options vest
annually over three years and expire on March 18, 2014.
On April 12, 2004, 1,678,433 warrants traded on the American Stock Exchange
under the ticker symbol IAO.WS were not exercised and became void. Each warrant
was exercisable to purchase one common share of IA Global Inc. at a price of
$3.50 per share.
On May 18, 2004, the company granted 300,000 stock options in total at an
exercise price of $.20 per share to three directors of the company. These
options vest quarterly over three years and expire on May 18, 2014.
On May 18, 2004, the company granted 100,000 stock options at an exercise
price of $.20 per share to an executive officer of the company. These options
vest quarterly over three years and expire on May 18, 2014.
On June 10, 2004, the company granted 150,000 stock options in total at an
exercise price of $.34 per share to executive officers of Rex Tokyo. These
options vest quarterly over three years and expire on June 10, 2014.
On June 10, 2004, the company granted 400,000 stock options at an exercise
price of $.34 per share to an executive officer of IA Global Acquisition Co.
These options vest quarterly over three years and expire on June 10, 2014.
23
On June 17, 2004, a previous executive officer of the company exercised
options totaling 500,000 shares for $40,000.
On June 18, 2004, the company announced that it reached agreement with PBAA
to convert the $1,500,000 Note, plus accrued interest of approximately $20,000,
into 5,065,037 shares of our common stock in accordance with the terms of the
Note.
The company's stockholders approved 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 May 14, 2004
annual meeting of its stockholders.
On July 8, 2004, the company issued 30,000 shares to Martin Stein for legal
services. The shares were valued at the fair market price of $.45 per share or
$13,500.
NOTE 14. THIRD PARTY LICENSES AND AGREEMENTS
The company relies on certain agreements and technologies we license from
third parties to operate our business.
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.
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 that is discussed above. This Subcontract
Agreement expires May 31, 2008, and is cancelable under certain conditions.
On July 30, 2004 and August 1, 2004 Fan Club signed two license agreements
with Total Insurance Management for use in building Internet platforms,
including content. The license costs of $540,930 were capitalized and are being
amortized the two year life of the agreements.
NOTE 15. COMMITMENTS AND CONTINGENCIES
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. On February
9, 2004, Mr. Krakowski filed for arbitration with the American Arbitration
Association in East Providence, Rhode Island. Arbitration proceedings with Mr.
Krakowski are on-going.
As part of the September 25, 2002 Agreement and Assignment (the "Agreement
and Assignment") between the company, IAJ and David Badner, a major stockholder
and former consultant to the company, Mr. Badner has agreed to indemnify and
hold the company harmless against certain expenses, including, among other
things, any fees and damages arising from the Krakowski matter. On November 5,
2004, we were notified that, in connection with the arbitration matter initiated
by Mr. Badner described below, Mr. Badner intends to contest his indemnification
obligation.
24
On November 5, 2004, the company received notice from the American
Arbitration Association in New York City that Mr. Badner has commenced an
arbitration proceeding against the company, our major shareholder, Inter Asset
Japan Co Ltd, and certain officers of the company and Inter Asset Japan Co Ltd
relating to the Agreement and Assignment. Mr. Badner alleges (i) unrestricted
shares of the company's stock to which he was entitled under the agreement were
not delivered as per the terms of the agreement, (ii) unspecified commitments to
engage in future business ventures with Mr. Badner were not made, and (iii)
damages resulting from intentional misrepresentation. Mr. Badner is seeking
damages of $6 million plus interest and costs and punitive and exemplary damages
in an amount to be determined.
The company believes that these allegations are entirely without merit and
will defend against these claims. There is no guarantee that the company has
insurance to cover these claims or that it will be successful in defending these
claims.
As part of the company's strategy to develop our multi-media compression
technology products, the company is in discussions with the parent company of
QuikCAT, Innovative Computing Group, Inc. ("ICG"), to acquire certain assets of
ICG that relate to the technology that the company acquired from QuikCAT on June
10, 2004. There is no assurance that the ICG asset acquisition will be closed.
NOTE 16. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
At the beginning of 2003, the company revised its 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 licensing, to a renewed focus on developing media technology
products, services and licensing revenues. To this end, we may develop such
media entertainment and technology products and services internally, or acquire
them from other parties.
We are organized by company. Each company reports to the President who has
been designated as the Chief Operating Decision Maker ("CODM") as defined by
SFAS 131 "Disclosures About Segments of an Enterprise and Related Information".
The CODM allocates resources to each of the companies using information
regarding revenues, operating income (loss) and total assets.
The following companies are the only reportable segments under the criteria
of SFAS 131 (i) IA Global, Inc., the parent company, (ii) Rex Tokyo Co Ltd, a
supplier and re-fitter of equipment for the Pachinko and gaming industry in
Japan., (iii) IA Global Acquisition Co, a US company, engaged in multi-media
compression technology products, (iv) Fan Club Entertainment Co Ltd, a Japanese
company focused on web and traditional print media, including providing services
to the official Fan Club in Japan for Marvel Entertainment Inc. and Marvel
Characters Inc., which provides advertising, merchandising, publishing, website
and data management services to Cyberbred Co Ltd and (v) iAccele Co Ltd, a
Japanese company engaged in the business of providing Internet data transmission
acceleration service. iAccele was sold on December 29, 2003.
25
The following table presents revenues, operating income (loss) and total
assets by company for the three and nine months ended September 30, 2004 and
2003:
(in thousands)
IA Rex IA
Global, Tokyo Global Fan Club
Inc. Co Ltd Acquisition Entertain. iAccele
Company (1)(2) (1)(2) Co Co Ltd Co Ltd Total
------- --------- ----------- ---------- ------- --------
Quarter Ended:
September 30, 2004
Revenue .................... $ - $ 7,490 $ 53 $ 905 $ - $ 8,448
Operating income (loss) .... (56) (21) (214) 58 - (233)
Total assets ............... 389 6,737 841 2,070 - 10,037
September 30, 2003
Revenue .................... $ - $ - $ - $ - $ 126 $ 126
Operating loss ............. (203) - - (39) (391) (633)
Total assets ............... 432 - - 1,393 1,578 3,403
Nine Months Ended:
September 30, 2004
Revenue .................... - 17,128 74 2,660 - 19,862
Operating income (loss) .... (835) 169 (264) 80 - (850)
Total assets ............... 389 6,737 841 2,070 - 10,037
September 30, 2003
Revenue .................... $ - $ - $ - $ - $ 231 $ 231
Operating loss ............. (551) - - (39) (1,196) (1,786)
Total assets ............... 432 - - 1,393 1,578 3,403
26
Geographic Region U.S. Japan Australia Total
--------- --------- --------- ---------
Quarter Ended:
September 30, 2004
Revenue ................. $ 53 $ 8,395 $ - $ 8,448
Operating income (loss) . (271) 38 - (233)
Total assets ............ 1,123 8,807 107 10,037
September 30, 2003
Revenue ................. $ - $ 126 $ - $ 126
Operating loss .......... (203) (430) - (633)
Total assets ............ 398 2,971 34 3,403
Nine Months Ended:
September 30, 2004
Revenue ................. 74 19,788 - 19,862
Operating income (loss) . (1,099) 249 - (850)
Total assets ............ 1,123 8,807 107 10,037
September 30, 2003
Revenue ................. $ - $ 231 $ - $ 231
Operating loss .......... (551) (1,235) - (1,786)
Total assets ............ 398 2,971 34 3,403
The following reconciles operating loss to net loss before income taxes:
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
2004 2003 2004 2003
----- ----- ----- -------
Operating loss ............... $(233) $(633) $(850) $(1,786)
Other income (expense) ....... 35 (50) 159 (269)
----- ----- ----- -------
Loss before minority
interests and income taxes . (198) (683) (691) (2,055)
Minority interests ........... (1) 11 68 11
----- ----- ----- -------
Loss before income taxes ..... $(197) $(694) $(759) $(2,066)
===== ===== ===== =======
(1) The Rex Tokyo Co Ltd operating income for the quarter ending September 30,
2004 is net of $164,000 of management service expenses paid to IA Global
and $14,000 related to a writedown of a fixed asset.
(2) The Rex Tokyo Co Ltd operating income for the nine months ending September
30, 2004 is net $164,000 of management service expenses paid to IA Global,
$147,000 of merger and acquisition expenses and $96,000 related to a
writedown of a fixed asset.
27
NOTE 17. SUBSEQUENT EVENTS
On September 15, 2004, the company announced the refocusing of its holdings
related to QuikCAT and QuikCAT Australia. The company's focus will be on the
development of its multi-media compression technologies for use in video,
picture and audio products and it will pursue licensing contracts with third
party vendors. The company has decided to divest the iNet outside of North
America to its joint venture partner QuikCAT Australia.
As part of this transaction, the company is assigning its intellectual
property rights in the iNet business outside of North America and its 47.54%
interest in QuikCAT Australia to QuikCAT Australia, for notes totaling $150,000
that are due from December 2004 thru June 2005. The notes are secured by the
assets of QuikCAT Australia until QuikCAT Australia raises $100,000 in capital.
Notes issued to the company by QuikCAT Australia in 2003 and 2004 totaling
approximately $102,000 and shares acquired for $50,000 were cancelled as part of
this transaction.
The company also granted QuikCAT Australia an exclusive option to acquire
the North American iNet business for $213,000 in cash. This option expires on
February 28, 2005. On October 8, 2004, the company announced that the
transaction with QuikCAT Australia closed.
There is no guarantee that QuikCAT Australia will be successful in raising
the capital it needs to pay off the $150,000 of notes to the company and to
exercise its option to acquire the North America iNet business. There is no
guarantee that the company will be successful in closing licensing agreements
necessary to the development of its multi-media compression technology business.
On September 9, 2004, the company announced that Rex Tokyo signed an
agreement to establish a joint venture company in Japan on September 6, 2004. On
October 15, 2004, the company announced that the formation of the joint venture
company, Timothy World Co Ltd ("Timothy World") has been completed and Timothy
World has signed an Exclusive Distributor Sales Agreement ("Agreement") with Rex
Tokyo's joint venture partner, Kyushu Tesco Co Ltd ("Tesco"). The Agreement is
for a two year term and is non-cancelable. There are no minimum purchase
requirements or penalties under this Agreement. Timothy World is 60% owned byRex
Tokyo and 40% by Tesco.
Kyushu Tesco has developed a unique down-lighting fixture that allows three
times the lighting capacity to be achieved from a standard fixture, thus
reducing running costs of the lights. Rex Tokyo has already test marketed the
lighting system to a number of its clients. This joint venture will enable Rex
and Tesco to market the lighting system to a much wider customer base.
Rex Tokyo will contribute approximately $55,000 out of working capital and
loans for its 60% interest in the joint venture company. In addition, Rex Tokyo
expects to provide a working capital loan as the business increases.
28
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. On February
9, 2004, Mr. Krakowski filed for arbitration with the American Arbitration
Association in East Providence, Rhode Island. Arbitration proceedings with Mr.
Krakowski are on-going.
As part of the September 25, 2002 Agreement and Assignment (the "Agreement
and Assignment") between the company, IAJ and David Badner, a major stockholder
and former consultant to the company, Mr. Badner has agreed to indemnify and
hold the company harmless against certain expenses, including, among other
things, any fees and damages arising from the Krakowski matter. On November 5,
2004, we were notified that, in connection with the arbitration matter initiated
by Mr. Badner described below, Mr. Badner intends to contest his indemnification
obligation.
On November 5, 2004, the company received notice from the American
Arbitration Association in New York City that Mr. Badner has commenced an
arbitration proceeding against the company, our major shareholder, Inter Asset
Japan Co Ltd, and certain officers of the company and Inter Asset Japan Co Ltd
relating to the Agreement and Assignment. Mr. Badner alleges (i) unrestricted
shares of the company's stock to which he was entitled under the agreement were
not delivered as per the terms of the agreement, (ii) unspecified commitments to
engage in future business ventures with Mr. Badner were not made, and (iii)
damages resulting from intentional misrepresentation. Mr. Badner is seeking
damages of $6 million plus interest and costs and punitive and exemplary damages
in an amount to be determined.
The company believes that these allegations are entirely without merit and
will defend against these claims. There is no guarantee that the company has
insurance to cover these claims or that it will be successful in defending these
claims.
On November 10, 2004, the company announced that PBAA , Inter Asset Japan
and Mr. Isobe have collectively invested an additional $1,130,000 into the
company in a private placement. PBAA and Inter Asset Japan are existing
shareholders of the company and, together with their affiliates, are the
majority shareholders in the company. Mr. Isobe is affiliated with each of PBAA
and Inter Asset Japan and is a business partner with Alan Margerison, the
company's CEO. The company will use the proceeds from this financing to
accelerate the development of the Rex Tokyo business and for general corporate
purposes. This financing will also increase the company's stockholders' equity
which is required in order for the company to maintain its AMEX listing.
Under the financing terms, the company has agreed to issue 4,448,820 shares
of the company's common stock at a price per share of $0.254, which was the
fair-market value of the trailing five-day average closing price of the
company's common stock ending November 8, 2004, the date the investors committed
to make the investment.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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 growing existing businesses and
acquiring additional companies, with a focus on media, entertainment and
technology businesses.
The acquisition of Fan Club and Rex Tokyo and the development of the
multi-media compression technology with QuikCAT 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 a related 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 a related party on March 17, 2004. In addition, on
November 10, 2004, we announced that PBAA , Inter Asset Japan and Mr. Isobe,
related parties, have collectively invested an additional $1,130,000 into the
company in a private placement.
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 IA Global
Acquisition Co, to acquire businesses and to meet AMEX requirements for
continued listing of our shares. Our major shareholders has indicated a
willingness to support our financing efforts. However, there can be no assurance
that 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 shareholders 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.
30
KEY MARKET OPPORTUNITIES
Building on the acquisitions of Rex Tokyo, Fan Club and QuikCAT, the key
market opportunities include:
o Expanding and strengthening the Rex Tokyo business by opening
additional regional offices in Japan.
o Vertically integrating Rex Tokyo business by acquiring or entering
into other Pachinko/Slot machine related business activities.
o Recognizing unique needs in Pachinko/ slot machine industry for
improved service and maintenance levels, and adapting to provide
these.
o Meeting the needs of current customers of Rex Tokyo and seek expansion
of customer base in Pachinko and Slot machine industry.
o Continued focus on servicing Pachinko / Slot machine stores that
operate as "Chain Stores" usually requiring a high level of automation
with stores.
o Expanding further the market reach of Fan Club Entertainment by
broadening the business model beyond bounds of Marvel Fan Club.
o Signing license deals utilizing the patented QuikCAT technology.
o Further expand the operations by acquiring other perceived quality
companies in Japan.
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to risks associated with our AMEX listing, legal claims, a
volatile share price and limited insurance. These risks and uncertainties are
discussed in Factors That May Effect Future Results.
Over the last few years the Pachinko / Slot Machine industry in Japan has
seen significant growth in operators known as "Chain Stores". Rex Tokyo has
taken advantage of this growth, and focused heavily on servicing these clients.
This quarter, 50.9% of Rex Tokyo's revenues resulted from sales to one Chain
Store. Any slow down in this side of the industry could significantly impact Rex
Tokyo's ability to perform at current levels of revenue. Further, Chain Stores
have thus far focused heavily on a high level of automation within the stores.
Any change in plan by Chain Stores to decrease the level of automation could
adversely affect Rex Tokyo's sales of machinery and parts. This could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
The Pachinko / Slot machine industry in Japan has seen a significant growth
in the Slot machine side of the business, while the Pachinko market has remained
more constant in terms of total number of machines in stores. Rex Tokyo has
focused heavily on the Slot machine side of the business. Any downturn in growth
of the Slot machine market, or change in law that might curtail sales of Slot
machines in the market, could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Rex Tokyo has expanded its sales offices based on a perceived need for more
local representation in areas where clients are based. In providing clients with
a local office, feedback from clients can be more readily received, thus helping
to improve service levels. There is also a possibility that information from
clients may be filtered prior to reaching head office. This may result in a less
accurate picture of client satisfaction levels and expectations. Rex Tokyo
regularly conducts meetings with managers from the local offices to hear their
views in an effort to combat this, however, a decrease in client satisfaction