Filed Pursuant to Rule 424(b)(3)
Registration No. 333-105182
PROSPECTUS SUPPLEMENT NO. 2
Island Pacific, Inc., a Delaware corporation
(formerly known as SVI Solutions, Inc.)
Common Stock
This prospectus supplement relates to the resale by the holders of Common Stock.
The Prospectus dated July 17, 2003, as supplemented by Prospectus
Supplement No. 1 dated November 10, 2003 (the "Prospectus"), is hereby amended
by the information contained in the attached report on form 10-Q dated September
30, 2003 and the attached reports on Form 8-K dated November 12, 2003 and
November 24, 2003. If the information in the attached reports is inconsistent
with any information contained in the Prospectus or any prospectus supplement
dated earlier than the date of this Supplement, the Prospectus or any earlier
supplement shall be deemed superceded by this Supplement. In all other ways, the
Prospectus and any prior supplement shall remain unchanged.
This Prospectus Supplement should be read in conjunction with, and may
not be delivered or utilized without, the Prospectus dated July 17, 2003, as
supplemented by Prospectus Supplement No. 1 dated November 10, 2003.
PROSPECTUS
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
PURSUANT TO THIS PROSPECTUS UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
ISLAND PACIFIC, INC.
39,010,184 SHARES
COMMON STOCK
We are registering 39,010,184 shares of our common stock for resale by
the selling stockholders identified in this prospectus on pages 17 and 18. The
selling stockholders may sell the shares of common stock described in this
prospectus in public or private transactions, on or off the American Stock
Exchange, at prevailing market prices, or at privately negotiated prices. The
selling stockholders may sell shares directly to purchasers or through brokers
or dealers. Brokers or dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders. We will not
receive any of the proceeds from the sale of the shares by the selling
stockholders. The selling stockholders will receive all of the proceeds from the
sale of the shares and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the shares. We will pay the
expenses of registration of the sale of the shares.
Our common stock is listed on the American Stock Exchange under the
symbol "IPI." The closing sale price of our common stock as reported on the
American Stock Exchange on July 16, 2003 was $3.10 per share. See "Price Range
of Common Stock."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 5.
NEITHER THE SECURITIES EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is July 17, 2003, subject to completion.
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.........................................................1
THE OFFERING...............................................................2
SUMMARY CONSOLIDATED FINANCING DATA........................................3
RISK FACTORS...............................................................5
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................15
FORWARD LOOKING STATEMENTS.................................................15
SELLING STOCKHOLDERS.......................................................16
PLAN OF DISTRIBUTION.......................................................20
USE OF PROCEEDS............................................................21
DIVIDEND POLICY............................................................21
PRICE RANGE OF COMMON STOCK................................................22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................22
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................41
BUSINESS...................................................................42
MANAGEMENT.................................................................51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................59
DESCRIPTION OF CAPTIAL STOCK...............................................62
LEGAL MATTERS..............................................................65
EXPERTS....................................................................65
WHERE YOU CAN FIND MORE INFORMATION........................................65
FINANCIAL STATEMENTS.......................................................F-1
PART II, INFORMATION NOT REQUIRED IN PROSPECTUS............................II-1
EXHIBIT INDEX..............................................................II-15
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE ON THE COVER PAGE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS,
"IPI", "WE", "US" AND "OUR" REFER TO ISLAND PACIFIC, INC., UNLESS THE CONTEXT
OTHERWISE REQUIRES.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS
BEFORE MAKING AN INVESTMENT DECISION.
We are an independent provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solutions. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
Our offerings consist of the following components:
The ISLAND PACIFIC MERCHANDISE MANAGEMENT suite of applications builds
on our long history in retail software design and development and provides our
customers with a comprehensive and fully integrated merchandise management
solution. Our complete enterprise-level offering of applications and services is
designed to assist our customers in maximizing their business potential. The
foundation of our application suite is the individual modules that comprise the
offering. The core modules are:
o IP GLADIATOR;
o IP GLOBAL NETWORK;
o IP INTEGRATOR;
o IP BUYER'S WORKMATE;
o IP WEATHER IMPACT;
o IP BUSINESS PROCESS OPTIMIZATION;
o IP CONSUMER RESEARCH;
o IP PROFILING;
o IP FORECASTING AND REPLENISHMENT;
o IP OMNICARD;
o IP STORE PEOPLE PRODUCTIVITY;
o MERCHANDISING MANAGEMENT;
o THE EYE (TM) ANALYSIS AND PLANNING;
o REPLENISHMENT AND FORECASTING;
o PROMOTION AND EVENTS;
o WAREHOUSE;
o TICKETING; AND
o FINANCIALS
The ISLAND PACIFIC STORE SOLUTION suite of applications builds on our
long history of providing multi-platform, client server in-store solutions. We
market this set of applications under the name "OnePointe," and "OnePointe
International" which is a full business to consumer software infrastructure
encompassing a range of integrated store solutions. "OnePointe" is a complete
application providing all point-of-sale ("POS") and in-store processor (server)
functions for traditional "brick and mortar" retail operations.
Our PROFESSIONAL SERVICES provide our customers with expert retail
business consulting, project management, implementation, application training,
technical and documentation services. This offering ensures that our customers'
technology selection and implementation projects are planned and implemented
timely and effectively. We also provide development services to customize our
applications to meet specific requirements of our customers and ongoing support
and maintenance services.
1
We market our applications and services through an experienced
professional direct sales force in the United States and in the United Kingdom.
We believe our knowledge of the complete needs of multi-channel retailers
enables us to help our customers identify the optimal systems for their
particular businesses. The customer relationships we develop build recurring
support, maintenance and professional service revenues and position us to
continuously recommend changes and upgrades to existing systems.
Our executive offices are located at 19800 MacArthur Boulevard, Irvine,
California, 92612, telephone number (949) 476-2212.
THE OFFERING
------------------------------- ---------------------------------
Common stock to be offered
by the selling stockholders 39,010,184 shares (1)
------------------------------- ---------------------------------
Common stock outstanding
as of July 1, 2003 36,906,490 shares
------------------------------- ---------------------------------
Use of proceeds We will not receive any
proceeds from the sale of
shares of common stock
covered by this prospectus.
------------------------------- ---------------------------------
American Stock Exchange symbol IPI
------------------------------- ---------------------------------
(1) Includes 7,043,095 shares held by or issuable to Koyah Leverage Partners,
L.P., Koyah Partners, L.P., Raven Partners, L.P., Brian Cathcart and Nigel
M. Davey, plus (b) 7,713,480 shares of common stock issuable upon the
conversion of convertible debentures and warrants held by Midsummer
Investment, Ltd., Omicron Master Trust, Islandia, L.P., MBSJ Investors LLC,
Crestview Capital Fund I, L.P., Crestview Fund II, L.P. and Crestview
Capital Offshore Fund, Inc, all of whom have registration rights, and
945,000 shares of common stock issuable as payment for interest accrued on
the debentures, plus (c) 18,575,904 shares of common stock issuable upon
the conversion of Series A Preferred Stock held by Softline, Ltd., which
was granted "piggy-back" registration rights, plus (d) 4,000,000 shares of
common stock issuable upon the exercise of stock options held by Steven
Beck and Harvey Braun, plus (e) 50,000 shares of common stock issuable upon
the exercise of a warrant held by Century Capital
(f) 682,705 shares held by or issuable to other
stock holders who are being provided the opportunity to register shares.
SUMMARY CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
The following financial information should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and unaudited
financial information included elsewhere in this prospectus.
2
SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE LAST 5 FISCAL YEARS(1):
YEAR ENDED MARCH 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 22,296 $ 26,715 $ 28,049 $ 25,027 $ 3,648
Cost of sales 8,045 11,003 10,815 6,176 1,206
--------- --------- --------- --------- ---------
Gross profit 14,251 15,712 17,234 18,851 2,442
Application development expenses 4,643 4,203 5,333 4,877 --
Depreciation and amortization 4,148 6,723 8,299 7,201 1,672
Selling, general and administrative expenses 8,072 12,036 16,985 13,769 3,181
Impairment of intangible assets -- -- 6,519 -- --
Impairment of note receivable received in
connection with the sale of IBIS Systems
Limited -- -- 7,647 -- --
--------- --------- --------- --------- ---------
Total expenses 16,863 22,962 44,783 25,847 4,853
--------- --------- --------- --------- ---------
Loss from operations (2,612) (7,250) (27,549) (6,996) (2,411)
Other income (expense):
Interest income 1 7 620 1,069 516
Other income (expense) 24 (56) 74 (202) 769
Interest expense (1,088) (3,018) (3,043) (1,493) (1)
--------- --------- --------- --------- ---------
Total other income (expense) (1,063) (3,067) (2,349) (626) 1,284
--------- --------- --------- --------- ---------
Loss before provision (benefit) for income taxes (3,675) (10,317) (29,898) (7,622) (1,127)
Provision (benefit) for income taxes 11 2 (4,778) (2,435) 30
--------- --------- --------- --------- ---------
Loss before extraordinary item and change
in accounting principle (3,686) (10,319) (25,120) (5,187) (1,157)
Extraordinary item- Gain on debt forgiveness 1,476 -- -- -- --
Cumulative effect of changing accounting principle
- Goodwill valuation under SFAS 142 (627) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (2,837) (10,319) (25,120) (5,187) (1,157)
Income (loss) from discontinued operations 119 (4,339) (3,825) 1,133 6,742
--------- --------- --------- --------- ---------
Net income (loss) $ (2,718) $(14,658) $(28,945) $ (4,054) $ 5,585
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Loss before extraordinary item and
change in accounting principle $ (0.12) $ (0.29) $ (0.72) $ (0.15) $ (0.04)
Extraordinary item - gain on debt forgiveness 0.05 -- -- -- --
Loss from change in accounting principle (0.02) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (0.09) (0.29) (0.72) (0.15) (0.04)
Income (loss) from discontinued operations -- (0.12) (0.11) 0.13 0.24
--------- --------- --------- --------- ---------
Net income (loss) $ (0.09) $ (0.41) $ (0.83) $ (0.12) $ 0.20
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Loss before extraordinary item and
change in accounting principle $ (0.12) $ (0.29) $ (0.72) $ (0.15) $ (0.03)
Extraordinary item - gain on debt forgiveness 0.05 -- -- -- --
Loss from change in accounting principle (0.02) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (0.09) (0.29) (0.72) (0.15) (0.03)
Income (loss) from discontinued operations -- (0.12) (0.11) 0.03 0.20
--------- --------- --------- --------- ---------
Net income (loss) $ (0.09) $ (0.41) $ (0.83) $ (0.12) $ 0.17
========= ========= ========= ========= =========
Weighted average common shares:
Basic 29,599 35,698 34,761 32,459 28,600
Diluted 29,599 35,698 34,761 32,459 33,071
3
YEAR ENDED MARCH 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands)
BALANCE SHEET DATA:
Working capital $ (4,056) $ (5,337) $ (2,782) $ 2,628 $ 26,387
Total assets $ 37,637 $ 40,005 $ 56,453 $ 94,083 $ 52,374
Long-term obligations $ 2,807 $ 8,013 $ 18,554 $ 21,586 $ 2,043
Stockholders' equity $ 23,842 $ 21,952 $ 26,993 $ 53,497 $ 45,270
(1) Except for the year ended March 31, 2002, certain reclassifications are
reflected in the above data since the filing of such annual reports on forms
10KSB and 10K. Such reclassifications did not result in changes in net income
(loss), net income (loss) per share or stockholders' equity.
4
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE
RISKS DESCRIBED BELOW BEFORE MAKING A DECISION TO BUY OUR COMMON STOCK. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS COULD BE HARMED. IN THAT
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL
OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION IN
THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES.
EXCEPT FOR HISTORICAL INFORMATION, THE INFORMATION IN THIS PROSPECTUS CONTAINS
"FORWARD-LOOKING" STATEMENTS ABOUT OUR EXPECTED FUTURE BUSINESS AND PERFORMANCE.
OUR ACTUAL OPERATING RESULTS AND FINANCIAL PERFORMANCE MAY PROVE TO BE VERY
DIFFERENT FROM WHAT WE MIGHT HAVE PREDICTED AS OF THE DATE OF THIS PROSPECTUS.
THE RISKS DESCRIBED BELOW ADDRESS SOME OF THE FACTORS THAT MAY AFFECT OUR FUTURE
OPERATING RESULTS AND FINANCIAL PERFORMANCE.
BUSINESS RISKS
WE INCURRED LOSSES FOR FISCAL YEARS 2003, 2002, 2001 and 2000.
We incurred losses of $2.7 million, $14.7 million, $28.9 million and
$4.1 million in the fiscal years ended March 31, 2003, 2002, 2001, and 2000
respectively. The losses in the past four years have generally been due to
difficulties completing sales for new application software licenses, the
resulting change in sales mix toward lower margin services, and debt service
expenses. We will need to generate additional revenue to achieve profitability
in future periods. Failure to achieve profitability, or maintain profitability
if achieved, may have a material adverse effect on our business and stock price.
WE HAVE NEGATIVE WORKING CAPITAL, AND WE HAVE EXTENDED PAYMENT TERMS WITH A
NUMBER OF OUR SUPPLIERS.
At March 31, 2003, 2002 and 2001, we had negative working capital of
$4.1 million, $5.3 million and $2.8 million, respectively. We have had
difficulty meeting operating expenses, including interest payments on debt,
lease payments and supplier obligations. We have at times deferred payroll for
our executives offices, and borrowed from related parties to meet payroll
obligations. We have extended payment terms with our trade creditors wherever
possible.
As a result of extended payment arrangements with suppliers, we may be
unable to secure products and services necessary to continue operations at
current levels from these suppliers. In that event, we will have to obtain these
products and services from other parties, which could result in adverse
consequences to our business, operations and financial condition.
OUR NET SALES HAVE DECLINED. WE EXPERIENCED A SUBSTANTIAL DECREASE IN
APPLICATION SOFTWARE LICENSE SALES. OUR GROWTH AND PROFITABILITY IS DEPENDENT ON
THE SALE OF HIGHER MARGIN LICENSES.
Our net sales decreased by 16% in the fiscal year ended March 31, 2003,
compared to the fiscal year ended March 31, 2002. Our net sales decreased by 5%
in the fiscal year ended March 31, 2002 compared to the fiscal year ended March
31, 2001. We experienced a substantial decrease in application license software
sales, which typically carry a much higher margin than other revenue sources. We
must improve new application license sales to become profitable. We have taken
steps to refocus our sales strategy on core historic competencies, but our
typically long sales cycles make it difficult to evaluate whether and when sales
will improve. We cannot be sure that the decline in sales has not been due to
factors which might continue to negatively affect sales.
5
OUR FINANCIAL CONDITION MAY INTERFERE WITH OUR ABILITY TO SELL NEW APPLICATION
SOFTWARE LICENSES.
Future sales growth may depend on our ability to improve our financial
condition. Our current financial condition has made it more difficult for us to
complete sales of new application software licenses. Because our applications
typically require lengthy implementation and extended servicing arrangements,
potential customers require assurance that these services will be available for
the expected life of the application. These potential customers may defer buying
decisions until our financial condition improves, or may choose the products of
our competitors whose financial condition is or is perceived to be stronger.
Customer deferrals or lost sales will adversely affect our business, financial
conditions and results of operations.
OUR SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS MAKES IT DIFFICULT
FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of sales cycles in our business makes it difficult to
evaluate the effectiveness of our sales strategies. Our sales cycles
historically has ranged from three to twelve months, which has caused
significant fluctuations in revenues from period to period. Due to our
difficulties in completing new application software sales in recent periods and
our refocused sales strategy, it is difficult to predict revenues and properly
budget expenses.
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND THEY MAY
CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the
past and may fluctuate in the future as a result of several factors, many of
which are outside of our control. If revenue declines in a quarter, our
operating results will be adversely affected because many of our expenses are
relatively fixed. In particular, sales and marketing, application development
and general and administrative expenses do not change significantly with
variations in revenue in a quarter. It is likely that in some future quarter our
net sales or operating results will be below the expectations of public market
analysts or investors. If that happens, our stock price will likely decline.
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAKES IT DIFFICULT TO PREDICT
FUTURE RESULTS.
Factors outside our control that could cause our revenue to fluctuate
significantly from period to period include:
o THE SIZE AND TIMING OF INDIVIDUAL ORDERS, PARTICULARLY WITH
RESPECT TO OUR LARGER CUSTOMERS;
o GENERAL HEALTH OF THE RETAIL INDUSTRY AND THE OVERALL ECONOMY;
o TECHNOLOGICAL CHANGES IN PLATFORMS SUPPORTING OUR SOFTWARE
PRODUCTS; AND
o MARKET ACCEPTANCE OF NEW APPLICATIONS AND RELATED SERVICES.
In particular, we usually deliver our software applications when
contracts are signed, so order backlog at the beginning of any quarter may
represent only a portion of that quarter's expected revenues. As a result,
application license revenues in any quarter are substantially dependent on
orders booked and delivered in that quarter, and this makes it difficult for us
to accurately predict revenues. We have experienced, and we expect to continue
to experience, quarters or periods where individual application license or
services orders are significantly
6
larger than our typical application license or service orders. Because of the
nature of our offerings, we may get one or more large orders in one quarter
from a customer and then no orders the next quarter.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD, WHICH COULD AFFECT QUARTERLY
RESULTS AND OUR STOCK PRICE.
If we incur additional expenses in a quarter in which we do not
experience increased revenue, our results of operations would be adversely
affected and we may incur losses for that quarter. Factors that could cause our
expenses to fluctuate from period to period include:
o THE EXTENT OF MARKETING AND SALES EFFORTS NECESSARY TO PROMOTE
AND SELL OUR APPLICATIONS AND SERVICES;
o THE TIMING AND EXTENT OF OUR DEVELOPMENT EFFORTS; AND
o THE TIMING OF PERSONNEL HIRING.
IT IS DIFFICULT TO EVALUATE OUR PERFORMANCE BASED ON PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
The many factors which can cause revenues and expenses to vary make
meaningful period to period comparisons of our results difficult. We do not
believe period to period comparisons of our financial performance are
necessarily meaningful, and you cannot rely on them as an indication of our
future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from
October through December of each year as a result of retailers' focus on the
holiday retail-shopping season. This can negatively affect revenues in our third
fiscal quarter and in other quarters, depending on our sales cycles.
OUR DEBT COULD ADVERSELY AFFECT US.
As of June 30, 2003, our debt is as follows:
o $3.5 MILLION IN CONVERTIBLE DEBENTURES ISSUED ON MARCH 31, 2003
TO MIDSUMMER INVESTMENT, LTD., OMICRON MASTER TRUST, AND
ISLANDIA, L.P. DUE IN FULL IN MAY 2005, WITH MONTHLY
REDEMPTIONS TO COMMENCE IN FEBRUARY 2004.
o $400,000 IN CONVERTIBLE DEBENTURES ISSUED ON APRIL 1, 2003 TO
MBSJ INVESTORS LLC DUE IN FULL IN OCTOBER 2005, WITH MONTHLY
REDEMPTIONS TO COMMENCE IN FEBRUARY 2004.
o $300,000 IN CONVERTIBLE DEBENTURES ISSUED ON MAY 7, 2003 TO
CRESTVIEW CAPITAL FUND I, L.P., CRESTVIEW CAPITAL
FUND II, L.P., AND CRESTVIEW CAPITAL OFFSHORE FUND, INC.,
WITH MONTHLY REDEMPTIONS TO COMMENCE IN FEBRUARY 2004.
o $1.25 MILLION IN CONVERTIBLE NOTES REISSUED IN JULY 2002 TO
ENTITIES RELATED TO ICM ASSET MANAGEMENT, INC. DUE SEPTEMBER
30, 2003.
o $500,000 IN A CONVERTIBLE NOTE ISSUED TO UNION BANK OF CALIFORNIA
NA ON MARCH 31, 2003, DUE MARCH 31, 2004.
The substantial amount of our indebtedness impacts us in a number of
ways:
o WE HAVE TO DEDICATE A PORTION OF CASH FLOW FROM OPERATIONS TO
PRINCIPAL AND INTEREST PAYMENTS ON THE DEBT, WHICH REDUCES FUNDS
AVAILABLE FOR OTHER PURPOSES.
7
o WE MAY NOT HAVE SUFFICIENT FUNDS TO PAY PRINCIPAL AND/OR INTEREST
PAYMENT WHEN THEY BECOME DUE, WHICH COULD LEAD TO A DEFAULT.
These are just some factors pertaining to our debt that generally place
us at a disadvantage to our less leveraged competitors. Any or all of these
factors could cause our stock price to decline.
WE HAVE RELIED ON CAPITAL CONTRIBUTED BY RELATED PARTIES, AND SUCH CAPITAL MAY
NOT BE AVAILABLE IN THE FUTURE.
Our cash from operations has not been sufficient to meet our
operational needs, and we have relied on capital from related parties. A company
affiliated with Donald S. Radcliffe, one of our directors, made short-term loans
to us in fiscal 2002 and in fiscal 2003 to meet payroll when cash on hand was
not sufficient. Softline loaned us $10 million to make a required principal
payment on our Union Bank term loan in July 2000. A subsidiary of Softline
loaned us an additional $600,000 in November 2000 to meet working capital needs.
This loan was repaid in February 2001, in part with $400,000 we borrowed from
Barry M. Schechter, our Chairman. We borrowed an additional $164,000 from Mr.
Schechter in March 2001 for operational needs related to our Australian
subsidiary, which was repaid in July 2001.
We may not be able to obtain capital from related parties in the
future. Neither Softline, Mr. Schechter, Mr. Radcliffe nor any other officers,
directors, stockholders or related parties are under any obligation to continue
to provide cash to meet our future liquidity needs.
WE MAY NEED TO RAISE CAPITAL TO REPAY DEBT AND GROW OUR BUSINESS. OBTAINING THIS
CAPITAL COULD IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise capital to discharge our aged payables and grow
our business. We will also likely need to raise capital to pay our $1.25 million
convertible note obligations to the entities related to ICM Asset Management,
Inc. due in full in September 2003, our $3.5 million and $300,000 convertible
debenture obligations due in full in May 2005, with monthly redemptions
commencing in February 2004, our $400,000 convertible debenture obligations due
in full in October 2005, with monthly redemptions commencing in February 2004,
and our $500,000 convertible note obligation due in full in March 2004. We may
also need to raise further capital to:
o SUPPORT UNANTICIPATED CAPITAL REQUIREMENTS;
o TAKE ADVANTAGE OF ACQUISITION OR EXPANSION OPPORTUNITIES;
o CONTINUE OUR CURRENT DEVELOPMENT EFFORTS;
o DEVELOP NEW APPLICATIONS OR SERVICES; OR
o ADDRESS WORKING CAPITAL NEEDS.
Our future capital requirements depend on many factors including our
application development, sales and marketing activities. We do not know whether
additional financing will be available when needed, or available on terms
acceptable to us. If we cannot raise needed funds for the above purposes on
acceptable terms, we may be forced to curtail some or all of the above
activities and we may not be able to grow our business or respond to competitive
pressures or unanticipated developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities or convertible debt securities, our stockholders may experience
substantial dilution and the new securities may have greater rights, preferences
or privileges than our existing common stock.
8
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other
intangible assets represent approximately 83% of our total assets as of March
31, 2003 and represent more than our stockholders' equity. We may have to impair
or write-off these assets, which will cause a charge to earnings and could cause
our stock price to decline.
Any such impairments will also reduce our assets, as well as the ratio
of our assets to our liabilities. These balance sheet effects could make it more
difficult for us to obtain capital, and could make the terms of capital we do
obtain more unfavorable to our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our
applications and services and our expenses, and foreign currency losses will
negatively affect profitability or increase losses. Approximately 12%, 9% and 8%
of our net sales were outside North America, principally in Australia and the
United Kingdom, in the fiscal years ended March 31, 2003, 2002 and 2001,
respectively. Many of our expenses related to foreign sales, such as corporate
level administrative overhead and development, are denominated in U.S. dollars.
When accounts receivable and accounts payable arising from international sales
and services are converted to U.S. dollars, the resulting gain or loss
contributes to fluctuations in our operating results. We do not hedge against
foreign currency exchange rate risks.
WE HAVE A SINGLE CUSTOMER REPRESENTING A SIGNIFICANT AMOUNT OF OUR BUSINESS.
Toys accounted for 31%, 47% and 33% of our net sales for the fiscal
years ended March 31, 2003, 2002 and 2001, respectively. While we have a
development agreement with this customer, Toys has the right to terminate the
agreement without cause with limited advance notice. A reduction, delay or
cancellation of orders from Toys would significantly reduce our revenues and
force us to substantially curtail operations. We cannot provide any assurances
that Toys or any of our current customers will continue at current or historical
levels or that we will be able to obtain orders from new customers.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on Barry M. Schechter, our Chairman, Harvey
Braun, our Chief Executive Officer, and Steven Beck, our President and Chief
Operating Officer. Mr. Schechter has an employment agreement with us, which
expires September 30, 2003 and may be terminated on 14 days notice. We do not
have any written employment agreements with Mr. Braun or Mr. Beck. We also
believe our future success will depend largely upon our ability to attract and
retain highly-skilled software programmers, managers, and sales and marketing
personnel. Competition for personnel is intense, particularly in international
markets. The software industry is characterized by a high level of employee
mobility and aggressive recruiting of skilled personnel. We compete against
numerous companies, including larger, more established companies, for our
personnel. We may not be successful in attracting or retaining skilled sales,
technical and managerial personnel. The loss of key employees or our inability
to attract and retain other qualified employees could negatively affect our
financial performance and cause our stock price to decline.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES
HAVE BEEN AND MAY CONTINUE TO BE SLOW.
Our future growth is critically dependent on increased sales to the
retail industry. We derive the substantial majority of our revenues from the
licensing of software applications and the performance of related professional
and consulting services to the retail industry. Demand for our applications and
services could decline in the event of consolidation, instability or more
downturns in the retail industry. This decline would likely cause reduced sales
and could impair our ability to collect accounts receivable. The result would be
reduced earnings and weakened financial condition, each or both of which would
likely cause our stock price to decline.
9
The success of our customers is directly linked to economic conditions
in the retail industry, which in turn are subject to intense competitive
pressures and are affected by overall economic conditions. In addition, the
retail industry may be consolidating, and it is uncertain how consolidation will
affect the industry. The retail industry as a whole is currently experiencing
increased competition and weakening economic conditions that could negatively
impact the industry and our customers' ability to pay for our products and
services. Such consolidation and weakening economic conditions have in the past,
and may in the future, negatively impact our revenues, reduce the demand for our
products and may negatively impact our business, operating results and financial
condition. Weakening economic conditions and the September 11, 2001 terrorist
attack have adversely impacted sales of our software applications, and we
believe mid-tier specialty retailers may be reluctant during the current
economic slowdown to make the substantial infrastructure investment that
generally accompanies the implementation of our software applications. Also, the
recent war in Iraq and the anticipated burden of rebuilding that country's
infrastructure has led to some uncertainty in the economic climate, which may
adversely impact our business.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS.
We have in the past and may in the future be impacted by customer
bankruptcies. During weak economic conditions, such as those currently being
experienced in many geographic regions around the world, there is an increased
risk that certain of our customers will file bankruptcy. When our customers file
bankruptcy, we may be required to forego collection of pre-petition amounts
owed, and to repay amounts remitted to us during the 90-day preference period
preceding the filing. Accounts receivable balances related to pre-petition
amounts may in certain of these instances be large due to extended payment terms
for software license fees, and significant billings for consulting and
implementation services on large projects. The bankruptcy laws, as well as the
specific circumstances of each bankruptcy, may severely limit our ability to
collect pre-petition amounts, and may force us to disgorge payments made during
the 90-day preference period. We also face risk from international customers
which file for bankruptcy protection in foreign jurisdictions, in that the
application of foreign bankruptcy laws may be less certain or harder to predict.
Although we believe that we have sufficient reserves to cover anticipated
customer bankruptcies, there can be no assurance that such reserves will be
adequate, and if they are not adequate, our business, operating results and
financial condition would be adversely affected.
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We conduct business in an industry characterized by intense
competition. Most of our competitors are very large companies with an
international presence. We must also compete with smaller companies which have
been able to develop strong local or regional customer bases. Many of our
competitors and potential competitors are more established, benefit from greater
name recognition and have significantly greater resources than us. Our
competitors may also have lower cost structures and better access to the capital
markets than us. As a result, our competitors may be able to respond more
quickly than we can to new or emerging technologies and changes in customer
requirements. Our competitors may:
o INTRODUCE NEW TECHNOLOGIES THAT RENDER OUR EXISTING OR FUTURE
PRODUCTS OBSOLETE, UNMARKETABLE OR LESS COMPETITIVE;
o MAKE STRATEGIC ACQUISITIONS OR ESTABLISH COOPERATIVE RELATIONSHIPS
AMONG THEMSELVES OR WITH OTHER SOLUTION PROVIDERS, WHICH WOULD
INCREASE THE ABILITY OF THEIR PRODUCTS TO ADDRESS THE NEEDS OF OUR
CUSTOMERS; AND
o ESTABLISH OR STRENGTHEN COOPERATIVE RELATIONSHIPS WITH OUR CURRENT
OR FUTURE STRATEGIC PARTNERS, WHICH WOULD LIMIT OUR ABILITY TO
COMPETE THROUGH THESE CHANNELS.
10
We could be forced to reduce prices and suffer reduced margins and
market share due to increased competition from providers of offerings similar
to, or competitive with, our applications, or from service providers that
provide services similar to our services. Competition could also render our
technology obsolete. For a further discussion of competitive factors in our
industry, see "Business" under the heading "Competition."
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological
change, evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
The success of application enhancements and new applications depends on
a variety of factors, including technology selection and specification, timely
and efficient completion of design, and effective sales and marketing efforts.
In developing new applications and services, we may:
o FAIL TO RESPOND TO TECHNOLOGICAL CHANGES IN A TIMELY OR
COST-EFFECTIVE MANNER;
o ENCOUNTER APPLICATIONS, CAPABILITIES OR TECHNOLOGIES DEVELOPED BY
OTHERS THAT RENDER OUR APPLICATIONS AND SERVICES OBSOLETE OR
NON-COMPETITIVE OR THAT SHORTEN THE LIFE CYCLES OF OUR EXISTING
APPLICATIONS AND SERVICES;
o EXPERIENCE DIFFICULTIES THAT COULD DELAY OR PREVENT THE SUCCESSFUL
DEVELOPMENT, INTRODUCTION AND MARKETING OF THESE NEW APPLICATIONS
AND SERVICES; OR
o FAIL TO ACHIEVE MARKET ACCEPTANCE OF OUR APPLICATIONS AND
SERVICES.
The life cycles of our applications are difficult to estimate,
particularly in the emerging electronic commerce market. As a result, new
applications and enhancements, even if successful, may become obsolete before we
recoup our investment.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our success and competitive position is dependent in part upon our
ability to develop and maintain the proprietary aspects of our intellectual
property. Our intellectual property includes our trademarks, trade secrets,
copyrights and other proprietary information. Our efforts to protect our
intellectual property may not be successful. Effective copyright and trade
secret protection may be unavailable or limited in some foreign countries. We
hold no patents. Consequently, others may develop, market and sell applications
substantially equivalent to ours or utilize technologies similar to those used
by us, so long as they do not directly copy our applications or otherwise
infringe our intellectual property rights.
We may find it necessary to bring claims or litigation against third
parties for infringement of our proprietary rights or to protect our trade
secrets. These actions would likely be costly and divert management resources.
These actions could also result in counterclaims challenging the validity of our
proprietary rights or alleging infringement on our part. The ultimate outcome of
any litigation will be difficult to predict.
OUR APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial
11
resources to defend or prosecute our rights in connection with any such
litigation. Responding to and defending claims related to our intellectual
property rights, even ones without merit, can be time consuming and expensive
and can divert management's attention from other business matters. In addition,
these actions could cause application delivery delays or require us to enter
into royalty or license agreements. Royalty or license agreements, if required,
may not be available on terms acceptable to us, if they are available at all.
Any or all of these outcomes could have a material adverse effect on our
business, operating results and financial condition.
DEVELOPMENT AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources
necessary to develop and market our offerings to their target markets, our
business strategy substantially depends on our strategic relationships. While
some of these relationships are governed by contracts, most are non-exclusive
and all may be terminated on short notice by either party. If these
relationships terminate or fail to deliver the intended benefits, our
development and marketing efforts will be impaired and our revenues may decline.
We may not be able to enter into new strategic relationships, which could put us
at a disadvantage to those of our competitors which do successfully exploit
strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Substantially all of our primary computer and telecommunications
systems are located in two geographic areas. These systems are vulnerable to
damage or interruption from fire, earthquake, water damage, sabotage, flood,
power loss, technical or telecommunications failure or break-ins. Our business
interruption insurance may not adequately compensate us for our lost business
and will not compensate us for any liability we incur due to our inability to
provide services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product
liability or other claims brought against us, if successful and of sufficient
magnitude, could negatively affect our financial performance and cause our stock
price to decline.
Our applications are highly complex and sophisticated and they may
occasionally contain design defects or software errors that could be difficult
to detect and correct. In addition, implementation of our applications may
involve customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
We are not currently aware of any defects in our applications that
might give rise to future lawsuits. However, errors or integration problems may
be discovered in the future. Such defects, errors or difficulties could result
in loss of sales, delays in or elimination of market acceptance, damage to our
brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing costs. In
addition, third-party products, upon which our applications are dependent, may
contain defects which could reduce or undermine entirely the performance of our
applications.
12
Our customers typically use our applications to perform
mission-critical functions. As a result, the defects and problems discussed
above could result in significant financial or other damage to our customers.
Although our sales agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, we do not
know if these limitations of liability are enforceable or would otherwise
protect us from liability for damages to a customer resulting from a defect in
one of our applications or the performance of our services. Our product
liability insurance may not cover all claims brought against us.
SOFTLINE LIMITED HAS THE RIGHT TO ACQUIRE A CONTROLLING PERCENTAGE OF OUR COMMON
STOCK, SO WE MAY BE EFFECTIVELY CONTROLLED BY SOFTLINE, AND OUR OTHER
STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING.
Softline Limited beneficially owns 49.6% of our outstanding common
stock, including shares Softline has the right to acquire upon conversion of its
Series A Convertible Preferred Stock. Ivan M. Epstein, Softline's Chief
Executive Officer, and Robert P. Wilkie, Softline's Chief Financial Officer,
serve on our board of directors. If Softline converts its Series A Preferred
Stock, it may have effective control over all matters affecting us, including:
o THE ELECTION OF ALL OF OUR DIRECTORS;
o THE ALLOCATION OF BUSINESS OPPORTUNITIES THAT MAY BE SUITABLE FOR
SOFTLINE AND US;
o ANY DETERMINATIONS WITH RESPECT TO MERGERS OR OTHER BUSINESS
COMBINATIONS INVOLVING US;
o THE ACQUISITION OR DISPOSITION OF ASSETS OR BUSINESSES BY US;
o DEBT AND EQUITY FINANCING, INCLUDING FUTURE ISSUANCE OF OUR
COMMON STOCK OR OTHER SECURITIES;
o AMENDMENTS TO OUR CHARTER DOCUMENTS;
o THE PAYMENT OF DIVIDENDS ON OUR COMMON STOCK; AND
o DETERMINATIONS WITH RESPECT TO OUR TAX RETURNS.
OUR BUSINESS MAY BE DISADVANTAGED OR HARMED IF SOFTLINE'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have and will continue to arise between Softline
and us in a number of areas relating to our past and ongoing relationships.
Conflicts may not be resolved in a manner that is favorable to us, and such
conflicts may result in harmful consequences to our business or prospects.
SOFTLINE'S INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY
TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Softline's potential voting control could discourage others from
initiating any potential merger, takeover or other change of control transaction
that may otherwise be beneficial to our business or our stockholders. As a
result, Softline's control could reduce the price that investors may be willing
to pay in the future for shares of our stock, or could prevent any party from
attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to
continue to be, volatile. When we or our competitors announce new customer
orders or services, change pricing policies, experience quarterly fluctuations
in operating results, announce strategic relationships or acquisitions, change
earnings estimates, experience government regulatory actions or suffer from
generally adverse economic conditions, our stock price could be affected. Some
of the volatility in our stock price may be unrelated to our performance.
Recently, companies similar to ours have experienced extreme price fluctuations,
often for reasons unrelated to their performance. For further information on our
stock price trends, see "Price Range of Common Stock."
13
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common
stock. We anticipate that we will use our earnings and cash flow for repayment
of indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Softline is entitled
to dividends on its Series A Convertible Preferred Stock in preference and
priority to common stockholders. Future equity financing(s) may further restrict
our ability to pay dividends.
THE TERMS OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock in
one or more series. We issued 141,000 shares of Series A Convertible Preferred
Stock to Softline in May 2002. Our board of directors may determine the terms of
subsequent series of preferred stock without further action by our stockholders.
If we issue additional preferred stock, it could affect your rights or reduce
the value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. We are actively seeking capital, and some of the
arrangements we are considering may involve the issuance of preferred stock.
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The
Exchange has published certain guidelines it uses in determining whether a
security warrants continued listing. These guidelines include financial, market
capitalization and other criteria, and as a result of our financial condition or
other factors, the American Stock Exchange could in the future determine that
our stock does not merit continued listing. If our stock were delisted from the
American Stock Exchange, the ability of our stockholders to sell our common
stock could become limited, and we would lose the advantage of some state and
federal securities regulations imposing lower regulatory burdens on
exchange-traded issuers.
DELAWARE LAW AND SOME PROVISIONS OF OUR CHARTER AND BYLAWS MAY ADVERSELY AFFECT
THE PRICE OF YOUR STOCK.
Special meetings of our stockholders may be called only by the Chairman
of the Board, the Chief Executive Officer or the Board of Directors.
Stockholders have no right to call a meeting. Stockholders must also comply with
advance notice provisions in our bylaws in order to nominate directors or
propose matters for stockholder action. These provisions of our charter
documents, as well as certain provisions of Delaware law, could delay or make
more difficult certain types of transactions involving a change in control of
the Company or our management. Delaware law also contains provisions that could
delay or make more difficult change in control transactions. As a result, the
price of our common stock may be adversely affected.
SHARES ISSUED UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND CONVERTIBLE
NOTES COULD DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our
employees and certain other persons at various prices, some of which are or may
in the future have exercise prices at below the market price of our stock. We
currently have outstanding options and warrants for 16,967,480 shares. Of these
options and warrants, 831,821 have exercise prices above the recent market
price of $2.45 per share (as of July 10, 2003), and 16,135,659 have exercise
prices at below that recent market price. If exercised, these options and
warrants will cause immediate and possibly substantial dilution to our
stockholders.
Our existing stock option plan currently has approximately 2,251,242
shares available for issuance as of July 10, 2003. Future options issued under
the plan may have further dilutive effects.
14
We issued to Toys "R" Us, our major customer, a note convertible into
2,500,000 shares of common stock. This note has a conversion price of $0.553.
This note will have a dilutive effect on stockholders if converted.
We issued to entities related to ICM Asset Management notes that are
convertible into 2,083,333 shares of common stock. These notes have a conversion
price of $0.60 per share, which is currently below the recent market price of
$2.45 (as of July 10, 2003). These notes will have a dilutive effect on
stockholders if converted.
We also recently issued to a group of investors debentures that are
convertible into 4,103,165 shares of common stock. These debentures have a
conversion price of $1.0236, which is currently below the recent market price of
$2.45. These debentures will have a dilutive effect on stockholders of
converted. We also issued these investors warrants to purchase 2,205,381 shares
of common stock at exercise prices ranging from $1.0236 to $1.65. These warrants
will have a dilutive effect on stockholders if converted.
We issued to Union Bank of California, N.A. an unsecured note that is
convertible into shares of common stock at a price per share of eighty percent
(80%) of the average share closing price of our common stock for the ten trading
day period immediately preceding the maturity date of the note. This note will
have a dilutive effect on stockholders if converted.
We issued to Roth Capital partners a warrant to purchase 527,500 shares
of common stock. This warrant has an exercise price of $1.65 per share. This
warrant will have a dilutive effect on Stockholders if exercised.
Sales of shares pursuant to exercisable options, warrants, convertible
notes, and convertible debentures could lead to subsequent sales of the shares
in the public market, and could depress the market price of our stock by
creating an excess in supply of shares for sale. Issuance of these shares and
sale of these shares in the public market could also impair our ability to raise
capital by selling equity securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our
consolidated financial position, results of operations or cash flows. We are
exposed to market risks, which include changes in interest rates and changes in
foreign currency exchange rate as measured against the U.S. dollar.
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe
and until February 2002, Australia. Sales are typically denominated in the local
foreign currency, which creates exposures to changes in exchange rates. These
changes in the foreign currency exchange rates as measured against the U.S.
dollar may positively or negatively affect our sales, gross margins and retained
earnings. We attempt to minimize currency exposure risk through decentralized
sales, development, marketing and support operations, in which substantially all
costs are local-currency based. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the value of the foreign currency. We do not hedge against foreign currency
risk. Approximately 12%, 9% and 8% of our total net sales were denominated in
currencies other than the U.S. dollar for the periods ended March 31, 2003, 2002
and 2001, respectively.
EQUITY PRICE RISK
We have no direct equity investments.
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS THE
WORDS MAY, WILL, SHOULD, EXPECT, PLAN, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT,
POTENTIAL OR CONTINUE, OR THE NEGATIVES OF SUCH WORDS OR OTHER COMPARABLE
TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO
15
DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO THE ITEMS DISCUSSED UNDER "RISK FACTORS" AND OTHER SECTIONS OF THIS
PROSPECTUS.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO OBLIGATION TO
UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE FILING OF THIS REPORT TO
CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
SELLING STOCKHOLDERS
We are registering 39,010,184 shares of our common stock for resale by
the selling stockholders named below. The term "selling stockholders" includes
each stockholder named below and such stockholder's transferees, pledgees,
donees or other successors. See "Registration Rights" and below for a more
complete description of our agreements with selling stockholders in connection
with their registration rights.
BACKGROUND
In this registration statement, 7,043,095 shares of common stock held
by or issuable to Koyah Leverage Partners, L.P., Koyah Partners, L.P., Raven
Partners, L.P., Brian Cathcart and Nigel M. Davey are being registered herein
pursuant to an investors rights agreement. We previously issued or sold shares
of common stock, as well as warrants and convertible notes, to these investors,
who are or were related to ICM Asset Management. Pursuant to an investors'
rights agreement, we also agreed to file a registration statement for the resale
of all shares held by or issuable to these investors. See "Managements'
Discussion and Analysis of Financial Condition and Results of Operations -
Financing Transactions, ICM Asset Management." Accordingly, we are registering
for these investors 3,359,762 shares of common stock, 1,600,000 shares of common
stock issuable upon the exercise of their warrants, and 2,083,333 shares of
common stock issuable upon the conversion of their convertible notes.
In May 2002, we entered into a securities purchase agreement with
Softline Limited where we issued and sold 141,000 shares of newly designated
Series A Convertible Preferred Stock. The Series A Preferred Stock is
convertible into that number of shares of our common stock as determined in
accordance with this formula:
Number of shares of common stock = $100 + amount of all dividends
accrued since 1/01/02 x (# of shares of preferred stock)/ conversion price
(the conversion price is initially $0.80, but increases at the annual
rate of 3.5%; dividends accrue on $100 at the rate of 7.2% per year)
Pursuant to a registration rights agreement, we granted "piggy back"
registration rights covering the resale of the shares of our common stock
issuable upon conversion of the Series A Preferred Stock. The number of shares
being registered by Softline is 18,575,904, which is the number of shares of
common stock issuable upon conversion of the Series A Preferred Stock as of
January 1, 2003. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations - Financing Transactions, Softline."
In March 2003, we granted registration rights to Midsummer Investment,
Ltd., Omicron Master Trust, and Islandia, L.P. with respect to debentures that
are convertible into an aggregate of 3,419,304 shares of common stock and
warrants to purchase an aggregate 1,572,858 shares of common stock pursuant to a
registration rights agreement. Under that agreement, we are required to file a
registration statement covering 130% of the shares issuable upon the conversion
of the debentures and warrants. We are also registering an aggregate of 819,000
shares issuable as payment for interest accrued on the debentures. The total
number of shares to be registered equals 7,308,811. Additional debentures and
warrants may be issued to these investors if certain conditions are met. The
shares underlying these additional debentures and additional warrants are not
included for registration under this prospectus. See "Managements' Discussion
and Analysis of Financial Condition and Results of Operations - Financing
Transactions, Midsummer/Omicron/Islandia."
In connection with the debentures sold in March 2003, Softline entered
into a "lock up" agreement with the purchasers of those debentures under which
Softline is limited or restricted in the number of shares Softline may sell
during any period of time debentures are still outstanding with respect to
Midsummer and/or Omicron.
On April 1, 2003, we granted registration rights to MBSJ Investors LLC
with respect to a debenture that is convertible into an aggregate of 390,778
shares of common stock and warrants to purchase an aggregate of 156,311 shares
of common stock pursuant to a registration rights agreement. Under that
agreement, we are required to file a registration rights agreement covering 130%
of the shares issuable upon the conversion of the debentures and warrants. We
are also registering an aggregate of 72,000 shares issuable as payment for
interest accrued on the debentures. See "Managements' Discussion and Analysis of
Financial Condition and Results of Operations - Financing Transactions, MBSJ."
16
On May 6, 2003, we granted registration rights to Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. with respect to debentures that are convertible into an aggregate of
293,083 shares of common stock and warrants to purchase an aggregate of 101,112
shares of common stock pursuant to a registration rights agreement. Under that
agreement, we are required to file a registration statement covering 130% of the
shares issuable upon the conversion of the debentures and warrants. We are also
registering an aggregate of 54,000 shares issuable as payment for interest
accrued on the debentures. Additional debentures and warrants may be issued to
these investors if certain conditions are met. The shares underlying these
additional debentures and additional warrants are not included for registration
under this prospectus. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations - Financing Transactions, Crestview."
In September 2002, we granted each of Steven Beck and Harvey Braun a
non-qualified option to purchase up to 2,000,000 shares of common stock at an
exercise price of $0.28 per share. We granted registration rights covering the
shares issuable upon the exercise of the options.
In connection with the debentures sold in March 2003 and May 6, 2003,
we issued to Century Capital a warrant to purchase 50,000 shares of common
stock. We also granted Century Capital registration rights respecting those
shares.
In addition, 682,705 shares of common stock, including shares that
are issuable upon the exercise or conversion of options and warrants, are being
registered for other individuals or entities who are being extended this
opportunity to register their shares.
The following table, which reflects stockholdings as of July 1, 2003,
is based in part upon information provided by the selling stockholders and sets
forth (i) the names of the selling stockholders; (ii) the number of shares of
our common stock that the selling stockholders owned prior to the offering for
resale of any of the shares or our common stock being registered hereby; (iii)
the maximum number of shares of our common stock that may be offered for resale
for the accounts of the selling stockholders pursuant to this prospectus; and
(iv) the percentage of shares of common stock to be held by the selling
stockholders after the offering of the resale shares (assuming all of the resale
shares are sold by the selling stockholders).
--------------------------------------- ------------------------- -------------------------- -------------------------
NUMBER OF SHARES OF IPI NUMBER OF SHARES OF IPI PERCENTAGE OF COMMON
COMMON STOCK COMMON STOCK TO BE STOCK OUTSTANDING AFTER
SELLING STOCKHOLDERS BENEFICIALLY OWNED (1) RESOLD IN THE OFFERING THE OFFERING (2)
--------------------------------------- ------------------------- -------------------------- -------------------------
Gary Seehoff 39,705 39,705 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Rachel Clicksman 70,080 70,080 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Gary Nash 2,920 2,920 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Steven Beck (3) 2,000,000 2,000,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Harvey Braun (3) 2,000,000 2,000,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Norman Smith 180,000 180,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Barry M. Schechter (4) 4,093,391 20,000 5.6%
--------------------------------------- ------------------------- -------------------------- -------------------------
Softline Limited (5) 27,571,631 18,575,904 12.5%
--------------------------------------- ------------------------- -------------------------- -------------------------
Brian Cathart (6) 29,355 29,355 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Nigel M. Davey (7) 27,013 15,013 <1%
--------------------------------------- ------------------------- -------------------------- -------------------------
Koyah Leverage Partners, L.P. (8) 5,461,962 5,461,962 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Koyah Partners, L.P. (9) 1,262,883 1,262,883 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Raven Partners, L.P. (10) 273,882 273,882 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Donald Radcliffe (11) 1,115,900 370,000 1.0%
--------------------------------------- ------------------------- -------------------------- -------------------------
17
--------------------------------------- ------------------------- -------------------------- -------------------------
NUMBER OF SHARES OF IPI NUMBER OF SHARES OF IPI PERCENTAGE OF COMMON
COMMON STOCK COMMON STOCK TO BE STOCK OUTSTANDING AFTER
SELLING STOCKHOLDERS BENEFICIALLY OWNED(1) RESOLD IN THE OFFERING THE OFFERING(2)
--------------------------------------- ------------------------- -------------------------- -------------------------
Midsummer Investment, Ltd. (12) 2,121,865 2,923,525 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Omicron Master Trust (13) 2,273,427 3,132,347 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Islandia, L.P. (14) 909,370 1,252,939 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
MBSJ Investors LLC (15) 582,803 783,216 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Crestview Capital Fund I., L.P. (16) 140,327 188,817 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Crestview Capital Fund, II, L.P. (17) 245,572 330,431 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Crestview Capital Offshore Fund, Inc. 35,082 47,205 0%
(18)
--------------------------------------- ------------------------- -------------------------- -------------------------
Century Capital (19) 50,000 50,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
(1) The number of shares does not include an indeterminate number of additional
shares that may be registered and issued in accordance with Rule 416 under the
Securities Act to prevent dilution of the common stock resulting from stock
splits, stock dividends or other events.
(2) Percentage of shares of common stock outstanding after the offering (a) is
based upon 36,906,490 shares of our common stock outstanding as of July 1, 2003,
plus 35,282,717 shares of our common stock issuable upon the conversion or
exercise of the Series A Preferred Stock, options, warrants, convertible notes
and for the payment of interest on the debentures, which shares are being
registered in this prospectus, and (b) assumes that the selling stockholders
sell all shares of our common stock that are registered pursuant to this
prospectus.
(3) Represents shares issuable upon exercise of options granted outside of our
incentive stock option plans.
(4) Claudav Holdings Ltd. B.V. ("Claudav"), the Ivanhoe Irrevocable Trust
("Ivanhoe") and Barry M. Schechter may be deemed a group pursuant to Rule 13d-5
promulgated under the Exchange Act. Claudav holds 462,300 shares, for which it
shares voting power with Mr. Schechter pursuant to a proxy. Claudav is managed
by Erwin Wachter, Trustee. Mr. Wachter has beneficial ownership of the shares
held by Claudav. Ivanhoe holds 2,008,237 shares for which it shares voting and
investment power with Mr. Schechter pursuant to Mr. Schechter's position as a
trustee. Includes 2,000 shares held by Mr. Schechter's minor children and
1,516,854 shares issuable upon exercise of options held by Mr. Schechter. We are
registering 20,000 shares of common stock issuable upon the exercise of Mr.
Schechter's options.
(5) Includes 8,923,915 shares of common stock and 71,812 shares issuable upon
exercise of options held by Softline Limited, which shares we are not
registering with this offering. Also includes 18,575,904 shares issuable upon
conversion of the Series A Preferred Stock, which we are registering with this
offering. Ivan Epstein and Robert Wilkie are the chief executive officer and
chief financial officer, respectively, of Softline Limited and have shared
voting and dispositive power over the shares held by Softline Limited, but
disclaim beneficial ownership of the shares of our common stock owned by
Softline Limited.
(6) Includes 14,743 shares issuable upon exercise of a warrant held by Mr.
Cathart.
(7) Includes 5,013 shares issuable upon exercise of a warrant held by Mr. Davey.
18
(8) Includes 1,257,925 shares issuable upon exercise of warrants and 1,562,500
shares issuable upon conversion of a convertible promissory note held by Koyah
Leverage Partners, L.P. Also includes shares for which a trade was executed
prior to June 30, 2003, but subsequently sold in July 2003 pursuant to Rule 144.
Koyah Ventures, LLC is the general partner of Koyah Leverage Partners, L.P. and
as a result has shared voting and dispositive power over shares held by Koyah
Leverage Partners, L.P. ICM Asset Management, Inc. is the investment advisor to
Koyah Leverage Partners, L.P. and as a result has shared voting and dispositive
power over shares held by Koyah Leverage Partners, L.P. James M. Simmons is the
managing member of Koyah Ventures, LLC and the chief investment officer and
controlling shareholder of ICM Asset Management, Inc. and as a result has shared
voting and dispositive power over shares held by Koyah Leverage Partners, L.P.
James M. Simmons disclaims beneficial ownership of the shares of our common
stock owned by Koyah Leverage Partners, L.P.
(9) Includes 309,784 shares issuable upon exercise of warrants and 312,500
shares issuable upon conversion of a convertible promissory note held by Koyah
Partners, L.P. Also includes shares for which a trade was executed prior to June
30, 2003, but subsequently sold in July 2003 pursuant to Rule 144. Koyah
Ventures, LLC is the general partner of Koyah Partners, L.P. and as a result has
shared voting and dispositive power over shares held by Koyah Partners, L.P. ICM
Asset Management, Inc. is the investment advisor to Koyah Partners, L.P. and as
a result has shared voting and dispositive power over shares held by Koyah
Partners, L.P. James M. Simmons is the managing member of Koyah Ventures, LLC
and the chief investment officer and controlling shareholder of ICM Asset
Management, Inc. and as a result has shared voting and dispositive power over
shares held by Koyah Partners, L.P. James M. Simmons disclaims beneficial
ownership of the shares of our common stock owned by Koyah Partners, L.P.
(10) Includes 12,535 shares issuable upon exercise of warrants and 208,333
shares issuable upon conversion of a convertible promissory note held by Raven
Partners, L.P. Koyah Ventures, LLC and Raven Ventures, LLC are the general
partners of Raven Partners, L.P. and as a result have shared voting and
dispositive power over shares held by Raven Partners, L.P. ICM Asset Management,
Inc. is the investment advisor to Raven Partners, L.P. and as a result has
shared voting and dispositive power over shares held by Raven Partners, L.P.
James M. Simmons is the managing member of Koyah Ventures, LLC and Raven
Ventures, LLC and the chief investment officer and controlling shareholder of
ICM Asset Management, Inc. and as a result has shared voting and dispositive
power over shares held by Raven Partners, L.P. James M. Simmons disclaims
beneficial ownership of the shares of our common stock owned by Raven Partners,
L.P.
(11) Includes 610,000 shares issuable upon exercise of options, of which we are
registering 295,000 shares with this offering. Also includes 17,600 shares held
by an entity for which Mr. Radcliffe has sole voting and investment power. Also
includes an aggregate of 82,100 shares held by three entities for which Mr.
Radcliffe has shared voting and investment power. Excludes 124,500 shares held
by Mr. Radcliffe's spouse, for which Mr. Radcliffe disclaims beneficial
ownership. We are registering 75,000 shares held by Mr. Radcliffe with this
offering.
(12) Includes 1,367,722 shares issuable upon conversion of debentures and
754,143 shares issuable upon exercise of warrants. We are registering a number
of shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Midsummer Investment, Ltd. as of March 31, 2003
in accordance with the requirements of a registration rights agreement. We are
also registering 327,600 shares issuable for interest accrued on the debentures.
(13) Includes 1,465,416 shares issuable upon conversion of debentures and
808,011 shares issuable upon exercise of warrants. We are registering a number
of shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Omicron Master Trust as of March 31, 2003 in
accordance with the requirements of a registration rights agreement. We are also
registering 351,000 shares issuable for interest accrued on the debentures.
(14) Includes 586,166 shares issuable upon conversion of debentures and 323,304
shares issuable upon exercise of warrants. We are registering a number of shares
equal to 130% of the number of shares issuable upon conversion of the debentures
and warrants held by Islandia, L.P. as of March 31, 2003 in accordance with the
requirements of a registration rights agreement. We are also registering 140,400
shares issuable for interest accrued on the debentures.
(15) Includes 390,778 shares issuable upon conversion of debentures and 192,025
shares issuable upon exercise of warrants. We are registering a number of shares
equal to 130% of the number of shares issuable upon conversion
19
of the debentures and warrants held be MBSJ Investors, LLC as of April 1,
2003 pursuant to a registration rights agreement. We are also registering 72,000
shares issuable for interest accrued on the debentures.
(16) Includes 97,694 shares issuable upon conversion of debentures and 42,633
shares issuable upon conversion of warrants. We are registering a number of
shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Crestview Capital Fund I, L.P. as of May 6, 2003
pursuant to a registration rights agreement. We are also registering 18,000
shares issuable for interest accrued on the debentures.
(17) Includes 170,965 shares issuable upon conversion of debentures and 74,607
shares issuable upon exercise of warrants. We are registering a number of shares
equal to 130% of the number of shares issuable upon conversion of the debentures
and warrants held by Crestview Capital Fund II, L.P. as of May 6, 2003 pursuant
to a registration rights agreement. We are also registering 31,500 shares
issuable for interest accrued on the debentures.
(18) Includes 24,424 shares issuable upon conversion of debentures and 10,658
shares issuable upon exercise of warrants. We are registering a number of shares
equal to 130% of the number of shares issuable upon conversion of the debentures
and warrants held by Crestview Capital Offshore Fund, Inc. as of May 6, 2003
pursuant to a registration rights agreement. We are also registering 4,500
shares issuable for interest accrued on the debentures.
(19) Includes 50,000 shares issuable upon exercise of a warrant held by Century
Capital.
PLAN OF DISTRIBUTION
The shares of common stock offered for resale through this prospectus
may be sold from time to time by the selling stockholders in one or more
transactions at fixed prices, at market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The selling
stockholders may offer their shares of common stock in one or more of the
following transactions:
o ON ANY NATIONAL SECURITIES EXCHANGE OR QUOTATION SERVICE AT WHICH
THE COMMON STOCK MAY BE LISTED OR QUOTED AT THE TIME OF SALE,
INCLUDING THE AMERICAN STOCK EXCHANGE;
o IN THE OVER-THE-COUNTER MARKET;
o IN PRIVATE TRANSACTIONS;
o THROUGH OPTIONS;
o BY PLEDGE TO SECURE DEBTS AND OTHER OBLIGATIONS;
o ORDINARY BROKERAGE TRANSACTIONS AND TRANSACTIONS IN WHICH THE
BROKER-DEALER SOLICITS PURCHASES;
o BLOCK TRADES IN WHICH THE BROKER-DEALER WILL ATTEMPT TO SELL THE
SHARES AS AGENT BUT MAY POSITION AND RESELL A PORTION OF THE BLOCK
AS PRINCIPAL TO FACILITATE THE TRANSACTION;
o PURCHASES BY A BROKER-DEALER AS PRINCIPAL AND RESALE BY THE
BROKER-DEALER FOR ITS ACCOUNT;
o AN EXCHANGE DISTRIBUTION IN ACCORDANCE WITH THE RULES OF THE
APPLICABLE EXCHANGE;
o SETTLEMENT OF SHORT SALES;
o THE SALE OF A SPECIFIED NUMBER OF SHARES AT A STIPULATED PRICE
PER SHARE BY AGREEMENT BETWEEN BROKER-DEALERS AND THE SELLING
SHAREHOLDERS; OR
o A COMBINATION OF ANY OF THE ABOVE METHODS.
If required, we will distribute a supplement to this prospectus to
describe material changes in the terms of the offering.
20
The shares of common stock described in this prospectus may be sold
from time to time directly by the selling stockholders. Alternatively, the
selling stockholders may from time to time offer shares of common stock to or
through underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933 (the "Securities Act"). Any profits on the resale
of shares of common stock and any compensation received by any underwriter,
broker/dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares and, if they default in the
performance of any of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provisions of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders may also transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
Any shares covered by this prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares we are registering. The selling stockholders may transfer, devise or gift
such shares by other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common
stock must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the shares may not be offered or
sold unless they have been registered or qualified for sale or an exemption is
available and the selling stockholder complies with the exemption.
Under the Securities Exchange Act of 1934 (the "Exchange Act'), any
person engaged in a distribution of the common stock may not simultaneously
engage in market-making activities with respect to the common stock for nine
business days prior to the start of the distribution. In addition, each selling
stockholder and any other person participating in a distribution will be subject
to the Exchange Act which may limit the timing of purchases and sales of common
stock by the selling stockholders or any such other person. These factors may
affect the marketability of the common stock and the ability of brokers or
dealers to engage in market-making activities.
We will pay all expenses of this registration. These expenses include
the Securities Exchange Commission's (the "SEC's") filing fees, fees under state
securities or "blue sky" laws, and accounting and legal fees. We estimate that
our expenses in connection with this registration will be approximately $83,000.
All expenses for the issuance of any supplement to this prospectus will be paid
by us. The selling stockholders may pay selling commissions or brokerage fees
with respect to the sale of the resale shares by them. Some of the selling
stockholders will be indemnified by us against certain civil liabilities under
securities laws or will be entitled to contribution in connection therewith. We
will be indemnified by some of the selling stockholders against certain
liabilities under securities laws or will be entitled to contribution in
connection therewith.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale by the selling
stockholders of any of the shares of common stock covered by this prospectus.
All proceeds from the resale of the shares of our common stock described in this
prospectus will be for the accounts of the selling stockholders.
DIVIDEND POLICY
We have never declared any dividends. We currently intend to retain any
future earnings to discharge indebtedness and finance the growth and development
of the business. We therefore we do not anticipate paying
21
any cash dividends in the foreseeable future. Furthermore, our Certificate
of Designation restricts us from declaring dividends on our common stock until
we first declare and pay all accrued and unpaid dividends to the holders of
Series A Preferred Stock. Any future determination to pay cash dividends when we
are permitted to do so will be at the discretion of the board of directors and
will be dependent upon the future financial condition, results of operations,
capital requirements, general business conditions and other factors that the
board of directors may deem relevant.
PRICE RANGE OF COMMON STOCK
Until July 15, 2003, our common stock was listed on the American Stock
Exchange under the symbol "SVI" and had traded on that exchange since July 8,
1998. Effective July 16, 2003, our common stock traded on the American Stock
Exchange under the symbol "IPI". The following table indicates the high and low
sales prices for our shares for each quarterly period for each of our two most
recent fiscal years.
YEAR ENDED MARCH 31, 2003 HIGH LOW
First Quarter $ 0.660 $ 0.300
Second Quarter $ 1.300 $ 0.210
Third Quarter $ 1.250 $ 0.400
Fourth Quarter $ 1.170 $ 0.550
YEAR ENDED MARCH 31, 2002 HIGH LOW
First Quarter $ 1.600 $ 0.650
Second Quarter $ 1.040 $ 0.690
Third Quarter $ 1.010 $ 0.670
Fourth Quarter $ 0.920 $ 0.580
YEAR ENDED MARCH 31, 2001 HIGH LOW
First Quarter $ 10.250 $ 5.125
Second Quarter $ 7.063 $ 4.760
Third Quarter $ 5.000 $ 0.950
Fourth Quarter $ 2.700 $ 0.910
As of July 1, 2003 there were 36,906,490 shares of our common stock
outstanding, which were held by approximately 140 stockholders of record.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an independent provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solution. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
We developed our retail application software technology and services
business through acquisitions. The largest and most important of these
acquisitions were:
o APPLIED RETAIL SOLUTIONS, INC. (ARS) IN JULY 1998 FOR AGGREGATE
CONSIDERATION OF $7.9 MILLION IN CASH AND STOCK PAID TO THE
FORMER STOCKHOLDERS; AND
o ISLAND PACIFIC SYSTEMS CORPORATION IN APRIL 1999 FOR $35 MILLION
CASH.
We consider ourselves to be one of the leading providers of retail
enterprise applications. ARS was one of the leading providers of store
applications, and the technology we acquired and have subsequently enhanced now
forms the core of our Store Solutions.
22
We accounted for both the Island Pacific and ARS acquisitions using
purchase accounting, which has resulted in the addition of significant goodwill
and capitalized software assets on our balance sheet. See "Significant
Accounting Policies."
Effective April 1, 2002, we restructured our operations into three
strategic business units lead by experienced managers. The business units were
our retail management solutions (formerly referred to as our Island Pacific
unit), Store Solutions (formerly referred to as our SVI Store Solutions unit)
and SVI Training Products, Inc. ("Training Products"). Effective April 1, 2003,
we sold the Training Products unit and discontinued the training product line of
business. Our operations are conducted principally in the United States and the
United Kingdom. Prior to February 2002, we also conducted business in Australia.
We currently derive the majority of our revenues from the sale of
application software licenses and the provision of related professional and
support services. Application software license fees are dependent upon the sales
volume of our customers, the number of users of the application(s), and/or the
number of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds additional users
and/or adds additional locations, we charge additional license fees. We
typically charge for support, maintenance and software updates on an annual
basis pursuant to renewable maintenance contracts. We typically charge for
professional services including consulting, implementation and project
management services on an hourly basis. Our sales cycles for new license sales
historically ranged from three to twelve months, but new license sales were
limited during the past two fiscal years and sales cycles are now difficult to
estimate. Our long sales cycles have in the past caused our revenues to
fluctuate significantly from period to period. The reduction of new license
sales caused the revenues of our Australian subsidiary to decrease substantially
prior to discontinuation of operations in February 2002, and caused our sales
mix in the US and the UK to shift to lower margin services.
We manage long-lived assets by geographic region. The geographic
distribution of our revenues and long-lived assets for the fiscal years ended
March 31, 2003, 2002 and 2001, is as follows (in thousands):
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
------------ ------------ ------------
(in thousands)
Net Sales:
Continuing operations:
United States $ 19,616 $ 24,246 $ 25,930
United Kingdom 2,680 2,469 2,119
------------ ------------ ------------
22,296 26,715 28,049
------------ ------------ ------------
Discontinued operations:
United States 1,370 1,390 1,300
Australia -- 2,363 4,959
United Kingdom 147 146 216
------------ ------------ ------------
1,517 3,899 6,475
------------ ------------ ------------
Total net sales $ 23,813 $ 30,614 $ 34,524
============ ============ ============
Long-lived assets:
United States $ 31,595 $ 36,154 $ 48,270
Australia (discontinued operations) -- -- 1,370
United Kingdom 27 22 59
------------ ------------ ------------
Total long-lived assets $ 31,622 $ 36,176 $ 49,699
============ ============ ============
Up to April 1, 2002, we classified our operations into two lines of
business: retail solutions and training products. As revenues, results of
operations and assets related to our training products subsidiary were below the
threshold established for segment reporting, we considered our business for the
periods prior to April 1, 2002 to have consisted of one reportable operating
segment.
23
Effective April 1, 2002, we reorganized our operations into three
business units that have separate management teams and reporting
infrastructures. Each unit is evaluated primarily based on total revenues and
operating income excluding depreciation and amortization. Identifiable assets
are also managed by business units. The units are as follows:
o RETAIL MANAGEMENT SOLUTIONS - offers suite of applications,
which builds on our long history in retail software design and
development. We provide our customers with an extremely
reliable, widely deployed, comprehensive and fully integrated
retail management solutions. Retail Management Solution
includes merchandise management that optimizes workflow and
provides the highest level of data integrity. This module
supports all operational areas of the supply chain including
planning, open-to-buy purchase order management, forecasting,
warehouse and store receiving distribution, transfers, price
management, performance analysis and physical inventory. In
addition, Retail Management Solutions includes a comprehensive
set of tools for analysis and planning, replenishment and
forecasting, event and promotion management, warehouse,
ticketing, financials and sales audit. Through collaborations
with strategic partners, Retail Management Solutions offers
tools for loss prevention, communication with stores and
vendors, integration needs, purchase and allocation decisions,
analysis of weather impact, control and management of business
processes, consumer research, tracking consumer shopping
patterns, forecasting and replenishment, and analyzing store
people productivity.
o STORE SOLUTIONS - offers suite of applications builds on our
long history of providing multi-platform, client server
in-store solutions. We market this set of applications under
the name "OnePointe," and "one Pointe International" which is
a full business to consumer software infrastructure
encompassing a range of integrated store solutions.
"OnePointe" is a complete application providing all
point-of-sale ("POS") and in-store processor (server)
functions for traditional "brick and mortar" retail
operations.
o TRAINING PRODUCTS, INC. ("Training Products") - developed and
distributed PC Courseware and skills assessment products for
both desktop and retail applications. This unit was sold and
discontinued effective April 1, 2003.
A summary of the revenues and operating income (loss), excluding depreciation
and amortization, attributable to each of these business units and identifiable
assets is as follows (in thousands):
24
Fiscal 2003
Net sales:
Retail Management Solutions $ 20,390
Store Solutions 1,906
Training Products 1,517
---------------
Consolidated net sales $ 23,813
===============
Operating income (loss):
Retail Management Solutions $ 3,129
Store Solutions 129
Training Products 287
Other (see below) (5,974)
---------------
Consolidated operating loss $ (2,429)
===============
Depreciation:
Retail Management Solutions $ 192
Store Solutions 47
Other 91
---------------
Consolidated depreciation $ 330
===============
Other operating loss:
Amortization of intangible assets $ (3,818)
Depreciation (91)
Administrative costs and other
non-allocated expenses (2,065)
---------------
Consolidated other operating loss $ (5,974)
===============
Identifiable assets:
Retail Management Solutions $ 31,953
Store Solutions 4,404
Training Products 381
---------------
Consolidated identifiable assets $ 36,738
---------------
Operating income in Retail Management Solutions, Store Solutions and Training
Products includes direct expenses for software licenses, maintenance services,
programming and consulting services, sales and marketing expenses, product
development expenses, and direct general, administrative and depreciation
expenses. The "Other" caption includes amortization of intangible assets,
non-allocated costs and other expenses that are not directly identified with a
particular business unit and which we do not consider in evaluating the
operating income of the business unit.
Results of operations for fiscal 2003 reflect continued weakness in new
license sales of our application software suites. As a result of our net losses,
we experienced significant strains on our cash resources throughout the 2003
fiscal year. We have taken a number of affirmative steps to address our
operating situation and liquidity problems, and to position us for improved
results of operations.
o In January 2003, we appointed Harvey Braun, a well-known and
highly-respected retail industry veteran, to the position of
Chief Executive Officer of Island Pacific, one of our business
units. In April 2003, our Board of Directors appointed Mr.
Braun to the position of Chief Executive Officer and director.
o In October 2002, we appointed Steven Beck, a retail industry
expert, to the position of President of our Island Pacific
unit. In April 2003, our Board of Directors appointed Mr. Beck
to the position of President and Chief Operating Officer and
director.
o We are strengthening our product offerings through strategic
relationships with Planalytics, KMG Solutions, Raymark, Inc.,
Wazagua LLC, ANT USA, Inc. and IT Resources Inc.
o Under a partnership agreement with Planalytics Inc., Island
Pacific will market Impact LR, an internet-based application
that measures the specific effects of future weather on
consumer demand by product, location and time. Using Impact
LR, our customers can plan the timing of in-season markdowns,
as well as the season-to-season flow of merchandise into their
stores with maximum effectiveness.
25
o Under a marketing license agreement with KMG Solutions, Island
Pacific will integrate, market and support Traxion(TM)process
management solutions. Traxion's business process management
solution consists of three modules. Traxion
ProcessEngine(TM)is the real-time process management platform
that retailers use to actively manage and support their
organizations' unique business processes. Traxion
ProcessModeler(TM), includes simulation functions such as
same-time comparison of process variations and the use of
actual cost data to produce process-based financial estimates.
Traxion OrganizationModeler(TM) simplifies the creation of
sophisticated models including inter-company workgroups,
payroll information, and roles.
o Under an OEM agreement with Raymark, Inc., we will integrate,
market and support Xpert Store point-of-sale ("POS") software
solution under the Island Pacific brand. Raymark's
full-featured POS solution streamlines the checkout process in
order to increase sales associate efficiency and augment
customer satisfaction. The software supports multi-channel,
multi-language, multi-currency and multi-taxation
requirements.
o Under a agreement with Wazagua LLC, we will exclusively offer
to retailers worldwide Wazagua's products and services
including web-based Loss Prevention Case Management Package,
ASP Data Hosting and POS Exception Reporting. WAZAGUA(TM) ASP
Hosted Suite of Modules automates data management for the Loss
Prevention, Operations, Human Resources, Safety & Risk
Management community. These ASP-hosted productivity tools
enable retailers to capture the power of the internet.
Retailers can create efficiencies, manage and share
information, make better use of their staff, eliminate
redundant data entry - and work from virtually any point in
the world.
o Under terms of a reseller agreement, we will market, sell,
install, interface to, and support ANT USA's products
including Buyer's Toolbox(tm), a leading suite of merchandise
and assortment planning software that has been successfully
implemented by over 140 retailers worldwide. The software will
extend Island Pacific's assortment and planning capabilities
by providing a solid planning methodology accessed through an
easy-to-use interface, in a cost-effective offering.
o A marketing license agreement with IT Resources Inc. enables
Island Pacific to market, sell, install, support and integrate
IT Resources' Buyer's WorkMate(r) Suite, an innovative
decision support software platform developed for merchandising
organizations. The software will bring mobility and other
timesaving benefits to the buying process.
o Under a marketing alliance agreement with BIGresearch, we will
provide retailers, suppliers and third party companies with an
end-to-end information solution to forecast consumer demand,
better utilize assets and merchandise, and develop strategy
and market position.
o As of April 1, 2002, we refocused the company into three
strategic business units each led by experienced managers. The
units were retail management solutions (formerly known as
Island Pacific division), Store Solutions (formerly known as
our SVI Store Solutions division), and SVI Training Products,
Inc. Effective April 1, 2003, we agreed to sell our shares of
SVI Training Products, Inc., a wholly-owned subsidiary, to
Arthur Klitofsky. Mr. Klitofsky resigned from the Board in
March 2003. See "Discontinued Operations" below.
o We issued a total of $1.25 million in convertible notes to a
limited number of accredited investors related to ICM Asset
Management, Inc. of Spokane, Washington, a significant
beneficial owner of our common stock in fiscal 2001. In July
2002, we amended the convertible notes to extend the maturity
date to September 30, 2003 and we replaced the warrants issued
to these investors. See "Liquidity and Capital Resources --
Indebtedness -- ICM Asset Management, Inc." below.
o In July 2002, we negotiated an extension of our senior bank
lending facility to August 31, 2003, and then we subsequently
satisfied this debt under the Discounted Loan Payoff Agreement
dated March 31, 2003. See "Liquidity and Capital Resources --
Indebtedness -- Union Bank" below.
26
o In May 2002, we completed a series of transactions with
Softline Limited to repay our subordinated note to Softline,
to transfer to Softline our note received in connection with
the sale of IBIS Systems Limited, and to issue to Softline new
preferred securities. Softline also returned to us 10,700,000
shares of our common stock. Steven Cohen, Softline's Chief
Operating Officer, and Gerald Rubenstein, a director of
Softline, resigned from our board of directors in May 2002.
Ivan Epstein, Softline's Chief Executive Officer, continues to
serve on our board, and in June 2002, Robert P. Wilkie,
Softline's Chief Financial Officer, was appointed to our board
of directors. For a further discussion of the terms of
transactions with Softline during the 2002 fiscal year, see
"Financing Transactions -- Softline."
o In May 2002, we entered into a new two-year software
development and services agreement with our largest customer,
Toys "R' Us, Inc. ("Toys"). Toys also agreed to invest $1.3
million for the purchase of a non-recourse convertible note
and a warrant to purchase up to 2,500,000 common shares. For a
further details, see "Liquidity and Capital Resources -
Indebtedness -- Toys "R" Us' below.
o In March 2003, we issued a total of $3.5 million in 9%
convertible debentures to Midsummer Investment, Ltd., Omicron
Master Trust and Islandia, L.P. Along with these debentures,
warrants to purchase an aggregate of 1,572,858 shares of
common stock were issued to these investors. See "Financing
Transactions - Midsummer/Omicron/Islandia" below.
o In April 2003, we issued $400,000 in 9% convertible debentures
to MBSJ Investors, LLC. Along with these debentures, warrants
to purchase 156,311 shares of common stock were issued to this
investor. See "Financing Transactions - MBSJ".
o In March 2003, the Board adopted a resolution to change our
name to "Island Pacific, Inc.", and our shareholders approved
of this change on July 9, 2003.
o In May 2003, we issued $300,000 in 9% convertible debentures
to Crestview Capital Fund I, L.P., Crestview Capital Fund II,
L.P. and Crestview Capital Offshore Fund, Inc. Along with
these debentures, warrants to purchase 101,112 shares of
common stock were issued to these investors. See "Financing
Transactions - Crestview".
o Under a Securities Purchase Agreement dated June 27, 2003, we
issued a total of 5,275,000 shares of common stock to various
institutional investors for an aggregate purchase price of of
$7,912,500. See "Financing Transactions - Common Stock
Institutional Investors" below.
DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold Training Products unit to Arthur
Klitofsky, a former director, for the sale price of $180,000 plus earn-out
payments equal to 20% of the total gross revenues of the Training Products unit
in each of its next two fiscal years, to the extent the revenues in each of
those years exceed certain targets. We received a promissory note for the amount
of $180,000 and the earn-out payments, if any, will be made in quarterly
installments following each fiscal year, bearing an annual interest rate of 5%.
The sale of this resulted in a loss of $129,000, net of estimated income taxes,
which was accrued for at March 31, 2003. The operating results of this
subsidiary of $248,000 are shown as discontinued operations, net of the loss on
sale of the Training Products unit with the prior period results restated.
Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in April 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to the entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as our potential exposure. The
receiver has also claimed that we are obligated for inter-company balances of
$636,000. We do not believe any amounts are owed to the receiver, who has not as
of the date of this report acknowledged the monthly corporate overhead recovery
fees and other amounts charged by us to the Australian subsidiary offsetting the
amount claimed to be due. For further details, see "Liquidity and Capital
Resources -- Contractual Obligations -- National Australia Bank."
27
The disposal of our Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown on our
financial statements as discontinued operations with the prior period results
restated.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o Revenue recognition. Our revenue recognition policy is
significant because our revenue is a key component of our
results of operations. In addition, our revenue recognition
determines the timing of certain expenses such as commissions
and royalties. We follow specific and detailed guidelines in
measuring revenue; however, certain judgments affect the
application of our revenue policy.
We license software under non-cancelable agreements and
provide related services, including consulting and customer
support. We recognize revenue in accordance with Statement of
Position 97-2 (SOP 97-2), Software Revenue Recognition, as
amended and interpreted by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with
respect to certain transactions, as well as Technical Practice
Aids issued from time to time by the American Institute of
Certified Public Accountants.
Software license revenue is generally recognized when a
license agreement has been signed, the software product has
been delivered, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and
collection is considered probable. If a software license
contains an undelivered element, the fair value of the
undelivered element is deferred and the revenue recognized
once the element is delivered. In addition, if a software
license contains customer acceptance criteria or a
cancellation right, the software revenue is recognized upon
the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right. Typically, payments
for our software licenses are due in installments within
twelve months from the date of delivery. Where software
license agreements call for payment terms of twelve months or
more from the date of delivery, revenue is recognized as
payments become due and all other conditions for revenue
recognition have been satisfied. Deferred revenue consists
primarily of deferred license, prepaid services revenue and
maintenance support revenue.
Consulting services are separately priced, are generally
available from a number of suppliers, and are not essential to
the functionality of our software products. Consulting
services, which include project management, system planning,
design and implementation, customer configurations, and
training are billed on both an hourly basis and under fixed
price contracts. Consulting services revenue billed on an
hourly basis is recognized as the work is performed. On fixed
price contracts, consulting services revenue is recognized
using the percentage of completion method of accounting by
relating hours incurred to date to total estimated hours at
completion. We have from time to time provided software and
consulting services under fixed price contracts that require
the achievement of certain milestones. The revenue under such
arrangements is recognized as the milestones are achieved.
28
Customer support services include post-contract support and
the rights to unspecified upgrades and enhancements.
Maintenance revenues from ongoing customer support services
are billed on a monthly basis and recorded as revenue in the
applicable month, or on an annual basis with the revenue being
deferred and recognized ratably over the maintenance period.
If an arrangement includes multiple elements, the fees are
allocated to the various elements based upon vendor-specific
objective evidence of fair value.
o Accounts Receivable. We typically extend credit to our
customers. Software licenses are generally due in installments
within twelve months from the date of delivery. Billings for
customer support and consulting services performed on a time
and material basis are due upon receipt. From time to time
software and consulting services are provided under fixed
price contracts where the revenue and the payment of related
receivable balances are due upon the achievement of certain
milestones. Management estimates the probability of collection
of the receivable balances and provides an allowance for
doubtful accounts based upon an evaluation of our customers
ability to pay and general economic conditions.
o Valuation of Long-lived and Intangible Assets and Goodwill.
For fiscal 2003, we have adopted SFAS No. 142 resulting in a
change in the way we value long-term intangible assets and
goodwill. We were required to perform an initial transitional
analysis of goodwill impairment. We concluded this analysis as
of April 1, 2002 and recorded an impairment of $0.6 million as
a cumulative effect of a change in accounting principle in the
first quarter of fiscal 2003. We will no longer amortize
goodwill, but will instead test goodwill for impairment on an
annual basis or more frequently if certain events occur.
Goodwill is to be measured for impairment by reporting units,
which currently consist of our operating segments. At each
impairment test for a business unit, we are required to
compare the carrying value of the business unit to the fair
value of the business unit. If the fair value exceeds the
carrying value, goodwill will not be considered impaired. If
the fair value is less than the carrying value, we will
perform a second test comparing the implied fair value of
reporting unit goodwill with the carrying amount of that
goodwill. The difference if any between the carrying amount of
that goodwill and the implied fair value will be recognized as
an impairment loss, and the carrying amount of the associated
goodwill will be reduced to its implied fair value. These
tests require us to make estimates and assumptions concerning
prices for similar assets and liabilities, if available, or
estimates and assumptions for other appropriate valuation
techniques.
For our intangible assets with finite lives, including our
capitalized software and non-compete agreements, we assess
impairment at least annually or whenever events and
circumstances suggest the carrying value of an asset may not
be recoverable based on the net future cash flows expected to
be generated from the asset on an undiscounted basis. When we
determine that the carrying value of intangibles with finite
lives may not be recoverable, we measure any impairment based
on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the
risk inherent in our current business model.
FINANCING TRANSACTIONS
AMRO INTERNATIONAL, S.A.
On October 24, 2000, the SEC declared effective a registration
statement registering up to 700,000 shares of our common stock for resale by
AMRO International, S.A. AMRO purchased 344,948 shares in March 2000 for
approximately $2.9 million, and under the terms of the purchase agreement, was
entitled to receive additional shares of our common stock if the average of the
closing price of our stock for the five days preceding the effective date of the
registration statement was less than $10.34. Pursuant to the repricing formula,
we issued to AMRO 375,043 additional shares of common stock. We became obligated
to pay to AMRO liquidated damages for late effectiveness of the registration
statement in the amount of $286,000. AMRO agreed in March 2001 to accept 286,000
shares of common stock in satisfaction of the liquidated damages, and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, we issued AMRO a two-year warrant to purchase up
to 107,000 shares of common stock at $1.50 per share, which has since expired.
We agreed to register all of the shares sold in March 2001, and those
that we may sell under the warrant, with the SEC. We became obligated to pay to
AMRO as liquidated damages the amount of $60,000. In April 2002, AMRO agreed to
accept 140,000 shares of common stock in satisfaction of the liquidated damages
29
ICM ASSET MANAGEMENT, INC.
In December 2000, we entered into an agreement to sell up to 2,941,176
common shares to a limited number of accredited investors related to ICM Asset
Management, Inc. for cash at $0.85 per share. We sold 1,764,706 of such shares
in December 2000, for gross proceeds of $1.5 million, and an additional 588,235
shares in January 2001, for additional gross proceeds of $0.5 million. Two of
the investors exercised a right to purchase an additional 588,235 shares in
February 2001 for additional gross proceeds of $0.5 million.
We also agreed to issue to each investor a warrant to purchase one
common share at $1.50 for each two common shares purchased in the private
placement (aggregate warrants exercisable for 1,470,590 shares). We had the
right to call 50% of the warrants, subject to certain conditions, if our common
shares traded at a price above $2.00 per share for thirty consecutive days. We
had the right to call the remaining 50% of the warrants, subject to certain
conditions, if our common shares traded at a price above $3.00 per share for
thirty consecutive days.
We agreed to register all of the shares sold under the purchase
agreement or upon exercise of the warrants with the SEC. Our agreement with the
investors provided that if a registration statement was not effective on or
before April 21, 2001, we would be obligated to issue two-year warrants to each
investor, entitling the investor to purchase additional shares of our common
stock at $0.85 per share. We filed a registration statement in January 2001 to
register these shares, but it did not become effective. As of June 28, 2002, we
had issued the investors warrants to purchase 1,249,997 common shares under this
agreement.
In May and June 2001, we issued a total of $1.25 million in convertible
notes to a limited number of accredited investors related to ICM Asset
Management, Inc. The notes were originally due August 30, 2001, and required
interest at the rate of 12% per annum to be paid until maturity, with the
interest rate increasing to 17% in the event of a default in payment of
principal or interest. Any portion of the unpaid amount of principal and
interest was convertible at any time by the investors into common shares valued
at $1.35 per share. We also agreed to issue to the investors three-year warrants
to purchase 250 common shares for each $1,000 in notes purchased, at an exercise
price of $1.50 per share.
In July 2002, we agreed to amend the terms of the notes and warrants
issued to the investors related to ICM Asset Management, Inc. The investors
agreed to replace the existing notes with new notes having a maturity date of
September 30, 2003. The interest rate on the new notes was reduced to 8% per
annum, increasing to 13% in the event of a default in payment of principal or
interest. We are required to pay accrued interest on the new notes calculated
from July 19, 2002, in quarterly installments beginning September 30, 2002. The
investors agreed to reduce accrued interest and late charges on the original
notes by up to $16,000, and to accept the reduced amount in 527,286 shares of
our common stock valued at $0.41 per share which was the average closing price
of our shares on the American Stock Exchange for the 10 trading days prior to
July 19, 2002. The new notes are convertible at the option of the holders into
shares of our common stock valued at $0.60 per share. We do not have a right to
prepay the notes. In December 2002, the investors agreed to extend the payments
of accrued interest to September 30, 2003.
We also agreed that the warrants previously issued to the investors to
purchase an aggregate of 3,033,085 shares at exercise prices ranging from $0.85
to $1.50, and expiring on various dates between December 2002 and June 2004,
would be replaced by new warrants to purchase an aggregate of 1,600,000 shares
at $0.60 per share, expiring July 19, 2007. The replacement warrants are not
callable by us.
We also agreed to file a registration statement for the resale of all
shares held by or issuable to these investors. In the event such registration
statement is not declared effective by the SEC by July 31, 2003, we will be
obligated to issue five-year warrants for the purchase of 5% of the total number
of registrable securities at an exercise price of $0.60 per share. For the first
30 day period after July 31, 2003 in which the registration statement is not
effective, we will be obligated to issue additional warrants for the purchase of
5% of the total number of registrable securities at an exercise price of $0.60
per share. For each 30 day period thereafter in which the registration statement
is not effective, we will be obligated to issue additional warrants for the
purchase of 2.5% of the total number of registrable securities at an exercise
price of $0.60 per share.
We incurred approximately $40,000 in legal fees and costs to consummate
these transactions with the investors related to ICM Management.
30
SOFTLINE
In May 2002, we entered into a series of transactions with Softline by
which:
1. We transferred to Softline the note received in connection with the
sale of IBIS Systems Limited.
2. We issued to Softline 141,000 shares of newly-designated Series A
Convertible Preferred Stock.
3. Softline released us from approximately $12.3 million in
indebtedness due to Softline under a promissory note.
4. Softline surrendered 10,700,000 shares of our common shares
held by Softline.
The Series A Preferred Stock has a stated value of $100 per share and
is redeemable at our option any time prior to the maturity date of December 31,
2006 for 107% of the stated value and accrued and unpaid dividends. The shares
are entitled to cumulative dividends of 7.2% per annum, payable semi-annually
when, as and if declared by the board of directors. Softline may convert each
share of Series A Preferred Stock at any time into the number of common shares
determined by dividing the stated value plus all accrued and unpaid dividends,
by a conversion price initially equal to $0.80. The conversion price increases
at an annual rate of 3.5% calculated on a semi-annual basis. The Series A
Preferred Stock is entitled upon liquidation to an amount equal to its stated
value plus accrued and unpaid dividends in preference to any distributions to
our common stockholders. The Series A Preferred Stock has no voting rights prior
to conversion into common stock, except with respect to proposed impairments of
the Series A Preferred rights and preferences, or as provided by law. We have
the right of first refusal to purchase all but not less than all of any shares
of Series A Preferred Stock or common shares received on conversion which
Softline may propose to sell to a third party, upon the same price and terms as
the proposed sale to a third party. We also granted Softline certain
registration rights for the common shares into which the Series A Preferred
Stock is convertible, including the right to demand registration on Form S-3 if
such form is available to us and Softline proposes to sell at least $5 million
of registrable common shares, and the right to include shares obtainable upon
conversion of the Series A Preferred Stock in other registration statements we
propose to file.
These transactions were recorded for accounting purposes on January 1,
2002, the date when Softline took effective control of the IBIS note and we
ceased accruing interest on the Softline note. We did not recognize any gain or
loss in connection with the disposition of the IBIS note or the other components
of the transactions.
We incurred approximately $50,000 in legal fees and expenses to
consummate these transactions with Softline.
TOYS "R" US, INC.
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million
for the purchase of a non-recourse convertible note and a warrant to purchase
2,500,000 common shares. The purchase price was received in installments through
September 27, 2002. The note is non-interest bearing, and the face amount was
either convertible into shares of our stock valued at $0.553 per share or
payable in cash at our option, at the end of the term. In November 2002, the
Board decided that this note will be converted solely for equity and will not be
repaid in cash. The note is due May 29, 2009, or if earlier than that date,
three years after the completion of the development project contemplated in the
development agreement between us and Toys entered into at the same time. We do
not have the right to prepay the convertible note before the due date. The face
amount of the note is 16% of the $1.3 million purchase price as of May 29, 2002,
and increases by 4% of the $1.3 million purchase price on the last day of each
succeeding month, until February 28, 2004, when the face amount is the full $1.3
million purchase price. The face amount will cease to increase if Toys
terminates its development agreement with us for a reason other than our breach.
The face amount will be zero if we terminate the development agreement due to an
uncured breach by Toys of the development agreement.
The warrant entitles Toys to purchase up to 2,500,000 of our common
shares at $0.553 per share. The warrant is initially vested as to 400,000 shares
as of May 29, 2002, and vests at the rate of 100,000 shares per month until
February 28, 2004. The warrant will cease to vest if Toys terminates its
development agreement with us for a reason other than our breach. The warrant
will become entirely non-exercisable if we terminate the development agreement
due to an uncured breach by Toys of the development agreement. Toys may elect a
"cashless exercise" where a portion of the warrant is surrendered to pay the
exercise price. As of March 31, 2003, 1.4 million shares of the warrant are
exercisable.
31
The note conversion price and the warrant exercise price are each
subject to a 10% reduction in the event of an uncured breach by us of certain
covenants to Toys. These covenants do not include financial covenants.
Conversion of the note and exercise of the warrant each require 75 days advance
notice to us. As a result, under the rules of the SEC, Toys will not be
considered the beneficial owner of the common shares into which the note is
convertible and the warrant is exercisable until 15 days after it has given
notice of conversion or exercise, and then only to the extent of such noticed
conversion or exercise. We also granted Toys certain registration rights for the
common shares into which the note is convertible and the warrant is exercisable,
including the right to demand registration on Form S-3 if such form is available
to us, and the right to include shares into which the note is convertible and
the warrant is exercisable in other registration statements we propose to file.
We incurred approximately $40,000 in legal fees and expenses to
consummate these transactions with Toys.
MIDSUMMER/OMICRON/ISLANDIA
On March 31, 2003, we entered into a Securities Purchase Agreement
with Midsummer Investment, Ltd. ("Midsummer"), Omicron Master Trust ("Omicron"),
and Islandia, L.P. ("Islandia") for the sale to these investors of 9%
debentures, convertible into shares of our common stock at a conversion price
equal to $1.0236 per share, for an aggregate amount of $3,500,000. The investors
also each received a warrant to purchase up to, in the aggregate, 1,572,858
shares of common stock with an exercise price equal to $1.0236 per share.
The debentures bear an interest rate of 9% per annum, and they provide
for interest only payments on a quarterly basis, payable, at our option, in cash
or shares of common stock. The debentures mature in May 2005. If certain
conditions are met, we have the right, but not the obligation, to redeem the
debentures at 110% of their face value, plus accrued interest. Commencing on
February 1, 2004, we must redeem $218,750 per month of the debenture.
Furthermore, if the daily volume weighed average price of our common stock on
the American Stock Exchange exceeds $1.0236 by more than 200% for 15 consecutive
trading days, we will have the option to cause the investors to convert their
debentures into common stock.
The warrants issued to the investors are for a 5-year term, with an
exercise price equal to $1.0236 per share.
The investors were granted the right of first refusal to participate
in our future offerings of common stock or equivalent securities so long as any
one of them owns at least 5% of the debentures purchased by them. Monthly
redemptions shall be in cash, or, provided certain conditions are met, such as
an effective registration statement, in shares of common stock. If we elect to
pay in shares of common stock, the conversion price shall be the lessor of
$1.0236 and 90% of the average of the daily volume weighted average price of the
common stock for the 20 trading days immediately prior to the redemption date.
The investors were also given registration rights under a Registration Rights
Agreement requiring us to file by April 30, 2003 a registration statement
respecting 130% of the common stock issuable upon the conversion of the
debentures and the warrants, and to use best efforts to have the registration
statement declared effective at the earliest date. If the registration statement
is not filed within these timeframes or declared effective by June 29, 2003
following the closing date of the debentures sold in the first phase, or within
120 days in the event of a review by the Securities and Exchange Commission, we
will be obligated to pay liquidated damages to the investors equal to 2% of the
sum of the amount of debentures subscribed to by the investors and the value of
the warrants for each month until the registration statement becomes effective.
Additional debentures aggregating up to $2,000,000 will be sold to
these investors in a second closing if within one year after the date of first
sale of debentures there occurs a period of 15 consecutive trading days during
which the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
are not included for registration in this prospectus.
We incurred approximately $23,000 in legal fees and expenses to
consummate these transactions with Midsummer, Islandia and Omicron.
MBSJ INVESTORS, LLC
On April 1, 2003, we entered into a Securities Purchase Agreement with
MBSJ Investors, LLC ("MBSJ") for the sale to MBSJ of a 9% debenture, convertible
to shares of our common stock at a conversion price of $1.0236, for $400,000.
This debenture was accompanied by a five-year warrant to purchase 156,311 shares
of common stock with an exercise price of $1.0236 per share. Interest is due on
a quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $20,000 per month of the
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debenture. The debenture matures in October 2005. MBSJ was also granted
registration rights under a Registration Rights Agreement, and certain other
rights similar to those granted to Midsummer, Omicron and Islandia.
CRESTVIEW
On May 6, 2003, we entered into an agreement with Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. (collectively, the "Crestview Investors") for the sale to the
Crestview Investors of 9% debentures, convertible into shares of our common
stock at a conversion price of $1.0236, for $300,000. These debentures were
accompanied by five-year warrants to purchase an aggregate of 101,112 shares of
common stock with an exercise price of $1.0236 per share. Interest is due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $18,750 per month of the
debentures. The debentures mature in October 2005. The Crestview Investors were
also granted registration rights under a registration rights agreement, and
certain other rights similar to those granted to Midsummer, Omnicron and
Islandia.
We incurred approximately $1,200 in legal fees and expenses to
consummate these transactions with the Crestview Investors.
COMMON STOCK INSTITUTIONAL INVESTORS
On June 27, 2003, we entered into an agreement with various
institutional investors ("Common Stock Institutional Investors") for the sale to
these investors of 5,275,000 shares of common stock at a per share price of
$1.50 for an aggregate purchase price of $7,912,500. We also granted the Common
Stock Institutional Investors registration rights under a Registration Rights
Agreement that obligates us to file a separate registration statement respecting
their shares within the earlier of 10 trading days after this registration
statement becomes effective and August 1, 2003.
In connection with this financing, we paid Roth Capital Partners, LLC,
as placement agent, cash compensation of 8% of the proceeds and issued a warrant
to purchase 527,500 shares of common stock at an exercise price of $1.65 per
share. We also issued warrants to purchase 375,000 shares of common stock at an
exercise price of $1.65 to certain holders of our 9% convertible debentures in
order to obtain their requisite consents and waivers of rights they possessed to
participate in the financing. We incurred approximately $29,000 in legal fees
and costs to consummate these transactions with the Common Stock Institutional
Investors.
33
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
fiscal years ended March 31, 2003, 2002, and 2001 (in thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- ---------- --------- ---------- --------- ----------
Net sales $ 22,296 100% $ 26,715 100% $ 28,049 100%
Cost of sales 8,045 36% 11,003 41% 10,815 39%
--------- --------- --------- --------- --------- ---------
Gross profit 14,251 64% 15,712 59% 17,234 61%
Application development expense 4,643 21% 4,203 16% 5,333 19%
Depreciation and amortization 4,148 19% 6,723 25% 8,299 30%
Selling, general and administration expenses 8,072 36% 12,036 45% 16,985 60%
Impairment of intangible assets -- -- -- -- 6,519 23%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited -- -- -- -- 7,647 27%
--------- --------- --------- --------- --------- ---------
Total expenses 16,863 76% 22,962 86% 44,783 159%
--------- --------- --------- --------- --------- ---------
Loss from operations (2,612) (12)% (7,250) (27)% (27,549) (98)%
Other income (expense)
Interest income 1 0% 7 0% 620 2%
Other income (expense) 24 0% (56) 0% 74 1%
Interest expense (1,088) (5)% (3,018) (11)% (3,043) (11)%
--------- --------- --------- --------- --------- ---------
Total other expense (1,063) (5)% (3,067) (11)% (2,349) (8)%
--------- --------- --------- --------- --------- ---------
Loss before provision (benefit) for income taxes (3,675) (17)% (10,317) (38)% (29,898) (106)%
Provision (benefit) for income taxes 11 0% 2 0% (4,778) 17%
--------- --------- --------- --------- --------- ---------
Loss before extraordinary item and change in
accounting principle (3,686) (17)% (10,319) (38)% (25,120) (89)%
Extraordinary item - gain on debt forgiveness 1,476 -- --
Cumulative effect of changing accounting principle
- Goodwill valuation under SFAS 142 (627) -- --
--------- --------- ---------
Loss from continuing operations (2,837) (10,319) (25,120)
Income (loss) from discontinued operations,
net of taxes 119 (4,339) (3,825)
--------- --------- ---------
Net loss $ (2,718) $(14,658) $(28,945)
========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2002
NET SALES
Net sales decreased by $4.4 million, or 16%, to $22.3 million in the fiscal
year ended March 31, 2003 from $26.7 million in the fiscal year ended March 31,
2002.
Fiscal 2003 was a challenging year for the sale of new application
licenses. The slow down in the U.S. and world economy combined with the fear of
future terrorist attacks and the ongoing hostilities in the world cause the
retail industry to be more cautious with their investment in information systems
and deliberately evaluating solutions, which resulted in decrease in sales and
in extended sales cycles. In addition, our financial condition may have
interfered with our ability to sell new application software licenses, as
implementation of our applications generally requires extensive future services
and support, and some potential customers have expressed concern about our
financial ability to provide these ongoing services. We believe strongly that we
provide and will continue to provide excellent support to our customers, as
demonstrated by the continuing upgrade purchases by our top-tier established
customer base. Significant sales growth may however depend in part on our
ability to improve our financial condition.
34
COST OF SALES/GROSS PROFIT
Cost of sales decreased $3.0 million, or 27%, to $8.0 million in the fiscal
year ended March 31, 2003 from $11.0 million in the fiscal year ended March 31,
2002. Gross profit as a percentage of net sales increased to 64% in fiscal 2003
from 59% in fiscal 2002. The increase in gross profit margin was due to a
decrease in modification and professional services sales, which have low margin,
combined with an increase in software license sales, which have much higher
margin. During fiscal 2003, software license sales represented 25% of net sales
and related services represented 45% of net sales, compared to 17% and 57%,
respectively, of net sales during fiscal 2002.
Cost of sales for fiscal 2003 and 2002 included $2.4 million and $3.6
million, respectively, in costs associated with the development or modification
of modules for Toys "R" Us, including the use of higher cost outsource
development services (subcontractors) for certain components of the overall
project. These costs are neither capitalized nor included in application
technology development expenses, but we consider them to be part of our overall
application technology development program.
APPLICATION DEVELOPMENT EXPENSE
Application development expense increased by $0.4 million, or 10%, to $4.6
million in fiscal year ended March 31, 2003 from $4.2 million in the fiscal year
ended March 31, 2002. The increase in application development expense is
primarily due to the ongoing enhancement of our suites of applications.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $3.9 million, or
33%, to $8.1 million compared to $12.0 million in the fiscal year ended March
31, 2002. The decrease is due to decrease in sales and personnel reduction
implemented in the third quarter of 2002 and fourth quarter of 2003 and control
of expenditures.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $2.6 million, or 38%, to $4.1
million in the fiscal year ended March 31, 2003 from $6.7 million in the fiscal
year ended March 31, 2002. The decrease is mainly due a reduction of $2.2
million in amortization pursuant to the non-amortization provisions of Statement
Financial Accounting Standard No. 142 ("SFAS 142") for goodwill with indefinite
useful lives.
INTEREST EXPENSE
Interest expense decreased by $1.9 million, or 64%, to $1.1 million in the
fiscal year ended March 31, 2003 from $3.0 million in the fiscal year ended
March 31, 2002. Interest expense in fiscal 2002 included $1.2 million interest
expense on the $10 million note payable to Softline Limited. Our obligations
related to this note were released by Softline effective in January 1, 2002 in
connection with the integrated series of recapitalization transactions with
Softline. The decrease was also due to $0.7 million decrease in amortization of
debt discount.
DISCONTINUED OPERATIONS
Income from discontinued operations in fiscal 2003 represents a profit of
$0.2 million from operations of the Training Products subsidiary; offset in part
by $0.1 million accrual for loss on the sale of our Training Products
subsidiary. Our Training Products subsidiary was sold effective April 1, 2003.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2001
NET SALES
Net sales decreased slightly by $1.3 million, or 5%, to $26.7 million in
the fiscal year ended March 31, 2002 from $28.0 million in the fiscal year ended
March 31, 2001. Fiscal year 2001 revenues included recognition of $2.0 million
in revenue from a one-time sale of technology rights, which was signed in fiscal
2000.
Fiscal 2002 was a challenging year in which to close new application
license sales. We believe our difficulties initially arose from insufficient
staffing of our sales force. Although we significantly increased the staffing of
our sales force in the first quarter of fiscal 2002, the economic slowdown and
the terrorist attacks of September 11, 2001, and the ongoing hostilities in the
world increased the challenges faced by our sales force. In addition, our
financial condition may have interfered with our ability to sell new application
software licenses, as implementation of our applications generally requires
extensive future services and support, and some potential customers have
expressed concern about our financial ability to provide these ongoing services.
35
COST OF SALES/GROSS PROFIT
Cost of sales was $11.0 million in the fiscal years ended March 31, 2002
and 2001. Gross profit as a percentage of net sales decreased to 59% in fiscal
2002 from 61% in fiscal 2001. The decrease in gross profit margin was due to a
further shift in the sales mix from high margin application licenses to lower
margin software modification and professional services. During fiscal 2002,
application technology license revenues represented 17% of net sales and related
services represented 57% of net sales, compared to 24% and 49%, respectively, of
net sales during fiscal 2001.
Cost of sales for fiscal 2002 and 2001 included $3.6 million and $3.4
million, respectively, in costs associated with the development or modification
of modules for Toys "R" Us, including the use of higher cost outsource
development services (subcontractors) for certain components of the overall
project. These costs are neither capitalized nor included in application
technology development expenses, but we consider them to be part of our overall
application technology development program.
APPLICATION DEVELOPMENT EXPENSE
Application development expense for the fiscal year ended March 31, 2002
was $4.2 million as most development expenditures were client funded compared to
$5.3 million for the fiscal year ended March 31, 2001, a decrease of 21%. The
decrease reflects a shift toward customer-funded development expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $5.0 million, or
29%, to $12.0 million compared to $17.0 million in the fiscal year ended March
31, 2001. The decrease was due to the following:
o Personnel reduction implemented in the fourth quarter of 2001 and
third quarter of 2002 and control of expenditures.
o A $0.9 million reserve for bad debts in fiscal 2001.
During the third quarter of 2002, we completed an analysis of our
operations and concluded that it was necessary to restructure the composition of
our management and personnel. We anticipated that the restructuring would result
in an approximately $3.0 million annual reduction in our expense levels compared
to expenses prior to implementation of the plan. To the extent resources are
available, we expect to slowly increase our expense levels in fiscal 2003 from
the reduced level after the reductions in the third quarter of fiscal 2002.
Additional planned expenditures are for the building of our sales force and for
additions to our Professional Services group for US and UK retail operations as
new licenses and services are sold.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $1.6 million, or 19%, to $6.7
million in the fiscal year ended March 31, 2002 from $8.3 million in the fiscal
year ended March 31, 2001. The decrease reflected the reduction in the base
amounts of goodwill and capitalized software assets resulting from the
recognition of impairments of those assets in the fourth quarter of fiscal 2001.
INTEREST INCOME AND EXPENSE
Interest expense was $3.0 million in the fiscal years ended March 31, 2002
and 2001.
Interest income decreased $0.6 million to $0.1 million in fiscal 2002,
compared to $0.7 million in fiscal 2001 due to cessation of the accrual of
interest income on the note receivable received in connection with the sale of
IBIS after the second quarter of fiscal 2001.
DISCONTINUED OPERATIONS
Loss from discontinued operations in fiscal 2002 was $4.3 million, which
included $1.4 million of net loss from Australian operations and $3.2 million of
loss on disposal of the Australian operations; offset in part by $0.2 million of
net income from the Training Products operations. Loss from discontinued
operations in fiscal 2001 was $3.8 million, which included $3.7 million of net
loss from the Australian operations and $0.1 million of net loss from the
Training Products operations. Our Training Products subsidiary was sold
effective April 1, 2003 and our Australian operations were disposed in the
fourth quarter of fiscal 2002.
36
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 2003, we financed our operations
using cash on hand, internally generated cash, cash from the issuance of
convertible note and debentures and loans from an entity affiliated with Donald
S. Radcliffe, a director. During the fiscal year ended March 31, 2002, we
financed our operations using cash on hand, internally generated cash, cash from
the issuance of convertible notes and loans from an entity affiliated with
Donald S. Radcliffe, a director. During the fiscal year ended March 31, 2001, we
financed our operations using cash on hand, internally generated cash, cash from
the sale of common stock, proceeds from the exercise of options, lines of credit
and loans from each of Softline, a subsidiary of Softline and Barry M.
Schechter, our Chairman. At March 31, 2003 and 2002, we had cash from continuing
operations of $1.3 million.
Operating activities used cash of $1.1 million in the fiscal year ended
March 31, 2003, provided cash of $1.6 million in the fiscal year ended March 31,
2002 and used cash of $2.4 million in the fiscal year ended March 31, 2001. Cash
used in fiscal 2003 resulted primarily from $2.7 million of net loss, $1.5
million non-cash gain on debt forgiveness, $2.0 million increase on accounts
receivable and other receivable and $2.0 million increase in deferred revenue;
offset in part by non-cash charges of $4.1 million in depreciation and
amortization and $0.6 million in a change in accounting principle, $1.0 million
increase in accounts payable and accrued expenses and $0.9 million increase in
accrued interest payable. Cash provided for operating activities in fiscal 2002
resulted primarily from $2.5 million decrease in accounts receivable and other
receivables, $1.6 million increase in deferred revenue, $7.1 million in non-cash
depreciation and amortization, $3.2 million of loss on disposal of Australian
operations, $2.3 million increase in interest payable and $1.0 million in
non-cash charges for stock-based compensation and interest related to
convertible notes due stockholders; offset by $14.7 million of net losses and
$1.9 million decrease in accounts payable and accrued expenses. Cash used for
operating activities in fiscal 2001 resulted primarily from $28.9 million of net
loss, a $4.4 million decrease in net deferred tax liability and a $4.4 million
decrease in deferred revenue; offset by $16.5 million in non-cash impairments of
assets, $9.5 million in non-cash depreciation and amortization, a $5.1 million
decrease in accounts receivable, and a $4.4 million increase in accounts payable
and accrued expenses.
Accounts receivable increased during fiscal year 2003 primarily due to $2.5
million increase in unbilled receivables. The unbilled receivables represents
license and services revenue fully earned at March 31, 2003 that will be billed
subsequently in accordance with the contract terms. Accounts receivable
decreased during fiscal year 2002 primarily due to a write-off of $367,000 in
receivables in connection with the discontinuation of Australian operations in
February 2002 and a significant improvement in collection efforts. Accounts
receivable balances fluctuate significantly due to a number of factors including
acquisitions and dispositions, seasonality, shifts in customer buying patterns,
contractual payment terms, the underlying mix of applications and services sold,
and geographic concentration of revenues.
Investing activities used cash of $0.2 million, $0.7 million and $3.0
million in the fiscal years ended March 31, 2003, 2002 and 2001. Investing
activities during fiscal 2003 included $0.1 million purchases of furniture and
equipment and $0.1 million capitalized development costs. Investing activities
during fiscal 2002 included a $0.4 million increase in capitalized software
development costs and $0.3 million in furniture and equipment purchases.
Investing activities during fiscal year 2001 included a $2.5 million increase in
purchase of software and capitalized software development costs and $0.5 million
in furniture and equipment purchases.
Financing activities provided cash of $1.3 million in the fiscal year ended
March 31, 2003, used cash of $0.8 million in the fiscal year ended March 31,
2002 and provided cash of $1.9 million in the fiscal year ended March 31, 2001.
Financing activities during fiscal 2003 included proceeds of $3.5 million from
the issuance of convertible debentures, $1.4 million from issuance of
convertible note to our major customer and $0.1 million loan from an entity
affiliated with Donald S. Radcliffe, a director; offset in part by payments of
$3.3 million on a term loan, $0.3 million interest on stockholders' notes and
$0.1 million on loan from Mr. Radcliffe's affiliated entity. Financing
activities during fiscal year 2002 included $1.2 million in note payments and
$0.8 million decrease in amounts due to stockholders; offset in part by $1.3
million in proceeds from issuance of convertible notes. Financing activities
during fiscal year 2001 included $3.8 million in proceeds from the sale of
common stock, $9.9 million increase in amounts due to stockholders and $1.6
million in proceeds from lines of credit, offset by $13.2 million in note
payments.
Changes in the currency exchange rates of our foreign operations had the
effect of decreasing cash by $0.1 million in the fiscal years ended March 31,
2003, 2002 and 2001.
37
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including
purchase commitments at March 31, 2003, and the effect such obligations are
expected to have on our liquidity and cash flow in future periods.
For the fiscal years ending March 31,
-------------------------------------
Contractual Cash Obligations 2004 2005 2006 2007 Thereafter
---------------------------- --------- --------- --------- --------- ----------
(in thousands)
Operating leases $ 736 $ 708 $ 195 $ 7
Capital leases 156
Convertible notes due stockholders 1,371
Convertible debentures 839 3,276 575
Payables aged over 90 days 2,496
--------- --------- --------- --------- ----------
Total contractual cash obligations $ 5,598 $ 3,984 $ 770 $ 7 $ --
========= ========= ========= ========= ==========
For the fiscal years ending March 31,
-------------------------------------
Other Commercial Commitments 2004 2005 2006 2007 Thereafter
---------------------------- --------- --------- --------- --------- ----------
(in thousands)
Guarantees $ 187
--------- --------- --------- --------- ----------
Total commercial commitments $ 187
========= ========= ========= ========= ==========
NATIONAL AUSTRALIA BANK LIMITED
Our Australian subsidiary maintained an AUS$1,000,000 (approximately
US$510,000) line of credit facility with National Australia Bank Limited. The
facility was secured by substantially all of the assets of our Australian
subsidiary, and we have guaranteed all amounts owing on the facility. In April
2001, we received a formal demand under our guarantee for the full AUS$971,000
(approximately US$495,000) then alleged by the bank to be due under the
facility. Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
Australian subsidiary's assets for $300,000 in May 2002 to the entity affiliated
with former management, and is actively pursuing the collection of receivables.
If the sale proceeds plus collections on receivables are insufficient to
discharge the indebtedness to National Australia Bank, we may be called upon to
pay the deficiency under our guarantee to the bank. We have accrued $187,000 as
the maximum amount of our potential exposure. The receiver has also claimed that
we are obligated to it for inter-company balances of $636,000, but we do not
believe any amounts are owed to the receiver, who has not as of the date of this
report acknowledged the monthly corporate overhead recovery fees and other
amounts charged by us to the Australian subsidiary offsetting the amount claimed
to be due.
OTHER INDEBTEDNESS, INCLUDING RELATED PARTIES
We issued convertible notes to entities related to ICM Asset Management,
Inc., which notes were amended in July 2002. See "Financing Transactions -- ICM
Asset Management, Inc." above.
At March 31, 2003, we had an outstanding balance of approximately $1.0
million due on payroll taxes, which was subsequently paid in the first quarter
of fiscal 2004.
38
In March 2003, we issued 9% convertible debentures to Midsummer, Omicron
and Islandia for the total proceeds of $3.5 million. See "Financing Transactions
- Midsummer/Omicron/Islandia" above.
In April 2003, we issued 9% convertible debentures to MBSJ Investors, LLC
for a proceeds of $400,000. See "Financing Transactions - MBSJ" above.
In May 2003, we issued 9% convertible debentures to the Crestview Investors
for a proceeds of $300,000. See "Financing Transactions - Crestview" above.
CASH POSITION
As a result of our indebtedness and net losses for the past three years, we
have experienced significant strains on our cash resources. In order to manage
our cash resources, we reduced expenses and discontinued our Australian
operations. We have also extended payment terms with many of our trade creditors
wherever possible, and we have diligently focused our collection efforts on our
accounts receivable. We had a negative working capital of $4.1 million and $5.3
million at March 31, 2003 and 2002, respectively.
We were unable to make timely, monthly rent payments due for our Irvine and
Carlsbad facilities during fiscal 2003. We renegotiated rent terms with the
landlords of our Irvine and Carlsbad facilities, and we are currently in
compliance with the renegotiated terms.
We have been actively engaged in attempts to resolve our liquidity
problems. Under a Securities Purchase Agreement dated June 27, 2003, we issued
5,275,000 shares of our common stock for an aggregate amount of $7.9 million,
less expenses and placement fees. We believe we will have sufficient cash to
remain in compliance with our debt obligations, and meet our critical operating
obligations, for the next twelve months. We may continue to seek a private
equity placement to help discharge aged payables, pursue growth initiatives and
prepay bank indebtedness. We have no binding commitments for funding at this
time. Financing may not be available on terms and conditions acceptable to us,
or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
updates, clarifies, and simplifies existing accounting pronouncements. This
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded.
SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends
SFAS No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in the same
manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The accounting prescribed in SFAS 145 was applied in connection with the gain
from extinguishment of our debt to Union Bank of California.
In November 2001, the FASB issued an Emerging Issues Task Force Issue No.
01-14 ("EITF No. 01-14"), "Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred". EITF No. 01-14 establishes that
reimbursements received for out-of-pocket expenses should be reported as revenue
in the income statement. Currently, we classify reimbursed out-of-pocket
expenses as a reduction in cost of consulting services. We are required to adopt
the guidance of EITF No. 01-14 in the first quarter of fiscal year 2003 and our
consolidated statements of operations for prior periods will be reclassified to
conform to the new presentation. The adoption of EITF No. 01-14 results in an
increase in reported net sales and cost of sales; however, it does not affect
net income or loss in any past or future periods.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or
Disposal Activities". SFAS 146 replaces current accounting standards and
requires the recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. The provisions of the SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. We do not
expect adoption of SFAS No. 146 to have a significant effect on our results of
operations or financial condition.
47
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS 147"), "Acquisition of certain Financial Institutions".
SFAS 147 removes the requirement in SFAS 72 and Interpretation 9 thereto, to
recognize and amortize any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those transactions
be accounted for in accordance with SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". In addition, this
statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets, to include certain financial institution related intangibles.
We do not expect SFAS 147 to have a material impact on our financial
statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. We do not expect SFAS 148
to have a material impact on our financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accountings and disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others", which clarifies the requirement of SFAS No. 5, "Accounting for
Contingencies", relating to a guarantor's accounting for and disclosures of
certain guarantee issues. FIN 45 was applied to our guarantee of a line of
credit facility from National Australia Bank Limited to our former Australian
subsidiary.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities".
Variable interest entities are defined as entities with a level of invested
equity that is not sufficient to fund future activities to permit it to operate
on a stand-alone basis. We do not participate in variable interest entities and
therefore have not applied FIN 46.
In November 2002, the FASB reached consensus on Emerging Issues Task
Force Issue No. 00-21 ("EITF No. 00-21"), "Accounting for Revenue Arrangements
with Multiple Deliverables." In general, this issue addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, this issue addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one earnings process and, if so, how to divide the arrangement into
separate units of accounting consistent with the identified earnings processes
for revenue recognition purposes. This issue also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. EITF Issue 00-21 is applicable to arrangements
entered into after June 15, 2003. We do not believe the application of EITF
Issuer 00-21 will have any material impact on our consolidated financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS 149 further clarifies accounting for
derivative instruments. We believe the adoption of this statement will have no
material impact on our consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We do not believe the adoption of SFAS 150 will have a material impact on
our consolidated financial statements.
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EMPLOYEES
At May 31, 2003, we had a total of 123 employees, 107 of which were
based in the United States and 16 of which were based in the United Kingdom. Of
the total, 13% were engaged in sales and marketing, 43% were engaged in
application technology development projects, 27% were engaged in professional
services, and 17% were in general and administrative. We believe our relations
with our employees overall are good. We have never had a work stoppage and none
of our employees are subject to a collective bargaining agreement.
FACILITIES
Our principal corporate headquarters consists of 26,521 square feet in
a building located at 19800 MacArthur Blvd. This facility is occupied under a
lease that expires on June 30, 2005. The current monthly rent is $56,148. We
also occupy offices in Carlsbad, California. The current monthly rent for that
lease is $13,680. We have notified the landlord that we are terminating this
lease effective July 31, 2003. Starting August 2003, we will occupy
administrative offices in La Jolla, California. These offices are occupied under
leases that expire in June 2007 and October 2005, and the monthly rent for these
offices is $12,859 in the aggregate. We also occupy premises in the United
Kingdom located at The Old Building, Mill House Lane, Wendens Ambo, Essex,
England. The lease for this office building expires August 31, 2003. Annual rent
is $43,646 (payable quarterly) plus common area maintenance charges and real
estate taxes.
LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand
with the California Labor Commissioner for $256,250 in severance benefits
allegedly due under a disputed employment agreement, plus attorney's fees and
costs. Mr. Dorosewicz's demand was later increased to $283,894. On June 18,
2002, we filed an action against Mr. Dorosewicz, Michelle Dorosewicz and an
entity affiliated with him in San Diego Superior Court, Case No. GIC790833,
alleging fraud and other causes of action relating to transactions Mr.
Dorosewicz caused us to enter into with his affiliates and related parties
without proper board approval. On July 31, 2002, Mr. Dorosewicz filed
cross-complaints in that action alleging breach of statutory duty, breach of
contract, fraud and other causes of action related to his employment with the
Company and other transactions he entered into with the Company. These matters
are still pending and the parties have agreed to resolve all claims in binding
arbitrations, scheduled for September 2003.
Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of our
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have accrued $187,000 as our potential exposure.
The receiver has also claimed that we are obligated to it for inter-company
balances of $636,000, but we do not believe any amounts are owed to the
receiver, who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on
disability/worker's compensation leave, Debora Hintz, filed a claim with the
California Labor Commissioner seeking $41,000 in alleged unpaid commissions. In
or about December of 2002, Ms. Hintz filed a discrimination claim against the
Company with the Department of Fair Employment and Housing, alleging harassment
and sexual orientation discrimination. The Company has responded appropriately
to both the wage claim and the discrimination allegations, which the Company
believes lack merit based on present information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation
("Cord Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail,
Inc. as the successor to Island Pacific Systems Corporation, in the United
States District Court for the Southern District of Ohio, Eastern Division, Case
No. C2 02 859. The lawsuit claims damages in excess of $1.5 million, plus
punitive damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
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claims pertain to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. At this time, we cannot predict the merits of this case because it is
in its preliminary state and discovery has not yet commence. However, SVI Retail
intends to defend vigorously the action and possibly file one or more
counter-claims. A trial is scheduled for May 2004.
In mid-2002, we were the subject of an adverse judgment entered against
it in favor of Randall's Family Golf Centers, ("Randall") in the approximate sum
of $61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On December 16, 2002, Chapter 11 Debtors Natural Wonders, Inc. and
World of Science, Inc. (collectively "Debtors") filed an adversary proceeding
against our subsidiary SVI Retail, Inc. seeking to avoid and recover
preferential transfers. The Debtors sought recovery of approximately $84,000,
which it had previously paid to SVI Retail for goods and services rendered. On
March 12, 2003, the Debtors and SVI Retail settled the adversary proceeding for
$18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as
Shea Homes, Inc. served Sabica Ventures, Inc. ("Sabica"), our wholly owned
subsidiary and our then Island Pacific division (now are retail management
solutions division) with a cross-complaint for indemnity on behalf of an entity
identified in the summons as Pacific Cabinets. We filed a notice of motion and
motion to quash service of summons on the grounds that we have never done
business as Pacific Cabinets and have no other known relation to the
construction project that is the subject of the cross-complaint and underlying
complaint. A hearing on our motion to quash occurred on May 22, 2003 and was
subsequently denied.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On November 30, 2001, Deloitte & Touche LLP notified us that they were
resigning as our independent certified public accountants. On December 5, 2001,
we engaged Singer Lewak Greenbaum & Goldstein LLP ("Singer Lewak") as our new
independent auditors. Singer Lewak previously audited our financial statements
for the fiscal years ended March 31, 1998 and September 30, 1997, 1996, 1995 and
1994. The decision to engage Singer Lewak was recommended by the Audit Committee
of the Board of Directors and approved by the Board of Directors.
Deloitte & Touche's reports on the financial statements for the fiscal
years ended March 31, 2001 and 2000 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except as noted in the following sentence.
Deloitte & Touche's audit report on the financial statements for the year ended
March 31, 2001, dated July 13, 2001, expressed an unqualified opinion and
included an explanatory paragraph relating to substantial doubt about our
ability to continue as a going concern. Further, in connection with its audits
of our financial statements for the past two fiscal years and the subsequent
interim period immediately preceding the date of resignation of Deloitte &
Touche, we had no disagreements with Deloitte & Touche on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche, would have caused them to make a reference to the subject
matter of the disagreements in connection with their reports on our consolidated
financial statements.
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DESCRIPTION OF BUSINESS
GENERAL
We are a leading provider of software solutions and services to the
retail industry. We provide high value innovative solutions that help retailers
understand, create, manage and fulfill consumer demand. Up until April 1, 2003,
we also developed and distributed PC courseware and skills assessment products
for both desktop and retail applications.
Our solutions and services have been developed specifically to meet the
needs of the retail industry. Our solutions help retailers improve the
efficiency and effectiveness of their operations and build stronger, longer
lasting relationships with their customers.
We market our software solutions through direct and indirect sales
channels primarily to retailers who sell to their customers through traditional
retail stores, catalogs and/or Internet-enabled storefronts. To date, we have
licensed our solutions to more than 200 retailers across a variety of retail
sectors.
ISLAND PACIFIC
Historically, retailers have relied upon custom-built systems, often
self-developed, to manage business processes and business information with both
trading partners and customers. These legacy systems are typically built on
1960's business models and 1970s technology. They are not Internet-enabled, and
do not permit collaboration among a retailer's customers, partners, suppliers
and other members of the supply/demand chain. Moreover, they reflect the
thinking of a seller's market.
Over the past few years, retailers have begun to purchase packaged
solutions designed specifically for the retail industry. Most of these systems
are very expensive to license, and very expensive, time-consuming and difficult
to implement. They have been primarily positioned to the largest companies, who
have enormous amounts of managerial, technical and financial resources at their
disposal- organizations for which distraction and mistakes are affordable.
These solutions ignore the needs of the small to medium sized
retailers, who have many of the same needs and face many of the same challenges
as do the larger retailers, but lack the managerial, financial and technological
capacity of the larger retailers.
Our solutions serve the small to medium sized market.
All retailers today face the challenge of operating in a very
competitive environment, an environment that can be best described as
over-stored and over-homogenized -- an environment in which power has shifted
from the seller to the buyer.
As retailers expand their businesses to include the Internet, catalog,
kiosk and other distribution channels, the complexity of managing inventory and
meeting customer demands places tremendous pressure on their business processes
and their technology infrastructure.
To meet an ever more mobile and demanding consumer's expectations,
retailers need to deliver on the customer's terms. This means having the right
product, at the right time and in the right place across multi-channel touch
points. To do this, retailers need valuable consumer insights, intelligence on
external factors that shape consumer response such as how the weather, the
economy and changing consumer attitudes will affect future buying patterns. This
intelligence, augmented by powerful communications, comprehensive loss
prevention, strong forecasting, planning, assortment planning, allocation, event
planning, replenishment and merchandising functions are critical to profitably
achieve this goal. These represent the content of our product offering.
Small to medium sized retailers need a cost-effective, easily
installed, affordable, comprehensive, integrated software infrastructure that
spans supplier to consumer and gives the retailer visibility, flexibility and
control of all business processes to meet all competitive challenges.
We believe a market opportunity exists to provide these retailers with
a software solution that is designed specifically for their needs. This solution
should be easy-to-use, leverage a retailer's existing investments in information
technology and be sufficiently flexible to meet the specific needs of a broad
range of retail sectors, such as fashion, hard-lines, mass merchandise or food
and drug.
We have developed and deployed software solutions that enable retailers
to manage the entire scope of their operations. These operations include
point-of-sale, customer relationship management, vendor relationship management,
merchandising, demand chain management, planning, and forecasting.
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Key areas, which differentiate our software solutions, include:
o VALUE - Our integrated and modular architecture helps retailers
meet return on investment (ROI) objectives by allowing them to
implement the most critical and valuable applications first. This
modular architecture decreases migration path risk for the
replacement of legacy systems and increases the probability of an
on-time, on-budget implementation project.
o PROVEN - We are a leading provider of retail infrastructure
software and services. We understand the complex needs of
retailers and have designed our solutions specifically for the
retail industry. We provide certain software products and
services infrastructure for retailers with combined revenues of
over $200 billion annually.
o SCALABLE - Our solutions are engineered to provide scalability to
efficiently handle large volumes of transactions and users. Our
solutions work in environments that span from one to five
thousand stores.
o INNOVATIVE - Our partnerships and our solutions include some of
the most advanced technologies available to retailers.
RECENT DEVELOPMENTS
In January 2003, we appointed Harvey Braun, a well-known and
highly-respected retail industry veteran, to the position of Chief Executive
Officer of Island Pacific, one of our business units. In April 2003, our Board
of Directors appointed Mr. Braun to the position of Chief Executive Officer and
director. Barry Schechter remains as Chairman of the Board.
In October 2002, we appointed Steven Beck, a retail industry expert, to the
position of President of Island Pacific. In April 2003, our Board of Directors
appointed Mr. Beck to the position of President and Chief Operating Officer and
director. We anticipate Mr. Braun and Mr. Beck will lead us through the next
evolution of product and service offerings to meet the everchanging needs of
retailers worldwide. Mr. Beck's vision for our company is to become the dominant
provider of "Thoughtware" to the retail industry. Mr. Beck's goals are to
develop high value products and services to the retail industry; using
breakthrough technologies and processes, and to provide these products and their
associated services in partnership with major consulting organizations and other
best of breed solution providers. These products and services will be offered to
small and mid-size retailers. Our goal is to expand alternatives to retailers,
matching innovative solutions to emerging industry complexities so retailers
will realize ongoing successes. We will make available to retailers at what we
believe to be affordable prices a "dashboard" of decision makers, and
experienced minds in the industry, yielding a range of velocity management
alternatives for review and actions that span merchandising and marketing
activities from conception to consumption.
We are strengthening our product offerings through strategic relationships
with Planalytics, KMG Solutions, Raymark, Inc., Wazagua LLC, ANT USA, Inc. and
IT Resources Inc.
Under a partnership agreement with Planalytics Inc. ("Planalytics"), Island
Pacific will market Impact LR, an internet-based application that measures the
specific effects of future weather on consumer demand by product, location and
time. Using Impact LR, our customers can plan the timing of in-season markdowns,
as well as the season-to-season flow of merchandise into their stores with
maximum effectiveness.
Under a marketing license agreement with KMG Solutions ("KMG"), Island
Pacific will integrate, market and support Traxion(TM) process management
solutions. Traxion's business process management solution consists of three
modules. Traxion ProcessEngine(TM) is the real-time process management platform
that retailers use to actively manage and support their organizations' unique
business processes. Traxion ProcessModeler(TM), includes simulation functions
such as same-time comparison of process variations and the use of actual cost
data to produce process-based financial estimates. Traxion
OrganizationModeler(TM) simplifies the creation of sophisticated models
including inter-company workgroups, payroll information, and roles.
Under an OEM agreement with Raymark, Inc., we will integrate, market and
support Xpert Store point-of-sale ("POS") software solution under the Island
Pacific brand. Raymark's full-featured POS solution streamlines the checkout
process in order to increase sales associate efficiency and augment customer
satisfaction. The software supports multi-channel, multi-language,
multi-currency and multi-taxation requirements.
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Under an agreement with Wazagua LLC ("Wazagua"), we will exclusively offer
to retailers worldwide Wazagua's products and services including web-based Loss
Prevention Case Management Package, ASP Data Hosting and POS Exception
Reporting. WAZAGUA(TM) ASP Hosted Suite of Modules automates data management for
the Loss Prevention, Operations, Human Resources, Safety & Risk Management
community. These ASP-hosted productivity tools enable retailers to capture the
power of the internet. Retailers can create efficiencies, manage and share
information, make better use of their staff, eliminate redundant data entry -
and work from virtually any point in the world.
Under terms of a reseller agreement, we will market, sell, install,
interface to, and support ANT USA Inc.'s ("ANT") products including Buyer's
Toolbox(tm), a leading suite of merchandise and assortment planning software
that has been successfully implemented by over 140 retailers worldwide. The
software will extend Island Pacific's assortment and planning capabilities by
providing a solid planning methodology accessed through an easy-to-use
interface, in a cost-effective offering.
A marketing license agreement with IT Resources Inc. enables Island Pacific
to market, sell, install, support and integrate IT Resources' Buyer's
WorkMate(r) Suite, an innovative decision support software platform developed
for merchandising organizations. The software will bring mobility and other
timesaving benefits to the buying process.
Under a marketing alliance agreement with BIGresearch, we will provide
retailers, suppliers and third party companies with an end-to-end information
solution to forecast consumer demand, better utilize assets and merchandise, and
develop strategy and market position.
As of April 1, 2002, we refocused the company into three strategic business
units each lead by experienced managers. The units were our retail management
solutions unit (formerly known as Island Pacific division), our Store Solutions
division (formerly known as our SVI Store Solutions division), and SVI Training
Products, Inc. Effective April 1, 2003, we agreed to sell our shares of SVI
Training Products, Inc., our wholly-owned subsidiary, to Arthur Klitofsky. Mr.
Klitofsky resigned from the Board in March 2003. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the heading
"Discontinued Operations" below.
We issued a total of $1.25 million in convertible notes to a limited number
of accredited investors related to ICM Asset Management, Inc. of Spokane,
Washington, a significant beneficial owner of our common stock in fiscal 2001.
In July 2002, we amended the convertible notes to extend the maturity date to
September 30, 2003 and we replaced the warrants issued to these investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Liquidity and Capital Resources -- Indebtedness
-- ICM Asset Management, Inc." below.
In July 2002, we negotiated an extension of our senior bank lending
facility to August 31, 2003, and then we subsequently satisfied this debt under
the Discounted Loan Payoff Agreement dated March 31, 2003. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Liquidity and Capital Resources -- Indebtedness -- Union Bank"
below.
In May 2002, we completed a series of transactions with Softline Limited
("Softline") to repay our subordinated note to Softline, to transfer to Softline
our note received in connection with the sale of IBIS Systems Limited, and to
issue to Softline new preferred securities. Softline also returned to us
10,700,000 shares of our common stock. Steven Cohen, Softline's Chief Operating
Officer, and Gerald Rubenstein, a director of Softline, resigned from our board
of directors in May 2002. Ivan Epstein, Softline's Chief Executive Officer,
continues to serve on our board, and in June 2002, Robert P. Wilkie, Softline's
Chief Financial Officer, was appointed to our board of directors. For a further
discussion of the terms of transactions with Softline during the 2002 fiscal
year, see "Management's Discussion and Analysis of Financial Condition and
Results of Operation" under the heading "Financing Transactions -- Softline."
In May 2002, we entered into a new two-year software development and
services agreement with our largest customer, Toys. Toys also agreed to invest
$1.3 million for the purchase of a non-recourse convertible note and a warrant
to purchase up to 2,500,000 common shares. For a further details, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Liquidity and Capital Resources - Indebtedness --
Toys "R" Us' below.
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In March 2003, we issued a total of $3.5 million in 9% convertible
debentures to Midsummer Investment, Ltd., Omicron Master Trust and Islandia,
L.P. Along with these debentures, warrants to purchase an aggregate of 1,572,858
shares of common stock were issued to these investors. See "Financing
Transactions - Midsummer/Omicron/Islandia" below.
In April 2003, we issued $400,000 in 9% convertible debentures to MBSJ
Investors, LLC. Along with these debentures, warrants to purchase 156,311 shares
of common stock were issued to this investor. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
"Financing Transactions - MBSJ".
In March 2003, the Board adopted a resolution to change our name to "Island
Pacific, Inc.", and the resolution was approved by our shareholders on July 9,
2003.
In May 2003, we issued $300,000 in 9% convertible debentures to Crestview
Capital Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital
Offshore Fund, Inc. Along with these debentures, warrants to purchase 101,112
shares of common stock were issued to these investors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Financing Transactions - Crestview".
Under a Securities Purchase Agreement dated June 27, 2003, we issued a
total of 5,275,000 shares of common stock to various institutional investors for
an aggregate purchase price of $7,912,500. See "Financing Transactions - Common
Stock Institutional Investors."
STRATEGY
Our mission is to provide the small to medium sized retailer all the
intelligence, tools and infrastructure necessary to success in a highly
competitive environment.
Our mission is to make this information and these tools and infrastructure
useable, affordable and reliable for end-use in highly volatile environments.
Our mission is to make our products and services easy to acquire, easy to
install and easy to live with.
Our mission is to create value for retailers by providing valuable
intelligence and innovative technology solutions that help to understand,
create, manage, and fulfill consumer demand.
Our strategies are as follows:
o INCREASE OUR MARKET SHARE. We believe we can continue to build
and expand our position of leadership within the retail packaged
software applications market as the retail industry increasingly
turns to packaged software applications as an alternative to
expensive in-house and custom developed applications.
o PROVIDE HIGH LEVELS OF CUSTOMER SATISFACTION. The retail industry
is strongly influenced by formal and informal references. We
believe we have the opportunity to expand market share by
providing high levels of customer satisfaction with our current
customers, thereby fostering strong customer references to
support sales activities.
o DELIVER VALUE TO OUR CUSTOMERS. We believe that maximizing our
customers' return on investment will help us compete in our
market space and increase our market share.
o BECAME THE PREFERRED APPLICATION AND TECHNOLOGY ARCHITECTURE FOR
THE SMALL TO MEDIUM SIZED RETAILERS GLOBALLY. By leveraging our
25 years of success, we believe we are uniquely positioned to
become the preferred application and technology architecture
provider for retail software and associated services to this
market.
PRODUCTS
We partner, develop and sell business intelligence and software solutions
that support virtually all of the operational activities of a typical retailer.
Our business intelligence is critical to sound strategy and execution. Our
software solutions create value by applying innovative technology that help our
customers efficiently and effectively understand, create, manage and fulfill
consumer demand. Our products can be deployed individually to meet specific
business needs, or as part of a fully integrated, end-to-end solution.
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Our solution set consists of the following components:
[IP INTEGRATOR GRAPHIC APPEARS HERE]
THE ISLAND PACIFIC RETAIL MANAGEMENT suite of applications builds on our
long history in retail software design and development and provides our
customers with an extremely reliable, widely deployed, comprehensive and fully
integrated retail management solution. Our complete enterprise-level offering of
applications and services is designed to assist our customers in maximizing
their business potential.
Our offerings are a combination of collaborations with partner companies
and solutions developed internally by us. They are all completely integrated.
Our offerings include:
o IP GLADIATOR: is a collaborative solution with Wazagua that
orchestrates a myriad of processes across retail enterprise to
deliver effective loss prevention. To do so, IP Gladiator enables
an integrated asset protection workflow spanning exception
management, investigation management, case management and civil
collection. The salient features of this solution include: (a)
availability in ASP or in-house modes, (b) advanced data mining
to recognize loss patterns, and (c) POS platform independence.
o IP GLOBAL NETWORK: is an offering that cost-effectively enables
retailer collaboration with vendors, including product design
collaboration, and facilitates improved communication with
stores. This will feature services such as teleconferencing,
voice-over-IP, and instant messaging to deliver the collaboration
capabilities.
o IP INTEGRATOR: is a common integration platform that seamlessly
unifies all IP applications with partner applications as well as
enables integrations to 3rd party and legacy applications of a
retailer. It leverages an industry proven technology to deliver
speed, reliability, maintainability and shorter implementation
cycles in addressing integration needs. This solution is jointly
developed with Bostech.
o IP BUYER'S WORKMATE: features a suite of integrated modules that
enable, automate and enforce best practices leading to sound
merchandise purchase and allocation decisions, in compliance with
the approved budgets. This suite, along with the range of
capabilities provided through IP Consumer Research, IP Weather
Impacts, IP Profiling and the IP Core Merchandising suite,
enables the retailer to plan and execute consumer-sensitive
merchandising, placement, pricing and promotion decisions. The
suite consists of:
o IP DECISION SUPPORT: features an analytical processing tool
designed to provide retailers with relevant, timely and
detailed business information.
o IP ASSORTMENT PLANNING: enables retailer to arrive at a
well-researched and sound buying decisions - yielding
merchandise assortments that meet local consumer demand,
minimize inventory investment, accelerate sales, lessen
inter-store transfers and reduce markdowns.
o IP ALLOCATION: enables allocation of purchase order
receipts, advanced shipping notices and warehouse back-stock
in a manner sensitive to the assortment plan, merchandise
performance, and store stocking levels.
o IP WEATHER IMPACTS: is a collaborative offering with Planalytics
to enable retailers to understand and address the impact that
weather has had and will have on their businesses, helping them
to avoid surprises and improve bottom line profitability.
o IP BUSINESS PROCESS OPTIMIZATION: is a collaborative retail
process management solution offered in partnership with KMG that
enables the retailers to improve productivity and reduce
inefficiencies through better control and management of business
processes. The applications of interest to retailers can range
from operational activities such as new store construction and
opening, global sourcing, distribution center optimization and
promotions management to fiduciary responsibilities and processes
such tracking and control of financial reporting.
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o IP CONSUMER RESEARCH: is a collaborative offering with
BIGresearch to leverage syndicated consumer intelligence from
over 8,000 shoppers each month to provide retailers a projected
look at consumers demand. The deep and proven consumer research
insights can enable retailers to anticipate consumer demand,
correct market focus, develop strategy and market positioning, to
understand simultaneous media usage and exposure to determine
what they are actually receiving from their media expenditures.
o IP PROFILING: is a collaborative offering to develop Sales
Profiles by recognizing common selling patterns from voluminous
sales history. It features an advanced statistical pattern
coupled with an interactive graphical approach to the creation,
maintenance and monitoring of seasonal profiles.
o IP FORECASTING AND REPLENISHMENT: is a collaborative offering of
a full feature forecasting and replenishment solution to address
the needs of retailers seeking a higher end solution in this
area.
o IP OMNICARD: provides a loyalty card application, with advanced
features such as secure authentication, data storage, and
radio frequency identification, to retailers that enables them to
provide consumers with reason to carry a retailer loyalty card.
o IP STORE PEOPLE PRODUCTIVITY: application helps retailer analyze
store, people and item and transaction level sales productivity.
At the foundation of our application suite are the integrated modules that
comprise our core-merchandising solution. They are:
o MERCHANDISING MANAGEMENT
o The Island Pacific Merchandising module is a comprehensive
solution for management of core retail processes, which
optimizes workflow and provides the highest level of data
integrity.
o This module supports all operational areas of the supply
chain: Planning, Open-To-Buy, Purchase Order Management,
Forecasting, Warehouse and Store Receiving, Distribution,
Transfers, Price Management, Performance Analysis, and
Physical Inventory.
o THE EYE (TM) ANALYSIS AND PLANNING
o The Eye(TM), our datamart is a comprehensive
analysis and planning tool that provides answers to
retailer's merchandising questions. The specific "who, what,
where, when and why" are defined in a multi-dimensional
format. The Eye is completely integrated to IP Core
Merchandising.
o This application enables the retailer to develop completely
user-defined inquiries and reports. The capacity of The Eye
to store, manipulate, and present information is limited
only by the retailer's imagination.
o REPLENISHMENT AND FORECASTING
o The Island Pacific Replenishment module is a tool that
ensures the retailer will have the right merchandise in the
right stores at the right time by dynamically forecasting
accurate merchandise need, reducing lost sales, increasing
stock turn, and reducing cost of sales.
o PROMOTIONS AND EVENTS
o The Island Pacific Event and Promotion Management tool
enables the retailer to manage, plan and track all
promotional and event related activities including price
management, in-store display, deal, and media related
promotions. The promotions addressed through this module can
include non-price promotions as well. The analysis includes
actual to plan comparisons prior to, during and after the
event.
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o WAREHOUSE
o The Island Pacific Warehouse module provides enhanced
control and visibility of product movement through the
warehouse. Item, quantity and bin integrity is ensured
through directed put away, task confirmation, RF procedures,
automated cycle counts and carton control.
o TICKETING
o The Island Pacific Ticketing module supports both
merchandise and warehouse location identification utilizing
multiple printers and bar codes. User-configured tickets may
include desired product characteristics, including but not
limited to retail price, compare at pricing, item, style,
color and size information.
o FINANCIALS
o The Island Pacific Financials module incorporates a General
Ledger that is synchronized with the Merchandising Stock
Ledger.
o This module also includes a robust Accounts Payable
application, which supports 3-way automated matching of
invoices, receipts, and purchase orders that streamline
workflow to optimize operations.
o SALES AUDIT
o This module is an integrated conduit between Point-of-Sale
applications and the Island Pacific Host System, which
manages the upload- and download- processes. The upload
process manages all transactional information that occurs at
H= the store such as Sales, Customer Returns, Physical
Inventory, Transfers, Acknowledgements, Purchase Order Drop
Ship Receipts, Layaway, and Special Order. The Download
process manages all Store pricing including Price Look Up,
Promotional pricing, Deal pricing, Event pricing, Price
Changes, Markdowns, On Order to Stores, In-transit, Current
Inventory, Company definitions (Hierarchy, Constants,
Vendors, Stores)
o This application is flexible relative to POS requirements,
while featuring full integration to IP POS product,
OnePointe.
The ISLAND PACIFIC STORE SOLUTION suite of applications builds on our long
history of providing multi-platform, client server in-store solutions. We market
this set of applications under the name "OnePointe," and "OnePointe
International" which is a full business to consumer software infrastructure
encompassing a range of integrated store solutions. "OnePointe" is a complete
application providing all point-of-sale ("POS") and in-store processor (server)
functions for traditional "brick and mortar" retail operations.
Our PROFESSIONAL SERVICES provide our customers with expert retail business
consulting, project management, implementation, application training, technical
and documentation services. This product offering ensures that our customers'
technology selection and implementation projects are planned and implemented
timely and effectively. We also provide development services to customize our
applications to meet specific requirements of our customers and ongoing support
and maintenance services.
We market our applications and services through an experienced professional
direct sales force in the United States and in the United Kingdom. We believe
our knowledge of the complete needs of multi-channel retailers enables us to
help our customers identify the optimal systems for their particular businesses.
The customer relationships we develop build recurring support, maintenance and
professional service revenues and position us to continuously recommend changes
and upgrades to existing systems.
Up until April 1, 2003, we also developed and distributed retail system
training products and general computer courseware and computer skills testing
products through our SVI Training Products, Inc. subsidiary. Effective April 1,
2003, we sold the SVI Training Products, Inc. subsidiary and discontinued this
line of business.
Our executive offices are located at 19800 MacArthur Boulevard, Irvine,
California 92612, telephone number (949) 476-2212.
48
MARKETS AND CUSTOMERS
Our software is installed in over 200 retailers worldwide. Our applications
are used by the full spectrum of retailers including specialty goods sellers,
mass merchants and department stores. Most of our U.S. customers are in the Tier
1 to Tier 3 retail market sectors.
A sample of some of our active customers are listed below:
Nike Limited Brands American Eagle Outfitters Disney
Phillips-Van Heusen Signet (UK) Shoefayre (UK) Pacific Sunwear
Toys "R" Us Timberland Vodaphone (UK) Academy Sports
MARKETING AND SALES
We sell our applications and services primarily through a direct sales
force that operates in the United States and the United Kingdom. Sales efforts
involve comprehensive consultations with current and potential customers prior
to completion of the sales process. Our Sales Executives, Retail Application
Consultants (who operate as part of the sales force) and Marketing and
Technology Management associates use their collective knowledge of the needs of
multi-channel retailers to help our customers identify the optimal solutions for
their individual businesses.
We maintain a comprehensive web site describing our applications, services
and company. We regularly engage in cooperative marketing programs with our
strategic alliance partners. We annually host a Users Conference in which
hundreds of our customers attend to network and to share experiences and ideas
regarding their business practices and implementation of our, and our partners'
technology. This Users Conference also provides us with the opportunity to meet
with many of our customers on a concentrated basis to provide training and
insight into new developments and to gather valuable market requirements
information.
We are aggressively focusing on our Product Marketing and Product
Management functions to better understand the needs of our markets in advance of
required implementation, and to translate those needs into new applications,
enhancements to existing applications and related services. These functions are
also responsible for managing the process of market need identification through
product or service launch and deployment. It is the goal of these functions to
position Island Pacific optimally with customers and prospects in our target
market.
We have established a Product Direction Council, comprised of leading
executives from our customers. The purpose of this Council is to help guide us
in the future development of our applications and services, to maximize our
opportunity to meet overall retail market trends and needs for a broad sector of
the industry, and to do so well in advance of our competitors.
COMPETITION
The markets for our application technology and services are highly
competitive, subject to rapid change and sensitive to new product introductions
or enhancements and marketing efforts by industry participants. We expect
competition to increase in the future as open systems architecture becomes more
common and as more companies compete in the emerging electronic commerce market.
The largest of our competitors offering end-to-end retail solutions is JDA
Software Group, Inc. Other suppliers offer one or more of the components of our
solutions. In addition, new competitors may enter our markets and offer
merchandise management systems that target the retail industry. For enterprise
solutions, our competitors include Retek Inc., SAP AG, nsb Retail Systems PLC,
Essentus, Inc., GERS, Inc., Marketmax, Inc., Micro Strategies Incorporated and
NONSTOP Solutions. For Store Solutions, our competitors include Datavantage,
Inc., CRS Business Computers, nsb Retail Systems PLC, Triversity, ICL, NCR and
IBM. Our Direct applications compete with Smith Gardner & Associates, Inc., and
CommercialWare, Inc. Our professional services offerings compete with the
professional service groups of our competitors, major consulting firms
associated or formerly associated with the "Big 4" accounting firms, as well as
locally based service providers in many of the territories in which we do
business. Our strategic partners, including IBM, NCR and Fujitsu, represent
potential competitors as well.
49
We believe the principal competitive factors in the retail solutions
industry are price, application features, performance, retail application
expertise, availability of expert professional services, quality, reliability,
reputation, timely introduction of new offerings, effective distribution
networks, customer service, and quality of end-user interface.
We believe we currently compete favorably with respect to these factors. In
particular, we believe that our competitive advantages include:
o Proven, single version technology, reducing implementation costs and
risks and providing continued forward migration for our customers.
o Extensive retail application experience for all elements of the
customer's business, including Professional Services, Development,
Customer Support, Sales and Marketing/Technology Management.
o Ability to provide expert Professional Services.
o Large and loyal customer base.
o Hardware platform independent Store Solution (POS) application.
o Breadth of our application technology suite including our
multi-channel retailing capabilities. o Our corporate culture focusing
on the customer.
Many of our current and potential competitors are more established, benefit
from greater name recognition, have greater financial, technical, production
and/or marketing resources, and have larger distribution networks, any or all of
which could give them a competitive advantage over us. Moreover, our
current financial condition has placed us at a competitive disadvantage to many
of our larger competitors, as we are required to provide assurance to customers
that we have the financial ability to support the products we sell. We believe
strongly that we provide and will continue to provide excellent support to our
customers, as demonstrated by the continuing upgrade purchases by our top-tier
established customer base.
PROPRIETARY RIGHTS
Our success and ability to compete depend in part on our ability to develop
and maintain the proprietary aspects of our technologies. We rely on a
combination of copyright, trade secret and trademark laws, and nondisclosure and
other contractual provisions, to protect our various proprietary applications
and technologies. We seek to protect our source code, documentation and other
written materials under copyright and trade secret laws. We license our software
under license agreements that impose restrictions on the ability of the customer
to use and copy the software. These safeguards may not prevent competitors from
imitating our applications and services or from independently developing
competing applications and services, especially in foreign countries where legal
protections of intellectual property may not be as strong or consistent as in
the United States.
We hold no patents. Consequently, others may develop, market and sell
applications substantially equivalent to our applications, or utilize
technologies similar to those used by us, so long as they do not directly copy
our applications or otherwise infringe our intellectual property rights.
We integrate widely-available platform technology from third parties for
certain of our applications. These third-party licenses generally require us to
pay royalties and fulfill confidentiality obligations. Any termination of, or
significant disruption in, our ability to license these products could cause
delays in the releases of our software until equivalent technology can be
obtained and integrated into our applications. These delays, if they occur,
could have a material adverse effect on our business, operating results and
financial condition.
Intellectual property rights are often the subject of large-scale
litigation in the software and Internet industries. We may find it necessary to
bring claims or litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. These actions would likely
be costly and divert management resources. These actions could also result in
counterclaims challenging the validity of our proprietary rights or alleging
infringement on our part. We cannot guarantee the success of any litigation we
might bring to protect our proprietary rights.
Although we believe that our application technology does not infringe on
any third-party's patents or proprietary rights, we cannot be certain that we
will not become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to, defending or bringing claims related to our intellectual property
rights may require our management to redirect our human and monetary resources
to address these claims. In addition, these actions could cause delivery delays
or require us to enter into royalty or license agreements. Royalty or license
agreements, if required, may not be available on terms acceptable to us, if they
are available at all. Any or all of these outcomes could have a material adverse
effect on our business, operating results and financial condition.
50
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
NAME AGE POSITION
Barry M. Schechter 49 Chairman of the Board
Harvey Braun 63 Chief Executive Officer and Director
Steven Beck 62 President and Chief Operating Officer and Director
Donald S. Radcliffe (2) 57 Director
Ivan M. Epstein 42 Director
Michael Silverman (1) (2) 58 Director
Ian Bonner (1) (2) 47 Director
Robert P. Wilkie 33 Director
Randy Pagnotta 46 President of Store Solutions division
Cheryl Valencia 39 Vice President, Management Services
Kavindra Malik 42 Executive Vice President, Product Management
Ronald Koren 48 Vice President, Marketing Communications
Mike Dotson 36 Managing Director, European Operations
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Barry M. Schechter has been the Chairman of the Board of the Company
since February 1994. He served as our Chief Executive Officer from October 2001
to March 2003 and also held such position from February 1994 to January
2001. He also has been Chief Executive Officer of our predecessor and
wholly-owned subsidiary, Sabica Ventures, Inc., from its inception in February
1990. Mr. Schechter is a director of Integrity Software, Inc. Mr. Schechter is a
Chartered Accountant (South Africa).
Harvey Braun became our Chief Executive Officer in April 2003, and he
served as CEO of our retail management solutions division (formerly our Island
Pacific division), from January 2003 to February 2003. Prior to joining the
Company, he was a Senior Partner in Deloitte & Touche's Consulting Consumer
Business Program. He worked for Deloitte & Touche for over 20 years, and has
acted as a consultant to many of the top retailers in the country, including
Ahold, ConAgra, Inc., Federated, Heilig-Meyers, Home Depot, IBM, Kmart, Marmaxx,
RJR Nabisco, Sears, The Gap, and The Limited. Mr. Braun holds an engineering
degree from Renuselaer Polytechnical Institute and a Masters of Administration
from Carnegie Mellon.
Steven Beck became our President, Chief Operating Officer and a
director in April 2003. He had been President and Chief Operating Officer of our
retail management solutions divisions (formerly our Island Pacific division)
since September, 2002. Since January 2002, he has served as an independent
consultant to various retailers. From March 1998 until January 2002, he was
co-founder and Chief Operating Officer of Planalytics, the foremost provider of
past and future weather analytics to industry, the inventor of ARTHUR (a
trademark of JDA), the most widely installed Merchandise Planning System for
retailers, an officer of The Limited, and President of Dennison TRG. Mr. Beck
received a B.A. from Adelphi University.
Donald S. Radcliffe became a director of the Company in May 1998. He
has been President of Radcliffe & Associates since 1990. Radcliffe & Associates
provides financial consulting services to public companies, and currently
provides us financial advisory and public relations services. Since 1984 he has
also been Executive Vice President and Chief Operating and Financial Officer of
World-Wide Business Centres, which is a privately held operator of shared office
space facilities. Mr. Radcliffe is a director of Integrity Software, Inc. Mr.
Radcliffe received a B.S. from Lehigh University and an M.B.A. from Dartmouth
College. He is a certified public accountant and a member of the Audit
Committee.
Ivan M. Epstein became a director of the Company in May 1998. He is the
Chief Executive Officer and Chairman of Softline Limited ("Softline"), which he
co-founded in 1988. Softline is listed in the Information Technology sector of
the Johannesburg Stock Exchange (JSE:SFT) and is one of the leading accounting
software vendors in the world. Softline is deemed the beneficial owner of 49.6%
of our outstanding common stock.
51
Michael Silverman became a director in January 2001. Mr.Silverman
founded Advanced Remote Communications Solutions, Inc. (formerly known as
Boatracs, Inc.) in 1990 and serves on its board of directors. He previously
served as its Chairman until May 2002, and as Chief Executive Officer and
President until October 1997, and from November 1999 to May 2002. Mr. Silverman
is a Chartered Accountant (South Africa) and has an M.B.A. from Stanford
University. Mr. Silverman is a member of the Audit and Compensation Committees.
Ian Bonner became a director in May 1998. He is President and Chief
Executive Officer of Terraspring, Inc., a software and Internet infrastructure
company. From 1993 until April 2001, he held various positions with IBM
Corporation, including Vice President of Partner Marketing and Programs for the
IBM/Lotus/Tivoli Software Group. His responsibilities included the development
and implementation of marketing campaigns and programs designed to serve the
business partners of IBM, Lotus and Tivoli, including major accounts,
independent software vendors and global systems integrators. He also oversaw the
IBM BESTeam and the Lotus Business Partner programs which are designed to
provide enhanced opportunities, including education, marketing and training
support, to qualified providers of IBM's and Lotus's portfolio of network
solutions. Mr. Bonner received a Bachelor of Commerce from the University of the
Witwatersrand in 1976 and a graduate degree in Marketing Management and Market
Research and Advertising from the University of South Africa in 1978. Mr. Bonner
is a member of the Audit and Compensation Committees.
Robert P. Wilkie became a director in June 2002. He is the Group
Financial Director and director of Softline, which he joined in 1997 as
controller. Mr. Wilkie is responsible for operational fiscal discipline, group
treasury and financial reporting across Softline. Mr. Wilkie received a Bachelor
of Commerce from the University of Cape Town in 1989 and Bachelor of Accounting
from the University of Witwatersrand in 1992. Mr. Wilkie is a Chartered
Accountant (South Africa).
Randy Pagnotta became Vice President in December 2001. Mr. Pagnotta is
in charge of our domestic sales organization. Prior to joining Island Pacific,
Mr. Pagnotta served as Executive Vice President for 5R Online Solutions, Inc. in
Montreal Canada from 2000 to 2001. From 1999 to 2000, he was an account
executive for JDA Software Group. From 1995 to 1999, he was senior retail
industry consultant for Siemens Nixdorf Information Systems. Mr. Pagnotta
received a degree in Business General Study Program from University of Maryland
in 1977.
Cheryl Valencia became Vice President of Management Services in October
2002. Prior to joining Island Pacific in September 2002, Ms. Valencia was
Director of Product Management and Professional Services for eConnections since
February 2002. From November 2001 to April 2002, Ms. Valencia was contracted as
Director of Product Management and Professional Services for Hitech Systems,
Inc. From September 2000 to September 2001, she served as Product Manager for
iStarSystems. From June 1994 to October 2000, she held various positions
including Product Manager and Global Education Director with System Software
Associates. Ms. Valencia has a B.S. in Business Administration from Southeast
Missouri State University.
Kavindra Malik became Executive Vice President in May 2003. Mr. Malik
served as Vice President from January 2003 to April 2003. Mr. Malik is
responsible for the product vision and roadmap for Island Pacific unit. Prior to
joining Island Pacific, Mr. Malik served as Vice President of Product Management
for Spotlight Solutions from 2002. From 1997 to 2002, Mr. Malik was the Director
of Retail and Consumer Goods Solutions Management for i2 Technologies. Mr. Malik
received a Ph. D. in Decision Sciences from the University of Pennsylvania in
1988.
Ronald Koren became Vice President in December 2002. Mr.Koren is
responsible for marketing communications. Prior to joining Island Pacific, Mr.
Koren was briefly in charge of Retail Solutions Marketing at Fujitsu. From April
2000 to May 2002, Mr. Koren was Director of Marketing for Raymark in Canada. His
responsibilities included web development, direct and web-based mail campaigns
as well as launching a branding strategy for newly developed hand-held products
for point-of-sale and inventory. From November 1994 to May 2000, Mr. Koren was
Director of Sales Support for Wincor Nixdorf. Mr.Koren received a B.A.in
Communications from San Francisco State University.
Mike Dotson became Managing Director our United Kingdom Operations
since April 2001. Prior to such appointment, Mr. Dotson held various positions
with Island Pacific's United Kingdom office since January 1998. Mr. Dotson
received a B.A. in Political Science and Economy from University California of
Irvine in May 1988.
There are no family relationships among the directors. There are no
arrangements or understandings between any director and any other person
pursuant to which that director was or is to be elected.
52
BOARD COMMITTEES
We have established a compensation committee and an audit committee.
The Board of Directors formed a Compensation Committee in April 1998.
The Compensation Committee's primary function is to establish the compensation
policies and recommend to the Board the compensation arrangements for senior
management and directors. The Compensation Committee also recommends the
adoption of compensation plans in which officers and directors are eligible to
participate and the granting of stock options or other benefits to executive
officers. The Compensation Committee is composed entirely of independent
directors (as "independence" is defined in Section 121(A) of the listing
standards of the American Stock Exchange). Current members of the Compensation
Committee are Ian Bonner and Michael Silverman. The Compensation Committee met
three times during the fiscal year ended March 31, 2003.
The Board of Directors also formed an Audit Committee in April 1998.
The purpose of the Audit Committee is to assist the Board in fulfilling its
responsibilities for our financial reporting. The Audit Committee recommends the
engagement and discharge of independent auditors, reviews with independent
auditors the audit plan and the results of the audit, reviews the independence
of the independent auditors, reviews internal accounting procedures and
discharges such other duties as may from time to time be assigned to it by the
Board of Directors. Current members of the Audit Committee are Ian Bonner,
Donald S. Radcliffe and Michael Silverman. The Audit Committee met four times
during the fiscal year ended March 31, 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ian Bonner and Michael Silverman served as the members of the
Compensation Committee during the fiscal year ended March 31, 2003. No member of
our Compensation Committee during the last completed fiscal year has ever been
an officer of the Company or any of its subsidiaries. During the last completed
fiscal year, no executive officer of the Company served as a member of a
compensation committee or board of directors of any entity that had one or more
of its executive officers serving as a member of our Compensation Committee.
COMPENSATION OF DIRECTORS
During fiscal 2003, we issued the following options to purchase shares
of our common stock to our directors: (a) 5,000 options with exercise prices of
$0.35 per share to each of Barry Schechter, Arthur Klitofsky, Ian Bonner,
Michael Silverman, Donald Radcliffe and Ivan Epstein, vesting immediately; (b)
20,000 options with exercises prices of $0.28 to each of Arthur Klitofsky,
Donald Radcliffe, Ian Bonner, Michael Silverman, Ivan Epstein, and Robert
Wilkie, vesting 1/3 on the first anniversary date of the grant and 2/3 in 24
equal monthly installments; (c) 100,000 options with exercise prices of $0.44 to
Donald Radcliffe, vesting 1/3 on the first anniversary date of the grant and 2/3
in 24 equal monthly installments; (d) 5,000 options with exercise prices of
$0.85 to each of Donald Radcliffe, Ian Bonner, Michael Silverman, Ivan Epstein,
and Robert Wilke, vesting immediately; (e) 25,000 options with exercises prices
of $0.85 to Donald Radcliffe, vesting immediately; (f) 50,000 options with
exercise prices of $0.85 to each of Michael Silverman and Ian Bonner, vesting
immediately.
On January 30, 2002, the Board adopted a plan to issue to each director
who attends a Board meeting an option under the 1998 Incentive Stock Plan to
purchase 5,000 shares at an exercise price equal to the fair market value on the
date of the meeting.
53
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth summary information concerning the
compensation for the last three fiscal years received by each person who served
as Chief Executive Officer during the last completed fiscal year, the four other
most highly compensated persons serving as executive officers at the end of the
last completed fiscal year who earned more than $100,000 in salary and bonus in
the last completed fiscal year, and two other persons who were executive
officers during the last completed fiscal year and earned more than $100,000 in
salary and bonus, but who were not executive officers at the end of the last
completed fiscal year. These individuals are referred to as the "named executive
officers."
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------ ------------
SECURITIES ALL OTHER
NAME AND OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS ($)
------------------ ---- --------- -------- --------------- ------------ ------------
Barry M. Schechter 2003 369,314 -- -- 505,000 --
(Chairman of the 2002 337,486 -- -- 505,000 4,263
Board) 2001 312,492 -- -- 321,429 4,995
Harvey Braun 2003 162,764 -- -- 2,000,000 --
(Chief Executive
Officer)
Steven Beck 2003 379,431 -- -- 2,000,000 --
(President and Chief
Operating Officer)
Arthur S. Klitofsky 2003 201,755 -- -- 65,000 --
(Vice President and 2002 168,000 14,700 -- 5,000 3,807
Pres. of SVI Training) 2001 152,400 -- -- 90,000 4,572
Randy Pagnotta 2003 237,828 -- -- -- --
(Vice President)
Mike Dotson 2003 154,410 -- -- -- 6,176
(Vice President)
___________
We also provide certain compensatory benefits and other non-cash
compensation to the named executive officers. Except as set forth above, our
incremental cost of all such benefits and other compensation paid in the years
indicated to each such person was less than 10% of his or her reported
compensation and also less than $50,000.
54
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named executive
officers.
OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Individual Grants Appreciation for Option
----------------------------------------------------------------------------------- Term ($)
Exercise or -----------------------
Date of Options Base Price Expiration
Name Grant Granted(#) %of Total ($/Sh.) Date 5% 10%
------- -------- ------------ --------- ------------ ---------- ------- --------
Barry M.Schechter 06/24/02 5,000(2) 0.09% 0.35 06/24/12 1,101 2,789
09/03/02 500,000(1) 8.61% 0.28 09/03/12 88,045 223,124
Arthur S.Klitofsky 06/24/02 5,000(1) 0.09% 0.35 06/24/12 1,101 2,789
09/03/02 60,000(2) 1.03% 0.28 09/03/12 10,566 26,775
Harvey Braun 09/03/02 2,000,000(3) 34.52% 0.28 09/03/05 88,270 185,360
Steven Beck 09/03/02 2,000,000(3) 34.52% 0.28 09/03/05 88,270 185,360
(1) Options vest on the date of grant and subject to continuing service.
(2) Options vest as to one-third of the shares on the first anniversary of
the grant and the remaining two-thirds of the shares in 24 equal
monthly installments after the first vesting date, subject to
continuing service.
(3) Options granted outside of the plan and vest on the date of grant.
The potential realizable value is calculated based on the term of the
option at its time of grant and the number of shares underlying the grant at
fiscal year end. It is calculated based on assumed annualized rates of total
price appreciation from the market price at the date of grant of 5% and 10%
(compounded annually) over the full term of the grant with appreciation
determined as of the expiration date. The 5% and 10% assumed rates of
appreciation are mandated by SEC rules and do not represent our estimate or
projections of future common stock prices. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not be
achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth the information concerning the fiscal
year end value of unexercised options held by the named executive officers. None
of the named executive officers exercised options during the last fiscal year.
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY END (#) OPTIONS AT FY END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
-------------------- ------------------------- ---------------------------------
Barry M. Schechter 1,315,926/200,928 525,193/3,807
Arthur S. Klitofsky 162,549/122,151 3,867/46,783
Harvey Braun 2,000,000/0 1,540,000/0
Steven Beck 2,000,000/0 1,540,000/0
Randy Pagnotta 41,375/58,625 14,068/19,933
Mike Dotson 21,471/18,529 4,226/4,774
(1) Based upon the market price of $1.05 per share, determined on the basis
of the closing sale price per share of our common stock on the American
Stock Exchange on the last trading day of the 2003 fiscal year, less
the option exercise price payable per share.
55
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Barry M. Schechter
effective October 1, 2000. This agreement will continue until September 3 2003
unless earlier terminated for cause. Under the agreement Mr. Schechter has the
right to annual compensation of $325,000 for the first year of the agreement,
$350,000 for the second year of the agreement and $375,000 for the third year of
the agreement. In addition, Mr. Schechter is entitled to receive on each
anniversary of the date of the agreement, an option to purchase the number of
shares of common stock determined by dividing 150% of his base compensation for
the prior year by the closing price of our common stock on the anniversary date.
The agreement states that options will be fully vested when issued and
exercisable for ten years after the date of the grant. The Compensation
Committee is currently discussing restructuring Mr. Schechter's employment
agreement to base option grants on performance criteria. However, no such
agreement has yet been reached, and the current agreement remains in effect.
We entered into an employment agreement with Thomas A. Dorosewicz
effective January 10, 2001. Under the agreement, Mr. Dorosewicz was paid base
annual compensation of $250,000. For fiscal year 2001, he was entitled to earn a
guaranteed bonus of $18,750 and an additional $18,750 performance bonus. Mr.
Dorosewicz earned the full $37,500 bonus for fiscal 2001, and he agreed to
accept payment in shares of common stock. We agreed to pay the withholding taxes
which were due upon this stock grant and that Mr. Dorosewicz would be entitled
to a cash bonus upon achievement of performance targets in fiscal 2002. We also
agreed to issue Mr. Dorosewicz 250,000 options priced at fair market value on
his start date, vesting over five years, and an additional 300,000 special stock
options priced at 85% of fair market value, vesting 100,000 immediately, 100,000
after six months and 100,000 after 24 months. Furthermore, we agreed to issue
additional options to Mr. Dorosewicz during fiscal 2002 based on various
performance criteria and to pay Mr. Dorosewicz certain relocation expenses. If
we terminated the agreement, the agreement provided that Mr. Dorosewicz would be
entitled to severance equal to six months' base salary plus bonus. In addition,
if we terminated the agreement after one year, the agreement provided that Mr.
Dorosewicz would be entitled to additional severance of one month's base salary
for each year of service completed, up to a maximum of six additional months.
Effective October 21, 2001, Mr. Dorosewicz resigned from his position. As a
result of his resignation, we did not pay severance to Mr. Dorosewicz. Mr.
Dorosewicz filed a demand with the California Labor Commissioner for $256,250 in
alleged unpaid severance benefits. His demand was later increase to $283,893.43.
On June 18, 2002, we filed a lawsuit against Mr. Dorosewicz and an entity
affiliated with in the San Diego Superior Court alleging fraud and other causes
of action. Mr. Dorosewicz filed cross-complaints alleging various causes of
action. These matters are still pending and the parties have agreed to resolve
all claims in arbitration. Mr. Dorosewicz received no bonuses or additional
stock options for fiscal 2002.
LONG TERM INCENTIVE PLANS
We do not have any long-term incentive plans, as those terms are
defined in SEC regulations. During the fiscal years ended March 31, 2002 and
2003, we did not adjust or amend the exercise price of stock options awarded to
the named executive officers. We have no defined benefit or actuarial plans
covering any named executive officer.
STOCK INCENTIVE PLANS
We have two stock incentive plans. Our Incentive Stock Option Plan
("1989 Plan") terminated in October 1999. It provided for issuance of incentive
stock options to purchase up to 1,500,000 shares of common stock to employees.
580,735 of such shares remain subject to option as of April 11, 2003. The 1989
Plan was administered by the Board of Directors, which established the terms and
conditions of each option grant.
The 1998 Incentive Stock Plan ("1998 Plan") authorizes the issuance of
shares of common stock through incentive stock options, non-statutory options,
stock bonuses, stock appreciation rights and stock purchase agreements. The 1998
Plan was amended in August 2000 to increase the number of shares reserved from
3,500,000 to 4,000,000. The August 2000 amendments authorized a further
automatic annual increase in reserved shares to take place on the first trading
day of each fiscal year. The amount of the automatic annual increase is 2% of
the total number of shares of common stock outstanding on the last trading day
of the immediately prior fiscal year. The automatic annual increase cannot
however be more than 600,000 shares, and the Board may in its discretion provide
for a lesser increase. The 1998 Plan was further amended in August 2002 to
increase the number of shares reserved from 4,600,000 to 5,600,000. The August
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2000 amendments also implemented a limit on stock awards to any one person in
excess of 500,000 shares in any calendar year, which limit was increased to
1,000,000 shares in August 2002. Our stockholders approved the August 2000
amendments at our annual meeting held November 16, 2000 and the August 2002
amendments at our annual meeting held September 19, 2002. On April 1, 2002 and
April 1, 2003, the automatic increase of 565,872 and 600,000 shares,
respectively, was effected, so that the total number of shares reserved under
the 1998 Plan is currently 6,765,872. The exercise price of options is
determined by the Board of Directors, but the exercise price may not be less
than 100% of the fair market value on the date of the grant, in the case of
incentive stock options, or 85% of the fair market value on the date of the
grant, in the case of non-statutory stock options.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership of shares of our common stock as
of July 1, 2003 (except as otherwise stated below) (i) by all persons known by
us to beneficially own more than 5% of such stock and (ii) by each director,
each of the named executive officers, and all directors and executive officers
as a group. Except as otherwise specified, the address for each person is 5607
Palmer Way, Carlsbad, California 92007. As of July 1, 2003, there were
36,906,490 shares of common stock outstanding. Each of the named persons has
sole voting and investment power with respect to the shares shown (subject to
community property laws), except as stated below.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
-------------------- -------------------- ----------------
Softline Limited 27,561,631 (2) 49.6%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
Claudav Holdings Ltd. B.V. 3,895,090 (3) 10.2%
9 Rue Charles Humbert
1205 Geneva
Switzerland
The Ivanhoe Irrevocable Trust 3,895,090 (3) 10.2%
Barry M. Schechter 3,895,090 (3) 10.2%
ICM Asset Management, Inc. 7,009,128 (4) 17.3%
601 W. Main Ave., Suite 600
Spokane, WA 99201
Midsummer Investment 2,121,865 (9) 5.4%
c/o Midsummer Capital, LLC
485 Madison Avenue, 23/rd/ Floor
New York, NY 10022
Omnicron Master Trust 2,273,427 (10) 5.8%
c/o Omnicron Capital, LP
810 Seventh Avenue, 39/th/ Floor
New York, NY 10019
Arthur S. Klitofsky 426,147 (5) 1.1%
Steven Beck 2,000,000 (6) 5.1%
Harvey Braun 2,000,000 (6) 5.1%
Randy Pagnotta 55,333 (6) < 1%
Cheryl Valencia 3,500 < 1%
Kavindra Malik 50,000 < 1%
Ronald Koren 3,085 < 1%
Mike Dotson 26,628 (6) < 1%
Donald S. Radcliffe 953,280 (7) 2.6%
575 Madison Avenue
New York, NY 10022
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NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- -------------------- ----------------
Michael Silverman 152,897 (8) <1%
10675 Sorrento Valley Road, Suite 200
San Diego, CA 92121
Ian Bonner 125,897 (6) <1%
5527 Inverrary Court
Dallas, Texas 75287
Ivan M. Epstein 122,627 (6) <1%
2 Victoria
Eastgate Extension 13
Sandton 2148
South Africa
Robert P. Wilkie 10,000 (6) <1%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
All directors and executive officers as 9,824,484 (11) 22.7%
a group (14 persons)
(1) This table is based on information supplied by officers, directors and
principal stockholders. The inclusion in this table of such shares
does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of, or receives the economic
benefit of, such shares.
(2) Includes 61,812 shares pursuant to outstanding options exercisable
within 60 days of July 1, 2003 and 18,575,904 shares obtainable upon
conversion of Series A Convertible Preferred Stock. The nine directors
of the Softline Limited board are Ivan M. Epstein, Steven Cohen,
Carlos Soares dos Santos, Eric Ellerine, Mac Maharaj, Robert Wilkie,
Gerald Rubenstein, John Copelyn and Marcel Golding. Mr. Epstein serves
as Chief Executive Officer, Mr. Cohen serves as Chief Operating
Officer, and Mr. Wilkie serves as Group Financial Director of
Softline. Each of the foregoing persons disclaims beneficial ownership
of the shares and options held by Softline.
(3) Claudav Holdings Ltd. B.V., the Ivanhoe Irrevocable Trust and Barry M.
Schechter may be deemed a group pursuant to Rule 13d-5 promulgated
under the Exchange Act. Claudav holds 462,300 shares, for which it
shares voting power with Mr. Schechter pursuant to a proxy. Claudav is
managed by Erwin Wachter, Trustee. Mr. Wachter therefore has
beneficial ownership of the shares held by Claudav. Ivanhoe holds
2,008,237 shares for which it shares voting and investment power with
Mr. Schechter pursuant to Mr. Schechter's position as a trustee.
Includes 2,000 shares held by Mr. Schechter's minor children and
1,318,553 shares issuable upon exercise of options of Mr. Schechter
exercisable within 60 days of July 1, 2003. Excludes 10,000 shares
held by Mr. Schechter's spouse, for which Mr. Schechter disclaims
beneficial ownership.
(4) Includes 2,641,537 shares held by Koyah Leverage Partners, L.P.,
53,014 shares held by Raven Partners, L.P. and 640,599 shares held by
Koyah Partners, L.P. Also includes 1,257,925 shares issuable upon
exercise of outstanding warrants and 1,562,500 shares issuable upon
conversion of a convertible note held by Koyah Leverage Partners,
L.P., 309,784 shares issuable upon exercise of outstanding warrants
and 312,500 shares issuable upon conversion of a convertible note held
by Koyah Partners, L.P., and 12,535 shares issuable upon exercise of
outstanding warrants and 208,334 shares issuable upon conversion of a
convertible note held by Raven Partners, L.P. Also includes shares
held by Koyah Partners, L.P. and Koyah Ventures, LLC that which a
trade was initiated as of June 30, 2003 but settled in July 2003
pursuant to Rule 144. Koyah Ventures, LLC is the general partner of
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Koyah Leverage Partners, L.P., Koyah Partners, L.P. and Raven
Partners, L.P., and as a result has shared voting and investment power
over shares held by all three entities. Raven Ventures, LLC is an
additional general partner of Raven Partners, L.P. and as a result has
shared voting and investment power over shares held by Raven Partners,
L.P. ICM Asset Management, Inc. is the investment advisor to Koyah
Leverage Partners, L.P., Koyah Partners, L.P. and Raven Partners,
L.P., and as a result has shared voting and investment power over
shares held by all three entities. Also includes 10,400 shares held by
other clients of ICM Asset Management, Inc. ICM Asset Management, Inc.
has discretionary authority over shares held by these other clients
and as a result has shared voting and investment power over these
shares. James M. Simmons is the managing member of Koyah Ventures, LLC
and Raven Ventures, LLC and the chief investment officer and
controlling stockholder of ICM Asset Management, Inc. and as a result
has shared voting and investment power over shares held by Koyah
Leverage Partners, L.P., Koyah Partners, L.P., Raven Partners, L.P.,
ICM Asset Management, Inc. and the other clients of ICM Asset
Management, Inc. Each of these entities or persons disclaims
beneficial ownership in these securities except to the extent of such
entity's or person's pecuniary interest in these securities and
disclaims membership in a group with any other entity or person within
the meaning of Rule 13d-5(b)(1) under the Exchange Act.
(5) Includes 163,247 shares pursuant to outstanding options exercisable
within 60 days of July 1, 2003.
(6) Consists of outstanding options exercisable within 60 days of July 1,
2003.
(7) Includes 447,480 shares pursuant to outstanding options exercisable
within 60 days of July 1, 2003. Also includes 17,600 shares held by an
entity for which Mr. Radcliffe has sole voting and investment power.
Also includes an aggregate of 82,100 shares held by three entities for
which Mr. Radcliffe has shared voting and investment power. Excludes
124,500 shares held by Mr. Radcliffe's spouse, for which Mr. Radcliffe
disclaims beneficial ownership.
(8) Includes 143,897 shares pursuant to outstanding options exercisable
within 60 days of July 1, 2003.
(9) Includes 754,143 shares pursuant to outstanding warrants and 1,367,722
shares obtainable upon conversion of convertible debenture.
Midsummer's beneficial ownership is limited to 4.99% pursuant to
limitations contained in the debentures and warrants.
(10) Includes 808,011 shares pursuant to outstanding warrants and 1,465,416
shares obtainable upon conversion of convertible debenture. Omicron's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(11) Includes 6,413,662 shares pursuant to outstanding options exercisable
within 60 days of July 1, 2003.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions since April 1, 2001 to
which we have been a party, in which the amount involved exceeds $60,000 and in
which any director, executive officer or holder of more than 5% of our common
stock had or will have a direct or indirect interest, other than compensation
arrangements with our directors and named executive officers described above
under "Executive Compensation." Certain of these transactions will continue in
effect and may result in conflicts of interest between the Company and such
individuals. Although these persons may owe fiduciary duties to our
stockholders, there is a risk that such conflicts of interest may not be
resolved in our favor.
We borrowed $10 million from Softline in July 2000
in order to pay the same amount to Union Bank as a mandatory reduction of
principal owing to Union Bank. In July 2001, we amended and restated the
Softline note. The restated note was in the original principal amount of $11.4
million and accrued interest at 14% per annum. All unpaid principal and interest
was due May 1, 2003, unless our term loan from Union Bank of California, N.A.
was not extended to November 1, 2002, in which case the note would have been due
and payable on November 1, 2002. The restated note was subordinate to our bank
indebtedness, and we were not required or permitted to make any payments of
principal or interest under the restated note so long as the bank indebtedness
was outstanding.
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In May 2002, we entered into a series of transactions with Softline by
which:
o We transferred to Softline the note received in connection with
the sale of IBIS Systems Limited.
o We issued to Softline 141,000 shares of newly-designated Series A
Preferred Stock.
o Softline released us from approximately $12.3 million then due
under the promissory note to Softline.
o Softline surrendered 10,700,000 shares of our common stock held by
Softline.
In December 2000, we entered into an agreement to sell up to 2,941,176
common shares to a limited number of accredited investors related to ICM Asset
Management, Inc. ("ICM") for cash at $0.85 per share. We sold 1,764,706 of such
shares in December 2000, for gross proceeds of $1.5 million, and an additional
588,235 shares in January 2001, for additional gross proceeds of $0.5 million.
Two of the investors exercised a right to purchase an additional 588,235 shares
in February 2001 for additional gross proceeds of $0.5 million. We also agreed
to issue to each investor a warrant to purchase one common share at $1.50 for
each two common shares purchased in the private placement (aggregate warrants
exercisable for 1,470,590 shares). We had the right to call 50% of the warrants,
subject to certain conditions, if our common stock traded at a price above $2.00
per share for thirty consecutive days. We also had the right to call the
remaining 50% of the warrants, subject to certain conditions, if our common
stock traded at a price above $3.00 per share for thirty consecutive days. We
also agreed to register all of the shares sold under the purchase agreement or
upon exercise of the warrants with the SEC. The agreement with the investors
provided that if a registration statement was not effective on or before April
21, 2001, we would be obligated to issue two-year warrants to each investor,
entitling the investor to purchase additional shares of our common stock at
$0.85 per share. We filed a registration statement in January 2001 to register
these shares, but it did not become effective. As of June 28, 2002, we had
issued the investors warrants to purchase 1,249,997 shares of common stock under
this agreement. At the time of these investments, none of the investors were
affiliated with us, but ICM and related persons became greater than 5%
beneficial owners of our common stock as a result of such transactions.
In May and June 2001, we issued a total of $1.25 million in convertible
notes to a limited number of accredited investors related to ICM. The notes were
originally due August 30, 2001, and required interest at the rate of 12% per
annum to be paid until maturity, with the interest rate increasing to 17% in the
event of a default in payment of principal or interest. Any portion of the
unpaid amount of principal and interest was convertible at any time by the
investors into shares of common stock valued at $1.35 per share. We also agreed
to issue to the investors three-year warrants to purchase 250 common shares for
each $1,000 in notes purchased, at an exercise price of $1.50 per share.
In July 2002, the terms of the notes and warrants issued to the
investors related to ICM were amended. The investors agreed to replace the
existing notes with new notes having a maturity date of September 30, 2003. The
interest rate on the new notes was reduced to 8% per annum, increasing to 13% in
the event of a default in payment of principal or interest. We are required to
pay accrued interest on the new notes calculated from July 19, 2002, in
quarterly installments beginning September 30, 2002. In December 2002, the
investors agreed to extend the accrued interest payments on the new notes to
September 30, 2003. The investors agreed to reduce accrued interest and late
charges on the original notes by $16,000, and to accept the reduced amount in
527,286 shares of our common stock valued at $0.41 per share, which was the
average closing price of our shares on the American Stock Exchange for the ten
trading days prior to July 19, 2002. The new notes are convertible at the option
of the holders into shares of common stock valued at $0.60 per share. We do not
have a right to prepay the notes.
We also agreed that the warrants previously issued to the investors to
purchase an aggregate of 3,033,085 shares at exercise prices ranging from $0.85
to $1.50, and expiring on various dates between December 2002 and June 2004,
would be replaced by new warrants to purchase an aggregate of 1,600,000 shares
at $0.60 per share, expiring July 19, 2007. The replacement warrants are not
callable by us.
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We also agreed to file a registration statement for the resale of all
shares held by or issuable to these investors. In the event such registration
statement is not declared effective by the SEC by July 31, 2003, we will be
obligated to issue five-year warrants for the purchase of 5% of the total number
of registrable securities at an exercise price of $0.60 per share. For the first
30 day period after July 31, 2003 in which the registration statement is not
effective, we will be obligated to issue additional warrants for the purchase of
5% of the total number of registrable securities at an exercise price of $0.60
per share. For each 30 day period thereafter in which the registration statement
is not effective, we will be obligated to issue additional warrants for the
purchase of 2.5% of the total number of registrable securities at an exercise
price of $0.60 per share.
In May 2001, December 2001, May 2002 and September 2002, we borrowed
$50,000, $125,000, $70,000 and $50,000 from World-Wide Business Centres, a
company affiliated with Donald S. Radcliffe, to meet payroll expenses. These
amounts were repaid together with interest at the then-effective prime rate,
promptly as revenues were received, and have been paid in full as of the date of
this proxy statement.
We began occupying its current principal executive offices in July
2001. At that time, the premises were owned by an affiliate of then Chief
Executive Officer, Thomas A. Dorosewicz. Monthly rent for these premises was set
at $13,783. In April 2002, the premises were sold to an entity unrelated to Mr.
Dorosewicz. As of the date of this proxy statement, we are negotiating the terms
of a written lease with the new owner.
During fiscal 2002, we paid a total of $532,770 in interest and
principal to Claudav Holdings Ltd. B.V., which is deemed the beneficial owner of
10.2% of our outstanding common stock as of July 1, 2003. The original loan
was in the amount of $1.5 million, bore interest at the prime rate, and was used
to pay a portion of the purchase price for Island Pacific in 1999. The loan was
due on demand, and was paid in full as of July 31, 2002.
In March 2003, we entered into a Securities Purchase Agreement dated
March 31, 2003 with Midsummer Omicron, and Islandia, L.P. for the sale to these
investors of 9% debentures, convertible into shares of our common stock, for an
aggregate amount of up to $5,500,000, to be sold in two separate closings. The
debentures purchased are accompanied by a number of warrants to purchase shares
of our common stock equal to 40% of (a) the dollar amount of debentures
purchased by the Investors, (b) divided by the daily volume weighted average
price of our common stock on the American Stock Exchange for the ten consecutive
days immediately prior to the closing date the debentures were sold. At the
first closing, the closing price was $0.8901. The closing price for the second
closing will be determined at that time.
The first closing for the sale of debentures aggregating $3,500,000
occurred on March 31, 2003. Additional debentures aggregating up to $2,000,000
will be sold to these investors in a second closing if within one year after the
date of first sale of debentures there occurs a period of 15 consecutive trading
days during which the daily volume weighted average closing price of our common
stock is maintained at a price at or above $1.75 per share, subject to certain
conditions. The debentures bear an interest rate of 9% per annum, and they
provide for interest only payments on a quarterly basis, payable, at our option,
in cash or shares of common stock. The debentures sold in the first closing for
$3,500,000 mature 26 months after that closing, and the additional debentures
that may be sold for up to $2,000,000 in the second closing mature 30 months
after the first closing date. The debentures are convertible into shares of our
common stock at a conversion price equal to 115% of the daily volume weighed
average price of the common stock on the American Stock Exchange on the date the
debentures were sold. The debentures sold at the first closing have a conversion
price of $1.0236. If certain conditions are met, we have the option to redeem
the debentures at 110% of their face value, plus accrued interest. We must
redeem the debentures at the initial monthly amount of $218,750, commencing on
February 1, 2004. If the second closing occurs, this redemption amount will be
increased to $300,000, commencing on the later of February 1, 2004 or the fifth
month following the second closing. Furthermore, if the daily volume weighed
average price of our common stock on the American Stock Exchange exceeds its
closing price on the closing date (which was $0.8901 at the first closing) by
more than 200% for 15 consecutive trading days, we will have the option to
convert the debentures into common stock at the conversion price then in effect.
At the first closing, Midsummer was issued 629,143 warrants, Omicron
was issued 674,082 warrants, and Islandia was issued 269,633 warrants. These
warrants, as well as the warrants to be issued in the second closing, are for a
5-year term, with an exercise price equal to 115% of the daily volume weighed
average price of our common stock on the American Stock Exchange on the date the
accompanying debentures were sold. The warrants issued in the first closing have
an exercise price of $1.0236.
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The investors were granted the right of first refusal to participate in
our future offerings of common stock or equivalent securities so long as any one
of them owns at least 5% of the debentures purchased on the first closing. The
investors were also given registration rights under a Registration Rights
Agreement requiring us to file a registration statement respecting 130% of the
common stock issuable upon the conversion of the debentures and the warrants
within 30 days after the first closing, and to use best efforts to have the
registration statement declared effective at the earliest date. If the
registration statement is not filed within these timeframes or declared
effective within 90 days following the closing date of the debentures sold in
the first phase, or within 120 days in the event of a review by the Securities
and Exchange Commission, we will be obligated to pay liquidated damages to the
investors equal to 2% of the sum of the amount of debentures subscribed to by
the investors and the value of the warrants for each month until the
registration statement becomes effective.
On April 1, 2003, we entered into a Securities Purchase Agreement with
MBSJ Investors, LLC for the sale to MBSJ of a 9% debenture, convertible to
shares of our common stock at a conversion price of $1.0236, for $400,000. This
debenture was accompanied by five-year warrants to purchase 156,311 shares of
common stock with an exercise price of $1.0236 per share. Interests are due on a
quarterly basis, payable in cash or shares of common stock at or option.
Commencing on February 1, 2004, we must redeem $20,000 per month of the
debenture. The debenture matures in October 2005. MBSJ was also granted
registration rights under a Registration Rights Agreement, and certain other
rights similar to those granted to Midsummer, Omicron and Islandia.
On May 6, 2003, we entered into an agreement with Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. (collectively, the "Crestview Investors") for the sale to the
Crestview Investors of 9% debentures, convertible into shares of our common
stock at a conversion price of $1.0236, for $300,000. These debentures were
accompanied by five-year warrants to purchase an aggregate of 101,112 shares of
common stock with an exercise price of $1.0236 per share. Interest is due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $18,750 per month of the
debentures. The debentures mature in October 2005. The Crestview Investors were
also granted registration rights under a registration rights agreement, and
certain other rights similar to those granted to Midsummer, Omnicron and
Islandia. Additional debentures aggregating up to $300,000 will be sold to the
Crestview Investors in a second closing if within one year after the date of
first sale of debentures there occurs a period of 15 consecutive trading days
during which the daily volume weighted average closing price of our common stock
is maintained at a price at or above $1.75 per share, subject to certain
conditions.
We retain Radcliffe & Associates, an entity affiliated with Donald S.
Radcliffe, to perform financial advisory services. During the fiscal years ended
March 31, 2003 and 2002, we incurred $36,000 and $42,000, respectively, in fees
and costs to Radcliffe & Associates. We incurred an additional $19,000 in fees
to Mr. Radcliffe for accounting services during the fiscal year ended March 31,
2002. In June 2002, we issued Mr. Radcliffe 75,000 shares of common stock to
repay $25,000 in obligations pursuant to these arrangements.
Effective April 1, 2003, we sold our wholly-owned Training Products
subsidiary to its president, Arthur Klitofsky, for the sale price of $180,000
plus earn-out payments equal to 20% of the total gross revenues of Training
Products in each of its next two fiscal years, to the extent the revenues in
each of those years exceed certain targets. We received a promissory note for
the amount of $180,000 and the earn-out payments, if any, will be made in
quarterly installments following each fiscal year, bearing an annual interest
rate of 5%.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of (1) 100,000,000 authorized
shares of common stock, $0.001 par value, and (2) 5,000,000 shares of preferred
stock of which 141,000 are designated Series A Preferred Stock. As of July 1,
2003, there were 36,906,490 shares of common stock outstanding and 141,000
shares of Series A Preferred Stock outstanding. The following description of our
capital stock is a summary and is qualified by the provisions of our certificate
of incorporation, as amended and our bylaws, as amended, copies of which have
been filed as exhibits to the registration statement.
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COMMON STOCK
Holders of our common stock are entitled to one vote for each share on
all matters submitted to a shareholder vote. Holders of our common stock have no
conversion, preemptive or subscription rights and there are no redemption
provisions applicable to our common stock. The rights of the holders of common
stock are subject to the rights of holders of preferred stock. All outstanding
shares of common stock are, and the shares underlying all options and warrants
will be, duly authorized, validly issued, fully paid and non-assessable.
SERIES A PREFERRED STOCK
The Series A Preferred Stock has an original issue price of $100 per
share and is redeemable at our option any time prior to the maturity date of
December 31, 2006 for 107% of the original issue price and accrued and unpaid
dividends. The shares are entitled to cumulative dividends of 7.2% per annum,
payable semi-annually when, as and if declared by the board of directors.
Softline may convert each share of Series A Preferred Stock at any time into the
number of common shares determined by dividing the stated value plus all accrued
and unpaid dividends, by a conversion price initially equal to $0.80. The
conversion price increases at an annual rate of 3.5% calculated on a semi-annual
basis. The Series A Preferred Stock is entitled upon liquidation to an amount
equal to its original issue price plus accrued and unpaid dividends in
preference to any distributions to our common stockholders. The Series A
Preferred Stock has no voting rights prior to conversion into common stock,
except with respect to proposed impairments of the Series A Preferred rights and
preferences, or as provided by law. We have the right of first refusal to
purchase all but not less than all of any shares of Series A Preferred Stock or
common shares received on conversion which Softline may propose to sell to a
third party, upon the same price and terms as the proposed sale to a third
party. We also granted Softline certain registration rights for the common
shares into which the Series A Preferred Stock is convertible, including the
right to demand registration on Form S-3 if such form is available to us and
Softline proposes to sell at least $5 million of registrable common shares, and
the right to include shares obtainable upon conversion of the Series A Preferred
Stock in other registration statements we propose to file.
WARRANTS
Warrants to purchase 1,600,000 shares of common stock that are being
registered in this statement expire on July 19, 2007 and have an exercise price
of $0.60 per share. Warrants to purchase 1,830,833 shares of common stock that
are being registered in this statement expire on March 31, 2008 and have an
exercise price of $1.0236 per share. The exercise prices are subject to
adjustment to reflect stock dividends, splits, reverse splits, and other similar
events.
OPTIONS
Non-statutory options to purchase 4,000,000 shares of common stock
that are being registered in this statement have a 3-year term, expiring on
September 3, 2005. These options have an exercise price of $0.28 per share. The
exercise price is subject to adjustment to reflect stock dividends, splits,
reverse splits, and other similar events. The other options (consisting of
statutory and non-statutory) from which 315,000 shares of common stock are
issuable and being registered in this statement have varying expiration dates,
ranging from June 3, 2007 to November 3, 2007. The exercise prices range from
$2.00 per share to $4.50 per share. The exercise prices are subject to
adjustment to reflect stock dividends, splits, reverse splits, and other similar
events.
CONVERTIBLE DEBENTURES
The outstanding debentures bear an interest rate of 9% per annum, and
they provide for interest only payments on a quarterly basis, payable, at our
option, in cash or shares of common stock. $3,500,000 of the debentures mature
May 2005, and $400,000 of the debentures mature in October 2005. If certain
conditions are met, we have the right, but not the obligation, to redeem the
debentures at 110% of their face value, plus accrued interest. Commencing on
February 1, 2004, we must redeem the debentures at the rate of $238,750 per
month in the aggregate. Furthermore, if the daily volume weighed average price
of our common stock on the American Stock Exchange exceeds $1.0236 by more than
200% for 15 consecutive trading days, we will have the option to cause the
investors to convert their debentures into common stock. The conversion prices
are subject to adjustment to reflect stock dividends, splits, reverse splits,
and other similar events.
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CONVERTIBLE NOTES
The convertible notes are convertible into an aggregate of 2,083,333
shares of common stock at a conversion price of $0.60 per share prior to the
payment thereof. These notes are due in full on September 30, 2003. The
conversion prices are subject to adjustment to reflect stock dividends, splits,
reverse splits, and other similar events.
REGISTRATION RIGHTS
GENERAL
We have granted certain registration rights with respect to 38,342,279
of our securities, of which we are registering all of these shares on this
registration statement. The holders of the remaining 682,705 shares we are
registering in the offering were not granted contractual registration rights. We
will pay for all expenses incurred in connection with these registrations, other
than underwriting discounts and commissions. The following is only a summary of
the terms and conditions of the agreements involving parties which have
registration rights. Copies of the actual agreements have been filed as exhibits
to this registration statement.
GRANTED TO ICM ASSET MANAGEMENT AND RELATED PARTIES
We granted ICM and related entities and other individuals demand ,
"piggyback" and incidental registration rights with respect to 3,374,562 shares
of common stock, 1,600,000 shares of common stock underlying warrants and
2,083,333 shares of common stock underlying notes held by them. We are
registering all of these shares held by them.
GRANTED TO SOFTLINE LIMITED
We granted Softline demand, "piggyback" and incidental registration
rights with respect to 18,575,904 shares of common stock underlying the Series A
Preferred Stock held by them. We are registering these shares held by them.
EXTENDED TO MR. NORMAN SMITH
We extended to Mr. Smith the opportunity to participate as a selling
shareholder with respect to 180,000 shares of common stock held by him. We are
registering all of these shares held by Mr. Smith.
EXTENDED TO MR. GARY SEEHOFF
We extended to Mr. Seehoff the opportunity to participate as a
selling shareholder with respect to 39,705 shares of common stock held by him.
We are registering all of these shares held by Mr. Seehoff.
EXTENDED TO MS. RACHEL GLICKSMAN
We extended to Ms. Glicksman the opportunity to participate as a
selling shareholder with respect to 70,080 shares of common stock held by her.
We are registering all of these shares held by Ms.Glicksman.
EXTENDED TO MR. GARY NASH
We extended to Mr. Nash the opportunity to participate as a selling
shareholder with respect to 2,920 shares of common stock held by him. We are
registering all of these shares held by Mr. Nash.
EXTENDED TO MR. DONALD RADCLIFFE
We extended to Mr. Radcliffe the opportunity to participate as a
selling shareholder with respect to 75,000 shares of common stock and 295,000
shares of common stock underlying stock options held by him. We are registering
all of these shares.
EXTENDED TO MR. BARRY SCHECHTER
We extended to Mr. Schechter the opportunity to participate as a
selling shareholder with respect to 20,000 shares of common stock underlying
non-qualified stock options held by him. We are registering all of these shares.
GRANTED TO MR. STEVEN BECK
We granted to Mr. Beck "piggyback" rights with respect to 2,000,000
shares of common stock underlying non-qualified stock options held by him.
We are registering all of these shares.
64
GRANTED TO MR. HARVEY BRAUN
We granted to Mr. Braun "piggyback" rights with respect to 2,000,000
shares of common stock underlying non-qualified stock options held by him. We
are registering all of these shares.
GRANTED TO MIDSUMMER/OMICRON/ISLANDIA
We granted to Midsummer Investment, Ltd., Omicron Master Trust, and
Islandia, L.P. registration rights with respect an aggregate of 6,489,810 shares
of common stock underlying convertible dentures and warrants held or to be held
by them and representing 130% of the actual number of shares of common stock
issuable upon the conversion of the debentures and warrants currently held by
them. We are registering all of these shares, as well as 819,000 shares of
common stock issuable as payment for interest accrued on the debentures.
GRANTED TO MBSJ INVESTORS, LLC
We granted to MBSJ Investors, LLC registration rights with respect an
aggregate of 711,216 shares of common stock underlying convertible dentures and
warrants held or to be held by it and representing 130% of the actual number of
shares of common stock issuable upon the conversion of the debentures and
warrants currently held by it. We are registering all of these shares, as well
as 72,000 shares of common stock issuable as payment for interest accrued on the
debentures.
GRANTED TO CRESTVIEW INVESTORS
We granted to Crestview Capital Fund I, L.P., Crestview Capital Fund
II, L.P. and Crestview Capital Offshore Fund, Inc. registration rights with
respect an aggregate of 512,453 shares of common stock underlying convertible
dentures and warrants held or to be held by them and representing 130% of the
actual number of shares issuable upon the conversion of the debentures and
warrants currently held by them. We are registering all of these shares, as well
as 54,000 shares of common stock issuable as payment for interest accrued on the
debentures.
GRANTED TO CENTURY CAPITAL
We granted Century Capital "piggyback" rights with respect to 50,000
shares of common stock underlying warrants held by it. We are registering all of
these shares.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will by passed on for
us by Solomon Ward Seidenwurm & Smith, LLP, 401 B Street, Suite 1200, San Diego,
California 92101.
EXPERTS
The consolidated financial statements of Island Pacific, Inc. for the
years ended March 31, 2003 and March 31, 2002 appearing in this Prospectus and
Registration Statement have been audited by Singer Lewak Greenbaum Goldstein
LLP, independent accountants and auditors as set forth in their report thereof
appearing elsewhere herein and are included in reliance upon such report and
given upon their authority of such firm as experts in accounting and auditing.
The consolidated statements of operations, stockholders' equity and
cash flows of Island Pacific, Inc. for the year ended March 31, 2001 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Company's ability to continue as a going concern), and are included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 under the Act with
the SEC with respect to the shares offered hereby. This prospectus filed as part
of the registration statement does not contain all of the information contained
in the registration statement and exhibits thereto and reference is hereby made
to such omitted information. Statements made in this registration statement are
summaries of the terms of such referenced contracts, agreements or documents and
are not necessarily complete. Reference is made to each such exhibit for a more
complete description of the matters involved and such statements shall be deemed
qualified in their entirety by such reference.
You can read the registration statement and our future SEC filings,
over the Internet at the SEC's web site at HTTP://WWW.SEC.GOV. You may also read
and copy any document we file with the SEC at its public reference facility at
450 Fifth Street, N.W., Washington, DC 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.
65
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] 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 0-23049
ISLAND PACIFIC, INC.
--------------------
(Formerly, SVI Solutions, Inc.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0896617
---------------------------- ---------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
19800 MACARTHUR BOULEVARD, 12TH FLOOR, IRVINE, CALIFORNIA 92612
--------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(949) 476-2212
--------------
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $0.0001 Par Value - 47,472,554 shares as of November 10, 2003.
================================================================================
TABLE OF CONTENTS
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003
and March 31, 2003 ............................................3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended September 30, 2003 and 2002........4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2003 and 2002 ......................5
Notes to Condensed Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........29
Item 4. Controls and Procedures..............................................29
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings....................................................30
Item 2. Changes in Securities and Use of Proceeds............................31
Item 4. Submission of Matters to a Vote of Security Holders..................31
Item 6. Exhibits and Reports on Form 8-K.....................................31
SIGNATURES....................................................................33
CERTIFICATIONS................................................................34
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, MARCH 31,
2003 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,052 $ 1,319
Accounts receivable, net of allowance for doubtful accounts of $203 and $372,
respectively 8,514 3,974
Income tax refund receivable 846 --
Other receivables, including $0 and $3 from related parties, respectively 87 97
Inventories 84 91
Current portion of non-compete agreements 917 917
Net assets from discontinued operations -- 309
Prepaid expenses and other current assets 618 225
--------- ---------
Total current assets 12,118 6,932
Note receivable 171 --
Property and equipment, net 370 380
Purchased and capitalized software, net 15,846 14,804
Goodwill, net 14,795 14,795
Non-compete agreements, net 209 668
Other assets 29 58
--------- ---------
Total assets $ 43,538 $ 37,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due to stockholders $ -- $ 1,320
Convertible note 500 500
Current portion of long-term debts -- 149
Accounts payable 483 2,941
Accrued expenses 2,896 4,517
Deferred revenue 1,686 1,561
Income tax payable 398 --
--------- ---------
Total current liabilities 5,963 10,988
Convertible debentures, net of debt discount of $0 and $625, respectively -- 2,726
Other long-term liabilities 68 81
--------- ---------
Total liabilities 6,031 13,795
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred, 7.2% cumulative 141,100 shares authorized and
outstanding with a stated value of $100 per share, dividends in arrears of
$1,439 and $1,269, respectively 14,100 14,100
Committed common stock - 2,500,000 shares 1,383 1,383
Common stock, $.0001 par value; 100,000,000 shares authorized; 43,987,176 and
42,199,632 shares issued; and 43,987,176 and 31,499,632 shares outstanding 4 4
Additional paid in capital 61,526 57,751
Accumulated deficit (39,506) (40,490)
Treasury stock, at cost; shares - 10,700,000 -- (8,906)
--------- ---------
Total stockholders' equity 37,507 23,842
--------- ---------
Total liabilities and stockholders' equity $ 43,538 $ 37,637
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 6,679 $ 3,798 $ 12,145 $ 8,690
Cost of sales 1,074 1,608 2,728 3,662
--------- --------- --------- ---------
Gross profit 5,605 2,190 9,417 5,028
Expenses:
Application development 546 1,344 683 2,244
Depreciation and amortization 898 1,048 1,766 2,082
Selling, general and administrative 3,001 1,891 5,797 3,827
--------- --------- --------- ---------
Total expenses 4,445 4,283 8,246 8,153
--------- --------- --------- ---------
Income (loss) from operations 1,160 (2,093) 1,171 (3,125)
Other income (expense):
Interest income (17) -- 9 1
Other income (expense) (167) 3 (178) 2
Interest expense (210) (277) (521) (685)
--------- --------- --------- ---------
Total other expenses (394) (274) (690) (682)
--------- --------- --------- ---------
Income (loss) before provision for income taxes 766 (2,367) 481 (3,807)
Provision for income taxes (benefits) 67 1 (503) 1
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle 699 (2,368) 984 (3,808)
Cumulative effect of changing accounting principle -
goodwill valuation under SFAS 142 -- -- -- (627)
--------- --------- --------- ---------
Income (loss) from continuing operations 699 (2,368) 984 (4,435)
Income from discontinued operations of the SVI Training
Products Inc, subsidiary, net of applicable income
taxes -- 109 -- 159
--------- --------- --------- ---------
Net income (loss) 699 (2,259) 984 (4,276)
Cumulative preferred dividends 282 263 554 517
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 417 $ (2,522) $ 430 $ (4,793)
========= ========= ========= =========
Basic earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.02 $ (0.08) $ 0.03 $ (0.13)
Cumulative effect of a change in accounting principle -
goodwill Valuation under SFAS 142 -- -- -- (0.02)
--------- --------- --------- ---------
Income (loss) from continuing operations 0.02 (0.08) 0.03 (0.15)
Income from discontinued operations -- -- -- --
Cumulative preferred dividends 0.01 0.01 0.02 0.02
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 0.01 $ (0.09) $ 0.01 $ (0.17)
========= ========= ========= =========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.01 $ (0.08) $ 0.02 $ (0.13)
Cumulative effect of a change in accounting principle -
goodwill valuation under SFAS 142 -- -- -- (0.02)
--------- --------- --------- ---------
Income (loss) from continuing operations 0.01 (0.08) 0.02 (0.15)
Income from discontinued operations -- -- -- --
Cumulative preferred dividends -- 0.01 0.01 0.02
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 0.01 $ (0.09) $ 0.01 $ (0.17)
========= ========= ========= =========
Weighted-average common shares outstanding:
Basic 34,417 28,855 33,264 28,685
Diluted 63,990 28,855 61,718 28,685
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ 984 $(4,276)
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization 1,766 2,082
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- 627
Gain on disposal of furniture and equipment 169 --
Amortization of debt discount and conversion option 267 171
Stock-based compensation 126 8
Common stock issued for services rendered 25 64
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (4,530) 417
Income tax refund receivable (846) --
Inventories 7 7
Prepaid expenses and other assets (363) (34)
Accounts payable and accrued expenses (3,880) 348
Income tax payable 398 (106)
Accrued interest on stockholders' loans, convertible notes and term loan 187 465
Deferred revenue 125 (1,696)
-------- --------
Net cash used for operating activities (5,565) (1,923)
-------- --------
Cash flows from investing activities:
Payment received from note receivable 9 --
Purchases of furniture and equipment (264) (26)
Capitalized software development costs (2,243) (255)
-------- --------
Net cash used for investing activities (2,498) (281)
-------- --------
Cash flows from financing activities:
Sale of common stock, net of offering costs 7,232 --
Decrease in amount due to stockholders, net -- (287)
Proceeds from committed stock 700 1,383
Payments on term loan and debentures (135) (125)
Proceeds from short-term loan from related party -- 120
Payments on short-term loan from related party -- (70)
-------- --------
Net cash provided by financing activities 7,797 1,021
-------- --------
Effect of exchange rate changes on cash (1) (2)
-------- --------
Net decrease in cash and cash equivalents (267) (1,185)
Cash and cash equivalents, beginning of period 1,319 1,309
-------- --------
Cash and cash equivalents, end of period $ 1,052 $ 124
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 134 $ 246
Supplemental schedule of non-cash investing and financing activities:
Issued 4,103,161 shares of common stock upon conversion of the 9% debentures $ 4,200 --
Issued 2,287,653 shares of common stock upon conversion of the note due to
stockholders $ 1,374 --
Issued 500,000 shares of common stock as payment for dividend on preferred
stock $ 421 --
Retired 1,070,000 shares of treasury stock $(8,905) --
Issued 100,000 shares of common stock for services in connection with an
equity financing in December 2000 -- $ 45
Issued 140,000 shares of common stock to pay for penalty for late
effectiveness of the registration statement -- $ 60
Received 262,500 shares of common stock related to early termination
of a service contract -- $ (210)
Issued 84,849 and 568,380 shares of common stock as payments for bonuses
and services rendered in prior periods $ 83 $ 237
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ISLAND PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2003 and for all
the periods presented have been made.
Certain amounts in the prior periods have been reclassified to conform to the
presentation for the three and six months ended September 30, 2003. The
financial information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes thereto
in our Form 10-K/A for the year ended March 31, 2003.
The results of operations for the three and six months ended September 30, 2003
and 2002 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our wholly-owned subsidiary, SVI Training
Products, Inc. ("Training Products"), to its former president, for the sale
price of $180,000 plus earn-out payments equal to 20% of the total gross
revenues of Training Products in each of its next two fiscal years, to the
extent the revenues in each of those years exceed certain target. We received a
promissory note for the amount of $180,000 and the earn-out payments, if any,
will be made in quarterly installments following each fiscal year, bearing an
annual interest rate of 5%. The note has a balance of $171,000 at September 30,
2003.
The sale of the Training Products subsidiary resulted in a loss of $129,000, net
of estimated income taxes, which was accrued for at March 31, 2003. Accordingly,
the operating results of the Training Products subsidiary for the three and six
months ended September 30, 2002 were restated as discontinued operations.
NOTE 3 - INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost or
market, on a first-in, first-out basis.
NOTE 4 - CONVERTIBLE DEBTS
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
During the quarter ended June 30, 2001, we entered into subscription agreements
with a limited number of accredited investors related to existing stockholders
for gross proceeds of $1.3 million. Each unit consisted of a convertible
promissory note to purchase 250 shares of our common stock for each $1,000
borrowed by us. The holders of the notes had the option to convert the unpaid
principal and interest to common stock at any time at a conversion price of
$0.60 per share. The notes matured on September 30, 2003 and earned interest at
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest, to be paid at maturity. We did not have a right to prepay
the notes. In September 2003, these investors converted all outstanding balances
of principal and accrued interest totaling $1.4 million into 2,287,653 shares of
our common stock.
We also issued to these investors warrants to purchase an aggregate of 1,600,000
shares at $0.60 per share, expiring July 19, 2007. The warrants are not callable
by us. No warrants have currently been exercised.
We filed a registration statement for the resale of all shares held by or
obtainable by these and other investors. The registration statement was declared
effective on July 18, 2003.
CONVERTIBLE NOTE DUE TO UNION BANK OF CALIFORNIA
Pursuant to the Discounted Loan Payoff Agreement dated March 31, 2003, we issued
to Union Bank of California a $500,000 unsecured, non-interest bearing
convertible note payable in either cash or shares of common stock, at our
option. If we elect to pay the principal amount or any portion thereof in shares
of common stock, the shares will be computed on a price per share of 80% of the
average share closing price of our common stock for the ten trading day period
immediately preceding the payoff date. The maturity date is March 31, 2004. As
of September 30, 2003, the bank had assigned the note to an unrelated party.
6
CONVERTIBLE DEBENTURES
In March 2003, we entered into a Securities Purchase Agreement for the sale of
convertible debentures to a group of investors (the "March '03 Debenture
Investors"). The debentures were convertible into shares of our common stock at
a conversion price of $1.02 per share, for the total proceeds of $3.5 million.
The debentures would have matured in May 2005 and bore an interest rate of 9%
per annum. Interest was payable on a quarterly basis commencing on June 1, 2003,
in cash or shares of common stock, at our option. If certain conditions were
met, we had the right, but not the obligation, to redeem the debentures at 110%
of their face value, plus accrued interest. Commencing in February 2004, we
would have been obligated to redeem $219,000 per month of the debentures. In
August 2003, the daily volume weighted average price of our common stock on the
American Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive
trading days; therefore, we exercised our option to cause the investors to
convert their debentures into common stock. As a result, the investors converted
all of their debentures into an aggregate of 3,419,304 shares of our common
stock in the quarter ended September 30, 2003.
We filed a registration statement covering 130% of the common stock issuable
upon the conversion of the debentures and warrants. The registration statement
was declared effective on July 18, 2003.
Additional debentures, aggregating up to $2 million, will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of September
30, 2003.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. It was recognized
in the statement of operations during the period from the issuance of the debt
to the time at which the debt first became convertible. We recognized this
interest expense of $715,000 in March 2003.
The March '03 Debenture Investors also received warrants to purchase up to, in
the aggregate, 1,572,858 shares of common stock with an exercise price equal to
$1.02 per share. The warrants expire five years from the date of issuance. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants was $625,000 and was being
amortized as interest expense over the life of the convertible debentures. For
the six months ended September 30, 2003, we recorded an interest expense of
$144,000. At the date of the conversion of the debentures to equity, $481,000 of
the expense remained unamortized and has been debited to additional paid in
capital. The value of the detachable warrants of $481,000 has been recorded as
an offering cost at September 30, 2003. As such, there is no effect on our
statement of operations.
In April 2003, we entered into a Securities Purchase Agreement with an investor
(the "April '03 Debenture Investor") for the sale of a 9% debenture, convertible
to shares of our common stock at a conversion price of $1.02, for the gross
proceeds of $400,000. Interest was due on a quarterly basis commencing on June
1, 2003, payable in cash or shares of common stock at our option. Commencing on
February 1, 2004, we would have been obligated to redeem $20,000 per month of
the debenture. The debenture would have matured in October 2005. In August 2003,
the daily volume weighted average price of our common stock on the American
Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive trading days;
therefore, we exercised the option to cause this investor to convert its
debenture into common stock. As a result, the April '03 Debenture Investor
converted its debenture into 390,777 shares of our common stock in the quarter
ended September 30, 2003.
The April '03 Debenture Investor was also granted registration rights under a
registration rights agreement, and certain other rights similar to those granted
to the March '03 Debenture Investors.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. We recognized this
interest expense of $69,000 in the quarter ended June 30, 2003.
The debenture issued to the April '03 Debenture investor was accompanied by a
five-year warrant to purchase 156,311 shares of our common stock with an
exercise price of $1.02 per share. We allocated the proceeds received from debt
or convertible debt with detachable warrants using the relative fair value of
the individual elements at the time of issuance. The amount allocated to the
warrants was determined to be $63,000 and was being amortized as interest
expense over the life of the convertible debentures. We recorded an interest
7
expense of $11,000 in the six months ended September 30, 2003. At the date of
the conversion of the debentures to equity, $52,000 of the expense remained
unamortized and has been debited to additional paid in capital. The value of the
detachable warrants of $52,000 has been recorded as an offering cost at
September 30, 2003. As such, there is no effect on our statement of operations.
In May 2003, we entered into an agreement with a group of investors (the "May
'03 Debenture Investors") for the sale of 9% debentures, convertible into shares
of our common stock at a conversion price of $1.02 for the gross proceeds of
$300,000. Interest was due on a quarterly basis commencing on June 1, 2003,
payable in cash or shares of common stock at our option. Commencing on February
1, 2004, we would have been obligated to redeem $19,000 per month of the
debentures. In August 2003, the daily volume weighted average price of our
common stock on the American Stock Exchange exceeded $1.02 by more than 200% for
15 consecutive trading days; therefore, we exercised the option to cause the
investors to convert their debentures into common stock. As a result, the May
'03 Debenture Investors converted their debentures into an aggregate of 293,083
shares of our common stock in the quarter ended September 30, 2003.
The debentures would have been matured in May 2005. The May '03 Debenture
Investors were also granted registration rights under a registration rights
agreement, and certain other rights similar to those granted to the March '03
Debenture Investors.
Additional debentures aggregating up to $300,000 will be sold to the May '03
Debenture Investors in a second closing, if within one year after the date of
first sale of debentures there occurs a period of 15 consecutive trading days
during which the daily volume weighted average closing price of our common stock
is maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of the date of
this report.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. We recognized this
interest expense of $38,000 in the quarter ended June 30, 2003.
These debentures were accompanied by five-year warrants to purchase an aggregate
of 101,112 shares of common stock with an exercise price of $1.02 per share. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants is $39,000 and was being
amortized as interest expense over the life of the convertible debentures. We
recorded an interest expense of $5,000 in the six months ended September 30,
2003. At the date of the conversion of the debentures to equity, $34,000 of the
expense remained unamortized and has been debited to additional paid in capital.
The value of the detachable warrants of $34,000 has been recorded as an offering
cost at September 30, 2003. As such, there is no effect on our statement of
operations.
In June 2003, we entered into an agreement with various institutional investors
("Common Stock Institutional Investors") for the sale of 5,275,000 shares of
common stock at a per share price of $1.50 for an aggregate purchase price of
$7.9 million. In connection with this financing, we paid Roth Capital Partners,
LLC, as placement agent, cash compensation of 8% of the proceeds and issued a
five-year warrant to purchase 527,500 shares of common stock at an exercise
price of $1.65 per share. We also issued five-year warrants to purchase 375,000
shares of common stock at an exercise price of $1.65 to the March '04 Debenture
Investors and May '04 Debenture Investors in order to obtain their requisite
consents and waivers of rights they possessed to participate in the financing.
We filed a registration statement covering the shares sold and warrants issued
in connection with this transaction. The registration statement was declared
effective September 26, 2003.
NOTE 5 - INCOME TAX BENEFITS
Income tax benefits for the six months ended September 30, 2003 include $846,000
income tax refund receivable; offset in part by income tax payable relating to
prior periods of $271,000. The net amount of $570,000 has been recorded as
income under provision for income taxes in the consolidated statement of
operations in the six months ended September 30, 2003. The income tax refund
resulted from carrying back net operating losses in the last three years to
prior periods.
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could indicate
8
that their value has diminished or been impaired. Other intangible assets will
continue to be amortized over their estimated useful lives. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.
Effective April 1, 2002, we adopted SFAS 142 and ceased amortization of goodwill
recorded in business combinations prior to June 30, 2001. We evaluate the
remaining useful lives of these intangibles on an annual basis to determine
whether events or circumstances warrant a revision to the remaining period of
amortization.
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $627,000 as a
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002.
NOTE 7 - PREFERRED STOCK
The Series A Preferred has a stated value of $100 per share and is redeemed at
our option any time prior to the maturity date of December 31, 2006 for 107% of
the stated value and accrued and unpaid dividends. The preferred shares are
entitled to cumulative dividends of 7.2% per annum, payable semi-annually, and
have accumulative dividends of $1.4 million and $10.21 and $777,000 of $5.46 per
share, at September 30, 2003 and 2002, respectively. The holders may convert
each share of Series A Preferred at any time into the number of shares of our
common stock determined by dividing the stated value plus all accrued and unpaid
dividends, by a conversion price initially equal to $0.80. The conversion price
will increase at an annual rate of 3.5% calculated on a semi-annual basis. The
conversion price as of September 30, 2003 is $0.84. The Series A Preferred is
entitled upon liquidation to an amount equal to its stated value plus accrued
and unpaid dividends in preference to any distributions to common stockholders.
The Series A Preferred has no voting rights prior to conversion into common
stock, except with respect to proposed impairments of the Series A Preferred
rights and preferences, or as provided by law. We have the right of first
refusal to purchase all but not less than all of any shares of Series A
Preferred or shares of common stock received on conversion which the holder may
propose to sell to a third party, upon the same price and terms as the proposed
sale to a third party.
NOTE 8 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common shares ("diluted EPS") reflect the
potential dilutive effect, determined by the treasury method, of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. Earnings per share for the three and six months ended
September 30, 2003 and 2002 is calculated as follows (in thousands):
Three months ended September 30, Six months ended September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) available to
common stockholders $ 417 $ (2,522) $ 430 $ (4,793)
========= ========= ========= =========
Basic weighted average shares 34,417 28,855 33,264 28,685
Dilutive common stock equivalent 29,573 -- 28,454 --
--------- --------- --------- ---------
Diluted weighted average shares 63,990 28,855 61,718 28,685
========= ========= ========= =========
Basic earnings (loss) per share $ 0.01 $ (0.09) $ 0.01 $ (0.17)
Diluted earnings (loss) per share $ 0.01 $ (0.09) $ 0.01 $ (0.17)
The following potential common shares have been excluded from the computation of
diluted net loss per share for the three and six months ended September 30,
2002, because the effect would have been anti-dilutive:
Outstanding options under our stock option plans 5,181,082
Outstanding options granted outside our stock option plans 5,074,312
Warrants issued in conjunction with private placements 4,232,000
Warrants issued for services rendered 804,002
Convertible notes due to stockholders 2,083,333
Convertible note due to a major customer 2,500,000
Series A Convertible Preferred Stock 18,576,750
------------
Total 38,451,479
============
9
NOTE 9 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a leading provider of software solutions and services to the retail
industry. We provide high value innovative solutions that help retailers
understand, create, manage and fulfill consumer demand. Our solutions and
services have been developed specifically to meet the needs of the retail
industry. Our solutions help retailers improve the efficiency and effectiveness
of their operations and build stronger, longer lasting relationships with their
customers. We currently operate in the United States and the United Kingdom. The
geographic distribution of our net sales and long-lived assets are as follows
(in thousands):
Three months ended September 30, Six months ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales:
United States $ 6,188 $ 3,225 $11,114 $ 7,652
United Kingdom 491 573 1,031 1,038
-------- -------- -------- --------
Total net sales $ 6,679 $ 3,798 $12,145 $ 8,690
======== ======== ======== ========
September 30,
2003 2002
------------- -------------
Identifiable assets from continuing operations:
United States $ 42,921 $ 35,584
United Kingdom 617 420
------------- -------------
Total identifiable assets $ 43,538 $ 36,004
============= =============
For the three months ended September 30, 2003 and 2002, net sales to major
customers are as follows (in thousands):
Three months ended September 30, Six months ended September 30,
2003 2002 2003 2002
------------ ------------- ------------- -------------
QQQ Systems Ltd. 58% -- 32% --
Toys `R' Us 3% 27% 13% 35%
The account receivable balances from Toys `R' Us at September 30, 2003 and 2002
represent 25% and 9% of total accounts receivable. The account receivable
balance from QQQ Systems Ltd. at September 30, 2003 represents 46% of total
accounts receivable.
We organize our business into two segments as follows:
o RETAIL MANAGEMENT SOLUTIONS - offer suite of applications,
which builds on our long history in retail software design and
development. We provide our customers with an extremely
reliable, widely deployed, comprehensive and fully integrated
retail management solutions. Retail Management Solutions
include merchandise management that optimizes workflow and
provides the highest level of data integrity. This module
supports all operational areas of the supply chain including
planning, open-to-buy purchase order management, forecasting,
warehouse and store receiving distribution, transfers, price
management, performance analysis and physical inventory. In
addition, Retail Management Solutions include a comprehensive
set of tools for analysis and planning, replenishment and
forecasting, event and promotion management, warehouse,
ticketing, financials and sales audit. Through collaborations
with strategic partners, Retail Management Solutions offer
tools for loss prevention, communication with stores and
vendors, integration needs, purchase and allocation decisions,
analysis of weather impact, control and management of business
processes, consumer research, tracking consumer shopping
patterns, forecasting and replenishment, and analyzing store
people productivity.
o STORE SOLUTIONS - offer suite of applications builds on our
long history of providing multi-platform, client server
in-store solutions. We market this set of applications under
the name "OnePointe," and "OnePointe International" which is a
full business to consumer software infrastructure encompassing
a range of integrated store solutions. "OnePointe" is a
complete application providing all point-of-sale ("POS") and
in-store processor (server) functions for traditional "brick
and mortar" retail operations.
10
A summary of the revenues and operating income (loss), excluding depreciation
and amortization, attributable to each of these business units and identifiable
assets is as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales:
Retail Management Solutions $ 6,306 $ 3,528 $ 11,370 $ 7,972
Store Solutions 373 270 775 718
--------- --------- --------- ---------
$ 6,679 $ 3,798 $ 12,145 8,690
========= ========= ========= =========
Operating income (loss):
Retail Management Solutions $ 3,223 $ (249) $ 4,819 $ 535
Store Solutions (192) (181) (192) (341)
Other (see below) (1,871) (1,663) (3,456) (3,319)
--------- --------- --------- ---------
Total operating income (loss) $ 1,160 $ (2,093) $ 1,171 $ (3,125)
========= ========= ========= =========
Depreciation:
Retail Management Solutions $ 35 $ 50 $ 65 $ 100
Store Solutions 7 13 16 26
Other (see below) 8 23 25 47
--------- --------- --------- ---------
Total depreciation $ 50 $ 86 $ 106 $ 173
========= ========= ========= =========
Other operating loss:
Amortization of intangible assets $ (848) $ (962) $ (1,660) $ (1,909)
Depreciation (50) (86) (106) (173)
Administrative costs and other non-allocated
expenses (973) (615) (1,690) (1,237)
--------- --------- --------- ---------
Total other operating loss $ (1,871) $ (1,663) $ (3,456) $ (3,319)
========= ========= ========= =========
Identifiable assets:
Retail Management Solutions $ 37,228 $ 30,634 $ 37,228 $ 30,634
Store Solutions 4,410 4,756 4,410 4,756
--------- --------- --------- ---------
Total identifiable assets $ 41,638 $ 35,390 $ 41,638 $ 35,390
========= ========= ========= =========
Operating income (loss) in Retail Management Solutions and Store Solutions
includes direct expenses for software licenses, maintenance services,
programming and consulting services, sales and marketing expenses, product
development expenses, and direct general and administrative expenses. The
"Other" caption includes depreciation, amortization of intangible assets,
non-allocated costs and other expenses that are not directly identified with a
particular business unit and which management does not consider in evaluating
the operating income of the business unit.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 further clarifies accounting for derivative
instruments. We believe the adoption of this statement will have no material
impact on our consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. We do not believe the
adoption of SFAS 150 will have a material impact on our consolidated financial
statements.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In June 2003, we entered into a development and marketing license agreement with
a software and services company affiliated with one of our officers. Under this
agreement, we obtain an exclusive right to sell and distribute this company's
software. In return, we committed to fund $1.2 million toward development of
this product. We also agreed to pay a royalty of 30% of the software license
sales up until we have recuperated all the development funding, at which point
the royalty will increase to 50% thereafter. As of September 30, 2003, we've
funded $275,000 toward development.
11
In September 2003, we entered into an agreement in principle to acquire Page
Digital, Inc. for $7 million. This purchase has not yet been finalized as of the
date of this report.
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. This dispute was heard before an arbitrator during the week ended
October 3, 2003, and a decision from the arbitrator should be forthcoming.
We decided in the third quarter of fiscal 2002 to sell certain assets of our
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have reserved $187,000 as our potential exposure.
The receiver has also claimed that we are obligated to it for inter-company
balances of $636,000, but we do not believe any amounts are owed to the
receiver, who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against us with the Department
of Fair Employment and Housing, alleging harassment and sexual orientation
discrimination. We have responded appropriately to both the wage claim and the
discrimination allegations, which we believe lack merit based on present
information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claimed damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertained to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. The parties settled this matter in September 2003 and the terms of the
settlement are covered by a confidentiality agreement.
In mid-2002, we were the subject of an adverse judgment entered against us in
favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. A hearing on Sabica's and Island Pacific's motion to
quash occurred on May 22, 2003 which was subsequently denied.
12
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
NOTE 12 - RELATED-PARTY TRANSACTIONS
We retain our former CEO and Chairman of the Board to provide consulting
services starting August 2003. For the quarter and six months ended September
30, 2003, the expense for this service was $74,000.
We retained an entity owned by an immediate family member of our CEO and
Chairman to provide recruiting services. For the six months ended September 30,
2003, the expense for this service was $108,000.
In June 2003, we entered into a development and marketing license agreement with
a software and services company affiliated with one of our officers. Under this
agreement, we obtain an exclusive right to sell and distribute this company's
software. In return, we committed to fund $1.2 million toward development of
this product. We also agreed to pay a royalty of 30% of the software license
sales up until we have recuperated all the development funding, at which point
the royalty will increase to 50% thereafter. As of September 30, 2003, we've
funded $275,000 toward development.
NOTE 13 - SUBSEQUENT EVENTS
In October 2003, Donald Radcliffe resigned as a member of our Board Directors.
On November 7, 2003, we entered into an agreement with various institutional
investors ("November 2003 Institutional Investors") for the sale of 3,180,645
shares of common stock at a price of $1.55 per share for an aggregate purchase
price of $4.9 million. We also granted the November 2003 Institutional Investors
registration rights under a registration rights agreement in which we agree to
file a registration statement with the Securities and Exchange Commission for
the resale of all shares sold these investors. If the registration statement is
not filed by December 7, 2003, we will be obligated to pay on December 7, 2003,
and each monthly anniversary until the registration statement is filed, an
amount in cash, as liquidated damages, equal to 2.0% of the purchase price paid
by the November 2003 Institutional Investors.
In connection with this financing, we paid Roth Capital Partners, LLC ("Roth
Capital"), as placement agent, a compensation of $179,000 in cash and 115,226
shares of our common stock and issued a five-year warrant to purchase 282,065
shares of our common stock at an exercise price of $1.71 per share. Roth Capital
was granted the registration rights similar to those granted to the November
2003 Institutional Investors.
13
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934 AND THE COMPANY INTENDS THAT CERTAIN MATTER DISCUSSED IN THIS REPORT ARE
"FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY FOR THE SAFE HARBOR FROM
LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED BY THE CONTEXT OF
THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE COMPANY ("IPI", "WE" OR "US")
"BELIEVES", "ANTICIPATES", "EXPECTS", "FORECASTS", "ESTIMATES" OR OTHER WORDS
SIMILAR MEANING AND CONTEXT. SIMILARLY, STATEMENTS THAT DESCRIBE FUTURE PLANS,
OBJECTIVES, OUTLOOKS, TARGETS, MODELS, OR GOALS ARE ALSO DEEMED FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
FORECASTED OR ANTICIPATED AS OF THE DATE OF THIS REPORT. CERTAIN OF SUCH RISKS
AND UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY TO SUCH STATEMENTS AND
ELSEWHERE IN THIS REPORT INCLUDING ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." STOCKHOLDERS, POTENTIAL
INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE FACTORS IN EVALUATING
THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
SUCH FORWARD-LOOKING STATEMENTS OR CONSTRUE SUCH STATEMENTS TO BE A
REPRESENTATION BY US THAT OUR OBJECTIVES OR PLANS WILL BE ACHIEVED. THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE MADE ONLY AS OF THE DATE
OF THIS REPORT, AND WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS FORM 10-Q. READERS ARE ALSO URGED TO CAREFULLY
REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE FACTORS WHICH AFFECT OUR BUSINESS, INCLUDING WITHOUT
LIMITATION THE DISCLOSURES MADE UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN OUR ANNUAL
REPORT FILED ON FORM 10-K/A FOR THE YEAR ENDED MARCH 31, 2003, AND THE
DISCLOSURES UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K/A, AS WELL AS
OTHER REPORTS AND FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We are a provider of software solutions and services to the retail industry. We
provide innovative solutions that help retailers understand, create, manage and
fulfill consumer demand. Our solutions and services have been developed
specifically to meet the needs of the retail industry. Our solutions help
retailers improve the efficiency and effectiveness of their operations and build
stronger, longer lasting relationships with their customers. We market our
software solutions through direct and indirect sales channels primarily to
retailers who sell to their customers through traditional retail stores,
catalogs and/or Internet-enabled storefronts. To date, we have licensed our
solutions to more than 200 retailers across a variety of retail sectors. Our
operations are conducted principally in the United States and the United
Kingdom.
We currently derive the majority of our revenues from the sale of application
software licenses and the provision of related professional and support
services. Application software license fees are dependent upon the sales volume
of our customers, the number of users of the application(s), and/or the number
of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds additional users
and/or adds additional locations, we charge additional license fees. We
typically charge for support, maintenance and software updates on an annual
basis pursuant to renewable maintenance contracts. We typically charge for
professional services including consulting, implementation and project
management services on an hourly basis. Our sales cycles for new license sales
historically ranged from three to twelve months, but new license sales were
limited during the past two fiscal years and sales cycles are now difficult to
estimate. Our long sales cycles have in the past caused our revenues to
fluctuate significantly from period to period.
RECENT DEVELOPMENTS
In the third quarter of fiscal 2004, the 9% convertible debenture holders
converted all of outstanding balances totaling $4.2 million into 4,103,141
shares of our common stock.
In September 2003, ICM Asset Management's investors converted all outstanding
balances totaling $1.4 million of the convertible notes into 2,287,653 shares of
our common stock.
14
In October 2003, we announced our intentions to acquire Page Digital, Inc. for
$7 million. This acquisition has not yet been finalized as of the date of this
report.
In October 2003, Donald Radcliffe resigned as a member of our Board Directors.
In November 2003, we entered into an agreement with various institutional
investors for the sale of 3,180,645 shares of common stock at a price of $1.55
per share for an aggregate purchase price of $4.9 million. See "Liquidity and
Capital Resources -- Financing Transactions" below.
DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our wholly-owned subsidiary, SVI Training
Products, Inc. ("Training Products") to its former president for the sale price
of $180,000 plus earn-out payments equal to 20% of the total gross revenues of
Training Products in each of its next two fiscal years, to the extent the
revenues in each of those years exceed certain targets. We received a promissory
note for the amount of $180,000 and the earn-out payments, if any, will be made
in quarterly installments following each fiscal year, bearing an annual interest
rate of 5%. The sale of the Training Products subsidiary resulted in a loss of
$129,000, net of estimated income taxes, which was accrued for at March 31,
2003. The operating results of Training Products for the prior periods are
restated as discontinued operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements:
o REVENUE RECOGNITION. Our revenue recognition policy is
significant because our revenue is a key component of our
results of operations. In addition, our revenue recognition
determines the timing of certain expenses such as commissions
and royalties. We follow specific and detailed guidelines in
measuring revenue; however, certain judgments affect the
application of our revenue policy.
We license software under non-cancelable agreements and
provide related services, including consulting and customer
support. We recognize revenue in accordance with Statement of
Position 97-2 (SOP 97-2), Software Revenue Recognition, as
amended and interpreted by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with
respect to certain transactions, as well as Technical Practice
Aids issued from time to time by the American Institute of
Certified Public Accountants.
Software license revenue is generally recognized when a
license agreement has been signed, the software product has
been delivered, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and
collection is considered probable. If a software license
contains an undelivered element, the fair value of the
undelivered element is deferred and the revenue recognized
once the element is delivered. In addition, if a software
license contains customer acceptance criteria or a
cancellation right, the software revenue is recognized upon
the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right. Typically, payments
for our software licenses are due in installments within
twelve months from the date of delivery. Where software
license agreements call for payment terms of twelve months or
more from the date of delivery, revenue is recognized as
payments become due and all other conditions for revenue
recognition have been satisfied. Deferred revenue consists
primarily of deferred license, prepaid services revenue and
maintenance support revenue. Consulting services are
separately priced, are generally available from a number of
suppliers, and are not essential to the functionality of our
software products. Consulting services, which include project
management, system planning, design and implementation,
15
customer configurations, and training are billed on both an
hourly basis and under fixed price contracts. Consulting
services revenue billed on an hourly basis is recognized as
the work is performed. On fixed price contracts, consulting
services revenue is recognized using the percentage of
completion method of accounting by relating hours incurred to
date to total estimated hours at completion. We have from time
to time provided software and consulting services under fixed
price contracts that require the achievement of certain
milestones. The revenue under such arrangements is recognized
as the milestones are achieved.
Customer support services include post contract support and
the rights to unspecified upgrades and enhancements.
Maintenance revenues from ongoing customer support services
are billed on a monthly basis and recorded as revenue in the
applicable month, or on an annual basis with the revenue being
deferred and recognized ratably over the maintenance period.
If an arrangement includes multiple elements, the fees are
allocated to the various elements based upon vendor-specific
objective evidence of fair value.
o ACCOUNTS RECEIVABLE. We typically extend credit to our
customers. Software licenses are generally due in installments
within twelve months from the date of delivery. Billings for
customer support and consulting services performed on a time
and material basis are due upon receipt. From time to time
software and consulting services are provided under fixed
price contracts where the revenue and the payment of related
receivable balances are due upon the achievement of certain
milestones. Management estimates the probability of collection
of the receivable balances and provides an allowance for
doubtful accounts based upon an evaluation of our customers
ability to pay and general economic conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL.
For fiscal 2003, we have adopted SFAS No. 142 resulting in a
change in the way we value long-term intangible assets and
goodwill. We completed the initial transitional analysis of
goodwill impairment as of April 1, 2002 and recorded an
impairment of $0.6 million as a cumulative effect of a change
in accounting principle in the first quarter of fiscal 2003.
We no longer amortize goodwill, but instead test goodwill for
impairment on an annual basis or more frequently if certain
events occur. Goodwill is to be measured for impairment by
reporting units, which currently consist of our operating
segments. At each impairment test for a business unit, we are
required to compare the carrying value of the business unit to
the fair value of the business unit. If the fair value exceeds
the carrying value, goodwill will not be considered impaired.
If the fair value is less than the carrying value, we will
perform a second test comparing the implied fair value of
reporting unit goodwill with the carrying amount of that
goodwill. The difference if any between the carrying amount of
that goodwill and the implied fair value will be recognized as
an impairment loss, and the carrying amount of the associated
goodwill will be reduced to its implied fair value. These
tests require us to make estimates and assumptions concerning
prices for similar assets and liabilities, if available, or
estimates and assumptions for other appropriate valuation
techniques.
For our intangible assets with finite lives, including our
capitalized software and non-compete agreements, we assess
impairment at least annually or whenever events and
circumstances suggest the carrying value of an asset may not
be recoverable based on the net future cash flows expected to
be generated from the asset on an undiscounted basis. When we
determine that the carrying value of intangibles with finite
lives may not be recoverable, we measure any impairment based
on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the
risk inherent in our current business model.
RECENT ACCOUNTING PRONOUNCEMENTS
A number of new pronouncements have been issued for future implementation as
discussed in the footnotes to our interim financial statements (see Note 9). As
discussed in the notes to the interim financial statements, the implementation
of some of these new pronouncements is not expected to have a material effect on
our financial position or results of operations.
16
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
NET SALES
Net sales increased by $2.9 million, or 76%, to $6.7 million in the three months
ended September 30, 2003 from $3.8 million in the three months ended September
30, 2002 primarily due to an increase in license sales.
COST OF SALES/GROSS PROFIT
Cost of sales decreased by $0.5 million, or 31%, to $1.1 million in the quarter
ended September 30, 2003 from $1.6 million in the quarter ended September 30,
2002. Gross profit as a percentage of net sales increased to 84% in the quarter
ended September 30, 2003 from 58% in the prior comparative period. The decrease
in cost of sales and the increase in gross profit as a percentage of net sales
were due to the increase in high-margin application technology license revenues
coupled with the decrease in low-margin software modification and professional
services sales. During the quarter ended September 30, 2003 and 2002, license
revenues represented 61% and 13% of net sales, respectively, and modifications
and services revenues represented 13% and 43% of net sales, respectively.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $0.8 million, or 62%, to $0.5
million in the quarter ended September 30, 2003 from $1.3 million in the quarter
ended September 30, 2002. The decrease is primarily due to capitalizing $0.9
million development costs for new products. We've made significant investments
in our new products in the current year. We anticipate these new products will
be launched during the second half of the fiscal 2004. In the prior comparative
period, research and development efforts was spent on enhancing existing
products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.1 million, or 10%, to $0.9 million
in the quarter ended September 30, 2003 from $1.0 million in the quarter ended
September 30, 2002. The decrease is mainly due to a decrease in amortization of
purchased and capitalized software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $1.1 million, or 58%,
to $3.0 million in the three months ended September 30, 2003 from $1.9 million
in the three months ended September 30, 2002. Much of the current quarter was
spent building the infrastructure and developing our sales organization.
OPERATING INCOME
Operating income from continuing operations, which included depreciation and
amortization expense, was $1.2 million for the quarter ended September 30, 2003,
compared to a loss from continuing operations of $2.1 million for the quarter
ended September 30, 2002. Earnings from continuing operations before interest,
provision for income taxes, depreciation, amortization and change in accounting
principle was $2.1 million for the quarter ended September 30, 2003 compared to
a loss of $1.0 million for the quarter ended September 30, 2002.
INTEREST EXPENSE
Interest expense decreased by $0.1 million, or 33%, to $0.2 million in the
quarter ended September 30, 2003 from $0.3 million in the quarter ended
September 30, 2002. The decrease is due to $4.3 million decrease in average
balance of interest-bearing debts.
PROVISION FOR INCOME TAXES
Provision for income taxes for the quarters ended September 30, 2003 and 2002
are $67,000 and $1,000, respectively.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to the
quarter ended September 30, 2003 and 2002 were $0.3 million.
SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2002
NET SALES
Net sales increased by $3.4 million, or 39%, to $12.1 million in the six months
ended September 30, 2003 from $8.7 million in the six months ended September 30,
2002 primarily due to an increase in license sales.
17
COST OF SALES/GROSS PROFIT
Cost of sales decreased by $1.0 million, or 27%, to $2.7 million in the six
months ended September 30, 2003 from $3.7 million in the six months ended
September 30, 2002. Gross profit as a percentage of net sales increased to 78%
in the six ended September 30, 2003 from 58% in the prior comparative period.
The decrease in cost of sales and the increase in gross profit as a percentage
of net sales were due to the increase in high-margin license revenues coupled
with the decrease in low margin software modification and professional services.
During the six months ended September 30, 2003 and 2002, application technology
license revenues represented 44% and 14% of net sales, respectively, and
modification and professional services revenues represented 25% and 48% of net
sales, respectively.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $1.5 million, or 68%, to $0.7
million in the six months ended September 30, 2003 from $2.2 million in the six
months ended September 30, 2002. The decrease is primarily due to capitalizing
$1.8 million development costs for new products. We've made significant
investments in our new products in the first six months of the current quarter.
We anticipate these new products will be launched during the second half of the
fiscal 2004. In the prior comparative period, research and development efforts
was spent on enhancing existing products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.3 million, or 14%, to $1.8 million
in the six months ended September 30, 2003 from $2.1 million in the six months
ended September 30, 2002. The decrease is mainly due to a decrease in
amortization of purchased and capitalized software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $2.0 million, or 53%,
to $5.8 million in the six months ended September 30, 2003 from $3.8 million in
the six months ended September 30, 2002. The first six months of fiscal 2003
included a $0.6 million reversal of excess amount accrued in prior periods for a
litigation settlement. Additional, much of the first six months of fiscal 2004
was spent building the infrastructure and developing our sales organization.
OPERATING INCOME
Operating income from continuing operations, which included depreciation and
amortization expense, was $1.2 million for the six months ended September 30,
2003, compared to a loss from continuing operations of $3.1 million for the
comparable period in prior year. Earnings from continuing operations before
interest, provision for income taxes, depreciation, amortization and change in
accounting principle was $2.9 million for the six months ended September 30,
2003 compared to a loss of $1.0 million for the six months ended September 30,
2002.
INTEREST EXPENSE
Interest expense decreased by $0.2 million, or 29%, to $0.5 million in the six
months ended September 30, 2003 from $0.7 million in the six months ended
September 30, 2002. The decrease is due to $4.5 million decrease in average
balance of interest-bearing debts.
PROVISION FOR INCOME TAXES
Provision for income taxes represents $0.6 million income tax refund and $0.1
million provision for state income taxes in the six months ended September 30,
2003. No provision was made at in the six months ended September 30, 2002 due to
the availability of tax losses. The income tax refund of $0.6 million at
September 30, 2003 results from amending prior years' income tax returns to
carry back net operating losses incurred in the past 2 years.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $0.6 million as the
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002. We also evaluated the remaining useful lives of our intangibles in the
quarter ended June 30, 2002 and no adjustments have been made to the useful
lives of our intangible assets. There have been no such charges in the quarter
ended June 30, 2003.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to the six
months ended September 30, 2003 and 2002 were $0.6 million and $0.5 million,
respectivley.
18
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the six months ended September 30, 2003, we financed our operations using
cash on hand, internally generated cash, proceeds from the sale of common stock
and proceeds from sale of convertible debentures. At September 30, 2003 and
March 31, 2003, we had cash of $1.1 million and $1.3 million, respectively.
Operating activities used cash of $5.6 million in the six months ended September
30, 2003 and $1.9 million in the six months ended September 30, 2002. Cash used
for operating activities in the six months ended September 30, 2003 resulted
from $4.5 million increase in accounts receivable and other receivables and $3.9
million decrease in accounts payable and accrued expenses; offset in part by
$1.0 million net income and $1.8 million of non-cash depreciation and
amortization.
Investing activities used cash of $2.5 million in the six months ended September
30, 2003 and $0.3 million in the six months ended September 30, 2002. Cash used
for investing activities in the current quarter was primarily for capitalization
of $2.2 million software development costs.
Financing activities provided cash of $7.8 million and $1.0 million in the six
months ended September 30, 2003 and 2002, respectively. The 2004 financing
activities included net proceeds of $7.2 million from the sale of common stock
and $0.7 million from the issuance of convertible debentures.
Accounts receivable increased to $8.5 million at September 30, 2003 from $4.0
million at March 31, 2003. The increase is primarily due to $3.9 million in
current receivable from new sales.
We believe that our cash and cash equivalent and funds generated from operations
will provide adequate liquidity to meet our normal operating requirements for at
least the next twelve months.
FINANCING TRANSACTIONS
In June 2003, we entered into an agreement with various institutional investors
("June 2003 Institutional Investors") for the sale to these investors of
5,275,000 shares of common stock at a per share price of $1.50 for an aggregate
purchase price of $7.9 million. Pursuant to a registration rights agreement, we
filed a separate registration statement respecting their shares which was
declared effective on September 26, 2003 by the SEC.
In connection with this financing, we paid Roth Capital Partners, LLC, as
placement agent, cash compensation of 8% of the proceeds and issued a warrant to
purchase 527,500 shares of common stock at an exercise price of $1.65 per share.
We also issued warrants to purchase 375,000 shares of common stock at an
exercise price of $1.65 to certain holders of our 9% convertible debentures in
order to obtain their requisite consents and waivers of rights they possessed to
participate in the financing.
On November 7, 2003, we entered into an agreement with various institutional
investors ("November 2003 Institutional Investors") for the sale of 3,180,645
shares of common stock at a price of $1.55 per share for an aggregate purchase
price of $4.9 million. We also granted the November 2003 Institutional Investors
registration rights under a registration rights agreement in which we agree to
file a registration statement with the Securities and Exchange Commission for
the resale of all shares sold these investors. If the registration statement is
not filed by December 7, 2003, we will be obligated to pay on December 7, 2003,
and each monthly anniversary until the registration statement is filed, an
amount in cash, as liquidated damages, equal to 2.0% of the purchase price paid
by the November 2003 Institutional Investors.
In connection with this financing, we paid Roth Capital Partners, LLC ("Roth
Capital"), as placement agent, a compensation of $179,000 in cash and 115,226
shares of our common stock and issued a five-year warrant to purchase 282,065
shares of our common stock at an exercise price of $1.71 per share. Roth Capital
was granted the registration rights similar to those granted to the November
2003 Institutional Investors.
INDEBTEDNESS
UNION BANK
Pursuant to the Discounted Loan Payoff Agreement dated March 31, 2003, we issued
to Union Bank of California a $500,000 unsecured, non-interest bearing
convertible note payable in either cash or shares of common stock, at our
option. If we elect to pay the principal amount or any portion thereof in shares
of common stock, the shares will be computed on a price per share of 80% of the
average share closing price of our common stock for the ten trading day period
immediately preceding payoff date. The maturity date is March 31, 2004. As of
September 30, 2003, the bank had assigned the right of this note to Roth Capital
Partners, LLC.
19
NATIONAL AUSTRALIA BANK LIMITED
We decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was however subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to the entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. At June 30, 2002, we have accrued $187,000 as the
maximum amount of our potential exposure. The receiver has also claimed that we
are obligated to it for inter-company balances of $636,000, but we do not
believe any amounts are owed to the receiver, who has not as of the date of this
report acknowledged the monthly corporate overhead recovery fees and other
amounts charged by us to the Australian subsidiary offsetting the amount claimed
to be due.
ICM ASSET MANAGEMENT, INC.
During the quarter ended June 30, 2001, we entered into Subscription Agreements
with a limited number of accredited investors related to existing stockholders
for gross proceeds of $1.3 million. Each unit consisted of a convertible
promissory note to purchase 250 shares of our common stock for each $1,000
borrowed by us. The holders of the notes had the option to convert the unpaid
principal and interest to common stock at any time at a conversion price of
$0.60 per share. The notes matured on September 30, 2003 and earned interest at
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest, to be paid at maturity. We did not have a right to prepay
the notes. In September 2003, the investors converted the outstanding balance of
principal and accrued interest totaling $1.4 million into 2,287,653 shares of
our common stock.
We also issued to these accredited investors warrants to purchase an aggregate
of 1,600,000 shares at $0.60 per share, expiring July 19, 2007. The warrants are
not callable by us. No warrants have been exercised as of October 31, 2003.
We filed a registration statement for the resale of all shares held by or
obtainable by these and other investors. The registration statement was declared
effective by the SEC on July 18, 2003.
TOYS "R" US
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million for the
purchase of a non-recourse convertible note and a warrant to purchase 2,500,000
common shares. The purchase price was received in installments through September
27, 2002. The note is non-interest bearing, and the face amount was either
convertible into shares of our stock valued at $0.553 per share or payable in
cash at our option, at the end of the term. In November 2002, the Board decided
that this note will be converted solely for equity and will not be repaid in
cash. The note is due May 29, 2009, or if earlier than that date, three years
after the completion of the development project contemplated in the development
agreement between us and Toys entered into at the same time. We do not have the
right to prepay the convertible note before the due date. The face amount of the
note is 16% of the $1.3 million purchase price as of May 29, 2002, and increases
by 4% of the $1.3 million purchase price on the last day of each succeeding
month, until February 28, 2004, when the face amount is the full $1.3 million
purchase price. The face amount will cease to increase if Toys terminates its
development agreement with us for a reason other than our breach. The face
amount will be zero if we terminate the development agreement due to an uncured
breach by Toys of the development agreement. We have received all of the $1.3
million proceeds.
The warrant entitles Toys to purchase up to 2,500,000 of our common shares at
$0.553 per share. The warrant was initially vested as to 400,000 shares as of
May 29, 2002, and vests at the rate of 100,000 shares per month until February
28, 2004. The warrant will cease to vest if Toys terminates its development
agreement with us for a reason other than our breach. The warrant will become
entirely non-exercisable if we terminate the development agreement due to an
uncured breach by Toys of the development agreement. Toys may elect a "cashless
exercise" where a portion of the warrant is surrendered to pay the exercise
price. As of October 31, 2003, 2.1 million shares of the warrant are
exercisable. No warrants have currently been exercised.
The note conversion price and the warrant exercise price are each subject to a
10% reduction in the event of an uncured breach by us of certain covenants to
Toys. These covenants do not include financial covenants. Conversion of the note
and exercise of the warrant each require 75 days advance notice. As a result,
under the rules of the SEC, Toys will not be considered the beneficial owner of
20
the common shares into which the note is convertible and the warrant is
exercisable until 15 days after it has given notice of conversion or exercise,
and then only to the extent of such noticed conversion or exercise. We also
granted Toys certain registration rights for the common shares into which the
note is convertible and the warrant is exercisable, including the right to
demand registration on Form S-3 if such form is available to us, and the right
to include shares into which the note is convertible and the warrant is
exercisable in other registration statements we propose to file.
OMICRON/MIDSUMMER/ISLANDIA
On March 31, 2003, we entered into a securities purchase agreement with
Midsummer Investment, Ltd. ("Midsummer"), Omicron Master Trust ("Omicron"), and
Islandia, L.P. ("Islandia") for the sale to these investors of debentures,
convertible into shares of our common stock at a conversion price equal to
$1.0236 per share, for an aggregate amount of $3.5 million. The investors also
received a five-year warrant to purchase up to, in the aggregate, 1,572,858
shares of common stock with an exercise price equal to $1.0236 per share. The
debentures would have been matured in May 2005 and bore an interest rate of 9%
per annum. Interest was payable on a quarterly basis commencing on June 1, 2003,
in cash or shares of common stock, at our option. If certain conditions were
met, we had the right, but not the obligation, to redeem the debentures at 110%
of their face value, plus accrued interest. Commencing in February 2004, we
would have been obligated to redeem $219,000 per month of the debentures.
Furthermore, if the daily volume weighted average price of our common stock on
the American Stock Exchange exceeds $1.0236 by more than 200% for 15 consecutive
trading days, we will have the option to cause the investors to convert their
debentures into common stock. In July 2003, Omicron converted $500,000 of their
debenture into 488,472 shares of our common stock. In August 2003, the daily
volume weighted average price of our common stock on the American Stock Exchange
exceeded $1.02 by more than 200% for 15 consecutive trading days; therefore, we
exercised the option to cause the investors to convert their debentures into
common stock. As a result, the investors converted the remaining balance of
their debentures into an aggregate of 2,930,832 shares of our common stock as of
September 30, 2003.
Pursuant to the registration rights agreement, we filed a registration statement
covering 130% of the common stock issuable upon the conversion of the debentures
and the warrants. The registration statement was declared effective July 18,
2003.
Additional debentures, aggregating up to $2 million, will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of October 31,
2003.
MBSJ INVESTORS, LLC
On April 1, 2003, we entered into a securities purchase agreement with MBSJ
Investors, LLC ("MBSJ") for the sale to MBSJ of a 9% debenture, convertible to
shares of our common stock at a conversion price of $1.0236, for $400,000. This
debenture was accompanied by a five-year warrant to purchase 156,311 shares of
common stock with an exercise price of $1.0236 per share. Interest was due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we would have been obligated to redeem $20,000
per month of the debenture. The debenture would have matured in October 2005.
This debenture was accompanied by a five-year warrant to purchase 156,311 shares
of our common stock with an exercise price of $1.0236 per share. MBSJ was also
granted registration rights under a registration rights agreement, and certain
other rights similar to those granted to Midsummer, Omicron and Islandia. In
August 2003, the daily volume weighted average price of our common stock on the
American Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive
trading days; therefore, we exercised the option to cause the investor to
convert its debenture into common stock. As a result, the investor converted its
debenture into 390,777 shares of our common stock as of September 2003.
CRESTVIEW
On May 6, 2003, we entered into an agreement with Crestview Capital Fund I,
L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund, Inc.
(collectively, the "Crestview Investors") for the sale to the Crestview
Investors of 9% debentures, convertible into shares of our common stock at a
conversion price of $1.0236 for $300,000. These debentures were accompanied by
five-year warrants to purchase an aggregate of 101,112 shares of common stock
with an exercise price of $1.0236 per share. Interest was due on a quarterly
basis, payable in cash or shares of common stock at our option. Commencing on
February 1, 2004, we would have been obligated to redeem $19,000 per month of
the debentures. The debentures would have matured in May 2005. These debentures
were accompanied by five-year warrants to purchase an aggregate of 101,112
21
shares of common stock with an exercise price of $1.0236 per share. The
Crestview Investors were also granted registration rights under a registration
rights agreement, and certain other rights similar to those granted to
Midsummer, Omnicron and Islandia. In August 2003, the daily volume weighted
average price of our common stock on the American Stock Exchange exceeded $1.02
by more than 200% for 15 consecutive trading days; therefore, we exercised the
option to cause the investor to convert its debenture into common stock. As a
result, the investors converted their debentures into 293,082 shares of our
common stock as of September 30, 2003.
Additional debentures aggregating up to $300,000 will be sold to these investors
in a second closing, if within one year after the date of first sale of
debentures there occurs a period of 15 consecutive trading days during which the
daily volume weighted average closing price of our common stock is maintained at
a price at or above $1.75 per share, subject to certain conditions. The shares
of common stock underlying these debentures and warrants were not included in
the registration statement declared effective in July 2003. Neither the
investors nor we have executed the second closing as of October 31, 2003.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including purchase
commitments at September 30, 2003, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
For the fiscal years ending March 31,
-------------------------------------
Contractual Cash Obligations 2004 2005 2006 2007 Thereafter
---------------------------- ---- ---- ---- ---- ----------
(in thousands)
Operating leases $ 445 $ 867 $ 360 $ 107 $ 13
Purchases 667 394
Payables aged over 90 days 398
------- ------- ------- ------- -------
Total contractual cash obligations $1,510 $1,261 $ 360 $ 107 $ 13
======= ======= ======= ======= =======
For the fiscal years ending March 31,
-------------------------------------
Other Commercial Commitments 2004 2005 2006 2007 Thereafter
---------------------------- ---- ---- ---- ---- ----------
(in thousands)
Guarantees $ 187
---------
Total commercial commitments $ 187
=========
BUSINESS RISKS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN OUR FORM 10-K/A FOR THE YEAR ENDED MARCH 31, 2003 AND
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003. INVESTING IN OUR COMMON
STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THOSE DESCRIBED BELOW,
RISKS AND UNCERTAINTIES THAT ARE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY
BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS OCCUR, OUR BUSINESS COULD BE HARMED, THE PRICE OF OUR COMMON
STOCK COULD DECLINE AND OUR INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
SEE THE NOTE REGARDING FORWARD-LOOKING STATEMENTS INCLUDED AT THE BEGINNING OF
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS IN THIS FORM 10-Q.
OUR SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS MAKES IT DIFFICULT
FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of sales cycles in our business makes it difficult to evaluate the
effectiveness of our sales strategies. Our sales cycles historically has ranged
from three to twelve months, which has caused significant fluctuations in
revenues from period to period. Due to our difficulties in completing new
application software sales in recent periods and our refocused sales strategy,
it is difficult to predict revenues and properly budget expenses.
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
22
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND THEY MAY
CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the past and
may fluctuate in the future as a result of several factors, many of which are
outside of our control. If revenue declines in a quarter, our operating results
will be adversely affected because many of our expenses are relatively fixed. In
particular, sales and marketing, application development and general and
administrative expenses do not change significantly with variations in revenue
in a quarter. It is likely that in some future quarter our net sales or
operating results will be below the expectations of public market analysts or
investors. If that happens, our stock price will likely decline.
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAKES IT DIFFICULT TO PREDICT
FUTURE RESULTS.
Factors outside our control that could cause our revenue to fluctuate
significantly from period to period include:
o the size and timing of individual orders, particularly with
respect to our larger customers;
o general health of the retail industry and the overall economy;
o technological changes in platforms supporting our software
products; and
o market acceptance of new applications and related services.
In particular, we usually deliver our software applications when contracts are
signed, so order backlog at the beginning of any quarter may represent only a
portion of that quarter's expected revenues. As a result, application license
revenues in any quarter are substantially dependent on orders booked and
delivered in that quarter, and this makes it difficult for us to accurately
predict revenues. We have experienced, and we expect to continue to experience,
quarters or periods where individual application license or services orders are
significantly larger than our typical application license or service orders.
Because of the nature of our offerings, we may get one or more large orders in
one quarter from a customer and then no orders the next quarter.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD, WHICH COULD AFFECT QUARTERLY
RESULTS AND OUR STOCK PRICE.
If we incur additional expenses in a quarter in which we do not experience
increased revenue, our results of operations would be adversely affected and we
may incur losses for that quarter. Factors that could cause our expenses to
fluctuate from period to period include:
o the extent of marketing and sales efforts necessary to promote
and sell our applications and services;
o the timing and extent of our development efforts; and
o the timing of personnel hiring.
IT IS DIFFICULT TO EVALUATE OUR PERFORMANCE BASED ON PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
The many factors, which can cause revenues and expenses to vary, make meaningful
period to period comparisons of our results difficult. We do not believe period
to period comparisons of our financial performance are necessarily meaningful,
and you cannot rely on them as an indication of our future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from October
through December of each year as a result of retailers' focus on the holiday
retail-shopping season. This can negatively affect revenues in our third fiscal
quarter and in other quarters, depending on our sales cycles.
WE MAY NEED TO RAISE CAPITAL TO GROW OUR BUSINESS. OBTAINING THIS CAPITAL COULD
IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise further capital to:
o support unanticipated capital requirements;
o take advantage of acquisition or expansion opportunities;
o continue our current development efforts;
o develop new applications or services; or
o address working capital needs.
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Our future capital requirements depend on many factors including our application
development, sales and marketing activities. We do not know whether additional
financing will be available when needed, or available on terms acceptable to us.
If we cannot raise needed funds for the above purposes on acceptable terms, we
may be forced to curtail some or all of the above activities and we may not be
able to grow our business or respond to competitive pressures or unanticipated
developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities or convertible debt securities, our stockholders may experience
substantial dilution and the new securities may have greater rights, preferences
or privileges than our existing common stock.
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other intangible
assets represent approximately 73% of our total assets as of September 30, 2003.
We may have to impair or write-off these assets, which will cause a charge to
earnings and could cause our stock price to decline. Any such impairment will
also reduce our assets, as well as the ratio of our assets to our liabilities.
These balance sheet effects could make it more difficult for us to obtain
capital, and could make the terms of capital we do obtain more unfavorable to
our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our applications
and services and our expenses, and foreign currency losses will negatively
affect profitability or increase losses. Approximately 8% and 12% of our net
sales were in the United Kingdom, in the six months ended September 30, 2003 and
2002, respectively. Many of our expenses related to foreign sales, such as
corporate level administrative overhead and development, are denominated in U.S.
dollars. When accounts receivable and accounts payable arising from
international sales and services are converted to U.S. dollars, the resulting
gain or loss contributes to fluctuations in our operating results. We do not
hedge against foreign currency exchange rate risks.
WE HAVE CUSTOMERS REPRESENTING SIGNIFICANT AMOUNTS OF OUR BUSINESS.
QQQ Systems Ltd. ("QQQ") accounted for 32% and 0% and Toys "R" Us, Inc. ("Toys")
accounted for 13% and 35% of our net sales for the six months ended September
30, 2003 and 2002, respectively. The software license sale to QQQ was a one-time
transaction. While we have a development agreement with Toys, this customer has
the right to terminate the agreement without cause with limited advance notice.
A reduction, delay or cancellation of orders from Toys would significantly
reduce our revenues and force us to substantially curtail operations. We cannot
provide any assurances that Toys or any of our current customers will continue
at current or historical levels or that we will be able to obtain orders from
new customers.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on Harvey Braun, our Chief Executive Officer and
Chairman of the Board, and Steven Beck, our President and Chief Operating
Officer. We do not have any written employment agreements with Mr. Braun or Mr.
Beck. We also believe our future success will depend largely upon our ability to
attract and retain highly-skilled software programmers, managers, and sales and
marketing personnel. Competition for personnel is intense, particularly in
international markets. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. We compete
against numerous companies, including larger, more established companies, for
our personnel. We may not be successful in attracting or retaining skilled
sales, technical and managerial personnel. The loss of key employees or our
inability to attract and retain other qualified employees could negatively
affect our financial performance and cause our stock price to decline.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES
HAVE BEEN AND MAY CONTINUE TO BE SLOW.
Our future growth is critically dependent on increased sales to the retail
industry. We derive the substantial majority of our revenues from the licensing
of software applications and the performance of related professional and
consulting services to the retail industry. Demand for our applications and
services could decline in the event of consolidation, instability or more
downturns in the retail industry. This decline would likely cause reduced sales
and could impair our ability to collect accounts receivable. The result would be
reduced earnings and weakened financial condition, each or both of which would
likely cause our stock price to decline.
24
The success of our customers is directly linked to economic conditions in the
retail industry, which in turn are subject to intense competitive pressures and
are affected by overall economic conditions. In addition, the retail industry
may be consolidating, and it is uncertain how consolidation will affect the
industry. The retail industry as a whole is currently experiencing increased
competition and weak economic conditions that could negatively impact the
industry and our customers' ability to pay for our products and services. Such
consolidation and weak economic conditions have in the past, and may in the
future, negatively impact our revenues, reduce the demand for our products and
may negatively impact our business, operating results and financial condition.
Weak economic conditions and the September 11, 2001 terrorist attack have
adversely impacted sales of our software applications, and we believe mid-tier
specialty retailers may be reluctant during the current economic slowdown to
make the substantial infrastructure investment that generally accompanies the
implementation of our software applications. The war in Iraq and the anticipated
burden of rebuilding that country's infrastructure has also led to some
uncertainty in the economic climate, which may adversely impact our business.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS.
We have in the past and may in the future be impacted by customer bankruptcies.
During weak economic conditions, such as those currently being experienced in
many geographic regions around the world, there is an increased risk that
certain of our customers will file bankruptcy. When our customers file
bankruptcy, we may be required to forego collection of pre-petition amounts
owed, and to repay amounts remitted to us during the 90-day preference period
preceding the filing. Accounts receivable balances related to pre-petition
amounts may in certain of these instances be large due to extended payment terms
for software license fees, and significant billings for consulting and
implementation services on large projects. The bankruptcy laws, as well as the
specific circumstances of each bankruptcy, may severely limit our ability to
collect pre-petition amounts, and may force us to disgorge payments made during
the 90-day preference period. We also face risk from international customers
which file for bankruptcy protection in foreign jurisdictions, in that the
application of foreign bankruptcy laws may be less certain or harder to predict.
Although we believe that we have sufficient reserves to cover anticipated
customer bankruptcies, there can be no assurance that such reserves will be
adequate, and if they are not adequate, our business, operating results and
financial condition would be adversely affected.
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We conduct business in an industry characterized by intense competition. Most of
our competitors are very large companies with an international presence. We must
also compete with smaller companies which have been able to develop strong local
or regional customer bases. Many of our competitors and potential competitors
are more established, benefit from greater name recognition and have
significantly greater resources than us. Our competitors may also have lower
cost structures and better access to the capital markets than us. As a result,
our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Our competitors may:
o introduce new technologies that render our existing or future
products obsolete, unmarketable or less competitive;
o make strategic acquisitions or establish cooperative
relationships among themselves or with other solution
providers, which would increase the ability of their products
to address the needs of our customers; and
o establish or strengthen cooperative relationships with our
current or future strategic partners, which would limit our
ability to compete through these channels.
We could be forced to reduce prices and suffer reduced margins and market share
due to increased competition from providers of offerings similar to, or
competitive with, our applications, or from service providers that provide
services similar to our services. Competition could also render our technology
obsolete.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological change,
evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
25
The success of application enhancements and new applications depends on a
variety of factors, including technology selection and specification, timely and
efficient completion of design, and effective sales and marketing efforts. In
developing new applications and services, we may:
o fail to respond to technological changes in a timely or
cost-effective manner;
o encounter applications, capabilities or technologies developed
by others that render our applications and services obsolete
or non-competitive or that shorten the life cycles of our
existing applications and services;
o experience difficulties that could delay or prevent the
successful development, introduction and marketing of these
new applications and services; or
o fail to achieve market acceptance of our applications and
services.
The life cycles of our applications are difficult to estimate, particularly in
the emerging electronic commerce market. As a result, new applications and
enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our success and competitive position is dependent in part upon our ability to
develop and maintain the proprietary aspects of our intellectual property. Our
intellectual property includes our trademarks, trade secrets, copyrights and
other proprietary information. Our efforts to protect our intellectual property
may not be successful. Effective copyright and trade secret protection may be
unavailable or limited in some foreign countries. We hold no patents.
Consequently, others may develop, market and sell applications substantially
equivalent to ours or utilize technologies similar to those used by us, so long
as they do not directly copy our applications or otherwise infringe our
intellectual property rights.
We may find it necessary to bring claims or litigation against third parties for
infringement of our proprietary rights or to protect our trade secrets. These
actions would likely be costly and divert management resources. These actions
could also result in counterclaims challenging the validity of our proprietary
rights or alleging infringement on our part. The ultimate outcome of any
litigation will be difficult to predict.
OUR APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to and defending claims related to our intellectual property rights,
even ones without merit, can be time consuming and expensive and can divert
management's attention from other business matters. In addition, these actions
could cause application delivery delays or require us to enter into royalty or
license agreements. Royalty or license agreements, if required, may not be
available on terms acceptable to us, if they are available at all. Any or all of
these outcomes could have a material adverse effect on our business, operating
results and financial condition.
DEVELOPMENT AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources necessary
to develop and market our offerings to their target markets, our business
strategy substantially depends on our strategic relationships. While some of
these relationships are governed by contracts, most are non-exclusive and all
may be terminated on short notice by either party. If these relationships
terminate or fail to deliver the intended benefits, our development and
marketing efforts will be impaired and our revenues may decline. We may not be
able to enter into new strategic relationships, which could put us at a
disadvantage to those of our competitors, which do successfully exploit
strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
26
Substantially all of our primary computer and telecommunications systems are
located in two geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business interruption
insurance may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product liability or
other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our applications are highly complex and sophisticated and they may occasionally
contain design defects or software errors that could be difficult to detect and
correct. In addition, implementation of our applications may involve
customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
We are not currently aware of any defects in our applications that might give
rise to future lawsuits. However, errors or integration problems may be
discovered in the future. Such defects, errors or difficulties could result in
loss of sales, delays in or elimination of market acceptance, damage to our
brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing costs. In
addition, third-party products, upon which our applications are dependent, may
contain defects which could reduce or undermine entirely the performance of our
applications.
Our customers typically use our applications to perform mission-critical
functions. As a result, the defects and problems discussed above could result in
significant financial or other damage to our customers. Although our sales
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims, we do not know if these
limitations of liability are enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
applications or the performance of our services. Our product liability insurance
may not cover all claims brought against us.
SOFTLINE LIMITED HAS THE RIGHT TO ACQUIRE A CONTROLLING PERCENTAGE OF OUR COMMON
STOCK, SO WE MAY BE EFFECTIVELY CONTROLLED BY SOFTLINE, AND OUR OTHER
STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING.
Softline Limited beneficially owns approximately 49% of our outstanding common
stock, including shares Softline has the right to acquire upon conversion of its
Series A Convertible Preferred Stock. Ivan M. Epstein, Softline's Chief
Executive Officer, and Robert P. Wilkie, Softline's Chief Financial Officer,
serve on our board of directors. If Softline converts its Series A Preferred
Stock, it may have effective control over all matters affecting us, including:
o the election of all of our directors;
o the allocation of business opportunities that may be suitable
for Softline and us;
o any determinations with respect to mergers or other business
combinations involving us;
o the acquisition or disposition of assets or businesses by us;
o debt and equity financing, including future issuance of our
common stock or other securities;
o amendments to our charter documents;
o the payment of dividends on our common stock; and
o determinations with respect to our tax returns.
27
OUR BUSINESS MAY BE DISADVANTAGED OR HARMED IF SOFTLINE'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have and will continue to arise between Softline and us in
a number of areas relating to our past and ongoing relationships. Conflicts may
not be resolved in a manner that is favorable to us, and such conflicts may
result in harmful consequences to our business or prospects.
SOFTLINE'S INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY
TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Softline's potential voting control could discourage others from initiating any
potential merger, takeover or other change of control transaction that may
otherwise be beneficial to our business or our stockholders. As a result,
Softline's control could reduce the price that investors may be willing to pay
in the future for shares of our stock, or could prevent any party from
attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to continue to be,
volatile. When we or our competitors announce new customer orders or services,
change pricing policies, experience quarterly fluctuations in operating results,
announce strategic relationships or acquisitions, change earnings estimates,
experience government regulatory actions or suffer from generally adverse
economic conditions, our stock price could be affected. Some of the volatility
in our stock price may be unrelated to our performance. Recently, companies
similar to ours have experienced extreme price fluctuations, often for reasons
unrelated to their performance.
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common stock. We
anticipate that we will use our earnings and cash flow for repayment of
indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Softline is entitled
to dividends on its Series A Convertible Preferred Stock in preference and
priority to common stockholders. Future equity financing(s) may further restrict
our ability to pay dividends.
THE TERMS OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock in one or
more series. We issued 141,000 shares of Series A Convertible Preferred Stock to
Softline in May 2002. Our board of directors may determine the terms of
subsequent series of preferred stock without further action by our stockholders.
If we issue additional preferred stock, it could affect your rights or reduce
the value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. We are actively seeking capital, and some of the
arrangements we are considering may involve the issuance of preferred stock.
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The Exchange has
published certain guidelines it uses in determining whether a security warrants
continued listing. These guidelines include financial, market capitalization and
other criteria, and as a result of our financial condition or other factors, the
American Stock Exchange could in the future determine that our stock does not
merit continued listing. If our stock were delisted from the American Stock
Exchange, the ability of our stockholders to sell our common stock could become
limited, and we would lose the advantage of some state and federal securities
regulations imposing lower regulatory burdens on exchange-traded issuers.
DELAWARE LAW AND SOME PROVISIONS OF OUR CHARTER AND BYLAWS MAY ADVERSELY AFFECT
THE PRICE OF YOUR STOCK.
Special meetings of our stockholders may be called only by the Chairman of the
Board, the Chief Executive Officer or the Board of Directors. Stockholders have
no right to call a meeting. Stockholders must also comply with advance notice
provisions in our bylaws in order to nominate directors or propose matters for
stockholder action. These provisions of our charter documents, as well as
certain provisions of Delaware law, could delay or make more difficult certain
types of transactions involving a change in control of the Company or our
management. Delaware law also contains provisions that could delay or make more
difficult change in control transactions. As a result, the price of our common
stock may be adversely affected.
28
SHARES ISSUED UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND CONVERTIBLE
NOTES COULD DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our employees and
certain other persons at various prices, some of which are or may in the future
have exercise prices at below the market price of our stock. As of October 31,
2003, we have outstanding options and warrants for 16,865,219 shares. Of these
options and warrants, 1,048,005 have exercise prices above the recent market
price of $2.06 per share (as of October 31, 2003), and 15,817,214 have exercise
prices at below that recent market price. If exercised, these options and
warrants will cause immediate and possibly substantial dilution to our
stockholders.
Our existing stock option plan currently has approximately 2,108,005 shares
available for issuance as of October 31, 2003. Future options issued under the
plan may have further dilutive effects.
We issued to Toys "R" Us, Inc. our major customer, a note convertible into
2,500,000 shares of common stock. This note has a conversion price of $0.553.
This note will have a dilutive effect on stockholders if converted.
We issued to Union Bank of California, N.A. an unsecured note that is
convertible into shares of common stock at a price per share of eighty percent
(80%) of the average share closing price of our common stock for the ten trading
day period immediately preceding the payoff date. This note will have a dilutive
effect on stockholders if converted.
Sales of shares pursuant to exercisable options, warrants, convertible notes,
and convertible debentures could lead to subsequent sales of the shares in the
public market, and could depress the market price of our stock by creating an
excess in supply of shares for sale. Issuance of these shares and sale of these
shares in the public market could also impair our ability to raise capital by
selling equity securities.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risks, which include changes in interest rates, changes in foreign
currency exchange rate as measured against the U.S. dollar and changes in the
value of stock of a publicly traded company, which secures a promissory note we
hold.
INTEREST RATE RISK
We do not have debt or borrowings with variable rate term.
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe. Sales
are typically denominated in the local foreign currency, which creates exposures
to changes in exchange rates. These changes in the foreign currency exchange
rates as measured against the U.S. dollar may positively or negatively affect
our sales, gross margins and retained earnings. We attempt to minimize currency
exposure risk through decentralized sales, development, marketing and support
operations, in which substantially all costs are local-currency based. There can
be no assurance that such an approach will be successful, especially in the
event of a significant and sudden decline in the value of the foreign currency.
We do not hedge against foreign currency risk. Approximately 7% and 15% of our
total net sales were denominated in currencies other than the U.S. dollar for
the three months ended September 30, 2003 and 2002, respectively. Approximately
8% and 12% of our total net sales were denominated in currencies other than the
U.S. dollar for the six months ended September 30, 2003.
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 4. - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation of
our disclosure controls and procedures, as such term is defined under Rule
13a-14 (c) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of a date (the "Evaluation Date") within 90 days of the
filing date of this Quarterly Report on Form 10-Q, our principal executive
officer and finanical and accounting officer have concluded that our disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal
controls, as such term is defined under Section 13 (b) of the Exchange Act, or
to our knowledge, in other factors that could significantly affect these
controls subsequent to the Evaluation Date.
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PART II. - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. This dispute was heard before an arbitrator during the week ended
October 3, 2004 and a decision from the arbitrator should be forthcoming.
Due to the declining performance of our Australian subsidiary, we decided in the
third quarter of fiscal 2002 to sell certain assets of our Australian subsidiary
to the former management of such subsidiary, and then cease Australian
operations. Such sale was, however, subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to an entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have reserved $187,000 as our potential exposure. The
receiver has also claimed that we are obligated to it for inter-company balances
of $636,000, but we do not believe any amounts are owed to the receiver, who has
not as of the date of this report acknowledged the monthly corporate overhead
recovery fees and other amounts charged by us to the Australian subsidiary
offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against us with the Department
of Fair Employment and Housing, alleging harassment and sexual orientation
discrimination. We have responded appropriately to both the wage claim and the
discrimination allegations, which we believe lack merit based on present
information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claimed damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertained to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. The parties settled this matter in September 2003 and the terms of the
settlement are covered by a confidentiality agreement.
In mid-2002, we were the subject of an adverse judgment entered against us in
favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. A hearing on Sabica's and Island Pacific's motion to
quash occurred on May 22, 2003 which was subsequently denied.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
30
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2003, we issued 75,000 shares of common
stock to an employee in lieu of cash payments for commissions earned in prior
periods, valued at $75,000.
The foregoing securities were offered and sold without registration under the
Securities Act of 1933 to sophisticated investors who had access to all
information which would have been in a registration statement, in reliance upon
the exemption provided by Section 4(2) under such Act and Regulation D
thereunder.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 9, 2003, we held a special meeting of stockholders. All 32,577,343
shares were represented at the meeting in person or by proxy. The following
matters were considered and approved:
o Ratification of the sale and issuance of up to $6.5 million of
9% convertible debentures and accompanying warrants to
purchase shares of common stock to certain investors. The
measure passed with 21,475,900 votes for, 482,980 votes
against, 11,835 abstained and 10,606,628 broker non-votes.
o Change of our name from "SVI Solutions, Inc." to "Island
Pacific, Inc." The measure passed with 32,508,306 votes for,
56,072 votes against, 12,965 abstained and no broker
non-votes.
o Amendment and restatement of our Restated Certificate of
Incorporation to reflect the removal of Article XII, which
restricts the shareholders' ability to take actions by written
consent. The measure passed with 21,763,166 votes for, 82,572
votes against, 124,977 abstained and 10,606,628 broker
non-votes.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Business Sale Agreement dated May 3, 2002 among the receivers and
managers of the assets of SVI Retail (Pty) Limited and QQQ Systems PTY
Limited, incorporated by reference to exhibit 2.3 to the Company's Form
10-K for the fiscal year ended March 31, 2002.
2.2 Securities Purchase Agreement dated March 31, 2003 by and among the
Company, Midsummer Investment, Ltd., Omicron Master Trust, and
Islandia, L.P., incorporated by reference to exhibit 2.1 to the
Company's Form 8-K filed April 15, 2003
2.3 Securities Purchase Agreement dated April 1, 2003 by and among the
Company and MBSJ Investors, LLC, incorporated by reference to exhibit
2.2 to the Company's Form 8-K filed on April 15, 2003.
2.4 Agreement dated May 6, 2003 by and among the Company, Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital
Offshore Fund, Inc., incorporated by reference to exhibit 2.12 to
Company's Form S-1 filed May 12, 2003.
2.5 Securities Purchase Agreement dated June 27, 2003 by and among the
Company and the purchasers named therein, incorporated by reference to
exhibit 2.1 to the Company's Form 8-K filed on July 2, 2003.
2.6 Securities Purchase Agreement dated November 7, 2003 by and among the
Company and the purchasers named therein, incorporated by reference to
exhibit 2.1 to the Company's Form 8-K filed on November 12, 2003.
3.1 Amended and Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's 8-K filed on July 15, 2003.
3.2 Certificate of Designation, incorporated by reference to exhibit 4.1 of
the Company's Form 8-K filed May 16, 2002.
4.1 Registration Rights Agreement dated as of March 31, 2003 by and among
the Company, Midsummer Investment, Ltd., Omicron Master Trust, and
Islandia, L.P., incorporated by reference to exhibit 4.1 to the
Company's Form 8-K filed April 15, 2003.
4.2 Registration Rights Agreement dated as of April 1, 2003 between the
Company and MBSJ Investors LLC., incorporated by reference to exhibit
4.2 to the Company's Form 8-K filed April 15, 2003.
4.3 Registration Rights Agreement dated June 27, 2003 by and among the
Company and the parties named therein, incorporated by reference to
exhibit 4.1 to the Company's Form 8-K filed on July 2, 2003.
4.4 Registration Rights Agreement dated November 7, 2003 by and among the
Company and the parties named therein, incorporated by reference to
exhibit 4.1 to the Company's Form 8-K filed on November 12, 2003.
31
10.1 Discounted Loan Payoff Agreement dated March 31, 2003 by and amount
Union Bank of California, N.A., SVI Solutions, Inc., SVI Retail, Inc.,
Sabica Ventures, Inc. and SVI Training Products, Inc., incorporated by
reference to exhibit 10.3 to the Company's Form 8-K filed on April 15,
2003.
10.2 Unsecured Promissory Note dated March 31, 2003 in favor of Union Bank
of California, N.A., incorporated by reference to exhibit 10.47 to the
Company's Form S-1 filed on May 12, 2003.
10.3 Amendment Agreement to between the Company, Koyah Leverage Partners,
Koyah Partners, L.P., Raven Partners, L.P., Nigel Davey, and Brian
Cathcart dated July 15, 2002, incorporated by reference to exhibit
10.11 to the Company's Form 10-K for the fiscal year ended March 31,
2002.
10.4 First Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated December 5, 2002.Summary of loan
transactions between the Company and World Wide Business Centres,
incorporated by reference to exhibit 10.12 to the Company's Form 10-K
for the fiscal year ended March 31, 2002.
10.5 Second Amendment to Amendment Agreement between the Company,Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated March 14, 2003, incorporated by
reference to exhibit 10.29 to the Company's Form S-1 filed on May 12,
2003.
10.6 Third Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated March 28, 2003, incorporated by
reference to exhibit 10.30 to the Company's Form S-1 filed on May 12,
2003.
10.7 Fourth Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated April 3, 2003, incorporated by
reference to exhibit 10.31 to the Company's Form S-1 filed on May 12,
2003.
10.8 Fifth Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated June 27, 2003 , incorporated by
reference to exhibit 10.32 to the Company's Form S-3 filed on July 31,
2003.
10.9 Purchase Agreement between the Company and Toys "R" Us, Inc. dated May
29, 2002, incorporated by reference to exhibit 10.14 to the Company's
Form 10-K for the fiscal year ended March 31, 2002.
10.10 Convertible Note in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.15 to the Company's Form 10-K
for the fiscal year ended March 31, 2002.
10.11 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002, incorporated
by reference to exhibit 10.16 to the Company's Form 10-K for the fiscal
year ended March 31, 2002.
10.12 Development Agreement between the Company and Toys "R" Us, Inc. dated
May 29, 2002, incorporated by reference to exhibit 10.17 to the
Company's Form 10-K for the fiscal year ended March 31, 2002. Portions
of this exhibit (indicated by asterisks) have been omitted pursuant to
a request for confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.
99.1 Certification from Principal Executive Officer.
99.2 Certification from Principal Financial and Accounting Officer
(b) REPORTS ON FORM 8-K
On July 2, 2003, we filed a Form 8-K disclosing as Item 5 the sale of 5,275,000
shares of our common stock to a group of institutional investors.
On July 15, 2003, we filed a Form 8-K disclosing as Item 5 the name change to
Island Pacific, Inc.
On August 1, 2003, we filed a Form 8-K disclosing as Item 5 the appointment of
Harvey Braun, our Chief Executive Officer, to the position of Chairman of the
Board and Ran Furman to the position of Chief Financial Officer.
On August 13, 2003, we filed a Form 8-K disclosing as Item 9 our first quarter
financial results for the quarter ended June 30, 2003.
32
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Island Pacific, Inc.
Registrant
/S/ Ran Furman
-------------------------------------------
Date: November 12, 2003 Ran Furman
Chief Financial Officer
(Principal Financial and Accounting Officer)
Signing on behalf of the registrant
33
FORM 10-Q CERTIFICATIONS
I, Harvey Braun, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Island
Pacific, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2003
/s/ Harvey Braun
-----------------------------------------
Harvey Braun
Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
34
FORM 10-Q CERTIFICATIONS
I, Ran Furman, certify that:
5. I have reviewed this quarterly report on Form 10-Q of Island
Pacific, Inc.;
6. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
7. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
8. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
9. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
10. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2003
/s/ Ran Furman
-------------------------------------------
Ran Furman
Chief Financial Officer
(Principal Financial and Accounting Officer)
35
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 12, 2003
Island Pacific, Inc.
__________________________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Delaware
__________________________________________________________________________
(State or Other Jurisdiction of Incorporation)
0-23049 33-0896617
_____________________________ _________________________________
(Commission File Number) (IRS Employer Identification No.)
19800 MacArthur Boulevard, Suite 1200, Irvine, California 92612
________________________________________________________________________________
(Address of Principal Executive Offices) (Zip Code)
(949) 476-2212
__________________________________________________________________________
(Registrant's telephone number, including area code)
___________________________________________________________________________
(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS.
Island Pacific, Inc. ("Island Pacific") entered into a Securities
Purchase Agreement dated November 7, 2003 with a group of institutional and
accredited investors (collectively, the "Investors") for the sale by Island
Pacific to the Investors of up to 3,180,645 shares of common stock at a per
share price of $1.55, for an aggregate amount of up to $4,930,000. The
transaction was completed on November 7, 2003.
The Investors were given registration rights under a Registration
Rights Agreement requiring Island Pacific to file a registration statement
respecting the common stock within 30 days following the date of the purchase
agreement. If the registration statement covering the shares held by the
Investors is not filed within the timeframe specified in the Registration Rights
Agreement or declared effective within 90 days following the date of the
purchase agreement or upon the occurrence of certain other conditions, Island
Pacific will be obligated to pay liquidated damages to the Investors equal to
two percent (2%) per month of the amount invested by the Investors.
Roth Capital Partners, LLC ("Roth Capital") served as placement agent
in this transaction. It received fees of $178,600 in cash and 115,226 shares of
common stock, plus warrants to purchase 282,065 shares common stock at the
exercise price of $1.71 per share. Roth Capital was also granted registration
rights respecting these securities.
2
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
2.1 Securities Purchase Agreement dated as of November 7, 2003 by and among
Island Pacific and the Investors.
4.1 Registration Rights Agreement dated as of November 7, 2003 by and among
Island Pacific and the Investors.
99.1 Press Release dated November 10, 2003
3
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 hereto duly authorized.
Island Pacific, Inc.
Date: November 12, 2003 By: /s/ Ran Furman
-------------------------------
Name: Ran Furman
Title: Chief Financial Officer
4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 20, 2003
Island Pacific, Inc.
(formerly known as SVI Solutions, Inc.)
--------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
--------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-23049 33-0896617
----------------------------- ----------------------------
(Commission File Number) (IRS Employer Identification No.)
19800 MacArthur Boulevard, Suite 1200, Irvine, California 92612
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(949) 476-2212
--------------------------------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
1
ITEM 5. OTHER EVENTS.
On November 20, 2003, Island Pacific, Inc. ("Island Pacific") and Page
Digital Incorporated ("Page") executed an Agreement of Merger and Plan of
Reorganization ("Merger Agreement") pursuant to which Island Pacific will
acquire Page, a developer of multi-channel commerce software (the "Merger").
Under the terms of the Merger Agreement, Page will merge into IPI Acquisition,
Inc., a wholly owned subsidiary of Island Pacific. Island Pacific will pay the
stockholders of Page approximately $7,000,000 in consideration, consisting of
$2,000,000 in cash and 2,500,000 shares of common stock valued at $2.00 per
share. The Merger Agreement also provides for a potential adjustment to the
number of shares exchanged in the Merger if Island Pacific's common stock trades
below $1.50 for the 20 trading days immediately prior to the closing.
The consummation of the Merger is conditioned on the California
Commissioner of Corporations issuing a permit perfecting Island Pacific's
exemption under Section 3(a)(10) of the Securities Act of 1933 after a fairness
hearing, or, alternatively, the SEC declaring a Form S-4 registration statement
effective. Completion of the transaction is also subject to approval by the
stockholders of Page, as well as satisfaction of customary closing conditions.
The Merger is intended to be a tax-free reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended.
In connection with the Merger Agreement, Lawrence Page and David Joseph
(the "Stockholders") entered into a voting agreement with Island Pacific (the
"Voting Agreement"). Under the terms of the Voting Agreement the Stockholders
agreed, until the earlier of the consummation of the Merger, the termination of
the Voting Agreement or the termination of the Merger Agreement, to vote their
shares of Page common stock: (i) in favor of adoption and approval of the terms
of the Merger Agreement and the Merger; (ii) against any action, proposal,
transaction or agreement that would directly or indirectly result in a breach of
any covenant, representation, warranty or other obligation or agreement of Page
set forth in the Merger Agreement or of the Stockholders set forth in the Voting
Agreement; (iii) against any alternative proposal; (iv) against any change in a
majority of the members of the board of directors of Page; (v) against any
material change in the present capitalization of Page or any amendment of Page's
certificate of incorporation or bylaws; (vi) against any other material change
in Page's corporate structure or business, and (vii) against any other action or
proposal involving Page or any of its subsidiaries that is intended, or would
reasonably be expected, to prevent, impede, interfere with, delay, postpone or
adversely affect the Merger.
The foregoing descriptions of the Merger Agreement and Voting Agreement
do not purport to be complete and are qualified in their entirety by the terms
and conditions of the Merger Agreement and Voting Agreement attached hereto as
exhibits and incorporated herein by reference.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement of Merger and Plan or Reorganization by and among
Island Pacific, Inc., Page Digital Incorporated and IPI
Acquisition, Inc. dated November 20, 2003. *
99.1 Voting Agreement by and among Island Pacific, Inc., Lawrence
Page and David Joseph dated November 20, 2003.
*Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of
Regulation S-K, but a copy will be furnished to the Securities and Exchange
Commission upon request.
2
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 hereto duly authorized.
Island Pacific, Inc.
Date: November 24, 2003 By: /S/ Ran Furman
--------------------------
Name: Ran Furman
Title: Chief Financial Officer
3