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, 2003 Commission File No. 33-90344
Integrated Data Corp.
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(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)
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(Former name or former address, if changed since last report)
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. [ ]
As of 30 September 2003 the registrant had 7,685,609 common shares
outstanding. The aggregate market value of voting shares held by non-
affiliates as of that date was approximately $9,123,660(based on the average
closing bid and asked prices of $4.50).
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 14, 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
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.
History of the Company
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The Company was originally formed in February 1988 as the successor to a
music and recording studio business owned and operated by the 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. This wireless technology allowed 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.
Bankruptcy Proceedings
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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. Further information
regarding the bankruptcy proceedings can be found in this Form 10-K under
Item 3, Legal Proceedings.
Changes to Management and the Board of Directors
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An additional seat was added to the Board of Directors of the Company in
January 2003 with the nomination and acceptance of Eduard Will. Mr. Will
joined Abraham Carmel, Stuart W. Settle, Esq. and Ian Tromans making up IDC's
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four-man Board. In August 2003 David C. Bryan was promoted from Executive
Vice President to President and Chief Executive Officer of the Company
replacing a retiring Mr. 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 current and former management and Directors can be
found in Part III of this Form 10-K under Items 10 through 13.
Corporate Holdings
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As of June 30, 2003 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.
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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. In May 2003, C3 began a pilot program using
its VideoTopper(TM), a full-motion video, real-time wirelessly controllable
advertising display unit for the top of ATM machines. This program consists
of Lipman ATM Kiosk machines with C3's VideoTopper, DataWave's Pre-paid
MasterCard, prepaid wireless and long distance services. These combination
units are currently installed in five McDonald's restaurants, three in the
Philadelphia area and two in the New York/Long Island area, as a Pilot
Program and predecessor to a region-wide McDonald's ATM test market program.
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DATAWAVE SYSTEMS INC.
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DataWave Systems Inc. ("DataWave") is a profitable, Yukon, Canada
corporation, the shares of which trade on Level One of the TSX Venture
Exchange, and are also listed for trading in the United States on the Over-
the-Counter Bulletin Board (OTCBB). The trading symbols are DTV on the TSX
and DWVSF on the OTCBB. As a NASDAQ 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,
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 designs, develops, produces, owns and manages a proprietary,
intelligent, automated direct-merchandising network. Its network system is
used to distribute prepaid phone cards, primarily under the AT&T brand, in
the United States. The network system is scalable and flexible and can be
modified to offer other premium prepaid products such as prepaid cellular
telecommunications services, prepaid gift and prepaid stored value. In
Canada, DataWave wholesales prepaid phone cards to retail establishments.
"Phone cards" means both prepaid long distance and cellular time.
The DataWave network system includes free-standing "smart" machines capable
of dispensing multiple prepaid products and services, and over-the-counter
"swipe" units for point-of-sale prepaid retailing, both of which are
connected to DataWave's proprietary server and database software through a
wireless and/or land line wide area network. As of March 31, 2003, the
DataWave network system included 1,019 free-standing machines and 303 over-
the-counter units. The network system has been designed to work both with
the telephone switches of other parties as well as switches operated by
DataWave. In the United States, DataWave has elected to operate solely with
other parties' switches, such as those of AT&T and other long distance
carriers.
In Canada, until this past year, DataWave had followed the traditional
business model of selling in bulk preactivated or "live" prepaid phone cards
to retail establishments. This model is now changing with the introduction
of point-of-sale activation ("POSA") technology into the retail environment.
This gives DataWave the ability to authorize or recharge prepaid cards at
cash registers as well as through standalone terminals. As of September 30,
2003, over 1,600 DataWave POSA terminals were installed in Canada.
The predominant channels of distribution for prepaid phone cards are through
retail establishments and traditional vending machines, most of which sell
"live" prepaid phone cards purchased in bulk. "Live" prepaid phone cards are
preactivated with telephone time prior to sale to the retailer or placement
in a machine. In contrast, the DataWave network system in the United States
and Canada distributes non-activated prepaid phone cards which are authorized
only upon purchase by the consumer. Because the cards are not preauthorized,
certain costs incurred by distributors of "live" prepaid phone cards, such as
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paying for long distance telephone time prior to sale to consumers, losses
due to theft and other costs associated with the management of inventory, are
avoided. The DataWave network system also features:
(i) real-time remote monitoring of free-standing machines and over-
the-counter units, including cash balances, card inventory and machine
functioning;
(ii) remote adjustable pricing of prepaid products and services at each
free-standing machine location;
(iii) consumer convenience by permitting purchases of customer selected
dollar amounts of long distance or cellular time, by cash or credit
card, and providing detailed receipts and multilingual instructions; and
(iv) scalability, enabling the Company to increase the number of free-
standing machines and over-the-counter units with limited hardware and
software upgrades and to offer multiple future prepaid products and
services at existing and future locations.
POSA products and services currently being offered by DataWave include:
- Prepaid long distance cards, mostly with AT&T in the USA, Canada, and
Mexico, but also with Canquest and Group of Goldline in Canada.
- Prepaid cellular with the four major Canadian carriers: Telus Mobility;
Rogers AT&T Wireless; Bell; and Fido.
- The Prepaid debit card Interac in Canada, powered by NextWave Card
Corporation, a 50/50 JV with National Money Mart Corporation of
Victoria,
BC with about 300 check cashing stores and one million registered
customers in Canada. This program will begin its national rollout in
October 2003.
- Prepaid MasterCards, issued by ABN AMRO Bank subsidiary Standard Federal
Bank as an Independence One card in the USA available at a limited
number of McDonald's restaurants under an initial pilot program.
In total, DataWave prepaid products are being distributed through more than
8,000 locations in Canada, the United States, and Mexico. DataWave has
approximately 90 employees working in three offices in Vancouver, BC,
Toronto, Ontario, and Wayne, NJ.
DATAWAVE INTERNATIONAL LICENSE
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Excluding the Americas, IDC owns 100% of the exclusive worldwide rights to
own, operate, and license any and all DataWave technologies. This current
license is valid until 2010 and can be extended for an additional 10 years to
2020. The DataWave joint venture with National Money Mart in Canada,
NextWave Card Corporation, has obtained from IDC a non-exclusive license to
begin distribution of prepaid debit, cash, and telecom cards in the UK,
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through its 487 Money Shop stores, and in Australia. IDC's marketing
strategy for the DataWave International License is to find similar
relationships with established partners in other regions of the world.
IDC ITALIA Srl
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IDC Italia Srl is an Italian Joint Venture company 60% owned by IDC, and 40%
owned by Pasubio 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, IDC
plans to offer DataWave prepaid POSA services in Italy through IDC Italia.
INTEGRATED COMMUNICATIONS SERVICES LTD.
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Integrated Communications Services Ltd ("ICS") is a London-based, wholly-
owned subsidiary of Integrated Data Corp. ICS has its offices in Ladbroke
Grove in West London and its telecommunications infrastructure in the City of
London. ICS manages and operates Public Switching and Network assets worth
more than $2 million. The ICS website can be found at www.ics.uk.com;
however, information contained on the ICS website is not part of this report.
ICS's current operation is positioned as a Facilities Manager for a small
number of blue chip customers generating modest revenues, but with very high
gross margins. Its business proposition to customers is unique in the U.K.
market -- multiple services, single customer connection, one bill. In the
future, ICS's plan and commitment is to become one of the first Integrated
Communications Providers (ICP) delivering Voice; Data; un-metered,
permanently-on Internet access; and Audio-Visual Streaming Services across
broadband local loop connections to Small and Medium-Sized Enterprises in the
United Kingdom.
INTEGRATED DATA TECHNOLOGIES LTD.
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Integrated Data Technologies Ltd ("IDT") is a limited liability corporation
registered in the United Kingdom, and is owned 100% by Integrated Data Corp.
The company has its offices in London, England. Although currently a non-
operating company, IDT owns rights to the technologies of DataWave Systems
Inc and C3 Technologies Inc for the United Kingdom and the Republic of
Ireland as described below.
DataWave Systems Technology License -- IDT owns the exclusive rights to own,
operate, and license any and all of DataWave Systems Inc technologies in the
United Kingdom and the Republic of Ireland, these rights having been assigned
to IDT by Integrated Data Corp. This current license runs concurrent with
the term of Integrated Data Corp's exclusive international (other than the
Americas) license, and is valid until 2010 and can be extended for an
additional 10 years to 2020. A DataWave Systems Inc joint venture with
National Money Mart in Canada, called NextWave Card Corporation, has obtained
from Integrated Data Corp a non-exclusive license (with the approval of IDT)
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to begin distribution of prepaid debit, cash, and telecom cards in the United
Kingdom.
C3 Technologies Technology License -- IDT 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 has been granted to
run concurrent with the term of IDT's license for the DataWave technologies
in that it is valid until 2010, and can be extended for an additional 10
years to 2020.
Corporate Growth & Strategy
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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.
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
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The prepaid phone card market is highly competitive and is served by numerous
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 TCI and Phone Time. In addition in both Canada
and the United States, as the use of cellular phones and phone charge cards
increases, competition from providers of these products also increases. Many
of these competitors have significantly greater financial, technical and
marketing resources, and 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
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the features of DataWave's network system products, resulting in a reduction
of 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 resulting in additional competition from new entrants. 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, and offer additional bundled features not
available from DataWave such as voicemail and facsimile services. The
ability to compete also depends in part on a number of competitive factors
outside the Company's and DataWave's 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 the Company or DataWave 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 business, financial condition and results of
operations.
The Company 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 paging and cellular services. 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.
Intellectual Property
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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
of 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
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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
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As of June 30, 2003, 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
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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.
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.
Completion of Bankruptcy Proceedings
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On April 18, 2002, Clariti Telecommunications International Ltd ("Clariti")
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court (the "Court")
for the Eastern District of Pennsylvania (Case number 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.
Disbursements to all creditors were made in accordance with the Plan in
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November 2002. The Notice of Motion, Response Deadline and Hearing Date was
filed in March 2003, and no objections were received in response,
subsequently the case was closed with the Order and Final Decree dated May 6,
2003.
Funding to execute the Plan of Reorganization came via a Funding Agreement
the Company negotiated with Integrated Technologies & Systems Ltd., a greater
than 5% shareholder, and/or affiliates. Per the terms of this Funding
Agreement, all advances are 0% interest, unsecured loans convertible, at the
discretion of the Company, to common stock at $2.00 per share.
Also in accordance to the Plan of Reorganization all existing shares of
Clariti common stock were cancelled and pre-petition shareholders received
one share of stock in the reorganized Company, renamed Integrated Data Corp
on November 20, 2002, for every 100 shares of pre-petition stock held. All
existing holders of Company stock options were converted at the same rate
with the price of the option prorated to the cost of the new shares.
Secured creditors, of which there were four, received unsecured, interest
free, convertible promissory notes ("Notes") with a principal amount equal to
their respective secured claims. At the sole option of the Company, the
Notes were convertible into post-reorganization common shares at conversion
prices ranging form $2.00 to $10.00 per share. The Notes were to mature on
December 31, 2005; however all Notes have now been converted to 902,577
shares of Company common stock.
Clariti Wireless Messaging, Inc. and RadioNet International, Inc., both
wholly-owned subsidiaries of Clariti Telecommunications International Ltd,
each filed a voluntary petition for bankruptcy under Chapter 7 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of
Pennsylvania on October 24, 2001 and May 3, 2002, respectively. Both
companies' operations have ceased. Neither company held significant assets.
The Bankruptcy Court closed the case on Clariti Wireless Messaging, Inc. in
Fiscal 2002 and closed the case on RadioNet International, Inc. on July 12,
2002.
McAndrews
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On or about September 28, 2000, Michael P. McAndrews filed a Demand for
Arbitration with the American Arbitration Association against the Company and
Clariti Wireless Messaging concerning obligations arising under Mr.
McAndrews' Employment Agreement. Mr. McAndrews alleged that the Company had
guaranteed and assumed the obligation due Mr. McAndrews pursuant to an
Assignment and Guaranty Agreement. Mr. McAndrews claimed that as a result of
a material change in his duties, he resigned from employment for "good
reason" (as defined in the Employment Agreement), therefore entitling him to
a severance package in an amount in excess of $294,000. Additionally, Mr.
McAndrews requested reasonable attorney fees and other costs and fees,
together with interest thereon. Clariti Wireless Messaging and the Company
disputed Mr. McAndrews' allegations, asserting that Mr. McAndrews was not
entitled to any payments and/or damages under the Employment Agreement. The
Arbitrators held a hearing on June 14 and 15, 2001 regarding the matter. On
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October 18, 2001, the Arbitrators ruled that the Company and Clariti Wireless
Messaging are jointly and severally liable to pay Mr. McAndrews $290,500 plus
reasonable attorney's fees and costs. On December 17, 2001, the Arbitrators
awarded Mr. McAndrews $83,219 for attorney's fees and costs, bringing the
total award for Mr. McAndrews to $401,000, including accrued interest. This
award amount was included as a general unsecured claim in the Company's
Chapter 11 bankruptcy proceedings and under the terms of the Company's Plan
of Reorganization, the judgment was satisfied with a payment of $20,482.22.
M&T Bank
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On June 12, 2001, M&T Bank filed an action against the Company in the Court
of Common Pleas of Montgomery County, Pennsylvania. M&T Bank was seeking to
hold Clariti responsible under the terms of a guaranty agreement pursuant to
which Clariti allegedly guaranteed certain obligations of its former
subsidiary, Clariti Telecom, Inc. The judgment for the amount owed was for
$92,000 which was included as a general unsecured claim in the Company's
Chapter 11 bankruptcy proceedings. Under the terms of the Company's Plan of
Reorganization, M&T Bank received $4,606.62 in satisfaction of the amount
owed.
Nine Penn Center Associates
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On October 17, 2001, Nine Penn Center Associates filed a complaint against
the Company in the Court of Common Pleas of Montgomery County, Pennsylvania.
Nine Penn Center Associates was the landlord and owner of real property known
as the Mellon Bank Center, 1735 Market Street, Philadelphia, PA 19103, a
former address of the Company's headquarters. Nine Penn Center Associates is
seeking damages associated with the remainder of a lease agreement. On April
2, 2002, the Court entered a judgment by default in favor of Nine Penn Center
Associates in the amount of $1,203,493; however, this amount was disputed by
the Company through the Bankruptcy Court. The judgment was subsequently
lowered to $258,266.45, and, as an unsecured creditor, Nine Penn Center
Associates received $12,931.92 in satisfaction of the judgment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal Year 2003.
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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
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The following table sets forth the high and low bid prices per share of
Common Stock as quoted by National Quotation Bureau, Inc. The following
table presents data for the years ended June 30, 2003 and 2002. All amounts
have been retroactively adjusted to reflect the Reverse Stock Splits.
Year Ended June 30, 2003
- ------------------------ High Bid Low Bid
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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
Year Ended June 30, 2002
- ------------------------ High Bid Low Bid
-------- -------
Quarter ended:
September 30, 2001 $ 18.00 $ 4.00
December 31, 2001 $ 7.60 $ 0.80
March 31, 2002 $ 2.70 $ 0.40
June 30, 2002 $ 0.50 $ 0.30
The above prices presented are bid prices, which represent prices between
broker dealers and do not include retail mark-ups, mark-downs or commissions
to the dealer. The prices also may not necessarily reflect actual
transactions. On September 30, 2003 the closing price for the Company's
common stock was $4.00 per share.
Holders
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As of September 30, 2003 the Company had 131 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.
Dividends
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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
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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
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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.
Fiscal Fiscal Fiscal Fiscal Fiscal
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
- ---------------------
Revenue $ 4,017 $ - $ - $ - $ -
-------- -------- -------- -------- --------
Gross profit $ 1,512 $ - $ - $ - $ -
Operating expenses (2,638) (5,033) (15,605) (16,794) (9,374)
Other income (expense) 7 (81) 350 430 396
-------- -------- -------- -------- --------
Net loss from continuing
operations (1,119) (5,114) (15,255) (16,364) (8,978)
Discontinued operations:
Income (loss) from dis-
continued operations - - (6,519) 12,254 (211,434)
Gain (loss) on disposal - (100) 193 (762) -
-------- -------- -------- -------- --------
-13-
Net loss before
extraordinary gain $ (1,119) $ (5,214) $(21,581) $ (4,872) $(220,412)
Extraordinary gain on dis-
charge of indebtedness 3,975 1,568 - - -
-------- -------- -------- -------- --------
Net Income (Loss) $ 2,856 $ (3,646) $(21,581) $ (4,872) $(220,412)
======== ======== ======== ======== ========
PER SHARE DATA, BASIC AND DILUTED
- ---------------------------------
Net loss from continuing
operations $ (0.26) $ (13.42) $ (42.73) $ (48.70) $ (48.27)
Income (loss) from dis-
continued operations - - (18.26) 36.47 (1,136.74)
Gain (loss) on disposal - ( 0.26) 0.54 (2.27) -
-------- -------- -------- -------- --------
Net loss before
extraordinary gain $ (0.26) $ (13.68) $ (60.45) $ (14.50) (1,185.01)
Extraordinary gain on dis-
charge of indebtedness 0.93 4.11 - - -
-------- -------- -------- -------- --------
Net income (loss) $ 0.67 $ (9.57) $ (60.45) $ (14.50) (1,185.01)
======== ======== ======== ======== ========
Cash dividends None None None None None
======== ======== ======== ======== ========
As of As of As of As of As of
June 30, June 30, June 30, July 31, July 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA
- ------------------
Total assets $ 13,456 $ 526 $ 1,298 $ 22,627 $ 19,930
Long-term obligations $ - $ - $ - $ - $ -
Stockholders' equity
(deficit) $ 6,040 $ (5,210) $ (1,992) $ 21,859 $(19,660)
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
- Manage the transition from our former board of directors and
management team to the new board of directors and management team
-14-
- Develop commercially viable applications for the ClariCAST(R)
technology
- Obtain access to engineering resources required to complete
development and commercial implementation of potential applications
for the ClariCAST(R) technology
- Lease SCA channels from FM radio stations
- Select and develop partnerships to help market, sell and distribute
the wireless products and services we are attempting to develop
- Develop a marketing strategy for the wireless products and services we
are attempting to develop
- Develop manufacturing and distribution channels for the wireless
products and services we are attempting to develop
- Manage the progress and costs of additional research and development
of the ClariCAST(R) technology
- Manage the risks, restrictions and barriers of conducting business
internationally
- Reduce future operating losses and negative cash flow
- Compete effectively in the markets we choose to enter
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
- ------------
- - We Need to Obtain Financing in Order to Continue Our Operations
Our inability to secure financing to fund our obligations is the reason we
entered Chapter 11 bankruptcy proceedings. Since then Integrated
Technologies & Systems Ltd ("ITS", 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.
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
-15-
have not yet established any sources for additional financing; however, ITS
has committed to funding operational expenses through the end of Fiscal 2004.
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 Common Stock Make It Difficult For Us to Obtain
Equity Financing
The implementation of a 100:1 reverse stock split substantially reduced the
number of shares outstanding and in the public float. There can be no
assurance that this reverse stock split will have the desired effect of
raising our common stock price to such a level that attracts third party
investors.
Our common stock is currently traded on the OTC Bulletin Board and, as
such, it is relatively illiquid.
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. In addition, the issuance of preferred
stock may make it more difficult for a third party to acquire control of the
Company.
- - We Have a Limited Operating History Upon Which to Base an Evaluation of Our
Performance
We were formed in February 1988 as the successor to a music and recording
studio business. In 1995, we were introduced to the concept of using FM
radio frequencies to transmit digital information, which we have now
developed into our ClariCAST(R) technology. As an early stage company in the
rapidly evolving wireless technology industry, we face numerous risks and
uncertainties. In addition, we have had only a limited operating history
upon which investors may base an evaluation of our performance.
- - We Have Substantially Changed Our Board of Directors and Management
During Fiscal 2002, all but one member of our Board of Directors resigned and
all of our executive officers resigned as well. We added three new members
to our Board of Directors, none of which have significant experience in
wireless telecommunications. In addition, we are currently using third party
consultants to perform required financial functions.
- - We Have Eliminated Substantially All of Our Engineering Staff
Our financial difficulties forced us to terminate nearly all of our
engineering research and development personnel during Fiscal 2002. We now
-16-
have only two experienced engineers on staff who are working on the
development of applications for our ClariCAST(R) technology. To execute our
plans, we will have to hire additional engineering staff and/or obtain
engineering support from third parties interested in working with us to
develop one or more applications of our ClariCAST(R) technology. There can
be no assurance that we will be able to internally fund additional
engineering staff or that we will be able to develop relationships with third
parties that will provide engineering assistance to us.
- - We Have a History of Losses and Losses May Occur in the Future
Since our inception, we have incurred significant losses from continuing
operations of $1,119,000, $5,114,000 and $15,255,000 for Fiscal 2003, Fiscal
2002 and Fiscal 2001, respectively. In order to achieve profitability in the
future, we will need to generate significant revenue. We cannot assure
generating sufficient revenue to achieve profitability, nor can we assure
achieving, or if achieved, maintaining profitability.
- - We Are in Competition With Companies That Are Larger, More Established and
Better Capitalized Than We Are
The wireless telecommunications industry is highly competitive, rapidly
evolving and subject to constant technological change. We expect that our
wireless voicemail products and services will compete with those of numerous
well-established companies, including Motorola, AT&T, Sprint PCS and many
paging companies, which design, manufacture and/or market wireless
telecommunications systems. 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.
- - Successful Development of Our ClariCAST(TM) Technology Is Largely Dependent
Upon the Two Remaining Engineering Staff Members
Our two remaining engineering staff members are the only employees we have
with the knowledge and skill to develop potential applications for our
ClariCAST(R) technology. The loss of one or more of these individuals could
have a material adverse effect on us.
In the longer term, our future operating results will substantially depend
upon our ability to attract and retain highly qualified management,
financial, technical and administrative personnel. Competition for highly
trained technical personnel is intense. We cannot assure you that we will be
able to attract and retain the personnel necessary for the development of our
business.
- - Rapid Technological Change Makes Our Success Unpredictable
The wireless telecommunications industry is characterized by rapid
technological change, new product introduction and evolving industry
standards. Our success will depend, in significant part, on our ability to
make timely and cost-effective enhancements and additions to our technology
and introduce new services that meet consumer demands. We expect new products
-17-
and services, and enhancements to existing products and services, will be
developed and introduced in order to compete with our technology. The
proliferation of new telecommunications technologies may reduce demand for
our ClariCAST(TM) technology. There can be no assurance that we will have the
necessary financial resources or will be successful in developing and
marketing new services or enhancements to services that respond to these or
other technological changes or evolving industry standards. In addition, we
may experience difficulties that could delay or prevent the successful
development, introduction and marketing of applications for our ClariCAST(TM)
technology. Delay in the introduction of new services or enhancements, our
inability to develop new services or enhancements or the failure of such
services or enhancements to achieve market acceptance could have a material
adverse effect on our business, financial condition and results of
operations.
- - Operating Internationally May Expose Us to Additional and Unpredictable
Risks
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;
- 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.
Specific Risks Associated with Our Wireless Technology
- ------------------------------------------------------
- - Consumers May Not Accept Applications of Our ClariCAST(R) Technology We
Choose to Develop
The acceptance of any application or our ClariCAST(R) Technology is a key
element to our success and profitability. As with all new products, there is
a risk that potential customers may not accept our product. Other companies
may develop products in response to technological changes that make our
system noncompetitive, especially if the development, introduction and
marketing of our product is delayed.
- - We Are Subject to Uncertain Government Regulation Over Use of FM-SCA
Channels
Our ClariCAST(R) technology utilizes FM-SCA channels available on nearly all
FM radio stations worldwide. In the United States, the FCC considers FM-SCA
channels to be part of the total FM frequency allocated to a radio station
and therefore regulates only the FM licensee, and does not require a separate
-18-
license for the contractual use of FM-SCA channels. There can be no
assurance that Congress, the FCC, state regulatory agencies, foreign
governments or supranational bodies will not in the future require us to
obtain a license to operate our business or impose other requirements on
radio stations that may limit our ability to operate. Regulators in most of
the foreign markets may take a similar position in their countries to that of
the FCC regarding the licensing and regulation of FM-SCA channels. There can
be no assurance that foreign regulatory agencies will allow us access to
their FM-SCA channels.
- - We May Be Dependent Upon Third Parties To Provide FM-SCA Channels in Areas
in Which We Intend to Operate Our Wireless Services
In markets where we intend to distribute and operate our wireless services,
we will be required to enter into contractual arrangements with FM radio
stations in order to secure the use of FM radio subcarrier frequencies to
operate our wireless system. We may not be able to enter into these
arrangements or we may not be able to obtain sufficient radio frequency
coverage in our target market. In addition, FM radio station owners may
develop other uses for their subcarrier frequencies, which would limit our
ability to enter into these arrangements. If we are unable to enter into
arrangements with a significant number of FM radio stations, or to do so on
economically advantageous terms, our ability to commercialize our wireless
products and services and our profitability, if any, will be limited.
- - We Have Limited Protection of Proprietary Rights and Technology
Our intellectual property rights include patents, copyrights, trade secrets,
trademarks and exclusive and non-exclusive licenses. We have been granted a
U.S. patent dealing with FM Subcarrier Digital Voice Paging. Patents on this
invention have also been granted in South Africa and Taiwan and are pending
in 10 additional countries. We have also filed for patent protection in the
United States and multiple 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
Our Market Share and Profitability
We rely on our patents, copyrights, trademarks, trade secrets, know how and
continuing technological advancement to establish a competitive position in
the marketplace. We attempt to protect our proprietary technology through an
employee handbook and agreements with our employees. Other companies may
independently develop or otherwise acquire similar technology or gain access
to our proprietary technology. Despite our precautions, there can be no
assurance that we will be able to adequately protect our technology from
competitors in the future. The enforcement of patent rights often requires
the institution of litigation against infringers. This litigation is often
costly and time consuming.
-19-
- - We Face Risks of Infringement Claims
We 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 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
- ------------------
The Company is a non-operating U.S. holding company with interests in the
U.S., Canada, the U.K., and Italy. Its subsidiaries offer a wide range of
telecommunications, wireless, point-of-sale activation, financial
transaction, and other services. In 2002 the Company successfully completed
reorganization under Chapter 11 and is now operating with no secured debt
liabilities. Further description of the operations is included above under
Item 1, Business.
Results of Operations
- ---------------------
On December 12, 2002, the Company acquired an approximate 41% interest in
DataWave Systems, Inc. a Yukon Canadian public company, which trades on the
TSE Venture Exchange with the symbol "DTV" and on the NASDAQ OTCBB with the
symbol "DWVSF" for 1,794,900 newly issued shares of the Company's common
stock valued at $1.00 per share. Also, effective January 14, 2003, the
Company agreed to purchase 4,023,030 freely tradable shares of DataWave
Systems, Inc. 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 newly acquired 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.
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, 2003 financial statements of the Company
-20-
include the balance sheet of DataWave as of March 31, 2003. The results of
operations of DataWave for the period effective January 1, 2003 through March
31, 2003 are included in the statement of operations of the Company for the
year ended June 30, 2003.
Year Ended June 30, 2003 (Fiscal 2003)
vs. Year Ended June 30, 2002 (Fiscal 2002)
- ------------------------------------------
For Fiscal 2003, the Company 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 operations was primarily due to a decrease in general and
administrative expenses of approximately $3,283,000. The Company was 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 were 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.
Year Ended June 30, 2002 (Fiscal 2002)
vs. Year Ended June 30, 2001 (Fiscal 2001)
- ------------------------------------------
For Fiscal 2002, the Company incurred a net loss of $3,646,000 or $(9.57) per
share on no revenue compared to a net loss of $21,581,000 or $(60.45) per
share on no revenue for Fiscal 2001. Net loss from continuing operations was
$5,114,000 $(13.42) per share in Fiscal 2002 compared to a net loss from
-21-
continuing operations of $15,255,000 $(42.73) per share for Fiscal 2001. The
$10,141,000 reduction in loss from continuing operations was primarily due to
a decrease in marketing, research and development, depreciation and
amortization, and general and administrative expenses of approximately
$10,572,000. The Company was forced to substantially reduce its overhead due
to the lack of capital in Fiscal 2002.
General and administrative expenses were $4,713,000 in Fiscal 2002 as
compared to $9,471,000 in Fiscal, 2001, a decrease of $4,758,000. This
decrease was a result of the reduction in overhead expenses associated with
decreasing headcount, consolidating offices and selling off its wireline
subsidiaries during the end of Fiscal 2001. By the end of Fiscal 2001, the
severe cash shortage forced the Company to lay off most of its Wireless
network engineering, marketing and administrative staff and relocate the
group headquarters from Fort Washington, Pennsylvania to Philadelphia.
Marketing expenses decreased from $1,044,000 in Fiscal 2001 to $0 in Fiscal
2002 as the Company was forced to relinquish marketing efforts due to the
severe cash shortage in Fiscal 2002. Research and development expenses
decreased by $4,711,000 from Fiscal 2001 to $0 in Fiscal 2002 primarily due
to the severe cash shortage in Fiscal 2002 as mentioned above. The Company
was unable to advance the projects on the Wireless Voicemail System and
additional applications of our ClariCAST(R) technology.
The Company's results of operations for Fiscal 2001 and 2000 reflect its
former business segment, Telephony/Internet Services, as discontinued
operations. In Fiscal 2001 when the Company divested a substantial portion of
such businesses, it recognized a loss from discontinued operations of
$6,519,000 as compared to $0 in Fiscal 2002. 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.
Liquidity and Capital Resources
- -------------------------------
At June 30, 2003, the Company had a working capital deficit of $712,000
(including a cash balance of $2,143,000) as compared to a working capital
deficit of $5,711,000 (including a cash balance of $5,000) at June 30, 2002.
The working capital increase of $4,999,000 is primarily due to the $3,975,000
in extraordinary gain on discharge of indebtedness as a result of closing of
the Company's Chapter 11 proceedings and closing of its wireless subsidiary,
RadioNet's, Chapter 7 liquidation. The increase in cash is primarily due the
$1,242,000 of cash from acquiring DataWave Systems, Inc.
Integrated Technologies & Systems Ltd ("ITS") and/or its affiliates have
agreed to provide funding to the Company for its working capital requirements
through the end of Fiscal 2004. Such working capital requirements are
forecasted to be approximately $50,000 per month, principally to cover the
compensation and related costs of its two engineering employees and general
and administrative expenses. This funding is under a convertible, non-
interest bearing, unsecured promissory note(s) issued to ITS and/or its
-22-
affiliates. 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
- ----------------------------
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several
of the estimates and assumptions we are required to make relate to matters
that are inherently uncertain as they pertain to future events. However,
events that are outside of our control cannot be predicted and, as such, they
cannot be contemplated in evaluating such estimates and assumptions. If
there is a significant unfavorable change to current conditions, it will
likely result in a material adverse impact to our consolidated results of
operations, financial position and in liquidity. We believe that the
estimates and assumptions we used when preparing our financial statements
were the most appropriate at that time. Presented below are those accounting
policies that we believe require subjective and complex judgments that could
potentially affect reported results.
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, collectability of proceeds is reasonably assured, the full
obligation to the phone service provider is fixed and determinable, and
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.
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
-23-
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. For each of the two
years ended June 30, 2003 and 2002, no such impairment losses were
identified.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In August 2001, FASB Statement 142, "Goodwill and Other Intangible Assets"
was issued, which is effective for fiscal years beginning after December 15,
2001. Statement 142 addresses how intangible assets that are acquired
individually or with a group of assets should be accounted for upon their
acquisition and also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements. Also, for previously recognized non-goodwill
intangible assets, the useful lives must be reassessed with remaining
amortization periods adjusted accordingly, and reflected as a change in
accounting principle. The adoption of this standard in Fiscal 2003 did not
result in any significant impact on results of operations or financial
position of the Company.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement 144"), effective in fiscal years beginning after December 15,
2001, with early adoption permitted, and in general are to be applied
prospectively. Statement 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued
operations. Statement 144 superseded Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The adoption of this
standard in Fiscal 2003 did not result in any significant impact on its
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. Companies are
required to adopt SFAS 143 for fiscal years beginning after June 15, 2002,
but early adoption is permitted. The Company has determined that the
application of SFAS 143 did not have a material affect on its financial
position or results of operations.
-24-
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities". SFAS 146 requires
that the liability for a cost associated with an exit or disposal activity be
recognized at its fair value when the liability is incurred. Under previous
guidance, a liability for certain exit costs was recognized at the date that
management committed to an exit plan. SFAS 146 is effective only for exit or
disposal activities initiated after December 31, 2002. The adoption of this
statement did not have a material effect on the financial statements for
Fiscal 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that
are issued or modified after December 31, 2002. The Company has adopted the
disclosure requirements and is currently evaluating the effects of the
recognition provisions of FIN 45; however, it does not expect that the
adoption of such provisions will have a material impact on the Company's
results of operations or financial position.
In December 2002, the FASB issued Statement of Financial Accounting Standard
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition
and Disclosure". SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS 148 also requires prominent disclosure in the
"Summary of Significant Accounting Policies" of both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company has adopted SFAS 148 for the 2003 fiscal year end. Adoption of this
statement has affected the location of the Company's disclosure within the
consolidated financial statements, but will not impact the Company's results
of operation or financial position unless the Company changes to the fair
value method of accounting for stock-based employee compensation.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No.
51". FIN 46 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 46 provisions are
effective for all arrangements entered into after January 31, 2003. For
those arrangements entered into prior to January 31, 2003, FIN 46 provisions
are required to be adopted at the beginning of the first interim or annual
period beginning after June 15, 2003. The adoption of this statement is not
expected to impact the Company's financial statements for Fiscal 2004.
In April 2003, the FASB issued Statement of Financial Accounting Standard No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
-25-
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. The Company
does not expect the adoption of SFAS 149 to have a material impact on its
operating results or financial condition.
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. The Company does not expect the adoption of SFAS 150 to have a
significant impact on its operating results or financial position.
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.
The Company's business does not bear significant exposures to the market
risks described in Item 305 of Regulation S-K.
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.
-26-
INTEGRATED DATA CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
------------
A. Independent Auditor's Report................................F-1
B. Consolidated Balance Sheets at June 30, 2003 and 2002.......F-2
C. Consolidated Statements of Operations for the
years ended June 30, 2003, 2002 and 2001..............F-3 to F-4
D. Consolidated Statement of Stockholders' Equity
for the years ended June 30, 2003, 2002 and 2001......F-5 to F-8
G. Consolidated Statements of Cash Flows for the
years ended June 30, 2003, 2002 and 2001..............F-9 to F-10
H. Notes to Consolidated Financial Statements.............F-11 to F-32
-27-
INDEPENDENT AUDITOR'S 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, 2003 and 2002, 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, 2003.
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 auditing standards generally
accepted in the 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, 2003 and 2002, and
the results of their consolidated operations and cash flows for each of the
three years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States.
/s/ COGEN SKLAR LLP
-------------------
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
October 3, 2003
F-1
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 and 2002
(Dollars in Thousands)
June 30 June 30
2003 2002
ASSETS --------- ---------
CURRENT ASSETS
Cash and equivalents $ 2,143 $ 5
Accounts receivable, net of allowance of $55 2,038 -
Inventory 1,225 20
Prepaid expenses and other current assets 487 -
--------- ---------
5,893 25
PROPERTY AND EQUIPMENT, NET 1,730 418
INTANGIBLE ASSETS, NET
Amortizable 4,330 75
Goodwill 1,464 -
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES 8 8
OTHER ASSETS 54 -
--------- ---------
TOTAL ASSETS $ 13,479 $ 526
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 6,141 $ 23
Short-term borrowings from related party 318 -
Deferred revenue 146 -
Post-petition financing - 156
Liabilities subject to compromise - 5,557
--------- ---------
6,605 5,736
--------- ---------
MINORITY INTEREST 811 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
$.001 par value; authorized 300,000,000 shares;
issued and outstanding, 7,685,609 shares at
June 30, 2003 and 385,829 shares at June 30, 2002 8 -
WARRANTS OUTSTANDING, NET 1,613 5,047
ADDITIONAL PAID-IN-CAPITAL 283,727 271,907
ACCUMULATED DEFICIT (279,308) (282,164)
ACCUMULATED OTHER COMPREHENSIVE INCOME 23 -
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 6,063 (5,210)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,479 $ 526
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(Dollars Thousands, Except Per Share Amounts)
Fiscal Fiscal Fiscal
2003 2002 2001
--------- --------- ---------
REVENUE $ 4,017 $ - $ -
COST OF REVENUE 2,505 - -
--------- --------- ---------
GROSS PROFIT 1,512 - -
Marketing expenses 384 - 1,044
Research and development expenses 254 - 4,711
Depreciation and amortization expenses 613 320 379
General and administrative expenses 1,360 4,713 9,471
Income from unconsolidated
subsidiary (8) - -
--------- --------- ---------
LOSS FROM OPERATIONS (1,091) (5,033) (5,605)
--------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 8 - 363
Interest expense (1) (81) (13)
Minority interest (35) - -
--------- --------- ---------
(28) (81) 350
--------- --------- ---------
NET LOSS FROM CONTINUING OPERATIONS (1,119) (5,114) (15,255)
DISCONTINUED OPERATIONS
Net loss from operations - - (6,519)
Gain (loss) on disposal - (100) 193
--------- --------- ---------
NET LOSS BEFORE EXTRAORDINARY
GAIN (1,119) (5,214) (21,581)
EXTRAORDINARY GAIN ON DISCHARGE
OF INDEBTEDNESS 3,975 1,568 -
--------- --------- ---------
NET INCOME (LOSS) $ 2,856 $ (3,646) $ (21,581)
========= ========= =========
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, 2003, 2002 AND 2001
(Dollars and Shares in Thousands, Except Per Share Amounts)
Fiscal Fiscal Fiscal
2003 2002 2001
--------- --------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,262 381 357
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE
Net loss from continuing operations $ (0.26) $ (13.42) $ (42.73)
Discontinued operations:
Net loss from operations - - (18.26)
Gain (loss) on disposal - (0.26) 0.54
--------- --------- ---------
Net loss before extraordinary
gain (0.26) (13.68) (60.45)
Extraordinary gain on discharge
of indebtedness 0.93 4.11 -
--------- --------- ---------
Net income (loss) $ 0.67 $ (9.57) $ (60.45)
========= ========= =========
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, 2003, 2002 AND 2001
(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, 2000 35,836 $ 36 $ 14,062 $ 264,643 $(256,937)
Year ended June 30, 2001:
Common stock issued as
additional consideration
for acquisition of TWC 222 - - 743 -
Common stock returned to
the Company pursuant to
terms of TWC acquisition
agreement (85) - - (766) -
Common stock returned to
the Company as consider-
ation for sale of NKA (277) - - (1,143) -
Common stock returned to
the Company as consider-
ation for sale of UK
operating assets (71) - - (98) -
Common stock retired as
a result of the divest-
ment of MegaHertz-NKO (245) (1) - (2,909) -
Common stock warrants
issued, net of unearned
consulting fees of $213 - - 1,377 483 -
Common stock warrants
expired - - (5,574) 5,574 -
Common stock options
issued at exercise
prices below market
value - - - 99 -
Net loss - - - - (21,581)
------ ------ -------- --------- ----------
BALANCES, JUNE 30, 2001 35,380 $ 35 $ 9,865 $ 266,626 $(278,518)
====== ==== ======== ========= ==========
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, 2003, 2002 AND 2001
(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)
====== ==== ======== ========= ===========
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, 2003, 2002 AND 2001
(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 for 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 loss - - - - 2,856
------ ---- -------- --------- ----------
BALANCES, JUNE 30, 2003 7,686 $ 8 $ 1,613 $ 283,727 $(279,308)
====== ==== ======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(Dollars and Shares in Thousands)
Continued From ACCUMULATED
Previous Page 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 for 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-8
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(Dollars in Thousands)
Fiscal Fiscal Fiscal
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,856 $( 3,646) $( 21,581)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Extraordinary gain on discharge of
Indebtedness ( 3,975) ( 1,568) -
Loss from discontinued operations - 100 6,326
Depreciation and amortization 613 320 379
Loss on sale of fixed assets - 133 -
Issuance of common stock warrants for
general and administrative expenses - 80 1,968
Income from unconsolidated subsidiary ( 8) - -
Minority interest 35 - -
Other (38) 78 122
Change in assets and liabilities which
increase (decrease) cash:
Accounts receivable 285 - -
Inventory ( 535) 87 107)
Prepaid expenses and other current
assets ( 61) 105 ( 27)
Accounts payable an accrued liabilities 1,445 3,767 3,004
Deferred revenue ( 172) - -
--------- --------- ---------
Net cash provided by (used) in
operating activities 445 ( 545) ( 11,278)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in discontinued operations - - ( 2,967)
Proceeds from sale of fixed assets - 19 -
Cash proceeds from sale of UK
operating assets - - 227
Investment in long-lived assets ( 366) - 423)
--------- --------- ---------
Net cash provided by (used) in
investing activities ( 366) 19 ( 3,163)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash of acquired company 1,242 - -
Proceeds from short-term borrowings 817 272 813
Sale of common stock for cash - 135 -
--------- --------- ---------
Net cash received from financing activities 2,059 407 813
--------- --------- ---------
NET CHANGE IN CASH AND EQUIVALENTS 2,138 ( 119) ( 13,628)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 5 124 13,752
--------- --------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 2,143 $ 5 $ 124
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements. F-9
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(Dollars in Thousands)
Fiscal Fiscal Fiscal
2003 2002 2001
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ - $ - $ -
Income taxes $ - $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Issuance of common stock as additional
consideration for acquisition of TWC $ - $ - $ 743
Common stock returned to the Company
pursuant to terms of acquisition
agreement for TWC $ - $ - $ 766
Common stock returned to the Company as
consideration for sales of NKA and UK
net assets $ - $ - $ 1,241
Common stock retired as a result of
the divestment of MegaHertz-NKO $ - $ - $ 2,909
Reclassification of prepetition
liabilities into liabilities subject
to compromise $ - $ 5,557 $ -
Conversion of debt into equity $ 1,996 - -
Issuance of shares upon acquisitions
DataWave Systems, Inc. $ 2,198 - -
C4 Services, Ltd. $ 4,200 - -
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
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. This wireless technology allowed 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 forming
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, 2003, 2002 and 2001 are referred to
as Fiscal 2003, Fiscal 2002 and Fiscal 2001 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, 2003 financial statements of the
Company include the balance sheet of DataWave as of March 31, 2003. The
results of operations of DataWave for the period January 1, 2003 through
March 31, 2003 are included in the statement of operations of the Company for
the year ended June 30, 2003.
F-11
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
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, collectability of proceeds is reasonably assured, the full
obligation to the phone service provider is fixed and determinable, and
F-12
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
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,
2003 and 2002, approximate their fair value because of their short
maturities.
Accounts receivable includes $57,749 that is 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. 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 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.
Advertising Costs and Sales Incentives
- --------------------------------------
Advertising costs are expensed as incurred.
F-13
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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. For each of the two
years ended June 30, 2003 and 2002, no such impairment losses were
identified.
F-14
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 2003. 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.
Income Taxes
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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)
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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.
F-15
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Income (Loss) Per Common Share
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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 2003, Fiscal 2002 and Fiscal 2001 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 March 31, 2003 is, on a diluted basis,
approximately 9%.
Accounting for Stock-Based Compensation
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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 th