Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended July
31, 2008
OR
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the
transition period from
to
Commission
file number 1-11601
iDNA,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
34-1816760
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
|
|
|
|
|
|
415
Madison Avenue, 7th
Floor, New York, New York
|
|
10017
|
(Address
of principal executive
offices)
|
|
(Zip
Code)
|
|
|
|
|
|
|
(212)
644-1400
|
|
|
(Registrant’s
telephone number, including
area code)
|
|
|
|
|
|
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
(See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes
o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
Class
|
|
Outstanding
at September 15,
2008
|
Common
Stock, $0.05 par value
|
|
13,085,864
|
|
|
|
iDNA,
Inc. and Subsidiaries
TABLE
OF CONTENTS
|
|
|
PAGE
|
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of
|
|
|
|
July
31, 2008 and January 31, 2008
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the
|
|
|
|
Three
Months and Six Months Ended July 31, 2008 and 2007
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statement of Stockholders’ Equity and
|
|
|
|
Comprehensive
Income (Loss) for the Six Months Ended July
31, 2008
|
|
5
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
|
|
Six
Months Ended July 31, 2008 and 2007
|
|
6
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
7
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of
|
|
|
|
Financial
Condition and Results of Operations
|
|
22
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
|
44
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
44
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
45
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
46
|
|
|
|
|
Item 2. |
Unregistered
Sales of
Equity Securities and Use of Proceeds |
|
46
|
|
|
|
|
Item 3. |
Defaults Upon
Senior
Securities |
|
46
|
|
|
|
|
Item 4. |
Submission
of Matters
to a Vote of Security Holders |
|
46
|
|
|
|
|
Item
5.
|
Other
Information
|
|
46
|
|
|
|
|
Item
6.
|
Exhibits
|
|
47
|
|
|
|
|
Signatures
|
|
|
48
|
|
|
|
|
Certifications
|
|
|
49
|
PART
I. FINANCIAL INFORMATION
Item
1.
Financial Statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(in
thousands, except share data)
|
|
July
31,
|
|
January
31,
|
|
|
|
2008
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
561
|
|
$
|
169
|
|
Restricted
cash (Note 1)
|
|
|
147
|
|
|
147
|
|
Investment
in trading securities (Note 1)
|
|
|
225
|
|
|
1,421
|
|
Accounts
receivable, net of allowance
|
|
|
|
|
|
|
|
of
$72 and $75, respectively (Note 1)
|
|
|
1,647
|
|
|
1,453
|
|
Income
taxes refundable
|
|
|
19
|
|
|
19
|
|
Inventory
(Note 1)
|
|
|
184
|
|
|
165
|
|
Prepaid
expenses
|
|
|
382
|
|
|
444
|
|
Other
current assets
|
|
|
73
|
|
|
90
|
|
Total
current assets
|
|
|
3,238
|
|
|
3,908
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated
|
|
|
|
|
|
|
|
depreciation
of $3,720 and $3,325, respectively (Note 1)
|
|
|
1,834
|
|
|
2,102
|
|
Investment
in AFC (Note 2)
|
|
|
6,743
|
|
|
7,129
|
|
Other
assets
|
|
|
149
|
|
|
414
|
|
|
|
$
|
11,964
|
|
$
|
13,553
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long term obligations (Notes 3 and 4)
|
|
$
|
1,009
|
|
$
|
1,123
|
|
Accounts
payable
|
|
|
2,190
|
|
|
1,220
|
|
Deferred
revenue (Note 1)
|
|
|
1,206
|
|
|
1,552
|
|
Self-insurance
claims (Note 5)
|
|
|
142
|
|
|
172
|
|
Other
liabilities
|
|
|
861
|
|
|
1,324
|
|
Total
current liabilities
|
|
|
5,408
|
|
|
5,391
|
|
|
|
|
|
|
|
|
|
Long
term obligations (Notes 3 and 4)
|
|
|
3,831
|
|
|
13,373
|
|
Convertible
promissory note (Note 4)
|
|
|
-
|
|
|
2,825
|
|
Accrued
income taxes, long term
|
|
|
622
|
|
|
610
|
|
Redeemable
common stock - issued 2,500,000 shares (Note 4)
|
|
|
3,121
|
|
|
-
|
|
|
|
|
12,982
|
|
|
22,199
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 5)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
-
|
|
Common
stock - $.05 par value,
|
|
|
|
|
|
|
|
authorized
50,000,000 shares, issued
|
|
|
|
|
|
|
|
37,449,589
and 39,949,589 shares, respectively (Note 4)
|
|
|
1,872
|
|
|
1,997
|
|
Additional
paid-in capital
|
|
|
175,743
|
|
|
175,537
|
|
Retained
deficit
|
|
|
(158,810
|
)
|
|
(164,076
|
)
|
Deferred
compensation
|
|
|
(6
|
)
|
|
(18
|
)
|
Treasury
stock, at cost, 26,863,725 and 29,938,725
|
|
|
|
|
|
|
|
shares,
respectively
|
|
|
(19,817
|
)
|
|
(22,086
|
)
|
Total
stockholders' equity (deficit)
|
|
|
(1,018
|
)
|
|
(8,646
|
)
|
|
|
$
|
11,964
|
|
$
|
13,553
|
|
See
accompanying notes to condensed consolidated financial statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(in
thousands, except per share data)
(unaudited)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
July
31,
|
|
July
31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(Note 1)
|
|
$
|
4,146
|
|
$
|
2,824
|
|
$
|
7,649
|
|
$
|
6,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues (Note 1)
|
|
|
2,562
|
|
|
2,045
|
|
|
4,896
|
|
|
4,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,584
|
|
|
779
|
|
|
2,753
|
|
|
1,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,087
|
|
|
2,349
|
|
|
4,164
|
|
|
4,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(503
|
)
|
|
(1,570
|
)
|
|
(1,411
|
)
|
|
(2,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from AFC investment (Note 2)
|
|
|
(22
|
)
|
|
65
|
|
|
214
|
|
|
336
|
|
Interest
income
|
|
|
2
|
|
|
1
|
|
|
3
|
|
|
3
|
|
Interest
expense (Note 3)
|
|
|
(290
|
)
|
|
(58
|
)
|
|
(524
|
)
|
|
(113
|
)
|
Interest
expense abatement (Note 4)
|
|
|
156
|
|
|
-
|
|
|
156
|
|
|
-
|
|
Gain
on restructuring of debt (Note 4)
|
|
|
9,026
|
|
|
-
|
|
|
9,026
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
8,369
|
|
|
(1,562
|
)
|
|
7,464
|
|
|
(2,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
(provision) for income taxes
|
|
|
(6
|
)
|
|
2
|
|
|
(12
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
8,363
|
|
|
(1,560
|
)
|
|
7,452
|
|
|
(2,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net of tax
|
|
|
1
|
|
|
3
|
|
|
2
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
8,364
|
|
$
|
(1,557
|
)
|
$
|
7,454
|
|
$
|
(2,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
.79
|
|
$
|
(.15
|
)
|
$
|
.72
|
|
$
|
(.26
|
)
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss) per share
|
|
$
|
.79
|
|
$
|
(.15
|
)
|
$
|
.72
|
|
$
|
(.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,586
|
|
|
9,955
|
|
|
10,320
|
|
|
9,908
|
|
See
accompanying notes to condensed consolidated financial statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Stockholder’ Equity
(Deficit)
and
Comprehensive Income
(Loss)
Six
Months Ended July 31,
2008
(in
thousands, except per share data)
(unaudited)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
|
|
|
|
|
|
Deferred
|
|
|
|
Comprehensive
|
|
|
|
|
|
Par
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury
|
|
Compensation
|
|
|
|
Income
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
Capital
|
|
Deficit
|
|
Stock
|
|
Expense
|
|
Total
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
31, 2008
|
|
|
-
|
|
$
|
-
|
|
|
39,949,589
|
|
$
|
1,997
|
|
$
|
175,537
|
|
$
|
(164,076
|
)
|
$
|
(22,086
|
)
|
$
|
(18
|
)
|
$
|
(8,646
|
)
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,454
|
|
|
|
|
|
|
|
|
7,454
|
|
$
|
7,454
|
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
Treasury
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(344
|
)
|
|
425
|
|
|
|
|
|
81
|
|
|
|
|
Issuance
of common stock from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
treasury
for restructuring debt (Note 4)
|
|
|
|
|
(2,500,000
|
)
|
|
(125
|
)
|
|
125
|
|
|
(1,844
|
)
|
|
1,844
|
|
|
|
|
|
-
|
|
|
|
|
Deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
-
|
|
$
|
-
|
|
|
37,449,589
|
|
$
|
1,872
|
|
$
|
175,743
|
|
$
|
(158,810
|
)
|
$
|
(19,817
|
)
|
$
|
(6
|
)
|
$
|
(1,018
|
)
|
|
|
|
See
accompanying notes to condensed consolidated financial statements.
iDNA,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
(unaudited)
|
|
Six
Months Ended
|
|
|
|
July
31,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
7,454
|
|
$
|
(2,595
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
Gain
on restructuring of debt
|
|
|
(9,026
|
)
|
|
-
|
|
Depreciation
and amortization
|
|
|
415
|
|
|
826
|
|
Non-cash
interest
|
|
|
192
|
|
|
-
|
|
Income
from AFC investment
|
|
|
(214
|
)
|
|
(336
|
)
|
Share-based
compensation expense
|
|
|
162
|
|
|
151
|
|
Stock
issued as compensation for services rendered
|
|
|
-
|
|
|
79
|
|
Amortization
of deferred compensation expense
|
|
|
12
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(194
|
)
|
|
11
|
|
Accrued
income tax/refundable
|
|
|
12
|
|
|
-
|
|
Accounts
payable
|
|
|
970
|
|
|
396
|
|
Deferred
revenue
|
|
|
(346
|
)
|
|
817
|
|
Self
insurance claims
|
|
|
(30
|
)
|
|
-
|
|
Other
operating assets and liabilities, net
|
|
|
(211
|
)
|
|
(165
|
)
|
Net
cash used in operating activities
|
|
|
(804
|
)
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from AFC distributions
|
|
|
600
|
|
|
750
|
|
Proceeds
from sale of marketable securities
|
|
|
1,196
|
|
|
-
|
|
Purchase
of other property and equipment
|
|
|
(147
|
)
|
|
(58
|
)
|
Net
cash provided by investing activities
|
|
|
1,649
|
|
|
692
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
-
|
|
|
14
|
|
Payments
of loan origination fees
|
|
|
(43
|
)
|
|
-
|
|
Payments
on debt, notes payable and capital lease
|
|
|
(410
|
)
|
|
(155
|
)
|
Net
cash used in financing activities
|
|
|
(453
|
)
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
392
|
|
|
(254
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
169
|
|
|
548
|
|
Cash
and cash equivalents at end of period
|
|
$
|
561
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
197
|
|
$
|
115
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial statements
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 - Basis of Presentation and Significant Accounting
Policies
General
The
accompanying unaudited condensed consolidated financial statements include
the
accounts
of iDNA, Inc. and its subsidiaries (“iDNA”). iDNA’s operations are comprised of
three principal reportable segments: (i) strategic communications services,
(ii)
information services and (iii) entertainment. iDNA manages each segment
separately as a consequence of different marketing, service requirements and
technology strategies (see Note 6).
The
strategic communications services segment provides content development via
the
design, development and production of media, collateral material, logistics,
support and/or broadcast services for presentations at corporate and
institutional events, meetings, training seminars and symposiums. The
presentations may be live at single or multi-site venues and can include video
conferencing, satellite broadcasting and webcasting or the presentations may
be
provided via on-demand access via internet websites, DVD or video
tape.
The
information services segment utilizes custom wireless communication technology
and proprietary software to facilitate client audience interaction,
participation and polling to collect, exchange and/or analyze data and
information in real-time during a meeting or event. The wireless communication
services are available as a turn-key service provided by iDNA during a scheduled
meeting or event or alternatively, a client can purchase from iDNA the required
electronic components and related proprietary software to administer its needs
independently.
As
a
consequence of iDNA’s investment in the Angelika Film Centers, LLC (“AFC”), iDNA
operates in the movie exhibition and entertainment industry (see Note
2).
The
financial statements are unaudited but in the opinion of management, reflect
all
adjustments (consisting only of normal recurring accruals) necessary for a
fair
presentation of iDNA’s consolidated financial position, results of operations,
stockholders’ equity and comprehensive loss, and cash flows for the periods
presented.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the rules of the Securities and Exchange
Commission applicable to interim financial statements and therefore do not
include all disclosures that might normally be required for financial statements
prepared in accordance with generally accepted accounting principles. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with iDNA’s consolidated financial statements, including the
notes thereto, appearing in iDNA’s Annual Report on Form 10-K for the year ended
January 31, 2008. The results of operations for the three months and six months
ended July 31, 2008 are not necessarily indicative of operating results that
may
be achieved over the course of the full year.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
The
preparation of financial statements and the accompanying notes thereto, in
conformity with generally accepted accounting principles, requires management
to
make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities
at the
date of the financial statements and reported amounts of revenues and expenses
during the respective reporting periods. Examples include the provision for
bad
debt, useful lives of property and equipment and intangible assets, impairment
of property and equipment and intangible assets, deferred income taxes, self
insurance claims and assumptions related to equity-based compensation. Actual
results could differ from those estimates.
iDNA
uses
a January 31 year-end for financial reporting purposes. References herein to
the
term “Fiscal 2009” shall mean iDNA’s fiscal year ending January 31, 2009 and
references to other “Fiscal” years shall mean the year that ended (or ends, as
the case may be) on January 31 of the year indicated. The term the “Company” or
“iDNA” as used herein refers to iDNA, Inc. together with its consolidated
subsidiaries unless the context otherwise requires.
Investments
in Trading Securities
iDNA’s
investment in trading securities is comprised of an investment in a mutual
fund
which invests in highly liquid, AAA fixed income securities. iDNA’s investment
in trading securities is carried at fair market value at July 31, 2008.
Unrealized gains or losses on trading securities are credited or charged to
operations. Interest and dividends earned on the investment are recorded as
interest income.
Revenues
iDNA’s
revenues are earned within short time periods, generally less than one week.
iDNA recognizes revenue from its strategic communications segment, including
the
video production, video editing, meeting services and broadcast satellite or
webcast services, and its information services segment when the services are
complete and delivered or all technical services have been rendered. Deposits
and other prepayments are recorded as deferred revenue until revenue is
recognized. iDNA does not have licensing or other arrangements that result
in
additional revenues following the delivery of the video or a broadcast. Costs
accumulated in the production of the video, meeting services or broadcasts
are
deferred until the sale and delivery are complete. Deferred production costs
of
$73,000 and $90,000, respectively, are reported as other current assets at
July
31, 2008 and January 31, 2008.
iDNA
recognizes revenue from the sale of electronic equipment, proprietary software
and related components at the time of shipment. Deposits and other prepayments
received prior to shipment are recorded as deferred revenue until the electronic
equipment and related software are shipped. iDNA has licensing and technical
support arrangements for future software enhancements and upgrades for technical
support for previously delivered electronic equipment. Revenues derived from
licensing and technical support are recognized over the term of the licensing
and technical support period, which generally are sold in increments of one
year
of coverage. For the three months ended July 31, 2008 and 2007, electronic
equipment sales were $347,000 and $508,000, respectively. For the six months
ended July 31, 2008 and 2007, electronic equipment sales were $823,000 and
$1.1
million, respectively.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Cost
of Revenues
Cost
of
revenues consists of direct expenses specifically associated with client service
revenues. The cost of revenues includes direct salaries and benefits, purchased
products or services for clients, web hosting, support services, shipping and
delivery costs.
Research
and Development Costs
Research
and development costs are comprised principally of personnel costs incurred
for
enhancements, modifications, updates, service and support expenditures for
iDNA’s proprietary software. Research and development costs are charged to
operations as incurred and are included as a component of costs of revenues.
iDNA charged $103,000 and $111,000, respectively, to research and development
expense for the three months ended July 31, 2008 and 2007. iDNA charged $215,000
and $208,000, respectively, to research and development expense for the six
months ended July 31, 2008 and 2007.
Restricted
Cash
In
June
2006, iDNA obtained a letter of credit in an amount of $147,000 that was issued
in favor of the landlord of iDNA’s new New York headquarters. The letter of
credit is collateralized by an interest bearing money market account in the
same
amount. Therefore, $147,000 is classified as restricted cash as of July
31,
2008
and January 31, 2008.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is iDNA’s best estimate of the amount of
probable credit losses in iDNA's existing accounts receivable. iDNA determines
the allowance based on analysis of historical bad debts, client concentrations,
client credit-worthiness and current economic trends. iDNA reviews its allowance
for doubtful accounts quarterly. Past-due balances over 90 days and specified
other balances are reviewed individually for collectibility. All other balances
are reviewed on an aggregate basis. Account balances are written off against
the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. iDNA does not have any off-balance sheet
credit exposure related to its clients.
Inventory
Inventory
is comprised principally of electronic equipment and related components held
for
sale to clients. Inventory is valued at the lower of cost or market using the
first-in - first-out inventory cost method.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from eighteen months to ten years. Leasehold improvements are amortized over
the
shorter of the lease term or the estimated useful lives of the related
improvements.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Goodwill
and Other Intangible Assets
Intangible
assets with indefinite lives, including goodwill through January 31, 2008,
are
not subject to amortization but are subject to testing for impairment at least
annually or whenever there is an impairment indicator (see below).
Valuation
of Long-Lived Assets
iDNA
reviews
the carrying value of its long-lived assets (other than goodwill) whenever
events or changes in circumstances indicate that its carrying amount may not
be
recoverable. When indicators of impairment exist, iDNA determines whether the
estimated undiscounted sum of the future cash flows of such assets is less
than
their carrying amounts. If less, an impairment loss is recognized in the amount,
if any, by which the carrying amount of such assets exceeds their respective
fair values. The determination of fair value is based on quoted market prices
in
active markets, if available, or independent appraisals; sales price
negotiations; or projected future cash flows discounted at a rate determined
by
management to be commensurate with iDNA’s business risk. The estimation of fair
value utilizing discounted forecasted cash flows includes significant judgments
regarding assumptions of revenue, operating and marketing costs; selling and
administrative expenses; interest rates; property and equipment additions and
retirements; industry competition; and general economic and business conditions,
among other factors.
At
January 31, 2008, the goodwill for each of iDNA’s business segments (information
services and strategic communications services) was tested for impairment.
As a
consequence of the testing, iDNA determined that the carrying value of both
its
information services and its strategic communications services business segments
exceeded their fair value, which was estimated based upon the present value
of
each reporting units expected future cash flows. As a consequence, iDNA charged
to operations an aggregate of $8.0 million for the estimated impairment of
goodwill and other intangible assets relating to (i) its information services
segment in the amount of $5.9 million, and (ii) strategic communication services
segment in the amount of $2.1 million, respectively,
resulting in the reduction of the carrying value of all goodwill and other
intangible assets to zero. Prior to the impairment charge during the fourth
quarter of Fiscal 2008, iDNA charged to operations $202,000 and $405,000,
respectively, for the amortization of these intangibles for the three months
and
six months ended July 31, 2007.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Income
Taxes
Deferred
income taxes are provided for all temporary differences between the book and
tax
basis of assets and liabilities. Deferred income taxes are adjusted to reflect
new tax rates when they are enacted into law. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is recognized if it
is
anticipated that some or all of a net deferred tax asset may not be
realized.
In
February 2007, iDNA adopted the provisions of the Financial Accounting Standards
Board (“FASB”) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”), an interpretation of FASB Statement No. 109, Accounting
for Income Taxes.
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
recognition and measurement of a tax position taken or expected to be taken
on a
tax return. The interpretation requires that iDNA recognize the impact of a
tax
position in the financial statements if that position is more likely than not
of
being sustained on audit, based on the technical merits of the position. FIN
48
also provides guidance on derecognition classification, interest and penalties,
accounting in interim periods and disclosure.
In
accordance with the provisions of FIN 48, upon its adoption as of February
1,
2007, iDNA recorded an adjustment to retained deficit of $329,000, inclusive
of
interest, to reflect potential liabilities for iDNA’s uncertain tax positions,
inclusive of interest. iDNA recognizes interest and penalties associated with
uncertain tax positions as a component of tax expense (benefit). For the three
months and six months ended July 31, 2008, iDNA charged to operations $6,000
and
$12,000, respectively, for income taxes.
As
of
January 31, 2008 iDNA has federal net operating loss carryforwards of $91.5
million of which approximately $24.5 million is estimated to expire due to
the
limitations described below. As a consequence, iDNA’s remaining federal net
operating loss carryforwards of $67.0 million may be used to reduce future
taxable income. Largely
as a consequence of these operating loss carryforwards, iDNA reported a net
deferred tax asset of $29.0 million and an offsetting valuation allowance of
$29.0 million since iDNA is unable to determine, at this time, that it more
likely than not will generate future taxable income against which the net
operating loss could be applied.
Effective
November 3, 2000, iDNA repurchased shares of its common stock, $0.05 par value,
(“Common Stock”) and underwent a “change in ownership” as defined for the
purposes of Sections 382 and 383 of the Internal Revenue Code. As a consequence
of this “change in ownership”, the use of net operating loss carryforwards
totaling $61.0 million incurred prior to November 3, 2000 (“pre-change losses”)
will be subject to significant annual limitation. Based upon an evaluation
of
the tax position regarding the Section 382 limitation on the pre-change losses,
iDNA has determined that $24.5 million of these pre-change losses may expire
unused.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
Stock-Based
Compensation
Effective
February 1, 2006, iDNA adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based
Payment
(“SFAS
No. 123(R)”), which replaced SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
No. 123”), and superseded APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123(R) requires all share-based payments to employees, including grants
of
employee stock options, to be recognized in the financial statements based
on
their fair values beginning with the first interim or annual period after
December 15, 2005. iDNA elected the prospective method of adopting SFAS No.
123(R) which requires that compensation expense be recorded over the remaining
periods for what would have been the remaining fair value under SFAS No. 123
of
all unvested stock options and restricted stock at the beginning of the first
quarter of adoption. The compensation costs for that portion of awards is based
on the grant-date fair value of the awards as calculated for pro forma
disclosures under SFAS No. 123. iDNA charged to operations $40,000 and $74,000,
respectively, for share-based compensation for the three months ended July
31,
2008 and 2007. iDNA charged to operations $162,000 and $151,000, respectively,
for share-based compensation for the six months ended July 31, 2008 and
2007.
Earnings
Per Share
Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of shares of Common Stock, exclusive of Common Stock
subject to redemption (see Note 4), outstanding for the period. Dilutive
earnings per share for all periods presented is the same as basic earnings
per
share due to (i) the inclusion of common stock,
in the
form of stock options and warrants (“Common Stock Equivalents”), would have an
anti-dilutive effect on income (loss) per share for the three months and six
months ended July 31, 2008 and 2007 or (ii) there were no Common Stock
Equivalents for the respective period. For the three months ended July 31,
2008
and 2007, there were 0 and 12,736 Common Stock Equivalents, respectively,
excluded from the earnings per share computation due to their dilutive effect.
For the six months ended July 31, 2008 and 2007, there were 0 and 100,549 Common
Stock Equivalents, respectively, excluded from the earnings per share
computation due to their dilutive effect.
Non-cash
Financing Activities
In
July
2008, iDNA issued 2.5 million shares of Common Stock in exchange for the
repayment of $375,000 of aggregate principal amount of the Amended Promissory
Notes (defined below, see Note 4).
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair
Value Measurement
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with Generally Accepted Accounting Principles
(“GAAP”), and expands disclosures about fair value measurements. The provisions
of SFAS No. 157 are effective for fiscal years beginning after November 15,
2007. The FASB agreed to a one-year deferral of the effective date for
non-financial assets and liabilities that are recognized or disclosed at fair
value on a non-recurring basis. The application of this pronouncement did not
have a material impact on iDNA’s reported consolidated financial position or
results of operations.
In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
No. 159”). SFAS No. 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once
elected. SFAS No. 159 is effective for fiscal years beginning after November
15,
2007. The adoption of this pronouncement did not have a material impact on
iDNA’s reported consolidated financial position or results of
operations.
In
December 2007, the FASB issued SFAS No. 141-R, Business
Combinations.
SFAS
No. 141-R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The objective of SFAS No. 141-R
is to improve the relevance, representational faithfulness and comparability
of
the information that a reporting entity provides in its financial reports about
a business combination. SFAS No, 141-R changes the requirements for an
acquirer’s recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. iDNA does not anticipate the
application of this pronouncement will have a material impact on iDNA’s reported
consolidated financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements - an amendment to ARB
No.51.
SFAS
No. 160 requires that (i) noncontrolling (minority) interests be reported as
a
component of shareholders’ equity, (ii) net income attributable to the parent
and to the noncontrolling interest be separately identified in the consolidated
statement of operations, (iii) changes in a parent’s ownership interest while
the parent retains its controlling interest be accounted for as equity
transactions, (iv) any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value, and (v)
sufficient disclosures are provided that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No.160 is effective for annual periods beginning after December
15,
2008. iDNA does not anticipate the application of this pronouncement will have
a
material impact on iDNA’s reported consolidated financial position or results of
operations.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Basis of Presentation and Significant Accounting Policies
-
continued
In
March
2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities”
(“SFAS
161”). SFAS 161 enhances disclosure requirements for derivative instruments in
order to provide users of financial statements with an enhanced understanding
of
(i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities”
and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is to be applied prospectively for the first annual reporting
period beginning on or after November 15, 2008. iDNA does not anticipate the
application of this pronouncement will have a material impact on iDNA’s reported
consolidated financial position or results of operations.
Reclassifications
Certain
Fiscal 2008 amounts have been reclassified to conform with Fiscal 2009
presentations.
Note
2 – Investment in AFC
On
April
5, 2000, iDNA, through its wholly owned subsidiary National Cinemas, Inc.,
acquired a 50% membership interest in AFC. AFC is the owner and operator of
the
Angelika Film Centers,
which
is a multiplex cinema and café complex in the Soho District of Manhattan in New
York City.
AFC
is
currently owned 50% by iDNA and 50% by Reading International, Inc. (“Reading”).
The articles and bylaws of AFC provide that for all matters subject to a vote
of
the members, a majority is required, except that in the event of a tie vote,
the
Chairman of Reading shall cast the deciding vote.
iDNA
uses
the equity method to account for its investment in AFC. AFC uses a December
31
year-end for financial reporting purposes. iDNA reports on a January 31
year-end, and for its fiscal quarters ending April 30, July 31, October 31
and
January 31 records its pro-rata share of AFC’s earnings on the basis of AFC’s
fiscal quarters ending March 31, June 30, September 30 and December 31,
respectively. For the three months ended July 31, 2008 and 2007, iDNA recorded
a
loss of $22,000 and income of $65,000, respectively, representing its share
of
AFC’s net income (loss). For the six months ended July 31, 2008 and 2007, iDNA
recorded income of $214,000 and $336,000, respectively, representing its share
of AFC’s net income.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
2 – Investment in AFC - continued
Summarized
income statement data for AFC for the three months and six months ended June
30,
2008 and 2007, respectively, is as follows (in thousands):
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,043
|
|
$
|
1,288
|
|
$
|
2,890
|
|
$
|
3,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs
|
|
|
859
|
|
|
941
|
|
|
2,015
|
|
|
2,157
|
|
Depreciation
and amortization
|
|
|
206
|
|
|
195
|
|
|
403
|
|
|
390
|
|
General
and administrative expenses
|
|
|
22
|
|
|
21
|
|
|
44
|
|
|
68
|
|
|
|
|
1,087
|
|
|
1,157
|
|
|
2,462
|
|
|
2,615
|
|
Net
income (loss)
|
|
$
|
(44
|
)
|
$
|
131
|
|
$
|
428
|
|
$
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iDNA's
proportionate share of net income (loss)
|
|
$
|
(22
|
)
|
$
|
65
|
|
$
|
214
|
|
$
|
336
|
|
Note
3 – Current and Long Term Obligations
On
November 21, 2007, iDNA, via its wholly owned subsidiary, iDNA Cinema Holdings,
Inc. (“Holdings”), consummated a Master Loan and Security Agreement (the “Loan
Agreement”) with Silar Advisors, L.P. (“Silar”), as Lender and Administrative,
Payment and Collateral Agent, pursuant to which Silar provided a term loan
in an
aggregate principal amount of $4.25 million (the “Term Loan”) to Holdings (the
“Term Loan Financing”). Interest accrues on the Term Loan at a per annum rate
equal to the variable annual rate of interest designated from time to time
by
Citibank N.A. as its “prime rate,” plus 4%, or, if greater, 12.25%, and is
payable by Holdings on a quarterly basis. At July 31, 2008, the “prime rate” was
5.0%. The Term Loan matures on November 20, 2009 unless extended for one year
at
the option of Holdings, upon written notice provided to Silar between fifteen
(15) and forty-five (45) days prior to the Maturity Date, provided that no
default is then ongoing and that Holdings is then in compliance with its
financial covenants under the Loan Agreement. At July 31, 2008, Holdings and
iDNA were in compliance with the financial covenants under the Loan Agreement.
At July 31, 2008, the principal balance of the Term Loan was $3.9 million.
Holdings’
obligations under the Term Loan are secured by a pledge of all of Holdings’
assets, including all of the outstanding shares of National Cinemas, Inc.
(“NCI”), which owns a 50% membership interest in AFC.
The
Term Loan is also guaranteed by (i) iDNA (with such guaranty being secured
by a
pledge of substantially all of iDNA’s assets, other than the shares of its
operating subsidiaries) and (ii) NCI (with such guaranty being secured by a
pledge of substantially all of NCI’s assets, other than its 50% membership
interest in AFC).
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Current and Long Term Obligations - continued
In
connection with the consummation of the Term Loan, as required by the Loan
Agreement, iDNA issued warrants to Silar and a consultant (the “Warrants”) to
purchase 1.5 million and 60,000 shares, respectively, of iDNA’s Common Stock at
an exercise price of $0.27 per share. The number of shares issuable upon
exercise of the Warrants is subject to customary adjustment in the event of
a
stock dividend, stock split, reverse stock split or similar event and is
furthermore subject to a weighted-average antidilution protection in the event
that iDNA issues additional shares of Common Stock for consideration less than
the existing exercise price under the Warrants. Additionally, pursuant to the
Warrants, the holder thereof has been granted (subject to certain conditions,
including the reimbursement of iDNA’s costs) three demand registration rights
for the underlying shares of Common Stock, as well as unlimited piggyback
registration rights for such shares of Common Stock. The fair value of the
Warrants at the date of grant was $339,000. At July 31, 2008, the unamortized
fair value of the Warrants issued in the amount of $231,000 was recorded as
a
reduction of the principal on the Term Loan. iDNA charges to interest expense
the fair value of the Warrants over the expected three year term of the Term
Loan. For the three months and six months ended July 31, 2008, iDNA charged
to
interest expense $46,000 and $74,000, respectively, for the fair value of the
Warrants.
On
January 31, 2008, ARS consummated an auto loan with a financing institution
for
the purchase of a delivery van in the principal amount of $24,000. The auto
loan
is repayable in monthly installments of $755 with the last payment due February
2011. The auto loan bears interest at the rate of 9.0% and is collateralized
by
the van purchased with the proceeds from the loan. At July 31, 2008, the
principal balance of the auto loan was $21,000.
As
a
consequence of iDNA’s acquisition of OTI effective November 18, 2005, iDNA
issued to Flexner Wheatley & Associates (“FWA”) and MeetingNet Interactive,
Inc. (“MeetingNet”) promissory notes in an aggregate principal amount of $1.5
million (the “OTI Promissory Notes”). The OTI Promissory Notes bear interest at
5% per annum and are repayable in quarterly installments according to a formula
based upon the future cash flows realized from OTI’s operations. iDNA’s
obligations under the OTI Promissory Notes are secured by the membership
interests of OTI. At July 31, 2008, iDNA had outstanding principal obligations
under the terms of the OTI Promissory Notes of $855,000 and accrued interest
obligations of $12,000.
As
of
January 31, 2008, OTI did not meet certain minimum financial performance
criterion and, as a consequence, (i) iDNA retained an option to reduce the
purchase price in an amount estimated between $206,000 and $412,000 and (ii)
for
the three months and six months ended July 31, 2008 no interest was incurred
under the OTI Promissory Notes. iDNA has not exercised its option to reduce
the
purchase price for its acquisition of OTI as of September 12, 2008 and no
adjustment to the OTI Promissory Notes was recorded at July 31, 2008.
Prospectively, interest may accrue pursuant to the terms of the OTI Promissory
Notes once the minimum operating cash flow thresholds are achieved.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Current and Long Term Obligations - continued
As
a
consequence of iDNA’s acquisition of OMI Business Communications, Inc. (“OMI”)
effective April 1, 2003, iDNA assumed a $402,000 loan guaranteed by the U.S.
Small Business Administration (the “SBA Loan”). At July 31, 2008, the remaining
balance of the SBA Loan of $286,000 is repayable in monthly installments of
$3,309 with the last payment due in April 2017. The SBA Loan bears interest
at
the rate of 4% per annum. OMI’s obligations under the SBA Loan are
collateralized by substantially all of OMI’s assets and the personal guarantee
of Mr. Dean Thompson, President of OMI.
In
September 2006, OMI consummated equipment financing in the form of a capital
lease with a financing institution to acquire $102,000 in various digital media
production and editing equipment. The capital lease bears an implied interest
rate of 10% and is payable in monthly installments with the last payment due
in
July 2009. At July 31, 2008, the remaining balance due under the capital lease
was $35,000. The accumulated depreciation for the underlying equipment pursuant
to the capital lease was $65,000 and $48,000, respectively, at July 31, 2008
and
January 31, 2008.
The
components of long term obligations at July 31, 2008 are as follows (in
thousands):
|
|
Amounts
|
|
Auto
loan
|
|
$
|
21
|
|
Capital
leases
|
|
|
35
|
|
SBA
loan
|
|
|
286
|
|
Term
Loan
|
|
|
3,643
|
|
OTI
promissory notes
|
|
|
855
|
|
|
|
|
4,840
|
|
Less
current maturities
|
|
|
(1,009
|
)
|
Long-term
obligations and
|
|
|
|
|
convertible
debt
|
|
$
|
3,831
|
|
iDNA’s
current maturities and long term obligations at July 31, 2008 are as follows
(in
thousands):
|
|
Amounts
|
|
2009
|
|
$
|
1,012
|
|
2010
|
|
|
1,386
|
|
2011
|
|
|
2,480
|
|
2012
|
|
|
32
|
|
2013
|
|
|
32
|
|
Thereafter
|
|
|
132
|
|
|
|
|
5,074
|
|
Less
- unamortized debt discount
|
|
|
(231
|
)
|
Less
- capital lease interest
|
|
|
(3
|
)
|
|
|
$
|
4,840
|
|
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
4 – Gain on Restructuring of Debt and Issuance of Shares of Common Stock
Subject to Redemption
Effective
as of July 3, 2008, iDNA entered into a Reduction of Purchase Price Agreement
(the “Reduction Agreement”) with Steven Campus, president of the Campus Group
(defined below), the Campus Family 2000 Trust
(the
“Family Trust”)
and
the
Trust Established Under the Will of Nancy Campus (the “Shelter Trust” and,
collectively with the Family Trust, the “Trusts” and each a “Trust”). (The
Trusts and Steven Campus are herein referred to collectively as the
“Stockholders” and each as a “Stockholder”).
Pursuant
to and as provided in that certain Stock Purchase Agreement dated July 31,
2003
between iDNA and the Stockholders, iDNA acquired from the Stockholders all
of
the issued and outstanding shares of capital stock of each of (i) Campus
Group Companies, Inc. (“CGCI”),
(ii) Multi-Video Services,
Inc.
(“Multi-Video”),
(iii)
Interactive Conferencing Network, Inc.
(“Interactive”)
and
(iv)
Audience Response Systems, Inc. (“ARSI” and,
collectively with CGCI, Multi-Video, Interactive and ARSI, the “Campus
Group”).
In
consideration for the shares of the Campus Group so acquired, iDNA (i) made
a
cash payment to the Stockholders and (ii) issued to the Stockholders certain
promissory notes in an aggregate principal amount of $9.9 million and a
convertible promissory note in the principal amount of $2.8 million
(collectively, the “Promissory Notes”) (the cash amount and Promissory Notes
collectively, the “Purchase Price”). At July 2, 2008, iDNA had outstanding
principal obligations under the terms of the Promissory Notes of $12.1 million
and accrued interest of $156,000.
Pursuant
to the Reduction Agreement, iDNA and the Stockholders agreed, among other
matters, that the Purchase Price was reduced to a remaining balance of three
hundred seventy-five thousand dollars ($375,000) (the “Purchase Price Balance”).
The parties further agreed that, inasmuch as the Promissory Notes were intended
to represent iDNA’s obligation to pay the unpaid portion of the Purchase Price,
the aggregate outstanding amount of the Promissory Notes was reduced from an
aggregate of $12.1 million to an amount equal to the Purchase Price Balance.
The
Promissory Notes were modified and amended so that the outstanding principal
amounts due thereunder were reduced to an aggregate of $375,000. (The Promissory
Notes, as modified and amended pursuant to the Reduction Agreement, are
hereinafter referred to as the “Amended Promissory Notes.”)
Furthermore,
pursuant to the Reduction Agreement, in July 2008 the Stockholders surrendered
and delivered to iDNA each and all of the Amended Promissory Notes, marked
cancelled, and iDNA, in full payment, discharge and satisfaction of the Amended
Promissory Notes, issued to the Stockholders an aggregate of two million five
hundred thousand (2,500,000) shares of iDNA’s common stock, $0.05 par value per
share (the “Issued Shares”), such Issued Shares to be allocated proportionally
among the Stockholders. iDNA and the Stockholders agreed that upon the issuance
of the Issued Shares to the Stockholders, the Purchase Price Balance shall
be
paid, discharged and satisfied in full, and no additional amount (whether
pursuant to the Promissory Notes or otherwise) shall be payable by iDNA on
account of or with respect to the Purchase Price.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
4 – Gain on Restructuring of Debt and Issuance of Shares of Common Stock
Subject to Redemption - continued
In
addition, subject to the terms and conditions set forth in the Reduction
Agreement, iDNA (i) assumed certain obligations to redeem or repurchase from
the
Stockholders their Issued Shares and (ii) granted to the Stockholders certain
rights to sell (or “put”) the Issued Shares to iDNA. iDNA is required to
semi-annually offer to redeem certain Issued Shares from the Stockholders at
the
rate of $2.00 per share for a maximum total redemption payment equal
to
the excess
(if any)
of certain minimum operating cash flow thresholds of the Campus Group for the
period from August 1, 2008 through July 31, 2013. At any time, the Stockholders
are free to (i) accept or decline iDNA’s offer to redeem or repurchase the
Issued Shares and (ii) sell,
redeem, transfer or otherwise dispose of the Issued Shares to third parties.
(All shares redeemed by iDNA, or sold, transferred or otherwise disposed of
to
third parties are hereinafter referred to as “Excluded Shares”.)
Pursuant
to the Reduction Agreement, iDNA also granted to the Stockholders the right,
subject to certain criteria, to sell (or “put”) to iDNA, and require iDNA to
purchase from the Stockholders, any or all of the Issued Shares
(exclusive of all Excluded Shares) at the rate of $2.00 per share during
the period October 31, 2013 through November 15, 2013 (the “Put
Right”).
However, the
Put
Right shall not be exercisable if one or more of the Stockholders shall have
received (or be deemed to have received) aggregate consideration of at least
five million dollars ($5,000,000) on account of or with respect to the sale,
transfer, redemption or other disposition of some or all of the Issued Shares.
At July 31, 2008, iDNA recorded a $3.1 million obligation representing the
fair
value of the future redemption obligation for the Issued Shares (exclusive
of all Excluded Shares) as follows (in thousands):
|
|
Shares
|
|
Amount
|
|
Issuance
of redeemable Common Stock
|
|
|
|
|
|
for
restructuring of debt
|
|
|
2,500,000
|
|
$
|
3,121
|
|
In
order
to secure its obligations to the Stockholders under the Reduction Agreement,
iDNA has (i) pledged to the Stockholders all of iDNA’s right, title and interest
in and to all of the capital stock of the Campus Group held by iDNA and (ii)
caused the Campus Group to guaranty such obligations, with such guaranty to
be
secured by the assets of the Campus Group.
In
addition, pursuant to the Reduction Agreement, Mr. Campus, the Campus Group
and
iDNA are entering into an employment agreement (the “Employment Agreement”)
under which Mr. Campus shall serve as President of the Campus Group until
the
earliest to occur of (i) the redemption of all Issued Shares (exclusive of
any
Excluded Shares) or (ii) the lapse of the Put Right. Mr. Campus is entitled
to
base compensation of $100,000 per year and standard employment benefits pursuant
to the Campus Group’s employment benefits program offered to all personnel from
time-to-time.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
4 – Gain on Restructuring of Debt and Issuance of Shares of Common Stock
Subject to Redemption - continued
As
a
consequence of the various terms of the Reduction Agreement, iDNA (i) realized
a
gain of $9.0 million for the restructuring of debt, (ii) recorded a $3.1 million
obligation for the fair value of the redemption obligation for the Issued Shares
and (iii) realized the abatement of previously accrued interest of $156,000 for
the three months and six months ended July 31, 2008. Prospectively, the fair
value of the redemption obligation is subject to adjustment each reporting
period as a consequence of changes, if any, to (i) the number of Issued Shares
(exclusive
of all Excluded Shares) held by the Stockholders at the end of a period, (ii)
actual redemption accepted or declined, by the Stockholders and/or (iii) sales
of Issued Shares to third parties.
Note
5 – Commitments and Contingencies
Self-Insurance
Reserves for Property Damage and Personal Injury Claims
iDNA,
under the names Agency Rent-A-Car, Inc. (“ARAC”), Altra Auto Rental and Automate
Auto Rental, previously engaged in the rental of automobiles on a short-term
basis, principally to the insurance replacement market. In Fiscal 1996, iDNA
disposed of its rental fleet business through the sale of certain assets and
through certain leases to a national car rental company. All liabilities related
to the discontinued rental business, principally self-insurance claims, were
retained by ARAC.
iDNA
is
subject to certain self-insurance claims and litigation expenses relating to
its
discontinued automobile rental operations. iDNA’s management estimates the
required self-insurance liability based upon specific identification of the
known matters subject to future claims, the nature of the claim and the
estimated costs to be incurred. These estimates include, but are not limited
to,
ARAC’s historical loss experience and projected loss factors. The required
self-insurance liability is subject to adjustment in the future based upon
changes in the nature of the remaining claims or the ultimate cost. As a
consequence of iDNA’s sale of its automobile rental operations in 1995, iDNA
believes that all incurred claims have been reported to ARAC and that there
are
no longer any incurred but not yet reported claims to be received by ARAC.
iDNA’s self-insurance liability at July 31, 2008 and January 31, 2008 was
$142,000 and $172,000, respectively.
Other
Litigation
In
the
normal course of its business, iDNA is periodically named as defendant in legal
proceedings. It is the policy of iDNA to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate. In the
opinion of management, the amount of ultimate liability with respect to any
current actions, if any, is unlikely to materially affect iDNA’s financial
position, results of operations or liquidity.
iDNA,
Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
6 –
Segment Information
iDNA’s
operations are comprised of three principal reportable segments: (i) strategic
communications services, (ii) information services and (iii) entertainment.
iDNA
manages each segment separately as a consequence of different marketing, service
requirements and technology strategies for the respective segments.
iDNA
evaluates the performance of its segments and allocates resources based on
revenues and operating income. The table below presents the information about
reportable segments for continuing operations used by iDNA’s chief operating
decision-makers for the three months ended and six months ended July 31, 2008
and 2007. Prior financial periods have been conformed to the current
presentation (in thousands):
|
|
|
|
Strategic
|
|
|
|
Undistributed
|
|
|
|
|
|
|
|
Information
|
|
Communications
|
|
|
|
Corporate
|
|
Intersegment
|
|
|
|
|
|
Services
|
|
Services
|
|
Entertainment
|
|
Expenses
|
|
Elimination
|
|
Total
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,189
|
|
$
|
1,984
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(27
|
)
|
$
|
4,146
|
|
Operating
income (loss)
|
|
|
(91
|
)
|
|
(72
|
)
|
|
(22
|
)
|
|
8,554
|
|
|
-
|
|
|
8,369
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
138
|
|
|
60
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
209
|
|
Capital
expenditures
|
|
|
53
|
|
|
2
|
|
|
-
|
|
|
7
|
|
|
-
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,337
|
|
$
|
514
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(27
|
)
|
$
|
2,824
|
|
Operating
income (loss)
|
|
|
(290
|
)
|
|
(1,035
|
)
|
|
65
|
|
|
(302
|
)
|
|
-
|
|
|
(1,562
|
)
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
217
|
|
|
177
|
|
|
-
|
|
|
12
|
|
|
-
|
|
|
406
|
|
Capital
expenditures
|
|
|
36
|
|
|
-
|
|
|
-
|
|
|
7
|
|
|
-
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,287
|
|
$
|
3,424
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(62
|
)
|
$
|
7,649
|
|
Operating
income (loss)
|
|
|
(581
|
)
|
|
(310
|
)
|
|
214
|
|
|
8,141
|
|
|
-
|
|
|
7,464
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
271
|
|
|
123
|
|
|
-
|
|
|
21
|
|
|
-
|
|
|
415
|
|
Capital
expenditures
|
|
|
121
|
|
|
6
|
|
|
-
|
|
|
20
|
|
|
-
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,642
|
|
$
|
1,840
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(58
|
)
|
$
|
6,424
|
|
Operating
income (loss)
|
|
|
(516
|
)
|
|
(1,846
|
)
|
|
336
|
|
|
(573
|
)
|
|
-
|
|
|
(2,599
|
)
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
437
|
|
|
362
|
|
|
-
|
|
|
27
|
|
|
-
|
|
|
826
|
|
Capital
expenditures
|
|
|
39
|
|
|
-
|
|
|
-
|
|
|
19
|
|
|
-
|
|
|
58
|
|
Item
2.
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations
General
iDNA,
Inc. (the “Company” or “iDNA”), began operations in 1969 and was incorporated in
Delaware in 1971. iDNA’s operations are comprised of three principal reportable
segments: (i) strategic communications services, (ii) information services
and
(iii) entertainment. iDNA manages each segment separately as a consequence
of
different marketing, service requirements and technology strategies for the
respective segments.
The
strategic communications services segment provides content development via
the
design, development and production of media, collateral material, logistics,
support and/or broadcast services for presentations at corporate and
institutional events, meetings, training seminars and symposiums. The
presentations may be live at single or multi-site venues and can include video
conferencing, satellite broadcasting and webcasting, or the presentations may
be
provided via on-demand access via internet websites, DVD or video
tape.
The
information services segment utilizes custom wireless communication technology
and proprietary software to facilitate client audience interaction,
participation and polling to collect, exchange and/or analyze data and
information in real-time during a meeting or event. The wireless communication
services are available as a turn-key service provided by iDNA during a scheduled
meeting or event or alternatively, a client can purchase from iDNA the required
electronic components and related proprietary software to administer its needs
independently.
As
of
consequence of iDNA’s investment in the Angelika Film Centers, LLC (“AFC”), iDNA
operates in the movie exhibition and entertainment industry.
Recent
Developments
Effective
as of July 3, 2008, iDNA entered into a Reduction of Purchase Price Agreement
(the “Reduction Agreement”) with Steven Campus, president of the Campus Group
(defined below), the Campus Family 2000 Trust
(the
“Family Trust”)
and
the
Trust Established Under the Will of Nancy Campus (the “Shelter Trust” and,
collectively with the Family Trust, the “Trusts” and each a “Trust”). (The
Trusts and Steven Campus are herein referred to collectively as the
“Stockholders” and each as a “Stockholder”).
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Pursuant
to and as provided in that certain Stock Purchase Agreement dated July 31,
2003
between iDNA and the Stockholders, iDNA acquired from the Stockholders all
of
the issued and outstanding shares of capital stock of each of (i) Campus
Group Companies, Inc. (“CGCI”),
(ii) Multi-Video Services,
Inc.
(“Multi-Video”),
(iii)
Interactive Conferencing Network, Inc.
(“Interactive”)
and
(iv)
Audience Response Systems, Inc. (“ARSI” and,
collectively with CGCI, Multi-Video, Interactive and ARSI, the “Campus
Group”).
In
consideration for the shares of the Campus Group so acquired, iDNA (i) made
a
cash payment to the Stockholders and (ii) issued to the Stockholders certain
promissory notes in an aggregate principal amount of $9.9 million and a
convertible promissory note in the principal amount of $2.8 million
(collectively, the “Promissory Notes”) (the cash amount and Promissory Notes
collectively, the “Purchase Price”). At July 2, 2008, iDNA had outstanding
principal obligations under the terms of the Promissory Notes of $12.1 million
and accrued interest of $156,000.
Pursuant
to the Reduction Agreement, iDNA and the Stockholders agreed, among other
matters, that the Purchase Price was reduced to a remaining balance of three
hundred seventy-five thousand dollars ($375,000) (the “Purchase Price Balance”).
The parties further agreed that, inasmuch as the Promissory Notes were intended
to represent iDNA’s obligation to pay the unpaid portion of the Purchase Price,
the aggregate outstanding amount of the Promissory Notes was reduced from an
aggregate of $12.1 million to an amount equal to the Purchase Price Balance.
The
Promissory Notes were modified and amended so that the outstanding principal
amounts due thereunder were reduced to an aggregate of $375,000. (The Promissory
Notes, as modified and amended pursuant to the Reduction Agreement, are
hereinafter referred to as the “Amended Promissory Notes.”)
Furthermore,
pursuant to the Reduction Agreement, in July 2008 the Stockholders surrendered
and delivered to iDNA each and all of the Amended Promissory Notes, marked
cancelled, and iDNA, in full payment, discharge and satisfaction of the Amended
Promissory Notes, issued to the Stockholders an aggregate of two million five
hundred thousand (2,500,000) shares of iDNA’s common stock, $0.05 par value per
share (the “Issued Shares”), such Issued Shares to be allocated proportionally
among the Stockholders. iDNA and the Stockholders agreed that upon the issuance
of the Issued Shares to the Stockholders, the Purchase Price Balance shall
be
paid, discharged and satisfied in full, and no additional amount (whether
pursuant to the Promissory Notes or otherwise) shall be payable by iDNA on
account of or with respect to the Purchase Price.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
In
addition, subject to the terms and conditions set forth in the Reduction
Agreement, iDNA (i) assumed certain obligations to redeem or repurchase from
the
Stockholders their Issued Shares and (ii) granted to the Stockholders certain
rights to sell (or “put”) the Issued Shares to iDNA. iDNA is required to
semi-annually offer to redeem certain Issued Shares from the Stockholders at
the
rate of $2.00 per share for a maximum total redemption payment equal
to
the excess
(if any)
of certain minimum operating cash flow thresholds of the Campus Group for the
period from August 1, 2008 through July 31, 2013. At any time, the Stockholders
are free to (i) accept or decline iDNA’s offer to redeem or repurchase the
Issued Shares and (ii) sell,
redeem, transfer or otherwise dispose of the Issued Shares to third parties.
(All shares redeemed by iDNA, or sold, transferred or otherwise disposed of
to
third parties are hereinafter referred to as “Excluded Shares”.)
Pursuant
to the Reduction Agreement, iDNA also granted to the Stockholders the right,
subject to certain criteria, to sell (or “put”) to iDNA, and require iDNA to
purchase from the Stockholders, any or all of the Issued Shares
(exclusive of all Excluded Shares) at the rate of $2.00 per share during
the period October 31, 2013 through November 15, 2013 (the “Put
Right”).
However, the
Put
Right shall not be exercisable if one or more of the Stockholders shall have
received (or be deemed to have received) aggregate consideration of at least
five million dollars ($5,000,000) on account of or with respect to the sale,
transfer, redemption or other disposition of some or all of the Issued Shares.
At July 31, 2008, iDNA recorded a $3.1 million obligation representing the
fair
value of the future redemption obligation for the Issued Shares (exclusive
of
all Excluded Shares).
In
order
to secure its obligations to the Stockholders under the Reduction Agreement,
iDNA has (i) pledged to the Stockholders all of iDNA’s right, title and interest
in and to all of the capital stock of the Campus Group held by iDNA and (ii)
caused the Campus Group to guaranty such obligations, with such guaranty to
be
secured by the assets of the Campus Group.
In
addition, pursuant to the Reduction Agreement, Mr. Campus, the Campus Group
and
iDNA are entering into an employment agreement (the “Employment Agreement”)
under which Mr. Campus shall serve as President of the Campus Group until
the
earliest to occur of (i) the redemption of all Issued Shares (exclusive of
any
Excluded Shares) or (ii) the lapse of the Put Right. Mr. Campus is entitled
to
base compensation of $100,000 per year and standard employment benefits pursuant
to the Campus Group’s employment benefits program offered to all personnel from
time-to-time.
As
a
consequence of the various terms of the Reduction Agreement, iDNA (i) realized
a
gain of $9.0 million for the restructuring of debt, (ii) recorded a $3.1 million
obligation for the fair value of the redemption obligation for the Issued Shares
and (iii) realized the abatement of interest of $156,000 for the three months
and six months ended July 31, 2008. Prospectively, the fair value of the
redemption obligation is subject to adjustment each reporting period as a
consequence of changes, if any, to (i) the number of Issued Shares (exclusive
of all Excluded Shares) held by the Stockholders at the end of a period, (ii)
actual redemption accepted or declined, by the Stockholders and/or (iii) sales
of Issued Shares to third parties.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Critical
Accounting Policies
iDNA’s
consolidated financial statements are prepared in accordance with generally
accepted accounting principles, which require iDNA to make estimates and
assumptions. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and
the reported revenues and expenses of iDNA. iDNA’s significant accounting
policies are described in Note 1 of Notes to Condensed Consolidated Financial
Statements included under Item 1 of this Part I (hereinafter, the “Notes”).
However, certain accounting policies are deemed “critical”, as they require
management’s highest degree of judgment, estimates and assumptions. These
accounting estimates and disclosures have been discussed with the Audit
Committee of iDNA’s Board of Directors. A discussion of iDNA’s critical
accounting policies, the judgments and uncertainties affecting their application
and the likelihood that materially different amounts would be reported under
different conditions or using different assumptions are as follows:
Revenues:
iDNA’s
revenues are earned within short time periods, generally less than one week.
iDNA recognizes revenue from its strategic communications segment, including
the
video production, video editing, meeting services and broadcast satellite or
webcast services, and its information services segment when the services are
complete and delivered or all technical services have been rendered. Deposits
and other prepayments are recorded as deferred revenue until revenue is
recognized. iDNA does not have licensing or other arrangements that result
in
additional revenues following the delivery of the video or a broadcast. Costs
accumulated in the production of the video, meeting services or broadcasts
are
deferred until the sale and delivery are complete. Deferred production costs
of
$73,000 and $90,000, respectively, are reported as other current assets at
July
31, 2008 and January 31, 2008.
iDNA
recognizes revenue from the sale of electronic equipment, proprietary software
and related components at the time of shipment. Deposits and other prepayments
received prior to shipment are recorded as deferred revenue until the electronic
equipment and related software are shipped. iDNA has licensing and technical
support arrangements for future software enhancements and upgrades for technical
support for previously delivered electronic equipment. Revenues derived from
licensing and technical support are recognized over the term of the licensing
and technical support period, which generally are sold in increments of one
year
of coverage. For the three months ended July 31, 2008 and 2007, electronic
equipment sales were $347,000 and $508,000, respectively. For the six months
ended July 31, 2008 and 2007, electronic equipment sales were $823,000 and
$1.1
million, respectively.
Cost
of Revenues:
Cost of
revenues consists of direct expenses specifically associated with client service
revenues. The cost of revenues includes direct salaries and benefits, purchased
products or services for clients, web hosting, support services, shipping and
delivery costs.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Accounts
Receivable:
iDNA
extends credit to clients in the normal course of business. iDNA continuously
monitors collections and payments from clients and maintains an allowance for
doubtful accounts based upon historical experience and any specific client
collection issues that have been identified. Since accounts receivable are
concentrated in a relatively few number of clients, a significant change in
the
liquidity or financial position of any of these clients could have a material
adverse impact on the collectibility of the accounts receivable and future
operating results. iDNA
does
not have any off-balance sheet credit exposure related to its
customers.
Valuation
of Long-lived Assets and Goodwill:
iDNA
reviews the carrying value of its long-lived assets (other than goodwill)
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. When indicators of impairment exist, iDNA determines
whether the estimated undiscounted sum of the future cash flows of such assets
is less than their carrying amounts. If less, an impairment loss is recognized
in the amount, if any, by which the carrying amount of such assets exceeds
their
respective fair values. The determination of fair value is based on quoted
market prices in active markets, if available, or independent appraisals; sales
price negotiations; or projected future cash flows discounted at a rate
determined by management to be commensurate with iDNA’s business risk. The
estimation of fair value utilizing discounted forecasted cash flows includes
significant judgments regarding assumptions of revenue, operating and marketing
costs; selling and administrative expenses; interest rates; property and
equipment additions and retirements; industry competition; and general economic
and business conditions, among other factors.
At
January 31, 2008, the goodwill for each of iDNA’s business segments (information
services and strategic communications services) was tested for impairment.
As a
consequence of the testing, iDNA determined that the carrying value of both
its
information services and its strategic communications services business segments
exceeded their fair value, which was estimated based upon the present value
of
each reporting units expected future cash flows. As a consequence, iDNA charged
to operations an aggregate of $8.0 million for the estimated impairment of
goodwill and other intangible assets relating to (i) its information services
segment in the amount of $5.9 million, and (ii) strategic communication services
segment in the amount of $2.1 million, respectively, resulting in the carrying
value of all goodwill and other intangible assets being reduced to zero. Prior
to the impairment charge during the fourth quarter of Fiscal 2008, iDNA charged
to operations $203,000 and $405,000 for the amortization of these intangibles
for the three months and six months ended July 31, 2007.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Self-Insurance
Claims:
iDNA’s
wholly-owned subsidiary ARAC, Inc. (“ARAC”) maintained and continues to maintain
self-insurance for claims and associated litigation expenses relating to bodily
injury or property damage from accidents involving the vehicles rented to
customers by its discontinued automobile rental operations occurring in Fiscal
1996 and prior. ARAC was, when required by either governing state law or the
terms of its rental agreement, self-insured for the first $1.0 million per
occurrence, and for losses in excess of $5.0 million per occurrence, for bodily
injury and property damage resulting from accidents involving its rental
vehicles. ARAC was also self-insured, up to certain retained limits, for bodily
injury and property damage resulting from accidents involving ARAC vehicles
operated by employees within the scope of their employment.
ARAC
is
the subject to certain self-insurance claims and associated litigation expenses
relating to its discontinued automobile rental operations. iDNA’s management
estimates the required self-insurance liability based upon specific
identification of the known matters subject to future claims, the nature of
the
claim and the estimated costs to be incurred. These estimates include, but
are
not limited to, ARAC’s historical loss experience and projected loss factors.
The required self-insurance liability is subject to adjustment in the future
based upon changes in the nature of the remaining claims or the ultimate cost.
As a consequence of iDNA’s sale of its automobile rental operations in 1995,
iDNA believes that all incurred claims have been reported to ARAC and that
there
are no longer any incurred but not yet reported claims to be received by ARAC.
iDNA’s self-insurance liability at July 31, 2008 and January 31, 2008 was
$142,000 and $172,000, respectively.
Because
of the uncertainties related to several residual small claims and legal
proceedings involving iDNA’s former rental operations and self-insurance claims,
it is difficult to project with precision the ultimate effect that the
adjudication or settlement of these matters will have on iDNA. As additional
information regarding iDNA’s potential liabilities becomes available, iDNA will
revise its estimates as appropriate.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Stock-Based
Compensation:
Effective February 1, 2006, iDNA adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based
Payment
(“SFAS
No. 123(R)”), which replaced SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
No. 123”), and superseded APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123(R) requires all share-based payments to employees, including grants
of
employee stock options, to be recognized in the financial statements based
on
their fair values beginning with the first interim or annual period after
December 15, 2005. iDNA elected the prospective method of adopting SFAS No.
123(R) which requires that compensation expense be recorded over the remaining
periods for what would have been the remaining fair value under SFAS No. 123
of
all unvested stock options and restricted stock at the beginning of the first
quarter of adoption. The compensation costs for that portion of awards is based
on the grant-date fair value of the awards as calculated for pro forma
disclosures under SFAS No. 123. iDNA charged to operations $40,000 and $74,000,
respectively, for share-based compensation for the three months ended July
31,
2008 and 2007. iDNA charged to operations $162,000 and $151,000, respectively,
for share-based compensation for the six months ended July 31, 2008 and
2007.
Income
Taxes:
iDNA
recognizes deferred tax assets and liabilities based on differences between
the
financial statement carrying amounts and the tax basis of assets and
liabilities. Loss carrybacks, reversal of deferred tax liabilities, tax planning
and estimates of future taxable income are considered in assessing the need
for
a valuation allowance. At the time it is determined that iDNA will more likely
than not be able to realize deferred tax assets in excess of the recorded
amount, net of its valuation allowance, an adjustment to reduce the valuation
allowance would be recorded that would increase income in the period such
determination was made. Likewise, should management determine that iDNA would
not be able to realize all or part of net deferred tax assets generated in
the
future, an increase to the valuation allowance would be charged to and reduce
income in the period such determination was made.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Financial
Condition and Results of Operations
Results
from Operations for the Three Months Ended July 31, 2008
as
Compared to the Three Months Ended July 31, 2007
The
following table sets forth for the three months ended July 31, 2008 and 2007
certain statements of operations data by segment obtained from iDNA’s
consolidated statement of operations (in thousands). All figures described
in
the ensuing discussion (as derived from the table) are stated in approximate
amounts, based upon rounding of figures presented in the table.
|
|
|
|
|
|
Strategic
|
|
|
|
|
|
|
|
Information
Services
|
|
Communications
Services
|
|
Intersegment
Elimination
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
July
31,
|
|
July
31,
|
|
July
31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,189
|
|
$
|
2,337
|
|
$
|
1,984
|
|
$
|
514
|
|
$
|
(27
|
)
|
$
|
(27
|
)
|
Cost
of revenues
|
|
|
1,251
|
|
|
1,438
|
|
|
1,338
|
|
|
634
|
|
|
(27
|
)
|
|
(27
|
)
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
1,029
|
|
|
1,182
|
|
|
718
|
|
|
915
|
|
|
-
|
|
|
-
|
|
Operating
income (loss)
|
|
|
(91
|
)
|
|
(290
|
)
|
|
(72
|
)
|
|
(1,035
|
)
|
|
-
|
|
|
-
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
138
|
|
|
217
|
|
|
60
|
|
|
177
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Undistributed
|
|
|
|
|
|
|
|
Entertainment
|
|
Corporate
Expenses
|
|
Consolidated
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
July
31,
|
|
July
31,
|
|
July
31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,146
|
|
$
|
2,824
|
|
Cost
of revenues
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,562
|
|
|
2,045
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
-
|
|
|
-
|
|
|
340
|
|
|
252
|
|
|
2,087
|
|
|
2,349
|
|
Operating
income (loss)
|
|
|
(22
|
)
|
|
65
|
|
|
8,554
|
|
|
(302
|
)
|
|
8,369
|
|
|
(1,562
|
)
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
12
|
|
|
209
|
|
|
406
|
|
Revenues:
Revenues
increased $1.3 million to $4.1 million for the three months ended July
31,
2008 as
compared to $2.8 million for the three months ended July 31, 2007.
Revenues
attributed to the information services segment decreased $148,000 to $2.2
million for the three months ended July 31, 2008 as compared to $2.3 million
for
the three months ended July 31, 2007. The decrease in revenues was principally
due to a decline in electronic equipment sales of $161,000 during the three
months ended July 31, 2008 as compared to the three months ended July 31, 2007.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Revenues
attributed to the strategic communications services segment increased $1.5
million to $2.0 million for the three months ended July 31, 2008 as compared
to
$514,000 for the three months ended July 31, 2007. The increase in revenues
was
principally due to an increase in the scope and size of projects completed
during the three months ended July 31, 2008 as compared to the three months
ended July 31, 2007.
The
nature of iDNA’s business is such that the nature and timing of assignments
completed for clients, and the resulting revenue, will vary from period to
period in terms of scope, size of projects and the ultimate revenues derived.
The timing and fluctuations between periods for assignments is particularly
apparent for our strategic communications segment where assignments tend to
be
fewer in number but larger in scope than the information services segment.
As a
consequence, revenues tend to fluctuate from quarter-to-quarter based upon
the
client determined timing for completion of an assignment.
Cost
of Service Revenues:
Cost of
revenues for the three months ended July 31, 2008 and 2007 was $2.6 million
and
$2.0 million, respectively.
Cost
of
revenues attributed to the information services segment was $1.3 million for
the
three months ended July 31, 2008 as compared to $1.4 million for the three
months July 31, 2007.
The
gross
profit realized by the information services segment for the three months ended
July 31, 2008 and 2007 was $938,000 and $899,000, respectively. The gross profit
increase of $39,000 for the three months ended July 31, 2008 as compared to
the
three months ended July 31, 2007 is due principally to the net effect of (i)
an
increase in project margins for the period, (ii) a decrease of $18,000 in
project overhead costs offset by (iii) a decrease in revenues. The gross margin
for the three months ended July 31, 2008 increased 4.3% to 42.8% as compared
to
38.5% for the three months ended July 31, 2007, principally due to the net
effect of (i) an increase of 17.8% associated with equipment sales due to a
favorable product mix sold, (ii) a decrease in direct project costs of 3.7%
that
resulted in higher project margins, offset by (iii) an increase of 0.5% in
indirect production overhead expenses as a percentage of revenues.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Cost
of
revenues attributable to the strategic communications segment increased $704,000
to $1.3 million for the three months ended July 31, 2008 as compared to $634,000
for the three months ended July 31, 2007. The increase in the costs of revenues
was principally due to an increase in revenues for the three months ended July
31, 2008 as compared to the three months ended July 31, 2007. The gross profit
realized by the strategic communications segment for the three months ended
July
31, 2008 and 2007 was $646,000 and ($120,000), respectively. The gross profit
increase of $766,000 for the three months ended July 31, 2008 as compared the
three months ended July 31, 2007 was principally due to an increase in
production projects completed during the period which utilized internal
production staff and resources. The nature of the strategic communications
segment’s cost of revenues includes various fixed production, operating and
personnel costs as well as variable direct project costs. As a consequence,
the
absorption of the fixed production operating and personnel costs can cause
quarter-to-quarter fluctuations in gross profit realized as iDNA experiences
quarter-to-quarter fluctuations in revenues.
Selling,
General and Administrative (“SG&A”):
SG&A for the three months ended July 31, 2008 and the three months ended
July 31, 2007 was $2.1 million and $2.3 million, respectively.
SG&A
attributed to the information services segment was $1.0 million and $1.2 million
respectively, for three months ended July 31, 2008 and the three months ended
July 31, 2007. The decrease in SG&A of $153,000 was principally due to the
net effect of (i) a decrease of $92,000 for depreciation and amortization
expense as a consequence of the elimination of the amortization of certain
intangible assets written off in Fiscal 2008, (ii) a reduction in corporate
expense allocation offset by (iii) an increase of $28,000 in personnel and
related cost and (iv) an increase of $33,000 for other SG&A
costs.
SG&A
attributable to the strategic communications services segment decreased $197,000
to $718,000 for the three months ended July 31, 2008 as compared to $915,000
for
the three months ended July 31, 2007. The decrease in SG&A was due to (i) a
decrease of $111,000 for depreciation and amortization expense as a consequence
of the elimination of the amortization of certain intangible assets written
off
in Fiscal 2008, (ii) a decrease of $29,000 for facility expenses as a
consequence of the consolidation of certain facilities implemented in Fiscal
2008 and (iii) a decrease of $57,000 in personnel and related
costs.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
SG&A
for undistributed corporate expenses for the three months ended July 31, 2008
and July 31, 2007 was $340,000 and $252,000, respectively. The corporate
expenses incurred by iDNA relate principally to expenses incurred at its
executive offices for executive and corporate finance personnel, certain
employee benefits, professional services such as consulting, legal and
accounting fees, corporate insurance, corporate marketing initiatives and the
costs associated with maintaining its New York facility. iDNA allocates to
its
various business segments or units the proportionate share of corporate expenses
that directly relate to and/or benefit such business segment or unit. The
undistributed corporate expenses reflect the remaining expenses incurred but
not
directly attributable to a business segment or unit. The increase in corporate
SG&A of $88,000 for the three months ended July 31, 2008 as compared to the
three months ended July 31, 2007 was due principally to the net effect of (i)
higher professional fees from company advisors offset by (ii) the reduction
in
facility rent and related occupancy costs as iDNA consolidated its New York
City-based strategic communications operations into one facility and (iii)
a net
decrease in personnel and related benefit expenses.
Income
from AFC Investment:
iDNA
accounts for its investment in AFC using the equity method. For the three months
ended July 31, 2008 and July 31, 2007, iDNA recorded a loss of $22,000 and
earnings of $65,000, respectively, representing iDNA’s share of AFC’s net income
(loss).
Summarized
income statement data for AFC for the three months ended June 30, 2008 and
2007,
respectively, is as follows (in thousands):
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,043
|
|
$
|
1,288
|
|
|
|
|
|
|
|
|
|
Operating
costs
|
|
|
859
|
|
|
941
|
|
Depreciation
and amortization
|
|
|
206
|
|
|
195
|
|
General
and administrative expenses
|
|
|
22
|
|
|
21
|
|
|
|
|
1,087
|
|
|
1,157
|
|
Net
income (loss)
|
|
$
|
(44
|
)
|
$
|
131
|
|
|
|
|
|
|
|
|
|
iDNA's
proportionate share of net income (loss)
|
|
$
|
(22
|
)
|
$
|
65
|
|
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
AFC’s
revenues decreased $245,000 to $1.0 million for the three months ended June
30,
2008 as compared to $1.3 million for the three months ended June 30, 2007,
principally as a result of the net effects of (i) a decrease of 24.0% in
attendance period-to-period, (ii) a decrease of $43,000 in other, concession
and
café revenues offset by (iii) an increase of 6.3% in average ticket prices. The
attendance, and at times the ticket prices, at AFC will vary depending on
audience interest in, and the popularity of the films it exhibits and other
factors. Operating costs, as a percentage of revenue, increased 9.3% to 82.4%
for the three months ended June 30, 2008, as compared to 73.1% for the three
months ended June 30, 2007 due principally to (i) an increase in film rental
expense of 1.6% and (ii) a decrease in revenues for the three months ended
June
30, 2008 as compared to the three months ended June 30, 2007. The nature of
AFC’s operating costs tend generally to be more fixed overhead-related costs and
advertising expenses. In addition, film rental expense generally is a factor
of
a fixed percentage rental rate per film multiplied by the number of tickets
sold. AFC experiences fluctuations in film rental expense, as a percentage
of
revenue, depending upon the rental rate per film and the popularity of the
film.
Interest
Expense:
For the
three months ended July 31, 2008 and 2007, iDNA incurred interest expense of
$290,000 and $58,000, respectively. The increase of $232,000 in interest expense
for the three month period ended July 31, 2008 as compared to the three month
period ended July 31, 2007 is due principally to an increase in interest costs
attributable to the Term Loan (defined below) consummated in November
2007.
Interest
Abatement:
As a
consequence of the various terms of the Reduction Agreement, iDNA realized
a
reduction of interest expense from the abatement of previously accrued interest
of $156,000 for the three months ended July 31, 2008.
Gain
on Restructuring of Debt:
As
a
consequence of the various terms of the Reduction Agreement, for the three
months ended July 31, 2008, iDNA realized a gain of $9.0 million relating to
the
reduction of the Campus Group Purchase Price and the restructuring of the
corresponding debt.
Income
Taxes:
Due to
net operating losses and the availability of net operating loss carryforwards,
iDNA’s effective federal income tax rate was zero for the three month periods
ended July 31, 2008 and July 31, 2007. Additionally, iDNA is in the process
of
analyzing the final tax treatment associated with the Reduction Agreement
however, based upon currently available information, iDNA believes that the
gain
on the Reduction Agreement is not a gain for tax purposes. iDNA has provided
a
full valuation allowance against its net operating loss carryforward and other
net deferred tax asset items due to the uncertainty of their future realization.
For the three months ended July 31, 2008, iDNA has charged to income tax expense
$6,000 relating to estimated state and local income taxes.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Financial
Condition and Results of Operations
Results
from Operations for the Six Months Ended July 31, 2008
as
Compared to the Six Months Ended July 31, 2007
The
following table sets forth for the six months ended July 31, 2008 and 2007
certain statements of operations data by segment obtained from iDNA’s
consolidated statement of operations (in thousands). All figures described
in
the ensuing discussion (as derived from the table) are stated in approximate
amounts, based upon rounding of figures presented in the table.
|
|
|
|
Strategic
|
|
|
|
|
|
Information
Services
|
|
Communications
Services
|
|
Intersegment
Elimination
|
|
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
July
31,
|
|
July
31,
|
|
July
31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,287
|
|
$
|
4,642
|
|
$
|
3,424
|
|
$
|
1,840
|
|
$
|
(62
|
)
|
$
|
(58
|
)
|
Cost
of revenues
|
|
|
2,676
|
|
|
2,784
|
|
|
2,282
|
|
|
1,840
|
|
|
(62
|
)
|
|
(58
|
)
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
2,191
|
|
|
2,367
|
|
|
1,453
|
|
|
1,846
|
|
|
-
|
|
|
-
|
|
Operating
income (loss)
|
|
|
(581
|
)
|
|
(516
|
)
|
|
(310
|
)
|
|
(1,846
|
)
|
|
-
|
|
|
-
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
271
|
|
|
437
|
|
|
123
|
|
|
362
|
|
|
-
|
|
|
-
|
|
|
|
|
|
Undistributed
|
|
|
|
|
|
Entertainment
|
|
Corporate
Expenses
|
|
Consolidated
|
|
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
July
31,
|
|
July
31,
|
|
July
31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
7,649
|
|
$
|
6,424
|
|
Cost
of revenues
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,896
|
|
|
4,566
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
-
|
|
|
-
|
|
|
520
|
|
|
470
|
|
|
4,164
|
|
|
4,683
|
|
Operating
income (loss)
|
|
|
214
|
|
|
336
|
|
|
8,141
|
|
|
(573
|
)
|
|
7,464
|
|
|
(2,599
|
)
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
-
|
|
|
-
|
|
|
21
|
|
|
27
|
|
|
415
|
|
|
826
|
|
Revenues:
Revenues
increased $1.2 million to $7.6 million for the six months ended July 31, 2008
as
compared to $6.4 million for the six months ended July 31, 2007.
Revenues
attributed to the information services segment decreased $355,000 to $4.3
million for the six months ended July 31, 2008 as compared to $4.6 million
for
the six months ended July 31, 2007. The decrease in revenues was principally
due
to (i) a decline in electronic equipment sales of $261,000 and (ii) a decrease
in the scope and size of projects completed during the six months ended July
31,
2008 as compared to the six months ended July 31, 2007.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Revenues
attributed to the strategic communications services segment increased $1.6
million to $3.4 million for the six
months
ended July 31, 2008 as compared to $1.8 million for the six months ended July
31, 2007. The increase in revenues was principally due to an increase in the
scope and size of projects completed during the six months ended July 31, 2008
as compared to the three months ended July 31, 2007.
The
nature of iDNA’s business is such that the nature and timing of assignments
completed for clients, and the resulting revenue, will vary from period to
period in terms of scope, size of projects and the ultimate revenues derived.
The timing and fluctuations between periods for assignments is particularly
apparent for our strategic communications segment where assignments tend to
be
fewer in number but larger in scope than the information services segment.
As a
consequence, revenues tend to fluctuate from quarter-to-quarter based upon
the
client determined timing for completion of an assignment.
Cost
of Service Revenues:
Cost of
revenues for the six months ended July 31, 2008 and 2007 was $4.9 million and
$4.6 million, respectively.
Cost
of
revenues attributed to the information services segment was $2.7 million for
the
six months ended July 31, 2008 as compared to $2.8 million for the six months
July 31, 2007.
The
gross
profit realized by the information services segment for the six months ended
July 31, 2008 and 2007 was $1.6 million and $1.9 million, respectively. The
gross profit decrease of $247,000 for the six months ended July 31, 2008 as
compared to the six months ended July 31, 2007 is due principally to the net
effect of (i) a decrease in project margins for the period, (ii) a decrease
of
$32,000 in project overhead costs offset by (iii) a decrease in revenues. The
gross margin for the six months ended July 31, 2008 decreased 2.4% to 37.6%
as
compared to 40.0% for the six months ended July 31, 2007, principally due to
the
net effect of (i) an increase of 2.4% associated with equipment sales due to
a
favorable product mix sold offset by (ii) an increase in direct project costs
of
2.4% that resulted in lower project margins and (iii) an increase of 0.8% in
indirect production overhead expenses as a percentage of revenues.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Cost
of
revenues attributable to the strategic communications segment increased $442,000
to $2.3 million for the six months ended July 31, 2008 as compared to $1.8
million for the six months ended July 31, 2007. The increase in the costs of
revenues was principally due to an increase in revenues for the six months
ended
July 31, 2008 as compared to the six months ended July 31, 2007. The gross
profit increase of $1.1 million for the six months ended July 31, 2008 as
compared the six months ended July 31, 2007 was principally due to an increase
in production projects completed during the period which utilized internal
production staff and resources. The nature of the strategic communications
segment’s cost of revenues includes various fixed production, operating and
personnel costs as well as variable direct project costs. As a consequence,
the
absorption of the fixed production operating and personnel costs can cause
quarter-to-quarter fluctuations in gross profit realized as iDNA experiences
quarter-to-quarter fluctuations in revenues.
Selling,
General and Administrative (“SG&A”):
SG&A for the six months ended July 31, 2008 and the six months ended July
31, 2007 was $4.2 million and $4.7 million, respectively.
SG&A
attributed to the information services segment was $2.2 million and $2.4 million
respectively, for six months ended July 31, 2008 and the six months ended July
31, 2007. The decrease in SG&A of $176,000 was principally due to the net
effect of (i) a decrease of $184,000 for depreciation and amortization expense
as a consequence of the elimination of the amortization of certain intangible
assets written off in Fiscal 2008, (ii) a decrease of $46,000 in personnel
and
related cost offset by (iii) an increase of $54,000 for other SG&A
costs.
SG&A
attributable to the strategic communications services segment decreased $393,000
to $1.4 million for the six months ended July 31, 2008 as compared to $1.8
million for the six months ended July 31, 2007. The decrease in SG&A was due
to (i) a decrease of $222,000 for depreciation and amortization expense as
a
consequence of the elimination of the amortization of certain intangible assets
written off in Fiscal 2008, (ii) a decrease of $62,000 for facility expenses
as
a consequence of the consolidation of certain facilities implemented in Fiscal
2008 and (iii) a decrease of $109,000 in personnel and related
costs.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
SG&A
for undistributed corporate expenses for the six months ended July 31, 2008
and
July 31, 2007 was $520,000 and $470,000, respectively. The corporate expenses
incurred by iDNA relate principally to expenses incurred at its executive
offices for executive and corporate finance personnel, certain employee
benefits, professional services such as consulting, legal and accounting fees,
corporate insurance, corporate marketing initiatives and the costs associated
with maintaining its New York facility. iDNA allocates to its various business
segments or units the proportionate share of corporate expenses that directly
relate to and/or benefit such business segment or unit. The undistributed
corporate expenses reflect the remaining expenses incurred but not directly
attributable to a business segment or unit. The increase in corporate SG&A
of $50,000 for the six months ended July 31, 2008 as compared to the six months
ended July 31, 2007 was due principally to the net effect of (i) higher
professional fees from company advisors offset by (ii) the reduction in facility
rent and related occupancy costs as iDNA consolidated its New York City-based
strategic communications operations into one facility.
Income
from AFC Investment:
iDNA
accounts for its investment in AFC using the equity method. For the six months
ended July 31, 2008 and July 31, 2007, iDNA recorded income of $214,000 and
$336,000, respectively, representing iDNA’s share of AFC’s net income.
Summarized
income statement data for AFC for the six months ended June 30, 2008 and 2007,
respectively, is as follows (in thousands):
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,890
|
|
$
|
3,288
|
|
|
|
|
|
|
|
|
|
Operating
costs
|
|
|
2,015
|
|
|
2,157
|
|
Depreciation
and amortization
|
|
|
403
|
|
|
390
|
|
General
and administrative expenses
|
|
|
44
|
|
|
68
|
|
|
|
|
2,462
|
|
|
2,615
|
|
Net
income
|
|
$
|
428
|
|
$
|
673
|
|
|
|
|
|
|
|
|
|
iDNA's
proportionate share of net income
|
|
$
|
214
|
|
$
|
336
|
|
iDNA,
Inc. and Subidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
AFC’s
revenues decreased $398,000 to $2.9 million for the six months ended June 30,
2008 as compared to $3.3 million for the six months ended June 30, 2007,
principally as a result of the net effects of (i) a decrease of 17.5% in
attendance period-to-period, (ii) a decrease of $63,000 in other, concession
and
café revenues offset by (iii) an increase of 6.2% in average ticket prices. The
attendance, and at times the ticket prices, at AFC will vary depending on
audience interest in, and the popularity of the films it exhibits and other
factors. Operating costs, as a percentage of revenue, increased 4.1% to 69.7%
for the six months ended June 30, 2008, as compared to 65.6% for the six months
ended June 30, 2007 due principally to (i) an increase in film rental expense
of
0.6% and (ii) a decrease in revenues for the six months ended June 30, 2008
as
compared to the six months ended June 30, 2007. The nature of AFC’s operating
costs tend generally to be more fixed overhead-related costs and advertising
expenses. In addition, film rental expense generally is a factor of a fixed
percentage rental rate per film multiplied by the number of tickets sold. AFC
experiences fluctuations in film rental expense, as a percentage of revenue,
depending upon the rental rate per film and the popularity of the
film.
Interest
Expense:
For the
six months ended July 31, 2008 and 2007, iDNA incurred interest expense of
$524,000 and $113,000, respectively. The increase of $411,000 in interest
expense for the six month period ended July 31, 2008 as compared to the six
month period ended July 31, 2007 is due principally to an increase in interest
costs attributable to the Term Loan (defined below) consummated in November
2007.
Interest
Abatement:
As a
consequence of the various terms of the Reduction Agreement, iDNA realized
a
reduction of interest expense from the abatement of previously accrued interest
of $156,000 for the six months ended July 31, 2008.
Gain
on Restructuring of Debt:
As
a
consequence of the various terms of the Reduction Agreement, for the six months
ended July 31, 2008, iDNA realized a gain of $9.0 million relating to the
reduction of the Campus Group Purchase Price and the restructuring of the
corresponding debt.
Income
Taxes:
Due to
net operating losses and the availability of net operating loss carryforwards,
iDNA’s effective federal income tax rate was zero for the six month periods
ended July 31, 2008 and July 31, 2007. Additionally, iDNA is in the process
of
analyzing the final tax treatment associated with the Reduction Agreement
however, based upon currently available information, iDNA believes that the
gain
on the Reduction Agreement is not a gain for tax purposes. iDNA has provided
a
full valuation allowance against its net operating loss carryforward and other
net deferred tax asset items due to the uncertainty of their future realization.
For the six months ended July 31, 2008, iDNA has charged to income tax expense
of $12,000 relating to estimated state and local income taxes.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Liquidity
and Capital Resources
As
a
consequence of periodic fluctuations in iDNA’s working capital needs based upon
the timing of collections, distributions from AFC, and periods of increased
production activity, on November 21, 2007, iDNA, via its wholly owned
subsidiary, iDNA Cinema Holdings, Inc. (“Holdings”), consummated a Master Loan
and Security Agreement (the “Loan Agreement”) with Silar Advisors, L.P.
(“Silar”), as Lender and Administrative, Payment and Collateral Agent, pursuant
to which Silar provided a term loan in an aggregate principal amount of $4.25
million (the “Term Loan”) to Holdings (the “Term Loan Financing”). Interest
accrues on the Term Loan at a per annum rate equal to the variable annual rate
of interest designated from time to time by Citibank N.A. as its “prime rate,”
plus 4%, or, if greater, 12.25%, and is payable by Holdings on a quarterly
basis. At July 31, 2008, the “prime rate” was 5.0%. The Term Loan matures on
November 20, 2009 unless extended for one year at the option of Holdings, upon
written notice provided to Silar between fifteen (15) and forty-five (45) days
prior to the Maturity Date, provided that no default is then ongoing and that
Holdings is then in compliance with its financial covenants under the Loan
Agreement. At July 31, 2008, Holdings and iDNA were in compliance with the
financial covenants under the Loan Agreement. At July 31, 2008, the principal
balance of the Term Loan was $3.9 million. The Term Loan is also guaranteed
by
(i) iDNA (with such guaranty being secured by a pledge of substantially all
of
iDNA’s assets, other than the shares of its operating subsidiaries) and (ii)
National Cinemas, Inc. (“NCI”), which owns a 50% membership interest in AFC
(with such guaranty being secured by a pledge of substantially all of NCI’s
assets, other than its 50% membership interest in AFC).
As
a
consequence of iDNA’s acquisition of OTI effective November 18, 2005, iDNA
issued to Flexner Wheatley & Associates (“FWA”) and MeetingNet Interactive,
Inc. (“MeetingNet”) promissory notes in an aggregate principal amount of $1.5
million (the “OTI Promissory Notes”). The OTI Promissory Notes bear interest at
5% per annum and are repayable in quarterly installments according to a formula
based upon the future cash flows realized from OTI’s operations. iDNA’s
obligations under the OTI Promissory Notes are secured by the membership
interests of OTI. At July 31, 2008, iDNA had outstanding principal obligations
under the terms of the OTI Promissory Notes of $855,000 and accrued interest
obligations of $12,000.
As
of
January 31, 2008, OTI did not meet certain minimum financial performance
criterion and, as a consequence, (i) iDNA retained an option to reduce the
purchase price in an amount estimated between $206,000 and $412,000 and (ii)
for
the three and six months ended July 31, 2008 no interest was incurred under
the
OTI Promissory Notes. iDNA has not exercised its option to reduce the purchase
price for its acquisition of OTI as of September 12, 2008 and no adjustment
to
the OTI Promissory Notes was recorded at July 31, 2008. Prospectively, interest
may accrue pursuant to the terms of the OTI Promissory Notes once the minimum
operating cash flow thresholds are achieved.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
As
a
consequence of iDNA’s acquisition of OMI Business Communications, Inc. (“OMI”)
effective April 1, 2003, iDNA assumed a $402,000 loan guaranteed by the U.S.
Small Business Administration (the “SBA Loan”). At July 31, 2008, the remaining
balance of the SBA Loan of $286,000 is repayable in monthly installments of
$3,309 with the last payment due in April 2017. The SBA Loan bears interest
at
the rate of 4% per annum. OMI’s obligations under the SBA Loan are
collateralized by substantially all of OMI’s assets and payment thereunder is
subject to the personal guarantee of Mr. Dean Thompson, President of OMI.
In
September 2006, OMI consummated equipment financing in the form of a capital
lease with a financing institution to acquire $102,000 in various digital media
production and editing equipment. The capital lease bears an implied interest
rate of 10% and is payable in monthly installments with the last payment due
in
July 2009. At July 31, 2008, the remaining balance due under the capital lease
was $35,000.
On
January 31, 2008, ARS consummated an auto loan with a financing institution
for
the purchase of a delivery van in the principal amount of $24,000. The auto
loan
is repayable in monthly installments of $755 with the last payment due February
2011. The auto loan bears interest at the rate of 9.0% and is collateralized
by
the van purchased with the proceeds from the loan. At July 31, 2008, the
principal balance of the auto loan was $21,000.
In
July
2008, as set forth in the Reduction Agreement, iDNA (i) assumed certain
obligations to redeem or repurchase from the Stockholders their Issued Shares
and (ii) granted to the Stockholders certain rights to sell (or “put”) the
Issued Shares to iDNA. iDNA is required to semi-annually offer to redeem certain
Issued Shares from the Stockholders at the rate of $2.00 per share for a maximum
total redemption payment equal
to
the excess
(if any)
of certain minimum operating cash flow thresholds of the Campus Group for the
period from August 1, 2008 through July 31, 2013. At any time, the Stockholders
are free to (i) accept or decline iDNA’s offer to redeem or repurchase the
Issued Shares and (ii) sell,
redeem, transfer or otherwise dispose of the Issued Shares to third parties.
Pursuant
to the Reduction Agreement, iDNA also granted to the Stockholders the right,
subject to certain criteria, to sell (or “put”) to iDNA, and require iDNA to
purchase from the Stockholders, any or all of the Issued Shares
(exclusive of all Excluded Shares) at the rate of $2.00 per share during
the period October 31, 2013 through November 15, 2013 (the “Put
Right”).
However, the
Put
Right shall not be exercisable if one or more of the Stockholders shall have
received (or be deemed to have received) aggregate consideration of at least
five million dollars ($5,000,000) on account of or with respect to the sale,
transfer, redemption or other disposition of some or all of the Issued Shares.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
As
a
consequence of the iDNA’s redemption obligation of the Issued Shares under the
terms of the Reduction Agreement, at July 31, 2008 iDNA recorded a $3.1 million
obligation for the fair value of the redemption obligation. Prospectively,
the
fair value of the redemption obligation is subject to adjustment each reporting
period as a consequence of changes, if any, to (i) the number of Issued Shares
(exclusive
of all Excluded Shares) held by the Stockholders at the end of a period, (ii)
actual redemption accepted or declined, by the Stockholders and/or (iii) sales
of Issued Shares to third parties.
In
order
to secure its obligations to the Stockholders under the Reduction Agreement,
iDNA has (i) pledged to the Stockholders all of iDNA’s right, title and interest
in and to all of the capital stock of the Campus Group held by iDNA and (ii)
caused the Campus Group to guaranty such obligations, with such guaranty to
be
secured by the assets of the Campus Group.
For
the
six months ended July 31, 2008, iDNA’s cash and cash equivalents increased
$392,000 due principally to the net effects of (i) proceeds from the sale of
marketable securities of $1.2 million, (ii) AFC distributions of $600,000 offset
by (iii) cash flows used in operations of $804,000, (iv) capital expenditures
of
$147,000, and (v) the repayment of debt and fees of $453,000.
Prior
to
the Term Loan, iDNA had limited external sources of financing and has operated
on its existing cash balances, cash flows from operations and distributions
from
its investment in AFC. iDNA will continue to pursue reductions in its operating
expenses, invest in marketing initiatives and seek new debt or equity financing
(though there can be no assurance iDNA will obtain such financing) as means
of
supplementing iDNA’s resources available to pursue new acquisitions, joint
ventures or other business development opportunities. At July 31, 2008, iDNA
had
unrestricted cash of $561,000 and investments in trading securities of $225,000
which together with any cash flow derived from its investment in AFC and the
operations of iDNA’s corporate communications business will be used to pursue
such opportunities and reduce debt.
iDNA
believes that its available cash and cash equivalents and investments in trading
securities totaling $786,000 at July 31, 2008 and any cash distributions from
its investment in AFC and cash flow from operations will be sufficient to pay
operating expenses, existing liabilities, fund existing debt repayments and
fund
its activities through the next twelve months as iDNA explores new strategic
business alternatives. However, as previously discussed, iDNA’s lack of external
financing sources may limit its ability to pursue strategic business
alternatives being considered by iDNA’s Board of Directors. Such limitations may
have an adverse impact on iDNA’s financial position, results of operations and
liquidity.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
Other
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair
Value Measurement
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with Generally Accepted Accounting Principles
(“GAAP”), and expands disclosures about fair value measurements. The provisions
of SFAS No. 157 are effective for fiscal years beginning after November 15,
2007. The FASB agreed to a one-year deferral of the effective date for
non-financial assets and liabilities that are recognized or disclosed at fair
value on a non-recurring basis. The application of this pronouncement did not
have a material impact on iDNA’s reported consolidated financial position or
results of operations.
In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
No. 159”). SFAS No. 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once
elected. SFAS No. 159 is effective for fiscal years beginning after November
15,
2007. The adoption of this pronouncement did not have a material impact on
iDNA’s reported consolidated financial position or results of
operations.
In
December 2007, the FASB issued SFAS No. 141-R, Business
Combinations.
SFAS
No. 141-R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The objective of SFAS No. 141-R
is to improve the relevance, representational faithfulness and comparability
of
the information that a reporting entity provides in its financial reports about
a business combination. SFAS No, 141-R changes the requirements for an
acquirer’s recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. iDNA does not anticipate the
application of this pronouncement will have a material impact on iDNA’s reported
consolidated financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements - an amendment to ARB
No.51.
SFAS
No. 160 requires that (i) noncontrolling (minority) interests be reported as
a
component of shareholders’ equity, (ii) net income attributable to the parent
and to the noncontrolling interest be separately identified in the consolidated
statement of operations, (iii) changes in a parent’s ownership interest while
the parent retains its controlling interest be accounted for as equity
transactions, (iv) any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair value, and (v)
sufficient disclosures are provided that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No.160 is effective for annual periods beginning after December
15,
2008. iDNA does not anticipate the application of this pronouncement will have
a
material impact on iDNA’s reported consolidated financial position or results of
operations.
iDNA,
Inc. and Subsidiaries
Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations - continued
In
March
2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities”
(“SFAS
161”). SFAS 161 enhances disclosure requirements for derivative instruments in
order to provide users of financial statements with an enhanced understanding
of
(i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for under SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities”
and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS 161 is to be applied prospectively for the first annual reporting
period beginning on or after November 15, 2008. iDNA does not anticipate the
application of this pronouncement will have a material impact on iDNA’s reported
consolidated financial position or results of operations.
Inflation
Inflation
has not had a material adverse impact on iDNA.
Off-Balance
Sheet Arrangements
iDNA
does
not have in place any off-balance sheet arrangements (as defined in Item
303(a)(4) of Regulation S-K).
Forward
Looking Statements
Some
of
the information in this Quarterly Report on Form 10-Q (including the section
titled Management’s Discussion and Analysis of Financial Condition and Results
of Operations) contains forward looking statements within the meaning of the
federal securities laws that relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause iDNA or iDNA’s industry’s actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward-looking statements. You should not rely on forward-looking statements
in
this report. Forward-looking statements typically are identified by use of
terms
such as “anticipate”, “believe”, “plan”, “expect”, “intend”, “may”, “will”,
“should”, “estimate”, “predict”, “potential”, “continue” and similar words,
although some forward-looking statements are expressed differently. This report
may contain forward-looking statements attributed to third parties relating
to
their estimates regarding the growth of iDNA’s markets or other factors. All
forward-looking statements address matters that involve risk and uncertainties,
and there are many important risks, uncertainties and other factors that could
cause iDNA’s actual results as well as those of the markets it serves, levels of
activity, performance, achievements and prospects to differ materially from
the
forward-looking statements contained in this report. You should also consider
carefully the statements under other sections of this report that address
additional factors that could cause our actual results to differ from those
set
forth in any forward-looking statements. iDNA undertakes no obligation to
publicly update or review any forward-looking statements, whether as a result
of
new information, future developments or otherwise.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Not
applicable
Item
4. Controls and Procedures.
As
of the
end of the period covered by this Quarterly Report on Form 10-Q, the Chief
Executive Officer and the Chief Financial Officer of iDNA (the “Certifying
Officers”) have conducted evaluations of iDNA’s disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure
controls and procedures” means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits 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 by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate
to
allow timely decisions regarding required disclosure. The Certifying
Officers have reviewed iDNA’s disclosure controls and procedures and have
concluded that those disclosure controls and procedures were effective as of
the
end of iDNA’s most recent fiscal quarter. In compliance with Rules 13a-14(a) and
15d-14(a) under the Exchange Act and Section 302 of the Sarbanes-Oxley Act
of
2002, (18 U.S.C. 1350), each of the Certifying Officers has executed the
requisite Officer’s Certification included as Exhibit 31 to this Quarterly
Report on Form 10-Q.
In
accordance with Rules 13a-15(d) and 15d-15(d) of the Exchange Act, the
Certifying Officers have also conducted an evaluation of iDNA’s internal control
over financial reporting and have concluded that there has been no change in
iDNA’s internal control over financial reporting during its most recent fiscal
quarter covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, iDNA’s internal control
over financial reporting.
PART
II. - OTHER
INFORMATION
Item
1. |
Legal
Proceedings
|
Self-Insurance
Reserves for Property Damage and Personal Injury Claims
iDNA,
under the names Agency Rent-A-Car, Inc. (“ARAC”), Altra Auto Rental and Automate
Auto Rental, previously engaged in the rental of automobiles on a short-term
basis, principally to the insurance replacement market. In Fiscal 1996, iDNA
discontinued its automobile rental fleet business through the sale of certain
assets and through certain leases to a national car rental company. All
liabilities related to the discontinued rental business, principally
self-insurance claims, were retained by ARAC.
iDNA’s
wholly-owned subsidiary ARAC maintained and continues to maintain self-insurance
for claims relating to bodily injury or property damage from accidents involving
the vehicles rented to customers by its discontinued automobile rental
operations occurring in Fiscal 1996 and prior. ARAC was, when required by either
governing state law or the terms of its rental agreement, self-insured for
the
first $1.0 million per occurrence, and for losses in excess of $5.0 million
per
occurrence, for bodily injury and property damage resulting from accidents
involving its rental vehicles. ARAC was also self-insured, up to certain
retained limits, for bodily injury and property damage resulting from accidents
involving ARAC vehicles operated by employees within the scope of their
employment.
ARAC
is
subject to certain self-insurance claims and litigation expenses relating to
its
discontinued automobile rental operations. iDNA’s management estimates the
required self-insurance liability based upon specific identification of the
known matters subject to future claims, the nature of the claim and the
estimated costs to be incurred. These estimates include, but are not limited
to,
ARAC’s historical loss experience and projected loss factors. The required
self-insurance liability is subject to adjustment in the future based upon
changes in the nature of the remaining claims or the ultimate cost. As a
consequence of iDNA’s sale of its automobile rental operations in 1995, iDNA
believes that all incurred claims have been reported to ARAC and that there
are
no longer any incurred but not yet reported claims to be received by ARAC.
iDNA’s self-insurance liability at July 31, 2008 and January 31, 2008 was
$142,000 and $172,000, respectively.
Because
of the uncertainties related to several residual small claims and legal
proceedings involving iDNA’s former rental operations and self-insurance claims,
it is difficult to project with precision the ultimate effect the adjudication
or settlement of these matters will have on iDNA. As additional information
regarding iDNA’s potential liabilities becomes available, iDNA will revise the
estimates as appropriate.
Other
Litigation
In
the
normal course of its business, iDNA is periodically named as defendant in legal
proceedings. It is the policy of iDNA to vigorously defend litigation and/or
enter into settlements of claims where management deems appropriate. In the
opinion of management, the amount of ultimate liability with respect to any
current actions, if any, is unlikely to materially affect our financial
position, results of operations or liquidity.
Not
applicable
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
Such
description is incorporated by reference to the Current Report of iDNA on Form
8-K dated July 15, 2008.
Item
3. |
Defaults
Upon Senior Securities.
|
Not
applicable
Item
4. |
Submission
of Matters to a Vote of Security
Holders.
|
iDNA
held
its annual meeting of shareholders on July 30, 2008. The following matters
were
voted upon and approved by the shareholders:
|
|
|
|
|
|
|
Votes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Withheld
|
|
Abstained
|
|
Non-Votes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
To
elect directors of the Company to serve until the
|
|
|
|
|
|
|
|
|
|
|
next
annual meeting of stockholders
|
|
|
|
|
|
|
|
|
|
|
|
James
M. Augur
|
|
|
|
5,979,299
|
|
-
|
|
874,008
|
|
-
|
|
-
|
|
|
John
A. Gleason
|
|
|
|
5,982,199
|
|
-
|
|
871,108
|
|
-
|
|
-
|
|
|
James
McNamara
|
|
|
|
5,975,897
|
|
-
|
|
877,410
|
|
-
|
|
-
|
|
|
Donald
Shek
|
|
|
|
5,982,299
|
|
-
|
|
871,008
|
|
-
|
|
-
|
|
|
Henry
Y. L. Toh
|
|
|
|
5,982,199
|
|
-
|
|
871,108
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
To
ratify the appointment of Grant Thornton LLP as
|
|
|
|
|
|
|
|
|
|
|
independent
registered public accountants for Fiscal 2009
|
6,592,986
|
|
87,326
|
|
-
|
|
172,993
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
3
|
To
consider and act upon a proposal to ratify and approve
|
|
|
|
|
|
|
|
|
|
|
an
amendment to our 2005 Equity Compensation Plan
|
|
|
|
|
|
|
|
|
|
|
to
increase the number of shares issuable thereunder by
|
|
|
|
|
|
|
|
|
|
|
one
million (1,000,000) shares
|
|
1,632,676
|
|
513,397
|
|
-
|
|
32,822
|
|
4,674,412
|
Item
5. |
Other
Information.
|
Not
applicable
Exhibit
|
|
Page
|
Number
|
Title
of Exhibit
|
Number
|
3.1
|
Second
Amended and Restated Certificate of
Incorporation of the |
|
|
Company
(incorporated by reference to Exhibit 99.1 to the |
|
|
Company’s
Current Report on Form 8-K filed with the SEC on |
|
|
November
4, 2005, SEC File No. 1-11601). |
N/A
|
|
|
|
3.2
|
Second
Amended and Restated By-Laws of the Company dated as
|
|
|
of
November 4, 2005 (incorporated by reference to Exhibit 99.2
to
|
|
|
the
Company’s Current Report on Form 8-K filed with the SEC on
|
|
|
November
4, 2005, SEC File No. 1-11601).
|
N/A
|
|
|
|
4.1
|
Certificate
of Designation Preferences and Rights of Series D Junior
|
|
|
Participating
Preferred Stock of the Company (incorporated by
|
|
|
reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K
|
|
|
filed
with the SEC on October 9, 2001, SEC File No. 1-11601).
|
N/A
|
|
|
|
4.2
|
Specimen
Stock Certificate - of the Company’s Common Stock
|
|
|
(incorporated
by reference to Exhibit 4(c) to the Company’s
|
|
|
Annual
Report on Form 10-K for the fiscal year ended
|
|
|
January
31, 1996, filed with the SEC on April 25, 1996,
|
|
|
SEC
File No. 1-11601).
|
N/A
|
|
|
|
4.3
|
Rights
Agreement, dated as of September 26, 2001, by and between
|
|
|
the
Company and American Stock Transfer & Trust Company,
|
|
|
including
the form of Certificate of Designation, Preferences
|
|
|
and
Rights for the Series D Junior Participating Preferred
Stock
|
|
|
attached
as Exhibit “A”, the form of Rights Certificate attached as
|
|
|
Exhibit
“B” and the Summary of Rights to Purchase Preferred
|
|
|
Stock
attached as Exhibit “C” (incorporated by reference to
|
|
|
Exhibit
4.1 to the Company’s Current Report on Form 8-K,
|
|
|
filed
with the SEC on October 9, 2001, SEC File No. 1-11601).
|
N/A
|
|
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant to
|
|
|
Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934,
|
|
|
As
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
|
49
|
|
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to
|
|
|
Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934,
|
|
|
As
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
|
50
|
|
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to
|
|
|
Rule
13a-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C.
|
|
|
Section
1350, as adopted pursuant to Section 906 of the
|
|
|
Sarbanes-Oxley
Act of 2002
|
51
|
|
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to
|
|
|
Rule
13a-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C.
|
|
|
Section
1350, as adopted pursuant to Section 906 of the
|
|
|
Sarbanes-Oxley
Act of 2002
|
52
|
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.
|
|
|
|
iDNA,
INC. |
|
|
|
Date: September
16, 2008 |
By: |
/s/ James
J.
McNamara |
|
James J. McNamara |
|
Chairman
of the
Board and Chief Executive Officer
(principal
executive officer)
|
|
|
|
Date: September
16, 2008 |
By: |
/s/ Robert
V.
Cuddihy, Jr. |
|
Robert V. Cuddihy, Jr. |
|
Chief
Financial Officer, Secretary and Treasurer
(principal
accounting and financial officer)
|