SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
Commission File Number: 1-15863
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IA Global, Inc.
(Exact name of Registrant as specified in its charter)
----------------------
Delaware 13-4037641
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
533 Airport Boulevard, Suite 400
Burlingame, CA 94010
(Address of principal executive offices)
Registrant's telephone number: (650) 685-2403
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of November 6, 2003 there were issued and outstanding 65,480,889
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.......................... 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 32
Item 4. Controls and Procedures...................................... 33
PART II.
Item 1. Legal Proceedings............................................ 34
Item 2. Changes in Securities and Use of Proceeds.................... 34
Item 3. Defaults Upon Senior Securities.............................. 35
Item 4. Submission of Matters to a Votes of Security Holders......... 35
Item 5. Other Information............................................ 35
Item 6. Exhibits and Reports on Form 8-K............................. 35
Signatures.................................................................. 36
2
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2003 December 31, 2002
------------------ -----------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 613,151 $ 444,383
Deferred license fee .......................... 31,384 -
Other Current Assets .......................... 188,645 -
------------ ------------
Total current assets ........................ 833,180 444,383
EQUIPMENT, NET .................................... 604,365 812
OTHER ASSETS
Software development costs, net ............... 131,334 -
Intangible Assets, Net ........................ 1,799,683 -
Loan to QuikCat Australia Pty Ltd. ............ 34,060 -
Other assets .................................. - 5,477
------------ ------------
$ 3,402,622 $ 450,672
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ...................... $ 410,793 $ 246,353
Accrued liabilities ........................... 304,196 31,000
Loan payable - related party .................. 834,167 1,063,857
Deferred revenue .............................. 755,276 -
Short term loan - related party ............... 344,122 -
Income taxes payable .......................... 18,981 -
------------ ------------
Total current liabilities ................... 2,667,535 1,341,210
------------ ------------
MINORITY INTERESTS ................................ 12,002 -
------------ ------------
STOCKHOLDER'S EQUITY:
Series B Preferred stock, $.01 par value,
5,000 shares authorized 1,158 and
-0- issued and outstanding, respectively
(liquidation value $1,158,000) .............. 12 -
Common stock, $.01 par value, 75,000,000
shares authorized, 65,480,889 and 51,797,556,
issued and outstanding, respectively ........ 654,810 517,976
Paid in capital ............................... 23,207,997 19,744,331
Accumulated deficit ........................... (23,215,533) (21,022,845)
Unearned compensation expense ................. - (80,000)
Treasury stock ................................ (50,000) (50,000)
Unrealized foreign exchange gain (loss) ....... 125,799 -
------------ ------------
Total stockholder's equity (deficiency) ..... 723,085 (890,538)
------------ ------------
$ 3,402,622 $ 450,672
============ ============
See notes to consolidated financial statements.
3
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ----------- ---------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE ........................................ $ 126,070 $ 180,000 $ 230,793 $ 406,046
COST OF SALES .................................. 152,821 - 453,174 62,552
------------ ----------- ------------ ------------
GROSS PROFIT (LOSS) ............................ (26,751) 180,000 (222,381) 343,494
------------ ----------- ------------ ------------
EXPENSES
Production ............................. - - - 24,815
Selling, general and administrative .... 606,437 131,542 1,563,301 612,928
Writedown of fixed assets .............. - - - 87,137
------------ ----------- ------------ ------------
Total expenses .................. 606,437 131,542 1,563,301 724,880
------------ ----------- ------------ ------------
OPERATING INCOME (LOSS) ........................ (633,188) 48,458 (1,785,682) (381,386)
------------ ----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ........................ 661 - 2,357 -
Interest expense ....................... (78,789) - (274,924) -
Other income (expense) ................. 24,965 209,211 865 209,244
------------ ----------- ------------ ------------
Total other income (expense) .... (53,163) 209,211 (271,702) 209,244
------------ ----------- ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND INCOME TAXES ....................... (686,351) 257,669 (2,057,384) (172,142)
MINORITY INTERESTS ............................. (10,914) - (10,914) -
------------ ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES .............. (697,265) 257,669 (2,068,298) (172,142)
INCOME TAXES: .................................. - - 334 -
------------ ----------- ------------ ------------
NET INCOME (LOSS) .............................. (697,265) 257,669 (2,068,632) (172,142)
Other comprehensive income, net of tax:
Foreign currency translation adjustments 2,805 - 2,616 -
------------ ----------- ------------ ------------
Comprehensive Income ........................... $ (694,460) $ 257,669 $ (2,066,016) $ (172,142)
============ =========== ============ ============
Per share of Common
Basic net income (loss) per share ...... $ (0.01) $ 0.01 $ (0.04) $ (0.01)
============ =========== ============ ============
Diluted net income (loss) per share .... $ (0.01) $ 0.01 $ (0.04) $ (0.01)
============ =========== ============ ============
Weighted average shares of common
stock outstanding ............... 65,343,932 37,055,889 56,362,635 31,887,556
Weighted average shares of common stock
and common equivalent shares
outstanding ..................... 65,343,932 37,055,889 56,362,635 31,887,556
See notes to consolidated financial statements.
4
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
-----------------------------
2003 2002
----------- ---------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $(2,068,632) $(172,142)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation & amortization ........................................ 518,556 6,374
Writedown of fixed assets .......................................... - 87,137
Amortization of beneficial conversion feature ...................... 168,124 -
Minority interests ................................................. 10,914 -
Equity based compensation .......................................... 80,000 194,341
Other current assets ............................................... (67,681) 376
Other assets ....................................................... 3 27,570
Deferred license fee receivable .................................... (31,384) -
Accounts payable ................................................... 164,440 (162,541)
Accrued expenses ................................................... 264,261 (181,843)
Income taxes payable - foreign ..................................... 18,981 -
Deferred revenue ................................................... 755,276 (305,000)
----------- ---------
NET CASH USED IN OPERATIONS ........................................ (187,142) (505,728)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of capital expenditures .................................. (666,512) -
Other assets ....................................................... 5,477 -
Purchase of intangibles ............................................ (2,221,414) -
Investment in affiliate ............................................ - 100,000
----------- ---------
NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES ................ (2,882,449) 100,000
----------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from loan payable - related party ......................... 1,432,419 320,379
Repayments of related party loans .................................. (160,000) -
Loan to QuikCat Australia Pty Ltd. ................................. (34,060) -
Proceeds from sale of stock ........................................ 2,000,000 2,250
Contribution of capital ............................................ - 64,719
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 3,238,359 387,348
----------- ---------
NET INCREASE (DECREASE) IN CASH .................................... 168,768 (18,380)
CASH, beginning of the period ...................................... 444,383 18,380
----------- ---------
CASH, end of the period ............................................ $ 613,151 $ -
=========== =========
Supplemental disclosures of cash flow information:
Interest paid ...................................................... $ - $ -
Taxes paid ......................................................... $ 334 $ -
Non-cash financing activities:
Conversion of debt to equity ....................................... $ 1,157,988 $ -
Common stock and options issued for services ....................... $ - $ 160,000
Conversion of preferred stock to common stock ...................... $ - $ 200,000
Common stock issued for Fan Club acquisition ....................... $ 165,200 $ -
See notes to consolidated financial statements.
5
IA GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements of IA Global, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
prepare them for inclusion as part of the Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The financial
statements for the periods ended September 30, 2003 and 2002 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,
2002.
2. GOING CONCERN:
These financial statements have been prepared assuming the Company will continue
as going concern. The Company has suffered recurring losses in excess of $23
million. The Company has borrowed funds from its shareholders to meet its daily
cash flow requirements during the past two years; additional loans from
affiliates are not guaranteed but may occur. The Company may need to obtain
additional financings through debt or equity raises in order to continue its
operations for the period beyond the end of the December 2003 and to acquire new
businesses.
In January 2003, a loan agreement was signed with PBAA FUND LTD, a related
party, for the financing of an acquisition and in June 2003, PBAA FUND LTD.
agreed to acquire $2.0 million of the Company's Common Stock through a private
placement, and in the quarter ended June 30, 2003, the Company borrowed funds
from Inter Asset Japan KK, a related party, to fund operations of iAccele. On
November 12, 2003 the Company receive a $.5 million subscription to acquire
common stock from a related entity.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its majority and wholly-owned subsidiaries.
Intercompany 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.
PROPERTY AND EQUIPMENT - Property and equipment represent machinery, equipment
and software which are stated at cost less accumulated depreciation.
Depreciation of machinery and equipments is computed by the declining method
over the estimated useful lives of the related assets (approximately 4 - 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 five years.
INTANGIBLE ASSETS/INTELLECTUAL PROPERTY - The Company is amortizing the
intangible assets/intellectual property for the iAccele acquisition over
twenty-four months on a straight - line basis. For the Fan Club
6
Entertainment acquisition, the Company is amortizing the intangible
assets/intellectual property over sixty months on a straight - line basis, which
is the expected life of the agreement.
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.
SOFTWARE DEVELOPMENT COSTS - The Company capitalizes software development costs
upon the establishment of technological feasibility, subject to net realizable
value considerations. These costs are included in the balance sheet in property
and equipment. Capitalization ends when the product is available for general
release. Capitalized software development costs are amortized over 24 months
using the higher of the straight line method or the ratio of current gross
revenues to the total of the current and expected future revenues of the
product. Costs capitalized include expenses to adopt licensed internet
acceleration software to the Japanese Market.
SOFTWARE REVENUE AND COST RECOGNITION - The Company's revenue recognition
policies are in accordance with Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as amended, and Staff Accounting Bulletin No. 101, Revenue
Recognition.
The Company sells its software and provides support service on a subscription
basis through Value Added Resellers ("VARs"), Internet Service Providers
("ISPs") or directly to end-users. They purchase either 13 months/12 months/6
months/3 months/30 days license products, and receive a copy of the iAccele
software and full access to the acceleration server maintained by the Company.
Revenues are recognized ratably over the license period upon delivery of the
software to the end user.
As detailed more fully in Note 8, the Company has a license agreement to use
certain internet acceleration technology which forms the basis of the iAccele
software service. The Company pays a license fee for each customer purchasing
this product. Fees paid under this license are capitalized as deferred license
fee and amortized to cost of sales over the life of the product period from the
month of selling and receiving the cash from the customers to the expiration
month of the product life span.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
USE OF ESTIMATES - The preparation of financial statements in conformity with
U.S. GAAP 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments,
including accounts receivable and accounts payable are carried at cost, which
approximates fair value due to the relatively short maturity of those
instruments.
STOCK BASED COMPENSATION PLANS - We account for our stock-based compensation
plans under Accounting Principles Board Opinion 25, (APB 25) Accounting for
Stock Issued to Employees and the related interpretation, for which no
compensation cost is recorded in the statement of operations for the estimated
fair value of stock options issued with an exercise price equal to the fair
value of the common stock on the date of grant. Statement of Financial
Accounting Standards No. 123 (SFAS 123) Accounting for Stock-Based Compensation,
as amended by Statement of Financial Accounting Standards No. 148 (SFAS 148)
Accounting for Stock-Based Compensation - Transition and Disclosure, requires
that companies, which do not elect to account for
7
stock-based compensation as prescribed by this statement, disclose the pro-forma
effects on earnings and earnings per share as if SFAS 123 has been adopted.
If we applied the recognition provisions of SFAS 123 using the Black-Scholes
option pricing model, the resulting pro-forma net income (loss) available to
common shareholders, and pro-forma net income (loss) available to common
shareholders per share would be as follows:
For the nine months ended For the three months ended
September 30, September 30,
--------------------------- ----------- -----------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss available to common
shareholders, as reported ....... $(2,066,016) $ (172,142) $ (694,460) $ 257,669
Deduct: Stock-based compensation,
net of tax ...................... $ 80,000 - - -
----------- ----------- ----------- -----------
Net loss available to common
shareholders, pro-forma ......... $(2,146,016) $ (172,142) $ (694,460) $ 257,669
=========== =========== =========== ===========
Basic earnings per share:
As reported - .......... $ (.04) $ (.01) $ (.01) $ .01
Pro-forma - ............ $ (.04) $ (.01) $ (.01) $ .01
The above stock-based employee compensation expense has been determined
utilizing a fair value method, the Black-Scholes option-pricing model.
We have recorded no compensation expense for stock options granted to employees
during the three or nine months ended September, 2003 and 2002.
In accordance with SFAS 123, the fair value of each option grant has been
estimated as of the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
For the Nine Months
Ended September 30,
2003 2002
---- ----
Risk free interest rate .......... 3.75% 4.08%
Expected life .................... 10 yrs 10 years
Dividend rate .................... 0.00% 0.00%
Expected volatility .............. 65% 75%
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -
FASB Interpretation ("FIN") No. 45: In November 2002, the FASB issued FIN No.
45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others," an interpretation of SFAS Nos.
5, 57 and 107, and rescission of FIN No. 34,"Disclosure of Indirect Guarantees
of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made
by the guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are applicable on
8
a prospective basis to guarantees issued or modified after March 31, 2002;
while, the provisions of the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of such interpretation on January 1, 2003 did not have a material
impact on the Company's results of operations, financial position or cash flows.
FIN No. 46: In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities," an interpretation of Accounting Research Bulletin
No. 51. FIN No. 46 requires that variable interest entities be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. FIN No. 46 also requires disclosures
about variable interest entities that companies are not required to consolidate
but in which a company has a significant variable interest. The consolidation
requirements of FIN No. 46 will apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements will apply to
entities established prior to January 31, 2003 in the first fiscal year or
interim period beginning after June 15, 2003. The disclosure requirements will
apply in all financial statements issued after January 31, 2003. The Company has
adopted the provisions of FIN No. 46, such provisions have not had a material
effect on its results of operation, financial position or the related financial
statement disclosures.
In April 2003, the FASB issued Statements of Financial Accounting Standards No.
149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No. 149 clarifies under
what circumstances a contract with initial investments meets the characteristics
of a derivative and when a derivative contains a financing component. This SFAS
is effective for contracts entered into or modified after June 30, 2003. The
Company has adopted the provisions of SFAS No. 149 and such provisions have not
had a material effect on its results of operation, financial position or the
related financial statement disclosures.
Accounting for Financial Instruments - In May 2003, the FASB issued Statements
of Financial Accounting Standards No. 150 ("SFAS No. 150") "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". SFAS No. 150 established standards for how an issuer classifies and
measures in its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This SFAS is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS
No.150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company has adopted the provisions of SFAS No.
150 and such provisions have not had a material effect on its results of
operation, financial position or the related financial statement disclosures.
4. RISK OF CONCENTRATION
Significant Distributor - The Company's largest distributor is a VAR that
accounted for 0% and 78% of revenue and deferred revenue for the three and nine
month periods ending September 30, 2003. A second VAR accounted for a further
54% and 20% of revenue and deferred revenue for the same three and nine month
periods. The Company anticipates that significant distributor concentration will
continue for the foreseeable future.
5. EQUIPMENT
The Company purchased and subsequently leased 600 computers to an investee of
the major shareholder of the Company, ForeignTV Japan. The InterAsset Group owns
approximately 66% of ForeignTV Japan. The Company had a minority ownership in
the ForeignTV Japan, but was sold approximately one year ago. These computers
9
cost approximately $1,000 per machine or approximately $600,000. The Company
expects to receive about $1,200,000 over the term of these leases for the
equipment under lease. The terms of the leases are as follows;
o Lease 1 dated June 10, 2003 for 100 computers. The monthly rental is
950,000 Yen or approximately $8,000 per month.
o Lease 2 dated June 20, 2003 for 200 computers. The monthly rental is
1,900,000 Yen or approximately $17,000 per month.
o Lease 3 dated August 1, 2003 for 300 computers. The monthly rental is
2,850,000 Yen or approximately $25,000 per month.
o The rental period for each lease is for 2 years.
o The lease contract shall be automatically extended for six months if
ForeignTV Japan does not object within one month of the contract
termination date.
o These computers are to be returned to the Company upon termination of the
leases.
These leases were not recorded as a financing lease, because these leasing
transactions are between related parties under common control. As a result,
revenues are not being recognized on any cash receipts. In addition, the lessee
of these computers is not adequately capitalized, therefore the collectibility
of the lease payments are not guaranteed. The Company has received 3,429,749 Yen
or approximately $31,000 during the quarter ending September 30, 2003 and this
amount has been booked as deferred revenue on the balance sheet.
These computers are being depreciated over three years.
6. INTANGIBLE ASSETS
Intangible assets include the following as of September, 30, 2003:
o Software development costs, net of accumulated amortization, of $131,334.
o Identifiable intangible assets of $1,034,092, net of accumulated
amortization of $274,264. The intellectual property arose from the net
difference in assets and liabilities acquired from the Company acquiring a
76.9% equity interest in a privately held Japanese corporation, "iAccele",
that is engaged in the business of providing an internet data transmission
acceleration service that targets narrowband users. The Company financed
this acquisition by borrowing the 100 million Japanese Yen or
approximately $830,000 from a related party and the assumption of
indebtedness of iAccele.
o Identifiable intangible assets of $1,073,909, net of accumulated
amortization of $34,054. The intellectual property arose from the net
difference in assets and liabilities acquired from the Company acquiring a
67% equity interest in a privately held Japanese corporation, Fan Club
Entertainment, that is engaged in the business of providing advertising,
merchandising, publishing, website and data management services to
Cyberbred Co., Ltd.
7. INCOME TAXES
The Company management is not able to determine whether it is more likely than
not that the deferred tax assets will be realized. As a result, management has
provided a 100% valuation allowance against the net deferred tax assets.
10
8. RELATED PARTY RELATIONSHIPS WITH INTER ASSET JAPAN
Alan Margerison, our President and Chief Executive Officer and one of our
directors, currently serves as the Chairman of Inter Asset Japan KK (Kabushiki
Gaisha), a Japanese venture capital company and an affiliate of Inter Asset
Japan LBO No. 1 Fund, a Japanese limited partnership ("IAJ"), the majority owner
of our common stock.
Conversion of Preferred A Shares
On September 30, 2002, IAJ consummated a series of related transactions pursuant
to which IAJ, together with its affiliates, became the majority stockholder of
our company. As of such date, IAJ converted 1,000 shares of our Series A
convertible preferred stock (the "Preferred Shares") for 20,000,000 shares of
our common stock (the "Conversion Shares"). IAJ had acquired the Preferred
Shares from us on October 30, 2001, in a private transaction for an aggregate
consideration of $1,000,000. No additional consideration was due from or paid by
IAJ for the exercise of its right to convert the Preferred Shares to Conversion
Shares.
In connection with these transactions, Jonathan Braun, our President and Chief
Executive Officer at that time, resigned as a director of our company effective
September 30, 2002. On October 18, 2002, Mr. Braun resigned as our President and
Chief Executive Officer. Mr. Braun's resignation was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices. Immediately following Mr. Braun's resignation as our President and
Chief Executive Officer, our Board of Directors elected Alan Margerison to serve
as one of our directors and appointed Mr. Margerison to serve as our President
and Chief Executive Officer.
Debt to Preferred B Shares Conversion
We owed David Badner, a shareholder of, and a former consultant to, our company,
$563,857 on September 25, 2002 pursuant to a convertible promissory note dated
May 31, 2002 (the "Promissory Note"). On September 25, 2002, IAJ acquired the
right, title and interest to the Promissory Note. The interest rate under the
Promissory Note is 10% per annum.
During the three months ended December 31, 2002, IAJ loaned us $500,000 pursuant
to the terms and conditions of the Promissory Note, increasing the principal
amount to $1,063,857. The proceeds of this loan were for working capital
purposes.
The debt under the Promissory Note is convertible into our Series B convertible
preferred stock, which is convertible into shares of our common stock. The
issuance of the Series B convertible preferred stock is subject to certain
conditions including an amendment to our certificate of incorporation increasing
our authorized common stock to at least 100,000,000 shares. On June 30, 2003,
Inter Asset Japan LBO No.1 Fund ("IAJ"), elected to convert its $1,063,857
Mezzanine Finance Loan Note due from the Company, plus accrued interest of
$95,000 into Series B Preferred Stock at the conversion rate of $1,000 per
share. We issued 1,158 shares of Series B Preferred Stock in exchange for the
note and accrued interest. Each share of Series B convertible preferred stock is
convertible at any time or from time to time into 10,000 shares of our common
stock, or an aggregate of 11,580,000 shares of our common stock if all of the
Series B convertible preferred stock is converted.
Acquisition of iAccele Co., Ltd.
On February 10, 2003, we acquired a 76.9% equity interest in iAccele Co., Ltd.,
a privately held Japanese corporation engaged in the business of providing an
Internet data transmission acceleration service that targets narrowband users,
as well as broadband users, for 100.0 million Japanese Yen, or approximately
$825,000 based on the Japanese Yen/US dollar exchange rate on that date.
11
In order to finance this purchase, we borrowed 100.0 million Japanese Yen from
PBAA Fund Ltd., a British Virgin Islands limited liability company. The
principal amount of this loan, together with interest thereon at 4.50% per
annum, is due and payable on January 31, 2004. We may defer payment of the
principal amount of this loan, but not accrued interest, for one additional year
with the consent of PBAA. We may prepay all or specified minimum portions of
this loan at any time after March 31, 2003 upon payment of certain prepayment
penalties.
If this loan is not repaid by January 31, 2004, PBAA will be afforded the right
to convert any portion of the then unpaid principal amount of the loan, as well
as any then accrued but unpaid interest thereon, into shares of our common stock
at a per share conversion price equal to the Japanese Yen equivalent of 80% of
the average of the US dollar closing price of our common stock on the American
Stock Exchange in the 20 consecutive trading days immediately prior to the date
upon which PBAA gave us notice of conversion, or, if our common stock is not
then traded on the American Stock Exchange, the closing bid price for our common
stock as reported by the Nasdaq Stock Market or such other primary exchange or
stock bulletin board on which our common stock is then traded. By way of
illustration, had such conversion occurred on February 10, 2003, PBAA would have
received 7,335,145 shares of our common stock which, when added to those shares
currently beneficially owned by PBAA and its affiliates would increase their
collective ownership of our common stock to approximately 78.9%.
iAccele used 70.0 million of the 100.0 million Japanese Yen that it received
from us to partially repay a contractual obligation of 150.0 million Japanese
Yen, since reduced by iAccele's payment of 30.0 million Japanese Yen, that it
owes to InfoShowerX, a Japanese public company, which was incurred by iAccele in
connection with a December 2002 reorganization by which iAccele, previously an
unincorporated operating division of InfoShowerX, acquired the division's assets
from InfoShowerX and became a stand-alone corporation. iAccele was required to
repay this contractual obligation to InfoShowerX in its entirety by the end of
April 2003. Further, 42.0 million Japanese Yen was paid by iAccele between
February 10, 2003 and June 30, 2003 and the balance of 8.0 million Japanese Yen
in August 2003. InfoShowerX has agreed to indemnify us for any damages that may
result from representations and warranties made to us by iAccele to acquire our
equity interest thereon.
IAJ, together with PBAA and another affiliated entities, are the majority owners
of our equity capital. IAJ and other entities, also affiliated with IAJ, own an
aggregate of 42.7% and Hiroshi Kubori, a director of our company as well as CEO
of iAccele, own approximately 5% of the capital stock of InfoShowerX.
InfoShowerX owns the balance of the capital stock of iAccele or 23.1%.
InfoShowerX had outstanding indebtedness owed to IAJ. A portion of the payment
that InfoShowerX received from iAccele, noted above, were used to repay some or
all of its indebtedness to IAJ and its related entities.
Pursuant to a one-year outsourcing agreement, dated as of December 20, 2002,
iAccele had provided business services to InfoShowerX and InfoShowerX had
provided technology services and office space to iAccele. A new agreement was
signed between the two companies for the term April 1, 2003 to July 31, 2003.
During the three months ended June 30, 2003, iAccele purchased 300 computers for
an aggregate purchase price of approximately $ 300,000. iAccele is leasing all
of these computers to ForeignTV Co. Ltd. for a term of 2 years for aggregate
lease payments over the term of the lease of $600,000. We previously held a
minority ownership in ForeignTV, a Japanese limited liability company, but this
was sold approximately one year ago. IAJ, a principal shareholder of our
company, currently owns approximately 66% of the outstanding shares of
ForeignTV.
The details of the lease are as follows. There are two leases; one for 200
computers and one for 100 computers. The rental period for each lease is for 2
years. The lease contract shall be automatically extended for six months if
ForeignTV Co. Ltd. does not object within one month of the contract termination
date. The monthly rental for the 200 computers is 1,900,000 Yen or approximately
$ 17,000. The monthly rental for the 100 computers is 950,000 Yen or
approximately $ 8,000. These computers are to be returned to the Company upon
termination of the leases.
12
During the quarter ended June 30, 2003, iAccele borrowed 52,500,000 Yen from
Inter Asset Japan KK, our major shareholder, or approximately $454,000. This
financing was made in four separate advances. These advances bear interest at
rates ranging from 3.5% to 6.7% per annum. These advances matured during the
following dates: 5,500,000 Yen or approximately $45,000 on July 25, 2003,
7,000,000 Yen or approximately $62,000 on July 27, 2003, 10,000,000 Yen or
approximately $89,000 on August 1, 2003 and 30,000,000 Yen or approximately
$258,000 on December 1, 2003. The Company has repaid 18,500,000 Yen or
approximately $160,000 on July 25th. The remaining 4,000,000 Yen which was due
on August 1, 2003 was deferred with a new note until the end of 2003. Therefore,
the total outstanding amount to Inter Asset Japan KK due in December, 2003 and
bears interest at 3.5% per annum is 34,000,000 Yen or approximately $ 290,000.
Alan Margerison, President, Chief Executive Officer and a director of our
company, is chairman of Inter Asset Japan KK.
In August 2003, iAccele entered into a transaction with Foreign TV for the
leasing of an additional 300 computers. The terms of the lease are similar to
the earlier lease discussed above.
$2.0M Financing
On June 30, 2003, we agreed to sell to PBAA, 13,333,333 shares of our common
stock at an average price of $0.15 per share, for a total of $2.0 million,
representing an approximate 25% discount to the trailing five-day average
closing price of our common stock ending June 15, 2003, the date PBAA Fund made
its investment commitment. As PBAA Fund's purchase price per share was at a
discount to market, our shareholders will be asked to ratify and approve this
transaction, as required by the applicable rules of the American Stock Exchange
at the our forthcoming 2003 annual meeting of shareholders.
Acquisition of Fan Club Entertainment Co., Ltd.
On August 5, 2003, we executed a Share Purchase Agreement to acquire from Cyber
Holdings Co., Ltd. ("Cyber Holdings") a 67% equity interest in Fan Club, a
privately-held Japanese company. Fan Club will provide advertising,
merchandising, publishing, website and data management services to Cyberbred
Co., Ltd., ("Cyberbred"). The purchase price for our equity interest in Fan Club
is 134,000,000 Japanese Yen, or $1,112,960 (based on the Japanese Yen/US dollar
exchange rate on August 5, 2003), as well as 350,000 shares of our common stock
issued at $.472 per share. The 350,000 shares require Cyber Holdings to transfer
the rights under the Marvel agreement (described below) to Fan Club within five
months or make its best efforts to fully cooperate in any commercially
reasonable arrangement designed to provide the benefit of the Marvel agreement
to Fan Club. We used our 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 currently holds
20,000 shares, will receive a total 33% equity interest by paying 56 million
Japanese Yen to Fan Club for an additional 112,000 shares. Cyber Holdings'
obligation has not been paid to date.
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.
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.
13
There was no prior material relationship between the Company (and any of our
affiliates) and Fan Club. However, an affiliate of InterAsset Japan LBO No. 1
Fund, which is one of our principal shareholders, owned an approximate 27%
equity interest in Cyberbred. This interest was sold to Mr. Ito, the CEO of
Cyberbred, on September 29, 2003.
The Company currently is not a party to the agreement between Cyberbred and
Marvel. This is a material contract to the Company. We would be materially
adversely affected by a termination of the relationship between Cyberbred and
Marvel and can make no assurances about the relationship between Cyberbred and
Marvel.
$.5M Financing
On November 11, 2003, we agreed to sell to Inter Asset Japan Co. Ltd., 1,666,666
shares of our common stock at an average price of $0.30 per share, for a total
of $.5 million, representing an approximate 17% discount to the trailing
five-day average closing price of our common stock ending November 6,, 2003, the
date Inter Asset Japan made its investment commitment. As Inter Asset Japan's
purchase price per share was at a discount to market, our shareholders will be
asked to ratify and approve this transaction, as required by the applicable
rules of the American Stock Exchange at the our forthcoming 2003 annual meeting
of shareholders.
9. COMMITMENT
In November 2002, the Company assumed from InfoshowerX Co. Ltd ("ISX"), a
license agreement for the non-exclusive use to certain internet acceleration
technology. This technology forms the basis of iAccele's only product offering,
and was originally licensed by ISX in July 2002. The license agreement is
renewable annually and requires fixed royalties in the amount of approximately
$13 per twelve month license sold during the period. The Company must pay the
royalties within twenty days after the Company has collected from its customers.
The Company has incurred approximately $67,000 and $273,000 under this license
agreement for the three and nine months ended September, 30, 2003, respectively.
10. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
At the beginning of 2003, we revised our business plan to expand into other
areas of media entertainment and technology. We have shifted the revenue model
from broadband entertainment channels and revenues derived predominantly from
licensing, to a renewed focus on developing media technology products, services
and licensing revenues. To this end, we may develop such media entertainment and
technology products and services internally, or acquire them from other parties.
We are organized by company. Each company reports to the President and he has
been identified as the Chief Operating Decision Maker ("CODM") as defined by
SFAS 131 "Disclosures About Segments of an Enterprise and Related Information".
The CODM allocates resources to each of the companies using information
regarding revenues, operating income (loss) and total assets.
The following companies are the only reportable segments under the criteria of
SFAS 131 (i) IA Global, Inc., the parent company, (ii) iAccele Co., Ltd., a
Japanese company engaged in the business of providing Internet data transmission
acceleration service, (iii) Fan Club Entertainment Co., Ltd., a Japanese company
which provides advertising, merchandising, publishing, website and data
management services to CyberbredCo., Ltd., and (iv) QuikCat Australia Pty Ltd.,
an Australian company engaged in the business of providing Internet data
transmission acceleration service to the Australia and New Zealand markets.
14
The following table presents revenues, operating income (loss) and total assets
by company for the three and nine months ending September 30, 2003:
Company IA Global, Inc. iAccele Leasing Fan Club Total
--------------- ---------- ---------- ---------- ----------
Three months ended:
September 30, 2003
Revenue ............... - 126,070 - - 126,070
Operating income (loss) (203,001) (349,940) (41,667) (38,580) (633,188)
Total Assets .......... 431,873 1,019,330 558,333 1,393,086 3,402,622
September 30, 2002
Revenue ............... 180,000 - - - 180,000
Operating income (loss) 48,458 - - - 48,458
Total Assets (1) ...... - - - - -
Nine months ended:
September 30, 2003
Revenue ............... - 230,793 - - 230,793
Operating income (loss) (550,909) (1,154,526) (41,667) (38,580) (1,785,682)
Total Assets .......... 431,873 1,019,330 558,333 1,393,086 3,402,622
September 30, 2002
Revenue ............... 406,046 - - - 406,046
Operating income (loss) (381,386) - - - (381,386)
Total Assets (1) ...... - - - - -
All assets were written off during the three months ended September 30, 2002
15
The following table presents revenues, operating income (loss) and total assets
by geographic region for the three and nine months ending September 30, 2003:
Geographic Region U.S. Japan Australia Total
---------- ---------- ---------- ----------
Three months ended:
September 30, 2003
Revenue ................... - 126,070 - 126,070
Operating income (loss) ... (203,001) (430,187) - (633,188)
Total Assets .............. 397,813 2,970,749 34,060 3,402,622
September 30, 2002
Revenue ................... 180,000 - - 180,000
Operating Income .......... 48,458 - - 48,458
Total Assets (1) .......... - - - -
Nine months ended:
September 30, 2003
Revenue ................... - 230,793 - 230,793
Operating income (loss) ... (550,909) (1,234,773) - (1,785,682)
Total Assets .............. 397,813 2,970,749 34,060 3,402,622
September 30, 2002
Revenue ................... 406,046 - - 406,046
Operating income (loss) ... (381,386) - - (381,386)
Total Assets (1) .......... - - - -
All assets were written off during the three months ended September 30, 2002
11. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform with the 2003 presentation.
12. STOCKHOLDER'S EQUITY
During the nine months ended September 30, 2003, the following stockholder
equity events occurred:
The beneficial conversion rights for the mezzanine loan from Inter Asset Japan
LBO No. 1 Fund ("IAJ") were recorded at $277,311 as a contribution to capital.
In February 2003, the Company signed three year employment agreements with two
of its executives and granted a total of 1,500,000 Incentive Stock options at
$.08 per share (fair market value at the date of the grant), exercisable
immediately and expiring on January 23, 2013.
In April 2003, the board of directors voted to amend the conversion price for
the 1,678,433 warrants issued in connection with the initial public offering
from an exercise price of $9.00 per share to $3.50 per share.
In June 2003, the Company granted 4,975,000 stock options with an exercise price
of $.20 per share, which was the market price at the grant date. Four million
five hundred thousand of the stock options, which vest over three years, were
issued to the directors and officers. Four hundred and seventy-five thousand
options are performance based stock options. As of June 30, 2003, none of the
performance based stock options were earned. The term of these 4,975,000 stock
options granted are for a term of ten years.
16
In June 2003 the Company agreed to sell $2,000,000 or 13,333,333 shares of its
common stock at an approximate 25% discount or $.15 per share to an affiliated
party, pending approval of the sale by the Company's shareholders.
In June 2003, IAJ converted approximately $1,159,000 of indebtedness, including
the interest thereon into 1,158 shares of Series B Preferred Stock. The 1,158
shares of preferred stock are convertible into 11,580,000 shares of common
stock, subject to approval by the Company's shareholders of an amendment to the
Company's Certificate of Incorporation increasing its authorized common stock to
at least 100,000,000 shares.
13. SUBSEQUENT EVENTS
On October 31, 2003, we completed a joint venture agreement with London Wall
Investment Pty. Ltd., a privately held corporation located in Perth Australia,
whereby we will acquire a 50% equity stake in a newly formed company to be
called, QuikCat Australia Pty Ltd ("QuikCat") for a nominal value. We provided
QuikCat with an initial unsecured loan of AUD$50,000 or approximately $35,000
based on the Australian /US dollar exchange rate for operating costs of the
business. On October 15, 2003, the Company provided QuikCat a loan of an
additional $15,000. We expect to provide additional funding of approximately
$105,000 in the fourth quarter of 2003 and the first quarter of 2004 to purchase
licenses and assist QuikCat in its plans to expand its internet acceleration
service offering to the Australia and New Zealand markets. The first priority
will be to complete the English language client application software and launch
the commercial service in Australia. A beta version of the software is nearing
completion and trials should commence in Australia in November 2003. A full
commercial launch is planned for early 2004. IA Global already provides an
internet acceleration service in Japan thru its subsidiary, iAccele. The QuikCat
joint venture will provide IA Global with the means to extend the service to
other geographical and language markets. The joint venture is currently
negotiating a separate and wide-ranging marketing and development license for
the core technology, and is completing the development of its own English
language client application. Completion of the license is dependent upon
regulatory approvals. No guarantee can be made that these approvals will be
obtained to the full satisfaction of IA Global, if at all.
On November 12, 2003, we agreed to sell to Inter Asset Japan Co. Ltd., 1,666,666
shares of our common stock at an average price of $0.30 per share, for a total
of $.5 million, representing an approximate 17% discount to the trailing
five-day average closing price of our common stock ending November 6, 2003, the
date Inter Asset Japan made its investment commitment. As Inter Asset Japan's
purchase price per share was at a discount to market, our shareholders will be
asked to ratify and approve this transaction, as required by the applicable
rules of the American Stock Exchange at the our forthcoming 2003 annual meeting
of shareholders.
On November 12, 2003, the Board of Directors, subject to shareholder approval at
the forthcoming 2003 annual meeting of shareholders, approved an increase in the
number of shares available for grant under the 1999 and 2000 stock options plans
from 11,500,000 to 12,000,000 shares.
14. LEGAL PROCEEDINGS
On September 26, 2003 Andzej Krakowski, a former employee of ForeignTV.com,
Inc., filed a civil action seeking damages and injunctive relief for (i) for
statutory damages, costs and attorney fees resulting from the Company's willful
copyright infringement, (ii) for monetary damages in the amount of $436,477 for
breach of an employment agreement, (iii) for issuance of 180,000 shares of
common stock in IA Global, (iv) for monetary damages for fraud as determined by
the court, (v) for monetary damages of at least $1,200,000, (vi) for punitive
damages, costs and attorney fees, and (vii) rescinding the Stipulation.
17
IA Global, Inc. is a successor corporation to ForeignTV.com, Inc. and
Medium4.com, Inc. ("Medium"). As part of the September 25, 2002 Agreement and
Assignment between Medium, Inter Asset Japan Co., Ltd., our principal
stockholder, and David Badner, a major stockholder and former consultant, Mr.
Badner agreed to indemnify and hold harmless the Company against expenses,
obligations and liabilities related to any breach of the representations and
warranties and any creditor claims arising from this agreement which facilitated
the financial restructuring of the Company.
The Company believes it has appropriate indemnification from Mr. Badner for this
claim, but there can be no guarantee that the Company will be successful in
resolving this claim.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In April 1999, we commenced operations on the Internet as a single channel
broadcaster that created, produced and distributed location-specific programming
using streaming video technology. We then expanded our business to provide
streaming audio and video content over six Internet "television" networks, which
in the aggregate hosted over 100 distinct channels targeted to various market
and segments and niches. During 2001, we refocused our business model to
de-emphasize the offering of thematic video-on-demand networks in favor of a
single network of special interest, continuously streaming broadband
entertainment channels, using a previously unavailable technology called
Simulated Live Stream, or SLS.
At the beginning of 2003, we revised our business plan to expand into other
areas of media entertainment and technology. We have shifted the revenue model
from broadband entertainment channels and revenues derived predominantly from
licensing, to a renewed focus on developing media technology products, services
and licensing revenues. To this end, we may develop such media entertainment and
technology products and services internally, or acquire them from other parties.
On February 10, 2003, we made an acquisition of a 76.9% equity interest in
iAccele Co., Ltd., a privately held Japanese corporation. iAccele is engaged in
the business of providing an Internet data transmission acceleration service.
Its main product offering is named after the company, iAccele. This service
allows narrow band users, as well as broadband users, to accelerate their access
to the Internet, enabling them to increase the speed of downloading and
uploading data from their local machine to the Internet. This speeds up web
browsing, network services and accelerates email services. There is no need for
the user to change his provider of network connection. The iAccele product is
based on a repeat subscriber business model. The subscriber to the service signs
up for a product license from three to thirteen months, which provides them with
a copy of the iAccele software and full access to the acceleration server.
On August 5, 2003, we executed a Share Purchase Agreement to acquire from Cyber
Holdings Co., Ltd. ("Cyber Holdings") a 67% equity interest in Fan Club, a
privately-held Japanese company. Fan Club provides advertising, merchandising,
publishing, website and data management services to Cyberbred Co., Ltd.,
("Cyberbred"). 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.
As of the end of the fiscal quarter ended September 30, 2003, Fan Club had
commenced operations and had received orders from Cyberbred and ADPlannet for
work in relation to the Marvel Fan Club. However, due to a lack of adequate
staff resources, the Board of Directors of Fan Club determined that most of the
work should be outsourced.
18
Initially, Fan Club's plan is to focus all of its activity on the work for
Marvel Fan Club. Mr. Kazunori Ito, the CEO of Cyberbred is also the CEO of Fan
Club. In order to avoid a conflict of interest with Mr. Ito, Cyberbred and Fan
Club entered into an agreement covering the terms of outsourcing projects which
was filed with the Securities and Exchange Commission on October 20, 2003 on
Form 8-K/A.
During the next few months, Fan Club's main source of revenue will be derived
from the activities associated with Marvel, as received from Cyberbred. These
activities include the following:
o Marvel Fan Club Website - Management, Operation
By utilizing the knowledge of the staff and management, a website will be
established to increase the number of members of the Marvel Fan Club,
distribute a mail magazine, and data mine the member database.
o Marvel Fan Club Magazine - Creation, Production
Produce a regular magazine for members of the Marvel Fan Club
o Marvel Fan Club Merchandising - Creation, Sales
o Event Planning, Operation
Assist in the planning and running of an event for Marvel Fan Club that is
to be held at the end of this year in a major Japanese department store,
Parco. This will be the first official event for the Marvel Fan Club in
Japan. Work will include ticket sales and pamphlet production.
In order to strengthen the team at Fan Club, three new staff were hired as of
November 1, 2003. The main objective of the company at this stage is to increase
sales orders and to continue outsourcing most of the work received. As work flow
increases, management will look to further increase staff numbers. Also, the
composition of Board of Directors will be reviewed by December 31, 2003.
Since the time of incorporation, Fan Club has been using the offices of
Cyberbred at a cost of Yen 500,000 (approximately $4,500) per month, for which
Cyberbred has been invoicing Fan Club. As of November 1, 2003, Fan Club moved
its operational office (leaving its registered headquarters in the Cyberbred
building) and is now paying Yen 230,000 (approximately $2,000) per month.
On October 31, 2003, we entered into a joint venture agreement with London Wall
Investment Pty. Ltd., a privately held corporation located in Perth Australia,
whereby we will acquire a 50% equity stake in a newly formed company to be
called QuikCat Australia Pty Ltd ("QuikCat") for a nominal value. We provided
QuikCat with an initial unsecured loan of AUD$50,000 or approximately $35,000
based on the Australian /US dollar exchange rate for operating costs of the
business. On October 15, 2003, the Company provided QuikCat a loan of an
additional $15,000. We expect to provide additional funding of approximately
$105,000 in the fourth quarter of 2003 and the first quarter of 2004 to purchase
licenses and assist QuikCat in its plans to expand its internet acceleration
service offering to the Australia and New Zealand markets. The first priority
will be to complete the English language client application software and launch
the commercial service in Australia. A beta version of the software is nearing
completion and trials should commence in Australia in November 2003. A full
commercial launch is planned for early 2004.
IA Global already provides an internet acceleration service in Japan thru its
subsidiary, iAccele. The QuikCat joint venture will provide IA Global with the
means to extend the service to other geographical and language markets. The
joint venture is currently negotiating a separate and wide-ranging marketing and
development license for the core technology, and is completing the development
of its own English language client application. Completion of the license is
dependent upon regulatory approvals. No guarantee can be made that these
approvals will be obtained to the full satisfaction of IA Global, if at all.
19
We still own the proprietary rights to the VToob software, and have been looking
into the possibility of licensing this software to other companies. At this
time, we do not believe that the VToob software can be effectively marketed, and
that the costs of pursuing this product any further would be greater than any
anticipated return. Therefore, we have decided not to focus our resources on the
development or marketing of VToob software. Similarly we will not be focusing
our resources on the broadcasting channel of StreamingUSA.com, which utilizes
the VToob software.
Our business plan for 2003 assumed that we would not derive any significant
revenues from advertising or other activities related to VToob, except for the
possibility of a licensing model as stated above. No revenues have been
forthcoming from such licensing model for the nine month period ended September
30, 2003, and none can be reasonably foreseen in the future. All of the revenue
for the first nine months of 2003 has been recorded from our recently acquired
company, iAccele.
The acquisition of iAccele on February 10, 2003 has been accounted for under the
purchase method of accounting and, therefore, our historical results of
operations for 2003 include the results of operations of iAccele subsequent to
its acquisition date. This acquisition affects the comparability of the
historical results of operations.
The acquisition of Fan Club on August 5, 2003 has been accounted for under the
purchase method of accounting and, therefore, our historical results of
operations for 2003 include the results of operations of Fan Club subsequent to
its acquisition date. This acquisition affects the comparability of the
historical results of operations.
Our current business plan assumes that, subject to cash flow availability, we
will continue to seek out opportunities to acquire companies that have a
synergetic approach with our general operations. In order to pursue such a
strategy or to provide additional capital, if so required, we expect that we
will require additional capital investments.
RESULTS OF OPERATIONS
Three months ended September 30, 2003 vs. three months ended September 30, 2002
Nine months ended September 30, 2003 vs. nine months ended September 30, 2002
Net Revenue
Net revenue for the three month period ended September 30, 2003 decreased
$54,000 to $126,000, as compared to the same period in the prior year. This
decrease was due to a change in business direction, offset by sales of iAccele
software. The iAccele revenue primarily related to the amortization of deferred
revenue and the sale of new iAccele software licenses sold to value added
resellers (VARs), internet service providers (ISPs) or directly to end-users was
insignificant during the quarter.
Net revenue for the nine month period ended September 30, 2003 decreased
$175,000 to $231,000, as compared to the same period in the prior year. This
decrease was due to a change in business direction, offset by sales of iAccele
software. The iAccele revenue primarily related the sale of new iAccele software
licenses sold to value added resellers (VARs), internet service providers (ISPs)
or directly to end-users.
As of September 30, 2003, we had deferred revenues of $755,000. This is an
increase of $755,000 from December 31, 2002. The increase in deferred revenues
relates to the VARS contracting for the delivery of iAccele software but not
distributing such software as timely as it is received from iAccele.
20
Revenues have been accounted for on the basis of the number of users who have
activated the software license key after they purchased the iAccele software,
rather than accruing revenues at the time the iAccele software was purchased by
the VARs. In the case of VARs, revenue is received by iAccele on a monthly
accruals base but was not recognized by us until the license key was activated
by the end user. This can lead to a significant time lag between cash being
received by us and being converted from the deferred revenue to earned revenue
in our financial reports. Further, our accounting policy records revenue on a
deferred basis whereby the revenue derived is divided evenly over the period of
the licenses validity span, currently a maximum of 13 months. Based on the
number of license keys distributed to users through VARs, as of September 30,
2003, we have recorded an average activation rate of 10% for iAccele software.
During the three month period ended September 30, 2003, $411,000 of accounts
receivable, which was booked as deferred revenue during the three month period
ended June 30, 2003, was reversed, because the VARs have distributed an
insignificant amount of iAccele software in the three month period ended
September 30, 2003. The revenues of the VAR have been below forecast and the VAR
is experiencing financial difficulties.
Cost of Sales
Cost of sales for the three month period ended September 30, 2003 increased
$153,000 to $153,000, as compared to the same period in the prior year. This
increase was due to license fees on iAccele software, other iAccele costs and
depreciation on the computer leases for which we deferred revenues as was
previously discussed.
Cost of sales for the nine month period ended September 30, 2003 increased
$391,000 to $453,000, as compared to the same period in the prior year. This
increase was due to license fees on iAccele software, other iAccele costs and
depreciation on the computer leases for which we deferred revenues as was
previously discussed.
Expenses
Selling, general and administrative expenses for the three month period ended
September 30, 2003 increased $475,000 to $606,000, as compared to the same
period in the prior year. This was due to increased operating expenses of
$227,000 related to iAccele, $33,000 related the Fan Club acquisition, and the
amortization of identifiable intangible assets of $178,000 for the iAccele and
Fan Club acquisitions.
Selling, general and administrative expenses for the nine month period ended
September 30, 2003 increased $950,000 to $1,563,000, as compared to the same
period in the prior year. This was due to increased operating expenses of
$700,000 related iAccele, $33,000 related to the Fan Club acquisition and the
amortization of identifiable intangible assets of $335,000 for the iAccele and
Fan Club acquisitions.
For the current periods, the selling, general and administrative expenses
consisted primarily of employee and independent contractor expense, rent,
overhead, equipment and depreciation, amortization of identifiable intangible
assets and intellectual property, professional and consulting fees, sales and
marketing costs, and other general and administrative costs. The difference in
the current periods compared to the prior periods is primarily due to the
acquisition of iAccele on February 10, 2003, the sales and marketing expenses
related to iAccele software license sale, and the acquisition of Fan Club on
August 5, 2003.
A writedown of fixed assets of $87,000 and production costs of $24,000 were
recorded in the nine month period ended September 30, 2002. There was no similar
writedown or expense in 2003.
21
Other Income (Expense)
Other expense was $53,000 for the three month period ended September 30, 2003 as
compared to other income of $209,000 for the same period in the prior year. This
expense was due to interest on related party loans. The prior year included a
$200,000 gain related to the sale of the Company's 10% interest in ForeignTV, an
affiliated company.
Other expense was $272,000 for the nine month period ended September 30, 2003 as
compared to other income of $209,000 for the same period in the prior year. This
expense was due to interest on related party loans. The prior year included a
$200,000 gain related to the sale of the Company's 10% interest in ForeignTV, an
affiliated company.
Net Income (Loss)
Net loss was $697,000 for the three month period ended September 30, 2003 as
compared to net income of $258,000 for the same period in the prior year. The
reasons for the increased losses were discussed above.
Net loss was $2,069,000 for the nine month period ended September 30, 2003 as
compared to a net loss of $172,000 for the same period in the prior year. The
reasons for the increased losses were discussed above.
Grant of Stock Options
In February, 2003, the Company granted 1,500,000 stock options to two executives
at an exercise price of $.08 per share, which was the market price at the grant
date. These options are exercisable immediately and have a term of ten years.
In June 2003, the Company granted 4,975,000 stock options, which are subject to
shareholder approval at the 2003 annual shareholder meeting, at an exercise
price of $.20 per share, which was the market price at the grant date. An
aggregate of three million five hundred thousand to the two executives and one
million were granted to the directors, which vest over three years. Four hundred
and seventy-five thousand options are performance based stock options. As of
September 30, 2003, none of the performance based stock options were earned. The
term of these 4,975,000 stock options granted is ten years.
We have not recorded any compensation expense for stock options granted to
employees during the three and nine months ended September 30, 2003 and 2002.
Liquidity and Capital Resources
As of September 30, 2003, the Company had cash of $613,000, negative net working
capital of $1,834,000 and an accumulated deficit of $23,216,000. For the nine
months ending September 30, 2003, the Company had a net loss of $2,069,000 and
expects to incur operating losses through 2004.
At the beginning of 2003, we revised our business plan to expand into other
areas of media entertainment and technology. We have shifted the revenue model
from broadband entertainment channels and revenues derived predominantly from
licensing, to a renewed focus on developing media technology products, services
and on licensing revenues. To this end, we may develop such media entertainment
and technology products and services internally, or acquire them from other
parties.
Since inception, we have financed our operations primarily through sales of our
equity securities in our initial public offering, from several private
placements and loans from related entities. Net proceeds from these sales have
totaled approximately $24.0 million as of September 30, 2003, with approximately
$8.8 million raised in the initial public offering and the balance raised in the
private placements and equity issued for services in the amount of approximately
$17.8 million, including $1.2 million loan from a related party converted to
equity, and a $2.0 million subscription to acquire common stock from a related
party. Additional funding was obtained in the form of loans from related
parties, of which approximately $1,178,000 was outstanding at September 30,
2003.
22
On November 12, 2003, the Company received a $.5 million subscription to acquire
common stock from a related entity. With this investment plus our existing cash
resources, we expect to be able to support our operations into 2004. We may need
to obtain additional financing in order to continue our current operations and
acquire businesses and our major shareholder has indicated a willingness to
support the Company in its financing efforts. Moreover, if we raise additional
capital through borrowing or other debt financing, we will 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 raise
more capital through equity financing in the future, it is likely that it will
result in substantial dilution to our present stockholders. Any inability to
obtain additional financing will materially adversely affect us, including
possibly requiring us to significantly curtail or cease business operations. We
can give no assurances that we will be able to raise additional financing from
any party, including from any related party.
Operating Activities
Net cash used in operations for the nine months ended September 30, 2003 was
$187,000. This amount was primarily related to a net loss of $2,069,000, offset
by depreciation and amortization of $519,000, amortization of beneficial
conversion feature of $168,000 and increases in accounts payable of $164,000,
accrued expenses of $264,000 and deferred revenue of $755,000.
Investing Activities
Net cash used in investing activities for the nine months ended September 30,
2003 was $2,882,000. This amount related to the acquisitions of $2,221,000
discussed below and capital expenditures of $667,000.
On February 10, 2003, we acquired an approximately 76.9% equity interest in
iAccele, a privately held Japanese corporation engaged in the business of
providing an Internet data transmission acceleration service that targets
narrowband users, as well as broadband users, for 100.0 million Japanese Yen, or
approximately $830,000 based on the Japanese Yen/US dollar exchange rate on that
date.
On August 5, 2003, we executed a Share Purchase Agreement to acquire from Cyber
Holdings Co., Ltd. ("Cyber Holdings") a 67% equity interest in Fan Club, a
privately-held Japanese company. Fan Club will provide advertising,
merchandising, publishing, website and data management services to Cyberbred
Co., Ltd., ("Cyberbred"). The purchase price for our equity interest in Fan Club
is 134,000,000 Japanese Yen, or $1,112,960 (based on the Japanese Yen/US dollar
exchange rate on August 5, 2003), as well as 350,000 shares of our common stock
issued at $.472 per share. We used our working capital to fund the cash portion
of the purchase price.
The Company purchased and subsequently leased 600 computers to an investee of
the major shareholder of the Company, ForeignTV Japan. The InterAsset Group owns
approximately 66% of ForeignTV Japan. The Company had a minority ownership in
the ForeignTV Japan, but was sold approximately one year ago. These computers
cost approximately $1,000 per machine or approximately $600,000. The Company
expects to receive about $1,200,000 over the term of these leases for the
equipment under lease. The terms of the leases are as follows;
o Lease 1 dated June 10, 2003 for 100 computers. The monthly rental is
950,000 Yen or approximately $8,000 per month.
o Lease 2 dated June 20, 2003 for 200 computers. The monthly rental is
1,900,000 Yen or approximately $17,000 per month.
o Lease 3 dated August 1, 2003 for 300 computers. The monthly rental is
2,850,000 Yen or approximately $25,000 per month.
o The rental period for each lease is for 2 years.
23
o The lease contract shall be automatically extended for six months if
ForeignTV Japan does not object within one month of the contract
termination date.
o These computers are to be returned to the Company upon termination of the
leases.
These leases were not recorded as a financing lease, because these leasing
transactions are between related parties under common control. As a result,
revenues are not being recognized on any cash receipts. In addition, the lessee
of these computers is not adequately capitalized, therefore the collectibility
of the lease payments is not guaranteed. The Company has received 3,429,749 Yen
or approximately $31,000 during the quarter ending September 30, 2003 and this
amount has been booked as deferred revenue on the balance sheet.
These computers are being depreciated over three years.
Financing Activities
Net cash provided by financing activities for the nine months ending September
30, 2003 was $3,238,000. This amount related to loans from related parties of
$1,432,000 and the proceeds from the sale of stock of $2,000,000, offset by
repayments of related party debt of $160,000.
During the quarter ended June 30, 2003, iAccele borrowed 52,500,000 Yen from
Inter Asset Japan KK, our major shareholder, or approximately $454,000. This
financing was made in four separate advances. These advances bear interest at
rates ranging from 3.5% to 6.7% per annum. These advances matured during the
following dates: 5,500,000 Yen or approximately $45,000 on July 25, 2003;
7,000,000 Yen or approximately $62,000 on July 27, 2003; 10,000,000 Yen or
approximately $89,000 on August 1, 2003; and 30,000,000 Yen or approximately
$258,000 on December 1, 2003. The Company has repaid 18,500,000 Yen or
approximately $160,000 on July 25th. The remaining 4,000,000 Yen which was due
on August 1, 2003 was deferred with a new note until the end of 2003. Therefore,
the total outstanding amount to Inter Asset Japan KK due in December, 2003 and
bears interest at 3.5% per annum is 34,000,000 Yen or approximately $ 290,000.
In order to finance the purchase of iAccele, we borrowed 100.0 million Japanese
Yen from PBAA Fund Ltd., a British Virgin Islands limited liability company and
a principal shareholder of our company. The principal amount of this loan,
together with interest thereon at 4.50 percent per annum, is due and payable on
January 31, 2004. We may defer payment of the principal amount of this loan, but
not accrued interest, for one additional year with the consent of PBAA. We may
prepay all or specified minimum portions of this loan at any time after March
31, 2003, upon payment of certain prepayment penalties.
If the PBAA loan is not repaid by January 31, 2004, PBAA will be afforded the
right to convert any portion of the then unpaid principal amount of the loan, as
well as any then accrued but unpaid interest thereon, into shares of our common
stock at a per share conversion price equal to the Japanese Yen equivalent of
80% of the average of the US dollar closing price of our common stock on the
American Stock Exchange in the 20 consecutive trading days immediately prior to
the date upon which PBAA gave us notice of conversion, or, if our common stock
is not then traded on the American Stock Exchange, the closing bid price for our
common stock as reported by the Nasdaq Stock Market or such other primary
exchange or stock bulletin board on which our common stock is then traded. By
way of illustration, had such conversion occurred on February 10, 2003, PBAA
would have received 7,335,145 shares of our common stock which, when added to
those shares currently beneficially owned by PBAA and its affiliates would
increase their collective ownership of our common stock to approximately 78.9%.
iAccele originally owed Infoshower Exchange Corp. ("ISX") 150.0 million
Japanese Yen, or approximately $1,300,000 based on the Japanese Yen/US dollar
rate on that date, under contractual obligations between the two companies prior
to our acquisition of an equity interest in iAccele. Of this 150.0 million
Japanese Yen, 30.0 million Japanese Yen was paid by iAccele prior to our
24
acquisition of an equity interest in iAccelle, 70.0 million Japanese Yen was
paid by iAccele from our payment for an equity interest in iAccelle, 42.0
million Japanese Yen was paid by iAccele between February 10, 2003 and June 30,
2003 and the balance of 8.0 million Japanese Yen was paid in August 2003. We own
76.9% of the outstanding common stock of iAccele while ISX owns the balance of
the capital stock of iAccele.
On June 30, 2003, we agreed to sell to PBAA, 13,333,333 shares of our common
stock at an average price of $0.15 per share, for a total of $2.0 million,
representing an approximate 25% discount to the trailing five-day average
closing price of our common stock ending June 15, 2003, the date PBAA Fund made
its investment commitment. As PBAA Fund's purchase price per share was at a
discount to market, our shareholders will be asked to ratify and approve this
transaction, as required by the applicable rules of the American Stock Exchange
at the our forthcoming 2003 annual meeting of shareholders.
Non-Cash Financing Activities
On June 30, 2003, Inter Asset Japan LBO No.1 Fund ("IAJ"), elected to convert
its $1,064,000 Mezzanine Finance Loan Note due from the Company, plus accrued
interest of $95,000 into Series B Preferred Stock at the conversion rate of
$1,000 per share. We issued 1,158 shares of Series B Preferred Stock in exchange
for the note and accrued interest.
On August 5, 2003, the Company committed to issue 350,000 shares of our common
stock at $.472 per share in conjunction with the acquisition of Fan Club
Entertainment.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, in addition to the other information contained in this
report, should be considered carefully in evaluating us and our prospects. This
report (including without limitation the following factors that may affect
operating results) contains forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) regarding us and our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this report. Additionally, statements concerning future matters such as the
development of new products, enhancements or technologies, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Forward-looking statements in this report reflect the good faith judgment of our
management and the statements are based on facts and factors we currently know
them. Forward-looking statements are subject to risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, but are not
limited to, those discussed below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as those discussed
elsewhere in this report. Readers are urged not to place undue reliance on these
forward-looking statements which speak only as of the date of this report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of the
report.
- - WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history on which to base an evaluation of our
business and prospects, having only commenced our initial business operations in
April 1999. Our prospects must be considered in light of the risks, difficulties
and uncertainties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets such as
25
the market for Internet broadcasting, services and advertising. These risks
include our ability to:
- provide compelling and unique content to Internet users;
- successfully market and sell our services; and
- effectively develop new and maintain existing relationships with
advertisers, content providers, business customers and advertising
agencies and other persons with which do business.
As we have such a limited history of operations, investors will be unable to
assess our future operating performance or our future financial results or
condition by comparing these criteria against their past or present equivalents.
- - WE HAVE EXTREMELY LIMITED CASH FLOW
Our business requires substantial capital to continue operations. At the present
time, we have not generated material revenues from operations. To date, our cash
flow has primarily come from sales of our securities and from loans from an
affiliated party. We also have minimal cash on hand. We can give no assurance
our cash flow will be sufficient to allow the company to continue our operations
at present levels, if at all.
- - WE EXPECT TO INCUR SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE
We have only recently recognized material revenues from services or advertising
and we have experienced net losses since inception. We expect to incur
significant losses on both a quarterly and an annual basis for the foreseeable
future. There can be no assurance that we will ever achieve profitability.
- - WE MAY NEED SIGNIFICANT ADDITIONAL FINANCING TO SUPPORT OUR OPERATIONS AND TO
ACQUIRE BUSINESSES
On November 12, 2003, the Company received a $.5 million subscription to acquire
common stock from a related entity. With this investment plus our existing cash
resources, we expect to be able to support our operations into 2004. We may need
to obtain additional financing in order to continue our current operations and
acquire businesses and our major shareholder has indicated a willingness to
support the Company in its financing efforts. Moreover, if we raise additional
capital through borrowing or other debt financing, we will 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 raise
more capital through equity financing in the future, it is likely that it will
result in substantial dilution to our present stockholders. Any inability to
obtain additional financing will materially adversely affect us, including
possibly requiring us to significantly curtail or cease business operations. We
can give no assurances that we will be able to raise additional financing from
any party, including from any related party.
- - OUR COMMON STOCK COULD BE DELISTED FROM THE AMERICAN STOCK EXCHANGE ("AMEX")
The Company has submitted and AMEX has accepted a plan to regain compliance with
the continued listing standards by November 27, 2004. The Company is subject to
periodic reviews by AMEX where it is required to make progress consistent with
the plan. Failure to do so could result in the Company's common stock being
delisted from AMEX and being listed on another market and this could materially
affect the ability of an investor to dispose of their shares and reduce the
liquidity of their investment. In addition, delisting could effect the Company's
ability to obtain financing to support future operations and acquistions.
- - WE ARE SUBJECT TO COMPETITIVE PRESSURES
While we are not aware of any organization that is providing the complete suite
of services under the same business model we are utilizing, in general, we face
competition from other providers of services to entities that provide Internet
data transmission acceleration service or which provide advertising,
merchandising, publishing, website and data management services. Certain of our
competitors may be able to devote greater resources to marketing, adopt more
aggressive pricing policies and devote substantially more resources to
developing their services and products. We may be unable to compete successfully
against current and future competitors, and competitive pressures may have a
26
material adverse effect on our business. Further, as a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on its business, prospects, financial condition and
results of operations.
In addition to the foregoing, some of our key customers or potential customers
might decide to build their own Internet data transmission acceleration service
or company's which provide advertising, merchandising, publishing, website and
data management services. Although this has not been the industry trend over the
past year, if this were to happen, the Company might be adversely impacted
thereby.
- - WE WILL BE UNABLE TO ATTRACT VIEWERS TO OUR NETWORKS AND THEIR CHANNELS IF THE
PUBLIC REJECTS STREAMING TECHNOLOGY
Our success will depend upon market acceptance of streaming technology as an
alternative to broadcast television. Without streaming technology, viewers would
not be able to initiate playback of our programming until such programming is
downloaded in its entirety, resulting in significant waiting times. The
acceptance of streaming technology will depend upon a number of factors,
including market acceptance of streaming players such as Microsoft's Windows
Media Player (TM), Real Networks' Real Player(TM), and Medium4.com Player,
technological improvements to the Internet infrastructure to allow for improved
video and audio quality and a reduction in Internet usage congestion. In
addition, Internet congestion may interrupt audio and video streams, resulting
in user dissatisfaction. Our prospects will be adversely affected if streaming
media technology fails to achieve or maintain broad acceptance.
- - WE ARE DEPENDENT ON CERTAIN THIRD PARTY PROVIDERS
Our future success depends upon our ability to aggregate and deliver compelling
content over the Internet. We rely exclusively on third party content providers,
such as television stations and networks, businesses and other organizations,
film producers and distributors, and record labels for compelling and
entertaining content. Our ability to maintain and build relationships with
content providers is critical to our success. Although many of our agreements
with third party content providers are for initial terms of more than one year,
such agreements may not be renewed or may be terminated prior to the expiration
of their terms if we do not fulfill our contractual obligations. Our inability
to secure licenses from content providers or the termination of a significant
number of content provider agreements would decrease the availability of content
that we can offer users. Such inability or termination may result in decreased
traffic on our Websites and, as a result, decreased advertising revenue, which
could adversely affect our business.
We also rely on certain technologies we license from third parties. There can be
no assurance these third-party technology licenses will continue to be available
to us on commercially reasonable terms. The loss of such technology could
require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could harm our business. However, other than
our trademarks and service marks, we do not believe that the loss of any
particular one of our intellectual property rights would materially harm our
business.
- - WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS
We regard our copyrights, trade secrets, trademarks, patents, and similar
intellectual property as significant to our growth and success. We rely upon a
combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
our employees and with third parties to establish and protect our proprietary
rights. We have applied for federal trademark protection for our networks and
other channels and brands and intend to apply for federal trademark protection
for other marks and names used in our business. Legal standards relating to the
validity, enforceability and scope of protection of certain Proprietary rights
27
in Internet-related industries are uncertain and still evolving. We are unable
to assure investors as to the future viability or value of any of our
proprietary rights or those of other companies within the industry. We are also
unable to assure investors that the steps taken by us to protect our proprietary
rights will be adequate. Furthermore, we can give no assurance that our business
activities will not infringe upon the proprietary rights of others, or that
other parties will not assert infringement claims against us.
- - GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS
There are few laws or regulations directly applicable to the Internet. For
example, the Digital Millennium Copyright Act, enacted into law in 1998,
protects certain qualifying online service providers from copyright infringement
liability, the Internet Tax Freedom Act, also enacted in 1998, placed a three
year moratorium on new state and local taxes on Internet access and commerce,
and under the Communications Decency Act, an Internet service provider will not
be treated as the publisher or speaker of any information provided by another
information content provider. The appeal of the Internet makes it likely,
however, that state, national or international laws may be implemented in the
future covering such issues as user privacy, defamatory speech, copyright
infringement, pricing and characteristics and quality of products and services.
Any new law or regulation may have the effect of limiting the use of the
Internet and its growth as a new medium to communicate could harm our business.
We currently do not collect sales or other taxes with respect to the sale of
services or products in states and countries where we believe we are not
required to do so. One or more states or countries have sought to impose sales
or other tax obligations on companies that engage in online commerce within
their jurisdictions. A successful assertion by one or more states or countries
that we should collect sales or other taxes on products and services, or remit
payment of sales or other taxes for prior periods, could adversely affect our
business.
The Child Online Protection Act of 1998 imposes criminal penalties and civil
liability on anyone engaged in the business of selling or transferring material
that is harmful to minors, by means of the Internet, without restricting access
to this type of material by underage persons. Numerous states have adopted or
are currently considering similar types of legislation. The imposition upon us
of potential liability for broadcasting content that is harmful to minors could
require us to implement measures to reduce exposure to liability, which may
require the expenditure of substantial resources., or to discontinue various
content offerings. Further, the costs of defending against any claims and
potential adverse outcomes of these claims could have a material adverse effect
on our business.
- - THE COMPANY IS EXPOSED TO LEGAL CLAIMS
The Company has been, currently is, or in the future may be involved in legal
proceedings or claims. The Company has been served with a civil action with
Andzej Krakowski, a former employee. This claim is discussed in Legal
Proceedings (Part 2, Item 1 of this Form 10Q). While the Company believes it has
appropriate indemnification for this claim, such claims, whether with or without
merit, could be time-consuming and expensive to defend and could divert
management's time and attention. There can be no guarantee that the Company will
be successful in resolving such claims.
- - WE REVISED OUR BUSINESS PLAN
At the beginning of 2003, we revised our business plan to expand into other
areas of media entertainment and technology. We have shifted the revenue model
from broadband entertainment channels and revenues derived predominantly from
advertising, to a renewed focus on developing media technology products,
services and on licensing revenues. To this end, we may develop such media
entertainment and technology products and services internally, or acquire them
from other parties.
28
Our future success depends upon our ability to implement our revised business
plan and expand into other areas of media entertainment and technology. There is
no assurance that we will be able to effectively implement our revised business
plan in the near future or that we will be successful in selling our products
and services to new markets or through new channels. Further, even if we are
able to effectively implement our revised plan, we may not be able to achieve
the benefits that we anticipate from it.
- - WE MAY ENGAGE IN ACQUISITIONS, MERGERS, STRATEGIC ALLIANCES, JOINT VENTURES
AND DIVESTITURES THAT COULD RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT
THAN EXPECTED.
In the normal course of business, we engage in discussions relating to possible
acquisitions, mergers, strategic alliances, joint ventures and divestitures. As
part of our business strategy, we completed two acquisitions and one joint
venture during 2003. Such transactions are accompanied by a number of risks,
including:
- Use of significant amounts of cash,
- Potentially dilutive issuances of equity securities on potentially
unfavorable terms,
- Incurrence of debt on potentially unfavorable terms as well as
amortization expenses related to goodwill and other intangible assets, and
- The possibility that we may pay too much cash or issue too much of our
stock as the purchase price for an acquisition relative to the economic
benefits that we ultimately derive from such acquisition.
The process of integrating any acquisition may create unforeseen operating
difficulties and expenditures and is itself risky. The areas where we may face
difficulties include:
- Diversion of management time (at both companies) during the period of
negotiation through closing and further diversion of such time after
closing from focus on operating the businesses to issues of integration
and future products,
- Decline in employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects or the direction
of the business,
- The need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective
management, and the lack of control if such integration is delayed or not
implemented,
- The need to implement controls, procedures and policies appropriate for a
larger public company at companies that prior to acquisition had been
smaller, private companies,
- The need to incorporate acquired technology, content or rights into our
products and unanticipated expenses related to such integration, and
- The need to successfully develop an acquired in-process technology to
achieve the value currently capitalized as intangible assets.
From time to time, we have also engaged in discussions with candidates regarding
the potential acquisitions of our product lines, technologies and businesses. If
such divestiture does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and adversely affected. A
successful divestiture depends on various factors, including our ability to:
29
- Effectively transfer liabilities, contracts, facilities and employees to
the purchaser,
- Identify and separate the intellectual property to be divested from the
intellectual property that we wish to keep, and
- Reduce fixed costs previously associated with the divested assets or
business.
In addition, if customers of the divested business do not receive the same level
of service from the new owners, this may adversely affect our other businesses
to the extent that these customers also purchase other Company products. All of
these efforts require varying levels of management resources, which may divert
our attention from other business operations. Further, if market conditions or
other factors lead us to change our strategic direction, we may not realize the
expected value from such transactions.
If we do not realize the expected benefits or synergies of such transactions,
our consolidated financial position, results of operations, cash flows and stock
price could be negatively impacted.
- - WE ARE DEPENDENT ON KEY PERSONNEL
Our success depends to a significant degree upon the continued contributions of
key management and other personnel, some of whom could be difficult to replace.
We do not maintain key man life insurance covering our officers. Our success
will depend on the performance of our officers, our ability to retain and
motivate our officers, our ability to integrate new officers into our operations
and the ability of all personnel to work together effectively as a team. The
Company has had significant turnover of its executive officers in the past and
could continue to have problems retaining and recruiting executive officers in
the future. On September 25, 2002, the Company's former Director, President and
Chief Executive Officer, Jonathan Braun, agreed to resign. On September 25,
2002, a major shareholder and consultant to the Company, David Badner, signed an
Agreement and Assignment to facilitate the restructuring of the Company's
finances. Our failure to retain and recruit officers and other key personnel
could have a material adverse effect on our business, financial condition and
results of operations.
- - WE ARE DEPENDENT ON A LIMITED NUMBER OF MAJOR CUSTOMERS AND A DECREASE IN
ORDERS FROM ANY MAJOR CUSTOMER COULD DECREASE OUR REVENUES.
The Company's largest distributor is a VAR that accounted for 78% of revenue and
deferred revenue for the nine-month period ending September 30, 2003. A second
VAR accounted for a further 20% of revenue and deferred revenue for the same
nine-month period. The Company anticipates that significant distributor
concentration will continue for the foreseeable future. No other customer
accounted for sales of 10% or more during those years.
There can be no assurance regarding the amount or timing of purchases by any
customer in any future period and business fluctuations affecting our customers
have affected and will continue to affect our business. Our success is dependent
upon our ability to broaden our customer base and to obtain orders from
additional original equipment manufacturers to increase our level of sales. None
of our customers has a written agreement with us that obligates them to purchase
additional products. If one or more of our major customers decide not to
purchase additional products or cancels orders previously placed, our net sales
could decrease which could have a material adverse effect on our business,
financial condition and results of operations.
- - THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of our common stock has been and is likely in the future to be
highly volatile. Our common stock price may fluctuate significantly in response
to factors such as:
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- Quarterly variations in our operating results,
- Announcements of technological innovations,
- New product introductions by us or our competitors,
- Competitive activities,
- Announcements by us regarding significant acquisitions, strategic
relationships, capital expenditure commitments, liquidity and our AMEX
listing,
- Additions or departures of key personnel,
- Issuance of convertible or equity securities for general or merger and
acquisition purposes,
- Issuance of debt or convertible debt for general or merger and acquisition
purposes,
- General market and economic conditions, and
- Defending significant litigation.
The stocks of technology companies have experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. These broad market and industry
factors may have a material adverse effect on the market price of our common
stock, regardless of our actual operating performance. Factors like this could
have a material adverse effect on our business, financial condition and results
of operations.
- - OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY
As of November 6, 2003, Inter Asset Japan LBO No. 1 Fund, PBAA Fund Ltd., and
Terra Firma Fund Ltd. ("IAJ") collectively held approximately 80.9% of the
common stock. Such entities stated in a Schedule 13D that they may be deemed to
constitute a "group" for the purposes of Rule 13d-3 under the Exchange Act. Mr.
Margerison, our Director, President and Chief Executive Officer, currently
serves as the Chairman of Inter Asset Japan KK(Kabushiki Gaisha), a Japanese
venture capital company and an affiliate of IAJ.
IAJ has the ability to cause a change of control of the board of directors of
the Company by electing candidates of its choice to the board at a stockholder
meeting, approve or disapprove any matter requiring stockholder approval,
regardless of how our other stockholders may vote. Further, under Delaware law,
IAJ has significant influence over our affairs, including the power to cause,
delay or prevent a change in control or sale of the Company, which in turn could
adversely affect the market price of our common stock.
- - THE SALE OF A SIGNIFICANT NUMBER OF OUR SHARES COULD DEPRESS THE PRICE OF OUR
STOCK.
Sales or issuances of a large number of shares of common stock in the public
market or the perception that sales may occur could cause the market price of
our common stock to decline. As of November 6, 2003, 65.1 million shares of
common stock were outstanding. Of these shares, 11.1 million were eligible for
sale in the public market without restriction. The remaining shares were held by
our principal stockholder and other company insiders. As an "affiliate" (as
defined under Rule 144 of the Securities Act ("Rule 144") of the Compnay, they
may only sell his shares of common stock in the public market in compliance with
the volume limitations of Rule 144.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in trading market risk sensitive instruments and do not
purchase hedging instruments or "other than trading" instruments that are likely
to expose us to market risk, foreign currency exchange, commodity price or
equity price risk. We have purchased no options and entered into no swaps. We
have no bank borrowing facility that could subject us to the risk of interest
rate fluctuations.
Because we translate foreign currencies into U.S. dollars for reporting
purposes, we are exposed to the impact of foreign currency fluctuations.
On February 10, 2003, we acquired a 76.9% equity interest in iAccele Co., Ltd.,
a privately held Japanese corporation engaged in the business of providing an
Internet data transmission acceleration service that targets narrowband users,
as well as broadband users, for 100.0 million Japanese Yen, or approximately
$825,000 based on the Japanese Yen/US dollar exchange rate on that date.
In order to finance this purchase, we borrowed 100.0 million Japanese Yen from
PBAA Fund Ltd., a British Virgin Islands limited liability company. The
principal amount of this loan, together with interest thereon at 4.50% per
annum, is due and payable on January 31, 2004. We may defer payment of the
principal amount of this loan, but not accrued interest, for one additional year
with the consent of PBAA. We may prepay all or specified minimum portions of
this loan at any time after March 31, 2003 upon payment of certain prepayment
penalties.
If the PBAA loan is not repaid by January 31, 2004, PBAA will be afforded the
right to convert any portion of the then unpaid principal amount of the loan, as
well as any then accrued but unpaid interest thereon, into shares of our common
stock at a per share conversion price equal to the Japanese Yen equivalent of
80% of the average of the US dollar closing price of our common stock on the
American Stock Exchange in the 20 consecutive trading days immediately prior to
the date upon which PBAA gave us notice of conversion, or, if our common stock
is not then traded on the American Stock Exchange, the closing bid price for our
common stock as reported by the Nasdaq Stock Market or such other primary
exchange or stock bulletin board on which our common stock is then traded.
During the quarter ended June 30, 2003, iAccele borrowed 52,500,000 Yen from
Inter Asset Japan KK, our major shareholder, or approximately $454,000. This
financing was made in four separate advances. These advances bear interest at
rates ranging from 3.5% to 6.7% per annum. These advances matured during the
following dates: 5,500,000 Yen or approximately $45,000 on July 25, 2003,
7,000,000 Yen or approximately $62,000 on July 27, 2003, 10,000,000 Yen or
approximately $89,000 on August 1, 2003 and 30,000,000 Yen or approximately
$258,000 on December 1, 2003. The Company has repaid 18,500,000 Yen or
approximately $160,000 on July 25th. The remaining 4,000,000 Yen which was due
on August 1, 2003 was deferred with a new note until the end of 2003. Therefore,
the total outstanding amount to Inter Asset Japan KK due in December, 2003 and
bears interest at 3.5% per annum is 34,000,000 Yen or approximately $ 290,000.
On August 5, 2003, we executed a Share Purchase Agreement to acquire from Cyber
Holdings Co., Ltd. ("Cyber Holdings") a 67% equity interest in Fan Club, a
privately-held Japanese company. Fan Club will provide advertising,
merchandising, publishing, website and data management services to Cyberbred
Co., Ltd., ("Cyberbred"). The purchase price for our equity interest in Fan Club
is 134,000,000 Japanese Yen, or $1,112,960 (based on the Japanese Yen/US dollar
exchange rate on August 5, 2003), as well as 350,000 shares of our common stock
issued at $.472 per share. The 350,000 shares require Cyber Holdings to transfer
the rights under the Marvel agreement to Fan Club within five months or make its
best efforts to fully cooperate in any commercially reasonable arrangement
designed to provide the benefit of the Marvel agreement to the Company. We used
our working capital to fund the cash portion of the purchase price.
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ITEM 4. CONTROLS AND PROCEDURES
Our management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of September 30, 2003. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There has not been any change in our internal control over financial reporting
in connection with the evaluation required by Rule 13a-15(d) under the Exchange
Act that occurred during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 26, 2003 Andzej Krakowski, a former employee of ForeignTV.com,
Inc., filed a civil action seeking damages and injunctive relief for (i)for
statutory damages, costs and attorney fees resulting from the Company's willful
copyright infringement, (ii) for monetary damages in the amount of $436,477 for
breach of an employment agreement, (iii) for issuance of 180,000 shares of
common stock in IA Global,(iv) for monetary damages for fraud as determined by
the court, (v) for monetary damages of at least $1,200,000, (vi) for punitive
damages, costs and attorney fees, and (vii) rescinding the Stipulation.
IA Global, Inc. is a successor corporation to ForeignTV.com, Inc. and
Medium4.com, Inc. ("Medium"). As part of the September 25, 2002 Agreement and
Assignment between Medium, Inter Asset Japan Co., Ltd., our principal
stockholder, and David Badner, a major stockholder and former consultant, Mr.
Badner agreed to indemnify and hold harmless the Company against expenses,
obligations and liabilities related to any breach of the representations and
warranties and any creditor claims arising from this agreement which facilitated
the financial restructuring of the Company.
The Company believes it has appropriate indemnification from Mr. Badner for this
claim, but there can be no guarantee that the Company will be successful in
resolving this claim.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of June 30, 2003, we received a cash infusion of $2 million from PBAA Fund
Ltd., an open ended limited liability investment company incorporated in the
British Virgin Islands as a "Private Fund" ("PBAA"), in exchange for an
aggregate of 13,333,333 shares of our common stock. This investment was based on
a purchase price per share of $0.15, representing an approximate 25% discount to
the trailing 5-day average closing price of the common stock ending June 15,
2003, the date upon which PBAA made its investment commitment. As PBAA's
purchase price per share was at a discount to market, our shareholders will be
asked to ratify and approve this transaction, as required by Section 713 of the
American Stock Exchange Guide, at our forthcoming 2003 annual meeting of
shareholders. Upon consummation of this transaction, PBAA beneficially owned
17,343,133 shares of common stock, representing approximately 22.6% of our
outstanding Common Stock. No underwriter was involved in this transaction. This
issuance and sale was exempt from registration under the Securities Act of 1933
by reason of the exemption afforded by Section 4(2) of that Act as a transaction
not involving a public offering.
As of June 30, 2003, Inter Asset Japan LBO No. 1 Fund, a Japanese limited
partnership ("IAJ"), converted approximately $1,064,000 in principal amount of
our outstanding convertible indebtedness, as well as approximately $95,000 of
accrued interest thereon, into 1,158 shares of our Series B preferred stock. IAJ
may elect to convert the 1,158 shares of preferred stock into 11,580,000 shares
of our common stock, subject to approval by our shareholders of an amendment to
our Certificate of Incorporation increasing our authorized common stock to at
least 100,000,000 shares. Upon consummation of this transaction, IAJ
beneficially owned 31,580,000 shares of common stock, representing approximately
41.2% of our outstanding common stock. No underwriter was involved in this
transaction. This issuance and sale was exempt from registration under the
Securities Act of 1933 by reason of the exemption afforded by Section 4(2) of
that Act as a transaction not involving a public offering.
As of November 6, 2003, Inter Asset Japan LBO No. 1 Fund, PBAA Fund
Ltd., and Terra Firma Fund Ltd. ("IAJ") collectively held approximately 80.9% of
the common stock. Such entities stated in a Schedule 13D that they may be deemed
to constitute a "group" for the purposes of Rule 13d-3 under the Exchange Act.
Mr. Margerison, our Director, President and Chief Executive Officer, currently
serves as the Chairman of Inter Asset Japan KK(Kabushiki Gaisha), a Japanese
venture capital company and an affiliate of IAJ.
34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31 - Rule 13a-14(a)/15d-14(a) Certifications
32 - Section 1350 Certifications
(b) Reports of Form 8-K
During the quarter ended September, 30 2003, we filed or submitted the following
current reports on Form 8-K with the Securities and Exchange Commission:
Current report on Form 8-K, dated July 7, 2003, was filed on July 10, 2003. The
items reported were as follows:
Item 5 - Other Events and Required FD Disclosure, which reported the issuance of
a press release announcing that (a) The PBAA Fund Ltd., our majority
stockholder, had invested an additional $2.0 million into our company and (b) in
a contemporaneous transaction, approximately $1.16 million of outstanding
convertible debt had been exchanged for Series B preferred stock at the
predetermined conversion price.
Item 7 - Financial Statements and Exhibits, which identified the exhibit filed
with the Form 8-K.
Current report on Form 8-K, dated August 15, 2003, was filed on September 5,
2003. The item reported was as follows:
Item 2 - Acquisition or Disposition of Assets, which reported the agreement to
acquire a 67% equity interest in Fan Club Entertainment and filing documents
related to such acquisition.
Amendment to the current report on Form 8-K, dated August 15, 2003, was filed on
October 22, 2003. The items reported were as follows:
Item 2 - Acquisition or Dispositions of Assets, which reported the updated
agreement to acquire a 67% equity interest in Fan Club Entertainment and filing
revised documents related to such acquisitions.
Item 7 - Financial Statements and Exhibits, Which Filed the Following:
(a) Financial statements of business acquired.
Fan Club Entertainment's audited financial statements for the period from March
1, 2003, its date of inception, through June 30, 2003 expressed in Japanese Yen.
(b) Pro Forma financial information.
The unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company and
Fan Club Entertainment as of June 30, 2003 and the unaudited Pro Forma Condensed
Consolidated Statement of Operations of the Company and Fan Club Entertainment
for the six months ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
IA Global, Inc.
(Registrant)
Date: November 14, 2003 By: /s/ Alan Margerison
-------------------
Alan Margerison,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2003 By: /s/ Mark E. Scott
------------------
Mark E. Scott,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
36