________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
COMMISSION FILE NUMBER: 1-15863
___________________________
IA GLOBAL, INC.
(Exact name of Registrant as specified in its charter)
___________________________
DELAWARE 13-4037641
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
533 AIRPORT BOULEVARD, SUITE 400
BURLINGAME, CA 94010
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (650) 685-2403
___________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of August 9, 2004 there were issued and outstanding 77,921,361
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.......................... 27
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 43
Item 4. Controls and Procedures...................................... 44
PART II.
Item 1. Legal Proceedings............................................ 44
Item 2. Changes in Securities and Use of Proceeds.................... 45
Item 3. Defaults Upon Senior Securities.............................. 45
Item 4. Submission of Matters to a Vote of Security Holders.......... 46
Item 5. Other Information............................................ 46
Item 6. Exhibits and Reports on Form 8-K............................. 47
Signatures.................................................................. 49
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2004 2003
------------ ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 3,087,520 $ 676,782
Accounts receivable, net of allowance for doubtful
accounts of $88,907 and $0, respectively .............................. 4,116,426 1,266,335
Consumption and deferred tax receivable .................................. 47,861 49,482
Notes receivable ......................................................... 350,803 -
Inventories .............................................................. 1,128,181 -
Prepaid costs ............................................................ 148,891 438,142
Subscription receivable .................................................. - 400,000
Other current assets ..................................................... 283,024 296,163
------------ ------------
Total current assets .................................................... 9,162,706 3,126,904
EQUIPMENT, NET ............................................................. 297,004 812
OTHER ASSETS
Intangible assets, net ................................................... 1,562,940 1,014,685
Deferred tax asset ....................................................... 310,256 -
Loan to QuikCAT Australia Pty Ltd ........................................ 100,911 74,849
Investment in QuikCAT Australia Pty Ltd .................................. 33,590 -
Other assets ............................................................. 230,448 -
------------ ------------
$ 11,697,855 $ 4,217,250
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ................................................. $ 5,130,105 $ 861,149
Accrued liabilities ...................................................... 601,756 138,580
Deferred revenue ......................................................... - 463,119
Investment in QuikCAT Australia Pty Ltd .................................. - 1,137
Consumption taxes received ............................................... 64,922 -
Income taxes payable ..................................................... 148,799 23,754
Current portion of long term debt ........................................ 461,638 -
------------ ------------
Total current liabilities ............................................... 6,407,220 1,487,739
------------ ------------
LONG TERM LIABILITIES:
Long term debt ........................................................... 461,637 -
------------ ------------
MINORITY INTERESTS ......................................................... 1,289,861 44,706
------------ ------------
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 12
Common stock, $.01 par value, 150,000,000 shares authorized,
77,921,361 and 71,894,324, issued and outstanding, respectively ......... 779,213 718,943
Paid in capital .......................................................... 27,687,127 26,049,286
Accumulated deficit ...................................................... (24,912,227) (24,147,785)
Treasury stock ........................................................... (50,000) (50,000)
Foreign currency translation adjustment .................................. 35,012 114,349
------------ ------------
Total stockholder's equity .............................................. 3,539,137 2,684,805
------------ ------------
$ 11,697,855 $ 4,217,250
============ ============
See notes to consolidated financial statements.
3
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE ............................................ $ 9,382,494 $ 99,164 $ 11,413,240 $ 105,018
COST OF SALES ...................................... 7,916,473 190,871 9,427,491 299,922
------------ ------------ ------------ ------------
GROSS PROFIT ....................................... 1,466,021 (91,707) 1,985,749 (194,904)
------------ ------------ ------------ ------------
EXPENSES:
Selling, general and administrative expenses ..... 1,638,266 579,845 2,521,434 971,466
Writedown of fixed assets ........................ 81,652 - 81,652 -
------------ ------------ ------------ ------------
Total expenses ............................ 1,719,918 579,845 2,603,086 971,466
------------ ------------ ------------ ------------
OPERATING LOSS ..................................... (253,897) (671,552) (617,337) (1,166,370)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income .................................. 5,325 642 7,853 1,697
Interest expense ................................. (14,518) (117,068) (19,525) (196,139)
Other income (expense) ........................... 146,205 (19,207) 148,853 (23,849)
Foreign currency translation adjustment .......... - 2,805 2,255 2,616
Loss on equity investment in QuikCAT
Australia Pty Ltd ......................... (17,229) - (15,273) -
------------ ------------ ------------ ------------
Total other income (expense) .............. 119,783 (132,828) 124,163 (215,675)
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTERESTS
AND INCOME TAXES ................................. (134,114) (804,380) (493,174) (1,382,045)
MINORITY INTERESTS ................................. 34,203 - 68,567 -
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ........................... (168,317) (804,380) (561,741) (1,382,045)
INCOME TAXES:
Current .......................................... 114,298 - 178,421 332
Deferred ......................................... 12,866 - 24,281 -
------------ ------------ ------------ ------------
NET LOSS ........................................... (295,481) (804,380) (764,443) (1,382,377)
Deemed dividend .................................... - (693,333) - (693,333)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS ..................................... $ (295,481) $ (1,497,713) $ (764,443) $ (2,075,710)
============ ============ ============ ============
Per share of Common-
Basic net loss per share ......................... $ (0.00) $ (0.03) $ (0.01) $ (0.04)
============ ============ ============ ============
Diluted net loss per share ....................... $ (0.00) $ (0.03) $ (0.01) $ (0.04)
============ ============ ============ ============
Weighted average shares of common
stock outstanding ......................... 73,156,824 51,797,556 72,561,112 51,797,556
Weighted average shares of common stock
and common equivalent shares
outstanding ............................... 73,156,824 51,797,556 72,561,112 51,797,556
See notes to consolidated financial statements.
4
IA GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
-----------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................. $ (764,443) $(1,384,993)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................................... 195,749 285,380
Loss on disposal of leasehold improvement .............................. 81,652 -
Amortization of beneficial conversion feature .......................... - 98,796
Equity based compensation .............................................. - 80,000
Equity gain from investment in QuickCAT Australia Pty Ltd. ............. 15,273 -
Minority interests ..................................................... 478,047 -
Accrued interest on notes/loans payable ................................ 16,820 -
Accounts receivable .................................................... 112,308 (372,263)
Notes receivable - trade ............................................... (303,153) -
Consumption and deferred tax receivable ................................ 66,543 -
Inventory .............................................................. (299,966) -
Prepaid costs .......................................................... 289,252 -
Deferred license fee receivable ........................................ - (144,383)
Other current assets ................................................... 246,150 -
Deferred tax assets .................................................... 13,020 -
Other assets ........................................................... (107,705) -
Accounts payable ....................................................... 126,925 79,900
Accrued liabilities .................................................... (35,901) 347,949
Income taxes payable - foreign ......................................... 125,046 17,582
Deferred revenue ....................................................... (463,119) 1,069,626
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS .................................. (207,502) 77,594
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in QuikCAT Australia Pty Ltd ................................ (50,000) -
Cash of Rex Tokyo Co Ltd immediately following acquisition ............. 1,934,839 -
Purchase of Rex Tokyo Co Ltd ........................................... (941,000) -
Purchase of IA Global Acquisition Co., Inc. ............................ (700,000) -
Purchase of iAccele Co Ltd ............................................. - (1,299,966)
Purchases of capital expenditures ...................................... (304,524) (376,842)
Other assets ........................................................... - 5,476
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................ (60,685) (1,671,332)
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from loan payable - related party ............................. 1,500,000 1,288,710
Loan to Innovative Computing Group, Inc. ............................... (100,000) -
Loan to QuikCAT Australia Pty Ltd. ..................................... (25,000) -
Proceeds from issuance of common stock ................................. 400,000 -
Proceeds from long term debt ........................................... 923,275 -
Proceeds from exercise of options ...................................... 40,000 -
Proceeds from sale of stock ............................................ - 2,000,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................. 2,738,275 3,288,710
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... 2,470,088 1,694,972
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................................... (59,350) -
CASH AND CASH EQUIVALENTS, beginning of the period ......................... 676,782 444,383
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period ............................... $ 3,087,520 $ 2,139,355
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid .......................................................... $ - $ -
Taxes paid ............................................................. $ 198,219 $ -
Non-cash financing activities:
Common stock issued for Rex Tokyo Co Ltd ............................... $ 138,600 $ -
Conversion of debt to equity ........................................... $ 1,519,511 $ 1,158,367
Contribution of note to capital ........................................ $ 101,629 -
See notes to consolidated financial statements.
5
IA GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited CONSOLIDATED financial statements of IA Global, Inc.
and SUBSIDIARIES (the "company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to prepare them for inclusion as part of the Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The financial statements for the periods ended June 30, 2004 and 2003 are
unaudited and include all adjustments necessary to a fair statement of the
results of operations for the periods then ended. All such adjustments are of a
normal recurring nature. The results of the company's operations for any interim
period are not necessarily indicative of the results of the company's operations
for a full fiscal year. For further information, refer to the financial
statements and footnotes thereto included in the company's annual report on Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2003.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the company and its majority-owned subsidiaries. QuikCAT Australia
Pty Ltd is accounted for on an equity basis based on our 47.5% equity ownership
as of June 30, 2004. 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.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable
consists primarily of amounts due to the company from our normal business
activities. The company maintains an allowance for doubtful accounts to reflect
the expected non-collection of accounts receivable based on past collection
history and specific risks identified within our portfolio. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out)
or market. The company records a provision for excess and obsolete inventory
whenever an impairment has been identified.
EQUIPMENT - Equipment represents machinery, equipment and software, which are
stated at cost less accumulated depreciation. Depreciation of machinery and
equipments is computed by the declining method over the estimated useful lives
of the related assets (approximately 3-15 years). Software developed or obtained
for internal use is depreciated using the straight-line method over the
estimated useful life of the software, generally not in excess of two years.
INTANGIBLE ASSETS / INTELLECTUAL PROPERTY - The company amortized the intangible
assets and intellectual property acquired in connection with the acquisition of
Fan Club Entertainment over sixty months on a straight - line basis, which is
the life of the Marvel Enterprises, Inc. agreement. The company amortized the
intangible assets and intellectual property acquired in connection with the
acquisition of QuikCAT over sixty months on a straight - line basis, which is
the expected life of the technology.
LONG - LIVED ASSETS - The company reviews its long-lived assets for impairment
when changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets under certain circumstances are reported
at the lower of carrying amount or fair value. Assets to be disposed of and
assets not expected to provide any future service potential to the company are
recorded at the lower of carrying amount or fair value less cost to sell. To the
extent carrying values exceed fair values, an impairment loss is recognized in
operating results.
6
SOFTWARE DEVELOPMENT COSTS - The company capitalizes software license and
development costs, subject to net realizable value considerations. These costs
are included in the balance sheet in property and equipment and are amortized
over 24 months using the higher of the straight line method or the ratio of
current gross revenues to the total of the current and expected future revenues
of the product. Costs capitalized in 2003 of $145,802 were sold as part of the
iAccele sale on December 29, 2003 and included expenses to adopt licensed
internet acceleration software to the Japanese Market.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts receivable and accounts
payable and loan payable-related party approximate fair value based on the
short-term maturity of these instruments.
DEBT AND EQUITY FINANCING OF CAPITAL TRANSACTIONS - BENEFICIAL CONVERSION
FEATURES - The company has adopted EITF issues 98-5, ACCOUNTING FOR CONVERTIBLES
SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE
CONVERSION RATIOS, and 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN
CONVERTIBLE SECURITIES in accounting for the convertible debt. EITF 98-5
requires recognition of a conversion feature that is in-the-money at issuance as
additional paid-in-capital, measured by allocating a portion of the proceeds
equal to the intrinsic value of that feature. The intrinsic value of the feature
is the difference between the conversion price and the fair value of the stock
into which the security is convertible, multiplied by the number of shares.
According to EITF 00-27, the issuance proceeds should not be reduced by issuance
costs when calculating the intrinsic value of the conversion feature. The
beneficial conversion feature of debt or equity instruments, depending on the
specific facts and circumstances, will determine whether such beneficial
conversion feature is to be recorded as an expense to be amortized over a period
of time, expensed immediately or recorded as a deemed dividend.
FAN CLUB REVENUE RECOGNITION - Fan Club's main source of revenue was derived
from the activities associated with Marvel, as received from Cyberbred. These
activities include the following:
o Website development- Fan Club establishes websites 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 - Fan Club creates and produces a monthly
magazine for members of the Marvel Fan Club.
o Marvel Fan Club Merchandising - Fan Club creates and sells Marvel
merchandise to fan club members.
o Event Planning - Fan Club assists in the planning and running of an events
for Marvel Fan Club.
The company recognizes Fan Club revenue when it is realized. We consider revenue
realized when the product has been shipped or the services have been provided to
the customer, the work has been accepted and collectibility is reasonably
assured. Deferred revenue includes amounts billed to customers for whom revenue
has not been recognized that generally results from products completed by the
company prior to year-end but not accepted by end users until after year-end.
REX TOKYO REVENUE RECOGNITION - Rex Tokyo's revenue was derived from the
following:
o Sale of equipment to major stores.
o Installation of machines and fittings to major stores.
o Maintenance of machines and other equipment in major stores.
The company recognizes Rex Tokyo revenue when it is realized. We consider
revenue realized when the product has been shipped or the services have been
provided to the customer, the work has been accepted by the customer and
collectibility is reasonably assured.
7
ADVERTISING COSTS - Advertising costs are expensed as incurred. There were no
advertising costs incurred for the three and six months ended June 30, 2004 and
2003.
FOREIGN CURRENCY TRANSLATION - Foreign entities whose functional currency is the
local currency translate net assets at the end of period rates and income and
expense accounts at average exchange rates for the three and six month periods.
Adjustments resulting from these translations are reflected in the consolidated
balance sheet under unrealized foreign currency exchange and the statement of
operations under other income (expense).
STOCK BASED COMPENSATION - The company has stock-based employee compensation
plans. The company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. No stock-based employee compensation
cost is reflected in the net loss, as all stock options granted under the plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net loss and
earnings per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
to stock-based employee compensation.
For the three months ending For the six months ending
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net loss available to common
shareholders, as reported ................ $(295,481) $(1,497,713) $(764,443) $(2,075,710)
Deduct: total stock-based employee
compensation determined under fair
value based method for all awards, net
of related tax effects ................... (53,102) (2,474) (82,821) (106,846)
--------- ----------- --------- -----------
Pro-forma net loss available to common
shareholders ............................. $(348,583) $(1,500,187) $(847,264) $(2,182,556)
========= =========== ========= ===========
Earnings per share:
Basic and diluted- as reported ........... $ (0.00) $ (0.03) $ (0.01) $ (0.04)
Basic and diluted- pro-forma ............. $ (0.00) $ (0.03) $ (0.01) $ (0.04)
The company accounts for non-employee stock transactions in accordance with SFAS
No. 123 and EITF 96-18.
The above stock-based employee compensation expense has been determined
utilizing a fair value method, the Black-Scholes option-pricing model.
In accordance with SFAS 123, the fair value of each option grant has been
estimated as of the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
For the Six Months Ended
June 30,
-------------------
2004 2003
---- ----
Risk free interest rate .......... 3.75% 3.75%
Expected life .................... 10 yrs 10 years
Dividend rate .................... 0.00% 0.00%
Expected volatility .............. 65% 65%
8
COMPREHENSIVE INCOME - The company has adopted SFAS No. 130 Reporting
Comprehensive Income. This statement establishes rules for the reporting of
comprehensive income and its components. Comprehensive income consists of net
loss to common shareholders and foreign currency translation adjustments and is
presented in the Statements of Operations.
INCOME TAXES - Income tax expense is based on reported income before income
taxes. Deferred income taxes reflect the effect of temporary differences between
asset and liability amounts that are recognized for financial reporting purposes
and the amounts that are recognized for income tax purposes. These deferred
taxes are measured by applying currently enacted tax laws. Valuation allowances
are recognized to reduce the deferred tax assets to the amount that is more
likely than not to be realized. In assessing the likelihood of realization,
management considers estimates of future taxable income.
NET LOSS PER SHARE - The company has adopted SFAS 128, "Earnings per Share."
Loss per common share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. The common stock equivalents have not been included as they are
anti-dilutive.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In January 2003, the FASB issued FIN
46, "Consolidation of Variable Interest entities," which addresses consolidation
by business enterprises of VIEs that either: (i) do not have sufficient equity
investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (ii) have equity investors that
lack an essential characteristic of a controlling financial interest. Throughout
2003, the FASB released numerous proposed and final FASB Staff Positions (FSPs)
regarding FIN 46, which both clarified and modified FIN 46's provisions. In
December 2003, the FASB issued Interpretation No. 46 (FIN 46-R), which will
replace FIN 46 upon its effective date. FIN 46-R retains many of the basic
concepts introduced in FIN 46; however, it also introduces a new scope exception
for certain types of entities that qualify as a "business" as defined in FIN
46-R, revises the method of calculating expected losses and residual returns for
determination of the primary beneficiary, includes new guidance for assessing
variable interests, and codifies certain FSPs on FIN 46. FIN 46-R did not have a
material impact on the company's Consolidated Financial Statements.
In 2003, the Emerging Issues Task Force (EITF) reached a consensus on two issues
relating to the accounting for multiple-element arrangements: Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," and Issue No.
03-05, "Applicability of AICPA SOP 97-2 to Non- Software Deliverables in an
Arrangement Containing More Than Incidental Software." The consensus opinion in
EITF No. 03-05 clarifies the scope of both EITF 00-21 and Statement of Financial
Position (SOP) 97-2, "Software Revenue Recognition," and was reached on July 31,
2003. The transition provisions allow either prospective application or a
cumulative effect adjustment upon adoption. EITF Nos. 00-21 and 03-05 did not
have a material impact on the company's Consolidated Financial Statements.
9
In December 2003, the FASB revised SFAS No.132, "Employers' Disclosures about
Pensions and other Post-retirement Benefits, an amendment of FASB Statements No.
87, 88 and 106." This new SFAS No. 132 retains all of the disclosure
requirements of SFAS No. 132; however, it also requires additional annual
disclosures describing types of plan assets, investment strategy, measurement
date(s), expected employer contributions, plan obligations, and expected benefit
payments of defined benefit pension plans and other defined benefit
postretirement plans. SFAS No. 132 did not have a material impact on the
company's Consolidated Financial Statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and develops
a single accounting model, based on the framework established in SFAS No. 121
for long-lived assets to be disposed of by sale, whether such assets are or are
not deemed to be a business. SFAS No. 144 also modifies the accounting and
disclosure rules for discontinued operations. The standard was adopted on
January 1, 2003, and did not have a material impact on the company's
Consolidated Financial Statements. The sale of iAccele operations on December
29, 2003 are presented in the Consolidated Financial Statements in accordance
with SFAS No. 144.
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. It also specifies
when a derivative contains a financing component that requires special reporting
in the Consolidated Statement of Cash Flows. SFAS No. 149 amends certain other
existing pronouncements in order to improve consistency in reporting these types
of transactions. The new guidance is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. SFAS No. 149 did not have a material effect on the company's
Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. It establishes
classification and measurement standards for three types of freestanding
financial instruments that have characteristics of both liabilities and equity.
The provisions of SFAS No. 150 are effective for (i) instruments entered into or
modified after May 31, 2003, and (ii) pre-existing instruments as of July 1,
2003. In November 2003, through the issuance of FSP 150-3, the FASB indefinitely
deferred the effective date of certain provisions of SFAS No. 150, including
mandatory redeemable instruments as they relate to minority interests in
consolidated finite-lived entities. The adoption of SFAS No. 150, as modified by
FSP 150-3, did not have a material effect on the company's Consolidated
Financial Statements.
NOTE 3. ACQUISITIONS
The acquisition Rex Tokyo and QuikCAT are key components of our strategy to
shift our business model to the development of media, entertainment and
technology products and services.
10
REX TOKYO CO LTD
On March 18, 2004, the company executed Share Purchase Agreements and a
Stockholders Agreement with Rex Tokyo Co. Ltd. ("Rex Tokyo") and certain of its
management, pursuant to which we acquired a 60.5% ownership interest in Rex
Tokyo. The company purchased 1,000 shares of Rex Tokyo stock for 100 million
Yen, or approximately $941,000 based on the Japanese Yen/US dollar exchange rate
on March 25, 2004. In addition, we purchased 150 Rex Tokyo shares from Mr.
Ejima, the CEO of Rex Tokyo, for 462,000 shares of our common stock issued at
$.30 per share which is the average closing price five days before closing. The
Stockholder's Agreement places restrictions on the sale of Rex Tokyo stock in
the future, requires existing management to operate the business and places
conditions on the board of director composition. This agreement can be
terminated under certain conditions. The company used working capital to fund
the cash portion of the purchase price.
Rex Tokyo is a supplier and maintenance contractor of parts to the Pachinko and
machine gaming industry in Japan. Rex Tokyo is a supplier and fitter of
installations for both new Pachinko parlors and stores that are carrying out
re-fittings. It supplies items such as automatic medal dispensing machines,
automatic cigarette butt disposal systems, Pachinko balls and other Pachinko
accessory products as well as numerous new Pachinko and slot machines.
The Pachinko industry has experienced significant consolidation since the late
1990s, with small parlor operators being replaced by large mega-parlor owners.
Rex Tokyo's business expansion focus is to provide support and services to these
mega-parlor owners.
Rex Tokyo is a member of the Pachinko Chain Store Association and the East Japan
Gaming Machinery Association. As a member of this Association, it is authorized
to certify second hand machines. Also, it is registered as a Gaming Machinery
Sales Operation with the Japan Gaming Related Business Association. The Japan
Gaming Related Business Association conducts training and qualification testing.
Its objective is to ensure that members uphold the rules and teachings of the
association in their everyday work. Once a member passes the test of the
Association, it receives the Gaming Machine Handling Manager Certificate.
Approximately half of Rex Tokyo's staff and related contractors have achieved
this qualification.
The cost to acquire these assets has been preliminarily allocated to the assets
acquired according to estimated fair values and is subject to adjustment when
additional information concerning asset valuations is finalized. The preliminary
allocation is as follows:
Purchase price:
Cash .................................................... $ 941,000
Stock ................................................... 138,600
-----------
1,079,600
Net Assets Acquired (3/18/04):
Total Assets .............................................. 5,549,826
Liabilities ............................................... (4,618,949)
-----------
Net Assets at 3/18/04 ..................................... 930,877
Reserve ................................................... (22,159)
Plus 10 million Yen contributed by other .................. 92,328
Plus cash paid by IA Global ............................... 941,000
-----------
1,942,046
% Acquired ................................................ 60.5%
-----------
1,174,938
-----------
Negative goodwill ......................................... $ (95,338)
===========
11
The results of operations of Rex Tokyo are included in the Consolidated
Statements of Operations for the period March 18, 2004 to June 30, 2004.
The pro-forma financial data on the acquisition is included in this section
below:
Pre-Acquisition
As Reported, Operatons of Pro Forma,
Six Months Rex Tokyo Six Months
Ended January 1- Ended
June 30, 2004 March 18, 2004 June 30, 2004
-----------------------------------------------
Revenues ....................... $ 11,413,240 $ 5,639,384 $ 17,052,624
Loss before extraordinary items (764,443) 111,505 (652,938)
Net loss ....................... (764,443) 111,505 (652,938)
Loss per common share .......... (0.01) (0.01)
There were no material, nonrecurring items included in the reported the
pro-forma results.
QUIKCAT.COM, INC.
On June 10, 2004, the company closed the acquisition of the intellectual
property and other assets of QuikCAT.com, Inc. ("QuikCAT"). The purchase price
was $700,000 in cash, plus the assumption of certain contracts, agreements and
liabilities. QuikCAT had filed for bankruptcy in the United States Bankruptcy
Court, Northern District of Ohio and the Company had submitted a bid on February
5, 2004. The acquisition was funded from working capital.
QuikCAT is a leading multi-media compression technology company, which has
developed several patented video, picture and audio compression algorithms
(codecs). By utilizing a part of this technology, we have developed a
proprietary Internet acceleration product.
This Internet acceleration software accelerates the delivery of data (web
content and email attachments) by 3-6 times over the "last mile", where the
transmission of data is typically the slowest for a dial-up connection to the
Internet. IA Global has previously licensed specific parts of this technology
from QuikCAT in relation to its Internet Acceleration business in Japan and
Australia.
The cost to acquire these assets has been preliminarily allocated to the assets
acquired according to estimated fair values and is subject to adjustment when
additional information concerning asset valuations is finalized. The preliminary
allocation is as follows:
Purchase Price:
Cash ............................... $ 700,000
---------
Net Assets Acquired (6/10/04):
Accounts receivable ................ 29,114
Fixed assets ....................... 5,000
---------
Total assets ....................... 34,114
---------
Identifiable intangible assets ..... $ 665,886
=========
The results of operations of IA Global Acquisition Co. are included in the
Consolidated Statements of Operations for the period June 10, 2004 to June 30,
2004.
12
Historical financial statements of QuikCAT.com, Inc. and pro forma financial
information relating to this transaction, as prescribed by Regulation S-X,
promulgated by the Securities and Exchange Commission, are not required. The
company contributed the assets of QuikCAT and a loan to Innovative Computing
Group, Inc. of $101,629 to IA Global Acquisition Co on June 30, 2004 in exchange
for a 90.5% in this corporation.
NOTE 4. ACCOUNTS RECEIVABLE/ CUSTOMER CONCENTRATION
Accounts receivable was $4,116,426 and $1,266,335 as of June 30, 2004 and
December 31, 2003, respectively. The company had the following customers with
sales in excess of 10% for the six months ended June 30, 2004 and 2003:
2004 2003
---- ----
Dynamu, Inc. 41.3% 0.0%
Quest Co Ltd 0.0% 78.0%
ITCA Co Ltd 0.0% 19.0%
Dynamu is a Rex Tokyo customer. Quest and ITCA were iAccele customers and this
business was sold on December 29, 2003. There were no other customers in excess
of 10% in the respective periods.
The company anticipates that significant customer concentration will continue
for the foreseeable future.
NOTE 5. INVENTORIES
Inventories were $1,128,181 and $0 as of June 30, 2004 and December 31, 2003,
respectively. The inventory consisted of the following:
June 30,
2004
----------
Raw materials ........................... $ 52,275
Work in process ......................... 1,075,905
Finished goods .......................... -
----------
Total inventories ....................... 1,128,181
Reserve for obsolete inventories ........ -
----------
Net inventories ......................... $1,128,181
==========
NOTE 6. PREPAID COSTS
Prepaid costs were $148,891 and $438,142 as of June 30, 2004 and December 31,
2003, respectively. Such costs as of June 30, 2004 consisted of prepaid
insurance costs incurred by IA Global and prepaid Fan Club expenses related to
future revenue. Such costs as of December 31, 2003 consisted of costs incurred
by Fan Club for revenue that was deferred as of December 31, 2003.
NOTE 7. OTHER CURRENT ASSETS
Other current assets were $283,024 and $296,163 as of June 30, 2004 and December
31, 2003, respectively. Such assets as of June 30, 2004 included marketable
securities and other assets held by Rex Tokyo. Such assets as of December 31,
2003 consisted of a receivable from GM2 of $279,356 related to the sale of
iAccele on December 29, 2003. This cash was received on January 16, 2004.
NOTE 8. EQUIPMENT
Equipment was $297,004 and $812 as of June 30, 2004 and December 31, 2003,
respectively. The equipment consisted of leasehold improvements, capitalized
software licenses, vehicles and equipment.
13
NOTE 9. INTANGIBLE ASSETS
Intangible assets as of June 30, 2004 consisted of the following:
Amount Estimated Life
------ --------------
Licensing fee ...................... $ 923,276 5-years
Other intangible ................... 955,632 5-years
Goodwill on Rex Tokyo .............. (95,338) 5-years
-----------
1,783,570
Less: accumulated amortization ..... (220,630)
-----------
Intangible Assets, net .... $ 1,562,940
===========
Total amortization expense for the three and six months ended June 30, 2004
amounted to $109,678 and $54,812, respectively. The license fee amortization was
$91,231 and the amortization of other intangibles was $18,447 for the six months
ended June 30, 2004.
The fair value of the Fan Club intellectual property acquired was estimated
using a discounted cash flow approach based on future economic benefits
associated with the Marvel Enterprises contract. The fair value of the QuikCAT
intellectual property acquired was estimated using a discounted cash flow
approach based on future economic benefits associated with the intellectual
property.
Management's evaluation of the fair value allocated to the aforementioned Fan
Club and QuikCAT assets and liabilities acquired did not result in any excess
values for goodwill being acquired.
NOTE 10. LOAN TO/INVESTMENT IN QUIKCAT AUSTRALIA PTY LTD
During the six months ended June 30, 2004, the company made unsecured loans
totaling $26,062 to QuikCAT Australia Pty Ltd ("QuikCAT Australia"). During the
year ended December 31, 2003, the company made loans to QuikCAT Australia in the
aggregate amount of $74,849. Interest on these loans accrues at 3% after certain
profit targets are achieved. The company acquired 47.5% of QuikCAT Australia in
2003.
On March 31, 2004, QuikCAT Australia was recapitalized by a subscription for
common shares totaling $100,000, with our contribution being $50,000. After this
recapitalization, our ownership percentage increased to 47.54%.
NOTE 11. 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, the company has
provided a 100% valuation allowance against the net deferred tax assets.
NOTE 12. DEBT
On June 30, 2004, Rex Tokyo entered into a 100,000,000 Yen or $923,275 working
capital loan with Nihon Shinko Bank Co. The loan requires twenty three monthly
payments of 4,167,000 Yen or $3,847 starting July 29, 2004, with a final payment
of 4,159,000 Yen, or $3,840 due on June 29, 2006. The loan accrues interest at
9.75% based on the Japanese Yen TIBOR rate, which is adjustable quarterly. The
loan is cosigned by the CEO of Rex Tokyo and has certain covenants, including
interest coverage, minimum assets and minimum equity. Certain activities are
prohibited without consent, including distribution of profits, acquisitions and
leases in excess of certain targets. The loan is not secured.
14
NOTE 13. RELATED PARTY RELATIONSHIPS WITH INTER ASSET JAPAN
Inter Asset Japan LBO No. 1 Fund ("IAJ LBO Fund"), PBAA Fund Ltd. ("PBAA"),
Terra Firma Fund Ltd. ("Terra Firma") and Inter Asset Japan Co. Ltd. ("IAJ" and
together with IAJ LBO Fund, PBAA, and Terra Firma, our "Controlling
Stockholders") collectively hold approximately 81.8% of the common shares of the
company. Our Controlling Stockholders (other than IAJ which was not a
stockholder at the time) stated in a Schedule 13D filed with the Securities and
Exchange Commission ("SEC") on July 6, 2004, and have subsequently confirmed
orally, that they may be deemed to constitute a "group" for the purposes of Rule
13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act"). Mr. Alan
Margerison, our Director, President and Chief Executive Officer, currently
serves as the Chairman of IAJ, and together with his business partner, Mr.
Hiroki Isobe, they control each of our Controlling Stockholders.
The following table provides details on the affiliated parties owned or
controlled by each of the company's controlling stockholders and certain other
entities, as of June 30, 2004, that are relevant for purposes of understanding
the related party transactions that have taken place:
Ownership:
Inter Asset Japan LBO No. 1 Fund owns:
InfoshowerX Co., Ltd...............42.7%
IA Global, Inc.....................35.3%
PBAA Fund Ltd. owns:
IA Global, Inc.....................30.1%
Terra Firma Fund Ltd. owns:
IA Global, Inc.....................14.6%
Inter Asset Japan Co., Ltd. owns:
IA Global, Inc......................1.9%
Cyberbred Co., Ltd..................0.0% (1)
IA Global, Inc. owns:
iAccele Co. Ltd.....................0.0% (2)
QuikCAT Australia Pty Ltd..........47.5%
Fan Club Entertainment Co., Ltd....67.0%
Rex Tokyo Co. Ltd..................60.5% (3)
IA Global Acquisition Co...........90.5% (4)
InfoshowerX Co. Ltd. owns:
iAccele Co. Ltd....................23.1%
Mr. Kazunari Ito (CEO of Fan Club Entertainment Co. Ltd., Cyberbred Co.
Ltd, and Cyberholdings Co. Ltd)
Cyber Holdings Co. Ltd............100.0%
Cyberbred Co. Ltd..................69.0% (1)
Cyber Holdings Co. Ltd. owns:
Fan Club Entertainment Co. Ltd.....33.0%
(1) Mr. Kazunari Ito, Chief Executive Officer of Fan Club Entertainment Co.,
Ltd., Cyberbred Co., Ltd. and Cyberholdings Co. Ltd., repurchased the
27.1% ownership interest in Cyberbred from IAJ on September 29, 2003.
(2) The company sold its 76.9% interest in iAccele Co. Ltd on December 29,
2003.
(3) The company acquired its 60.5% interest in Rex Tokyo Co Ltd on March 18,
2004.
(4) The company acquired its 90.5% interest when it contributed the assets of
QuikCAT and a loan to Innovative Computing Group, Inc. of $101,629 to IA
Global Acquisition Co on June 30, 2004 in exchange for a 90.5% in this
corporation.
15
DEBT TO PREFERRED B SHARES CONVERSION
The company owed David Badner, a stockholder and a former consultant of the
company, $563,857, as of September 25, 2002, pursuant to a convertible
promissory note, dated May 31, 2002 (the "Convertible Promissory Note"). The
company has been informed by IAJ that, as of September 25, 2002, IAJ LBO Fund,
our largest stockholder, acquired the Convertible Promissory Note from Mr.
Badner. The interest rate under the Convertible Promissory Note was 10% per
annum.
During the three months ended December 31, 2002, IAJ LBO Fund loaned the company
an additional $500,000 under the Convertible Promissory Note, thereby increasing
the principal amount to $1,063,857. The proceeds from this additional loan were
used for working capital purposes.
The Convertible Promissory Note was convertible into the company's Series B
convertible preferred stock. Each share of Series B convertible preferred stock
is convertible into 10,000 shares of the company's common stock. On June 30,
2003, IAJ LBO Fund converted the principal amount of the Convertible Promissory
Note, as well as approximately $95,000 of accrued interest thereon, into 1,158
shares of the company's Series B convertible preferred stock. The 1,158 shares
of Series B convertible preferred stock are convertible into 11,580,000 shares
of common stock.
ACQUISITION OF IACCELE CO LTD
On February 10, 2003, the company acquired a 76.9% equity interest in iAccele Co
Ltd ("iAccele"), a privately held Japanese corporation engaged in the business
of providing an Internet data transmission acceleration service that targets
narrowband users, as well as broadband users, for 100.0 million Japanese Yen, or
approximately $830,000 based on the Japanese Yen/US dollar exchange rate on that
date.
iAccele was engaged in the business of providing an Internet data transmission
acceleration service. Its main product offering is named after the company,
iAccele. This service allowed narrow band users, as well as broadband users, to
accelerate their access to the Internet, enabling them to increase the speed of
downloading and uploading data from their local machine to the Internet. This
speeds up web browsing and network services and accelerates email services.
There was no need for the user to change his network provider connection. The
iAccele product was based on a repeat subscriber business model. Subscribers to
the service signed up for a 3 month or 1 year license, which provided them with
a copy of the iAccele software and full access to the acceleration server.
In order to finance this purchase, the company borrowed 100.0 million Japanese
Yen from PBAA Fund Ltd. Mr. Alan Margerison, our Director, President and Chief
Executive Officer, currently serves as the Chairman of IAJ, and together with
his business partner, Mr. Hiroki Isobe, they control PBAA.
The principal amount of this loan, together with interest thereon at 4.50% per
annum, was due and payable on January 31, 2004. Pursuant to the terms of the
loan, the company deferred payment of the principal amount of this loan, but not
accrued interest, for one additional year with the consent of PBAA.
16
If this loan was not repaid by January 31, 2004, PBAA would be afforded the
right to convert any portion of the then unpaid principal amount of the loan, as
well as any then accrued but unpaid interest thereon, into shares of the
company's common stock at a per share conversion price equal to the Japanese Yen
equivalent of 80% of the average of the US dollar closing price of the common
stock on the American Stock Exchange in the 20 consecutive trading days
immediately prior to the date upon which PBAA gave the company notice of
conversion, or, if the common stock is not then traded on the American Stock
Exchange, the closing bid price for the common stock as reported by the Nasdaq
Stock Market or such other primary exchange or stock bulletin board on which the
common stock is then traded. By way of illustration, had such conversion
occurred on February 10, 2003, PBAA would have received 7,335,145 shares of
common stock which, when added to those shares currently beneficially owned by
PBAA and its affiliates would increase their collective ownership of the
company's common stock to approximately 78.9%.
iAccele used 70.0 million of the 100.0 million Japanese Yen that it received
from the company to partially repay a contractual obligation of 150.0 million
Japanese Yen, since reduced by iAccele's payment of 30.0 million Japanese Yen,
that it owes to InfoShowerX, a Japanese public company, which was incurred by
iAccele in connection with a December 2002 reorganization by which iAccele,
previously an unincorporated operating division of InfoShowerX, acquired the
division's assets from InfoShowerX and became a stand-alone corporation. iAccele
was required to repay this contractual obligation to InfoShowerX in its entirety
by the end of April 2003. Further, 42.0 million Japanese Yen was paid by iAccele
between February 10, 2003 and June 30, 2003 and the balance of 8.0 million
Japanese Yen in August 2003. InfoShowerX has agreed to indemnify the company for
any damages that may result from representations and warranties made to the
company by iAccele to acquire the company's equity interest thereon.
IAJ and its affiliates own an aggregate of 42.7% and Hiroshi Kubori, who became
a director of the company after the acquisition and functions as CEO of iAccele,
owns approximately 5% of the capital stock of InfoShowerX. InfoShowerX owns the
balance of the capital stock of iAccele, or 23.1%.
InfoShowerX had indebtedness owed to IAJ. A portion of the payments that
InfoShowerX received from iAccele, noted above, were used to repay some of its
indebtedness to IAJ and its affiliates.
Pursuant to a one-year outsourcing agreement, dated as of December 20, 2002,
iAccele had provided business services to InfoShowerX and InfoShowerX had
provided technology services and office space to iAccele. A new agreement was
signed between the two companies for the term April 1, 2003 to July 31, 2003.
The primary factors that resulted in $1,178,000 being allocated to the
intangibles for the purchase of iAccele is due to the company acquiring $348,000
of potential liabilities in excess of the $569,000 of identifiable assets in
addition to the $830,000 of cash paid at closing. Although the company acquired
76.9% of iAccele there can be no assurance the minority interest holder would
ever pay their portion of any cash shortfalls.
The results of operations of iAccele are included in the Consolidated Statements
of Operations for the period February 11, 2003 to December 29, 2003.
The company purchased and subsequently leased 600 computers to an investee of
the major shareholder of the company, foreignTV Japan co. Ltd., a Japanese
limited liability company ("foreignTV"), IAJ owns approximately 66% of foreignTV
Japan. The company previously held a minority ownership in foreignTV, but sold
its interest in 2002. IAJ, a principal stockholder of the company, currently
owns approximately 66% of the outstanding shares of foreignTV. These computers
cost approximately $1,000 per machine or approximately $600,000. The company
expected to receive about $1,200,000 over the term of these leases for the
equipment under lease. The terms of the leases were as follows;
17
o Lease 1 dated June 10, 2003 for 100 computers. The monthly rental is
950,000 Yen or approximately $8,000 per month.
o Lease 2 dated June 20, 2003 for 200 computers. The monthly rental is
1,900,000 Yen or approximately $17,000 per month.
o Lease 3 dated August 1, 2003 for 300 computers. The monthly rental is
2,850,000 Yen or approximately $25,000 per month.
o The rental period for each lease was for 2 years.
o The lease contract shall be automatically extended for six months if
foreignTV does not object at least one month prior to the contract's
termination date.
o These computers were to be returned to the company upon termination of the
leases.
These leases were not recorded as a financing lease, because these leasing
transactions are between related parties under common control. As a result,
revenues are not being recognized on any cash receipts. In addition, since the
lessee of these computers is not sufficiently capitalized, the company's ability
to collect the lease payments is not certain. The company has received 3,429,749
Yen or approximately $31,000 during the quarter ending September 30, 2003 and
this amount has been booked as deferred revenue on the balance sheet.
These computers were depreciated over three years.
During the quarter ended June 30, 2003, iAccele borrowed 52,500,000 Yen, or
approximately $454,000, from IAJ. This financing was made in four separate
advances. These advances bear interest at rates ranging from 3.5% to 6.7% per
annum. These advances matured during the following dates: 5,500,000 Yen or
approximately $45,000 on July 25, 2003, 7,000,000 Yen, or approximately $62,000,
on July 27, 2003, 10,000,000 Yen, or approximately $89,000, on August 1, 2003
and 30,000,000 Yen, or approximately $258,000, on December 1, 2003. The company
repaid 18,500,000 Yen, or approximately $160,000, on July 25, 2003. The
remaining 4,000,000 Yen which was due on August 1, 2003 was deferred with a new
note until the end of 2003. Therefore, the total outstanding amount to IAJ due
in December, 2003 and bearing interest at 3.5% per annum is 34,000,000 Yen, or
approximately $ 290,000.
On November 17, 2003, the company assigned to IAJ (a) the lease with foreignTV
Japan for the 600 personal computers, (b) unpaid invoices totaling 18,947,500
Yen, or approximately $166,000, from foreignTV Japan, (c) and rights to cash
received of 3,429,749 Yen, or approximately $31,000, in exchange for (a)
cancellation of a 34,000,000 Yen, or approximately $298,000, loan from IAJ and
related accrued interest, and (b) 34,000,000 Yen, or approximately $298,000 that
was received by the company on December 18, 2003.
On December 2, 2003, the company reached agreement with PBAA to convert
approximately $834,000 in outstanding convertible debt plus interest of
approximately $33,000 in exchange for our common stock. PBAA, an affiliate of
our majority shareholder, plans to convert the remainder of its outstanding debt
under a revised agreement from its original contract dated January 31, 2003.
18
Under the conversion terms, the company issued 3,163,436 shares of common stock
to PBAA at a conversion rate of $0.30, representing an approximate 15% discount
to the trailing twenty day average closing price of the our common stock ending
November 21, 2003, the date PBAA made its investment commitment. The company
recorded a deemed dividend of $177,152 in connection with this transaction and a
foreign exchange adjustment of approximately $85,000.
On December 29, 2003, the company executed a share purchase agreement to sell
our 76.9% interest in iAccele for approximately $280,000 to GM2 Co. Ltd., a
private Japanese corporation ("GM2"). In addition, iAccele had approximately
$700,000 of liabilities that had previously been reflected in the consolidated
balance sheet of our company. In connection with the sale, we agreed to cancel
approximately $300,000 of inter-company debt owed by iAccele to us. The company
received the funds from GM2 on January 16, 2004.
IAJ, our majority shareholder, holds a warrant to purchase a 25% equity interest
in GM2 and has loaned GM2 approximately $500,000. However, IAJ does not control
GM2. The transaction price and terms were established on an arms-length basis
and this was the only offer the company received for iAccele.
The company acquired iAccele with the intent to become a wholesale distributor
of an Internet acceleration product. However, the company subsequently
determined that we would prefer to be a developer and licensor of the core
Internet acceleration technology, rather than a wholesale distributor of such
products. Therefore, the company sold its interest in iAccele, and has instead
been developing its own proprietary Internet accelerator product in conjunction
with QuikCAT, an Ohio based private company, that was the core technology
provider to iAccele. The company licensed the core technology from QuikCAT and
has also developed a user interface for this Internet acceleration product,
which the company believes will enhance the commercial reception of the product.
$2.0M FINANCING
On June 30, 2003, the company agreed to sell to PBAA, 13,333,333 shares of
common stock at an average price of $0.15 per share, for a total of $2.0
million, representing an approximate 25% discount to the trailing five-day
average closing price of our common stock ending June 15, 2003, the date PBAA
made its investment commitment. The company recorded a deemed dividend of
$693,333 in connection with this transaction.
ACQUISITION OF FAN CLUB ENTERTAINMENT CO LTD
On August 5, 2003, the company executed a Share Purchase Agreement to acquire
from Cyber Holdings Co Ltd ("Cyber Holdings") a 67% equity interest in Fan Club
Co Ltd (`Fan Club"), a privately-held Japanese company. Fan Club provides
advertising, merchandising, publishing, website and data management services to
Cyberbred Co Ltd, ("Cyberbred"). The purchase price for the company's equity
interest in Fan Club was 134,000,000 Japanese Yen, or $1,112,960 (based on the
Japanese Yen/US dollar exchange rate on August 5, 2003), as well as 350,000
shares of the company's common stock issued at $.472 per share, which is the
average closing price for the five days prior to closing.
19
The terms of the Share Purchase Agreement require Cyber Holdings to transfer the
rights under the Marvel agreement (described below) to Fan Club within five
months or make its best efforts to fully cooperate in any commercially
reasonable arrangement designed to provide the benefit of the Marvel agreement
to Fan Club. At this time, this transfer has not taken place. The company used
its working capital to fund the cash portion of the purchase price.
The Share Purchase Agreement provides that the company will receive a 67% equity
interest, or 268,000 shares, in Fan Club. Cyber Holdings, which already held
20,000 shares in Fan Club, following the share purchase would have a 33% equity
interest in Fan Club by paying 56 million Japanese Yen to Fan Club for an
additional 112,000 shares. Cyber Holdings' obligation had not been paid as of
December 31, 2003. A receivable was not booked as of December 31, 2003 due to
the lack of certainty over the receipt of the funds.
On February 5, 2004, the company executed a Share Purchase Agreement to sell
75,040 shares of Fan Club for approximately $354,000 in cash to Cyber Holdings.
Upon completion of this sale, we owned a 67% interest in Fan Club and Cyber
Holdings owned the remaining 33%. The sale of shares on February 5, 2004, was
conducted to maintain the initially agreed balance of share holdings between the
two companies at 67% and 33% respectively.
On June 4, 2003, Cyberbred signed a five year agreement with Marvel Enterprises,
Inc. ("Marvel Enterprises") and Marvel Characters, Inc.("Marvel Characters" and
collectively with Marvel Enterprises, "Marvel") to manage their fan club in
Japan. The Marvel Characters hold the rights to well known characters such as
Spider Man, The Hulk, X-Men, Daredevil, Captain America, The Punisher and many
others. Cyberbred currently holds the rights to manage the Universal Studio fan
club in Japan.
On July 28, 2003, Fan Club signed a Subcontract Agreement with Cyberbred to
exclusively manage the entire Marvel Fan Club in Japan in accordance with the
agreement between Cyberbred and Marvel that is discussed above. This Subcontract
Agreement expires May 31, 2008, and is cancelable under certain conditions. The
134,000,000 Yen payment was advanced to Cyberbred in late July, 2003 to fund the
100,000,000 Yen payment to Marvel under this agreement and to provide working
capital for Fan Club. There were no repayment requirements.
Mr. Kazunori Ito, CEO of Fan Club, has been CEO of both Cyberbred and Cyber
Holdings. As of June 30, 2003, Mr. Ito owned equity interests of 41.9% in
Cyberbred and 100% in Cyber Holdings.
There was no prior material relationship between the company (and any of its
affiliates) and Fan Club. However, an affiliate of IAJ LBO Fund, the company's
largest stockholder, owned approximately 27% of the equity in Cyberbred. This
interest was sold to Mr. Ito on September 29, 2003.
The company currently is not a party to the agreement between Cyberbred and
Marvel. However, this contract is material to the company since the company
would be materially adversely affected by a termination of the relationship
between Cyberbred and Marvel. The company cannot make any assurances about the
relationship between Cyberbred and Marvel.
The results of operations of Fan Club are included in the Consolidated
Statements of Operations for the period August 5, 2003 to June 30, 2004.
20
$500,000 FINANCING
On November 11, 2003, the company agreed to sell to IAJ, 1,666,666 shares of our
common stock at an average price of $0.30 per share, for a total of $500,000,
representing an approximate 17% discount to the trailing five-day average
closing price of our common stock ending November 6, 2003, the date IAJ made its
investment commitment. The company recorded a deemed dividend of $106,667 in
connection with this transaction.
$400,000 FINANCING
On December 29, 2003, the company agreed to sell to PBAA, a related party,
1,333,333 shares of our common stock at an average price of $0.30 per share, for
a total of $400,000, representing no discount to the trailing five-day average
closing price of our common stock ending December 29, 2003, the date PBAA made
its investment commitment. The funds were received January 16, 2004.
$1,500,000 CONVERTIBLE NOTE
On March 21, 2004, PBAA, an affiliate of the company's majority shareholder,
invested an additional $1.5 million into the company in a private placement.
Under the financing terms, the company has issued a $1.5 million convertible
note, convertible into 5 million shares of our common stock, representing a
conversion price per share of $0.30, which was the fair-market value of the
trailing five-day average closing price of our common stock ending March 5,
2004, the date PBAA committed to make the investment. The conversion price was
at market value and an allocation was not required for a beneficial conversion
feature under EIFT 98-5 or EITF 00-27.
On June 18, 2004, the company announced that it reached agreement with PBAA to
convert the $1,500,000 Note, plus accrued interest of approximately $20,000,
into 5,065,037 shares of our common stock in accordance with the terms of the
Note.
NOTE 14. EQUITY TRANSACTIONS
During the six months ended June 30, 2004, the following stockholder equity
events occurred:
In connection with the company's initial public offering, 167,843 units were
issued to the underwriter with each unit consisting of one share of common stock
and a warrant to purchase one share of common stock with an exercise price of
$9.00 per share. The warrants expired in May 2004.
On June 15, 2003, the company granted 4,975,000 stock options with an exercise
price of $.20 per share. Four million five hundred thousand of the stock options
were issued to the directors and officers of the company, and these options vest
annually over three years. Two million of these options expired on April 3, 2004
when three directors resigned from the board of directors. Four hundred and
seventy five thousand options are performance based stock options and none of
the performance based stock options were earned. The remaining 2,500,000 stock
options issued to the officers and directors expire on June 15, 2013.
On January 12, 2004, the company granted 400,000 stock options at an exercise
price of $.30 per share to an executive of the company. These options vest
annually over three years and expire on January 12, 2014.
On January 12, 2004, the company entered into an employment agreement with Mark
Scott to serve, for a term of two years, as our Chief Financial Officer at an
annual salary of $150,000. Mr. Scott is eligible to receive compensation,
including options, bonuses and benefits, at the discretion of our compensation
committee. Mr. Scott works full time for the company. This employment agreement
also contain provisions for confidentiality for the term of the agreement and
thereafter. The employment agreement also provides for a severance payment in
the amount of 20% of the executive's annual base salary in the event that the
employee is terminated by us without cause.
21
On February 25, 2004, the company granted 1,000,000 stock options at an exercise
price of $.30 per share to employees of Fan Club. These options vest annually
over three years and expire on February 25, 2014.
On March 18, 2004, the company purchased 150 Rex Tokyo Co Ltd shares from Mr.
Ejima, the CEO of Rex Tokyo, as part of the acquisition of Rex Tokyo, for
462,000 shares of our common stock issued at $.30 per share, which is the
average closing price for the five days prior to closing..
On March 21, 2004, PBAA, an affiliate of the company's majority shareholder,
invested an additional $1.5 million into the company in a private placement.
Under the financing terms, the company issued a $1.5 million convertible note,
convertible into approximately 5 million shares of our common stock,
representing a conversion price per share of $0.30, which was the fair-market
value of the trailing five-day average closing price of the company's common
stock ending March 5, 2004, the date PBAA committed to make the investment.
On March 18, 2004, the company granted 1,500,000 stock options at an exercise
price of $.30 per share to employees of Rex Tokyo. These options vest annually
over three years and expire on March 18, 2014.
On April 12, 2004,1,678,433 warrants traded on the American Stock Exchange under
the ticker symbol IAO.WS were not exercised and became void. Each warrant was
exercisable to purchase one common share of IA Global Inc. at a price of $3.50
per share.
On May 18, 2004, the company granted 300,000 stock options in total at an
exercise price of $.20 per share to three directors of the company. These
options vest quarterly over three years and expire on May 18, 2014.
On May 18, 2004, the company granted 100,000 stock options at an exercise price
of $.20 per share to an executive officer of the company. These options vest
quarterly over three years and expire on May 18, 2014.
On June 10, 2004, the company granted 150,000 stock options in total at an
exercise price of $.34 per share to executive officers of Rex Tokyo. These
options vest quarterly over three years and expire on June 10, 2014.
On June 10, 2004, the company granted 400,000 stock options at an exercise price
of $.34 per share to an executive officer of IA Global Acquisition Co. These
options vest quarterly over three years and expire on June 10, 2014.
On June 17,2004, a previous executive officer of the company exercised options
totaling 500,000 shares for $40,000.
On June 18, 2004, the company announced that it reached agreement with PBAA to
convert the $1,500,000 Note, plus accrued interest of approximately $20,000,
into 5,065,037 shares of our common stock in accordance with the terms of the
Note.
The company's stockholders approved an amendment to our certificate of
incorporation to increase the number of shares of common stock which we shall be
authorized to issue from 75,000,000 to 150,000,000 at the company's May 14, 2004
annual meeting of its stockholders.
NOTE 15. THIRD PARTY LICENSES AND AGREEMENTS
The company relies on certain agreements and technologies we license from third
parties to operate our business. The company been developing our own proprietary
Internet accelerator product in conjunction with QuikCAT, an Ohio based private
company. Development of the interface for this product was outsourced, with the
core patent based technology being licensed from QuikCAT.
22
The company owns the client interface software that was developed to work with
the iNet Client software, and receive a 5% royalty from QuikCAT Australia on
their net profits from the sales of their services that incorporate the client
interface. The company has no other contracts or agreements with other companies
at this time for the client interface software. The Internet acceleration
service is software based and uses a combination of highly advanced and proven
compression and caching technologies to increase substantially the speed of
delivery of Internet and email data to the end-user. The company believes that
its client interface software substantially enhances the core technology
licensed to us by QuikCAT and is critical to the commercial development and
acceptance of the service.
The company was granted an exclusive Reseller License Agreement by QuikCAT for
the iNet Client Software on October 6, 2003 for the territories of Australia,
New Zealand and Japan. This license was approved by the United States Bankruptcy
Court, Northern District of Ohio on December 15, 2003. The cost of the license
was $110,000, of which $10,000 was paid on September 3, 2003 and the balance was
paid on January 15, 2004. The license term is for three years, with one year
annual automatic renewals if the product is commercially deployed. The license
requires a 5% royalty on net revenues, which is to be paid monthly. In addition,
QuikCAT is to be granted (at their option) either a 10% net interest in the
profits, which is to be paid every six months, or a 10% equity share of the
entity that markets the iNet Client Software in the local marketplace. The
license can be terminated under certain conditions. The license agreement
required QuikCAT to place the source code for the software in independent escrow
and the source code may be released to us under certain conditions. As part of
the company's strategy to develop our multi-media compression technology and
Internet data acceleration products, the company is in discussions with the
parent company of QuikCAT, Innovative Computing Group, Inc. ("ICG"), to acquire
certain assets of ICG that relate to the technology that the company acquired
from QuikCAT on June 10, 2004, There is no assurance that the ICG asset
acquisition will be closed.
On June 4, 2003, Cyberbred signed a five year agreement with Marvel to manage
their fan club in Japan. On July 28, 2003, Fan Club signed a Subcontract
Agreement with Cyberbred to exclusively manage the entire Marvel Fan Club in
Japan in accordance with the agreement between Cyberbred and Marvel.
Under the July 28, 2003 agreement, Cyberbred will make "best efforts" to
transfer the rights under their agreement with Marvel, directly to Fan Club
Entertainment. At this time, this transfer has not taken place.
On July 28, 2003, Fan Club signed a Subcontract Agreement with Cyberbred to
exclusively manage the entire Marvel Fan Club in Japan in accordance with the
agreement between Cyberbred and Marvel that is discussed above. This Subcontract
Agreement expires May 31, 2008, and is cancelable under certain conditions.
NOTE 16. COMMITMENTS AND CONTINGENCIES
As previously disclosed, on September 26, 2003, Andzej Krakowski, a former
employee of foreignTV.com, Inc., filed a civil action seeking damages and
injunctive relief for (i) statutory damages, costs and attorney fees resulting
from our alleged willful copyright infringement, (ii) monetary damages in the
amount of $436,477 for alleged breach of an employment agreement with
foreignTV.com, (iii) the issuance of 180,000 shares of common stock in IA
Global, (iv) monetary damages for alleged fraud, (v) monetary damages of at
least $1,200,000, and (vi) punitive damages, costs and attorney fees. On January
10, 2004, the United States District Court for the Southern District of New York
dismissed without prejudice the complaint filed by Andzej Krakowski. On February
9, 2004, Mr. Krakowski filed for arbitration with the American Arbitration
Association in East Providence, Rhode Island.
23
The company 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, IAJ and David Badner, a major stockholder and former consultant
to us, Mr. Badner has agreed to indemnify and hold the company harmless against
any expenses, obligations and liabilities related to any breach of the
representations and warranties made to us in those agreements, and any creditor
claims arising from those agreements which facilitated our financial
restructuring.
While there can be no guarantee that we will be successful in resolving this
claim with Mr. Krakowski, the company believes that we are appropriately
indemnified by Mr. Badner for Mr. Krakowski's claims.
The company believes there are no other pending legal proceedings that, if
adversely determined, would have a material adverse effect on our business or
financial condition.
As part of the company's strategy to develop our multi-media compression
technology and Internet data acceleration products, the company is in
discussions with the parent company of QuikCAT, Innovative Computing Group, Inc.
("ICG"), to acquire certain assets of ICG that relate to the technology that the
company acquired from QuikCAT on June 10, 2004. There is no assurance that the
ICG asset acquisition will be closed.
NOTE 17. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
At the beginning of 2003, the company revised its business plan to expand into
other areas of media entertainment and technology. We have shifted the revenue
model from broadband entertainment channels and revenues derived predominantly
from licensing, to a renewed focus on developing media technology products,
services and licensing revenues. To this end, we may develop such media
entertainment and technology products and services internally, or acquire them
from other parties.
We are organized by company. Each company reports to the President who has been
designated as the Chief Operating Decision Maker ("CODM") as defined by SFAS 131
"Disclosures About Segments of an Enterprise and Related Information". The CODM
allocates resources to each of the companies using information regarding
revenues, operating income (loss) and total assets.
The following companies are the only reportable segments under the criteria of
SFAS 131 (i) IA Global, Inc., the parent company, (ii) 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 Cyberbred Co Ltd, (iv) IA Global Acquisition Co, a US
company, engaged in multi-media compression technology and Internet acceleration
products and (v) Rex Tokyo Co Ltd, a supplier and re-fitter of equipment for the
Pachinko and gaming industry in Japan. iAccele was sold on December 29, 2003.
24
The following table presents revenues, operating income (loss) and total assets
by company for the three and six months ended June 30,, 2004 and 2003:
(in thousands)
IA
IA Rex Global Fan Club
Global, Tokyo Acquisition Entertain. iAccele
Company Inc. Co Ltd Co Co Ltd Co Ltd Total
------- ------ ----------- ---------- ------- --------
Quarter Ended:
June 30, 2004
Revenue ...................... $ - $8,537 $ 21 $ 824 $ - $ 9,382
Operating income (loss) ...... (263) 57(1) (50) 2 - (254)
Total assets ................. 837 8,378 800 1,683 - 11,698
June 30, 2003
Revenue ...................... $ - $ - $ - $ - $ 99 $ 99
Operating loss ............... (123) - - - (549) (672)
Total assets ................. 2,304 - - - 1,925 4,229
Six Months Ended:
June 30, 2004
Revenue ...................... $ - $9,638 $ 21 $1,754 $ - $ 11,413
Operating income (loss) ...... (778) 190(1) (50) 21 - (617)
Total assets ................. 837 8,378 800 1,683 - 11,698
June 30, 2003
Revenue ...................... $ - $ - $ - $ - $ 105 $ 105
Operating loss ............... (348) - - - (818) (1,166)
Total assets ................. 2,304 - - - 1,925 4,229
(1) The Rex Tokyo Co Ltd operating income is net of $147,000 of merger and
acquisition expenses.
25
Geographic Region U.S. Japan Australia Total
----- ------- --------- -------
Quarter Ended:
June 30, 2004
Revenue .............................. $ 21 $ 9,361 $ - $ 9,382
Operating income (loss) .............. (314) 60 - (254)
Total assets ......................... 1,504 10,061 133 11,698
June 30, 2003
Revenue .............................. $ - $ 99 $ - $ 99
Operating loss ....................... (123) (549) - (672)
Total assets ......................... 2,304 1,925 - 4,229
Six Months Ended:
June 30, 2004
Revenue .............................. $ 21 $11,392 $ - $11,413
Operating income (loss) .............. (829) 212 - (617)
Total assets ......................... 1,504 10,061 133 11,698
June 30, 2003
Revenue .............................. $ - $ 105 $ - $ 105
Operating loss ....................... (348) (818) - (1,166)
Total assets ......................... 2,304 1,925 - 4,229
The following reconciles operating loss to net loss before income taxes:
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -------------------
2004 2003 2004 2003
----- ----- ----- -------
Operating loss ............... $(254) $(672) $(617) $(1,166)
Other income (expense) ....... 120 (132) 124 (216)
----- ----- ----- -------
Loss before minority
interests and income taxes . (134) (804) (493) (1,382)
Minority interests ........... 34 - 69 -
----- ----- ----- -------
Loss before income taxes ..... $(168) $(804) $(562) $(1,382)
===== ===== ===== =======
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We have incurred net losses of $2.1 million, $1.5 million and $6.2 million for
the years ended December 31, 2003, 2002 and 2001, respectively. We had revenues
of $1.1 million, $.4 million and $.7 million for the years ended December 31,
2003, 2002 and 2001, respectively. Our losses have been financed primarily by
the issuance of related party loans, the sale of equity in our company and
through the issuance of equity for services. We expect our net losses to
continue for the foreseeable future.
Our business model has changed substantially over the last several years. During
2002 and 2003, we shifted our business model from being a provider of broadband
entertainment channels with revenues derived from advertising, to a developer of
media, entertainment and technology products and services. This shift in focus
was implemented primarily through acquisitions, as described below. We intend to
grow our business by acquiring additional companies, with a focus on media,
entertainment and technology businesses, as well as by developing our own media
and technology products.
The acquisition of Fan Club and Rex Tokyo and the development of the multi-media
compression technology and Internet acceleration technology with QuikCAT and
QuikCAT Australia are key components of our strategy to shift our revenue model
from broadband entertainment channels and revenues derived from advertising to a
renewed focus on developing media technology products and services and on
licensing revenues. We may develop such media technology products and services
internally, or acquire them from other parties.
We received $280,000 from the sale of iAccele on January 16, 2004, $400,000 from
a subscription agreement from an affiliated party on January 12, 2004, $354,000
from the sale of our Fan Club shares on February 10, 2004 and $1,500,000 from a
convertible note from an affiliated party on March 17, 2004. We may need to
obtain additional financing in order to continue our current operations,
including the cash flow needs of Fan Club, Rex Tokyo, QuikCAT Australia and IA
Global Acquisition Co and to acquire businesses. Our major shareholder has
indicated a willingness to support our financing efforts. However, there can be
no assurance that the we will be able to secure additional funding, or that if
such funding is available, whether the terms or conditions would be acceptable
to us, from our major shareholder or otherwise. Moreover, if we raise additional
capital through borrowing or other debt financing, we would incur substantial
interest expense. Sales of additional equity securities will dilute on a pro
rata basis the percentage ownership of all holders of common stock. If we do
raise more equity capital in the future, it is likely that it will result in
substantial dilution to our current stockholders.
27
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
information and presentation of that data as a percentage of change from
period-to-period.
(dollars in thousands)
Three Months Ended June 30,
--------------------------------------------------------
2004 2003 $ Variance % Variance
--------------------------------------------------------
Revenue ......................................... $ 9,382 $ 99 $ 9,283 9376.8%
Cost of sales ................................... 7,916 191 7,725 4044.5%
-------- ------- -------- -------
Gross profit (loss) ............................. 1,466 (92) 1,558 1693.5%
-------- ------- -------- -------
Expenses:
Selling, general and
administrative expenses ....................... 1,638 580 1,058 182.4%
Writedown of fixed assets ....................... 82 - 82 *
-------- ------- -------- -------
Total expenses .................................. 1,720 580 1,140 196.6%
-------- ------- -------- -------
Operating loss .................................. (254) (672) 418 62.2%
-------- ------- -------- -------
Other Income (Expense):
Interest income ................................. 5 1 4 400.0%
Interest expense ................................ (14) (117) 103 -88.0%
Other Income .................................... 146 (19) 165 -868.4%
Foreign currency translation adjustment ......... - 3 (3) *
Loss on equity investment in QuikCAT
Australia Pty Ltd ........................ (17) - (17) *
-------- ------- -------- -------
Total other income (expense) .................... 120 (132) 252 190.9%
-------- ------- -------- -------
Loss before minority interests .................. (134) (804) 670 83.3%
and income taxes
Minority interests .............................. 34 - 34 *
-------- ------- -------- -------
Loss before income taxes ........................ (168) (804) 636 79.1%
Income taxes .................................... 127 - 127 *
-------- ------- -------- -------
Net loss ........................................ $ (295) $ (804) $ 509 63.3%
======== ======= ======== =======
28
Six Months Ended June 30,
--------------------------------------------------------
2004 2003 $ Variance % Variance
--------------------------------------------------------
Revenue ......................................... $ 11,413 $ 105 $ 11,308 10769.5%
Cost of sales ................................... 9,427 300 9,127 3042.3%
-------- ------- -------- -------
Gross profit (loss) ............................. 1,986 (195) 2,181 1118.5%
-------- ------- -------- -------
Expenses:
Selling, general and
administrative expenses ....................... 2,521 971 1,550 159.6%
Writedown of fixed assets ....................... 82 - 82 *
-------- ------- -------- -------
Total expenses .................................. 2,603 971 1,632 168.1%
-------- ------- -------- -------
Operating loss .................................. (617) (1,166) 549 47.1%
-------- ------- -------- -------
Other Income (Expense):
Interest income ................................. 8 1 7 700.0%
Interest expense ................................ (20) (196) 176 -89.8%
Other Income .................................... 149 (24) 173 -720.8%
Foreign currency translation adjustment ......... 2 3 (1) -33.3%
Loss on equity investment in QuikCAT
Australia Pty Ltd ........................ (15) - (15) *
-------- ------- -------- -------
Total other income (expense) .................... 124 (216) 340 157.4%
-------- ------- -------- -------
Loss before minority interests .................. (493) (1,382) 889 64.3%
and income taxes
Minority interests .............................. 69 - 69 *
-------- ------- -------- -------
Loss before income taxes ........................ (562) (1,382) 820 59.3%
Income taxes .................................... 203 - 203 *
-------- ------- -------- -------
Net loss ........................................ $ (765) $(1,382) $ 617 44.6%
======== ======= ======== =======
* Not meaningful.
29
THREE MONTHS ENDED JUNE 30, 2004 VS. THREE MONTHS ENDED JUNE 30, 2003
NET REVENUE
Net revenue for the quarter ended June 30, 2004 increased $9,283,000 to
$9,382,000, as compared to the quarter ended June 30, 2003. This increase was
due to revenue from our 2003 and 2004 acquisitions. Rex Tokyo, which was
acquired March 18, 2004, recorded revenue of $8,537,000 and Fan Club recorded
revenue of $825,000. The prior year included iAccele revenue of $99,000, which
was 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. iAccele was sold on December
29, 2003.
COST OF SALES
Cost of sales for the quarter ended June 30, 2004 increased $7,725,000 to
$7,916,000 as compared to the quarter ended June 30, 2003. This increase was due
to Rex Tokyo cost of sales of $7,158,000, primarily consisting of inventory
purchases and outsourced expenses, and Fan Club cost of sales of $759,000,
primarily related to outsourced website development for customers and
amortization of the Marvel contract. The prior year included license fees for
iAccele software and other iAccele costs of $192,000.
EXPENSES
Selling, general and administrative expenses for the quarter ended June 30, 2004
increased $1,140,000 to $1,720,000, as compared to the quarter ended June 30,
2003. This was due to increased operating expenses of $1,322,000 related to Rex
Tokyo, $63,000 related to Fan Club and $72,000 related to IA Global Acquisition
Co. The increased operating expenses included merger and acquisition expenses of
$252,000 and a writedown of fixed assets of $82,000. The prior year included
iAccele expenses of $456,000.
For 2004 and 2003, 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, merger and acquisition expenses and writedown of fixed assets and other
general and administrative costs. The difference in the current periods compared
to the prior periods is primarily due to the acquisition of Fan Club on August
5, 2003, Rex Tokyo on March 18, 2004 and IA Global Acquisition Co on June 10,
2004 and the sale of iAccele on December 29, 2003.
OTHER INCOME/ EXPENSE
Other income for the quarter ended June 30, 2004 was $120,000 as compared to
other expense of $132,000 for the quarter ended June 30, 2003. This change was
due to reduced interest and beneficial conversion rights on convertible loans-
related party and miscellaneous income from Rex Tokyo.
NET LOSS
Net loss was $295,000 for the quarter ended June 30, 2004 as compared to a net
loss of $804,000 for the quarter ended June 30, 2003. The reasons for the
decreased loss were discussed above.
30
GRANT OF STOCK OPTIONS
On May 18, 2004, we granted 300,000 stock options in total at an exercise price
of $.20 per share to three directors of the company. These options vest
quarterly over three years and expire on May 18, 2014.
On May 18, 2004, we granted 100,000 stock options at an exercise price of $.20
per share to an executive officer of the company. These options vest quarterly
over three years and expire on May 18, 2014.
On June 10, 2004, we granted 150,000 stock options in total at an exercise price
of $.34 per share to executive officers of Rex Tokyo. These options vest
quarterly over three years and expire on June 10, 2014.
On June 10, 2004, we granted 400,000 stock options at an exercise price of $.34
per share to an executive officer of IA Global Acquisition Co. These options
vest quarterly over three years and expire on June 10, 2014.
On June 17, 2004, a previous executive officer of the company exercised options
totaling 500,000 shares for $40,000.
We have not recorded any compensation expense for stock options granted to
employees during the quarters ended June 30, 2004 and 2003.
SIX MONTHS ENDED JUNE 30, 2004 VS. SIX MONTHS ENDED JUNE 30, 2003
NET REVENUE
Net revenue for the six months ended June 30, 2004 increased $11,308,000 to
$11,413,000, as compared to the six months ended June 30, 2003. This increase
was due to revenue from our 2003 and 2004 acquisitions. Rex Tokyo, which was
acquired March 18, 2004, recorded revenue of $9,638,000 and Fan Club recorded
revenue of $1,754,000. The prior year included iAccele revenue of $105,000,
which was 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. iAccele was sold on December
29, 2003.
COST OF SALES
Cost of sales for the six months ended June 30, 2004 increased $9,127,000 to
$9,427,000 as compared to the six months ended June 30, 2003. This increase was
due to Rex Tokyo cost of sales of $7,874,000 consisting primarily of inventory
purchases and outsourced expenses, and Fan Club cost of sales of $1,554,000,
primarily related to outsourced website development for customers and
amortization of the Marvel contract. The prior year included license fees for
iAccele software and other iAccele costs of $300,000.
EXPENSES
Selling, general and administrative expenses for the six months ended June 30,
2004 increased $1,632,000 to $2,603,000, as compared to the six months ended
June 30, 2003. This was due to increased operating expenses of $1,574,000
related to Rex Tokyo, $179,000 related to Fan Club and $72,000 related to IA
Global Acquisition Co. The increased operating expenses included merger and
acquisition expenses of $399,000 and the writedown of fixed assets of $82,000.
The prior year included iAccele expenses of $623,000.
For 2004 and 2003, 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, merger and acquisition expenses and writedown of fixed assets and other
general and administrative costs. The difference in the current periods compared
to the prior periods is primarily due to the acquisition Fan Club on August 5,
2003, Rex Tokyo on March 18, 2004 and IA Global Acquisition Co on June 10, 2004
and the sale of iAccele on December 29, 2003.
31
OTHER INCOME/ EXPENSE
Other income for the six months ended June 30, 2004 was $124,000 as compared to
other expense of $216,000 for the six months ended June 30, 2003. This decrease
was due to reduced interest and beneficial conversion rights on convertible
loans- related party and miscellaneous income from Rex Tokyo.
NET LOSS
Net loss was $765,000 for the six months ended June 30, 2004 as compared to a
net loss of $1,382,000 for the six months ended June 30, 2003. The reasons for
the decreased loss were discussed above.
GRANT OF STOCK OPTIONS
On June 15, 2003, we granted 4,975,000 stock options with an exercise price of
$.20 per share. Four million five hundred thousand of the stock options were
issued to the directors and officers of the company, and these options vest
annually over three years. Two million of these options expired on April 3, 2004
when three directors resigned from the board of directors. Four hundred and
seventy five thousand options are performance based stock options and none of
the performance based stock options were earned. The remaining 2,500,000 stock
options issued to the officers and directors expire on June 15, 2013.
On January 12, 2004, we granted 400,000 stock options at an exercise price of
$.30 per share to an executive of the company. These options vest annually over
three years and expire on January 12, 2014.
On February 25, 2004, we granted 1,000,000 stock options at an exercise price of
$.30 per share to employees of Fan Club. These options vest annually over three
years and expire on February 25, 2014.
On March 18, 2004, we granted 1,500,000 stock options at an exercise price of
$.30 per share to employees of Rex Tokyo. These options vest annually over three
years and expire on March 18, 2014.
On May 18, 2004, we granted 300,000 stock options in total at an exercise price
of $.20 per share to three directors of the company. These options vest
quarterly over three years and expire on May 18, 2014.
On May 18, 2004, we granted 100,000 stock options at an exercise price of $.20
per share to an executive officer of the company. These options vest quarterly
over three years and expire on May 18, 2014.
On June 10, 2004, we granted 150,000 stock options in total at an exercise price
of $.34 per share to executive officers of Rex Tokyo. These options vest
quarterly over three years and expire on June 10, 2014.
On June 10, 2004, we granted 400,000 stock options at an exercise price of $.34
per share to an executive officer of IA Global Acquisition Co. These options
vest quarterly over three years and expire on June 10, 2014.
On June 17, 2004, a previous executive officer of the company exercised options
totaling 500,000 shares for $40,000.
We have not recorded any compensation expense for stock options granted to
employees during the six month ended June 30, 2004 and 2003.
LIQUIDITY AND CAPITAL RESOURCES
We had cash of approximately $3.1 million and net working capital of
approximately $2.8 million as of June 30, 2004. We had a net loss of $2.1
million for the year ended December 31, 2003 and we expect to incur operating
losses through 2004.
32
We received $280,000 from the sale of iAccele on January 16, 2004, $400,000 from
a subscription agreement from an affiliated party on January 12, 2004, $354,000
from the sale of our Fan Club shares on February 10, 2004 and $1,500,000 from a
convertible note from an affiliated party on March 17, 2004. We may need to
obtain additional financing in order to continue our current operations,
including the cash flow needs of Fan Club, Rex Tokyo, QuikCAT Australia and IA
Global Acquisition Co and to acquire businesses. Our major shareholder has
indicated a willingness to support our financing efforts. However, there can be
no assurance that we will be able to secure additional funding, or that if such
funding is available, whether the terms or conditions would be acceptable to us,
from our major shareholder or otherwise. Moreover, if we raise additional
capital through borrowing or other debt financing, we would incur substantial
interest expense. Sales of additional equity securities will dilute on a pro
rata basis the percentage ownership of all holders of common stock. If we do
raise more equity capital in the future, it is likely that it will result in
substantial dilution to our current stockholders.
Since inception, we have financed our operations primarily through sales of our
equity securities in our initial public offering and from several private
placements, loans and capital contributions, primarily from related parties. Net
cash proceeds from these items have totaled approximately $18.9 million as of
June 30, 2004, with approximately $8.8 million raised in the initial public
offering, $6.5 million raised in private placements, $3.6 million raised in the
conversion of debt and $.1 million raised from a capital contribution. In
addition, we have issued equity for non-cash items totaling $9.5 million,
including $6.9 million issued for services, $2.3 million related to a beneficial
conversion feature, $.2 million related to the Fan Club acquisition and $.1
million related to the Rex Tokyo acquisition. Additional funding was obtained
from long term debt and approximately $.9 million was outstanding as of June 30,
2004.
OPERATING ACTIVITIES
Net cash used in operations for the six months June 30, 2004 was $208,000. This
amount was primarily related to a net loss of $764,000, an increase of $303,000
in notes receivable and $300,000 in inventory and a decrease in deferred
revenues of $463,000. This was offset by depreciation and amortization of
$196,000, a decrease in accounts receivable of $112,000, prepaid costs of
$289,000 and other current assets of $246,000, and an increase in accounts
payable of $127,000, income taxes payable- foreign of $125,000 and minority
interests of $478,000.
INVESTING ACTIVITIES
Net cash used in investing activities for the six months ended June 30, 2004 was
$61,000. This amount related to the cash of Rex Tokyo at the date of acquisition
of $1,935,000, offset by the acquisition of Rex Tokyo for $941,000 and IA Global
Acquisition Co for $700,000, discussed below, and purchase of capital
expenditures of $305,000.
On March 18, 2004, we executed separate share purchase agreements with Rex Tokyo
and its management, pursuant to which we acquired, in aggregate, a 60.5%
ownership interest in Rex Tokyo. We purchased 1,000 shares of Rex Tokyo stock
from the company for 100 million Yen, or approximately $941,000 based on the
Japanese Yen/US dollar exchange rate on March 17, 2004. In addition, we
purchased 150 Rex Tokyo shares from Mr. Ejima, the CEO of Rex Tokyo, for 462,000
shares of our common stock. The acquisition was funded from working capital.
On June 10, 2004, the company closed the acquisition of the intellectual
property and other assets of QuikCAT. The purchase price was $700,000 in cash,
plus the assumption of certain contracts, agreements and liabilities. QuikCAT
had filed for bankruptcy in the United States Bankruptcy Court, Northern
District of Ohio and the Company had submitted a bid on February 5, 2004. The
acquisition was funded from working capital.
FINANCING ACTIVITIES
Net cash provided by financing activities for the six months ended June 30, 2004
was $2,738,000. This amount related to a loan from a related party of
$1,500,000, the proceeds of the sale of common stock for $400,000 and the
proceeds of long term debt of $923,000.
33
On December 29, 2003, the company agreed to sell to PBAA, a related party,
1,333,333 shares of our common stock at an average price of $0.30 per share, for
a total of $400,000, representing no discount to the trailing five-day average
closing price of our common stock ending December 29, 2003, the date PBAA made
its investment commitment. The funds were received January 16, 2004.
On March 21, 2004, PBAA, invested an additional $1.5 million into the company in
a private placement. Under the financing terms we have issued a $1.5 million
convertible note, convertible into 5 million shares of our common stock,
representing a conversion price per share of $0.30, which was the fair-market
value of the trailing five-day average closing price of our common stock ending
March 5, 2004, the date PBAA committed to make the investment. The conversion
price was at market value and an allocation was not required for a beneficial
conversion feature under EIFT 98-5 or EITF 00-27.
On June 18, 2004, we announced that it reached agreement with PBAA to convert
the $1,500,000 Note, plus accrued interest of approximately $20,000, into
5,065,037 shares of our common stock in accordance with the terms of the Note.
On June 30, 2004, Rex Tokyo entered into a 100,000,000 Yen or $923,275 working
capital loan with Nihon Shinko Bank Co. The loan requires twenty three monthly
payments of 4,167,000 Yen or $3,847 starting July 29, 2004, with a final payment
of 4,159,000 Yen, or $3,840 due on June 29, 2006. The loan accrues interest at
9.75% based on the Japanese Yen TIBOR rate, which is adjustable quarterly. The
loan is cosigned by the CEO of Rex Tokyo and has certain covenants, including
interest coverage, minimum assets and minimum equity. Certain activities are
prohibited without consent, including distribution of profits, acquisitions and
leases in excess of certain targets. The loan is not secured.
Other Material Commitments. The company's contractual cash obligations as of
June 30, 2004 are summarized in the table below (1).
Less Than Greater Than
Contractual Cash Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
------------------------------------- ---------- ---------- --------- --------- --------
Operating leases .................... $1,598,452 $330,054 $403,586 $320,079 $544,733
Capital lease obligations ........... 171,692 67,975 93,142 10,575 0
Long term debt repayment ............ 923,275 461,638 461,637 0 0
Capital expenditures ................ 100,000 100,000 0 0 0
Acquisitions ........................ 60,000 60,000 0 0 0
----------
(1) Based on the end of period exchange rate.
NON-CASH FINANCING ACTIVITIES
On March 18, 2004, we purchased 150 Rex Tokyo Co Ltd shares from Mr. Ejima, the
CEO of Rex Tokyo, as part of the acquisition of Rex Tokyo, for 462,000 shares of
our common stock issued at $.30 per share, which is the average closing price
for the five days prior to closing.
On June 18, 2004, we announced that it reached agreement with PBAA to convert
the $1,500,000 Note, plus accrued interest of approximately $20,000, into
5,065,037 shares of our common stock in accordance with the terms of the Note.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The application of GAAP involves the exercise of varying degrees of judgment. On
an ongoing basis, the company evaluates its estimates and judgments based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe that of our
significant accounting policies (see summary of significant accounting policies
more fully described in Note 2 of notes to consolidated financial statements),
the following policies involve a higher degree of judgment and/or complexity:
34
INCOME TAXES
The company is subject to income taxes in both the U.S. and foreign (Japan)
jurisdictions. Significant judgment is required in determining the provision for
income taxes. We recorded a valuation for the deferred tax assets from our net
operating losses carried forward due to us not demonstrating any consistent
profitable operations. In the event that the actual results differ from these
estimates or we adjust these estimates in future periods, we may need to adjust
such valuation recorded.
STOCK-BASED COMPENSATION
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by SFAS 148,
ACCOUNTING FOR STOCK-BASED COMPENSATION-- TRANSITION AND DISCLOSURE, encourages,
but does not require, companies to record compensation cost for stock based
employee compensation plans at fair value. We have chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, AND RELATED INTERPRETATIONS. Accordingly,
compensation cost for stock options granted to employees is measured as the
excess, if any, of the quoted market price of our stock at the date of the grant
over the amount an employee must pay to acquire the stock.
INTANGIBLE ASSETS
Capitalized Software--Software license costs were capitalized upon the
establishment of technological feasibility, in accordance with SFAS No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE
MARKETED. Software license costs were capitalized based upon an assessment of
their recoverability. This assessment requires considerable judgment by
management with respect to various factors, including, but not limited to,
anticipated future gross margins, estimated economic lives, and changes in
software and hardware technology. Amortization is based on the straight-line
method over the remaining estimated economic life of the product which is two
years. Costs capitalized in 2003 of $145,802 were sold as part of the iAccele
sale on December 29, 2003.
Other Intangible Assets--Other intangible assets primarily relate to acquired
software, trademarks and customer lists acquired in our purchase of Fan Club and
iAccele. On January 1, 2003, we adopted the provisions of SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which generally
requires impairment losses to be recorded on long-lived assets (excluding
goodwill) used in operations, such as property, equipment and improvements, and
intangible assets, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of the assets. The company is amortizing the intangible
assets and intellectual property for Fan Club Entertainment over sixty months on
a straight - line basis, which is the life of the Marvel Enterprises, Inc.
agreement. The company amortized the intangible assets and intellectual property
acquired in connection with the acquisition of QuikCAT over sixty months on a
straight - line basis, which is the expected life of the technology.
REVENUE RECOGNITION
We recognize revenue when it is realized. We consider revenue realized when the
product has been shipped or the services have been provided to the customer, and
collectivity is reasonably assured. Deferred revenue includes amounts billed to
customers for whom revenue has not been recognized that generally results from
products completed by the company prior to year-end but not accepted by end
users until after year-end.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consists primarily of amounts due us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected non-collection of accounts receivable based on past collection
history and specific risks identified within our portfolio. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.
35
DEBT AND EQUITY FINANCING OF CAPITAL TRANSACTIONS-BENEFICIAL CONVERSION FEATURES
We have adopted EITF issues 98-5, ACCOUNTING FOR CONVERTIBLES SECURITIES WITH
BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, and
00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE SECURITIES in
accounting for the convertible debt. EITF 98-5 recognition of a conversion
feature that is in-the-money at issuance as additional paid-in-capital, measured
by allocating a portion of the proceeds equal to the intrinsic value of that
feature. The intrinsic value of the feature is the difference between the
conversion price and the fair value of the stock into which the security is
convertible, multiplied by the number of shares. According to EITF 00-27, the
issuance proceeds should not be reduced by issuance costs when calculating the
intrinsic value of the conversion feature. These beneficial conversion features
of debt or equity instruments, depending on the specific facts and circumstances
will determine whether such beneficial conversion feature is to be recorded as
an expense to be amortized over a period of time, expensed immediately or
recorded as a deemed dividend.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which addresses consolidation by business enterprises of VIEs that
either: (i) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (ii) have equity investors that lack an essential characteristic of
a controlling financial interest.
Throughout 2003, the FASB released numerous proposed and final FASB Staff
Positions (FSPs) regarding FIN 46, which both clarified and modified FIN 46's
provisions. In December 2003, the FASB issued Interpretation No. 46 (FIN 46-R),
which will replace FIN 46 upon its effective date. FIN 46-R retains many of the
basic concepts introduced in FIN 46; however, it also introduces a new scope
exception for certain types of entities that qualify as a "business" as defined
in FIN 46-R, revises the method of calculating expected losses and residual
returns for determination of the primary beneficiary, includes new guidance for
assessing variable interests, and codifies certain FSPs on FIN 46. FIN 46-R did
not have a material impact on our Consolidated Financial Statements.
In 2003, the Emerging Issues Task Force (EITF) reached a consensus on two issues
relating to the accounting for multiple-element arrangements: Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," and Issue
No.03-05, "Applicability of AICPA SOP 97-2 to Non- Software Deliverables in an
Arrangement Containing More Than Incidental Software." The consensus opinion in
EITF No. 03-05 clarifies the scope of both EITF 00-21 and Statement of Financial
Position (SOP) 97-2, "Software Revenue Recognition," and was reached on July 31,
2003. The transition provisions allow either prospective application or a
cumulative effect adjustment upon adoption. EITF Nos. 00-21 and 03-05 did not
have a material impact on our Consolidated Financial Statements.
In December 2003, the FASB revised SFAS No.132, "Employers' Disclosures about
Pensions and other Post-retirement Benefits, an amendment of FASB Statements No.
87, 88 and 106." This new SFAS No. 132 retains all of the disclosure
requirements of SFAS No. 132; however, it also requires additional annual
disclosures describing types of plan assets, investment strategy, measurement
date(s), expected employer contributions, plan obligations, and expected benefit
payments of defined benefit pension plans and other defined benefit
postretirement plans. SFAS No. 132 did not have a material impact on our
Consolidated Financial Statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and develops
a single accounting model, based on the framework established in SFAS No. 121
for long-lived assets to be disposed of by sale, whether such assets are or are
not deemed to be a business. SFAS No. 144 also modifies the accounting and
disclosure rules for discontinued operations. The standard was adopted on
January 1, 2003, and did not have a material impact on our consolidated
financial statements. The sale of iAccele operations are presented in the
Consolidated Financial Statements in accordance with SFAS No. 144.
36
In April 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. It also specifies
when a derivative contains a financing component that requires special reporting
in the Consolidated Statement of Cash Flows. SFAS No. 149 amends certain other
existing pronouncements in order to improve consistency in reporting these types
of transactions. The new guidance is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. SFAS No. 149 did not have a material effect on our Consolidated
Financial Statements.
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. It establishes
classification and measurement standards for three types of freestanding
financial instruments that have characteristics of both liabilities and equity.
The provisions of SFAS No. 150 are effective for (i) instruments entered into or
modified after May 31, 2003, and (ii) pre-existing instruments as of July 1,
2003. In November 2003, through the issuance of FSP 150-3, the FASB indefinitely
deferred the effective date of certain provisions of SFAS No. 150, including
mandatory redeemable instruments as they relate to minority interests in
consolidated finite-lived entities. The adoption of SFAS No. 150, as modified by
FSP 150-3, did not have a material effect on our Consolidated Financial
Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, in addition to the other information contained in this
report, should be considered carefully in evaluating us and our prospects. This
report (including without limitation the following factors that may affect
operating results) contains forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) regarding us and our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this report. Additionally, statements concerning future matters such as the
development of new products, enhancements or technologies, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Forward-looking statements in this report reflect the good faith judgment of our
management and the statements are based on facts and factors as we currently
know them. Forward-looking statements are subject to risks and uncertainties and
actual results and outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, but are not
limited to, those discussed below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as those discussed
elsewhere in this report. Readers are urged not to place undue reliance on these
forward-looking statements which speak only as of the date of this report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of the
report.
37
- - WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history on which to base an evaluation of our
business and prospects, having only commenced our initial business operations in
April 1999. In addition, we have shifted our revenue model from broadband
entertainment channels and revenues derived from advertising, to a renewed focus
on developing media technology products and services and on licensing revenues.
Our prospects must be considered in light of the risks, difficulties and
uncertainties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets such as
the market for media technology products and services.
As we have such a limited history of operations, investors will be unable to
assess our future operating performance or our future financial results or
condition by comparing these criteria against their past or present equivalents.
- - WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE
We have only recently recognized revenues from services and we have experienced
net losses since inception. We expect to incur losses on both a quarterly and an
annual basis for the foreseeable future. There can be no assurance that we will
ever achieve profitability.
- - WE REVISED OUR BUSINESS PLAN
At the beginning of 2003, we revised our business plan to expand into other
areas of media entertainment and technology. We have shifted the revenue model
from broadband entertainment channels and revenues derived predominantly from
advertising, to a renewed focus on developing media technology products and
services, and on generating licensing revenues. To this end, we may develop such
media entertainment and technology products and services internally, or acquire
them from other parties.
- - WE MAY NEED ADDITIONAL FINANCING TO SUPPORT OUR OPERATIONS AND ACQUIRE
BUSINESSES
We may need to obtain additional financing in order to continue our current
operations, including the cash flow needs of Fan Club, Rex Tokyo, QuikCAT
Australia and IA Global Acquisition Co and to acquire businesses. Our major
shareholder has indicated a willingness to support our financing efforts.
However, there can be no assurance that the we will be able to secure additional
funding, or that if such funding is available, whether the terms or conditions
would be acceptable to us, from our major shareholder or otherwise. Moreover, if
we raise additional capital through borrowing or other debt financing, we would
incur substantial interest expense. Sales of additional equity securities will
dilute on a pro rata basis the percentage ownership of all holders of common
stock. If we do raise more equity capital in the future, it is likely that it
will result in substantial dilution to our current stockholders. Any inability
to obtain additional financing may materially affect our business, financial
condition and results of operations.
- - OUR COMMON STOCK COULD BE DELISTED FROM THE AMERICAN STOCK EXCHANGE ("AMEX")
In May 2003, we received notice from the AMEX Staff indicating that we were
below certain of AMEX's continued listing standards, due to losses in two of our
most recent fiscal years with shareholder equity below $2 million, and had
sustained losses so substantial in our overall operations that it appeared
questionable, in the opinion of the Exchange, as to whether we would be able to
continue operations, as set forth in Section 1003(a)(i) and Section 1003(a)(iv)
of the AMEX "company Guide." We were afforded the opportunity to submit a plan
of compliance to AMEX and on July 7, 2003 presented our plan, with a further
amended submission on September 8, 2003.
38
On September 30, 2003, AMEX notified us that it accepted our plan of compliance
and granted us an extension until November 27, 2004 to regain compliance with
the continued listing standards. We will be subject to periodic review by AMEX
Staff during the extension period, during which we will be required to make
progress consistent with the plan and to regain compliance with the continued
listing standards.
Not achieving our plan of compliance accepted by AMEX could result in our common
stock being delisted from AMEX, which could materially affect the ability of our
stockholders to dispose of their shares and reduce the liquidity of their
investment. In addition, delisting could affect our ability to obtain financing
to support future operations and acquisitions.
- - WE MAY ENGAGE IN ACQUISITIONS, MERGERS, STRATEGIC ALLIANCES, JOINT VENTURES
AND DIVESTITURES THAT COULD RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT
THAN EXPECTED.
In the normal course of business, we may engage in discussions relating to
possible acquisitions, mergers, strategic alliances, joint ventures and
divestitures. As part of our business strategy, we completed one acquisition
during early 2003, one acquisition in August, 2003 one acquisition in March 2004
and one acquisition in June 2004, invested in a joint venture in July, 2003 and
sold a business in December, 2003. Such transactions are accompanied by a number
of risks, including:
- Use of significant amounts of cash,
- Potentially dilutive issuances of equity securities on potentially
unfavorable terms,
- Incurrence of debt on potentially unfavorable terms as well as
amortization expenses related to goodwill and other intangible assets, and
- The possibility that we may pay too much cash or issue too much of our
stock as the purchase price for an acquisition relative to the economic
benefits that we ultimately derive from such acquisition.
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,
39
- The need to sale acquired technology into the marketplace,
- The need to incorporate acquired technology, content or rights into our
products and unanticipated expenses related to such integration, and
- The need to successfully develop an acquired in-process technology to
achieve the value currently capitalized as intangible assets.
From time to time, we have also engaged in discussions with candidates regarding
the potential acquisitions of our product lines, technologies and businesses. If
divestiture such as this does occur, we cannot be certain that our business,
operating results and financial condition will not be materially and adversely
affected. A successful divestiture depends on various factors, including our
ability to:
- Effectively transfer liabilities, contracts, facilities and employees to
the purchaser,
- Identify and separate the intellectual property to be divested from the
intellectual property that we wish to keep, and
- Reduce fixed costs previously associated with the divested assets or
business.
In addition, if customers of the divested business do not receive the same level
of service from the new owners, this may adversely affect our other businesses
to the extent that these customers also purchase other products offered by us.
All of these efforts require varying levels of management resources, which may
divert our attention from other business operations. Further, if market
conditions or other factors lead us to change our strategic direction, we may
not realize the expected value from such transactions.
If we do not realize the expected benefits or synergies of such transactions,
our consolidated financial position, results of operations, cash flows and stock
price could be negatively impacted.
- - WE ARE DEPENDENT ON CERTAIN THIRD PARTY LICENSES AND AGREEMENTS
On June 4, 2003, Cyberbred signed a five year agreement with Marvel Enterprises,
Inc. to manage their fan club in Japan. On July 28, 2003, Fan Club signed a
Subcontract Agreement with Cyberbred to exclusively manage the entire Marvel Fan
Club in Japan in accordance with the agreement between Cyberbred and Marvel.
Under the July 28, 2003 agreement, Cyberbred will make "best efforts" to
transfer the rights under their agreement with Marvel, directly to Fan Club
Entertainment. At this time, this transfer has not taken place.
The company currently is not a party to the agreement between Cyberbred and
Marvel. However, this contract is material to the company since the company
would be materially adversely affected by a termination of the relationship
between Cyberbred and Marvel. The company cannot make any assurances about the
relationship between Cyberbred and Marvel.
40
- - 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 entities that provide multi-media compression technology and
Internet data transmission acceleration products, supply equipment and services
to the Pachinko and gaming industry or which provide advertising, merchandising,
publishing, website and data management services. Certain of our competitors may
be able to devote greater resources to marketing, adopt more aggressive pricing
policies and devote substantially more resources to developing their services
and products. We may be unable to compete successfully against current and
future competitors, and competitive pressures may have a material adverse effect
on our business. Further, as a strategic response to changes in the competitive
environment, we may from time to time make certain pricing, service or marketing
decisions or acquisitions that could have a material adverse effect on our
business, prospects, financial condition and results of operations.
In addition to the foregoing, some of our key customers or potential customers
might decide to build their own multi-media compression technology and Internet
data transmission acceleration product or supply equipment or services to the
Pachinko and gaming industry or provide advertising, merchandising, publishing,
website and data management services. Although this has not been the industry
trend over the past year, if this were to happen, we might be adversely impacted
thereby.
- - WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS
We regard our copyrights, trade secrets, trademarks, patents, and similar
intellectual property as significant to our growth and success. We rely upon a
combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
our employees and with third parties to establish and protect our proprietary
rights. Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving. We are unable to assure investors as to the future
viability or value of any of our proprietary rights or those of other companies
within the industry. We are also unable to assure investors that the steps taken
by us to protect our proprietary rights will be adequate. Furthermore, we can
give no assurance that our business activities will not infringe upon the
proprietary rights of others, or that other parties will not assert infringement
claims against us.
- - THE COMPANY IS EXPOSED TO LEGAL CLAIMS
We have been, currently are, or in the future may be involved in legal
proceedings or claims. Such claims are detailed in Part 2, Item 1, Legal
Proceedings. Such claims, whether with or without merit, could be time-consuming
and expensive to defend and could divert management's time and attention. There
can be no guarantee that we will be successful in resolving such claims.
- - WE ARE DEPENDENT ON KEY PERSONNEL
We have experienced turnover of management and directors. 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. 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.
41
- - THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of our common stock has been and is likely in the future to be
highly volatile. Our common stock price may fluctuate significantly in response
to factors such as:
- Quarterly variations in our operating results,
- Announcements of technological innovations,
- New product introductions by us or our competitors,
- Competitive activities,
- Announcements by us regarding significant acquisitions, strategic
relationships, capital expenditure commitments, liquidity and our AMEX
listing,
- Additions or departures of key personnel,
- Issuance of convertible or equity securities for general or merger and
acquisition purposes,
- Issuance of debt or convertible debt for general or merger and acquisition
purposes,
- General market and economic conditions,
- Investor relation activities,
- Defending significant litigation, and
- Foreign exchange gains and losses.
The stocks of technology companies have experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. These broad market and industry
factors may have a material adverse effect on the market price of our common
stock, regardless of our actual operating performance. Factors like this could
have a material adverse effect on our business, financial condition and results
of operations.
- - OUR PRINCIPAL STOCKHOLDER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY
As of August 9, 2004, Inter Asset Japan LBO No. 1 Fund ("IAJ LBO Fund"), PBAA
Fund Ltd. ("PBAA"), Terra Firma Fund Ltd. ("Terra Firma") and Inter Asset Japan
Co. Ltd. ("IAJ") collectively hold approximately 81.8% of our common stock. Such
entities stated in a Schedule 13D that they may be deemed to constitute a
"group" for the purposes of Rule 13d-3 under the Exchange Act. Mr. Margerison,
one of our Directors, and our President and Chief Executive Officer, currently
serves as the Chairman of IAJ, a Japanese venture capital company.
IAJ has the ability to cause a change of control of the board of directors of
the company by electing candidates of its choice to the board at a stockholder
meeting, and approve or disapprove any matter requiring stockholder approval,
regardless of how our other stockholders may vote. Further, under Delaware law,
IAJ has significant influence over our affairs, including the power to cause,
delay or prevent a change in control or sale of the company, which in turn could
adversely affect the market price of our common stock.
42
- - 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 August 9, 2004, 77.9 million shares of common
stock were outstanding. Significant shares were held by our principal
stockholder and other company insiders. As an "affiliate" (as defined under Rule
144 of the Securities Act ("Rule 144") of the company, they may only sell their
shares of common stock in the public market in compliance with the volume
limitations of Rule 144.
- - WE ARE EXPOSED TO FOREIGN CURRENCY RISKS
The majority of our operations are located in Japan. We do not trade in hedging
instruments or "other than trading" instruments and a significant change in the
foreign currency exchange rate between the Japanese Yen and US Dollar would have
a material adverse effect on our business, financial condition and results of
operations.
- - WE HAVE LIMITED INSURANCE
We have limited director and officer insurance and no commercial insurance
policies. Any significant insurance claims would have a material adverse effect
on our business, financial condition and results of operations.
- - OUR CUSTOMER BASE IS CONCENTRATED
One customer was 41.3% of net revenues for the six months ending June 30, 2004.
We anticipate that significant customer concentration will continue for the
foreseeable future. The loss of a significant customer would have a material
adverse effect on our business, financial condition and results of operations.
- - OUR VENDOR BASE IS CONCENTRATED
Our vendor base is concentrated in a few major suppliers for Rex Tokyo and Fan
Club. We anticipate that significant vendor concentration will continue for the
foreseeable future. Such concentration can result in pricing, payment or supply
issues and such issues would have a material adverse effect on our business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
We were exposed to foreign currency risks due to the acquisition of Fan Club on
August 5, 2003 and Rex Tokyo on March 18, 2004. These businesses operate in
Japan.
We do not trade in hedging instruments or "other than trading" instruments and
we are exposed to foreign currency exchange risks.
INTEREST RATE RISK
The Company is exposed to interest rate risk due to the loan payable of $923,275
as of June 30, 2004. The company does not trade in hedging instruments or "other
than trading" instruments and is exposed to interest rate risks. We believe that
the impact of a 10% increase or decline in interest rates would not be material
to our financial condition and results of operations.
43
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2004. Based on
this evaluation, our principal executive officer and principal financial officer
concluded that, as of June 30,, 2004, our disclosure controls and procedures
were effective in ensuring that (1) information to be disclosed in reports we
file under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the rules and forms promulgated under the
Exchange Act and (2) information required to be disclosed in reports filed under
the Exchange Act is accumulated and communicated to the principal executive
officer and principal financial officer as appropriate to allow timely decisions
regarding required disclosure. There were no changes in the company's internal
control over financial reporting that occurred during the company's last fiscal
quarter that have materially affected or are reasonably likely to materially
affect, the company's internal control over financial reporting.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, on September 26, 2003, Andzej Krakowski, a former
employee of foreignTV.com, Inc., filed a civil action seeking damages and
injunctive relief for (i) statutory damages, costs and attorney fees resulting
from our alleged willful copyright infringement, (ii) monetary damages in the
amount of $436,477 for alleged breach of an employment agreement with
foreignTV.com, (iii) the issuance of 180,000 shares of common stock in IA
Global, (iv) monetary damages for alleged fraud, (v) monetary damages of at
least $1,200,000, and (vi) punitive damages, costs and attorney fees. On January
10, 2004, the United States District Court for the Southern District of New York
dismissed without prejudice the complaint filed by Andzej Krakowski. In February
9, 2004, Mr. Krakowski filed for arbitration with the American Arbitration
Association in East Providence, Rhode Island.
We are a successor corporation to foreignTV.com, Inc. and Medium4.com, Inc.
("Medium"). As part of the September 25, 2002 Agreement and Assignment between
Medium, IAJ and David Badner, a major stockholder and former consultant to us,
Mr. Badner has agreed to indemnify and hold us harmless against any expenses,
obligations and liabilities related to any breach of the representations and
warranties made to us in those agreements, and any creditor claims arising from
those agreements which facilitated our financial restructuring.
While there can be no guarantee that we will be successful in resolving this
claim with Mr. Krakowski, we do believe that we are appropriately indemnified by
Mr. Badner for Mr. Krakowski's claims.
We believe there are no other pending legal proceedings that, if adversely
determined, would have a material adverse effect on our business or financial
condition.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 18, 2004, we granted 300,000 stock options in total at an exercise price
of $.20 per share to three directors of the company. These options vest
quarterly over three years and expire on May 18, 2014.
On May 18, 2004, we granted 100,000 stock options at an exercise price of $.20
per share to an executive officer of the company. These options vest quarterly
over three years and expire on May 18, 2014.
On June 10, 2004, we granted 150,000 stock options in total at an exercise price
of $.34 per share to executive officers of Rex Tokyo. These options vest
quarterly over three years and expire on June 10, 2014.
On June 10, 2004, we granted 400,000 stock options at an exercise price of $.34
per share to an executive officer of IA Global Acquisition Co. These options
vest quarterly over three years and expire on June 10, 2014.
On June 17, 2004, a previous executive officer of the company exercised options
totaling 500,000 shares for $40,000.
On June 18, 2004, the company announced that it reached agreement with PBAA to
convert the $1,500,000 Note, plus accrued interest of approximately $20,000,
into 5,065,037 shares of our common stock in accordance with the terms of the
Note.
The company's stockholders approved an amendment to our certificate of
incorporation to increase the number of shares of common stock which we shall be
authorized to issue from 75,000,000 to 150,000,000 at the company's May 14, 2004
annual meeting of its stockholders.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
45
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of Stockholders was held on May 14, 2004. The results of the
Annual Meeting were as follows:
Votes Votes Votes
Proposal Description For Against Abstained
-------- --------------------------------------------------- ----------- ------- ---------
1 Election of Directors-
Alan Margerison 46,079,992 13,300 -
Mark Scott 46,079,992 13,300 -
Raymond Christinson 46,079,992 13,300 -
Jun Kumamoto 46,079,992 13,300 -
Eric La Cara 46,079,992 13,300 -
2 Authorize the issuance of our common stock 46,018,292 75,000 -
upon conversion of our Series B convertible
preferred stock.
3 Amend our certificate of incorporation to increase 46,017,992 75,300 -
the number of authorized shares from 75,000,000
to 150,000,000.
4 Ratify the issuance of 15,411,650 shares of our 46,013,997 75,395 3,700
common stock to David Badner in various
transactions in 2001 and 2002.
5 Authorize the issuance of our common stock upon 46,025,292 37,000 31,000
conversion of outstanding debt.
6 Ratify the issuance of 13,333,333 shares of our 46,021,997 67,595 3,700
stock to PBAA Fund Ltd. as of June 30, 2003.
7 Approve an amendment to our 1999 and 2000 stock 45,840,040 251,652 1,600
option plans to increase the total number of shares
that may be granted under the plans from 1,500,000
to 12,000,000.
ITEM 5. OTHER INFORMATION
Not Applicable
46
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Asset Purchase Agreement between IA Global, Inc. and Quikcat.com,
Inc. (1)
10.2 Bill of Sale and Assignment and Assumption Agreement dated June 10,
2004 between IA Global, Inc. and QuikCat.com, Inc. (1)
10.3 Collateral Assignment of Intellectual Property Agreement dated June
10, 2004 between IA Global, Inc. and QuikCat.com, Inc. (1)
10.4 Notice of Intent to Convert Convertible Promissory Note to IA
Global Common Stock dated June 18, 2004 between IA Global, Inc. and
PBAA Fund Ltd. (2)
10.5 Revised Nominations and Governance Committee Charter dated July 10,
2004.
10.6 Revised Audit Committee Charter dated July 10, 2004.
10.7 Employment letter dated June 10, 2004 between IA Global, Inc. and
Dr. Olu Lafe.
10.8 Promissory Note Agreement dated June 29, 2004 between Rex Tokyo Co
Ltd and Nippon Shinko Bank Co.
31.1 Section 302 Certifications
31.2 Section 302 Certifications
32.1 Section 906 Certifications
32.2 Section 906 Certifications
----------
(1) Filed as an exhibit to Registrant's Current Report on Form 8-K, dated
June 18, 2004, and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Current Report on Form 8-K, dated
June 21, 2004, and incorporated herein by reference.
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(b) REPORTS OF FORM 8-K
During the quarter ended June 30, 2004, 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 April 5, 2004, was filed on April 5, 2004. The
items which reported the following:
o Item 5 - Other Events and Required FD Disclosures, which reported the
following:
- On April 5, 2004, the company announced the resignation of certain
directors, the appointment of a director and the resignation of an
officer.
Current report on Form 8-K, dated June 9, 2004, was filed on June 9, 2004. The
items which reported the following:
o Item 7 - Other Events and Required FD Disclosures, which reported the
following:
- The filing of certain exhibits related to press releases.
Current report on Form 8-K, dated June 10, 2004, was filed on June 18, 2004. The
items which reported the following:
o Item 2 - Acquisition or Dispositions of Assets, which reported the
following:
- The purchase of the intellectual property and other assets of QuikCAT
successfully closed on June 10, 2004.
Current report on Form 8-K, dated June 18, 2004, was filed on June 21, 2004. The
items which reported the following:
o Item 5 - Other Events and Required FD Disclosures, which reported the
following:
- On June 18, 2004, the company announced that it reached agreement with
PBAA to convert the $1,500,000 Note, plus accrued interest of
approximately $20,000, into 5,065,037 shares of our common stock in
accordance with the terms of the Note.
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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: August 10, 2004 By: /s/ Alan Margerison
-----------------------
Alan Margerison,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2004 By: /s/ Mark E. Scott
---------------------
Mark E. Scott,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
49