UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 2004 Commission File No. 33-90344
Integrated Data Corp.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 23-2498715
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 W. RIDGE PIKE, SUITE C-106
CONSHOHOCKEN, PENNSYLVANIA 19428
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-6224
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). Yes[ ] No[X]
As of September 24, 2004 the registrant had 7,685,677 common shares
outstanding. The aggregate market value of voting shares held by non-
affiliates as of that date was approximately $715,000(based on the closing
price of $0.39).
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes[X] No[ ]
DOCUMENTS INCORPORATED BY REFERENCE
See Item 15, Exhibits and Reports on Form 8-K.
PART I
ITEM 1. BUSINESS.
Integrated Data Corp. ("IDC"), formerly Clariti Telecommunications
International Ltd., is a non-operating U.S. holding company with interests in
the U.S., Canada, the U.K., and Italy. IDC and its subsidiaries
(collectively the "Company", "We", or "Our") offer a wide range of
communications, wireless, point-of-sale activation, financial transaction,
and other services. In 2002 IDC successfully completed reorganization under
Chapter 11 and is now operating with no secured debt liabilities.
History of the Company
----------------------
The Company was originally formed in February 1988 as the successor to a
music and recording studio business owned and operated by a former CEO of the
Company. The Company became publicly held upon its merger in January 1991
with an inactive public company incorporated in Nevada. The surviving
corporation changed its name to Sigma Alpha Entertainment Group Ltd. and was
subsequently reincorporated in Delaware. Beginning in 1995, the Company
began shifting its focus away from the music and recording business and
toward the development and commercialization of a proprietary data
broadcasting technology. The resulting wireless technology, trade-named
ClariCAST(r), allows for the metropolitan-wide distribution of data utilizing
the existing broadcast infrastructure of FM radio stations.
In 1998 the Company began to acquire interests in the telecommunications
business and changed its name to Clariti Telecommunications International,
Ltd. With the downturn in the telecommunications sector, the unforeseen
costs associated with a U.S. market launch of a voice paging service based
upon ClariCAST(r) technology, and the overall demise of paging in the U.S.,
the Company was driven to seek Chapter 11 protection in April 2002. Upon
emergence from Chapter 11 in late 2002, the company name was changed to
Integrated Data Corp. to more accurately reflect its new business focus of
acquiring, managing, and bringing into the global market leading-edge
communication, financial, and network technology solutions and service
providers.
Bankruptcy Proceedings
----------------------
On April 18, 2002, Clariti Telecommunications International, Ltd. filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Pennsylvania (Case no. 02-15817(DWS)). The Company's Plan of
Reorganization (the "Plan") was approved by the Court on October 23, 2002 and
the Plan became effective November 12, 2002. The bankruptcy proceedings
concluded with an Order and Final Decree on May 6, 2003.
-2-
Changes to Management and the Board of Directors
------------------------------------------------
On August 1, 2003, David C. Bryan was promoted from Executive Vice President
to President and Chief Executive Officer of the Company replacing a retiring
Abraham Carmel. Coincident with his retirement as an officer of the Company,
Mr. Carmel also resigned from the Board of Directors and Mr. Bryan was
elected to fill that position as well. Further information regarding the
Company's management and Directors can be found in Part III of this Form 10-K
under Items 10 through 12.
Corporate Holdings
------------------
As of June 30, 2004 Integrated Data Corp owns and/or controls the following
holdings and interests:
CORPORATION OR INTEREST PERCENT OWNERSHIP
C3 Technologies Inc. 100%
DataWave Systems Inc. 50.1%
DataWave International License 100%
IDC Italia Srl 60%
Integrated Communications Services Ltd 100%
Integrated Data Technologies Ltd 100%
A description of each of these interests follows.
C3 TECHNOLOGIES INC.
--------------------
From 1997 through 2000 the Company had been engaged in the development of a
proprietary technology that utilizes existing FM radio frequencies to provide
a low-cost, metropolitan-wide, wireless data broadcasting network. The
resulting technology and air interface protocol has been given the name
ClariCAST(r), a registered trademark of the Company. C3 Technologies Inc
("C3") was formed in April 2002 to manage all the proprietary ClariCAST(r)
intellectual property and assets, including patents, patents pending,
trademarks, and copyrights. C3 is a Delaware corporation collocated with IDC
in Conshohocken, Pennsylvania and is a wholly-owned subsidiary. ClariCAST(r)
applications currently being pursued by C3 include dynamic video advertising,
automobile telematics, personal communications information services, public
safety, and Homeland Security. C3, through IDC Italia (see below), holds
broadcasting rights on the FM subcarrier (SCA) channels of approximately 200
FM radio stations essentially covering all of Italy. Crossland Communication
Inc. of Lagos, Nigeria is in negotiations with C3 to acquire an exclusive
ClariCAST(r) license for the nation of Nigeria.
-3-
DATAWAVE SYSTEMS INC.
---------------------
DataWave Systems Inc. ("DataWave") of Richmond, British Columbia, Canada is a
profitable, Yukon, Canada corporation, the shares of which trade on the TSX
Venture Exchange ("TSX-V") as well as the National Association of Securities
Dealers' ("NASD") Over-the-Counter Bulletin Board ("OTCBB"). The trading
symbols are DTV on the TSX-V and DWVSF on the OTCBB. As an OTCBB-listed
public company, DataWave maintains current filings with the U.S. Securities
and Exchange Commission including annual reports on Form 10-KSB, quarterly
reports on Form 10-QSB, and current reports on Form 8-K. Detailed
information on DataWave can be found by accessing these filings either
through the SEC website (www.sec.gov) or on the DataWave corporate website
(www.datawave.ca); however, the information in, or that can be accessed
through, the DataWave website is not part of this report.
DataWave was initially established in 1986 and since 1994 has been a
developer of prepaid and stored-value software, hardware systems, programs
and complete customer solutions. DataWave has pioneered network systems (the
"DataWave System") that allow for point-of-sale-activation of high-value,
high-shrinkage products such as cash cards, prepaid phone cards, and prepaid
wireless phone time. This proprietary system works equally well over the
Internet or with various card activation devices such as cash registers and
over-the-counter card "swipe" units. DataWave network systems have been
designed to work both with the prepaid platforms of other parties as well as
telecommunication and financial switches. The systems are scalable and
flexible and can be readily modified to offer new premium stored-value
products such as prepaid gift cards and prepaid Internet cards.
IDC acquired approximately 41% of DataWave on December 12, 2002 in a
transaction with the shareholders of Cash Card Communications Corp. Ltd., a
privately held Bermuda corporation, in exchange for 1,794,900 shares of newly
issued IDC common stock nominally valued at the time at $1.00 per share. On
January 14, 2003 the Company acquired an additional approximately 9.1% of
DataWave through off-market transactions with various shareholders of
DataWave in exchange for 402,303 shares of newly issued IDC common stock.
DataWave sells and distributes prepaid products through a network that
includes, but is not limited to, point-of-sale-activation ("POSA") terminals,
free-standing "smart" machines ("DTMs"), and cash registers or the web-based
applications of some major retail chains. All of these devices are connected
to DataWave's proprietary server and database software through wireless, land
line wide area networks, or host-to-host connectivity, and are capable of
dispensing multiple prepaid products and services. In addition, DataWave
sells prepaid phone cards and POSA prepaid cellular minutes on a wholesale
basis to certain retail operators and other customers.
The DataWave System distributes inactive prepaid products, which are
activated only once they are purchased by the consumer, thus eliminating the
risk of theft and the cost of inventory management for the retailer.
-4-
The DataWave System features:
- the ability to activate prepaid products by assigning a value to them
at the time of purchase;
- the ability to print a prepaid PIN (Personal Identification Number)
number on a receipt voucher at the point of purchase;
- real-time monitoring of distribution networks;
- detailed reporting and sales analysis - either paper or web-based;
- the ability to remote download price adjustments or new products and
services to the distribution points;
- the capability to execute multiple simultaneous transactions in a
non-stop processing environment; and
- consumer convenience - payment options, multiple products and
denominations; detailed receipts, including tax information, terms &
conditions and other relevant instructions/information.
Historically, DataWave's core revenues have come from the sale of prepaid
long distance phone cards. In recent years, DataWave has pioneered the move
into prepaid cellular, prepaid cash, and prepaid debit card products.
In Canada, until this past year, DataWave has followed the traditional
business model of selling bulk pre-activated "live" prepaid phone cards to
retail establishments. DataWave has now successfully introduced point-of-
sale-activation ("POSA") technology into the retail environment. This
enables DataWave to activate or recharge prepaid products through POSA
terminals and the cash register systems or web-based applications of major
chains. For the year ended June 30, 2004, DataWave installed approximately
1,200 POSA terminals and as of June 30, 2004, DataWave has an installed base
of approximately 2,750 company-owned POSA terminals. DataWave is also
providing prepaid products to 537 distributor-owned terminals and host-to-
host (cash register) locations.
In the United States, DataWave has established a network of free-standing
vending machines ("DTMs") that sell prepaid long distance phone cards.
DataWave also sells phone cards through over-the-counter ("OTC") units and
during the year ended June 30, 2004 DataWave introduced a POSA host-to-host
solution to a grocery chain in the North-Eastern states. As of June 30,
2004, DataWave has an installed base of 1,044 DTMs and more than 350 OTC
units and host-to-host retail locations.
DataWave has approximately 80 employees working out of three offices located
in Richmond (Vancouver), British Columbia, Canada; Mississauga (Toronto),
Ontario, Canada; and Wayne, New Jersey, U.S.A.
-5-
DATAWAVE INTERNATIONAL LICENSE
------------------------------
IDC holds the exclusive worldwide license, excluding the Americas, to "make,
sell and use the DataWave trade name, technology, know-how, trade secrets,
and patents now existing and to be developed in the future" (the "DataWave
International License"). This DataWave International License is valid until
2010 and can be extended for an additional 10 years to 2020. It was acquired
by IDC on December 11, 2002 through the acquisition of C4 Services Ltd., a
Bermuda registered company, which acquired the license in 2000. The
consideration payable for C4 Services was $4,200,000 paid in shares of IDC
common stock at a valuation of $1.00 per share. IDC's marketing strategy for
the DataWave International License is to attempt to forge relationships with
affiliates and established, related contacts in various regions around the
world for joint venture partnerships and/or sublicensing agreements.
IDC ITALIA Srl
--------------
Based in Bolzano, Italy, IDC Italia Srl ("IDC Italia") is an Italian Joint
Venture company 60% owned by IDC and 40% owned by Elma Spa. IDC Italia has a
contract with Centro di Produzione SpA (also known as "Radio Radicale") to
use the FM subcarrier (SCA) channels of its approximately 200 FM radio
stations essentially covering all of Italy. With these stations, IDC Italia
has the capability of setting up an Italian national ClariCAST(r) network and
offering all the services and applications currently owned or being developed
by C3 Technologies. In addition, using the DataWave International License
IDC plans to offer DataWave prepaid POSA services in Italy through IDC
Italia.
INTEGRATED COMMUNICATIONS SERVICES LTD.
---------------------------------------
Integrated Communications Services Ltd ("ICS") is a London-based, wholly-
owned subsidiary of IDC. During the year ended June 30, 2004, the ICS
managed and operated a Nokia DX220 PSTN (Public Switched Telephone Network)
switch and network assets with a value of more than $2 million under a
facility management contract that was due for renewal in August 2004. Prior
to the renewal date and following negotiations in reference to the terms and
conditions of renewal, ICS decided not to extend this facility management
contract and concentrate company resources on expanding its provision of
high-tech services to third parties. In the short term, the revenues and
profit margins from such services are not expected to be demonstratively
higher than those ICS earned from facility management; however, ICS believes
that concentrating on the provision of high-tech services gives it far more
autonomy and independence over its business and greater long term
opportunities to expand its core business. Additionally, it is hoped that
ICS's reputation for reliable and cost effective high-tech services will
deliver further opportunities to expand ICS's profits and activities.
INTEGRATED DATA TECHNOLOGIES LTD.
---------------------------------
Integrated Data Technologies Ltd ("IDT") is a limited liability corporation
registered in the United Kingdom with offices in London, England. Although
currently a non-operating company, IDT owns rights to the technologies of
DataWave and C3 Technologies Inc. for the United Kingdom and the Republic of
Ireland as described below.
-6-
The exclusive rights from the DataWave International License have been
assigned to IDT by IDC for the territories of the United Kingdom and the
Republic of Ireland. This license runs concurrent with the term of IDC's
DataWave International License. IDT is a party to a non-exclusive sublicense
of the DataWave International License allowing for the distribution of
DataWave's prepaid debit, cash, and telecom cards through 487 Money Shop
retail stores in the United Kingdom
IDT also owns the exclusive rights to own, operate, and license any and all
of C3 Technologies Inc. technologies in the United Kingdom and the Republic
of Ireland. This license is valid until 2010, and can be extended for an
additional 10 years to 2020.
Corporate Growth & Strategy
---------------------------
As a technology holding company, IDC is continually looking for acquisitions
in the information technology, networking & communications, prepaid services,
and telecommunications business arenas to strengthen its portfolio of
companies. The Company's objective is to build a global technology and
communications group while remaining profitable and providing significant
shareholder value and returns on monies invested. There can be no assurance
that the Company will be able to raise enough capital to carry out its
acquisition plans.
In April 2004 the Company entered into a Letter Agreement with DataWave
outlining the terms under which IDC will acquire the remaining 49.9% of
DataWave not already owned by IDC making DataWave a wholly-owned subsidiary
of the Company. On June 2, 2004 IDC and DataWave signed an Agreement and
Plan of Merger detailing the terms of the planned merger. The transaction is
expected to close by December 31, 2004; however, there can be no assurance
that the merger be completed by that time, or at all.
IDC also intends to further develop and integrate its proprietary
technologies and continue to roll-out the products and applications that it
owns via its various subsidiaries and interests. New product development and
integration efforts are subject to all of the risks inherent in the
development and integration of new technology, products and systems,
including unanticipated delays, expenses, market acceptance, and technical
problems. There can be no assurance as to when, or whether, any applications
of the Company's proprietary technologies will be successfully completed. No
assurance can be given that products or services can be developed within a
reasonable development schedule, if at all, or that they can be produced or
provided at a reasonable cost. There can be no assurance that the Company
will have sufficient economic or human resources to complete such development
in a timely manner, or at all.
Competition
-----------
As a non-operating holding company, IDC, the parent company, is not really in
a competitive environment. There is, however, competition for the Company's
operating subsidiaries. A major portion of IDC's operations revolves around
DataWave or the DataWave technology dealing in the prepaid product market.
The prepaid product market is highly competitive and is served by numerous
-7-
international, national and local firms. In the United States, DataWave
competes with major long-distance providers, including but not limited to
Qwest, Verizon, MCI and Sprint, as well as with other prepaid phone card
distributors, including but not limited to IDT Corporation. DataWave also
competes with AT&T in certain locations where AT&T offers prepaid phone cards
directly or through other distributors. In Canada, DataWave competes with
long-distance providers, as with other prepaid phone card distributors,
including but not limited to Goldline, TCI and Phone Time. In addition, in
both Canada and the United States, as the use of cellular phones and phone
charge cards increases, DataWave faces increased competition from providers
of these products. Many of these competitors have significantly greater
financial, technical and marketing resources, much larger distribution
networks, and generate greater revenues and have greater name recognition
than DataWave or IDC. These competitors may be able to institute and sustain
price wars, or imitate the features of the DataWave network systems products,
resulting in a reduction of DataWave's share of the market and reduced price
levels and profit margins. In addition, there are relatively low barriers to
entry into the prepaid phone card market, and DataWave has faced, and expects
to continue to face, additional competition from new entrants. In both the
United States and Canada, DataWave also competes with prepaid phone card
distributors which own and operate switch and transmission platforms. Such
distributors may provide long distance services at lower cost than DataWave,
and offer additional bundled features not available from DataWave's long-
distance provider such as voicemail and facsimile services. DataWave
believes that its ability to compete also depends in part on a number of
competitive factors outside its control, including the reliability of
competitors' products and services, the ability of competitors to hire,
retain and motivate qualified personnel, the price at which competitors offer
comparable services and the extent of competitors' responsiveness to customer
needs. There can be no assurance that DataWave or IDC will be able to
compete effectively on pricing or other requirements with current and future
competitors or that competitive pressures will not materially adversely
affect the Company's businesses, financial condition and results of
operations.
The Company also expects its wireless datacasting products and services from
C3 Technologies to compete with those of numerous well-established companies
that design, manufacture and/or market wireless communications systems and
devices, including cellular services and Microsoft with its DirectBand/SPOT
technology. Most of these companies have substantially greater financial,
technical, personnel and other resources than the Company, and have
established reputations for success in the development, licensing, and sale
of their products and services. Most of these competitors also have the
financial resources necessary to enable them to withstand substantial price
competition or downturns in the market for wireless communications systems
and devices. C3 Technologies believes that its ability to compete also
depends in part on a number of competitive factors outside its control,
including the reliability of competitors' products and services, the ability
of competitors to hire, retain and motivate qualified personnel, the price at
which competitors offer comparable services and the extent of competitors'
responsiveness to customer needs. There can be no assurance that C3
Technologies or IDC will be able to compete effectively on pricing or other
requirements with current and future competitors or that competitive
-8-
pressures will not materially adversely affect the Company's businesses,
financial condition and results of operations.
Intellectual Property
---------------------
The company seeks to protect its intellectual property through patent,
copyright, trade secret and trademark law, and through contractual
restrictions such as confidentiality agreements. In March 1999, the U.S.
Patent and Trademark Office issued to the Company a patent, originally filed
in January 1996, dealing with FM Subcarrier Digital Voice Messaging. In July
2000, the U.S. Patent and Trademark Office issued the Company a second patent
on the invention with improved claim coverage. This invention had previously
been approved by government authorities in South Africa and Taiwan. In April
2000 the U.S. Patent and Trademark Office issued to the Company a patent,
which was originally filed in March 1999, on the overall design of its
Wireless Voicemail Player, the Voca(tm). The Company's current patents
expire between 2014 and 2016. ClariCAST(r), the name given to the
proprietary technology dealing with FM subcarrier data broadcasting, is a
registered trademark of the Company.
There can be no assurance that such patents, trademarks, or other
intellectual property protection will not be circumvented and/or invalidated
by competitors of the Company. Further, the enforcement of patent and other
intellectual property rights often requires the institution of litigation
against infringers, which litigation is often costly and time consuming.
There can be no assurance that the Company will be able to adequately protect
its technology from competitors in the future.
Employees
---------
As of June 30, 2004, the Company had two full-time employees working at its
Conshohocken, Pennsylvania headquarters. Neither of the employees belong to
a labor union. The Company uses the services of consultants in the
development of its software and hardware.
Available Information
---------------------
IDC's Web site is located at http://www.IntegratedDataCorp.com. IDC makes
available free of charge, on or through its Web site, its annual, quarterly,
and current reports, and any amendments to those reports, as soon as
reasonably practical after electronically filing such reports with the U.S.
Securities and Exchange Commission ("SEC"). Information contained on IDC's
Web site is not part of this report or any other report filed with the SEC.
ITEM 2. PROPERTIES.
The Company's headquarters are located at 625 W. Ridge Pike, Suite C-106,
Conshohocken, Pennsylvania 19428, where it leases approximately 4,000 square
feet of general office space. The lease agreement covering this property
runs through August 2005. C3 Technologies is collocated in this same space.
-9-
The other wholly-owned subsidiaries, Integrated Communications Services and
Integrated Data Technologies, are both based in London, England and own no
real property.
ITEM 3. LEGAL PROCEEDINGS.
The Company knows of no material, active, or pending legal proceedings
against IDC, nor is it involved as a plaintiff in any material proceeding or
pending litigation. There are no proceedings in which any of the Company's
directors, officers, or affiliates, or any registered or beneficial
shareholder, is an adverse party or has a material interest adverse to the
Company's interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 19, 2004, at a special meeting of the Board of Directors of the
Company (the "Board") at which a quorum of members of the Board was present,
the Board unanimously adopted a resolution to reduce the authorized number of
common shares of the Company's capital stock from 300,000,000 shares of par
value $.001 per share to 50,000,000 shares of par value $.001, while
retaining the existing authorization for preferred stock of 2,000,000 shares
of par value $.001 (the "Resolution"), and the Board did further find such
authorized capital reduction to be in the best interests of the Company, and
did recommend to the shareholders of the Company that they approve the
Resolution.
Thereafter, as of March 17, 2004, written consent of the majority of
shareholders of the Company was circulated, and effective as of March 29,
2004, the consent had been signed by shareholders owning of record in the
aggregate more than 79% of the shares of the Company's only class of stock
outstanding, its common stock, as provided by Section 228(a) of the Delaware
General Corporation Law, ratifying the Resolution, with notice of the
Resolution's adoption being sent to the Company's other shareholders.
The Certificate of Amendment of Certificate of Incorporation of Integrated
Data Corp. reducing the Company's authorized number of common shares of
capital stock to 50,000,000 was filed with the State of Delaware Secretary of
State on April 12, 2004.
-10-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is currently quoted on the National Association of
Securities Dealers, Inc., over-the-counter market on the OTC Bulletin Board
under the symbol "ITDD".
Market Information
------------------
The following tables set forth, for the periods indicated, the high and low
closing prices per share of common stock as quoted on the OTC Bulletin Board.
These quotations represent prices between dealers and do not include retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions. All amounts have been retroactively adjusted to reflect the
reverse stock splits.
Year Ended June 30, 2004
------------------------ High Bid Low Bid
-------- -------
Quarter ended:
September 30, 2003 $ 5.25 $ 3.60
December 31, 2003 $ 5.00 $ 2.00
March 31, 2004 $ 4.95 $ 2.00
June 30, 2004 $ 2.50 $ 1.01
Year Ended June 30, 2003
------------------------ High Bid Low Bid
-------- -------
Quarter ended:
September 30, 2002 $ 1.50 $ 0.30
December 31, 2002 $ 5.50 $ 0.67
March 31, 2003 $ 5.50 $ 2.50
June 30, 2003 $ 6.00 $ 2.10
On September 24, 2004 the closing price for the Company's common stock was
$0.39 per share.
Holders
-------
As of September 24, 2004 the Company had approximately 280 shareholders of
record of its common stock. Such number of record holders was derived from
the stockholder list maintained by the Company's transfer agent, American
Stock Transfer & Trust Co., and does not include the list of beneficial
owners of the Company whose shares are held in the names of various dealers
and clearing agencies.
-11-
Dividends
---------
To date, the Company has not declared or paid any cash dividends and does not
intend to do so for the foreseeable future. The Company intends to retain
all earnings, if any, to finance the continued development of its business.
Any future payment of dividends will be determined solely in the discretion
of the Company's Board of Directors.
Changes in Securities and Use of Proceeds
-----------------------------------------
The following information sets forth all shares of the Company's $.001 par
value common stock issued by the Company during the period covered by this
Form 10-K that were not registered under the Securities Act of 1933, as
amended (the "Act") at the time of issuance and were not previously reported
in a Quarterly Report on Form 10-Q.
None.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data relating to the Company
and its subsidiaries have been taken or derived from the financial statements
and other records of the Company. Such selected consolidated financial data
are qualified in their entirety by, and should be read in conjunction with,
the consolidated financial statements of the Company. On April 18, 2002,
Clariti Telecommunications International, Ltd. filed for bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code. Accordingly, results of operations
for the period April 18, 2002 through June 30, 2002, as well as balance sheet
data as of June 30, 2002 reflect operations as "debtor-in-possession" under
jurisdiction of the Bankruptcy Court. During Fiscal 2001, the Company
divested substantially all of its interests in the Telephony/Internet
Services business segment, representing the disposal of a business segment
under Accounting Principals Board Opinion No. 30. Accordingly, the selected
financial data have been restated to conform to discontinued operations
treatment for all periods presented.
-12-
Fiscal Fiscal Fiscal Fiscal Fiscal
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(dollars and shares in thousands,
except per share amounts)
SUMMARY OF OPERATIONS
---------------------
Revenue $ 18,174 $ 4,017 $ - $ - $ -
Operating costs/expenses (21,163) (5,143) (5,033) (15,605) (16,794)
Other income (expense) 64 7 (81) 350 430
Net loss from continuing
operations (2,925) (1,119) (5,114) (15,255) (16,364)
Discontinued operations:
Income (loss) from dis-
continued operations - - - (6,519) 12,254
Gain (loss) on disposal - - (100) 193 (762)
Net loss before
extraordinary gain (2,925) (1,119) (5,214) (21,581) (4,872)
Extraordinary gain on dis-
charge of indebtedness - 3,975 1,568 - -
Net Income (Loss) $ (2,925) $ 2,856 $ (3,646) $(21,581) $ (4,872)
PER SHARE DATA, BASIC AND DILUTED
---------------------------------
Weighted Average Number
of Shares Outstanding 7,686 4,262 381 357 336
Net loss from continuing
operations $ (0.38) $ (0.26) $ (13.42) $ (42.73) $ (48.70)
Income (loss) from dis-
continued operations - - - (18.26) 36.47
Gain (loss) on disposal - - ( 0.26) 0.54 (2.27)
Net loss before
extraordinary gain (0.38) (0.26) (13.68) (60.45) (14.50)
Extraordinary gain on dis-
charge of indebtedness - 0.93 4.11 - -
Net income (loss) $ (0.38) $ 0.67 $ (9.57) $ (60.45) $ (14.50)
Cash dividends None None None None None
As of As of As of As of As of
June 30, June 30, June 30, June 30, June 30,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(dollars in thousands)
BALANCE SHEET DATA
------------------
Total assets $ 13,854 $ 13,479 $ 526 $ 1,298 $ 22,627
Long-term obligations $ - $ - $ - $ - $ -
Stockholders' equity
(deficit) $ 3,204 $ 6,063 $ (5,210) $ (1,992) $ 21,804
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain information included in this Annual Report may be deemed to include
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that involve risk and uncertainty, such as
our ability to successfully do any or all of the following:
- Obtain financing for operations and expansion
- Effectively manage our subsidiaries
- Effectively compete in the markets we choose to enter
- Develop commercially viable applications with our technologies
- Develop a corporate-wide marketing strategy for our products and
services
- Develop partnerships, both foreign and domestic, to help market,
sell, and distribute our products and services
- Develop effective manufacturing and distribution channels for our
products and services
- Effectively manage the risks, restrictions and barriers of conducting
business internationally
- Reduce future operating losses and negative cash flow
In addition, certain statements may involve risk and uncertainty if they are
preceded by, followed by, or that include the words "intends," "estimates,"
"believes," "expects," "anticipates," "should," "could," or similar
expressions, and other statements contained herein regarding matters that are
not historical facts. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our expectations will
be achieved. The important factors that could cause actual results to differ
materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation, ability to obtain
funding, ability to reverse operating losses, competition and regulatory
developments, as well as the other risks identified below under "Risk
Factors" and those referenced from time to time in our filings with the
Securities and Exchange Commission. All subsequent written and oral forward-
looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary
Statements. We do not undertake any obligation to release publicly any
revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RISK FACTORS
------------
- Our need to obtain working capital financing raises doubt about our ability
to continue business operations.
Our inability to secure financing to fund our obligations is the reason we
entered Chapter 11 bankruptcy proceedings in 2002. Since then Integrated
Technologies & Systems Ltd ("IT&S", a greater than 5% shareholder) and/or
affiliates have advanced (in the form of a zero-interest loan) approximately
$1,000,000 to meet our operating requirements.
-14-
We require both short-term financing for operations and longer-term capital
to fund our expected growth. We have no existing bank lines of credit and
have not yet established any sources for additional financing; however, IT&S
has committed to funding operational expenses through the end Fiscal 2005.
Our ability to grow will be dependent upon our ability to raise longer-term
capital or otherwise finance our plans; however, additional financing may not
be available to us, or if available, may not be available upon terms and
conditions acceptable to us. Inability to raise sufficient funds for future
growth will have an adverse impact on our business.
- Several factors about our authorized capitalization may make it difficult
for us to obtain equity financing which could limit or curtail future
business development plans.
Our common stock is currently traded on the OTC Bulletin Board and, as
such, it is relatively illiquid. At times during the recent past there has
been only a limited market for those shares and there is no assurance that an
active market for the shares will develop or that, if one develops, that it
will be maintained. It is likely that any market that develops will be
highly volatile and that the trading volume may be limited.
In addition, our Board of Directors has the authority to issue up to two
million shares of a new series of preferred stock and to determine the price,
privileges and other terms of such shares. The Board may exercise this
authority without the approval of the stockholders. The rights of the
holders of common stock may be adversely affected by the rights of the
holders of any preferred stock that may be issued in the future. Also the
issuance of preferred stock may make it more difficult for a third party to
acquire control of the Company.
- Trading of our stock may be restricted by the SEC's penny stock regulations
which may limit a stockholder's ability to buy and sell our stock.
The SEC has adopted regulations which generally define "penny stock" to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Our securities are covered by the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell to
persons other than established customers and "accredited investors". The
term "accredited investor" refers generally to institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000
or annual income exceeding $200,000 or $300,000 jointly with their spouse.
The penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document in a form prepared by the SEC which provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current
bid and offer quotations for the penny stock, the compensation of the broker-
dealer and its salesperson in the transaction and monthly account statements
showing the market value of each penny stock held in the customer's account.
The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
-15-
prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny
stock rules require that prior to a transaction in a penny stock not
otherwise exempt from these rules, the broker-dealer must make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for the stock that is subject to
these penny stock rules. Consequently, these penny stock rules may affect
the ability of broker-dealers to trade our securities. We believe that the
penny stock rules discourage investor interest in and limit the marketability
of our common stock.
- NASD sales practice requirements may also limit a stockholder's ability to
buy and sell our stock.
In addition to the "penny stock" rules described above, the National
Association of Securities Dealers ("NASD") has adopted rules that require
that in recommending an investment to a customer, a broker-dealer must have
reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer's financial status, tax status,
investment objectives and other information. Under interpretations of these
rules, the NASD believes that there is a high probability that speculative
low priced securities will not be suitable for at least some customers. The
NASD requirements make it more difficult for broker-dealers to recommend that
their customers buy our common stock, which may limit investors' ability to
buy and sell our stock and have an adverse effect on the market for our
shares.
- We have a limited operating history upon which to base an evaluation of our
performance which raises doubt about our capability to succeed as a non-
operating, holding company.
When our Chapter 11 Plan of Reorganization became effective in November 2002,
we effectively became a non-operating holding company. Our reorganization
also included a complete turnover in our board of directors and executive
officers effectively creating, with the exception of our surviving assets and
intellectual property, a new company. Hence the reorganized company has a
very limited track record of successfully acquiring and managing subsidiary
businesses. This may also have a negative affect on our ability to raise
capital for future operating and expansion needs.
- We have a history of significant losses raising doubt about our ability to
achieve sustainable profitability.
Since our inception, we have incurred significant losses from continuing
operations of $2,925,000, $1,119,000, and $5,114,000 for Fiscal 2004, Fiscal
2003 and Fiscal 2002, respectively. In order to achieve profitability in the
future, we will need to generate significant revenue within our operating
subsidiaries. We cannot assure generating sufficient revenue to achieve
profitability, nor can we assure achieving, or if achieved, maintaining
profitability.
-16-
- Our subsidiaries are in competition with companies that are larger, more
established and better capitalized than we are which may adversely affect our
ability to compete effectively.
The prepaid services, telecommunications, and wireless communications
industries are highly competitive, rapidly evolving and subject to constant
technological change. We expect that our products and services will compete
with those of numerous well-established companies, including AT&T, Qwest,
Verizon, MCI, Sprint, IDT, Microsoft, and the cellular service companies.
Many of our competitors have greater financial, technical, engineering,
personnel and marketing resources; longer operating histories; greater name
recognition; and larger consumer bases than us.
- Operating internationally may expose us to additional and unpredictable
risks having the potential to significantly inhibit us from competing
effectively overseas.
We have established a joint venture in Italy to market our technology, and we
intend to enter other international markets as well. International
operations are subject to inherent risks, including:
- potentially weaker intellectual property rights;
- difficulties in obtaining foreign licenses;
- difficulties in establishing necessary partnerships with foreign
businesses;
- changes in regulatory requirements;
- political instability;
- unexpected changes in regulations and tariffs;
- fluctuations in exchange rates;
- varying tax consequences; and
- uncertain market acceptance and difficulties in marketing efforts due
to language and cultural differences.
- We have limited protection of proprietary rights and technology creating
the potential for our intellectual property to be copied reducing
significantly any technological advantage we have over our competition.
Our intellectual property rights include patents, copyrights, trade secrets,
trademarks and exclusive and non-exclusive licenses. We have been granted
U.S. patents dealing with data deliver utilizing the subcarrier channels
(SCA) of FM radio stations. Our subsidiaries have also filed for patent
protection in the United States and foreign countries on a number of
additional inventions. We cannot be certain that any patent applications
will result in the issuance of a patent or that our patents will withstand
any challenges by third parties.
- Unauthorized use of our intellectual property and trade secrets may affect
market share and profitability.
Our subsidiaries rely on patents, copyrights, trademarks, trade secrets, know
how and continuing technological advancement to establish a competitive
position in the marketplace. We attempt to protect our trade secrets and
-17-
other proprietary technology through an employee handbook and agreements with
our employees. Despite our precautions, there can be no assurance that we
will be able to adequately protect our technology from competitors in the
future. Also other companies may independently develop or otherwise acquire
similar technology or gain access to our proprietary technology. The
enforcement of patent rights often requires the institution of litigation
against infringers. This litigation is often costly and time consuming.
There can be no assurance that we will have adequate resources for
infringement litigation, nor that we will be successful with such litigation.
- We face risks of infringement claims which could disrupt the conduct of our
business or have a significant adverse effect on profitability.
We or our subsidiaries may be subject to legal proceedings and claims from
time to time relating to the intellectual property of others, even though we
take steps to assure that neither our employees nor our contractors knowingly
incorporate unlicensed copyrights or trade secrets into our products. It is
possible that third parties may claim that our current or future products or
services may infringe upon their patent, copyright, trademark or trade secret
rights. Any such claims, regardless of their merit, could be time consuming,
expensive, cause delays in introducing new or improved products or services,
require us to enter into royalty or licensing agreements, or require us to
stop using the challenged intellectual property. Successful infringement
claims against us may materially disrupt the conduct of our business or
affect profitability. There are currently no legal proceedings or claims for
infringement of intellectual property rights pending against us.
ANALYSIS OF THE BUSINESS
------------------------
The following discussion should be read in conjunction with the Company's
consolidated financial statements appearing elsewhere in this report.
General Operations
------------------
We are a non-operating U.S. holding company with interests in the U.S.,
Canada, the U.K., and Italy. Our subsidiaries offer a wide range of
telecommunications, wireless, point-of-sale activation, financial
transaction, and other services.
As of June 30, 2004 our holdings were as follows:
CORPORATION OR INTEREST PERCENT OWNERSHIP
C3 Technologies Inc. 100%
DataWave Systems Inc. 50.1%
DataWave International License 100%
IDC Italia Srl 60%
Integrated Communications Services Ltd 100%
Integrated Data Technologies Ltd 100%
-18-
Further descriptions of our operations, holdings, and subsidiaries are
included above under Item 1, Business.
Results of Operations
---------------------
We have undergone significant changes over the past two years. In November
2002 we held two operating subsidiaries, C3 Technologies Inc ("C3") and a 60%
ownership in an Italian Joint Venture Company then named RadioNet Italia and
subsequently renamed IDC Italia Srl. C3 was formed to manage all the
proprietary ClariCAST(r) intellectual property and assets, including patents,
patents pending, trademarks, and copyrights developed by the Company under
its former name of Clariti Telecommunications International. IDC Italia was
formed to market and operate ClariCAST(r) services in Italy.
Since December 2002, we have acquired a number of other holdings as detailed
in the table in the General Operations section above. While C3, Integrated
Communications Services Ltd ("ICS"), and DataWave Systems Inc. ("DataWave")
all reported revenue for this reporting fiscal year, DataWave's operating
results, by far, have the most influence on our consolidated financial
statements.
In April 2004 we entered into a Letter Agreement with DataWave outlining the
terms under which we will acquire the remaining 49.9% of DataWave not already
owned by the Company. The management of IDC and DataWave both believe a
single, merged entity will be stronger financially, more capable of raising
much needed capital for expansion, and better poised strategically to compete
in the international marketplace. On June 2, 2004 we signed an Agreement and
Plan of Merger with DataWave detailing the terms of the planned merger. The
transaction is expected to close by December 31, 2004; however, there can be
no assurance that the merger be completed by that time, or at all.
DataWave has a March 31 fiscal year end while our fiscal year ends on June
30th. Because of this difference, we have adopted the policy of
consolidating the financial statements of DataWave with a three-month lag
allowing like quarters and fiscal years to be consolidated.
When reading any of the following discussions and analysis of financial
condition and results of operations, it must be kept in mind the year ended
June 30, 2004 is the first full year of operations consolidating an entire
year of DataWave results. For the year ended June 30, 2003 only the final
quarter of DataWave's results were consolidated into our financial
statements.
Year Ended June 30, 2004 (Fiscal 2004)
vs. Year Ended June 30, 2003 (Fiscal 2003)
------------------------------------------
For Fiscal 2004, we incurred a net loss of $2,925,000 or $(0.38) per share,
on $18,174,000 in revenue as compared to net loss from continuing operations
of $1,119,000, or $(0.26) per share, on $4,017,000 in revenue for Fiscal
2003. The sharp increase in revenue was due to the consolidation of a full
fiscal year of DataWave operating results versus the consolidation of only
DataWave's fourth fiscal quarter for Fiscal 2003. (Majority ownership in
-19-
DataWave was established in January 2003.) For Fiscal 2004 and Fiscal 2003,
99% and 97%, respectively, of our revenue was attributable to DataWave
revenue.
The sharp increase in net loss was due to an impairment loss of $1,844,000
taken against the value of the DataWave International License. As of June
30, 2004 the DataWave International License was valued at $1,450,000 by an
independent financial advisor in their Valuation Report and Related Fairness
Opinion prepared in connection with the proposed IDC/DataWave merger.
In Fiscal 2003 we had an extraordinary gain on the discharge of indebtedness
of $3,975,000 due to our Chapter 11 reorganization and the liquidation of
Radio Net International Inc., a wholly owned subsidiary of the Company. With
this extraordinary gain our final net income for Fiscal 2003 was $2,856,000
or $0.67 per share.
Marketing expenses increased from $384,000 in Fiscal 2003 to $1,563,000 in
Fiscal 2004. Essentially all of the $1,563,000 in marketing expenses was
incurred by DataWave Systems, Inc. and associated with marketing personnel
salaries and expenses. The increase from Fiscal 2003 to Fiscal 2004 is
attributable to the consolidation of a full fiscal year of DataWave operating
results.
Research and development expenses increased from $254,000 in Fiscal 2003 to
$1,405,000 in Fiscal 2004. In addition to the increase associated with a
full fiscal year versus a single fiscal quarter consolidation, DataWave
experienced a 28% increase in its R&D expenditures over its 2003 fiscal year
continuing its rapid expansion of point-of-sale technology.
Depreciation and amortization expenses increase from $613,000 in Fiscal 2003
to $1,566,000 in Fiscal 2004. The reason for this increase was three-fold.
First, there was 12 months of amortization of the DataWave International
License in Fiscal 2004 versus six months in Fiscal 2003. Second, DataWave's
contribution increased due to the full fiscal year consolidation versus a
single fiscal quarter consolidation. Finally, DataWave's depreciation
expense increased as a result of its investment in POSA terminals and the
supporting network infrastructure that started in November 2002.
General and administrative expenses were $3,562,000 in Fiscal 2004 as
compared to $1,360,000 in Fiscal 2003, an increase of $2,202,000. This
increase is directly attributable to consolidating a full year of DataWave
results in Fiscal 2004 as opposed to only three months in fiscal 2003.
Year Ended June 30, 2003 (Fiscal 2003)
vs. Year Ended June 30, 2002 (Fiscal 2002)
------------------------------------------
For Fiscal 2003, we incurred net income of $2,856,000 or $0.67 per share on
$4,017,000 of revenue (principally from DataWave) compared to a net loss of
$3,646,000 or $(9.57) per share on no revenue for Fiscal 2002. Net loss from
continuing operations was $1,119,000 or $(0.26) per share in Fiscal 2003
compared to a net loss from continuing operations of $5,114,000 or $(13.42)
per share for Fiscal 2002. The $3,995,000 reduction in loss from continuing
-20-
operations was primarily due to a decrease in general and administrative
expenses of approximately $3,283,000. We were forced to substantially reduce
its overhead due to the lack of capital in Fiscal 2003.
Marketing expenses increased from $-0- in Fiscal 2002 to $384,000 in Fiscal
2003. All of the $384,000 in marketing expenses was incurred by DataWave
Systems, Inc. for advertising expenses related to its consumer long distance
business. Research and development expenses increased from $-0- in Fiscal
2002 to $254,000 in Fiscal 2003 due to product development costs associated
with DataWave Systems, Inc.
General and administrative expenses were $1,360,000 in Fiscal 2003 as
compared to $4,713,000 in Fiscal, 2002, a decrease of $3,353,000. This
decrease was a result of the reduction in overhead expenses and consolidating
offices due to the need to operate the business with minimum expenses during
the Chapter 11 proceedings in Fiscal 2003.
In Fiscal 2002, the Company filed for Chapter 7 voluntary liquidation for one
of its wireless subsidiaries. The liquidation proceedings subsequently
discharged all of their liabilities, and as a result the Company recognized a
gain of $1,568,000 on the discharge of such indebtedness in Fiscal 2002. In
Fiscal 2003, the Company filed for Chapter 7 voluntary liquidation for
another one of its wireless subsidiaries. The liquidation proceedings
subsequently discharged all of their liabilities, and as a result the Company
recognized a gain of $340,000 on the discharge of such indebtedness in Fiscal
2003. In Fiscal 2002, the Company filed for Chapter 11 bankruptcy. The
Chapter 11 bankruptcy proceedings resulted in the Company recognizing an
additional extraordinary gain of $3,635,000 on the discharge of indebtedness
in Fiscal 2003.
Liquidity and Capital Resources
-------------------------------
At June 30, 2004, we had a working capital deficit of $912,000 (including a
cash balance of $857,000) as compared to a working capital deficit of
$444,000 (including a cash balance of $2,143,000) at June 30, 2003. The
working capital decrease of $468,000 is primarily due to an increase in
short-term borrowings of $569,000 for Fiscal 2004. There were a number of
combining factors that contributed to the decrease in cash, but primarily
this decrease of $1,286,000 was due to a increasing accounts receivable and
inventory.
Integrated Technologies & Systems Ltd ("IT&S") and/or its affiliates have
agreed to provide funding to the Company for its working capital requirements
through June 30, 2005 (Fiscal 2005). Such working capital requirements are
forecasted to be approximately $100,000 per month, principally to cover the
proposed DataWave merger costs, the compensation and related costs of our two
employees, and general and administrative expenses. This funding is in the
form of a non-interest bearing, unsecured loan. Once the proposed DataWave
merger takes place, we expect to be able to reduce our overall expenses,
particularly in the general and administrative area, such that further
funding from IT&S or affiliates is no longer necessary to sustain general
operations. There can be no assurances that consolidating operations with
-21-
DataWave will produce the expected reduction in general and administrative or
that the merger will take place in a timely manner, if ever.
Future mergers and acquisitions are expected to require additional funding.
There can be no assurances that such funding will be generated or available,
or if available, on terms acceptable to the Company.
CRITICAL ACCOUNTING POLICIES
----------------------------
The following accounting policies and estimates are the most important to our
financial position and results of operations because they require the
exercise of significant judgment or the use of estimates. The preparation of
these financial statements requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. We
believe that the estimates we use are reasonable; however, actual results
could differ from those estimates.
Our financial statements are prepared in accordance with accounting
principles that are generally accepted in the United States. Our accounting
policies are set out in Note 2 of the accompanying consolidated financial
statements.
Revenue and Cost Recognition
----------------------------
Our revenues are primarily attributable to the consolidation of DataWave
revenues. DataWave revenues are primarily generated from the resale of
prepaid long distance and cellular telephone time. Most of DataWave's long
distance and all its cellular calling cards and virtual vouchers or PINs are
activated at the point-of-sale using its proprietary technologies. These
revenues are recognized when the following criteria are met:
- persuasive evidence of an arrangement exists
- delivery has occurred or services have been rendered
- the price is fixed or determinable, and
- collectibility is reasonably assured.
DataWave's revenue in Canada is primarily from the sale of prepaid long
distance and from the activation and dispensing of prepaid cellular PINs.
Prepaid cellular PINs incur inventory risk. Inventory levels reflect the
purchased value of the cost of the PIN and are managed to supply a level of
ten days activations; the resulting accounts payable liability is paid within
the normal terms offered by the supplier (including cash discounts for early
payment). Where DataWave is not the primary obligor or does not incur
significant unmitigated inventory or return risk, revenue is recorded at the
date of sale on a net agency basis. The underlying sales arrangements
entered into by DataWave will impact the presentation of revenues, inventory,
accounts receivable and resulting gross margin and working capital,
respectively. Accounts receivable reflect the wholesale value of the PINs
and are almost always collected within twenty days.
-22-
Most of DataWave's revenue in the United States is from the sale of prepaid
long distance through its network of vending machines and is recorded on a
net agency basis. Inventory risk (as the liability to the carrier is
incurred at the point-of-sale) is not created. The related U.S. accounts
receivable is the retail value of the product and is typically collected
within two weeks of the sale; this is primarily cash in the DataWave vending
machines which is collected on a regular basis.
Sales of company or custom branded cards where DataWave incurs significant
inventory risk but do not provide the related telephone time are recognized
on the gross basis on the date of sale to the consumer when title to the card
transfers, collectibility of proceeds is reasonably assured, the full
obligation to the phone service provider is fixed and determinable, and
DataWave has no significant continuing obligations.
Cost of revenues for prepaid long distance phone cards consists primarily of
long distance telephone time, standard phone cards, net of amounts earned on
early payments to suppliers and commissions to agents and site landlords.
Direct costs are also associated with the DTM machines including direct
production salaries, parts and accessories and costs to service the machines.
Cost of revenues for transaction fees and services consists of network and
communication service costs, costs of maintaining and supporting point-of-
sale activation terminals and third party processing costs for transactions.
The presentation of the revenues of the majority of DataWave's business
activities on a net agency basis impacts our financial statements. Where
DataWave obtains legal title to PIN and cellular time inventory but are not
the primary obligor or incur significant unmitigated inventory or return risk
our recording of inventory, the related trade payables and net agency revenue
from its sale significantly impacts our financial statements.
Impairment of Long-Lived Assets
-------------------------------
We review our long-lived assets, other than goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. To determine recoverability, we compare the
carrying value of the assets to the estimated future undiscounted cash flows.
Measurement of an impairment loss for long-lived assets held for use is based
on the fair value of the asset. Long-lived assets classified as held for
sale are reported at the lower of carrying value and fair value less
estimated selling costs. For assets to be disposed of other than by sale, an
impairment loss is recognized when the carrying value is not recoverable and
exceeds the fair value of the asset. For goodwill, an impairment loss will
be recorded to the extent that the carrying amount of the goodwill exceeds
its fair value.
An impairment loss in the amount of $1,844,000 was recorded at June 30, 2004
to reduce the net carrying value of the DataWave International License to
fair market value based on a valuation by an independent party. No other
impairment losses were identified for Fiscal 2004. For Fiscal 2003 no
impairment losses were identified.
-23-
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In January 2003 with a revision in December 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 and 46R ("FIN
46R"), "Consolidation of Variable Interest Entities - an interpretation of
ARB No. 51". FIN 46R requires that if any entity has a controlling financial
interest in a variable interest entity, the assets, liabilities and results
of activities of the variable interest entity should be included in the
consolidated financial statements of the entity. FIN 46R provisions are
effective for all arrangements entered into after January 31, 2003. For
those arrangements entered into prior to January 31, 2003, FIN 46R provisions
are required to be adopted for periods ending after March 15,2004. This
statement is not currently applicable to the Company.
In April 2003, the FASB issued Statement of Financial Accounting Standard No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133. SFAS 149 is generally
effective for derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. This statement
is not currently applicable to the Company.
In May 2003, the FASB issued Statement of Financial Accounting Standard No.
150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities on the balance sheet. Previously, many of those financial
instruments were classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. This statement is not currently applicable to the Company.
On April 22, 2003, the FASB announced its decision to require all companies
to expense the fair value of employee stock options. Companies will be
required to measure the cost according to the fair value of the options.
Although the new guidelines have not yet been released, it is expected that
they will be finalized soon and be effective in 2004. When final rules are
announced, the Company will assess the impact to its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt)
that are sensitive to future changes in interest rates, currency exchange
rates, commodity prices or other market factors.
Through our subsidiaries we are exposed to market risk related to changes in
interest and foreign currency exchange rates, each of which could adversely
affect the value of our current assets and liabilities. At June 30, 2004, we
-24-
had cash and cash equivalents consisting of cash on hand and highly liquid
money market instruments with original terms to maturity of less than 90
days. If market interest rates were to increase immediately and uniformly by
10% from its levels at June 30, 2004, the fair value would decline by an
immaterial amount.
We do not believe that our results of operations or cash flows would be
affected to any significant degree by a sudden change in market interest
rates relative to our cash and cash equivalents, given our current ability to
hold our money market investments to maturity. We do not have any long-term
debt instruments so we are not subject to market related risks such as
interest or foreign exchange on long-term debt. We do not enter into foreign
exchange contracts to manage exposure to currency rate fluctuations related
to our U.S. dollar denominated cash and money market investments.
With a significant portion of revenues and operating expenses denominated in
Canadian dollars and British pounds, a sudden or significant change in
foreign exchange rates could have a material effect on our future operating
results or cash flows. We purchase goods and services in U.S. dollars,
Canadian dollars, and British pounds and earn revenues in all three
currencies as well. Foreign exchange risk is managed by satisfying foreign
denominated expenditures with cash flows or assets denominated in the same
currency. We do not consider our market risk exposure relating to foreign
currency exchange to be material, as we generally have sufficient cash
outflows based in these currencies to largely offset the cash inflows based
in these currencies, thereby creating a natural hedge.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1. Such consolidated financial
statements are hereby incorporated by reference into this Item 8.
-25-
INTEGRATED DATA CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
------------
A. Independent Auditors' Report................................F-1
B. Consolidated Balance Sheets at June 30, 2004 and 2003...F-2 to F-3
C. Consolidated Statements of Operations for the
years ended June 30, 2004, 2003 and 2002..................F-4
D. Consolidated Statement of Stockholders' Equity
for the years ended June 30, 2004, 2003 and 2002......F-5 to F-7
G. Consolidated Statements of Cash Flows for the
years ended June 30, 2004, 2003 and 2002..............F-8 to F-9
H. Notes to Consolidated Financial Statements.............F-10 to F-29
-26-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Integrated Data Corp.
Conshohocken, Pennsylvania
We have audited the accompanying consolidated balance sheets of Integrated
Data Corp. and subsidiaries as of June 30, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended June 30, 2004.
These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Integrated Data Corp. and subsidiaries as of June 30, 2004 and 2003, and
the results of their consolidated operations and cash flows for each of the
three years in the period ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States.
/s/ COGEN SKLAR LLP
-------------------
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
September 22, 2004
F-1
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 and 2003
(Dollars and Shares in Thousands)
June 30, June 30,
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 857 $ 2,143
Accounts receivable,
net of allowance of $13 and $55 4,350 2,038
Inventory 2,235 1,225
Prepaid expenses and other current assets 457 487
--------- ---------
7,899 5,893
PROPERTY AND EQUIPMENT, NET 2,436 1,730
INTANGIBLE ASSETS, NET
Amortizable 1,829 4,330
Goodwill 1,464 1,464
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES 8 8
OTHER ASSETS 218 54
--------- ---------
TOTAL ASSETS $ 13,854 $ 13,479
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations $ 65 $ -
Accounts payable and accrued liabilities 7,798 5,873
Short-term borrowings from related party 887 318
Deferred revenue 61 146
--------- ---------
8,811 6,337
LONG-TERM LIABILITIES
Capital lease obligations 125 -
Other long-term liabilities 281 -
Deferred income taxes 268 268
--------- ---------
TOTAL LIABILITIES 9,485 6,605
MINORITY INTEREST 1,165 881
COMMITMENTS AND CONTINGENCIES - -
F-2
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 and 2003
-CONTINUED-
(Dollars and Shares in Thousands)
June 30 June 30
2004 2003
--------- ---------
STOCKHOLDERS' EQUITY
PREFERRED STOCK
$.001 par value; authorized 2,000 shares;
no shares issued and outstanding at June 30,
2004 and 2003 - -
COMMON STOCK
$.001 par value; authorized 50,000 shares;
issued and outstanding, 7,686 shares at
June 30, 2004 and at June 30, 2003 8 8
WARRANTS OUTSTANDING, NET 269 1,613
ADDITIONAL PAID-IN-CAPITAL 285,071 283,727
ACCUMULATED DEFICIT (282,233) (279,308)
ACCUMULATED OTHER COMPREHENSIVE INCOME 89 23
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 3,204 6,063
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,854 $ 13,479
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(Dollars Thousands, Except Per Share Amounts)
Fiscal Fiscal Fiscal
2004 2003 2002
---------- ---------- ----------
REVENUE $ 18,174 $ 4,017 $ -
OPERATING COSTS AND EXPENSES
Cost of revenues 10,873 2,505 -
Marketing expenses 1,563 384 -
Research and development expenses 1,405 254 -
Depreciation and amortization expenses 1,566 613 320
General and administrative expenses 3,562 1,360 4,713
Impairment loss 1,844 - -
Minority interest 286 35 -
Income from unconsolidated subsidiary 64 (8) -
---------- ---------- ----------
TOTAL OPERATING COSTS AND EXPENSES 21,163 5,143 5,033
---------- ---------- ----------
LOSS FROM OPERATIONS (2,989) (1,126) (5,033)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Other income 13 8 -
Interest expense - (1) (81)
Gain on foreign exchange 51 - -
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 64 7 (81)
---------- ---------- ----------
NET LOSS FROM CONTINUING OPERATIONS (2,925) (1,119) (5,114)
---------- ---------- ----------
LOSS ON DISPOSAL FROM DISCONTINUED OPS - - (100)
---------- ---------- ----------
EXTRAORDINARY GAIN ON DISCHARGE
OF INDEBTEDNESS - 3,975 1,568
---------- ---------- ----------
NET INCOME (LOSS) $ (2,925) $ 2,856 $ (3,646)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 7,686 4,262 381
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE
NET LOSS FROM CONTINUING OPERATION $ (0.38) $ (0.26) $ (13.42)
LOSS ON DISPOSAL FROM DISCONTINUED OPS - - (0.26)
---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY GAIN $ (0.38) $ (0.26) $ (13.68)
EXTRAORDINARY GAIN ON DISCHARGE
OF INDEBTEDNESS - 0.93 4.11
---------- ---------- ----------
NET INCOME (LOSS) $ (0.38) $ 0.67 $ (9.57)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
--------------- STOCK
NUMBER WARRANTS ADD'L
OF OUTSTAN- PAID-IN ACCUMULATED
SHARES AMOUNT DING,NET CAPITAL DEFICIT
------ ------ --------- --------- ----------
BALANCES, JUNE 30, 2003 7,686 $ 8 $ 1,613 $ 283,727 $(279,308)
Year ended June 30, 2004:
Exercise of stock options - - - - -
Common stock warrants expired - - (1,344) 1,344 -
Net loss - - - - (2,925)
Foreign currency translation
adjustment - - - - -
------ ------ -------- --------- ----------
BALANCES, JUNE 30, 2004 7,686 $ 8 $ 269 $ 285,071 $(282,233)
====== ====== ======== ========= ==========
ACCUMULATED
-Continued- OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
------------- -------------
BALANCES, JUNE 30, 2003 $ - $ 23
Year ended June 30, 2004:
Exercise of stock options - -
Common stock warrants expired - -
Net loss (2,925) -
Foreign currency translation
adjustment 66 66
---------- ----------
BALANCES, JUNE 30, 2004 $ (2,859) $ 89
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
-CONTINUED-
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
--------------- STOCK
NUMBER WARRANTS ADD'L
OF OUTSTAN- PAID-IN ACCUMULATED
SHARES AMOUNT DING,NET CAPITAL DEFICIT
------ ------ --------- --------- ----------
BALANCES, JUNE 30, 2002 38,530 $ 38 $ 5,047 $ 271,869 $(282,164)
Year ended June 30, 2003:
Common stock warrants expired - - (3,434) 3,434 -
Common stock issued for
conversion of debt 3,750 4 - 71 -
Common stock issued for
exercise of stock options 53 - - - -
1:100 reverse stock split (41,910) (42) - 42 -
Common stock issued for
conversion of debt 865 1 - 1,920 -
Common stock issued for
acquisitions 6,398 7 - 6,391 -
Net income - - - - 2,856
Foreign currency translation
adjustment - - - - -
------ ------ -------- --------- ----------
BALANCES, JUNE 30, 2003 7,686 $ 8 $ 1,613 $ 283,727 $(279,308)
====== ====== ======== ========= ==========
ACCUMULATED
-Continued- OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
------------- -------------
BALANCES, JUNE 30, 2002 $ - $ -
Year ended June 30, 2003:
Common stock warrants expired - -
Common stock issued for conversion of debt - -
Common stock issued for exercise of stock options - -
1:100 reverse stock split - -
Common stock issued for conversion of debt - -
Common stock issued for acquisitions - -
Net income 2,856 -
Foreign currency translation adjustment 23 23
---------- ----------
BALANCES, JUNE 30, 2003 $ 2,879 $ 23
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
-CONTINUED-
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
--------------- STOCK
NUMBER WARRANTS ADD'L
OF OUTSTAN- PAID-IN ACCUMULATED
SHARES AMOUNT DING,NET CAPITAL DEFICIT
------ ------ --------- --------- ----------
BALANCES, JUNE 30, 2001 35,380 $ 35 $ 9,865 $ 266,626 $(278,518)
Year ended June 30, 2002:
Common stock issued for
cash 3,000 3 - 147 -
Commission on issuance
of common stock - - - (15) -
Common stock issued for
expenses 150 - - 10 -
Common stock warrants issued,
net of change in unearned
consulting fees of $(235) - - 283 - -
Common stock warrants expired - - (5,101) 5,101 -
Net loss - - - - (3,646)
------ ------ -------- --------- ----------
BALANCES, JUNE 30, 2002 38,530 $ 38 $ 5,047 $ 271,869 $(282,164)
====== ====== ======== ========= ==========
ACCUMULATED
-Continued- OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
------------- -------------
BALANCES, JUNE 30, 2001 $ - $ -
Year ended June 30, 2002:
Common stock issued for cash - -
Commission on issuance of common stock - -
Common stock issued for expenses - -
Common stock warrants issued, net of change
in unearned consulting fees of $(235) - -
Common stock warrants expired - -
Net loss (3,646) -
---------- ----------
BALANCES, JUNE 30, 2002 $ (3,646) $ -
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
(Dollars in Thousands)
Fiscal Fiscal Fiscal
2004 2003 2002
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,925) $ 2,856 $ (3,646)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Extraordinary gain on discharge of
indebtedness - (3,975) (1,568)
Loss from discontinued operations - - 100
Depreciation and amortization 1,566 613 320
Impairment loss 1,844 - -
Loss on sale of fixed assets - - 133
Issuance of common stock warrants for
general and administrative expenses - - 80
Minority interest 286 35 -
Income from unconsolidated subsidiary 64 (8) -
Other - (38) 77
Change in assets and liabilities which
increase (decrease) cash:
Accounts receivable (2,312) 285 -
Inventory (1,009) (535) 87
Prepaid expenses and other current assets 26 (61) 105
Accounts payable an accrued liabilities 1,897 1,445 3,767
Deferred revenue (85) (172) -
--------- --------- ---------
Net cash provided by (used) in
operating activities (648) 445 (545)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash of acquired company - 1,242 -
Investment in long-lived assets (1,170) (366) -
Deferred rental inducements, net of
related receivables 198 - -
Deferred development cost (50) - -
Proceeds from sale of fixed assets - - 19
--------- --------- ---------
Net cash provided by (used in)
investing activities (1,022) 876 19
--------- --------- ---------
F-8
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
-CONTINUED-
(Dollars in Thousands)
Fiscal Fiscal Fiscal
2004 2003 2002
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 569 817 272
Sale of common stock for cash - - 135
Repayment of capital lease obligations (183) - -
--------- --------- ---------
Net cash provided by financing activities 386 817 407
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) - -
--------- --------- ---------
NET CHANGE IN CASH AND EQUIVALENTS (1,286) 2,138 (119)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,143 5 124
--------- --------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 857 $ 2,143 $ 5
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ - $ - $ -
Income taxes $ - $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Conversion of debt into equity $ - $ 1,996 $ -
Issuance of shares upon acquisitions
DataWave Systems, Inc. $ - $ 2,198 $ -
C4 Services, Ltd. $ - $ 4,200 $ -
Reclassification of pre-petition
liabilities into liabilities subject
to compromise $ - $ - $ 5,557
Equipment acquired under capital lease $ 349 $ - $ -
Tenant incentives for leased premises $ 540 $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 1. HISTORY AND NATURE OF THE BUSINESS
Integrated Data Corp. ("IDC"), formerly Clariti Telecommunications
International, Ltd., is a non-operating U.S. holding company with interests
in the U.S., Canada, the U.K., and Italy. IDC and its subsidiaries
(collectively the "Company", "We", or "Our") offer a wide range of
telecommunications, wireless, point-of-sale activation, financial
transaction, and other services. In 2002 IDC successfully completed
reorganization under Chapter 11 and is now operating with no secured debt
liabilities.
The Company was originally formed in February 1988 as the successor to a
music and recording studio business owned and operated by Company's former
CEO. The Company became publicly held upon its merger in January 1991 with
an inactive public company incorporated in Nevada. The surviving corporation
changed its name to Sigma Alpha Entertainment Group, Ltd. and was
subsequently reincorporated in Delaware. Beginning in 1995, the Company
began shifting its focus away from the music and recording business and
toward the development and commercialization of a proprietary data
broadcasting technology. The resulting wireless technology, trade named
ClariCAST(r), allows for the metropolitan-wide distribution of data utilizing
the existing broadcast infrastructure of FM radio stations. In 1998 the
Company began to acquire interests in the telecommunications business and
changed its name to Clariti Telecommunications International, Ltd. Upon
emergence from Chapter 11 in 2002, the company name was changed to Integrated
Data Corp. to more accurately reflect its new business focus of acquiring,
managing, and bringing into the global market leading-edge communication,
financial, and network technology solution and service providers. During
year ended June 30, 2003, the Company acquired 100% of C4 Services Ltd. and a
majority ownership in DataWave Systems Inc.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year End
---------------
The Company's fiscal year ends on June 30. In these financial statements,
the twelve month periods ended June 30, 2004, 2003 and 2002 are referred to
as Fiscal 2004, Fiscal 2003 and Fiscal 2002 respectively.
DataWave System's Inc. ("DataWave") has a March 31 fiscal year end and the
Company has adopted the policy to consolidate the March 31 financial
statements of DataWave in its June 30 financial statements. Therefore,
because of the three-month lag, the June 30, 2004 financial statements of the
Company include the balance sheet of DataWave as of March 31, 2004. The
results of operations of DataWave for the year ended March 31, 2004 are
included in the statement of operations of the Company for the year ended
June 30, 2004.
F-10
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Cash Equivalents
----------------
The Company considers certificates of deposit, money market funds and all
other highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Foreign Currency Translation
----------------------------
Assets and liabilities of its foreign subsidiaries have been translated using
the exchange rate at the balance sheet date. The average exchange rate for
the period has been used to translate revenues and expenses. Translation
adjustments are reported separately and accumulated in a separate component
of equity (accumulated other comprehensive income).
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates based on management's
knowledge and experience. Accordingly actual results may differ from those
estimates.
Revenue and Cost Recognition
----------------------------
The Company's revenues are primarily generated from the resale of prepaid
long distance and cellular telephone time, principally from the sale of
prepaid calling cards and point of sale activated PINs. Sales of prepaid
calling cards and point of sale activated PINs under third party brands,
where DataWave is not the primary obligor of the related phone service, does
not incur significant inventory risk, has no significant continuing
obligation with respect to services being rendered subsequent to sale, the
price to the consumer is fixed and determinable and collection is reasonably
assured, are recognized at the date of sale to the consumer on a net basis.
The resulting net agency revenue earned is calculated as the difference
between the gross proceeds received and the cost of the related phone time.
Sales of DataWave or custom branded cards where DataWave incurs inventory
risk but does not provide the related telephone time are recognized on the
gross basis on the date of sale to the consumer when title to the card
transfers, collectibility of proceeds is reasonably assured, the full
obligation to the phone service provider is fixed and determinable, and
F-11
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DataWave has no significant continuing obligations. Revenues from certain
prepaid phone cards where our obligation to the phone service provider is not
fixed or determinable at the date of delivery is deferred and recognized on a
gross basis when services have been rendered to the buyer, phone service is
delivered and its cost determined, as the card is used or expires.
Financial Instruments
---------------------
The Company's financial instruments consist primarily of cash and
equivalents, accounts receivable, accrued expenses, and short-term
borrowings. These balances, as presented in the balance sheet as of June 30,
2004 and 2003, approximate their fair value because of their short
maturities.
Accounts receivable includes amounts due from contractors who collect cash
from and service the DataWave's DTM and other vending machines. Certain of
these contractors are not bonded resulting in credit risk to DataWave.
DataWave is also exposed to certain concentrations of credit risk. At March
31, 2004 and 2003, the top ten customers accounted for 71% and 86% of
accounts receivable. DataWave actively monitors the granting of credit and
continuously reviews accounts receivable to ensure credit risk is minimized.
The Company is exposed to foreign exchange risks due to its sales denominated
in foreign currency.
Inventory
---------
Inventories include prepaid pre-activated calling cards and related cards and
promotional supplies, which are valued at the lower of average cost and
market. Component parts and supplies used in the assembly of machines and
related work-in-progress are included in machinery and equipment.
Direct Cost of Revenues
-----------------------
Direct cost of revenues consists primarily of long distance telephone time,
commissions to agents and site landlords, and standard phone cards. Direct
costs are also associated with the DTM machines including direct production
salaries, parts and accessories and costs to service the machines.
Research and Development Costs
------------------------------
Research and development costs are charged as an expense in the period in
which they are incurred.
F-12
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising Costs and Sales Incentives
--------------------------------------
Advertising costs are expensed as incurred.
The majority of the DataWave's advertising expense relates to its consumer
long distance business. Most of the advertisements are in print media, with
expenses recorded as they are incurred.
Effective July 1, 2002, the Company adopted the provisions of the Financial
Accounting and Standards Board's Emerging Issues Task Force Issue 01-9,
"Accounting for Consideration Given by a Vendor to a Customer" ("EITF 01-9").
Under EITF 01-9, DataWave's sales and other incentives are recognized as a
reduction of revenue, unless an identifiable benefit is received in exchange.
Certain advertising and promotional incentives in which DataWave exercises
joint-control over the expenditure, receives an incremental benefit and can
ascertain the fair value of advertising and promotion incurred are included
in Cost of Sales.
Property and Equipment
----------------------
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is calculated over the estimated useful lives of machinery and
equipment as follows:
Computer equipment & software 30% declining balance or 5-year straight line
Office equipment 20% declining balance or 5-year straight line
Other machinery & equipment 30% declining balance
Vending, DTM & OTC equipment 3 years straight-line
Leasehold improvements 4 years straight-line
Parts, supplies and components are depreciated when they are put in use.
Capitalized Internal Use Software Costs
---------------------------------------
DataWave capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". These costs consist of payments made to third parties and
the salaries of employees working on such software development. Subsequent
additions, modifications or upgrades to internal-use software are capitalized
only to the extent that they allow the software to perform a task it
previously did not perform. Capitalized computer software costs are
amortized using the straight-line method over a period of 3 years.
Software maintenance and training costs are expensed in the period in which
they are incurred.
F-13
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets, other than goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. To determine
recoverability, the Company compares the carrying value of the assets to the
estimated future undiscounted cash flows. Measurement of an impairment loss
for long-lived assets held for use is based on the fair value of the asset.
Long-lived assets classified as held for sale are reported at the lower of
carrying value and fair value less estimated selling costs. For assets to be
disposed of other than by sale, an impairment loss is recognized when the
carrying value is not recoverable and exceeds the fair value of the asset.
For goodwill, an impairment loss will be recorded to the extent that the
carrying amount of the goodwill exceeds its fair value. No such impairment
losses for goodwill were identified at June 30, 2004 and 2003.
Goodwill and Other Intangible Assets
------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141 ("SFAS 141"), "Business
Combinations", and Statement of Financial Accounting Standard No.142 ("SFAS
142"), "Goodwill and Other Intangible Assets".
SFAS 141 requires that business combinations be accounted for under the
purchase method of accounting and addresses the initial recognition and
measurement of assets acquired, including goodwill and intangibles, and
liabilities assumed in a business combination. The Company adopted SFAS 141
on a prospective basis effective July 1, 2002 with no significant effect on
its financial position or results of operations.
SFAS 142 requires that goodwill and intangible assets with indefinite lives
no longer be amortized. Instead, these amounts will be subject to a fair-
value based annual impairment assessment. An impairment loss on the DataWave
International License was identified at June 30, 2004. See Note 8.
Separable intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives.
The Company has performed an impairment test of its goodwill and determined
that no impairment of the recorded goodwill existed. Therefore, no
impairment loss was recorded during the year ended June 30, 2004. The
customer list is amortized over 6 years, management's best estimate of its
useful life, following the pattern in which the expected benefits will be
consumed or otherwise used up. The DataWave International License is
amortized over the term of the agreement expiring in March 2010.
F-14
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
------------
The Company has adopted FASB Statement No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for temporary differences between financial
statement and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to be
realized. Income tax expense is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and
liabilities.
Comprehensive Income (Loss)
---------------------------
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". This
statement establishes rules for the reporting of comprehensive income (loss)
and its components. The component of comprehensive income consists of
foreign currency translation adjustments.
Net Income (Loss) Per Common Share
----------------------------------
Net income (loss) per common share is based upon the weighted average number
of common shares outstanding during the period. The treasury stock method is
used to calculate dilutive shares. Such method reduces the number of
dilutive shares by the number of shares purchasable from the proceeds of the
options and warrants assumed to be exercised. Basic and diluted weighted
average shares outstanding for Fiscal 2004, 2003 and 2002 were the same
because the effect of using the treasury stock method would be antidilutive.
DataWave has an employee stock option plan providing for the issuance of
stock options to purchase DataWave common stock. Since these options are not
"in the money" at the DataWave level, there is no impact on the Company's
earnings per share. However, such options, when and if exercised, will
dilute the Company's actual ownership interest in DataWave. Based on the
current program, the potential percentage ownership interest attributable to
exercisable DataWave options as of June 30, 2004 is, on a diluted basis,
approximately 2%.
F-15
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting for Stock-Based Compensation
---------------------------------------
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the
stock on the date of the grant over the amount the employee is required to
pay to acquire the stock (the intrinsic value method under APB Opinion 25).
Such amount, if any, is accrued over the related vesting period, as
appropriate.
The Company has adopted FASB Statement 123, "Accounting for Stock-Based
Compensation", which encourages employers to account for stock-based
compensation awards based on their fair value on their date of grant. The
fair value method was used to value common stock warrants issued in
transactions with other than employees during the periods presented.
Entities may choose not to apply the new accounting method for options issued
to employees but instead, disclose in the notes to the financial statements
the pro forma effects on net income and earnings per share as if the new
method had been applied. The Company has adopted the disclosure-only
approach to FASB Statement 123 for options issued to employees. See Note 15.
Recent Accounting Pronouncements
--------------------------------
In January 2003 with a revision in December 2003, the FASB issued FASB
Interpretation No. 46 and 46R ("FIN 46R"), "Consolidation of Variable
Interest Entities - an interpretation of ARB No. 51". FIN 46R requires that
if any entity has a controlling financial interest in a variable interest
entity, the assets, liabilities and results of activities of the variable
interest entity should be included in the consolidated financial statements
of the entity. FIN 46R provisions are effective for all arrangements entered
into after January 31, 2003. For those arrangements entered into prior to
January 31, 2003, FIN 46R provisions are required to be adopted for periods
ending after March 15, 2004. This statement is not currently applicable to
the Company.
In April 2003, the FASB issued Statement of Financial Accounting Standard No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133. SFAS 149 is generally
effective for derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. This statement
is not currently applicable to the Company.
F-16
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2003, the FASB issued Statement of Financial Accounting Standard No.
150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities on the balance sheet. Previously, many of those financial
instruments were classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. This statement is not currently applicable to the Company.
On April 22, 2003, the FASB announced its decision to require all companies
to expense the fair value of employee stock options. Companies will be
required to measure the cost according to the fair value of the options.
Although the new guidelines have not yet been released, it is expected that
they will be finalized soon and be effective in 2004. When final rules are
announced, the Company will assess the impact to its financial statements.
Reclassifications
-----------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
NOTE 3. ACQUISITIONS
On December 11, 2002, the Company acquired all of the outstanding capital
stock of C4 Services, Ltd. ("C4 Services") for 4,200,000 newly issued shares
of the Company's common stock valued at $1.00 per share. The acquisition was
accounted for under the purchase method, and the results of C4 Services have
been included in the Company's consolidated results effective December 31,
2002. At the time of acquisition, C4 Services owned the exclusive
international (excluding the Americas) DataWave technology license and
Integrated Communication Services Ltd ("ICS"). Both were transferred
directly to the parent company, Integrated Data Corp, and the C4 Services
entity was discontinued. Hence, the Company now owns the exclusive worldwide
(excluding the Americas) rights to own, operate, and license any and all
DataWave technologies and services (the "DataWave International License"),
and ICS is a wholly-owned subsidiary of the Company. The purchase price of
$4,200,000 has been allocated to the DataWave International License.
On December 12, 2002, the Company acquired an approximate 41% interest in
DataWave Systems, Inc. for 1,794,900 newly issued shares of the Company's
common stock valued at $1.00 per share.
F-17
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 3. ACQUISITIONS (continued)
Effective January 14, 2003, the Company agreed to purchase an additional
4,023,030 freely tradable shares of DataWave. The shares were purchased in
off-market transactions for consideration of 402,303 newly issued Rule 144
restricted shares of the Company (one share of the Company's common stock
being exchanged for each ten shares of DataWave) valued at $1.00 per share.
These shares, when added to 17,949,000 shares acquired in December 2002,
bring the Company's total holdings in DataWave to 21,972,030 shares, which
constitutes a majority of 50.062% of the issued and outstanding shares of
DataWave. The acquisition was accounted for under the purchase method of
accounting.
DataWave Systems Inc. has a March 31 fiscal year end and the Company has
adopted the policy to consolidate the March 31 financial statements of
DataWave in its June 30 financial statements. Therefore, because of the
three-month lag, the June 30, 2004 financial statements of the Company
include the balance sheet of DataWave as of March 31, 2004. The results of
operations of DataWave for the year ended March 31, 2004 are included in the
statement of operations of the Company for the year ended June 30, 2004.
The following summary presents the Company's unaudited pro forma consolidated
results of operations for the year ended June 30, 2003 as if DataWave was
acquired July 1, 2002 (in thousands).
Fiscal
2003
----------
Revenue $ 18,247
Net loss before extraordinary gain $ (908)
Extraordinary gain $ 3,975
Net income $ 2,947
Basic and diluted income (loss) per share
Net loss from continuing operations $ (0.12)
Extraordinary gain $ 0.52
Net income $ 0.39
F-18
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 3. ACQUISITIONS (continued)
Proposed Merger
---------------
On April 22, 2004, the Company publicly announced a proposed merger with
DataWave and on June 1, 2004, the Company entered into a merger agreement to
purchase the remaining 49.9% interest in DataWave through an exchange of
stock. The Company would issue 2,034,165 shares of common stock in exchange
for 21,917,304 shares of common stock of DataWave. The proposed merger will
be accounted for by the Company under the purchase method of accounting. The
purchase price is estimated to be $2,280,000 excluding acquisition costs of
approximately $350,000. The Company is in the process of filing a Form S-4
Registration Statement to obtain the approval of its shareholders for the
proposed merger.
NOTE 4. DISCONTINUED OPERATIONS
The Company acquired MegaHertz-NKO, Inc. ("M-NKO") in May 1999 and Tekbilt
World Communications, inc. ("TWC") in December 1999. Prior to their sale,
the combined businesses of TWC and M-NKO operated as an Internet Service
Provider and a facilities-based provider of IP and conventional switched
telecommunications services in the United States. During Fiscal 2000, the
Company terminated most of M-NKO's revenue-generating activities and
consolidated those remaining operations into TWC. In May 2001, the Company
sold all of the common stock of TWC and M-NKO. During Fiscal 2002, the
Company recognized a loss on disposal of $100,000.
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable and other receivables consist of the following (in
thousands):
Fiscal Fiscal
2004 2003
---------- ----------
Trade accounts receivable (net of allowance
for doubtful accounts of $13 and $55) $ 3,590 $ 1,698
Input tax credits receivable 558 211
Tenant incentives 166 -
Other receivables 36 129
---------- ----------
$ 4,350 $ 2,038
========== ==========
F-19
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 6. INVENTORY
Inventory consists of the following (in thousands):
Fiscal Fiscal
2004 2003
---------- ----------
DataWave Telecard parts and supplies $ 139 $ 142
PINs and cellular time 1,778 1,015
Cards and long distance phone time 318 68
---------- ----------
$ 2,235 $ 1,225
========== ==========
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment of the Company and its consolidated subsidiaries
consist of the following (in thousands):
Fiscal Fiscal
2004 2003
---------- ----------
Computer equipment and software $ 2,447 $ 1,844
Office equipment and furniture 193 193
Other machinery and equipment 31 55
Parts, supplies and components 332 581
Vending machines in assembly 29 55
Vending equipment 4,322 3,325
Leasehold improvements 325 53
---------- ----------
Total cost $ 7,679 $ 6,106
Less accumulated depreciation (5,243) (4,376)
---------- ----------
$ 2,436 $ 1,730
========== ==========
Depreciation expense was $875,000, $225,000 and $247,000 for Fiscal 2004,
2003 and 2002.
Internal use software costs capitalized as computer software totaled $43,208
in Fiscal 2004 and $-0- in Fiscal 2003.
Computing equipment and software with a net book value of $316,707 in Fiscal
2004 and $-0- in Fiscal 2003 was acquired under capital lease.
F-20
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 8. INTANGIBLE ASSETS
Amortizable intangible assets consist of the following (in thousands):
Fiscal Fiscal
2004 2003
---------- ----------
DataWave International License $ 2,356 $ 4,200
Customer lists 657 623
Patents and technology 450 450
---------- ----------
$ 3,463 $ 5,273
Less accumulated amortization (1,634) (943)
---------- ----------
$ 1,829 $ 4,330
========== ==========
Goodwill in the amount of $1,464,000 resulted from the acquisition of
DataWave.
Amortization expense was $691,000, $338,000 and $73,000 for Fiscal 2004, 2003
and 2002.
An impairment loss in the amount of $1,844,000 was recorded at June 30, 2004
to reduce the net carrying value to fair market value based on a valuation by
an independent party.
NOTE 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
Fiscal Fiscal
2004 2003
---------- ----------
Trade accounts payable $ 5,456 $ 3,902
Accrued compensation and benefits 94 266
Co-op and rebate accruals 256 300
Long-distance time accruals 700 926
Other accrued liabilities 495 155
State, local, GST and other taxes payable 797 324
---------- ----------
$ 7,798 $ 5,873
========== ==========
F-21
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 10. EXTRAORDINARY GAIN ON DISCHARGE OF INDEBTEDNESS
Extraordinary gain on discharge of indebtedness of $3,975,000 in Fiscal 2003
resulted from Chapter 11 Reorganization of the Company in the amount of
$3,635,000 and $340,000 resulted from the Chapter 7 liquidation of Radio Net
International Inc., a wholly owned subsidiary of the Company.
Extraordinary gain on discharge of indebtedness of $1,568,000 in Fiscal 2002
resulted from the Chapter 7 liquidation of Clariti Wireless Messaging, Inc.
and Radio Net International, Inc.; both wholly-owned subsidiaries of the
Company.
NOTE 11. SHORT-TERM BORROWINGS FROM RELATED PARTY
Integrated Technologies & Systems Ltd. ("IT&S"), a greater than 5%
shareholder, and/or its affiliates agreed to fund the Company's working
capital requirements post Chapter 11 filing through June 30, 2005. For
Fiscal 2005 (July 1, 2004 through June 30, 2005), IT&S has committed to fund
up to $1,000,000 in working capital requirements. The amount funded as of
June 30, 2003 was $968,000; however, $650,000 of the loan amount was
converted into shares of the Company's common stock in December 2002 valued
at $2.00 per share. The balance of the loan as of June 30, 2004 and 2003 was
$887,000 and $318,000.
NOTE 12. INCOME TAXES
There is no income tax benefit for operating losses for Fiscal 2004, Fiscal
2003 and Fiscal 2002 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years and any taxable income will be offset by net operating
loss carryforwards.
Deferred tax benefit - the deferred tax assets were offset by a
Valuation allowance required by FASB Statement 109, "Accounting for
Income Taxes." The valuation allowance is necessary because, according
to criteria established by FASB Statement 109, it is more likely than
not that the deferred tax asset will not be realized through future
taxable income.
F-22
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 12. INCOME TAXES (continued)
The reconciliation of the statutory federal rate to the Company's effective
income tax rate is as follows (dollars in thousands):
Fiscal Fiscal Fiscal
2004 2003 2002
--------- --------- ---------
Statutory provision (benefit) $ (995) $ 971 $ (1,240)
Tax benefit not recognized
on current year loss 995 - 1,240
Tax benefit on use of loss carryforwards
not previously reorganized - (971) -
--------- --------- ---------
$ - $ - $ -
========= ========= =========
Under FASB Statement 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates.
The components of the Company's deferred tax assets are as follows (dollars
in thousands):
Fiscal Fiscal
2004 2003
---------- ----------
Intangible assets $ 722 $ 3
Property and equipment $ 215 $ 52
Net operating loss carryforwards 84,699 85,288
Capital loss carryforwards - 115
Valuation allowance (85,636) (85,458)
--------- ---------
$ - $ -
========= =========
The deferred tax liability of $268,000 at Fiscal 2004 and Fiscal 2003
represents deferred revenue related to an acquisition.
Integrated Data Corp. files a consolidated corporate income tax return in the
United States and its foreign subsidiaries will be required to file income
tax returns in their respective countries.
F-23
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 12. INCOME TAXES (continued)
The use of net operating loss carryforwards for United States income tax
purposes is limited when there has been a substantial change in ownership (as
defined) during a three-year period. Because of the recent and contemplated
changes in ownership of the Company's common stock, such a change may occur
in the future. In this event, the use of net operating losses each year
would be restricted to the value of the Company on the date of such change
multiplied by the federal long-term rate ("annual limitation"); unused annual
limitations may then be carried forward without this limitation.
At June 30, 2004 the Company had net operating loss carryforwards for US
Income Tax purposes of approximately $244,624,000 which if not used will
expire primarily during the years 2004 through 2023. For Canadian Income Tax
purposes, the Company had net operating loss and capital loss carryforwards
of $4,900,000 and $1,000,000, respectively. The net operating loss
carryforwards commenced expiring in 2003 and capital loss carryforwards
expire in fiscal year 2005.
NOTE 13. CAPITAL LEASE OBLIGATION
The future minimum lease payments for each fiscal year under the capital
lease for equipment expiring in fiscal year 2007, together with the balance
of the obligation under capital lease are as follows:
2005 $ 78,259
2006 78,259
2007 56,174
----------
Total minimum lease payments 212,692
Less: amount representing interest (23,025)
----------
189,667
Less: current portion (64,641)
----------
Balance of obligation $ 125,026
==========
NOTE 14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
-----------------
The Company, from time to time, during the normal course of its business
operations, may be subject to various litigation claims and legal disputes.
Currently there are no claims or disputes.
F-24
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 14. COMMITMENTS AND CONTINGENCIES (continued)
Leases
------
The Company has the following future minimum payments with respect to leases
for office space, computer and office equipment:
2005 $ 439,454
2006 429,704
2007 365,577
2008 296,732
2009 345,776
Thereafter 926,173
-----------
$ 2,803,416
===========
Rent expense for operating leases in Fiscal 2004, Fiscal 2003 and Fiscal 2002
was $307,000, $99,000 and $1,299,000, respectively.
Deferred Inducement
-------------------
In January 2004, DataWave entered into a ten year lease for office space in
Richmond, British Columbia, which is being amortized over the ten year term
of the lease. The agreement included cash inducements for leasehold
improvements of $277,162, of which $166,297 is recorded as a current
receivable and $110,865 is recorded as a long-term receivable. Also included
were inducements for free rent. At March 31, 2004, the deferred rent
inducement was $308,551 less the current portion of $27,716 (2003 - $-0-).
NOTE 15. STOCKHOLDERS' EQUITY
Common Stock
------------
Effective April 12, 2004, the number of authorized shares of common stock,
par value $0.001 per share, was reduced from 300,000,000 to 50,000,000.
On January 14, 2003, the Company's Board of Directors agreed to exercise its
right to convert three non-interest bearing notes in the respective amounts
of $857,544, $250,000 and $237,000. These notes had been issued to the three
secured creditors in the Company's Chapter 11 Bankruptcy proceedings as of
November 12, 2002, into newly issued restricted shares of common stock of the
Company. The notes in the amount of $857,554 and $250,000 were each
converted at $2 per share, while the note for $237,000 was converted at $10
per share. The transactions have resulted in the issuance of an aggregate
additional 577,577 shares of the Company's common stock. All these
F-25
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 15. STOCKHOLDERS' EQUITY (continued)
conversion shares in addition to the statutory restriction imposed under Rule
144 of the Securities Act of 1933, are subject to a contractual restriction
or "lock-up" for an additional period of one year after the expiration of the
Rule 144 restriction.
Effective December 6, 2002, the Company implemented a 1 for 100 shares
reverse stock split of its outstanding stock. The Company's common stock
began trading on a post-split basis at the opening of the stock market on
December 6, 2002 on the OTC Bulletin Board under the new symbol "ITDD". All
references in the consolidated financial statements to common shares, per
share amounts, stock options and warrants have been restated to reflect the
reverse stock split for all periods presented.
Warrants
--------
From time to time, the Board of Directors of the Company may authorize the
issuance of warrants to purchase the Company's common stock to parties other
than employees and directors. Warrants may be issued as a unit with shares
of common stock, as an incentive to help the Company achieve its goals, or in
consideration for cash, financing costs or services rendered to the Company,
or a combination of the above, and generally expire within several months to
5 years from the date of issuance. The following table summarizes activity
for common stock warrants outstanding during the 3-year period ended June 30,
2004:
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
------- -------------- ----------------
Warrants outstanding, 6/30/01 31 $ 25.00 - $1,600.00 $ 665.00
Warrants issued 11 $ 5.00 - $ 50.00 $ 46.00
Warrants canceled/expired (12) $ 25.00 - $1,200.00 $ 696.00
------- ------------------- -----------
Warrants outstanding, 6/30/02 30 $ 5.00 - $1,600.00 $ 346.00
Warrants canceled/expired (23) $ 7.00 - $1,600.00 $ 309.00
------- ------------------- -----------
Warrants outstanding, 6/30/03 7 $ 5.00 - $1,148.00 $ 412.00
Warrants canceled/expired (5) $100.00 - $1,148.00 $ 481.00
------- ------------------- -----------
Warrants outstanding, 6/30/04 2 $ 5.00 - $ 975.00 $ 185.00
F-26
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 15. STOCKHOLDERS' EQUITY (continued)
The Company has adopted FASB Statement 123, "Accounting for Stock-Based
Compensation," which requires compensation cost associated with warrants
issued to parties other than employees and directors to be valued based on
the fair value of the warrants. Such fair value was estimated using the
Black-Scholes model with the following assumptions for Fiscal 2002: no
dividend yield, expected volatility of 80%, and a risk-free interest rate of
6.5%. The Black-Scholes model valued the warrants issued or re-priced during
Fiscal 2004, Fiscal 2003 and Fiscal 2002 at $-0-, $-0- and $69,841,
respectively.
Stock Option Plan
-----------------
The Company, with stockholder approval, adopted a Stock Option Plan (the
"Plan") in November 1991 providing for the granting of options to officers,
key employees, certain consultants and others. Options to purchase the
Company's common stock could be made for a term of up to ten years at the
fair market value at the time of the grant. Incentive options granted to a
ten percent or more stockholder could not be for less than 110% of fair
market value nor for a term of more than five years. The aggregate fair
market value of the stock for which an employee could be granted incentive
options first exercisable in any calendar year could not exceed $100,000.
The Stock Option Plan terminated by default in November 2001. All options
granted under the Stock Option Plan remain valid through the specified life
of the option, typically 10 years. As of June 30, 2004 there were 5,428
common share options outstanding with none of the options being "in the
money". During Fiscal 2004, no options were exercised under the Stock Option
Plan.
Stock Options
-------------
Prior to November 1991 the Company's Board of Directors periodically
authorized the issuance of options to purchase the Company's common stock to
employees and members of the Board of Directors. These options could
generally be exercised at the fair market value of the common stock on the
date of the grant. The following table summarizes activity for stock options
during the 3-year period ended June 30, 2004:
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
------ -------------- ----------------
Options outstanding, 6/30/01 34 $0.10 - $1,550.00 $ 642.00
Options forfeited (29) $0.10 - $1,400.00 $ 643.00
----
Options outstanding, 6/30/02 5 $0.10 - $1,188.00 $ 641.00
Options outstanding, 6/30/03 5 $9.00 - $1,188.00 $ 637.00
Options outstanding, 6/30/04 5 $9.00 - $1,188.00 $ 637.00
F-27
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 15. STOCKHOLDERS' EQUITY (continued)
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for the issuance of its
stock options. There were no stock options issued during Fiscal 2004, 2003
and 2002.
NOTE 16. EMPLOYEE BENEFIT PLANS
The Company and its United States subsidiaries sponsor a defined contribution
pension plan for their employees in the form of a 401(k) plan. The Company
makes no contributions to such plan. The Company does not currently pay for
the cost of medical insurance for its United States employees. The Company
provides no post-retirement medical benefits.
NOTE 17. NET AGENCY SALES
DataWave's revenues are primarily generated from the resale of prepaid long
distance and cellular telephone time, principally from the sale of prepaid
calling cards and point of sale activated PINs. Sales of prepaid calling
cards and point of sale activated PINs under third party brands where
DataWave is not the primary obligor of the related phone service does not
incur significant inventory risk and has no significant continuing obligation
with respect to operation of the card subsequent to sale are recognized at
the date of sale on a net basis. The resulting net agency revenue earned is
calculated as the difference between the gross proceeds received and the cost
of the related phone time paid to suppliers and is included as revenue in the
Company's statement of operations. Net agency sales consist of the following
(in thousands):
Fiscal Fiscal
2004 2003
---------- ----------
Gross proceeds received on agency sales $ 63,902 $ 14,505
Less payments to suppliers (57,003) (7,510)
---------- ----------
Net agency sales $ 6,899 $ 6,995
========== ==========
F-28
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
NOTE 18. SEGMENT INFORMATION
The Company through its majority owned subsidiary, DataWave, manufactures and
operates prepaid calling card merchandising machines and resells long
distance telephone time through prepaid and other calling cards distributed
through its machines, at retail locations and on a wholesale basis to third
parties. The Company considers its business to consist of one reportable
operating segment; therefore, these consolidated financial statements have
not been segmented.
The Company has net long-lived assets of $4,987,000 in the US and $2,636,000
in Canada at June 30, 2004 and $5,848,000 in the US and $1,738,000 in Canada
at June 30, 2003. Long-lived assets consist of property and equipment,
goodwill, and licenses net of accumulated depreciation and amortization. The
Company has earned revenue from sales to customers of approximately
$7,180,000 in the US, $10,773,000 in Canada, $98,000 in Mexico, and $123,000
in the United Kingdom for Fiscal 2004 and approximately $1,733,000 in the US
and $2,284,000 in Canada for Fiscal 2003. During Fiscal 2004 and 2003, the
top ten customers comprised approximately 44% of revenue.
F-29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
As required by Rule 13a-15 under the Exchange Act, as of the end of the
period covered by this report, we have carried out an evaluation of the
effectiveness of the design and operation of our company's disclosure
controls and procedures. This evaluation was carried out under the
supervision and with the participation of our company's management, including
our company's president and chief executive officer. Based upon that
evaluation, our company's president and chief executive officer concluded
that our company's disclosure controls and procedures are effective. There
have been no significant changes in our company's internal controls or in
other factors, which could significantly affect internal controls subsequent
to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our company's
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our company's reports
filed under the Exchange Act is accumulated and communicated to management,
including our company's president and chief executive officer as appropriate,
to allow timely decisions regarding required disclosure.
-27-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of all directors
(including their term of service) and executive officers of the Company and
their positions in the Company as of September 24, 2004:
Current Position(s) Date First Elected
Name Age with Company or Appointed
------------------- --- ----------------------- ------------------
David C. Bryan 49 Director, President and August 2003
Chief Executive Officer
Stuart W. Settle Jr. 63 Director and Secretary April 2002
Ian Tromans 66 Director April 2002
Eduard Will 62 Director January 2003
Walter T. Bristow III 47 Vice President April 2002
All directors serve until their successors are duly elected and qualified.
Vacancies in the Board of Directors are filled by majority vote of the
remaining directors. The executive officers of the Company are elected by,
and serve at the discretion of, the Board of Directors.
A brief description of the business experience during the past five years or
more of each director and executive officer of the Company is as follows:
David C. Bryan took over the duties of President and Chief Executive Officer
in August 2003. He joined the Company in July 1997 as its Senior Vice
President and Chief Operating Officer and was instrumental in the multi-year,
multi-million dollar development of the ClariCAST(r) technology. In April of
2002, Mr. Bryan founded C3 Technologies Inc, a wholly-owned subsidiary of the
IDC, to manage the ClariCAST(r) technology and expand its applications in the
commercial, wireless communications arena. At that time, he also was
promoted to Executive Vice President of IDC. Between August 2001 and April
2002, Mr. Bryan held the position of Senior Vice President and Chief
Operating Officer of RadioNet International, Ltd., which at the time was a
wholly-owned subsidiary of the Company. He held the same positions with
another wholly-owned Company subsidiary prior to that, Clariti Wireless
Messaging, Inc., between December 1998 and August 2001. Prior to joining the
Company, Mr. Bryan spent 18 years with Magnavox/General Atronics Corporation,
a company engaged in the development and manufacturing of military RF
communication and telecommunication systems and products, where he held a
variety of senior-level management positions including Director of Business
Development, Division General Manager, and part owner. Mr. Bryan holds a
BSEE from Bucknell University, an MSEE from Villanova University, and an MBA
from Temple University.
-28-
Stuart W. Settle, Jr. is a graduate of the United States Naval Academy and
received his law degree from Harvard University. He is a member of the bars
of Virginia and New York and the federal bars in those states, as well as the
bar of the Supreme Court of the United States. For the past 30 years he has
concentrated in the areas of corporate finance, venture capital, and
securities law. Mr. Settle has served as counsel in a number of private and
public financings, acquisitions of public and privately held companies, and
has served as an officer and director of numerous corporations and charitable
foundations.
Ian Tromans is a trigonometrical surveyor and mining engineer, having
qualified in HM Royal Engineers in 1959. He has served with the British Army
in Africa and the Middle East and has operated at the Director level in the
UK for several major civil engineering and opencast mining companies,
including Trafalgar House, English China Clays and Public Works Ltd. Mr.
Tromans has been responsible for the overall management of engineering teams
of up to 600 personnel and has played a major role in the supervision of
several major engineering projects including Kielder Dam, Kernick Dam, the M4
Motorway and the Brent Cross Flyover. He has also served as Director in
other areas of commerce including the telecommunications, leisure and
building supplies industries and has controlled annual operating budgets of
up to $62M. Mr. Tromans has lectured to the Quarrying Associations of
Australia and the United Kingdom and has, in recent years, acted as
Management Consultant to many London-based international trading
corporations.
Eduard Will is an internationally accomplished investment banker with
extensive experience and high-level connections in Europe, Asia and North
America. He started the mergers and acquisitions business of JP Morgan in
Germany, ran corporate finance at Bank of America in London, and was a
partner of Bear Stearns and Co. in New York responsible for international
corporate finance. Mr. Will has a track record of several dozen completed
transactions. More recently Mr. Will was the CEO of Inprimis Inc., the
Nasdaq listed interactive TV solutions provider, which he sold to Ener1 in
2002. He is currently a senior adviser to Darby Overseas, the fund
management company in Washington DC, and several other entities in the US and
Asia.
Walter (Chuck) Bristow III joined the Company in 1998 as Director of Network
Engineering and was responsible for the ClariCAST(r) network development and
implementation, software engineering, corporate telecommunication, and
corporate IT. He was promoted to Vice President in April 2002. Prior to
joining the Company, Mr. Bristow was with Magnavox/General Atronics
Corporation, a manufacturer of military communications equipment, where he
worked in hardware engineering, integration, and design for state-of-the-art
military radio communications equipment. Before General Atronics, Mr.
Bristow worked at Telesciences, a manufacturer of Automatic Call
Distributors, Directory Assistance computers, and Voice Response equipment
for the telecommunications industry. He holds a Bachelor of Science in
Technology Management from Kennedy Western University and is working toward
his Masters in Computer Science at Kennedy Western.
-29-
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities and Exchange Act requires executive officers,
directors, and persons or entities that own more than 10% of the Company's
common stock to file reports regarding ownership of and transactions in the
Company's securities with the U.S. Securities and Exchange Commission and to
provide the Company with copies of those filings. Based solely on its review
of the copies of such forms received by the Company, or written
representations from certain reporting persons, the Company believes the
following officers and greater than 10% beneficial owners are delinquent in
their filing requirements: Eduard Will, Integrated Technologies & Systems
Ltd, Ansteed Investments Ltd, I. Hopkins, and B. Candlin.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth compensation paid or accrued during the fiscal
years ended June 30, 2004, 2003 and 2002 ("Fiscal 2004", "Fiscal 2003" and
"Fiscal 2002", respectively) to the Company's Chief Executive Officer and the
most highly compensated executive officers whose total annual salary and
bonus earned by them more than $100,000 during Fiscal 2004 (collectively, the
"Named Executives").
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
------------ Awards
------------
Secur-
ities
Other Restr- Under- All
Annual icted lying Other
Name and Fiscal Compen- Stock Options Compen-
Principal Year Salary Bonus sation Awards /SARs sation
Position Ended ($000) ($000) ($000) ($000) (#000) ($000)
----------------- ----- ------ ------ ------- ------ ------- -------
David C. Bryan 2004 156 - - - - -
President and CEO 2003 156 - - - - -
2002 60(a) - - - 1 -
(a) During Fiscal 2002, Mr. Bryan was paid a salary of $60,000 directly
from the Company. For the majority of Fiscal 2002, Mr. Bryan worked
for subsidiaries of the Company which were liquidated.
Long-Term Incentive Plans - Awards in Most Recently Completed Fiscal Year
-------------------------------------------------------------------------
The Company has no long-term incentive plans in place and therefore there
were no awards made under any long-term incentive plan to the Named
Executives during Fiscal 2004. A "Long-Term Incentive Plan" is a plan under
which awards are made based on performance over a period longer than one
fiscal year, other than a plan for options, SARs (stock appreciation rights)
or restricted share compensation.
-30-
Option Grants for the Year Ended June 30, 2004
----------------------------------------------
During Fiscal 2004 no stock options were granted to the Named Executives.
Aggregated Options Exercised for the Year Ended June 30, 2004
-------------------------------------------------------------
The following table provides information regarding exercised/unexercised
stock options held by the Named Executives:
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
For the Year Ended June 30, 2004
---------------------------------------------------
Number of
Securities
Underlying
Unexercised Value of
Options/SARs Unexercised
At Fiscal In-the-Money
Shares Year End Options/SARS
Acquired on Value Exercisable/ at Fiscal
Exercise Realized Unexercisable Year End(a)
Name (#000) ($000) (#000) ($000)
---------------- ----------- -------- ------------ ------------
David C. Bryan - - 4 -
Compensation Plans
------------------
With the exception of compensation in the form of certain medical, dental,
disability and life insurance benefits paid pursuant to plans that do not
discriminate in favor of officers or directors of the Company and are
available generally to all employees who are employed by the Company, the
Company has no plans pursuant to which cash or non-cash compensation was paid
or distributed during Fiscal 2004, Fiscal 2003 and Fiscal 2002, or is
proposed to be paid or distributed in the future, to the individuals and
group specified under "Executive Compensation" above.
Employment Contracts and Termination Arrangements
-------------------------------------------------
No employment contracts exist between the Company and the Named Executives.
There are no compensatory plans or arrangements with respect to the Named
Executives resulting from the resignation, retirement or other termination of
employment or from a change of control.
Stock Option Plan
-----------------
The Company's original Stock Option Plan (the "Stock Option Plan") was
approved by a majority of the Company's stockholders in November 1991. The
Stock Option Plan was intended to qualify, in part, as an incentive stock
option plan under Section 422 of the Internal Revenue Code (the "Code") and
in part as a non-qualified stock option plan, and to provide an incentive to
those directors, key employees of the Company and its subsidiaries, and
certain other persons who materially contributed to the Company's progress.
-31-
The Stock Option Plan terminated by default in November 2001. All options
granted under the Stock Option Plan remain valid through the specified life
of the option, typically 10 years. As of June 30, 2004 there were 5,428
common share options outstanding with none of the options being "in the
money". During Fiscal 2004, no options were exercised under the Stock Option
Plan.
Compensation of Directors
-------------------------
None.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Company's Board of Directors determines the compensation of the Company's
executive officers. The Company attempts to provide its executives with a
total compensation package that is competitive with those provided to
executives who hold comparable positions or have similar qualifications in
other similar organizations. The Board of Directors works closely with
management to design a compensation program to assist the Company in
attracting and retaining outstanding executives and senior management
personnel in the telecommunications and wireless communications industry who
the Company believes will be, or who are, valuable employees. Compensation
paid to the Company's Chief Executive Officer during Fiscal 2004 consisted
entirely of base salary to which they were entitled.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
generally disallows a tax deduction to public companies for annual
compensation over $1.0 million paid to their chief executive officer and
other highly compensated executive officers. The Code generally excludes
from the calculation of the $1.0 million cap compensation that is based on
the achievement of pre-established, objective performance goals. To maintain
a competitive position with the Company's peer group of corporations, the
Board of Directors retains the authority to authorize payments, including
salary and bonus, which may not be deductible.
By the Board of Directors,
David C. Bryan, Stuart W. Settle, Jr., Ian Tromans, and Eduard Will
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 30, 2004, certain information with
respect to beneficial ownership of the Company's common stock by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
Company's common stock, (ii) each director of the Company, (iii) each named
executive officer of the Company listed in the Summary Compensation Table,
and (iv) all officers and directors of the Company as a group. Unless
otherwise specified, the Company believes that all persons listed in the
table possess sole voting and investment power with respect to all shares of
the Company's common stock beneficially owned by them.
-32-
Amount and
Nature of
Beneficial
Ownership Percent of
Name and Address (#000) Class (a)
-------------------------- ----------- ----------
Integrated Technologies & Systems Ltd 1,677 21.8%
Tortola, British Virgin Islands
Ansteed Investments Ltd 1,536 20.0%
Basel, Switzerland
I. Hopkins 1,015 13.2%
London, England
B. Candlin 1,005 13.1%
London, England
David C. Bryan 3(b) *
St. Davids, Pennsylvania
Stuart W. Settle, Jr. 18 *
Richmond, Virginia
Ian Tromans 18 *
Oxfordshire, England
Eduard Will 0 *
Montclair, New Jersey
All officers and directors
as a group (5 persons) 39(c) *
---------------------------------
*less than 1%
(a) Based upon shares beneficially owned as a percent of shares of common
stock of the Company outstanding as of June 30, 2004 (7,685,677 shares).
For purposes of calculating each person's beneficial ownership, any
shares subject to options exercisable within 60 days of June 30, 2004
are deemed beneficially owned by, and outstanding with respect to, such
person.
(b) Includes 3,752 shares of common stock that such person has the right to
acquire pursuant to stock options exercisable within 60 days.
(c) Includes 3,862 shares of common stock that such persons have the right
to acquire pursuant to stock options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Integrated Technologies & Systems Ltd ("IT&S"), a greater than 5%
shareholder, and/or its affiliates have agreed to fund the Company's working
-33-
capital requirements through June 30, 2005. This funding is in the form of a
no interest, no security, short-term loan. As of 30 June 2004, the total
amount funded under this agreement was $1,537,000 of which $650,000 has been
converted to 325,000 shares of Company common stock leaving a balance owed of
$887,000.
During Fiscal 2004 the Company paid approximately $30,000 to Stuart W.
Settle, Jr., a Company director, for services provided in his role as
corporate general counsel.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
During the years ended June 30, 2004 and 2003, the following fees were
invoiced by Cogen Sklar LLP for services provided.
Audit Fees
----------
The aggregate fees billed for the annual audit of the Company's financial
statements included in our Form 10-K and review of financial statements
included in our Form 10-Qs for the years ended June 30, 2004 and 2003
amounted to approximately $50,800 and $54,100, respectively.
Audit Related Fees
------------------
For the years ended June 30, 2004 and 2003, there were no fees billed related
to other audit related services.
Tax Fees
--------
For the years ended June 30, 2004 and 2003, the aggregate tax fees billed
relating to tax services amounted to approximately $11,900 and $5,700,
respectively.
All Other Fees
--------------
For the years ended June 30, 2004 and 2003, there were no other fees billed.
-34-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
(1) Consolidated Financial Statements: See Index to Consolidated Financial
Statements under Item 8 on page 25 of this report.
(2) Financial Statement Schedule: See Index to Consolidated Financial
Statements under Item 8 on page 25 of this report.
(3) Exhibits below are incorporated herein by reference or, if marked with
an *, are filed with this report:
Exhibit
No. Description
------- -----------
2.1 Share Exchange Agreement for the acquisition of GlobalFirst Holdings
Limited (Filed December 23, 1998 on Form 8-K (earliest event
reported December 8, 1998))
2.2 Share Purchase and Sale Agreement for the sale of Telnet Products &
Services Limited (Filed February 18, 1999 on Form 8-K)
2.3 Share Exchange Agreement for the acquisition of Mediatel Global
Communications Limited (Filed March 26, 1999 on Form 8-K)
2.4 Amendment to Share Exchange Agreement for the acquisition of
Mediatel Global Communications Limited (Filed March 26, 1999 on
Form 8-K)
2.5 Share Exchange Agreement for the Acquisition of MegaHertz-NKO, Inc.
(Filed May 24, 1999 on Form 8-K)
2.6 Share Exchange Agreement for the Acquisition of NKA Communications
Pty. Ltd. (Filed under Amendment No. 2 to Annual Report on Form
10-KSB for the year ended June 30, 1999)
2.7 Agreement and Plan of Merger for the acquisition of Tekbilt World
Communications, Inc. (Filed under Amendment No. 1 to Annual Report
on Form 10-K for the year ended June 30, 2000)
2.8 Share Exchange Agreement for the Sale of Clariti Telecommunications
Pty. Ltd. (f/k/a NKA Communications Pty. Ltd.) (Filed as Exhibit 2.8
under Annual Form 10-K for the year ended June 30, 2001)
2.9 Agreement for the sale of certain operating assets and liabilities
of Clariti Telecommunications Europe Ltd. and Clariti Carrier
Services Ltd. (Filed as Exhibit 2.9 under Annual Form 10-K/A for the
year ended June 30, 2001)
2.10 Stock Sale and Purchase Agreement for sale of Tekbilt World
Communications, Inc. (Filed as Exhibit 2 to the May 24, 2001 Form
8-K)
2.11 Stock Sale and Purchase Agreement for sale of MegaHertz-NKO, Inc.
(Filed as Exhibit 2.11 under Annual Form 10-K/A for the year ended
June 30, 2001)
-35-
2.12 Acquisition and Share Exchange Agreement for the purchase of
17,949,900 common shares of DataWave Systems Inc. (Filed as Exhibit
A to the January 17, 2003 Schedule 13D)
2.13 Share Exchange Agreement for the purchase of 4,023,030 common shares
of DataWave Systems Inc. (Filed as Exhibit 1 to the January 24, 2003
Schedule 13D)
3.1 Articles of Incorporation (Filed with Annual Report on Form 10-KSB
for the period ended July 31, 1990)
3.1.1 Amendment to Articles of Incorporation (Filed with Annual Report on
Form 10-K for the period ended June 30, 2000)
3.2 Bylaws (Filed with Annual Report on Form 10-KSB for the period ended
July 31, 1990)
4.1 Secured Debenture for Borrowing of $750,000 (Filed as Exhibit 4.1
under Annual Form 10-K for the year ended June 30, 2001)
10.1 Employment Agreement with James M. Boyd, Jr. (Filed under Amendment
No. 2 to Annual Report on Form 10-KSB for the year ended July 31,
1997)
10.4 Employment Agreement with David C. Bryan (Filed under Amendment
No. 2 to Annual Report on Form 10-KSB for the year ended July 31,
1997)
10.5 Employment Agreement with Michael P. McAndrews (Filed under
Amendment No. 2 to Annual Report on Form 10-KSB for the year ended
July 31, 1997)
10.6 Employment Agreement with Ronald R. Grawert (Filed under Amendment
No. 2 to Annual Report on Form 10-KSB for the year ended June 30,
1999)
10.7 Employment Agreement with Joseph A. Smith (Filed under Amendment No.
2 to Annual Report on Form 10-KSB for the year ended June 30, 1999)
10.8 Employment Agreement with Daniel P. McDuffie (Filed under Amendment
No. 2 to Annual Report on Form 10-KSB for the year ended June 30,
1999)
10.9 Employment Agreement with James M. Boyd, Jr. (Filed with Annual
Report on Form 10-K for the period ended June 30, 2000)
16.1 Letter on change in certifying accountant (Filed December 23, 1998
on Form 8-K filed (earliest event reported December 18, 1998))
16.2 Letter on change in certifying accountant (Filed September 23,
1999 as Amendment No. 1 to Form 8-K)
21.1* List of Subsidiaries: See "Corporate Holdings" on page 3 of this
report.
31* Certification of Chief Executive Officer and principal financial
officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
See page 41 of this report.
32* Certification of Chief Executive Officer and principal financial
officer pursuant to 18 U.S.C. Section 1350: See page 43 of this
report.
-36-
Reports on Form 8-K
-------------------
The Company filed the following Form 8-K during the quarter ended June 30,
2004:
(a) A current report on Form 8-K dated April 12, 2004 was filed announcing a
reduction in the authorized number of shares of common stock of the Company
(from 300,000,000 to 50,000,000), the shareholder re-election of the current
Board of Directors, and the ratification of Cogen Sklar LLP of Bala Cynwyd,
Pennsylvania to serve as the Company's independent auditors for the fiscal
year ending June 30, 2004. The Certificate of Amendment of Certificate of
Incorporation of Integrated Data Corp reducing the authorized number of
shares of common stock of the Company was filed as an Exhibit to this
referenced Form 8-K.
(b) A current report on Form 8-K dated April 23, 2004 was filed to announce
that the Company and DataWave have signed a Letter Agreement regarding a
proposed merger in which the shareholders of DataWave will be issued shares
of the Company in exchange for all the issued and outstanding shares of
DataWave.
(c) A current report on Form 8-K dated June 3, 2004 was filed to announce
that the Company and DataWave have signed an Agreement and Plan of Merger.
The Agreement and Plan of Merger was filed as an Exhibit to this referenced
Form 8-K.
-37-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTEGRATED DATA CORP.
By: /s/David C. Bryan
-----------------
David C. Bryan
President & Chief Executive Officer
Date: September 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/David C. Bryan
-----------------
David C. Bryan
President & Chief Executive Officer
(Principal executive officer and
principal financial officer)
Date: September 28, 2004
-38-