________________________________________________________________________________
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 MARCH 31, 2005
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 May 6, 2005 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 ...........................25
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....44
Item 4. Controls and Procedures .......................................44
PART II.
Item 1. Legal Proceedings .............................................44
Item 2. Changes in Securities and Use of Proceeds .....................45
Item 3. Defaults Upon Senior Securities ...............................45
Item 4. Submission of Matters to a Vote of Security Holders ...........45
Item 5. Other Information .............................................45
Item 6. Exhibits and Reports on Form 8-K ..............................46
Signatures ...................................................................47
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, December 31,
2005 2004
------------ ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 2,315,393 $ 3,847,813
Accounts receivable, net of allowance for doubtful accounts of
$89,477 and $93,338, respectively .............................. 3,401,011 6,431,663
Notes receivable ................................................. 217,935 641,305
Inventories ...................................................... 650,386 164,046
Prepaid expenses ................................................. 211,955 771,036
Consumption and deferred tax receivable .......................... 16,164 161,769
Loan receivable from QuikCAT Australia Pty Ltd ................... 50,000 150,000
Other current assets ............................................. 416,017 136,102
Assets held for sale ............................................. 773,124 773,582
------------ ------------
Total current assets ........................................... 8,051,985 13,077,316
EQUIPMENT, NET ..................................................... 254,284 273,245
OTHER ASSETS
Intangible assets, net ........................................... 1,100,327 1,271,935
Deferred tax asset ............................................... 373,939 390,079
Other assets ..................................................... 991,051 200,641
------------ ------------
$ 10,771,586 $ 15,213,216
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ......................................... $ 2,867,227 $ 6,446,656
Notes payable .................................................... 820,266 1,474,582
Accrued liabilities .............................................. 579,806 529,198
Consumption taxes received ....................................... 69,977 260,648
Income taxes payable- foreign .................................... 38,778 235,047
Current portion of long term debt ................................ 598,494 484,966
------------ ------------
Total current liabilities ...................................... 4,974,548 9,431,097
------------ ------------
LONG TERM LIABILITIES:
Long term debt ................................................... 1,189,585 242,463
Retirement benefits .............................................. 36,297 39,932
------------ ------------
1,225,882 282,395
------------ ------------
MINORITY INTERESTS ................................................. 1,161,355 1,365,570
------------ ------------
STOCKHOLDER'S EQUITY:
Series B Preferred stock, $.01 par value, 5,000 shares authorized
1,158 issued and outstanding (liquidation value $1,158,000) .... 12 12
Common stock, $.01 par value, 150,000,000 shares authorized,
82,400,181 issued and outstanding, respectively ................ 824,001 824,001
Paid in capital .................................................. 28,785,839 28,785,839
Accumulated deficit .............................................. (26,135,213) (25,590,820)
Treasury stock ................................................... (50,000) (50,000)
Other comprehensive income (loss) ................................ (14,838) 165,122
------------ ------------
Total stockholder's equity ..................................... 3,409,801 4,134,154
------------ ------------
$ 10,771,586 $ 15,213,216
============ ============
See notes to consolidated financial statements.
3
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31,
-------------------------------
2005 2004
------------ ------------
(unaudited) (unaudited)
REVENUE ............................................................ $ 5,968,879 $ 2,030,746
COST OF SALES ...................................................... 4,864,214 1,511,018
------------ ------------
GROSS PROFIT ....................................................... 1,104,665 519,728
------------ ------------
EXPENSES:
Selling, general and administrative expenses ..................... 2,035,905 883,168
------------ ------------
Total expenses ................................................. 2,035,905 883,168
------------ ------------
OPERATING LOSS ..................................................... (931,240) (363,440)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income .................................................. 6,305 2,528
Interest expense ................................................. (22,909) (5,007)
Other income ..................................................... 30,659 2,648
Foreign currency transaction adjustment .......................... 17,413 2,255
Gain on equity investment in QuikCAT Australia Pty Ltd ........... - 1,956
------------ ------------
Total other income (expense) ................................... 31,468 4,380
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND INCOME TAXES .............................. (899,772) (359,060)
MINORITY INTERESTS ................................................. (204,165) 34,364
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ..................................................... (695,607) (393,424)
------------ ------------
INCOME TAXES:
Current .......................................................... (191,982) 64,123
Deferred ......................................................... - 11,415
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS ................................ (503,625) (468,962)
Loss from discontinued operations (Note 3) ......................... (40,768) -
------------ ------------
NET LOSS ........................................................... $ (544,393) $ (468,962)
============ ============
Per share of Common-
Basic net loss per share from continuing operations .............. $ (0.01) $ (0.01)
Basic net loss per share from discontinued operations ............ (0.00) -
------------ ------------
Total basic net loss per share ................................... $ (0.01) $ (0.01)
============ ============
Diluted net loss per share from continuing operations ............ $ (0.01) $ (0.01)
Diluted net loss per share from discontinued operations .......... (0.00) -
------------ ------------
Total diluted net loss per share ................................. $ (0.01) $ (0.01)
============ ============
Weighted average shares of common stock outstanding .............. 82,400,181 71,965,401
Weighted average shares of common stock and common
equivalent shares outstanding .................................. 82,400,181 71,965,401
See notes to consolidated financial statements.
4
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
2005 2004
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $ (544,393) $ (468,962)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................. 164,433 66,271
Equity gain from investment in QuikCAT Australia Pty Ltd ....... - (1,956)
Loss from discontinued operations .............................. 40,768 -
Minority interests ............................................. (204,215) 443,844
Accrued interest on notes/loans payable ........................ - (948)
Accounts receivable ............................................ 3,030,652 731,605
Notes receivable - trade ....................................... 423,370 -
Consumption and deferred tax receivable ........................ (45,066) 32,088
Inventory ...................................................... (486,340) 60,426
Prepaid expenses ............................................... 559,081 311,308
Other current assets ........................................... - 467,040
Deferred tax assets ............................................ 16,140 (8,171)
Other assets ................................................... - 2,009
Accounts payable ............................................... (3,579,429) (50,144)
Notes payable - trade .......................................... (654,316) -
Accrued liabilities ............................................ 50,608 (115,562)
Other liabilities-retirement benefits .......................... (3,635) 23,899
Income taxes payable - foreign ................................. (196,269) 159,862
Deferred revenue ............................................... - (463,119)
----------- -----------
Net cash provided by (used in) continuing operations ............... (1,428,611) 1,189,490
Net cash used in discontinued operations ........................... (40,310) -
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS .......................... (1,468,921) 1,189,490
----------- -----------
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)
Purchases of capital expenditures ................................ (17,540) (111,656)
Proceeds from sale of QuikCAT Australia Pty Ltd .................. 100,000 -
Other current assets ............................................. (279,915) -
Purchases of intangible assets ................................... 43,676 -
Other assets ..................................................... (790,410) 18,428
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................ (944,189) 850,611
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from loan payable ....................................... 1,859,600 -
Proceeds from loan payable - related party ....................... - 1,500,000
Repayment of loan payable ........................................ (798,950) -
Loan to Innovative Computing Group, Inc. ......................... - (100,000)
Loan to QuikCAT Australia Pty Ltd. ............................... - (25,000)
Proceeds from issuance of common stock ........................... - 400,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 1,060,650 1,775,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... (1,352,460) 3,815,101
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................ (179,960) (18,948)
CASH AND CASH EQUIVALENTS, beginning of the period ................. 3,847,813 676,782
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period ....................... $ 2,315,393 $ 4,472,935
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid .................................................... $ 22,899 $ -
Taxes paid ....................................................... $ - $ -
Non-cash investing and financing activities:
Common stock issued for Rex Tokyo Co Ltd ......................... $ - $ 138,600
See notes to consolidated financial statements.
5
IA GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 period ended March 31, 2005 and
2004 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, 2004.
NOTE 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 three
months ending March 31, 2005 because the subsidiary incurred losses for this
period and the company does not expect to recover these losses from the minority
owner. In accordance with SFAS 144, the company accounted for the loss for the
three months ended March 31, 2005 loss of $41,000 as discontinued operations in
its consolidated statement of operations. 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 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 the portfolio. If the financial
condition of the 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.
NOTES RECEIVABLE - The company's Japanese subsidiaries, on occasion, accept
notes receivable in payment of accounts receivable with certain customers. These
notes are usually of a short term nature, approximately three to six months in
length. They do not bear interest and are paid by, and secured by, the
customer's bank. Total notes receivable as of March 31, 2005 and December 31,
2004 were $217,935 and $641,305, respectively.
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 accelerated 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.
6
INTANGIBLE ASSETS / INTELLECTUAL PROPERTY - The company amortizes 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. 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 over the two year life of the
agreements.
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. On February 9, 2005,
the company announced a definitive agreement to divest its remaining holdings
related to QuikCAT to Nanocat Technologies PTE Limited, a Singapore corporation.
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. The company has performed its impairment tests and determined
there were no impaired long - lived assets as of March 31, 2005.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, notes payable and accrued liabilities and current
portion of long term debt approximate fair value based on the short-term
maturity of these instruments.
NOTES PAYABLE - The company's Japanese subsidiaries, on occasion, satisfy the
payment of their accounts payable, through the issuance of notes payable with
certain vendors. These notes are usually of a short term nature, approximately
three to six months in length. They do not bear interest and are paid by the
company's bank to the vendors upon presentation to the company's bank on the
date of maturity. In the event of insufficient funds to repay these notes, the
company's bank can proceed with bankruptcy proceedings in Japan. Total notes
payable as of March 31, 2005 and December 31, 2004 were $820,266 and $1,474,582,
respectively.
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 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 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:
7
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. Revenue is
considered 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.
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. Revenue
is considered 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.
ADVERTISING COSTS - Advertising costs are expensed as incurred. There were no
advertising costs incurred for the three months ended March 31, 2005 and 2004.
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 month period.
Adjustments resulting from these translations are reflected in the consolidated
balance sheet under other comprehensive income 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:
8
For the three months ended
March 31,
---------------------------
2005 2004
--------- ---------
Net loss available to common
shareholders, as reported ................ $(544,393) $(468,962)
Deduct: total stock-based employee
compensation determined under fair
value based method for all awards, net
of related tax effects ................... (80,342) (29,719)
--------- ---------
Pro-forma net loss available to common
shareholders ............................. $(624,735) $(498,681)
========= =========
Earnings per share:
Basic and diluted- as reported ........... $ (0.01) $ (0.01)
Basic and diluted- pro-forma ............. $ (0.01) $ (0.01)
The company accounts for non-employee stock transactions in accordance
with SFAS No. 123 and EITF 96-18.
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 Three Months Ended
March 31,
-------------------
2005 2004
---- ----
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 September 2004 that 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 is required to pay the company approximately $164,000 in April 2005 and
October 2005. As of April 30, 2005, Rex Tokyo owes approximately $82,000 for the
three months ended March 31, 2005. The company is negotiating to obtain payment
under the Management Services Agreement.
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 transaction adjustments and is
presented in the Consolidated Statements of Operations and Stockholder's Equity
(Deficiency).
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.
9
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 was restricted from paying dividends to its stockholders under the terms
of its loan with Nihon Shinko Bank Co Ltd. On January 18, 2005, Rex Tokyo
refinanced the loan with Nihon Shinko Bank Co by entering into a with Mizuho
Bank Co Ltd, an unrelated Japanese bank.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -
In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, provides guidance
for identifying a controlling interest in a variable interest entity established
by means other than voting interests. FIN No. 46 also requires consolidation of
a variable interest entity by an enterprise that holds such a controlling
interest. In December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Number 46R,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51
(FIN No. 46R). The decisions reached included a deferral of the effective date
and provisions for additional scope exceptions for certain types of variable
interests. Application of FIN No. 46R is required in financial statements of
public entities that have interests in variable interest entities or potential
variable interest entities commonly referred to as special - purpose entities
for periods ending after December 15, 2003. Application by public entities
(other than small business users) for all other types of entities is required in
financial statements for periods ending after March 15, 2004. The adoption of
FIN No. 46R did not have a material effect on the company's consolidated
financial statements.
In December of 2003, the FASB issued a revised SFAS No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The statement
revises employers' disclosures about pension plans and other postretirement
benefit plans but it does not change the measurement or recognition of those
plans. The revised SFAS No. 132 requires additional disclosures to those in the
original SFAS 132 about the assets, obligations, cash flows, and net periodic
benefit cost of defined pension plans and other defined benefit postretirement
plans. The statement also increases quarterly pension plan and postretirement
benefit plan disclosure requirements. Revised SFAS No. 132 domestic plan
disclosure requirements are effective for financial statements with fiscal years
ending after December 15, 2003. However, disclosure of information about foreign
plans required by the Statement is effective for fiscal years ending after June
15, 2004. The company adopted this statement in December of 2003 and it did not
have a material effect on the company's consolidated financial statements.
10
SFAS No. 123 (Revised 2004), "Share-Based Payment," issued in December
2004, is a revision of FASB Statement 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123 (Revised 2004)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. This statement is effective as of the beginning of the first interim
or annual reporting period that begins after January 15, 2006 and the company
will adopt the standard in the second quarter of fiscal 2006. The company has
not determined the impact, if any, that this statement will have on the
company's consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which clarifies the types of costs that
should be expensed rather than capitalized as inventory. This statement also
clarifies the circumstances under which fixed overhead costs associated with
operating facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005 and the company will adopt this standard in fiscal 2006. The company
has not determined the impact, if any, that this statement will have on the
company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets--An Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for the
fiscal periods beginning after June 15, 2005 and is required to be adopted by
the company in the first quarter of fiscal 2006. The company not determined the
impact, if any, that this statement will have on the company's consolidated
financial statements.
NOTE 3. ACQUISITIONS AND DIVESTITURES
The acquisition of Rex Tokyo Co. Ltd. ("Rex Tokyo") was a key component
of the company's strategy to operate primarily as a holding company. The company
intends to grow its Rex Tokyo business. Also, the company intends to further
increase the number of majority-owned companies by acquiring primarily Japanese
small to midsize companies at low acquisition costs in the media, entertainment
and technology areas.
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 the company acquired its 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, the company purchased 150 Rex Tokyo shares from Mr.
Ejima, the CEO of Rex Tokyo, for 462,000 shares of common stock issued at $.30
per share which is the average closing price five days before closing. The
Stockholders 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.
11
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 primary 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 cost to acquire these assets was allocated to the assets acquired
according to estimated fair values. The allocation was 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 company expanded this business in 2004 by acquiring new sales
offices in Kyushu and West Tokyo, Japan. In addition, Rex Tokyo established a
joint venture company, Timothy World, with Kyushu Tesco Co Ltd. for the supply
of lighting fixtures to the Pachinko industry in October, 2004 and began to sell
slot machines directly rather than as an agent during the 4th quarter of 2004.
12
On December 31, 2004, the company invested 50,000,000 Yen or
approximately $488,000 in Rex Tokyo. Under the terms of the Subscription
Agreement, the company agreed to purchase 500 Series A Preference Shares of Rex
Tokyo for the sum of 200,000 Yen per Preference Share, payable in two equal
installments. The initial 50,000,000 Yen was paid by December 31, 2004 and the
balance is to be paid by December 31, 2005. The funds will be used to expand the
Rex Tokyo business.
On March 25, 2005, Rex Tokyo announced that it has formed a new
wholly-owned subsidiary in Japan, Collaboration Co Ltd, to focus on business
development opportunities for Rex Tokyo, including the design and building of
"gaming machine islands" for pachinko slot machine stores. These "islands" are
made up of rows of gaming machines, typically sitting back-to-back, with
cabinets built around them. Instead of building cabinets on the store premises
and installing machines one by one, these "islands" can be pre-built to client
store specifications and delivered on the required day, saving onsite
construction time for the store owners.
The pro-forma financial data for the acquisition for the quarter ended
March 31, 2004 was as follows:
As Reported Pro Forma
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2004
-------------- --------------
Revenues ........................... $ 2,030,746 $ 7,670,130
Loss before extraordinary items .... (468,962) (357,457)
Net loss ........................... (468,962) (357,457)
Loss per common share .............. (0.01) (0.00)
There were no material, nonrecurring items included in the reported the
pro-forma results.
IA GLOBAL ACQUISITION CO / QUIKCAT.COM INC / QUIKCAT AUSTRALIA PTY LTD
On June 10, 2004, the company closed the acquisition of the
intellectual property and other assets of QuikCAT.Com Inc. ("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 focused on the development of multi-media compression
technologies for use in video, picture and audio products for license sales to
third party vendors.
The cost to acquire these assets was allocated to the assets acquired
according to estimated fair values. The allocation was 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
=========
13
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 Pty Ltd. ("QuikCAT
Australia"), acquired 9.5% of IA Global Acquisition Co. for $500 on June 30,
2004. The company increased its ownership percentage to 95% on October 8, 2004.
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 March 31, 2005 because the subsidiary
incurred losses for this period and the company does not expect to recover these
losses from the minority owner. In accordance with SFAS 144, the company
accounted for the loss for the three months ended March 31, 2005 of $41,000 as
discontinued operations in its consolidated statement of operations.
On February 9, 2005, the company announced a definitive agreement to
divest its remaining holdings related to QuikCAT to Nanocat Technologies PTE
Limited ("Nanocat"), a Singapore corporation. Nanocat is affiliated with QuikCAT
Australia.
As part of this transaction, the company is selling the remaining
rights and assets of QuikCAT which were acquired out of Chapter 11 on June 10,
2004. In addition, the company is assigning its intellectual property rights
related to the Miliki Supercompressor product and any additions, developments
and modifications related to certain projects and products, as well as certain
customer contracts, and Nanocat is assuming certain QuikCAT related liabilities.
The total purchase price is $650,000, which will be paid with a note that will
be due in installments. The note will be secured by the assets sold to Nanocat
and Nanocat has made an initial $25,000 deposit against the first installment
due under the note.
The company previously announced the divestiture of our Internet
accelerator Business ("iNet") outside of North America to QuikCAT Australia and
granted QuikCAT Australia an exclusive option to acquire the North America iNet
business for $213,000 in cash. This option is deemed exercised with the closing
of the definitive agreement with Nanocat.
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. They have made payments of
$100,000 under the notes.
The company decided to divest its remaining holdings related to QuikCAT
because the QuikCAT business was no longer core to our operations and the
closing of license sales was more difficult than expected. This transaction will
allow the company to focus on the development of our Rex Tokyo business.
The transactions with Nanocat and QuikCAT Australia are expected to
close during the second quarter of 2005 and are subject to the completion of due
diligence. However, the process for closing the Nanocat transaction has taken
longer than we initially anticipated and, on March 31, 2005, we issued a default
notice under the purchase agreement to Nanocat. While Nanocat has confirmed its
intention to complete the transaction, there can be no assurance that this
transaction will close. The company has recorded assets held for sale of
$773,124 as of March 31, 2005 related to these transactions.
14
NOTE 4. ACCOUNTS RECEIVABLE/ CUSTOMER CONCENTRATION
Accounts receivable was $3,401,011 and $6,431,663 as of March 31, 2005
and December 31, 2004, respectively. The company had the following customers
with sales in excess of 10% for the three months ended March 31, 2005 and 2004:
March 31, December 31,
2005 2004
---- ----
Dainam Co Ltd 59.1% 32.4%
Cyberbred Co Ltd (1) 33.4%
_________
(1) Less than 10% in the three months ended March 31, 2005.
Dainam is a Rex Tokyo customer. Cyberbred is a Fan Club customer. 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. The March 31, 2005 quarter typically is a
seasonal low quarter for Rex Tokyo. This results in reduced sales and accounts
receivable during the quarter.
NOTE 5. INVENTORIES
Inventories as of March 31, 2005 and December 31, 2004, respectively,
consisted of the following:
March 31, December 31,
2005 2004
--------- ------------
Raw materials ........................ $ 83,144 $ 67,941
Work in process ...................... 567,241 96,106
Finished goods ....................... - -
-------- --------
Total inventories .................... 650,386 164,046
Reserve for obsolete inventories ..... - -
-------- --------
Net inventories ...................... $650,386 $164,046
======== ========
NOTE 6. PREPAID COSTS
Prepaid expenses were $211,955 and $771,036 as of March 31, 2005 and
December 31, 2004, respectively. Such costs as of March 31, 2005 consisted of
prepaid insurance and other costs incurred by the company and prepaid Fan Club
expenses related to future revenue. Such costs as of December 31, 2004 consisted
of prepaid insurance and other costs incurred by the company, production cost
advances incurred by Rex Tokyo and prepaid Fan Club expenses related to future
revenue.
NOTE 7. OTHER CURRENT ASSETS
Other current assets were $416,017 and $136,102 as of March 31, 2005
and December 31, 2004, respectively. Such assets as of March 31, 2005 included
marketable securities, loans receivable from Kyushu Tesco used to fund the
growth of the Timothy World business and other assets held by Rex Tokyo. Such
assets as of December 31, 2004 included marketable securities and other assets
held by Rex Tokyo.
15
NOTE 8. EQUIPMENT
Equipment was $254,284 and $273,245 as of March 31, 2005 and December
31, 2004, respectively, net of accumulated depreciation of $242,040 and
$273,245. The equipment consisted of leasehold improvements, capitalized
software licenses, vehicles and equipment. Total depreciation expense was
$36,501 and $11,458 for the three months ended March 31, 2005 and 2004,
respectively.
NOTE 9. INTANGIBLE ASSETS
Intangible assets as of March 31, 2005 and December 31, 2004,
respectively, consisted of the following:
March 31, December 31,
2005 2004 Estimated Life
------ ------ --------------
Licensing fee ..................... $ 1,508,215 $ 1,551,891 2-5 years
Other intangible .................. 188,116 188,116 5 years
----------- -----------
1,696,331 1,740,007
Less: accumulated amortization .... (596,004) (468,072)
----------- -----------
Intangible Assets, net ... $ 1,100,327 $ 1,271,935
=========== ===========
Total amortization expense for the three months ended March 31, 2005
amounted to $127,932. The license fee amortization was $119,672 and the
amortization of other intangibles was $8,260 for the three months ended March
31, 2005.
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.
Management's evaluation of the fair value allocated to the
aforementioned Fan Club assets and liabilities acquired did not result in any
excess values for goodwill being acquired.
NOTE 10. OTHER ASSETS
Other assets were $991,051 and $200,641 as of March 31, 2005 and
December 31, 2004, respectively. Such assets as of March 31, 2005 included loans
receivable from Kyushu Tesco Co Ltd used to fund the growth of the Timothy World
Co Ltd business and other deposits and loans held by Rex Tokyo. Such assets as
of December 31, 2004 included other deposits and loans held by Rex Tokyo.
NOTE 11. DEBT AND DEBT - AFFILIATED PARTY
Debt was $1,788,079 and $0 as of March 31, 2005 and December 31, 2004,
respectively. Debt - affiliated party was $0 and $727,429 as of March 31, 2005
and December 31, 2004, respectively.
On June 30, 2004, Rex Tokyo entered into a 100,000,000 Yen, or $923,275
at current exchange rates, 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.
16
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.
On January 18, 2005, Rex Tokyo refinanced a 100,000,000 Yen working
capital loan with Nihon Shinko Bank Co by entering into a 100,000,000 Yen Loan,
or $978,761 at current exchange rates, with Mizuho Bank Co Ltd, an unrelated
Japanese bank. The Nihon Shinko loan was used to expand the Rex Tokyo business.
The loan requires thirteen quarterly payments of 7,692,000 Yen or
approximately $75,286 at the current exchange rate plus interest starting March
31, 2005, with a final payment of 7,696,000 Yen, or $75,325 at the current
exchange rate plus interest due on March 31, 2008. The loan accrues interest at
3.2% and is guaranteed by the CEO of Rex Tokyo Co Ltd. There are no covenants or
security requirements related to the loan.
On March 25, 2005, Rex Tokyo received a 100,000,000 Yen, or
approximately $940,000 at current exchange rates, working capital loan from
Chiba Bank Ltd, an unrelated Japanese bank. The loan will be used to fund Rex
Tokyo's growth.
The loan requires thirty five monthly payments of 2,800,000 Yen, or
approximately $26,000 at current exchange rates, plus interest starting April
25, 2005, with a final payment of 2,000,000 Yen, or approximately $19,000 at the
current exchange rates plus interest, due on March 25, 2008. The loan accrues
interest at 2.9% and is guaranteed by the CEO of Rex Tokyo Co Ltd. There are no
covenants or security requirements related to the loan.
NOTE 12. RELATED PARTY RELATIONSHIPS WITH INTER ASSET JAPAN AND CERTAIN
RELATIONSHIPS
As of March 31, 2005, Inter Asset Japan LBO No. 1 Fund ("IAJ LBO
Fund"), PBAA Fund Ltd. ("PBAA"), Terra Firma Fund Ltd. ("Terra Firma"), Inter
Asset Japan Co. Ltd. ("IAJ"), Alan Margerison and Hiroki Isobe collectively hold
approximately 83.1% of the company's common stock. Such entities stated in a
Schedule 13D that they may be deemed to constitute a "group" for the purposes of
Rule 13d-3 under the Exchange Act. Mr. Alan Margerison, the company's Director,
President and Chief Executive Officer, currently serves as the Chairman of IAJ,
and together with his business partner, Mr. Hiroki Isobe, 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 March 31, 2005, that are relevant for purposes of understanding
the related party transactions that have taken place:
17
OWNERSHIP:
Inter Asset Japan LBO No. 1 Fund owns:
IA Global, Inc..............................33.6%
PBAA Fund Ltd. owns:
IA Global, Inc..............................30.4%
Terra Firma Fund Ltd. owns:
IA Global, Inc..............................13.9%
Nihon Shinko Bank Co.........................6.0%
Inter Asset Japan Co., Ltd. owns:
IA Global, Inc...............................4.2%
Nihon Shinko Bank Co.........................8.5%
IA Global, Inc. owns:
Fan Club Entertainment Co., Ltd. ...........67.0%
Rex Tokyo Co. Ltd...........................60.5%
IA Global Acquisition Co....................95.0%
Mr. Kazunari Ito (Chairman of Fan Club Entertainment Co. Ltd., Cyberbred Co.
Ltd, and Cyberholdings Co. Ltd)
Cyber Holdings Co. Ltd (TK Partners, Inc.) 100.0%
Cyberbred Co. Ltd...........................69.0%
Cyber Holdings Co. Ltd. owns:
Fan Club Entertainment Co. Ltd..............33.0%
ACQUISITION OF IACCELE CO LTD
On December 29, 2003, the company executed a share purchase agreement
to sell its 76.9% interest in iAccele Co. Ltd. ("iAccele"), for approximately
$280,000 to GM2 Co. Ltd., a private Japanese corporation ("GM2"). In connection
with the sale, the company agreed to cancel approximately $300,000 of
inter-company debt owed by iAccele. The company received the funds from GM2 on
January 16, 2004.
Inter Asset Japan Co. Ltd. ("IAJ"), the company's 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.
18
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
equity interest in Fan Club is 134,000,000 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 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 the company
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 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 was not paid as of
December 31, 2003. A receivable was not booked due to the lack of certainty over
the receipt of the funds as of December 31, 2003.
On February 5, 2004, 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, the company 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. and Marvel Characters, Inc.("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, and 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.
There was no prior material relationship between the company and any of
our affiliates and Fan Club. However, an affiliate of IAJ LBO Fund, which is our
largest stockholder, owned an approximate 27% equity interest in Cyberbred. This
interest was sold to Mr. Ito on September 29, 2003.
The company is not a party to the agreement between Cyberbred and
Marvel. However, this contract is material 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.
19
Fan Club re-positioned its business during the 3rd quarter of 2004 by
establishing a creative design studio focusing on web and traditional print
media delivery, including the Marvel characters. This new design studio
compliments Fan Club's existing business providing services to the official fan
club in Japan for Marvel Entertainment Inc. and Marvel Characters Inc.
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 over the two year life of the agreements.
$400,000 FINANCING
On December 29, 2003, the company agreed to sell to PBAA Fund Ltd., a
related party, 1,333,333 shares of its 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 the company's common stock ending December 29,
2003, the date PBAA Fund Ltd 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 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 EITF 98-5 or EITF 00-27.
On June 18, 2004, the company announced that it had reached agreement
with PBAA to convert the $1,500,000 Note, plus accrued interest of approximately
$20,000, into 5,065,037 shares of its common stock in accordance with the terms
of the Note.
$1,130,000 FINANCING
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, IA
Global'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 stockholders' equity which is
required in order for the company to maintain its AMEX listing.
Under the financing terms, 4,448,820 shares of common stock were issued
at a price per share of $0.254, which was the fair-market value of the trailing
five-day average closing price ending November 8, 2004, the date the investors
committed to make the investment.
REX TOKYO CO LTD DISTRIBUTION AGREEMENT WITH HIROYUKI EJIMA
Rex Tokyo agreed in approximately 1998 to pay monthly 5,000,000 Yen or
approximately $47,000 at current exchange rates to a majority-owned company of
the CEO of Rex Tokyo for assigning the distribution rights for certain lock
products for Tokyo, Japan to Rex Tokyo. This distribution agreement assignment
is ongoing and resulted in 2004 sales of approximately $2,800,000 at current
exchange rates.
20
NOTE 13. EQUITY TRANSACTIONS
During the three months ended March 31, 2005, the following stockholder
equity events occurred:
On February 7, 2005, the company granted 30,000 stock options in total
at an exercise price of $.29 per share to employees of Rex Tokyo. These options
vest quarterly over three years and expire on February 7, 2015.
NOTE 14. THIRD PARTY LICENSES AND AGREEMENTS
The company relies on certain agreements and technologies licensed from
third parties to operate company 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. This
Subcontract Agreement expires May 31, 2008, and is cancelable under certain
conditions.
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 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 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 had 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, the company was 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.
On January 7, 2005, the company received notice from the American
Arbitration Association in New York City that Mr. Badner had amended his
arbitration claim against the company and our major shareholder, Inter Asset
Japan Co Ltd. Mr. Badner alleges (i) unrestricted shares of the company's stock
to which he was entitled under the Agreement and Assignment dated September 25,
2002 were not delivered as per the terms of the Agreement and Assignment, (ii)
unspecified commitments to engage in future business ventures with Mr. Badner
were not made, and (iii) damages resulting from fraud and misrepresentation. Mr.
Badner is seeking damages of $2,500,000 million plus interest related to the
breach of the Agreement, $100,000 for damages suffered related to fraud and
misrepresentations and costs and punitive and exemplary damages in an amount to
be determined.
21
On February 4, 2005, the company filed an answer and counterclaim
against Mr. Badner in response to Mr. Badner's amended arbitration claim filed
on January 7, 2005. The company is seeking an award of actual damages in the sum
according to proof, plus interest, costs and attorneys' fees, on our
counterclaims against David Badner.
The company appropriately responded to Mr. Badner's allegations by way
of our answer and counterclaims and the company intends to vigorously defend
against his claims. There is no guarantee that the company has insurance to
cover these claims or that the company will be successful in defending these
claims.
Rex Tokyo agreed in approximately 1998 to pay monthly 5,000,000 Yen or
approximately $47,000 at current exchange rates to a majority-owned Company of
the CEO of Rex Tokyo for assigning the distribution rights for certain lock
products for Tokyo, Japan to Rex Tokyo. This distribution agreement assignment
is ongoing and resulted in 2004 sales of approximately $2,800,000 at current
exchange rates.
On February 3, 2003, the company entered into an employment agreement
with Alan Margerison to serve, for a term of three years, as President and Chief
Executive Officer at an annual base salary of $60,000 and eligibility to receive
compensation, including options, at the discretion of the company's compensation
committee. Mr. Margerison currently works full time on company matters. This
employment agreement also contains provisions for confidentiality for the term
of each agreement and thereafter. This employment agreement also provides for a
severance payment in the amount of 25% of Mr. Margerison's annual base salary in
the event that he is terminated by the company without cause.
On January 12, 2004, the company entered into an employment agreement
with Mark Scott to serve, for a term of two years, as Chief Financial Officer at
an annual rate of $150,000 Mr. Scott is eligible to receive compensation,
including options, bonuses and benefits, at the discretion of the company's
compensation committee. Mr. Scott works full time for the company. This
employment agreement also contains 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 the company without cause.
On November 19, 2004, the company amended its employment agreement with
Mark Scott to serve, for a term of two years, as Chief Financial Officer at an
annual rate of $165,000. Mr. Scott is eligible to receive compensation,
including options, bonuses up to $40,000 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 33% of the executive's annual base salary in
the event that the employee is terminated by the company without cause.
On December 31, 2004, the company invested 50,000,000 Yen or
approximately $488,000 in Rex Tokyo. Under the terms of the Subscription
Agreement, the company agreed to purchase 500 Series A Preference Shares of Rex
Tokyo for the sum of 200,000 Yen per Preference Share, payable in two equal
installments. The initial 50,000,000 Yen was paid by December 31, 2004 and the
balance is to be paid by December 31, 2005. The funds will be used to expand the
Rex Tokyo business.
NOTE 16. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The company operates primarily as a holding company and is organized by
subsidiary. Each subsidiary 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.
22
The following subsidiaries are the only reportable segments under the
Criteria of SFAS 131 (i) IA Global, Inc., the parent company, which operates as
a holding company (ii) Rex Tokyo Co Ltd, a supplier and re-fitter of equipment
for the Pachinko and gaming industry in Japan.,(iii) Fan Club Entertainment Co
Ltd, a Japanese company which operates as a creative design studio focusing on
web and traditional print media delivery, including the Marvel characters. This
design studio compliments Fan Club's existing business providing services to the
official fan club in Japan for Marvel Entertainment Inc. and Marvel Characters
Inc. and (iv) IA Global Acquisition Co, which on February 9, 2005, the company
announced a definitive agreement to divest our remaining holdings related to
QuikCAT Technologies to Nanocat Technologies PTE Limited, a Singapore
corporation. In accordance with SFAS 144, the company accounted for the loss for
the three months ended March 31, 2005 of $41,000 as discontinued operations in
our consolidated statement of operations.
The following table presents revenues, operating income (loss) and
total assets by company for the three months ended March 31, 2005 and 2004:
(dollars in thousands)
Fan Club
IA Global, Rex Tokyo Entertain. Discontinued
Company Inc. Co Ltd Co Ltd Total Operations Total
- ------------------------- ---------- --------- ---------- --------- ------------ ---------
Three Months Ended:
March 31, 2005
Revenue ............... $ - $ 5,825 $ 144 $ 5,969 $ - $ 5,969
Operating income (loss) (302) (323) (306) (931) - (931)
Total assets .......... 231 8,449 1,319 9,999 773 10,772
March 31, 2004
Revenue ............... $ - $ 1,101 $ 930 $ 2,031 $ - $ 2,031
Operating income (loss) (516) 133 20 (363) - (363)
Total assets .......... 1,897 7,127 1,765 10,789 - 10,789
Discontinued
Geographic Region U.S. Japan Total Operations Total
- ------------------------- -------- -------- --------- ------------ ---------
Three Months Ended:
March 31, 2005
Revenue ............... $ - $ 5,969 $ 5,969 $ - $ 5,969
Operating income (loss) (302) (629) (931) - (931)
Total assets .......... 231 9,768 9,999 773 10,772
March 31, 2004
Revenue ............... $ - $ 2,031 $ 2,031 $ - $ 2,031
Operating income (loss) (516) 153 (363) - (363)
Total assets .......... 1,897 8,892 10,789 - 10,789
23
The following reconciles operating loss to net loss before income
taxes:
Three Months Ended
March 31,
------------------
2005 2004
------ ------
Operating loss ......................................... $(931) $(363)
Other income (expense) ................................. 31 4
----- -----
Loss from continuing operations
before minority interests and income taxes ........... (900) (359)
Minority interests ..................................... (205) 34
----- -----
Loss from continuing operations
before income taxes .................................. (695) (393)
Income taxes ........................................... (192) 76
----- -----
Net loss from continuing operations .................... (503) (469)
Loss from discontinued operations ...................... (41) -
----- -----
Net loss ............................................... $(544) $(469)
===== =====
NOTE 17. SUBSEQUENT EVENTS
The company signed a Share Exchange Agreement to acquire Global Hotline
Co Ltd. ("GHI"), a privately held Japanese company, on April 20, 2005. The
transaction is structured as a share exchange in which the company will issue
15,000,000 shares of its common stock in exchange for 100% of GHI's equity. At
the time the Share Exchange Agreement was signed, the company's common stock had
a value of $.207 per share, which was the average close price during the twenty
days prior to the signing of the Share Exchange Agreement, or an aggregate value
of $3,100,000.
GHI was established September 7, 2004 as a call center operator and
reseller of telephone and broadband lines in Japan. The Japanese
telecommunications market is experiencing significant growth in alternative
carriers due to recent regulatory changes that now permit individuals and
companies to choose their telephone service provider.
GHI has two contracts with a significant Japanese telecommunications
company. The first contract covers the period October 1, 2004 thru September 30,
2005 and requires GHI to sell subscriber lines based on agreed monthly targets.
GHI expects to be paid 841,000,000 Yen or $7,900,000, at current exchange rates
under this contract. The second contract covers the period March 16, 2005
through March 31, 2006 and requires GHI to sell subscriber lines based on agreed
monthly targets. GHI expects to be paid 2,925,000,000 Yen or $27,300,000, at
current exchange rates under this contract. Should the targets not be achieved
on a quarterly basis, then GHI will be required to refund portions of the
revenue to the customer. GHI has outsourced the call center operation for the
first contract with similar penalties to protect the revenues and profits. GHI
has a call center operation and is establishing a second call center operation
to support the second contract.
24
The company is acquiring its 100% ownership from Mr. Hideki Anan (67%),
Mr. Kyo Nagae (10%) and Mr. Hiroki Isobe (23%). Mr. Anan, who will remain as CEO
of GHI, is an experienced Japanese telecommunications executive. Mr. Isobe is
the business partner of our CEO and is affiliated with our majority
shareholders. In addition, Inter Asset Japan Co Ltd, a related party, has loaned
GHI approximately $600,000, at current exchange rates, and guarantees the rent
on the two GHI offices. This acquisition is expected to close on May 31, 2005
and is subject to the completion of due diligence. The company expects this
acquisition to increase its stockholder's equity by $3,100,000 to above
$6,000,000 and help the company maintain its AMEX listing.
There is no guarantee the above transaction will close. Further, the
company continues to work with AMEX to maintain its listing. There is no
guarantee that the company will be successful in maintaining its AMEX listing.
IA Global Inc. announced the sale of Fan Club Entertainment Co Ltd
("Fan Club") as of May 12, 2005 to TK Partners, Inc., formerly Cyber Holdings Co
Ltd. As part of this transaction, the company is selling the 67% owned business
for approximately $755,000 at current exchange rates plus 350,000 shares of IA
Global common stock valued at $.16 per share. The total cash purchase price
which will be paid with $189,000 at signing and a note that is due in monthly
installments of approximately $71,000 from June 2005 thru January 2006. The note
is unsecured and TK Partners has made an initial $189,000 payment. Fan Club
reported revenues and a net loss of approximately $144,000 and $205,000,
respectively, during the three months ended March 31, 2005. The company expects
to breakeven or have a small loss on the sale of the business. The company has
decided to divest the Fan Club business as it is no longer core to our
operations and the closing of new license sales was more difficult than the
company expected.
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 from continuing operations of $.9 million,
$2.1 million and $1.5 million for the years ended December 31, 2004, 2003 and
2002, respectively. We had revenues of $31.6 million, $1.1 million and $.4
million for the years ended December 31, 2004, 2003 and 2002, respectively. Our
losses have been financed primarily by the sale of equity in our company, by
loans from related parties, and through the issuance of equity for services. We
expect our net loss from operations to decrease in 2005, but to continue for the
foreseeable future.
We operate primarily as a holding company. We intend to grow our Rex
Tokyo business. Also, we intend to further increase the number of our
majority-owned companies by acquiring primarily Japanese small to midsize
companies at low acquisition costs in the media, entertainment and technology
areas.
25
We received $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.
On June 30, 2004, Rex Tokyo received a 100,000,000 Yen, or $923,275 at
current exchange rates, working capital loan with Nihon Shinko Bank Co, an
affiliated party, for use as operating capital. On January 18, 2005, Rex Tokyo
refinanced this loan by entering into a 100,000,000 Yen, or $978,761 at current
exchange rates, loan with Mizuho Bank Co Ltd, an unrelated Japanese bank.
On March 25, 2005, Rex Tokyo received a 100,000,000 Yen, or
approximately $940,000 at current exchange rates, working capital loan from
Chiba Bank Ltd, an unrelated Japanese bank. The loan will be used to fund Rex
Tokyo's growth.
We may need to obtain additional financing in order to continue our
current operations, including the cash flow needs of Rex Tokyo and subsidiaries,
Fan Club, IA Global Acquisition Co., to acquire businesses and to meet the
American Stock Exchange ("AMEX") requirements of $6 million in stockholders'
equity by May 15, 2005 for continued listing of our shares. Our major
shareholders thus far have 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.
KEY MARKET OPPORTUNITIES
Building on the acquisitions of Rex Tokyo and Fan Club, our key market
opportunities include:
o Expanding and strengthening the Rex Tokyo business by opening
additional regional offices in Japan.
o Vertically integrating the Rex Tokyo business by acquiring or
entering into other Pachinko/Slot machine related business activities.
o Expanding the sale of unique lighting fixtures through our Timothy
World joint venture with Kyushu Tesco.
o Expanding the direct sale of slot machines.
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 expanding our
customer base in the Pachinko and Slot machine industry.
o Continuing focus on servicing Pachinko / Slot machine stores that
operate as "Chain Stores" usually requiring a high level of automation among the
stores in the chain.
o Expanding operations by selectively acquiring other quality companies
in Japan.
26
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to risks associated with our AMEX listing, legal claims,
mergers and acquisitions, 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 from operators known as "Chain Stores". Rex Tokyo
has taken advantage of this growth, and focused heavily on servicing these
clients. During the three months ended March 31, 2005, 59.1% 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 its
current revenue levels. Further, Chain Stores have thus far focused heavily on a
high level of automation within the stores. Any change in plans 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 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 from the Slot machine market, or change in law that might curtail sales
of Slot machines, 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
levels could have a material adverse effect on our business prospects, financial
condition and results of operations.
Rex Tokyo has seen an expansion of its business by aligning itself
strongly with a few core clients. If for any reason Rex Tokyo's image was
damaged with those clients or in the industry as a whole, it could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Rex Tokyo's business is dependent upon its ability to maintain tight
control on its cash flows. In general, as the amount of work increases, the
amount of cash flow required increases. If Rex Tokyo is not able to maintain
sufficient cash flow to expand its business at the same pace as its clients are
expanding, it may lead to clients moving their accounts to other service
providers.
Rex Tokyo is dependent upon key suppliers for supply of parts and
machinery to the Pachinko slot machine industry. It also outsources a large
amount of its maintenance and installation work. Failure to secure specific
machines or parts that clients request from suppliers may lead to a decrease in
sales. Failure to maintain good relationships with its suppliers and outsourcing
companies could result in the inability to complete work for clients.
Revenue recognition is based on completion of work and industry
regulated police inspection being carried out so that stores can open. A change
in this system or the delay of inspections could adversely affect revenue.
27
The passing of legislation that may allow for other forms of gaming
within Japan could cause a material change in the business model of Rex Tokyo.
While no legislation has been passed at this time, debate in political circles
over the introduction of legal casinos in Japan has been public knowledge for
some time. It is not known whether such legislation might ever be passed in
Japan, or if it was passed, what impact that may have on Rex Tokyo's business,
prospects, financial condition and results of operations. Further, the existence
and growth of illegal or "underground" casinos in Japan may also have a similar
negative impact.
Fan Club Entertainment's business is 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. via appointment under an
exclusive contract with Cyberbred Co. Ltd. Any significant change in the
relationship between the above parties could adversely affect the business of
Fan Club Entertainment. From time to time, Fan Club Entertainment will be
required to seek the approval of Marvel and or Cyberbred to launch a new web
service, event, media publication or merchandising product. Lack of timely
approval of the parties, or non-approval could lead to a significant decrease in
the ability of Fan Club Entertainment to produce sales revenue, and indeed
sustain their business.
We have expanded our operations by acquiring companies, primarily in
Japan. We have been reliant on the company's majority shareholder in assisting
us in raising financing to carry out these acquisitions. We may need to obtain
additional financing in order to continue our current operations, including the
cash flow needs of Rex Tokyo, Fan Club and IA Global Acquisition Co., to acquire
businesses and to meet AMEX requirements of $6 million in stockholders' equity
by May 15, 2005 for continued listing of our shares. Our major shareholder 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 shareholder or otherwise.
KEY TRENDS
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.
The number of total stores in Japan has decreased during this time from
approximately 18,000 to approximately 16,000. The number of stores owned by
Chain Stores has increased dramatically, while the number of one-owner one-store
establishments have decreased.
In addition, the increase in market penetration of slot machines as
opposed to the more traditional Pachinko machines, has resulted in slot machines
making over 30% of the market in terms of total number of machines in stores.
Rex Tokyo has focused heavily on the slot machine side of the industry.
KEY DRIVERS
One of the key drivers in the industry for expansion has been the rapid
pace of new store openings by the Chain Stores. These stores have put an
emphasis on automating the operation within the store as much as possible, and
reducing the overhead of labor costs. Suppliers of automated equipment, such as
automatic medal dispenser and cigarette ash disposal machines, have benefited
from this expansion.
OUR STRATEGY
We operate primarily as a holding company. We intend to grow our Rex
Tokyo business. Also, we intend to further increase the number of majority-owned
companies by acquiring primarily Japanese small to midsize companies at low
acquisition costs in the media, entertainment and technology areas.
28
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of
operations information and presentation of that data as a percentage of change
from period-to-period.
(dollars in thousands)
Three Months Ended March 31,
---------------------------------------------------
2005 2004 $ Variance % Variance
------- ------- ---------- ----------
Revenue $ 5,969 $ 2,031 $ 3,938 193.9%
Cost of sales ........................................ 4,864 1,511 3,353 221.9%
------- ------- ------- -------
Gross profit ......................................... 1,105 520 585 112.5%
------- ------- ------- -------
Expenses:
Selling, general and
administrative expenses ............................ 2,036 883 1,153 130.6%
------- ------- ------- -------
Total expenses ....................................... 2,036 883 1,153 130.6%
------- ------- ------- -------
Operating loss ....................................... (931) (363) (568) 156.5%
------- ------- ------- -------
Other Income (Expense):
Interest income ...................................... 6 3 3 100.0%
Interest expense ..................................... (23) (5) (18) 360.0%
Other Income ......................................... 31 2 29 1450.0%
Foreign currency transaction adjustment .............. 17 2 15 750.0%
Gain on equity investment in QuikCAT Australia Pty Ltd - 2 (2) *
------- ------- ------- -------
Total other income (expense) ......................... 31 4 27 675.0%
------- ------- ------- -------
Loss before minority interests and income taxes ...... (900) (359) (541) 150.7%
Minority interests ................................... (205) 34 (239) -702.9%
------- ------- ------- -------
Loss before income taxes
taxes .............................................. (695) (393) (302) 76.8%
Income taxes:
Current .............................................. (192) 64 (256) -400.0%
Deferred ............................................. - 12 (12) *
------- ------- ------- -------
Loss from continuing operations ...................... (503) (469) (34) 7.2%
Loss from discontinued operations .................... (41) - (41) *
------- ------- ------- -------
Net loss ............................................. $ (544) $ (469) $ (75) 16.0%
======= ======= ======= =======
* Not meaningful.
29
THREE MONTHS ENDED MARCH 31, 2005 VS. THREE MONTHS ENDED MARCH 31, 2004
NET REVENUE
Net revenue for the three months ended March 31, 2005 increased
$3,938,000 to $5,969,000, as compared to the three months ended March 31 2004.
Rex Tokyo recorded revenue of $5,825,000 and Fan Club recorded revenue of
$144,000. In the prior year, Rex Tokyo, which was acquired March 18, 2004,
recorded $1,101,000 and Fan Club recorded revenue of $930,000. The reduction in
Fan Club revenues resulted from delays in closing new license sales.
COST OF SALES
Cost of sales for the three months ended March 31, 2005 increased
$3,353,000 to $4,864,000 as compared to the three months ended March 31, 2004.
This increase was due to Rex Tokyo cost of sales of $4,523,000 consisting
primarily of inventory purchases and outsourced expenses. Rex Tokyo outsources
the majority of its installation and maintenance work. Fan Club cost of sales
was $341,000 and this primarily related to outsourced website development for
customers and amortization of the Marvel contract and other license agreements.
EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 2005 increased $1,153,000 to $2,036,000, as compared to the three
months ended March 31, 2004. This was due to increased operating expenses of
$1,625,000 related to Rex Tokyo and $109,000 related to Fan Club.
For 2005 and 2004, the selling, general and administrative expenses
consisted primarily of employee and independent contractor expense, rent,
overhead, equipment and depreciation, amortization of identifiable intangible
assets and intellectual property, professional and consulting fees, sales and
marketing costs, investor relation, legal and other general and administrative
costs. The difference in the current periods compared to the prior periods is
primarily due to the acquisition Fan Club on August 5, 2003 and Rex Tokyo on
March 18, 2004.
OTHER INCOME/ EXPENSE
Other income for the three months ended March 31, 2005 was $31,000 as
compared to $4,000 for the three months ended March 31, 2004. The 2005 other
income was primarily due to miscellaneous income of $31,000 from Rex Tokyo,
offset by interest expense of $23,000 from Rex Tokyo.
NET LOSS FROM CONTINUING OPERATIONS
Net loss from continuing operations was $503,000 for the three months
ended March 31, 2005 as compared to a net loss of $469,000 for the three months
ended March 31, 2004. The reasons for the decreased loss were discussed above.
NET LOSS
Net loss was $544,000 for the three months ended March 31, 2005 as
compared to a net loss of $469,000 for the three months ended March 31, 2004.
The reasons for the decreased loss were discussed above.
On February 9, 2005, we announced a definitive agreement to divest our
remaining holdings related to QuikCAT Technologies ("QuikCAT") to Nanocat
Technologies PTE Limited ("Nanocat"), a Singapore corporation. In accordance
with SFAS 144, we accounted for the loss for the first quarter of 2005 of
$41,000 as discontinued operations in our consolidated statement of operations.
30
GRANT OF STOCK OPTIONS
On February 7, 2005, we granted 30,000 stock options in total at an
exercise price of $.29 per share to employees of Rex Tokyo. These options vest
quarterly over three years and expire on February 7, 2015.
We have not recorded any compensation expense for stock options granted
to employees during the three months ended March 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
We had cash of approximately $2.3 million and net working capital of
approximately $3.1 million as of March 31, 2005. We had a net loss from
continuing operations of approximately $.9 million for the year ended December
31, 2004. We expect our net loss from operations to decrease in 2005, but to
continue for the foreseeable future.
Rex Tokyo received a 100,000,000 Yen, or $923,275 at current exchange
rates, working capital loan with Nihon Shinko Bank Co, an affiliated party, for
use as operating capital on June 30, 2004. On January 18, 2005, Rex Tokyo
refinanced this loan by entering into a 100,000,000 Yen, or $978,761 at current
exchange rates, loan with Mizuho Bank Co Ltd, an unrelated Japanese bank.
On March 25, 2005, Rex Tokyo received a 100,000,000 Yen, or
approximately $940,000 at current exchange rates, working capital loan from
Chiba Bank Ltd, an unrelated Japanese bank. The loan will be used to fund Rex
Tokyo's growth.
We may need to obtain additional financing in order to continue our
current operations, including the cash flow needs of Rex Tokyo and subsidiaries,
Fan Club, IA Global Acquisition Co., to acquire businesses and to meet the
American Stock Exchange ("AMEX") requirements of $6 million in stockholders'
equity by May 15, 2005 for continued listing of our shares. Our major
shareholders thus far have 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.
Since inception, we have financed our operations primarily through
sales of our equity securities in our initial public offering and from several
private placements, loans and capital contributions, primarily from related
parties. Net cash proceeds from these items have totaled approximately $20.1
million as of March 31, 2005, with approximately $8.8 million raised in the
initial public offering, $7.6 million raised in private placements, $3.6 million
raised in the conversion of debt and $.1 million raised from a capital
contribution. In addition, we have issued equity for non-cash items totaling
$9.5 million, including $6.9 million issued for services, $2.3 million related
to a beneficial conversion feature, $.2 million related to the Fan Club
acquisition and $.1 million related to the Rex Tokyo acquisition. Additional
funding was obtained from short-term and long-term debt approximately $1.8
million was outstanding as of March 31, 2005.
31
OPERATING ACTIVITIES
Net cash used in operations for the three months ended March 31, 2005
was $1,469,000. This amount was primarily related to a net loss of $544,000, an
increase in inventory of $486,000, a decrease in accounts payable of $3,579,000
and a decrease in notes payable of $654,000. This was offset by depreciation and
amortization of $164,000, a decrease in accounts receivable of $3,031,000, a
decrease in notes receivable of $423,000 and a decrease of prepaid expenses of
$559,000.
The March 31, 2005 quarter typically is a seasonal low quarter for Rex
Tokyo. This results in reduced sales, accounts receivable and accounts payable
during the quarter.
INVESTING ACTIVITIES
Net cash used in investing activities for the three months ended March
31, 2005 was $944,000. This amount was primarily related to an increase in other
current assets of $280,000 and an increase in other assets of $790,000. These
amounts relate to Rex Tokyo loans receivable from Kyushu Tesco Co Ltd which was
used to fund the growth of the Timothy World Co Ltd business.
FINANCING ACTIVITIES
Net cash provided by financing activities for the three months ended
March 31, 2005 was $1,061,000. This amount related to proceeds from long term
debt of $1,860,000, offset by repayment of long term debt-affiliated party and
long term debt of $799,000.
Rex Tokyo received a 100,000,000 Yen, or $923,275 at current exchange
rates, working capital loan with Nihon Shinko Bank Co, an affiliated party, for
use as operating capital on June 30, 2004. On January 18, 2005, Rex Tokyo
refinanced this loan by entering into a 100,000,000 Yen, or $978,761 at current
exchange rates, loan with Mizuho Bank Co Ltd, an unrelated Japanese bank.
On March 25, 2005, Rex Tokyo received a 100,000,000 Yen, or
approximately $940,000 at current exchange rates, working capital loan from
Chiba Bank Ltd, an unrelated Japanese bank. The loan will be used to fund Rex
Tokyo's growth.
Other Material Commitments. The Company's contractual cash obligations
as of March 31, 2005 are summarized in the table below (1):
Less Than Greater Than
Contractual Cash Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
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