UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 2005
Commission File Number 0-31729
INTEGRATED DATA CORP.
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(Exact name of registrant as specified in its charter)
Delaware 23-2498715
- -------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
625 W. Ridge Pike, Suite C-106, Conshohocken, PA 19428
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(Address of principal executive offices)
Telephone: (610) 825-6224
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. [X]Yes [ ]No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ]Yes [X]No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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. [X]Yes [ ]No
As of May 19, 2005, there were 7,685,677 shares outstanding of the
Registrant's $.001 par value common stock.
INTEGRATED DATA CORP.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION.............................................1
Item 1. Financial Statements.........................................1
Consolidated Balance Sheets at March 31, 2005 (unaudited)
and June 30, 2004 (audited)......................................1
Consolidated Statements of Operations for the three months
and nine months ended March 31, 2005 and 2004 (unaudited)........3
Consolidated Statement of Stockholders' Equity (Deficit)
for the nine months ended March 31, 2005 (unaudited).............4
Consolidated Statements of Cash Flows for the six months
ended March 31, 2005 and 2004 (unaudited)........................5
Notes to Consolidated Financial Statements (unaudited)...........7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................29
Item 4. Controls and Procedures.....................................30
PART II. OTHER INFORMATION...............................................31
Item 1. Legal Proceedings...........................................31
Item 2. Changes in Securities and Use of Proceeds...................31
Item 3. Defaults Upon Senior Securities.............................31
Item 4. Submission of Matters to a Vote of Security Holders.........31
Item 5. Other Information...........................................31
Item 6. Exhibits and Reports on Form 8-K............................31
SIGNATURES................................................................32
-i-
NOTE REGARDING FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q, including exhibits thereto, contains
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. These forward-looking statements are
typically identified by the words "anticipates", "believes", "expects",
"intends", "forecasts", "plans", "future", "strategy", or words of similar
meaning. Various factors could cause actual results to differ materially
from those expressed in the forward-looking statements. The Company assumes
no obligations to update these forward-looking statements to reflect actual
results, changes in assumptions, or changes in other factors, except as
required by law.
-ii-
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
March 31, June 30,
2005 2004
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,517 $ 857
Accounts receivable, net allowance of $15 & $13 6,182 4,350
Inventory 5,188 2,235
Prepaid expenses and other current assets 500 457
--------- ---------
15,387 7,899
PROPERTY AND EQUIPMENT, NET 2,485 2,436
INTANGIBLE ASSETS, NET
Amortizable 1,146 1,829
Goodwill 1,464 1,464
INVESTMENT IN UNCONSOLIDATED SUSIDIARIES 31 8
OTHER ASSETS 202 218
--------- ---------
TOTAL ASSETS $ 20,715 $ 13,854
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations $ 72 $ 65
Accounts payable and accrued liabilities 14,559 7,798
Short-term borrowings from related parties 879 887
Deferred revenue 714 61
--------- ---------
16,224 8,811
--------- ---------
LONG-TERM LIABILITIES
Capital lease obligations 70 125
Other long-term liabilities 304 281
Deferred income taxes 277 268
--------- ---------
651 674
--------- ---------
TOTAL LIABILITIES 16,875 9,485
--------- ---------
MINORITY INTEREST 1,386 1,165
--------- ---------
COMMITMENTS - -
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
(Dollars and Shares in Thousands)
March 31, June 30,
2005 2004
----------- -----------
(Unaudited) (Audited)
STOCKHOLDERS' EQUITY
PREFERRED STOCK
$0.001 par value, authorized 2,000 shares,
no shares issued and outstanding at
March 31, 2005 and June 30, 2004 - -
COMMON STOCK
$0.001 par value; authorized 50,000 shares;
issued and outstanding, 7,686 shares at
March 31, 2005 and June 30, 2004 8 8
WARRANTS OUTSTANDING, NET 191 269
ADDITIONAL PAID-IN-CAPITAL 285,149 285,071
ACCUMULATED DEFICIT (282,914) (282,233)
ACCUMULATED OTHER COMPREHENSIVE INCOME 20 89
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,454 3,204
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,715 $ 13,854
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
REVENUE $ 6,749 $ 4,630 $ 16,648 $ 13,565
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Cost of revenues (exclusive of 4,425 2,649 10,355 7,969
depreciation shown separately
below)
Marketing expenses 562 374 1,389 1,198
Research and development expenses 306 375 927 1,121
Depreciation and amortization 351 456 1,078 1,192
General and administrative 1,023 967 2,616 2,643
Merger costs (55) - 582 -
Impairment loss - - 457 -
Minority interest 190 61 76 200
Income from unconsolidated subsidiary (55) - (87) -
-------- -------- -------- --------
TOTAL OPERATING COSTS AND EXPENSES 6,747 4,882 17,393 14,323
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 2 (252) (745) (758)
-------- -------- -------- --------
OTHER INCOME
Other income 20 8 23 27
Gain on foreign exchange 4 18 40 37
-------- -------- -------- --------
TOTAL OTHER INCOME 24 26 63 64
-------- -------- -------- --------
NET INCOME (LOSS) $ 26 $ (226) $ (682) $ (694)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 7,686 7,686 7,686 7,686
======== ======== ======== ========
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ 0.00 $ (0.03) $ (0.09) $ (0.09)
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED MARCH 31, 2005
(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, 2004 7,686 $ 8 $ 269 $ 285,071 $(282,233)
Nine months ended
March 31, 2005
(Unaudited):
Common stock warrants expired - - (78) 78 -
Net loss - - - - (682)
Foreign currency translation
adjustment - - - - -
------ ------ -------- --------- ----------
BALANCES, MARCH 31,
2005 (Unaudited) 7,686 $ 8 $ 191 $ 285,149 $(282,915)
====== ====== ======== ========= ==========
ACCUMULATED
-CONTINUED- OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
------------- -------------
BALANCES, JUNE 30, 2004 $ - $ 89
Three months ended
March 31, 2005
(Unaudited):
Common stock warrants expired - -
Net loss (682) -
Foreign currency translation
adjustment (69) (69)
---------- ----------
BALANCES, MARCH 31,
2005 (Unaudited) $ (751) $ 20
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Nine Months Ended
March 31,
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (682) $ (694)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,078 1,192
Impairment loss 457 -
Minority interest 76 200
Income from unconsolidated subsidiary (87) -
Change in assets and liabilities
which increase (decrease) cash:
Accounts receivable (1,832) (2,722)
Inventory (2,953) (1,615)
Prepaid expenses & other current assets 1 (410)
Accounts payable & accrued liabilities 6,495 3,942
Deferred revenue 653 (119)
---------- ----------
Net cash provided by operating activities 3,206 (226)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash 14 -
Proceeds from sale of intangibles 265 -
Equity investment (23) -
Investment in long-lived assets (745) (802)
---------- ----------
Net cash used in investing activities (489) (802)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital leases (48) -
Net (repayments)/proceeds from short-term
borrowings (9) 395
---------- ----------
Net cash provided by (used in) financing
activities (57) 395
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 165
---------- ----------
NET CHANGE IN CASH AND EQUIVALENTS 2,660 (468)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 857 2,143
---------- ----------
CASH AND EQUIVALENTS, END OF PERIOD $ 3,517 $ 1,675
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
INTEGRATED DATA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
(Dollars in Thousands)
Nine Months Ended
March 31,
2005 2004
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during period:
Interest $ - $ -
Income taxes $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 1 - BASIS OF INTERIM PRESENTATION
The accompanying interim period financial statements of Integrated Data Corp.
("IDC" or the "Company") are unaudited, pursuant to certain rules and
regulations of the Securities and Exchange Commission, and include, in the
opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair statement of the results for the periods
indicated, which, however, are not necessarily indicative of results that may
be expected for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the financial statements and
the notes thereto included in IDC's June 30, 2004 Form 10-K and other
information included in IDC's Forms 8-Ks and amendments thereto as filed with
the Securities and Exchange Commission.
NOTE 2 - HISTORY AND NATURE OF THE BUSINESS
Integrated Data Corp. ("IDC") 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.
The Company was originally formed in February 1988 as the successor to a
music and recording studio business. The Company became publicly held upon
its merger in January 1991 with an inactive public company incorporated in
Nevada. The surviving corporation changed its name to Sigma Alpha
Entertainment Group, Ltd. and was subsequently reincorporated in Delaware.
Beginning in 1995, the Company began shifting its focus away from the music
and recording business and toward the development and commercialization of a
proprietary data broadcasting technology. The resulting wireless technology,
trade named ClariCAST (Registered Trademark), allows for the metropolitan-
wide distribution of data utilizing the existing broadcast infrastructure of
FM radio stations. In 1998 the Company began to acquire interests in the
telecommunications business and changed its name to Clariti
Telecommunications International, Ltd. Upon emergence from Chapter 11 in
2002, the company name was changed to Integrated Data Corp. to more
accurately reflect its new business focus of acquiring, managing, and
bringing into the global market leading-edge communication, financial, and
network technology solution and service providers. During year ended June
30, 2003, the Company acquired 100% of C4 Services Ltd and a majority
ownership in DataWave Systems Inc.
-7-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year End
- ---------------
The Company's fiscal year ends on June 30. In these financial statements,
the three-month periods ended March 31, 2005 and 2004 are referred to as
Fiscal 3Q05 and Fiscal 3Q04, respectively, and the nine months ended March
31, 2005 and 2004 are referred to as Fiscal Nine Months 2005 and Fiscal Nine
Months 2004, respectively.
DataWave Systems 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 March 31, 2005 financial statements of
the Company include the balance sheet of DataWave as of December 31, 2004.
The results of operations of DataWave for the three months and nine months
ended December 31, 2004 are included in the statement of operations of the
Company for the three months and nine months ended March 31, 2005.
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.
-8-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue and Cost Recognition
- ----------------------------
The Company's revenues are primarily generated from the resale of prepaid
long distance and cellular telephone time, principally from the sale of
prepaid calling cards and point of sale activated PINs. Sales of prepaid
calling cards and point of sale activated PINs under third party brands,
where DataWave is not the primary obligor of the related phone service, does
not incur significant inventory risk, has no significant continuing
obligation with respect to services being rendered subsequent to sale, the
price to the consumer is fixed and determinable and collection is reasonably
assured, are recognized at the date of sale to the consumer on a net basis.
The resulting net agency revenue earned is calculated as the difference
between the gross proceeds received and the cost of the related phone time.
Sales of DataWave or custom branded cards where DataWave incurs inventory
risk but does not provide the related telephone time are recognized on the
gross basis on the date of sale to the consumer when title to the card
transfers, collectibility of proceeds is reasonably assured, the full
obligation to the phone service provider is fixed and determinable, and
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 approximate
their fair value because of their short maturities.
Accounts receivable includes amounts due from contractors who collect cash
from and service the DataWave's DTM and other vending machines. Certain of
these contractors are not bonded resulting in credit risk to DataWave.
DataWave is also exposed to certain concentrations of credit risk. DataWave
actively monitors the granting of credit and continuously reviews accounts
receivable to ensure credit risk is minimized. At March 31, 2005 and 2004,
the top ten customers accounted for 62% and 68% of accounts receivable.
The Company is exposed to foreign exchange risks due its sales denominated in
foreign currency.
-9-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
-10-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 from 4 to 10 years straight-line
Parts, supplies and components are depreciated when they are put in use.
Capitalized Internal Use Software Costs
- ---------------------------------------
DataWave capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". These costs consist of payments made to third parties and
the salaries of employees working on such software development. Subsequent
additions, modifications or upgrades to internal-use software are capitalized
only to the extent that they allow the software to perform a task it
previously did not perform. Capitalized computer software costs are
amortized using the straight-line method over a period of 3 years.
Software maintenance and training costs are expensed in the period in which
they are incurred.
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. An impairment loss
in the amount of $457,000 was recorded at December 31, 2004 to reduce the net
carrying value of the DataWave International License to fair market value
based on the purchase price to be paid by DataWave for the license. No other
impairment losses were identified at March 31, 2005 and 2004.
-11-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - 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 for goodwill was recorded during the three months ended and
nine months ended March 31, 2005. 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
- ------------
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.
-12-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss)
- ---------------------------
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". This
statement establishes rules for the reporting of comprehensive income (loss)
and its components. The component of comprehensive income consists of
foreign currency translation adjustments.
Net Income (Loss) Per Common Share
- ----------------------------------
Net income (loss) per common share is based upon the weighted average number
of common shares outstanding during the period. The treasury stock method is
used to calculate dilutive shares. Such method reduces the number of
dilutive shares by the number of shares purchasable from the proceeds of the
options and warrants assumed to be exercised. Basic and diluted weighted
average shares outstanding for Fiscal 3Q05 and 3Q04 and Fiscal Nine Months
2005 and Fiscal Nine Months 2004 were the same because the effect of using
the treasury stock method would be antidilutive.
DataWave has an employee stock option plan providing for the issuance of
stock options to purchase DataWave common stock. Since these options are not
"in the money" at the DataWave level, there is no impact on the Company's
earnings per share. However, such options, when and if exercised, will
dilute the Company's actual ownership interest in DataWave. Based on the
current program, the potential percentage ownership interest attributable to
exercisable DataWave options as of June 30, 2004 is, on a diluted basis,
approximately 2%.
Accounting for Stock-Based Compensation
- ---------------------------------------
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the
stock on the date of the grant over the amount the employee is required to
pay to acquire the stock (the intrinsic value method under APB Opinion 25).
Such amount, if any, is accrued over the related vesting period, as
appropriate.
The Company has adopted FASB Statement 123, "Accounting for Stock-Based
Compensation", which encourages employers to account for stock-based
compensation awards based on their fair value on their date of grant. The
fair value method was used to value common stock warrants issued in
transactions with other than employees during the periods presented.
Entities may choose not to apply the new accounting method for options issued
to employees but instead, disclose in the notes to the financial statements
the pro forma effects on net income and earnings per share as if the new
method had been applied. The Company has adopted the disclosure-only
approach to FASB Statement 123 for options issued to employees. See Note 14.
-13-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity Investment
- -----------------
DataWave accounts for its investment in a new corporation, NextWave Card
Corp. ("NCC") under the equity method and record its 50% share of income or
loss as equity income (loss) from investee. For the nine months ended March
31, 2005, DataWave recorded equity income of $87,121 ($-0- for 2003). At
March 31, 2005, DataWave has an equity investment of $22,630.
Recent Accounting Pronouncements
- --------------------------------
In December 2004, the FASB revised SFAS 123, "Accounting for Stock-Based
Compensation" to require all companies to expense the fair value of employee
stock options. SFAS 123R is effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005.
NOTE 4 - PROPOSED MERGER
In April 2004 the Company entered into a Letter Agreement with DataWave
outlining the terms under which it would acquire the remaining 49.9% of
DataWave not already owned. On June 2, 2004 the Company signed an Agreement
and Plan of Merger with DataWave detailing the terms of the planned merger.
On November 9, 2004 the Company announced the termination of the merger
agreement and cancellation of the merger process. Various delays pushed the
projected merger completion date past December 31, 2004, and the Company was
not prepared to continue to expend more funds on a merger transaction with no
definitive completion date.
The Company executed a Merger Break-up and Mutual Release Agreement (the
"Break-up Agreement") with DataWave on March 3, 2005. Under the terms of
this Break-up Agreement DataWave agreed to compensate IDC for expended merger
costs in the amount of $470,000, $235,000 in cash and 2,937,500 shares of
newly issued DataWave common stock at an issue price of $0.08 per share (the
"Compensation Shares"). Both parties accepted this as full and final
settlement of any and all issues relating to the termination of the planned
merger. IDC received the $235,000 cash payment in Fiscal 3Q05. The
2,937,500 shares of DataWave common stock were issued to IDC on May 11, 2005
bringing IDC's total number of DataWave shares owned to 24,899,530, or 53.2%
of DataWave's outstanding shares. The Compensation Shares are subject to the
restrictions on trading imposed by Rule 144 under the Securities Act of 1933.
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
-14-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 4 - PROPOSED MERGER (Continued)
three-month lag, the March 31, 2005 financial statements of the Company
include the balance sheet of DataWave as of December 31, 2004. The results
of operations of DataWave for the period January 1, 2005 through March 31,
2005 will be included in the statement of operations of the Company for the
year ended June 30, 2005. Therefore, the additional ownership increase on
March 3, 2005 from 51.1% to 53.2% will be reflected in the financial
statements at June 30, 2005.
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable and other receivables consist of the following (in
thousands):
Fiscal Fiscal
3Q05 2004
------ ------
Trade accounts receivable (net of allowance
for doubtful accounts of $15 and $13) $ 5,215 $ 3,590
Input tax credits receivable 796 558
Tenant incentives - 166
Other receivables 171 36
------- -------
$ 6,182 $ 4,350
======= =======
NOTE 6 - INVENTORY
Inventory consists of the following (in thousands):
Fiscal Fiscal
3Q05 2004
------ ------
Parts and supplies $ 208 $ 139
PINs and cellular time 4,729 1,778
Cards and long distance phone time 251 318
------- -------
$ 5,188 $ 2,235
======= =======
-15-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment of the Company and its consolidated subsidiaries
consist of the following (in thousands):
Fiscal Fiscal
3Q05 2004
------ ------
Computer equipment and software $ 2,613 $ 2,447
Office equipment and furniture 222 193
Other machinery and equipment 31 31
Parts, supplies and components 332 332
Vending machines in assembly 29 29
Vending equipment 3,244 3,321
Leasehold improvements 313 325
POSA equipment 1,736 1,001
------- -------
Total Cost 8,520 7,679
Less: accumulated depreciation (6,035) (5,243)
------- -------
$ 2,485 $ 2,436
======= =======
Depreciation expense was $327,000 and $286,000 for Fiscal 3Q05 and 3Q04 and
$877,000 and $671,000 for Fiscal Nine Months 2005 and Fiscal Nine Months
2004.
NOTE 8 - INTANGIBLE ASSETS
Amortizable intangible assets consist of the following (in thousands):
Fiscal Fiscal
3Q05 2004
------ ------
DataWave International License,
net of impairment adjustment $ 865 $ 2,356
Customer lists 633 657
Patents and technology 450 450
------- -------
1,948 3,463
Less: accumulated amortization (802) (1,634)
------- -------
$ 1,146 $ 1,829
======= =======
-16-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 8 - INTANGIBLE ASSETS (Continued)
Goodwill in the amount of $1,464,000 resulted from the acquisition of
DataWave.
Amortization expense was $24,000 and $170,000 for Fiscal 3Q05 and 3Q04, and
$201,000 and $521,000 for Fiscal Nine Months 2005 and Fiscal Nine Months
2004.
An impairment loss in the amount of $457,000 was recorded at December 31,
2004 to reduce the net carrying value of the DataWave International License
to fair market value based on the purchase price paid by DataWave for the
license.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
Fiscal Fiscal
3Q05 2004
------ ------
Trade accounts payable $11,878 $ 5,456
Accrued compensation and benefits 29 94
Co-op and rebate accruals 328 256
Long-distance time accruals 659 700
Other accrued liabilities 766 495
State, local, GST and other taxes payable 899 797
------- -------
$14,559 $ 7,798
======= =======
NOTE 10 - SHORT-TERM BORROWINGS FROM RELATED PARTY
Integrated Technologies & Systems Ltd. ("IT&S"), a greater than 5%
shareholder, and/or its affiliates agreed to fund the Company's working
capital requirements post Chapter 11 filing through June 30, 2005. The
balance of the loan as of June 30, 2004 was $887,000. During Fiscal Nine
Months 2005 the Company borrowed an additional $294,275 and paid back
$302,775. The balance of the loan as of March 31, 2005 was $878,500.
-17-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 11 - INCOME TAXES
There is no income tax benefit for operating losses for Fiscal 3Q05 and
Fiscal 3Q04 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years and any taxable income will be offset by net operating loss
carryforwards.
Deferred tax benefit - the deferred tax assets were offset by a
valuation allowance required by FASB Statement 109, "Accounting for Income
Taxes". The valuation allowance is necessary because, according to criteria
established by FASB Statement 109, it is more likely than not that the
deferred tax asset will not be realized through future taxable income.
The reconciliation of the statutory federal rate to the Company's effective
income tax rate is as follows (dollars in thousands):
Fiscal Fiscal
3Q05 3Q04
------ ------
Statutory provision (benefit) $ (232) $ (243)
Tax benefit not recognized on current year loss 232 243
------- -------
$ - $ -
======= =======
Under FASB Statement 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates.
The components of the deferred tax assets are as follows (dollars in
thousands):
Fiscal Fiscal
3Q05 2004
------ ------
Intangible assets $ 779 $ 722
Property and equipment 281 215
Net operating loss carryforwards 84,964 84,699
Valuation allowance (86,024) (85,636)
------- -------
$ - $ -
======= =======
-18-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 11 - INCOME TAXES (Continued)
The deferred tax liability of $277,000 and $268,000 at Fiscal 3Q05 and Fiscal
2004 represents deferred revenue related to an acquisition.
Integrated Data Corp. files a consolidated corporate income tax return in the
United States and its foreign subsidiaries will be required to file income
tax returns in their respective countries.
The use of net operating loss carryforwards for United States income tax
purposes is limited when there has been a substantial change in ownership (as
defined) during a three-year period. Because of the recent and contemplated
changes in ownership of the Company's common stock, such a change may occur
in the future. In this event, the use of net operating losses each year
would be restricted to the value of the Company on the date of such change
multiplied by the federal long-term rate ("annual limitation"); unused annual
limitations may then be carried forward without this limitation.
At March 31, 2005 the Company had net operating loss carryforwards for US
Income Tax purposes of approximately $245,465,000 which if not used will
expire primarily during the years 2005 through 2023. For Canadian Income Tax
purposes, the Company had net operating loss and capital loss carryforwards
of $4,000,000 and $1,000,000, respectively. The net operating loss
carryforwards commenced expiring in 2003 and capital loss carryforwards
expire in fiscal year 2005.
NOTE 12 - CAPITAL LEASE OBLIGATION
The future minimum lease payments for each fiscal year under the capital
lease for equipment expiring in fiscal year 2007, together with the balance
of the obligation under capital lease at March 31, 2005 are as follows:
2005 $ 77,970
2006 76,109
---------
Total minimum lease payments 154,079
Less: amount representing interest (12,327)
---------
141,752
Less: current portion (71,602)
---------
Balance of obligation $ 70,150
=========
-19-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
- -----------------
The Company, from time to time, during the normal course of its business
operations, may be subject to various litigation claims and legal disputes.
Currently there are no claims or disputes.
Operating Leases
- ----------------
The Company has the following future minimum payments with respect to leases
for office space, computer and office equipment at March 31, 2005.
2005 $ 333,702
2006 324,468
2007 303,276
2008 300,079
2009 361,465
Thereafter 981,915
-----------
$2,604,905
===========
Rent expense for operating leases in Fiscal 3Q05 and 3Q04 was $68,307 and
$16,977, respectively (net of $9,000 and $-0- of sublease income) and
$219,879 and $165,769 for Fiscal Nine Months 2005 and Fiscal Nine Months 2004
(net of $21,000 and $-0- of sublease income).
The above rental expenses will be offset by $15,000 in annual sublease income
through August 31, 2005.
Deferred Inducement
- -------------------
In January 2004, DataWave entered into a ten year lease for office space in
Richmond, British Columbia, which is being amortized over the ten year term
of the lease. At March 31, 2005, the tenant improvement allowance receivable
in the sixth year of the lease is $110,865. At March 31, 2005, the deferred
rent inducement was $330,426 less the current portion of $28,940 (2003 -
$-0- ).
-20-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 14 - STOCKHOLDERS' EQUITY
Warrants
- --------
From time to time, the Board of Directors of the Company may authorize the
issuance of warrants to purchase the Company's common stock to parties other
than employees and directors. Warrants may be issued as a unit with shares
of common stock, as an incentive to help the Company achieve its goals, or in
consideration for cash, financing costs or services rendered to the Company,
or a combination of the above, and generally expire within several months to
5 years from the date of issuance. The following table summarizes activity
for common stock warrants outstanding during the Fiscal Nine Months 2005:
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
------ ----------------- ----------------
Warrants outstanding, 6/30/04 2 $ 5.00 - $975.00 $185.00
Warrants cancelled/expired (1) $ 5.00 - $356.00 $ 95.00
------ ----------------- -------
Warrants outstanding, 3/31/05 1 $100.00 - $975.00 $350.00
====== ================= =======
The Company has adopted FASB Statement 123, "Accounting for Stock-Based
Compensation", which requires compensation cost associated with warrants
issued to parties other than employees and directors to be valued based on
the fair value of the warrants. There were no common stock warrants issued
during Fiscal Nine Months 2005.
Stock Option Plan
- -----------------
The Company, with stockholder approval, has adopted a Stock Option Plan (the
"Plan") which provides for the granting of options to officers, key
employees, certain consultants and others. Options to purchase the Company's
common stock may be made for a term of up to ten years at the fair market
value at the time of the grant. Incentive options granted to a ten percent
or more stockholder may not be for less than 110% of fair market value nor
for a term of more than five years.
The aggregate fair market value of the stock for which an employee may be
granted incentive options which are first exercisable in any calendar year
shall not exceed $100,000.
-21-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 14 - STOCKHOLDERS' EQUITY (Continued)
Stock Options
- -------------
The Company's Board of Directors periodically authorizes the issuance of
options to purchase the Company's common stock to employees and members of
the Board of Directors. These options may generally be exercised at the fair
market value of the common stock on the date of the grant and generally carry
such other terms as are outlined in the Company's stock option plan. The
following table summarizes activity for stock options during the Fiscal Nine
Months 2005:
Weighted Average
Shares Exercise Price Exercise Price
(000) Per Share Per Share
------ ----------------- ----------------
Options outstanding,
6/30/04 and 3/31/05 5 $9.00 - $1,188.00 $637.00
====== ================= =======
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for the issuance of its
stock options. There were no stock options issued during Fiscal Nine Months
2005.
-22-
INTEGRATED DATA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 15 - NET AGENCY SALES
DataWave's revenues are primarily generated from the resale of prepaid long
distance and cellular telephone time, principally from the sale of prepaid
calling cards and point of sale activated PINs. Sales of prepaid calling
cards and point of sale activated PINs under third party brands where
DataWave is not the primary obligor of the related phone service, does not
incur significant inventory risk, and has no significant continuing
obligation with respect to operation of the card subsequent to sale are
recognized at the date of sale on a net basis. The resulting net agency
revenue earned is calculated as the difference between the gross proceeds
received and the cost of the related phone time paid to suppliers and is
included as revenue in the Company's statement of operations. Net agency
sales consist of the following (in thousands):
Fiscal Fiscal
Fiscal Fiscal Nine Months Nine Months
3Q05 3Q04 2005 2004
-------- -------- ----------- -----------
Gross proceeds received
on agency sales $ 28,118 $ 18,021 $ 72,009 $ 47,401
Less payments to suppliers (26,273) (15,866) (66,553) (41,282)
-------- -------- ---------- ----------
Net agency sales $ 1,845 $ 2,155 $ 5,456 $ 6,119
======== ======== ========== ==========
NOTE 16 - SEGMENT INFORMATION
The Company through its majority owned subsidiary, DataWave, manufactures and
operates prepaid calling card merchandising machines and resells long
distance telephone time through prepaid and other calling cards distributed
through its machines, at retail locations and on a wholesale basis to third
parties. The Company considers its business to consist of one reportable
operating segment; therefore, these consolidated financial statements have
not been segmented.
The Company has net long-lived assets of $703,000 in the US and $4,513,000 in
Canada at March 31, 2005. Long-lived assets consist of property and
equipment, equity investment, deferred development costs, goodwill, and other
intangible assets net of accumulated depreciation and amortization. The
Company has earned revenue from sales to customers of approximately
$2,860,000 in the US, $3,878,000 in Canada, $8,000 in Mexico, and $-0- in the
United Kingdom for Fiscal 3Q05 and approximately $6,599,000 in the US,
$9,951,000 in Canada, $45,000 in Mexico and $53,000 in the United Kingdom,
for Fiscal Nine Months 2005. During Fiscal Nine Months 2005, the top ten
customers comprised approximately 60% of revenue.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of our results of operations and
financial position should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this Report.
General Operations
- ------------------
Integrated Data Corp. ("IDC") 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 communication, point-of-sale activation,
financial transaction, and other services.
As of March 31, 2005 our holdings were as follows:
CORPORATION OR INTEREST PERCENT OWNERSHIP
C3 Technologies Inc. 100%
DataWave Systems Inc. 50.1%
DataWave International License 100%
IDC Italia Srl 60%
Integrated Communications Services Ltd 100%
Integrated Data Technologies Ltd 100%
Descriptions of each of these interests and operations can be found in our
Annual Report on Form 10-K for Fiscal 2004.
Results of Operations
- ---------------------
We have undergone significant changes over the past several years. In
November 2002 we held two operating subsidiaries, C3 Technologies Inc ("C3")
and a 60% ownership in an Italian Joint Venture Company then named RadioNet
Italia and subsequently renamed IDC Italia Srl. C3 was formed to manage all
the proprietary ClariCAST (Registered Trademark) intellectual property and
assets, including patents, patents pending, trademarks, and copyrights
developed by the Company under its former name of Clariti Telecommunications
International. IDC Italia was formed to market and operate ClariCAST(R)
services in Italy.
Since December 2002, we have acquired a number of other holdings as detailed
in the table in the General Operations section above. While C3, Integrated
Communications Services Ltd ("ICS"), and DataWave Systems Inc ("DataWave")
all reported revenue for this reporting quarter, DataWave's operating
results, by far, have the most influence on our consolidated financial
statements.
-24-
As a publicly traded company, DataWave maintains current filings with the
U.S. Securities and Exchange Commission including annual reports on Form 10-
KSB, quarterly reports on Form 10-QSB, and current reports on Form 8-K.
Detailed information on DataWave can be found by accessing these filings
either through the SEC website (www.sec.gov) or on the DataWave corporate
website (www.datawave.ca); however, the information in, or that can be
accessed through, the DataWave website is not part of this report.
DataWave has a March 31 fiscal year end while our fiscal year ends on June
30th. Because of this difference, the Company has adopted the policy of
consolidating the financial statements of DataWave with a three-month lag
allowing like quarters to be consolidated. Hence, in this Form 10-Q for our
fiscal third quarter of 2005, the three months and nine months ended March
31, 2005, DataWave's financial statements for the three months and nine
months ended December 31, 2004 are being consolidated.
In April 2004 we entered into a Letter Agreement with DataWave outlining the
terms under which we would acquire the remaining 49.9% of DataWave not
already owned. On June 2, 2004 we signed an Agreement and Plan of Merger
with DataWave detailing the terms of the planned merger. On November 9, 2004
we announced the termination of the merger agreement and cancellation of the
merger process. Various delays pushed the projected merger completion date
past December 31, 2004, and we were not prepared to continue to expend more
funds on a merger transaction with no definitive completion date.
We executed a Merger Break-up and Mutual Release Agreement (the "Break-up
Agreement") with DataWave on March 3, 2005. Under the terms of this Break-up
Agreement DataWave agreed to compensate us for expended merger costs in the
amount of $470,000, $235,000 in cash and 2,937,500 shares of newly issued
DataWave common stock at an issue price of $0.08 per share (the "Compensation
Shares"). Both parties accepted this as full and final settlement of any and
all issues relating to the termination of the planned merger. We received
the $235,000 cash payment in Fiscal 3Q05. The 2,937,500 shares of DataWave
common stock were issued to us on May 11, 2005 bringing our total number of
DataWave shares owned to 24,899,530, or 53.2% of DataWave's outstanding
shares. The DataWave Compensation Shares are subject to the restrictions on
trading imposed by Rule 144 under the Securities Act of 1933.
Also on March 3, 2005 we entered into a License Termination Agreement with
DataWave terminating our exclusive license to make, sell, and use the
DataWave trade name, technology, know-how, trade secrets and patents then
existing and to be developed in the future for all territories world-wide
with the exception of North America, the Caribbean, and South America (the
"DataWave International License"). In exchange for the termination, or sell-
back, of the DataWave International License, we received $865,000 in
compensation payable as $265,000 in cash and $600,000 in the form of a two-
year convertible, interest-free promissory note. The terms of the promissory
note are that anytime during the two-year period we have the option to
convert the note upon demand into DataWave common shares at $0.08 (8 cents)
per share for a total of 7,500,000 newly issued shares. If we do not
exercise this right within the two years, DataWave shall have the option to
-25-
either repay the original $600,000 loan amount in cash or to issue 7,500,000
shares of newly issued common stock to us. Converting this note today would
bring our ownership position in DataWave to 32,409,530 shares, or a
controlling interest of 59.7% of DataWave's issued and outstanding common
shares.
Subsequent to the period covered by this quarterly report, Integrated
Communications Services Ltd. ("ICS"), a wholly-owned, London-based subsidiary
of IDC, acquired 100% of the assets of Data Marq (UK) Ltd. ("Data Marq") for
37,500 UK Pounds on May 3, 2005. At the time of the assets purchase, Data
Marq, a consolidator and reseller of long distance telephone service, was in
Administration, the U.K. equivalent of Chapter 11 protection in the U.S.
Three senior ex-employees of Data Marq shall be tasked with running this new
ICS operation. Funding for this venture was provided by Integrated
Technologies & Systems Ltd., a greater than 10% shareholder of IDC, under a
one-year, interest-free, no-collateral loan to ICS. To date under this loan,
ICS expects to borrow 88,000 UK Pounds to be allocated as follows: 37,500 UK
Pounds for the assets purchase, 3,500 UK Pounds for transaction fees and
costs, and 47,000 UK Pounds for working capital.
Three Months Ended March 31, 2005 ("Fiscal 3Q05")
vs. Three Months Ended March 31, 2004 ("Fiscal 3Q04")
- --------------------------------------------------------
For Fiscal 3Q05, we incurred net income of $26,000, or $0.003 per share, on
$6,749,000 in revenue as compared to a net loss of $226,000, or $(0.03) per
share, on $4,630,000 in revenue in Fiscal 3Q04. A number of factors
accounted for this increase in income including: (1) the significant
increase in consolidated revenue from DataWave; (2) a reduction in general
and administrative expenses as a percentage of revenue (21% in Fiscal 3Q04 to
15% in Fiscal 3Q05) attributable to cost cutting measures reducing corporate
overhead; and (3) the beginnings of income from an unconsolidated subsidiary,
the newly formed NextWave Card Corp venture of DataWave's. Cost of revenue
as a percentage of revenue increased from approximately 57% in Fiscal 3Q04 to
approximately 66% in Fiscal 3Q05. For Fiscal 3Q05 and Fiscal 3Q04, close to
100% and 99%, respectively, of our revenue was attributable to DataWave.
Marketing expenses increased from $374,000 in Fiscal 3Q04 to $562,000 in
Fiscal 3Q05 staying at approximately 8% of revenue. Research and development
expenses decreased from $375,000 in Fiscal 3Q04 to $306,000 in Fiscal 3Q05.
All research and development expenses are attributable to DataWave. Reduced
salary costs and the allocation of some resources to general and
administrative activities account for the decrease.
Depreciation and amortization expenses decreased from $456,000 in Fiscal 3Q04
to $351,000 in Fiscal 3Q05. The reduction is attributable to the termination
of the DataWave International License, an amortized intangible asset.
General and administrative expenses were $967,000 in Fiscal 3Q04 and
$1,023,000 in Fiscal 3Q05. As a percentage of revenue this is a decrease
from 21% in Fiscal 3Q04 to 15% in Fiscal 3Q05, and it is primarily due to IDC
corporate salary reductions.
-26-
Because of the reimbursement of merger costs from the Merger Break-up and
Mutual Release Agreement, a merger cost credit was necessary on the
consolidated statement of operations. The minority interest expense
represents the 49.9% of DataWave not held by us. Income from unconsolidated
subsidiary and gain on foreign exchange are attributable to DataWave
operations. Other income is from the IDC corporate office sublease.
Nine Months Ended March 31, 2005 ("Fiscal Nine Months 2005")
vs. Nine Months Ended March 31, 2004 ("Fiscal Nine Months 2004")
- ----------------------------------------------------------------
For Fiscal Nine Months 2005, we incurred a net loss of $682,000, or $(0.09)
per share, on $16,648,000 in revenue as compared to a net loss of $694,000,
or $(0.09) per share, on $13,565,000 in revenue in Fiscal Nine Months 2004.
Cost of revenue as a percentage of revenue increase slightly from 59% in
Fiscal Nine Months 2004 to 62% in Fiscal Nine Months 2005. For Fiscal Nine
Months 2005 and Fiscal Nine Months 2004, approximately 100% and 99%,
respectively, of our revenue was attributable to DataWave.
Marketing expenses increased from $1,198,000 in Fiscal Nine Months 2004 to
$1,389,000 in Fiscal Nine Months 2005, but as a percentage of revenue this
represents an insignificant change. Research and development expenses
decreased from $1,121,000 in Fiscal Nine Months 2004 to $927,000 in Fiscal
Nine Months 2005. All research and development expenses are attributable to
DataWave. Reduced salary costs and the allocation of some resources to
general and administrative activities account for the decrease.
Depreciation and amortization decreased from $1,192,000 in Fiscal Nine Months
2004 to $1,078,000 in Fiscal Nine Months 2005, attributable to the
termination of the DataWave International License, an amortized intangible
asset. General and administrative expenses were $2,643,000 in Fiscal Nine
Months 2004 and $2,616,000 in Fiscal Nine Months 2005, not a significant
decrease.
In Fiscal Nine Months 2005 we experienced merger costs associated with the
proposed merger with DataWave of $582,000, where there were no merger costs
in Fiscal Nine Months 2004. Based on the sale price of the DataWave
International License a $457,000 impairment loss was taken at December 31,
2004. The minority interest expense represents the 49.9% of DataWave not
held by us. Income from unconsolidated subsidiary and gain on foreign
exchange are attributable to DataWave operations.
Liquidity and Capital Resources
- -------------------------------
At March 31, 2005, we had a working capital deficit of $837,000 (including a
cash balance of $3,517,000) as compared to a working capital deficit of
$912,000 (including a cash balance of $857,000) at June 30, 2004. Our
operating activities provided cash of $3,206,000 during Fiscal Nine Months
2005 compared to a decrease in cash of $226,000 during Fiscal Nine Months
2004. The increase in cash provided by operating activities is due to
management of receivables and inventory and payments to suppliers resulting
-27-
in an increase in accounts payable of $6,495,000 offset by an increase in
accounts receivable of $2,953,000 and an increase in inventory of $1,832,000
during Fiscal Nine Months 2005. Inventory levels represent approximately ten
days sales.
Upon emergence from Chapter 11 bankruptcy in November 2002, we negotiated a
loan agreement with Integrated Technologies & Systems Ltd. ("IT&S") to have a
committed source of funds to satisfy our working capital requirements. The
terms of the loan are zero percent (0%) interest, no associated collateral,
and payable on demand. IT&S also has the option to convert any or all of the
loan balance at any time to IDC common stock at a conversion price of $2.00
per share. Under this loan IT&S and/or its affiliates have agreed to provide
up to $1,000,000 for our working capital requirements from July 1, 2004
through June 30, 2005. As of June 30, 2004 the IT&S loan balance was
$887,000. During Fiscal Nine Months 2005 we borrowed an additional $294,275
and paid back $302,775 yielding a loan balance as of March 31, 2005 of
$878,500. As of the filing of this Form 10-Q the IT&S loan balance stood at
$916,195.
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 us.
Significant Accounting Policies
- -------------------------------
Our accounting policies are set out in Note 3 of the accompanying
consolidated financial statements of IDC. 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.
-28-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt)
that are sensitive to future changes in interest rates, currency exchange
rates, commodity prices or other market factors.
Through our subsidiaries we are exposed to market risk related to changes in
interest and foreign currency exchange rates, each of which could adversely
affect the value of our current assets and liabilities. At March 31, 2005,
we had cash and cash equivalents consisting of cash on hand and highly liquid
money market instruments with original terms to maturity of less than 90
days. If market interest rates were to increase immediately and uniformly by
10% from its levels at March 31, 2005, the fair value would decline by an
immaterial amount.
We do not believe that our results of operations or cash flows would be
affected to any significant degree by a sudden change in market interest
rates relative to our cash and cash equivalents, given our current ability to
hold our money market investments to maturity. We do not have any long-term
debt instruments so we are not subject to market related risks such as
interest or foreign exchange on long-term debt. We do not enter into foreign
exchange contracts to manage exposure to currency rate fluctuations related
to our U.S. dollar denominated cash and money market investments.
With a portion of revenues and operating expenses denominated in Canadian
dollars and British pounds, a sudden or significant change in foreign
exchange rates could have a material effect on our future operating results
or cash flows. We purchase goods and services in U.S. dollars, Canadian
dollars, and British pounds and earn revenues in all three currencies as
well. Foreign exchange risk is managed by satisfying foreign denominated
expenditures with cash flows or assets denominated in the same currency. We
do not consider our market risk exposure relating to foreign currency
exchange to be material, as we generally have sufficient cash outflows based
in these currencies to largely offset the cash inflows based in these
currencies, thereby creating a natural hedge.
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ITEM 4. CONTROLS AND PROCEDURES.
As required by Rule 13a-15 under the Exchange Act, as of the end of the
period covered by this report, we have carried out an evaluation of the
effectiveness of the design and operation of our company's disclosure
controls and procedures. This evaluation was carried out under the
supervision and with the participation of our company's management, including
our company's president and chief executive officer. Based upon that
evaluation, our company's president and chief executive officer concluded
that our company's disclosure controls and procedures are effective. There
have been no changes in our company's internal controls over financial
reporting that occurred during the period covered by this quarterly report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our company's
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our company's reports
filed under the Exchange Act is accumulated and communicated to management,
including our company's president and chief executive officer as appropriate,
to allow timely decisions regarding required disclosure.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company, from time to time, during the normal course of its business
operations, may be subject to various litigation claims and legal disputes.
Currently there are no claims or disputes.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
- --------
31* Certification of Chief Executive Officer and principal financial
officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32* Certification of Chief Executive Officer and principal financial
officer pursuant to 18 U.S.C. Section 1350.
*filed herewith
Reports on Form 8-K
- -------------------
A current report on Form 8-K dated March 3, 2005 was filed disclosing the
entry into two (2) material definitive agreements between the Company and
DataWave Systems Inc.: (1) the License Termination Agreement and (2) the
Merger Break-up and Mutual Release Agreement.
-31-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED DATA CORP.
By: /s/David C. Bryan
-----------------
David C. Bryan
President & Chief Executive Officer
Dated: May 20, 2005
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