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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
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[ ] TRANSACTION 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
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ISLAND PACIFIC, INC.
(Formerly, SVI Solutions, Inc.)
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(Exact Name of Registrant as specified in its charter)
DELAWARE 33-0896617
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
19800 MacArthur Boulevard, 12th Floor, Irvine, CA 92612
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 476-2212
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.0001 par value American Stock Exchange
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Securities registered under Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates as of September 30, 2002 was approximately $18.1
million, based on the closing sale price on the American Stock Exchange on
September 30, 2002. Excludes shares of common stock held by directors, officers
and each person who holds 10% or more of the registrant's common stock.
The number of shares outstanding of the registrant's Common Stock was 37,507,304
on July 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
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None
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TABLE OF CONTENTS
PART I
Item 1. Description of Business 2
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results 16
of Operations
Business Risks 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 44
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationship and Related Transactions 53
Item 14. Controls and Procedures 56
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 57
Signatures 61
Certifications 62
1
INTRODUCTORY NOTE
THE ANNUAL REPORT ON FORM 10-K/A 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 7,
"MANANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." STAKEHOLDERS, 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.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Island Pacific, Inc. is 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 SOLUTIONS
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 painful 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 excess 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.
2
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 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.
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 our Retail Management Solutions division. In April 2003, our Board of
Directors appointed Mr. Braun to the position of Chief Executive Officer and
director. In July 2003, Mr. Braun was appointed to the position of Chairman of
the Board following Barry Schechter's resignation. Mr. Schechter remains as our
consultant.
In October 2002, we appointed Steven Beck, a retail industry expert, to the
position of President of our Retail Management Solutions division. 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 IPI 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,
3
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.
In August 2003, Ran Furman was appointed to the position of Chief Financial
Officer.
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"), we
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"), we 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.
Under a 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 us
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.
4
As of April 1, 2002, we have refocused our operations into three strategic
business units each lead by experienced managers. The units are Retail
Management Solutions, Store Solutions, 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 its president, 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 an integrated 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 "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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the heading "Liquidity and Capital
Resources - Indebtedness -- Toys "R" Us' below.
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 our shareholders approved this change in July 2003.
In July 2003, our common stock began trading on the American Stock Exchange
under the new ticker symbol "IPI".
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 of $7,912,500. See "Financing Transactions -
Common Stock Institutional Investors" below.
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.
5
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.
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.
6
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.
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.
7
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), Island Pacific's 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.
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.
8
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
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 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, 12th Floor,
Irvine, California 92612, telephone number (949) 476-2212.
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
9
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
solution. 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.
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.
10
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 advantages 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.
EMPLOYEES
At July 31,2003, we had a total of 121 employees, 105 of which were based
in the United States and 16 of which were based in the United Kingdom. Of the
total, 12% were engaged in sales and marketing, 41% were engaged in application
technology development projects, 27% were engaged in professional services, and
20% were in general and administrative. We believe our relations with our
employees are good. We have never had a work stoppage and none of our employees
are subject to a collective bargaining agreement.
11
ITEM 2. DESCRIPTION OF PROPERTY
Our principal corporate headquarters consists of 26,521 square feet in a
building located at 19800 MacArthur Blvd, Irvine, California. This facility is
occupied under a lease that expires on June 30, 2005. The current monthly rent
is $56,148 plus common area maintenance charges. We also occupy operational and
administrative offices in La Jolla, California. The leases for these offices
expire in October 2005 and May 2007, respectively. The current monthly rents are
$6,989 and $5,870, respectively. 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 $44,425
(payable quarterly) plus common area maintenance charges and real estate taxes.
ITEM 3. 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. 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 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 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
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 commenced. However, SVI
Retail intends to defend vigorously the action and possibly file one or more
counter-claims. The U.S. District Court of Ohio has proper jurisdiction over us,
and a trial is scheduled for May 2004.
12
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 we 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") 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.
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.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange under the symbol
"IPI" and has traded on that exchange since July 8, 1998. 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 $ 0.66 $ 0.30
Second Quarter $ 1.30 $ 0.21
Third Quarter $ 1.25 $ 0.40
Fourth Quarter $ 1.17 $ 0.55
YEAR ENDED MARCH 31, 2002 HIGH LOW
First Quarter $ 1.60 $ 0.65
Second Quarter $ 1.04 $ 0.69
Third Quarter $ 1.01 $ 0.67
Fourth Quarter $ 0.92 $ 0.58
We have never declared any dividends. Our agreement with Union Bank
prohibited us from paying dividends while the term loan from Union Bank was
outstanding. This loan was paid off on March 31, 2003. We are also required to
pay dividends on our Series A Convertible Preferred Stock in preference and
priority to dividends on our common stock. We currently intend to retain any
13
future earnings to discharge indebtedness and finance the growth and development
of the business. We, therefore, do not anticipate paying any cash dividends in
the foreseeable future. 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.
As of July 31, 2003 there were 37,507,304 shares of our common stock
outstanding, which were held by approximately 142 stockholders of record.
During the quarter ended March 31, 2003, we issued the following securities
without registration under the Securities Act of 1933:
o 1,000,000 shares of common stock to Union Bank of California
pursuant to the Loan Discount Payout agreement, valued at
$788,000.
o 25,000 shares of common stock to a consultant for investor
relation services, valued at $8,000.
o 9% debentures to Midsummer Investment, Ltd., Omicron Master
Trust, and Islandia, L.P.., convertible into our common stock at
the conversion price of $1.0236, for the gross proceeds of $3.5
million. These debentures were accompanied by five-year warrants
to purchase an aggregate of 1,572,858 shares of common stock with
an exercise price of $1.0236.
o warrant to purchase 50,000 of our common stock at an exercise
price of $1.0236 to Century Capital as placement agent fee for
the sale of 9% convertible debentures.
The foregoing securities were offered and sold without registration under
the Securities Act 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 the Securities Act and Regulation D
thereunder, and an appropriate legend was placed on the shares.
In addition, we received 367,000 shares, valued at $264,000, from a former
consultant as a result of early termination of an investor relation service
agreement. These shares were canceled and retired in the fourth quarter of 2003.
Information concerning securities authorized for issuance under our equity
compensation plans is included below under the heading "Security Ownership of
Certain Beneficial Owners and Management."
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of, each of our last five fiscal years are derived from our consolidated
financial statements. The consolidated financial statements as of March 31,
2003, 2002, and 2001 and the independent auditors' report thereon, are included
elsewhere in this report.
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
15
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
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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. Up until April 1, 2003, we also developed and distributed 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 ("IPS") in April 1999 for $35
million cash.
IPS is one of the leading providers of retail management solution. 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.
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. We amortized capitalized
software and goodwill from both of these acquisitions using ten-year lives
through March 31, 2002. See "Significant Accounting Policies" below.
Effective April 1, 2002, we restructured our operations into three
strategic business units lead by experienced managers. The business units are
Retail Management Solutions, Store Solutions and SVI Training Products, Inc.
Effective April 1, 2003, we sold the SVI Training Products, Inc. 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 our sales mix in
the US and the UK to shift to lower margin services.
16
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):
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, 2003, 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 consider our business for the
fiscal year ended March 31, 2003 to have consisted of one reportable operating
segment. Effective April 1, 2003, we sold our training products subsidiary and
discontinued the training products line of business.
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 our Retail Management Solutions
division. In April 2003, our Board of Directors appointed Mr.
Braun to the position of Chief Executive Officer and director. In
July 2003, our Board of Directors appointed Mr. Braun to the
position of Chairman of the Board following Barry Schechter's
resignation. Mr. Schechter remains as our consultant.
o In October 2002, we appointed Steven Beck, a retail industry
expert, to the position of President of our Retail Management
Solutions division. In April 2003, our Board of Directors
appointed Mr. Beck to the position of President and Chief
Operating Officer and director.
o In August 2003, Ran Furman was appointed to the position of Chief
Financial Officer.
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., we 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.
17
o Under a marketing license agreement with KMG Solutions, we 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 us
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 have refocused our operations into three
strategic business units each lead by experienced managers. The
units are Retail Management Solutions, Store Solutions, 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 "Discontinued Operations" below.
18
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.
o In May 2002, we completed an integrated 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 the shareholders approved this
change in July 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 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 of $248,000 are shown as
discontinued operations, net of the loss on sale of Training Products with the
prior period results restated.
19
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 sale 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 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. For further
details, see "Liquidity and Capital Resources -- Contractual Obligations --
National Australia Bank" below.
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 at March 31, 2002 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.
20
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. 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.
21
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
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 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 literature 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.
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.
This statement is not likely to have any impact on our consolidated 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 Statement 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 will provide the
comparative interim pro forma disclosures required by SFAS 148 beginning in
first quarter ending June 30, 2003. SFAS 148 is not expected to have a material
impact on our financial statements.
22
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.
FINANCING TRANSACTIONS
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 into 1,470,590 option 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.
23
We agreed to register all of the shares sold under the purchase agreement
or 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.
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% after
maturity. 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 obtainable by these investors. In the event such registration
statement was not declared effective by the SEC by July 31, 2003, we would have
been obligated to issue five-year penalty warrants for the purchase of 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 was not effective, we would have been 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 was not effective, we would have been obligated to
issue additional penalty warrants for the purchase of 2.5% of the total number
of registrable securities at an exercise price of $0.60. No further penalty
warrants was accrued from our original registration obligation. The registration
statement was filed in May 2003 and was declared effective on July 18, 2003.
SOFTLINE
In May 2002, we entered into an integrated 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.
24
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.
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. We 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 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 May 31, 2003, 1.6 million shares of the warrant are exercisable.
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.
25
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. We may call the warrant
for $0.001 per share if our common stock trades above $2.00 per share for twenty
consecutive trading days and the warrant shares are registered with the SEC for
resale or otherwise salable by AMRO without restriction. AMRO will have thirty
days after the call to exercise the warrant, after which time the warrant will
expire.
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.
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 $3.5 million. The investors also
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. In July 2003,
Omicron converted $500,000 of its debentures into 488,472 shares of our common
stock.
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 $219,000 per month of the debentures. Furthermore, if the daily
volume weighed average price of the our common stock on the American Stock
Exchange exceeds $1.02 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 June 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 was not filed within these
timeframes or declared effective by June 29, 2003 following the closing date of
the debentures sold in this first phase, or within 120 days in the event of a
review by the Securities and Exchange Commission, we would have been 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. The registration
statement was filed in May 2003 and was declared effective on July 18, 2003.
26
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 filed in May 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 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
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 $19,000 per month of the debentures. The
debentures mature in May 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.
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 by July 31, 2003. If this registration statement is not declared
effective by the SEC by September 29, 2003, or upon the occurrence of certain
events, we will be obligated to pay a cash penalty equal to the rate of 2% per
month, until such event is cured.
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 Midsummer, Omicron, Islandia and
the Crestview Investors in order to obtain their requisite consents and waivers
of rights they possessed to participate in the financing.
27
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:
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)
========= ========= =========
28
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.
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.
29
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.
EXTRAORDINARY ITEM - GAIN ON DEBT FORGIVENESS
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement with
Union Bank of California (the "Bank"), our senior lender. Under this agreement,
we paid the Bank $2.8 million acquired from the sale of 9% convertible
debentures to certain investors. We also issued to the Bank one million shares
of our common stock and a $500,000 one-year unsecured, non-interest bearing
convertible note payable in either cash or stock, at our option. The cash
payment, shares and convertible note were accepted by the Bank in full
satisfaction of our debt to the Bank. The Bank also canceled the warrant to
purchase 1.5 million shares of our common stock and returned all collateral
held, including 10.7 million shares of our common stock pledged as security. In
connection with the settlement of the debt to the Bank, we reported an
extra-ordinary gain of $1.5 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The cumulative effect of accounting change in the fiscal year end March 31,
2003 was a non-cash, net-of-tax transitional goodwill impairment charge of $0.6
million which relates to the adoption of SFAS 142.
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.
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.
30
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.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
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.
31
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 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.
32
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
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.
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.
33
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 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 are nonetheless actively seeking 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.
BUSINESS RISKS
Investors should carefully consider the following risk factors and all
other information contained in this Form 10-K/A. 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 this Form
10-K/A.
WE INCURRED LOSSES FOR THE 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 three 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, 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 executive
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.
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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. Net sales for the fiscal year ended March 31, 2001 decreased 5%
compared to the fiscal year ended March 31, 2000. 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.
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;
35
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.
OUR DEBT COULD ADVERSELY AFFECT US.
As of July 31, 2003, our debt is as follows:
o $3.0 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. due in May 2005, 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.
36
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 $3.0 million and $300,000 convertible
debenture obligations due in full in May 2005, with monthly redemptions
commencing in February 2004, and our $400,000 convertible debenture obligations
due in full in October 2005, with monthly redemptions commencing in February
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.
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.
37
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 "R" Us, Inc. ("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 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.
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
38
implementation of our software applications. The recent 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. 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:
39
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.
40
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.
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 49.3% 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;
41
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."
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.
42
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. As of
July 31, 2003, we have outstanding options and warrants for 16,951,939 shares.
Of these options and warrants, 579,981 have exercise prices above the recent
market price of $3.40 per share (as of July 31, 2003), and 16,371,958 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 2,266,783 shares
available for issuance as of July 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 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
$3.40. 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 below the recent market price of $3.40.
These debentures will have a dilutive effect on stockholders of 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.
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.
43
ITEM 7A. 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 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%, 17%, and 22% 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.
INTEREST RATE RISK
We do not have financial instruments or investment securities.
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements at March 31, 2003, March 31, 2002,
and March 31, 2000 and the reports of Singer Lewak Greenbaum & Goldstein LLP and
Deloitte & Touche LLP, independent accountants, are included in this report on
pages beginning F-1.
ITEM 9. 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 report on the financial statements for the fiscal year
ended March 31, 2001 did not contain an adverse opinion or a disclaimer of
opinion and was 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.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers are as follows:
Name Age Title
------------------------- --- -------------------------------------------------------
Harvey Braun 64 Chief Executive Officer and Chairman of the Board
Barry Schechter (3) 49 Former Chairman of the Board
Steven Beck 63 President and Chief Operating Officer and Director
Ran Furman 34 Chief Financial Officer
Donald S. Radcliffe (2) 58 Director
Ivan M. Epstein 42 Director
Michael Silverman (1) (2) 58 Director
Ian Bonner (1) (2) 48 Director
Robert P. Wilkie 33 Director
Cheryl Valencia 40 Vice President, Management Services
Kavindra Malik 42 Executive Vice President
Ronald Koren 49 Vice President, Marketing Communications
Mike Dotson 37 Managing Director of Island Pacific European Operations
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Resigned from the position of Chairman of the Board in July 2003.
Harvey Braun became our Chairman of the Board in July 2003 and our Chief
Executive Officer in April 2003. He served as CEO of our retail management
solutions division (formerly, Island Pacific division), from January 2003 to
March 2003. Prior to joining us, 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.
Barry M. Schechter was the Chairman of the Board of the Company from
February 1994 to July 2003. 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 was 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).
Steven Beck became our President, Chief Operating Officer and a director in
April 2003. He served as President and Chief Operating Officer of our retail
management solutions division (formerly, 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.
Ran Furman joins Island Pacific in August 2003 from e.Digital Corporation,
where he served as Chief Financial Officer since 2001. Prior to that, he was a
Managing Director at DP Securities, Inc. He was also a Senior Vice President at
Jesup & Lamont Securities between 1995 and 2000, and previously held positions
at Bank of Montreal/Nesbitt Burns and Deloitte & Touche. He was awarded a
Bachelor of Arts from the University of Washington and an M.B.A. from Columbia
Business School.
Donald S. Radcliffe became our director 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.
45
Ivan M. Epstein became our director 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 49.3%
of our outstanding common stock.
Michael Silverman became our 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 our 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 our 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).
Cheryl Valencia became Vice President of Management Services in October
2002. Prior to joining us 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 served 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. Prior to joining us, 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 us, 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 of our United Kingdom Operations since
April 2001. Prior to such appointment, Mr. Dotson held various positions with
our 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.
46
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth summary information concerning the annual and
long-term compensation for services rendered in all capacities during the fiscal
years ended March 31, 2003, 2002 and 2001, for those who served as Chief
Executive Officer during fiscal 2003 and the four most highly compensated
executive officers as of the end of the last completed fiscal year other than
the Chief Executive Officer. We refer to these individuals as the "named
executive officers."
Annual Compensation Long Term
------------------------------------------ Compensation
Securities All Other
Name and Other Annual Underlying Compensation
Principal Position Year Salary($) Bonus($) Compensation($) Options/SARs ($) (1)
--------------------------- ---- --------- -------- --------------- ------------ ------------
Barry M. Schechter 2003 369,314 -- -- 505,000 --
(Former Chairman 2002 337,486 -- -- 505,000 4,263
of the Board and 2001 312,492 -- -- 321,429 4,995
Chief Executive
Officer)
Harvey Braun 2003 162,764 -- -- 2,000,000 --
(Chief Executive
Officer and Chairman)
Steven Beck 2003 379,431 -- -- 2,000,000 --
(President and Chief
Operating Officer)
Arthur S. Klitofsky 2003 201,755 -- -- 65,000 --
(Former Vice President 2002 168,000 14,700 -- 5,000 3,807
and President of SVI 2001 152,400 -- -- 90,000 4,572
Training)
Randy Pagnotta 2003 237,828 -- -- -- --
(Former Vice President 2002 40,000 -- -- 100,000 --
of Island Pacific division)
Mike Dotson 2003 154,410 -- -- -- 6,176
(Vice President of 2002 143,100 -- -- 25,000 5,272
of Island Pacific division) 2001 148,290 -- -- 14,000 2,723
___________________
(1) Consists of 401(k) matching contributions.
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 reported compensation and
also less than $50,000.
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the Named Executive
Officers identified in the Summary Compensation Table. No SARs were granted
during fiscal 2003.
47
OPTION GRANTS IN LAST FISCAL YEAR
-----------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Individual Grants Annual Rates of
------------------------------------------------------------------------------------------- Stock Price
Number of Percent of Exercise Appreciation for
Securities Total Options Price Per Option Term (4)
Date of Underlying Options Granted to Share Expiration --------------------
Name Grant Granted (#) Employees (%) ($/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 10,565 26,775
Harvey Braun 09/03/02 2,000,000(3) 34.42% 0.28 09/03/05 88,270 185,360
Steven Beck 09/03/02 2,000,000(3) 34.42% 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.
(4) 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.
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.
48
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Barry M. Schechter effective
October 1, 2000. This agreement was terminated in July 2003 upon Mr.
Schechter's resignation from the position of Chairman of the Board. Under the
agreement, Mr. Schechter had 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 was
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 stated that options would be fully
vested when issued and exercisable for ten years after the date of the grant.
Mr. Schechter remains as a consultant. The consulting agreement with Mr.
Schechter is currently being drafted.
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 year ended March 31, 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. 550,735
of such shares remain subject to option as of July 31, 2003. The 1989 plan was
administered by the Board of Directors, which established the terms and
conditions of each option grant.
Our 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 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 annual increase cannot however be more than
600,000 shares, and the Board may in its discretion provide for a lesser
increase. The August 2000 amendments also implemented a limit on stock awards to
any one person in excess of 500,000 shares in any calendar year. Our
stockholders approved the amendments at our annual meeting held November 16,
49
2000. In September 2002, the shareholders approved to increase the number of
shares authorized in the 1998 Plan by 1,000,000 shares and to increase the
number of stock awards that may be granted to any one participant in any
calendar year under the 1998 Plan from 500,000 shares to 1,000,000 shares. 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. The
total number of shares reserved under the 1998 Plan as of July 31, 2003 is
6,765,872.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ian Bonner and Michael Silverman served as members of the Compensation
Committee during all of fiscal 2003. Neither Mr. Bonner nor Mr. Silverman has
ever been an officer of Island Pacific, Inc. or any of its subsidiaries. During
fiscal 2003, none of our executive officers served as a member of a compensation
committee or board of directors of any entity that has one or more if its
executive officers serving as a member of our Compensation Committee.
DIRECTOR COMPENSATION
During fiscal 2003, we issued the options to purchase 30,000 shares of our
common stock at exercise prices ranging from $0.28 to $0.85 each to Ian Bonner,
Donald Radcliffe, Michael Silverman and Ivan Epstein; 25,000 shares of our
common stock at exercise prices ranging from $0.28 to $0.85 to Robert Wilkie and
Arthur Klitofsky; and 5,000 shares of our common stock at an exercise price of
$0.35 to Barry Schechter in connection with their service on the board. We also
issued options to purchase 50,000 shares of our common stock at an exercise
price of $0.85 to each of Ian Bonner and Michael Silverman and 125,000 shares of
our common stock at exercise prices ranging from $0.44 to $0.85 to Donald
Radcliffe for committee service. These options expire between June 2012 and
March 2013 and vest immediately, subject to continuing of service.
On January 30, 2002, the board adopted a plan to issue to each director who
attends a board meeting an option under our 1998 plan to purchase 5,000 shares
at the fair market value on the date of the meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership of shares of our common
stock as of July 31, 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 19800 MacArthur Boulevard, 12th Floor, Irvine, California 92612. As of July
31, 2003, there were 37,507,304 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 27,830,580 (2) 49.3%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
Claudav Holdings Ltd. B.V. 3,895,368 (3) 10.0%
9 Rue Charles Humbert
1205 Geneva
Switzerland
The Ivanhoe Irrevocable Trust 3,895,368 (3) 10.0%
Barry M. Schechter 3,895,368 (3) 10.0%
ICM Asset Management, Inc. 6,342,627 (4) 15.4%
601 W. Main Ave., Suite 600
Spokane, WA 99201
Midsummer Investment 2,260,023 (9) 5.7%
c/o Midsummer Capital, LLC
485 Madison Avenue, 23rd Floor
New York, NY 10022
Omicron Master Trust 2,487,524 (11) 6.3%
c/o Omicron Capital, L.P.
810 Seventh Avenue, 39th Floor
New York, NY 10019
50
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership Percent of Class
-------------------- -------------------- ----------------
Arthur S. Klitofsky 446,086 (5) 1.2%
Steven Beck 2,000,000 (6) 5.1%
Harvey Braun 2,000,000 (6) 5.1%
Randy Pagnotta 55,333 (6) <1%
Cheryl Valencia 11,750 (10) <1%
Kavindra Malik 50,000 <1%
Ronald Koren 3,085 <1%
Mike Dotson 26,628 (6) <1%
Donald S. Radcliffe 964,207 (7) 2.5%
575 Madison Avenue
New York, NY 10022
Michael Silverman 161,032 (8) <1%
10675 Sorrento Valley Road, Suite 200
San Diego, CA 92121
Ian Bonner 134,032 (6) <1%
5527 Inverrary Court
Dallas, Texas 75287
Ivan M. Epstein 129,366 (6) <1%
2 Victoria
Eastgate Extension 13
Sandton 2148
South Africa
Robert P. Wilkie 16,600 (6) <1%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
All directors and executive officers 9,893,487 (12) 22.5%
as 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 March 31, 2003 and 18,844,853 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 1,318,831 shares
issuable upon exercise of options of Mr. Schechter exercisable within
60 days of July 31, 2003. Excludes 10,000 shares held by Mr.
Schechter's spouse, for which Mr. Schechter disclaims beneficial
ownership.
51
(4) Includes 2,116,737 shares held by Koyah Leverage Partners, L.P., 53,014
shares held by Raven Partners, L.P. and 509,299 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. Koyah Ventures, LLC is the general partner of
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. 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 183,186 shares pursuant to outstanding options exercisable
within 60 days of July 31, 2003.
(6) Consists of outstanding options exercisable within 60 days of July 31,
2003.
(7) Includes 458,407 shares pursuant to outstanding options exercisable
within 60 days of July 31, 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 152,032 shares pursuant to outstanding options exercisable
within 60 days of July 31, 2003.
(9) Includes 767,301 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 8,250 shares pursuant to outstanding options exercisable
within 60 days of July 31, 2003.
(11) Includes 822,108 shares pursuant to outstanding warrants and 976,944
shares obtainable upon conversion of convertible debentures. Omicron's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debenture and warrants.
(12) Includes 6,482,665 shares pursuant to outstanding options exercisable
within 60 days of July 31, 2003.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We have two equity incentive plans under which our equity securities are or
have been authorized for issuance to our employees or directors: the Incentive
Stock Option Plan (1989 plan), which terminated in October 1999, but under which
options remain outstanding, and the 1998 Incentive Stock Plan (1998 plan). Both
the 1989 plan and the 1998 plan have been approved by our stockholders. In
addition, from time to time we issue non-employee options and warrants to
service providers to purchase shares of our common stock, and these grants have
not been approved by our stockholders.
52
Plan category Number of Weighted-average Number of
securities to exercise price of securities
be issued outstanding remaining
upon options, warrants available for
exercise of and rights future issuance
outstanding under equity
options, compensation
warrants and plans
rights (excluding
securities
reflected in
column (a))
(a) (b) (c)
------------------------------ -------------- ----------------- ---------------
Equity compensation plans 4,819,177 $1.52 2,266,783
approved by security holders
------------------------------ -------------- ----------------- ---------------
Equity compensation plans not 12,132,762(1) $0.80 --
approved by security holders
------------------------------ -------------- ----------------- ---------------
Total 16,951,939 $1.00 2,266,783
------------------------------ -------------- ----------------- ---------------
(1) Consists of individual non-employee option and warrant grants to employees,
service providers and investors approved by the board from time to time.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions since April 1, 2002 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 us 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.
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
53
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.
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.
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 was not declared effective by the SEC by July 31, 2003, we would be
obligated to issue certain number of five-year warrants at an exercise price of
$0.60 per share. The registration statement was filed in May 2003 and was
declared effective on July 18, 2003.
In May 2002 and September 2002, we borrowed $70,000 and $50,000 from
World-Wide Business Centres, a company affiliated with Donald S. Radcliffe, to
meet payroll expenses and related obligations. 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 our former 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. We rented these premises from May 2002 to July 2003.
During fiscal 2003, we paid a total of $122,959 in interest and principal
to Claudav Holdings Ltd. B.V., which is deemed the beneficial owner of 10.0% of
our outstanding common stock as of July 31, 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.
54
In March 2003, we entered into a Securities Purchase Agreement dated March
31, 2003 with Midsummer, Omicron, and Islandia 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. In July 2003, Omicron converted $500,000 of its
debenture into 488,472 shares of our common stock. 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 will 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.
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 would be obligated to pay liquidated damages to the
investors. The registration statement was filed in May 2003 and was declared
effective on July 18, 2003.
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 aegistration rights agreement, and certain other rights similar to those
granted to Midsummer, Omicron and Islandia.
55
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 May 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.
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 $7.9 million. Pursuant to the Registration Rights
Agreement, we filed a separate registration statement respecting their shares on
July 31, 2003. As of the date of this report, the registration statement has not
been declared effective. 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 Midsummer,
Omicron, Islandia and the Crestview Investors in order to obtain their requisite
consents and waivers of rights they possessed to participate in the financing.
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%.
ITEM 14. 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 Annual Report on Form 10-K, our chief executive officer and
principal 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.
56
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules
Independent Auditors' Report of Singer Lewak Greenbaum &
Goldstein LLP.......................................................... F-1
Independent Auditors' Report of Deloitte & Touche LLP.................. F-2
Consolidated Balance Sheets as of March 31, 2003 and 2002.............. F-3
Consolidated Statements of Operations for the Fiscal Years ended March
31, 2003, 2002, and 2001............................................... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended March 31, 2003, 2002 and 2001.................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended March
31, 2003, 2002 and 2001................................................ F-7
Notes to Consolidated Financial Statements............................. F-9
57
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not considered necessary and therefore have been
omitted.
(b) Reports on Form 8-K.
No Form 8-k was filed during the quarter ended March 31, 2003.
(c) Exhibits
EXHIBIT DESCRIPTION
------- -----------
2.1 Purchase and Exchange Agreement dated as of January 1, 2002
between the Company and Softline Limited, incorporated by
reference to exhibit 2.1 to the Company's 8-K filed May 16,
2002. Exhibits and schedules have been omitted pursuant to
Item 601(b)(2) of Regulation S-K, but a copy will be furnished
supplementally to the Securities and Exchange Commission upon
request.
2.2 Deed of Appointment dated February 20, 2002 between the bank
and the receivers of SVI Retail (Pty) Limited, incorporated by
reference to exhibit 2.2 to the Company's 10-K for fiscal year
ended March 31, 2002.
2.3 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 10-K for fiscal year ended March 31, 2002.
2.4 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.
2.5 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.
2.6 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 the Company's Form S-1 filed
on May 12, 2003.
2.7 Stock Purchase Agreement effective April 1, 2003 between SVI
Solutions, Inc. and Arthur Klitofsky, incorporated by
reference to exhibit 4.1 to the Company's Form 8-K filed on
May 21, 2003.
2.8 Pledge Agreement effective April 1, 2003 between SVI
Solutions, Inc. and Arthur Klitofsky, incorporated by
reference to exhibit 4.2 to the Company's Form 8-K filed on
May 21, 2003.
2.9 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.
3.1 Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
3.2 Certificate of Designation, incorporated by reference to
exhibit 4.1 of the Company's Form 8-K filed May 16, 2002.
3.3 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's Form 10-K for the fiscal year ended March 31,
2001.
4.1 Form of Stock Certificate, incorporated by reference to
exhibit 4.1 to the Company's Form 10-K for the fiscal year
ended March 31, 2001.
46
EXHIBIT DESCRIPTION
------- -----------
4.2 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.
4.3 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.
4.4 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.
10.1 Letter Agreement between the Company and Union Bank of
California, N.A. dated April 24, 2001, incorporated by
reference to exhibit 10.18 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
10.2 Letter Agreement between the Company and Union Bank of
California, N.A. dated June 22, 2001, incorporated by
reference to exhibit 10.19 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
10.3 Amended and Restated Term Loan Agreement between the Company
and Union Bank of California, N.A. dated as of June 29, 2001,
incorporated by reference to exhibit 10.20 to the Company's
Form 10-K for the fiscal year ended March 31, 2001.
10.4 First Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of March 18, 2002, and First Amendment to Amended and
Restated Pledge Agreement between the Company, Sabica
Ventures, Inc., SVI Retail, Inc., SVI Training Products, Inc.,
and Union Bank of California, N.A. dated as of March 18, 2002,
incorporated by reference to exhibit 10.4 to the Company's
form 10-K for fiscal year ended March 31, 2002.
10.5 Second Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of May 21, 2001, incorporated by reference to exhibit 10.5
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.6 Third Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of July 15, 2002, incorporated by reference to exhibit 10.6
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.7 Fourth Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of November 15, 2002, incorporated by reference to exhibit
10.3 to the Company's 10-Q filed on February 14, 2003.
10.8 Warrant in favor of UNIONBANCAL EQUITIES, Inc. dated January
2, 2003, incorporated by reference to exhibit 10.4 to the
Company's 10-Q filed on February 14, 2003.
10.9 Discounted Loan Payoff Agreement dated March 31, 2003 by and
among Union Bank of California, N.A., SVI, 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.
10.10 Unsecured Promissory Note dated March 31, 2003 in favor of
Union Bank of California, incorporated by reference to exhibit
10.47 to the Company's Form S-1 filed on May 12, 2003.
10.11 Amended and Restated Subordinated Promissory Note of the
Company in favor of Softline Limited dated June 30, 2001,
incorporated by reference to exhibit 10.26 to the Company's
Form 10-K for the fiscal year ended March 31, 2001.
58
EXHIBIT DESCRIPTION
------- -----------
10.12 Investor Rights Agreement between the Company and Softline
Limited dated as of January 1, 2002, incorporated by reference
to exhibit 4.2 of the Company's Form 8-K filed May 16, 2002.
10.13 Investors' Rights Agreement between the Company, Koyah
Leverage Partners, L.P. and Koyah Partners, L..P.,
incorporated by reference to exhibit 10.3 to the Company's
Form 8-K filed January 8, 2001.
10.14 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P. dated July
19, 2002, incorporated by reference to exhibit 10.25 to the
Company's Form S-1 filed on May 12, 2003.
10.15 Form of Convertible Promissory Note, incorporated by reference
to exhibit 10.31 to the Company's Form 10-K for the fiscal
year ended March 31, 2001.
10.16 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 10-K for fiscal
year ended March 31, 2002.
10.17 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,
incorporated by reference to exhibit 10.6 to the Company's
10-Q filed on February 14, 2003.
10.18 Second Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 14, 2003, incorporated by reference
to exhibit 10.29 to the Company's Form S-1 filed on May 12,
2003.
10.19 Third Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 28, 2003, incorporated by reference
to exhibit 10.30 to the Company's Form S-1 filed on May 12,
2003..
10.20 Fourth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated April 3, 2003, incorporated by reference
to exhibit 10.31 to the Company's Form S-1 filed on May 12,
2003.
10.21 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 fiscal year ended March
31, 2002.
10.22 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by referenced to
exhibit 10.2 to the Company's Form 10-Q for the quarter ended
September 30, 2001. 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.
10.23 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 fiscal year ended March 31,
2002.
10.24 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 fiscal year ended March 31, 2002.
10.25 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 fiscal year ended March 31, 2002.
59
EXHIBIT DESCRIPTION
------- -----------
10.26 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 fiscal year ended March
31, 2002.
10.27 Summary of lease terms for Carlsbad facility, incorporated by
reference to exhibit 10.20 to the Company's form 10-K for
fiscal year ended March 31, 2002.
21 List of Subsidiaries.
99.1 Certification of Chief Executive Officer
60
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 14, 2003 ISLAND PACIFIC, INC., A DELAWARE CORPORATION
By: /s/ Harvey Braun
---------------------------------------
Harvey Braun, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer and
Principal Financial Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURES CAPACITY DATE
/s/ Harvey Braun Chairman and Chief Executive Officer August 14, 2003
---------------------------------------
Harvey Braun
/s/ Steven Beck President and Chief Operating August 14, 2003
--------------------------------------- Officer and Director
Steven Beck
/s/ Donald S. Radcliffe Director August 14, 2003
---------------------------------------
Donald S. Radcliffe
/s/ Ivan M. Epstein Director August 14, 2003
---------------------------------------
Ivan M. Epstein
/s/ Ian Bonner Director August 14, 2003
---------------------------------------
Ian Bonner
/s/ Michael Silverman Director August 14, 2003
---------------------------------------
Michael Silverman
/s/ Robert P. Wilkie Director August 14, 2003
---------------------------------------
Robert P. Wilkie
61
FORM 10-K CERTIFICATIONS
I, Harvey Braun, Chairman of the Board and Chief Executive Officer, certify
that:
1. I have reviewed this annual report on Form 10-K/A of Island
Pacific, Inc.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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
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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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 annual report whether 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.
By: /s/ HARVEY BRAUN
-----------------------
Harvey Braun
Chairman of the Board and Chief Executive Officer
(Principal Executive and Financial Officer)
Date: August 14, 2003
62
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
SVI Solutions, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of SVI Solutions,
Inc. and subsidiaries as of March 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SVI
Solutions, Inc. and subsidiaries as of March 31, 2003 and 2002, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
As described in Note 7 to the consolidated financial statements, the Company
adopted SFAS 142 effective April 1, 2002 and ceased amortization of goodwill.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 30, 2003
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SVI Solutions, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of SVI Solutions, Inc. and subsidiaries
(collectively, the "Company") (a majority owned subsidiary of Softline Limited)
for the year ended March 31, 2001. These statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
year ended March 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying statements have been prepared assuming that the Company will
continue as a going concern. The Company's recurring losses from operations and
negative working capital raise substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
July 13, 2001
F-2
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
2003 2002
------------ ------------
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 1,319 $ 1,309
Accounts receivable, net of allowance for doubtful
accounts of $372 and $446, respectively 3,974 1,946
Other receivables, including $3 and $31 from related parties, respectively 97 255
Inventories 91 126
Current portion - non-compete agreements 917 917
Net assets from discontinued operations 309 --
Prepaid expenses and other current assets 225 150
------------ ------------
Total current assets 6,932 4,703
Property and equipment, net 380 641
Purchased and capitalized software, net 14,804 17,612
Goodwill, net 14,795 15,422
Non-compete agreements, net 668 1,585
Other assets 58 42
------------ ------------
Total assets $ 37,637 $ 40,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt due to stockholders $ 1,320 $ 618
Current portion of long-term debt 649 435
Accounts payable 2,941 1,497
Accrued expenses 4,517 3,864
Deferred revenue 1,561 3,528
Income tax payable -- 98
------------ ------------
Total current liabilities 10,988 10,040
Term loans refinanced in July 2002 -- 6,472
Convertible notes due to stockholders -- 1,421
Convertible debentures 2,726 --
Other long-term liabilities 81 120
------------ ------------
Total liabilities 13,795 18,053
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred stock, 7.2% cumulative convertible 141,100 shares
authorized and outstanding with a stated value of $100 per
share, dividends in arrears of $1,269 and $254 14,100 14,100
Committed common stock - 2,500,000 shares 1,383 --
Common stock, $.0001 par value; 100,000,000 shares authorized;
42,199,632 and 38,993,609 shares issued and 31,499,632 and
28,293,609 shares outstanding 4 4
Additional paid-in capital 57,751 54,685
Retained (deficit) earnings (40,490) (37,772)
Treasury stock, at cost - 10,700,000 shares (8,906) (8,580)
Shares receivable -- (485)
------------ ------------
Total stockholders' equity 23,842 21,952
------------ ------------
Total liabilities and stockholders' equity $ 37,637 $ 40,005
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
-------------------------------------------------
2003 2002 2001
------------- ------------- -------------
(in thousands, except per share data)
Net sales $ 22,296 $ 26,715 $ 28,049
Cost of sales 8,045 11,003 10,815
------------- ------------- -------------
Gross profit 14,251 15,712 17,234
------------- ------------- -------------
Expenses:
Application development 4,643 4,203 5,333
Depreciation and amortization 4,148 6,723 8,299
Selling, general and administrative 8,072 12,036 16,985
Impairment of capitalized software and goodwill -- -- 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
------------- ------------- -------------
Loss from operations (2,612) (7,250) (27,549)
Other income (expense):
Interest income 1 7 620
Other income (expense) 24 (56) 74
Interest expense, including $128, $1,988 and $1,391 to
related parties (1,088) (3,018) (3,043)
------------- ------------- -------------
Total other expense (1,063) (3,067) (2,349)
------------- ------------- -------------
Loss before provision (benefit) for income taxes (3,675) (10,317) (29,898)
Provision (benefit) for income taxes 11 2 (4,778)
------------- ------------- -------------
Loss before extraordinary item and change in accounting principle (3,686) (10,319) (25,120)
Extraordinary item - Gain on debt forgiveness, net of taxes 1,476 -- --
Cumulative effect of changing accounting principle - Goodwill
valuation under SFAS 142 (627) -- --
------------- ------------- -------------
Loss from continuing operations (2,837) (10,319) (25,120)
Discontinued operations:
Income (loss) from operations of SVI Training Products, Inc., net
of estimated income tax expense (benefit) of ($57), $37 and $1 119 220 (79)
Loss from Australian operations, net of estimated
income taxes benefit of $0 and ($833) -- (4,559) (3,746)
------------- ------------- -------------
Income (loss) from discontinued operations 119 (4,339) (3,825)
------------- ------------- -------------
Net loss $ (2,718) $ (14,658) $ (28,945)
============= ============= =============
Basic and diluted earnings (loss) per share:
Loss before change in accounting principle $ (0.12) $ (0.29) $ (0.72)
Gain on debt forgiveness 0.05 -- --
Loss from change in accounting principle (0.02) -- --
------------- ------------- -------------
Loss from continuing operations (0.09) (0.29) (0.72)
Discontinued operations -- (0.12) (0.11)
------------- ------------- -------------
Net loss $ (0.09) $ (0.41) $ (0.83)
============= ============= =============
Basic and diluted weighted average common shares outstanding 29,599 35,698 34,761
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share amounts)
Balance, April 1, 2000 $ 3 $ 53,454 $ (4,306) $ 5,831 $ (1,485) $ 53,497
Exercise of stock options 792 792
Income tax benefit on stock
options Exercised 84 84
Compensation expense for
stock Options 28 28
Issuance of common stock
warrants For services 6 6
Issuance of common stock
(net of financing costs
of $40,035) 1 2,460 2,461
Issuance of common stock (net
of $286,000 late
registration fees) 214 214
Issuance of common stock for
Services 70 70
Comprehensive loss:
Net loss (28,945) $ (28,945) (28,945)
Other comprehensive loss:
Translation adjustment (1,214) (1,214) (1,214)
----------
Comprehensive loss $ (30,159)
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2001 $ 4 $ 57,108 $ (4,306) $ (23,114) $ (2,699) $ 26,993
Issuance of common stock for
services and severance
payments 441 441
Common stock to be returned 485 $ (485) --
Compensation expense for
warrants granted 579 579
Interest charges on
convertible notes due to
stockholders 438 438
Warrants issued for late
effectiveness of the
registration for common
stock sold in a private
placement in fiscal 2001 711 711
Offering costs (711) (711)
Liquidated damages for late
effectiveness of the
registration statement (60) (60)
Issuance of Series A
Preferred stock in exchange
for common stock, sale of
IBIS note receivable and
settlement of Softline
note payable $ 14,100 (8,580) 5,520
Retired treasury stock (4,306) 4,306 --
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMITTED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
--------- --------- -------- ---------- -------- ---------- ---------- ---------- ------- ----------
(in thousands, except share amounts)
Comprehensive loss:
Net loss (14,658) $ (14,658) (14,658)
Other comprehensive loss:
Disposal of Australian
operation -- 2,699 2,699
----------
Comprehensive loss $ (14,658)
--------- --------- -------- ---------- -------- ---------- ---------- ------- ----------
Balance, March 31, 2002 $ 14,100 $ 4 $ 54,685 $(8,580) $ (485) $ (37,772) $ -- $ 21,952
Issuance of common stock
for services and interest
expense 761 761
Issuance of common stock to
payoff a stockholder's note
payable 388 388
Issuance of common stock and
convertible note to payoff
term loan 787 787
Issuance of common stock for
liquidated damage charge
for late effectiveness of
the registration statement 60 60
Issuance of convertible note
payable solely in common
stock 1,383 1,383
Common stock returned (474) 485 11
Compensation expense for
warrants and options
granted 32 32
Interest charges on
convertible notes due to
major customer 879 879
Offering costs (708) (708)
Interest charges on
convertible debentures 1,341 1,341
Adjustment to cost of
treasury stock (326) (326)
Comprehensive loss:
Net loss (2,718) $ (2,718) (2,718)
----------
Comprehensive loss $ (2,718)
--------- --------- -------- ---------- -------- ---------- ---------- ========== ------- ----------
Balance, March 31, 2003 $ 14,100 $ 1,383 $ 4 $ 57,751 $(8,906) $ -- $ (40,490) $ -- $ 23,842
========= ========= ======== ========== ======== ========== ========== ======= ==========
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands, except share amounts)
Cash flows from operating activities:
Net loss $ (2,718) $ (14,658) $ (28,945)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization 4,148 7,069 9,540
Cumulative effect of a change in accounting principle -
Goodwill valuation under SFAS 142 627 -- --
Impairment of note receivable -- -- 7,647
Impairment of intangible assets associated with discontinued
operations -- -- 8,886
Gain on debt forgiveness (1,476) -- --
Loss on disposal of Training Products and Australian operations 129 3,171 --
Compensation expense for stock options and warrants 8 579 112
Interest charges on convertible debt 171 438 --
Common stock issued for services rendered, severance and
interest payments 115 245 --
Deferred income tax provision -- (149) (4,396)
Loss on sale of furniture and equipment -- 64 3
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable and other receivables (2,046) 2,548 5,126
Accrued interest on note receivable -- -- (555)
Inventories 24 61 (8)
Prepaid expenses and other current assets (286) 60 157
Accounts payable and accrued expenses 1,394 (1,892) 3,506
Accrued interest on stockholders' loans and note payable 853 2,295 944
Deferred revenue (1,967) 1,642 (4,438)
Income taxes payable (98) 98 --
------------ ------------ ------------
Net cash provided by (used for) operating activities (1,122) 1,571 (2,421)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (67) (301) (534)
Proceeds from sale of furniture and equipment -- 13 --
Purchase of software and capitalized software development costs (93) (409) (2,471)
------------ ------------ ------------
Net cash used for investing activities (160) (697) (3,005)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- -- 3,754
Increase (decrease) in amounts due to stockholders, net (287) (844) 9,855
Proceeds from lines of credit -- -- 1,555
Proceeds from committed stock 1,383 -- --
Proceeds from convertible notes due to stockholders -- 1,260 --
Proceeds from convertible debentures 3,500 -- --
Proceeds from short-term loan from related party 120 -- --
Payments on term loans (3,303) (1,243) (13,231)
Payments on short-term loan from related party (120) -- --
------------ ------------ ------------
Net cash provided by (used for) financing activities 1,293 (827) 1,933
------------ ------------ ------------
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands, except share amounts)
Effect of exchange rate changes on cash (1) (5) (78)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 10 42 (3,571)
Cash and cash equivalents, beginning of year 1,309 1,267 4,838
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,319 $ 1,309 $ 1,267
============ ============ ============
Supplemental disclosure of non-cash information:
Interest paid $ 492 $ 1,194 $ 1,990
Income taxes paid $ 40 -- $ 665
Supplemental disclosure of non-cash investing and financing activities:
Issued 1,000,000 shares of common stock for part of term loan
payoff $ 788 -- --
Issued 1,010,000 shares of common stock to payoff a shareholder's
loan $ 388 -- --
Issued 38,380 shares of common stock for services to be provided -- $ 31 --
629,500 shares of common stock returned for service contract
canceled after shares were issued $ (474) $ 485 --
Issuance of 141,000 shares of Series A Preferred Stock and Transfer of note
receivable received from the sale of
IBIS Systems Limited in exchange for 10,700,000 shares
of common stock and settlement of Softline note payable -- $ 5,520 --
Issued 1,223,580, 168,208 and 54,845 shares of common stock for
services rendered and interest payments $ 657 $ 165 $ 70
Issued 500,000 shares of common stock for $214,000 in cash
and $286,000 in accrued costs related to penalty for
late effectiveness of the registration statement -- -- $ 286
Issued 140,000 shares of common stock for accrued liquidated
damages for late effectiveness of the registration statement $ 60 -- --
Issued 5,000 warrants in connection with an equity financing -- -- $ 8
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SVI SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS CONDITIONS - 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 through our SVI Training Products
subsidiary. 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. Effective
April 1, 2003, we discontinued this line of business.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION - The
consolidated financial statements include the accounts of SVI
Solutions, Inc. and our wholly-owned subsidiaries, SVI Retail, Inc.,
Sabica Ventures, Inc. and SVI Training Products, Inc. ("Training
Products)", based in U.S., and SVI Retail (Pty) Limited based in
Australia. The Australian subsidiary ceased operations effective
February 2002 and the Training Products ceased operations effective
April 1, 2003 (see Note 3). All material intercompany balances and
transactions have been eliminated in consolidation. The consolidated
financial statements are stated in U.S. dollars and are prepared under
accounting principles generally accepted in the United States.
RECLASSIFICATIONS - Certain amounts in the prior periods have been
reclassified to conform to the presentation for the fiscal year ended
March 31, 2003. Such reclassifications did not have any effect on
losses reported in prior periods.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
highly liquid investments with original maturities of not more than
three months.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of short-term
financial instruments, including cash and cash equivalents, trade
accounts receivable, other receivables, prepaid expenses, other assets,
accounts payable, accrued expenses, lines of credit and demands due to
stockholders approximate their carrying amounts in the financial
statements due to the short maturity of and/or the variable nature of
interest rates associated with such instruments.
The fair value of the long-term note receivable is discussed in Note 5.
The amounts shown for term loans and convertible notes due to
stockholders approximate fair value because current interest rates
offered to the Company for debt of similar maturity are substantially
the same or the difference is immaterial.
INVENTORIES - Inventories consist of finished goods and are stated at
the lower of cost or market, on a first-in, first-out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally ranging from 4 to 10
years.
Leasehold improvements are amortized using the straight-line method,
over the shorter of the life of the improvement or lease term.
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized.
F-9
GOODWILL - Goodwill represents the excess of cost over the fair value
of net assets acquired. Beginning April 1, 2002, we adopted Statement
of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") and ceased amortization of goodwill
recorded in business combinations prior to June 30, 2001 (see Note 8).
We review goodwill for impairment at least annually or on an interim
basis if an event occurs or circumstances change that could indicate
that its value has diminished or been impaired. Goodwill was amortized
using the straight-line method over various periods not exceeding 10
years. As described in Note 8 to the consolidated financial statements,
effective April 1, 1999, we revised our estimate of the useful life of
goodwill from twenty years to ten years.
PURCHASED AND CAPITALIZED SOFTWARE COSTS - Pursuant to the provisions
of Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," we capitalize internally developed software and software
purchased from third parties if the related software product under
development has reached technological feasibility or if there are
alternative future uses for the purchased software. These costs are
amortized on a product-by-product basis typically over three to ten
years using the greater of the ratio that current gross revenue for a
product bears to the total of current and anticipated future gross
revenue for that product or the straight-line method over the remaining
estimated economic life of the product. At each balance sheet date, we
evaluate on a product-by-product basis the unamortized capitalized cost
of computer software compared to the net realizable value of that
product. The amount by which the unamortized capitalized costs of a
computer software product exceed its net realizable value is written
off (see Note 7).
NON-COMPETE AGREEMENTS - Non-compete agreements represent agreements to
retain key employees of acquired subsidiaries for a certain period of
time and prohibit those employees from competing with us within a
stated period of time after terminating employment with us. The amounts
incurred are capitalized and amortized over the life of the agreements,
generally ranging from two to six years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- We adopted Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the
impairment of disposal of long-lived assets, and supercedes Statement
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS
144 applies to all long-lived assets (including discontinued
operations) and consequently amends APB Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS 144 requires
that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value cost to sell. Additionally
SFAS 144 expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be distinguished
from the rest of the entity and (2) will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The
accounting prescribed in SFAS 144 was applied in connection with the
disposal of the Australian operations in fiscal 2002 and the Training
Products subsidiary sold on April 1, 2003.
Prior to the adoption of SFAS 144, we evaluated our long-lived assets
for impairment whenever events or changes in circumstances indicated
that the carrying amount of such assets or intangibles might not be
recoverable. Recoverability of assets to be held and used was measured
by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If
such assets were considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeded the fair value of the assets (see Notes 4, 7, 8 and
9). Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
REVENUE RECOGNITION - 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.
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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.
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.
REIMBURSABLE OUT-OF-POCKET EXPENSES - We adopted Financial Accounting
Standards Board Emerging Issues Task Force No. 01-14 ("EITF 01-14"),
"Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred". EITF 01-14 establishes that
reimbursements received for out-of-pocket expenses should be reported
as revenue in the income statement. Through March 31, 2002, we
classified reimbursed out-of-pocket expenses as a reduction in cost of
consulting services. The adoption of EITF 01-14 increased reported net
sales and cost of sales; however, it did not affect the net income or
loss in any post or future periods. Reimbursed expenses of $615,000
have been classified in both net sales and cost of sales for the year
ended March 31, 2003 and we have reclassified reimbursed expenses of
$1.1 million and $1.9 million to net sales and cost of sales in the
consolidated statements of operations for the years ended March 31,
2002 and 2001, respectively.
NET INCOME (LOSS) PER SHARE - As required by Statement of Financial
Accounting Standards No. 128, "Earnings per Share," we have presented
basic and diluted earnings per share amounts. Basic earnings per share
is calculated based on the weighted-average number of shares
outstanding during the year, while diluted earnings per share also
gives effect to all potential dilutive common shares outstanding during
the year such as stock options, warrants and contingently issuable
shares.
INCOME TAXES - We utilize Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which requires the recognition
of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
F-11
TRANSLATION OF FOREIGN CURRENCY - The financial position and results of
operations of our foreign division are measured using local currency as
the functional currency. Revenues and expenses of such division have
been translated into U.S. dollars at average exchange rates prevailing
during the period. Assets and liabilities have been translated at the
rates of exchange at the balance sheet date. Transaction gains and
losses are deferred as a separate component of stockholders' equity,
unless there is a sale or complete liquidation of the underlying
foreign investments. Aggregate foreign currency transaction gains and
losses are included in determining net earnings.
ADVERTISING AND PROMOTIONAL EXPENSES - Advertising and promotional
expenses are charged to expense as incurred and amounted to $60,000,
$38,000 and $198,000 for the years ended March 31, 2003, 2002 and 2001,
respectively.
COMPREHENSIVE INCOME - We utilize Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities and are included as a component of
stockholders' equity.
STOCK-BASED COMPENSATION - As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", we account for costs of stock based compensation in
accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and accordingly,
discloses the pro forma effect on net income (loss) and related per
share amounts using the fair-value method defined in SFAS No. 123.
In April 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB No. 25," which is effective July 1, 2000 except
for certain conclusions which cover specific events after either
December 15, 1998 or January 12, 2000. FIN No. 44 clarifies the
application of APB No. 25 related to modifications of stock options,
changes in grantee status, and options issued on a business
combination, among other things. The adoption of FIN No. 44 did not
have a significant impact on the consolidated financial position or
results of operations.
CONCENTRATIONS - We maintain cash balances and short-term investments
at several financial institutions. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000. As
of March 31, 2003, the uninsured portion of these balances held at
financial institutions aggregated to approximately $1.2 million. We
have not experienced any losses in such accounts and believe it is not
exposed to any significant credit risk on cash and cash equivalents.
For the fiscal years ended March 31, 2003, 2002 and 2001, sales to one
customer accounted for 31%, 47% and 33%, respectively, of total
consolidated net sales. As of March 31, 2003 and 2002, our trade
receivables from this customer accounted for 43% and 40%, respectively,
of total consolidated receivables. As of March 31, 2003 and 2002,
deferred revenues from this customer accounted for 0% and 48%,
respectively, of total consolidated deferred revenue.
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
F-12
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 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
literature 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.
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. This statement is not likely to have any impact on
our consolidated 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 Statement 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
will provide the comparative interim pro forma disclosures required by
SFAS 148 beginning in first quarter ending June 30, 2003. SFAS 148 is
not expected to have a material impact on the Company's 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 (see Note
2).
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.
F-13
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.
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 earnout 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 earnout 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 are shown
as discontinued operations with the prior period results restated. The
operating results reflected in income (loss) from operations are
summarized as follows:
Year ended March 31, 2003 2002 2001
---- ---- ----
Net sales $ 1,517 $ 1,537 $ 1,516
Income (loss) before taxes $ 191 $ 257 $ (80)
Taxes (benefits) on loss (57) 37 1
Net income (loss) $ 248 $ 220 $ (79)
Net income per share of common stock $ 0.01 $ 0.01 $ --
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
the Australian subsidiary, and we have guaranteed all amounts owing on
the facility. The facility became due in February of each year, but had
renewed annually. In April 2001, we received a formal demand under the
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 the Australian subsidiary, we decided in the third
quarter of fiscal 2002 to sell certain assets of the Australian
F-14
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 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.
The disposal of the Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown
as discontinued operations with the prior period results restated. The
operating results reflected in loss from discontinued operations are
summarized as follows:
Year ended March 31,
2002 2001
---- ----
Net sales $ 2,363 $ 4,959
Income (loss) before taxes $(1,056) $ (4,580)
Taxes (benefits) on loss 332 (833)
Net income (loss) $(1,388) $ (3,746)
Net income (loss) per share of common stock $ (0.04) $ (0.11)
3. ASSET IMPAIRMENT CHARGES
In the fiscal year ended March 31, 2001, we evaluated the
recoverability of the long-lived assets in accordance with the
evaluation of our long-lived assets as described in Note 1. In
determining the amount of impairment, we compared the net book value of
the long-lived assets associated with the Australian operations,
primarily consisting of recorded goodwill and software intangibles, to
their estimated fair values. Fair values were estimated based on
anticipated future cash flows of our operations consistent with the
assets' remaining useful lives. The anticipated future cash flows were
then discounted at 13%, which approximates our interest rate on our
amended and restated loan agreement in fiscal year ended March 31,
2001. Accordingly, we recorded impairment of goodwill of $2.3 million
and capitalized software of $6.6 million, of which $2.4 million was
classified as discontinued operations, in the fiscal year ended March
31, 2001.
We also recorded an impairment charge to our note receivable in the
fiscal year ended March 31, 2001 (See Note 4).
4. NOTE RECEIVABLE
In connection with the sale of our United Kingdom subsidiary, IBIS
Systems Limited ("IBIS") to Kielduff Investments Limited ("Kielduff")
in the fourth quarter of fiscal 1999, we recorded a note receivable
(the "Note") of $13.6 million. The Note bore interest at 2% over the
base prime rate for United States dollar deposits quoted by the Hong
Kong Shanghai British Columbia Bank plc, and principal and interest
were originally due October 1, 1999. In September 1999, the Note was
extended to February 15, 2000 to allow Kielduff sufficient time to
complete a combination of several companies under a common name,
Integrity Software, Inc. ("Integrity"), and register this newly formed
entity for trading on a United States exchange. The Note was further
extended to November 15, 2000 to accommodate the registration and
underwriting process related to Integrity. In September 2000, we
F-15
discontinued accruing interest on the Note. The Note was secured by
approximately 11% of the outstanding shares of Integrity. We also had
the right to convert all sums due from Kielduff into shares of
Integrity at our option. We did not exercise our option to convert any
amount of the Note into shares of Integrity. Kielduff did not pay the
Note on the November 15, 2000 due date. Given our lack of ability to
enforce collection on the due date, we classified the Note as long
term. We engaged Business Valuation Services, Inc. ("BVS") to perform
an analysis of the fair value of the Note's underlying collateral at
each quarter during fiscal year 2001. After consideration of the BVS
reports and other relevant data, we concluded that the fair value of
the collateral underlying the Note was impaired. Thus, during the
fiscal year ended March 31, 2001, we recorded an impairment of $7.6
million. The carrying value of the Note at March 31, 2001 was $7.0
million.
Effective January 1, 2002, we transferred the Note to Softline Limited
("Softline"), a major stockholder, in connection with an integrated
series of transactions with Softline (see Notes 10 and 13). The
transactions with Softline were as follows:
1. We transferred to Softline the note received in connection
with the sale of IBIS.
2. We issued to Softline 141,000 shares of newly-designated
Series A Convertible Preferred Stock ("Series A Preferred").
3. In consideration of the above, Softline released us from our
obligations related to the note payable due to Softline.
Softline also surrendered 10,700,000 shares of our common
stock held by Softline.
No gain or loss was recognized in connection with the disposition of
the Note or the other components of the transactions.
5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2003 and 2002 consisted of the
following (in thousands):
2003 2002
-------------- --------------
Computer equipment and purchased software $ 2,321 $ 2,299
Furniture and fixtures 474 473
Leasehold improvements 406 400
-------------- --------------
3,201 3,172
Less accumulated depreciation and amortization 2,821 2,531
-------------- --------------
Total $ 380 $ 641
============== ==============
Depreciation and amortization expense from continuing operations for
the fiscal years ended March 31, 2003, 2002 and 2001 was $330,000,
$520,000 and $698,000, respectively. Depreciation and amortization
expense from discontinued operations for the fiscal years ended March
31, 2003, 2002 and 2001 was $0, $46,000 and $173,000, respectively.
6. CAPITALIZED SOFTWARE
Capitalized software at March 31, 2003 and 2002 consisted of the
following (in thousands):
2003 2002
-------------- --------------
Software $ 28,221 $ 28,128
Less accumulated amortization 13,417 10,516
-------------- --------------
Total $ 14,804 $ 17,612
============== ==============
F-16
Amortization expense from continuing operations for the fiscal years
ended March 31, 2003, 2002 and 2001 was $2.9 million, $2.9 million and
$3.4 million, respectively. Amortization expense from discontinued
operations for the fiscal years ended March 31, 2002 and 2001 was
$300,000 and $751,000, respectively. We recorded an impairment of $6.6
million to the capitalized software associated with our discontinued
Australian subsidiary in fiscal 2001, of which $2.4 million was
classified as discontinued operations (see Note 2).
7. GOODWILL
Effective April 1, 1999, in evaluating the economic benefit and useful
lives of goodwill obtained in connection with our acquisition of
Divergent Technologies Pty. Ltd., Chapman Computers Pty. Ltd., Applied
Retail Solutions, Inc. and Island Pacific Systems Corporation,
management determined that the period of amortization should be revised
from twenty years to ten years. Accordingly, the unamortized cost of
such assets at April 1, 1999 have been allocated to the reduced number
of remaining periods in the revised useful life.
We adopted SFAS 142 effective April 1, 2002 and ceased amortization of
goodwill we recorded in business combinations prior to June 30, 2001.
SFAS 142 prohibits the amortization of goodwill and certain other
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
that their value has diminished or been impaired. Other intangible
assets continue to be amortized over their useful lives.
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. We also completed our annual test for
goodwill impairment during fourth quarter 2003 and found no indication
of impairment of the goodwill allocated to the individual reporting
units. Accordingly, absent future indications of impairment, the next
annual impairment test will be performed in fourth quarter 2004.
We also evaluated the remaining useful lives of our intangible assets
in the quarter June 30, 2002 and during the fourth quarter 2003. No
adjustments have been made to the useful lives of our intangible
assets.
Goodwill at March 31, 2003 and 2002 consisted of the following (in
thousands):
2003 2002
-------------- --------------
Cost $ 21,288 $ 21,915
Less accumulated amortization 6,493 6,493
-------------- --------------
Total $ 14,795 $ 15,422
============== ==============
The amortization expense for twelve months ended March 31, 2002 and
2001 was $2.2 million, and $2.6 million, respectively. We recorded an
impairment to the goodwill associated with our discontinued Australian
subsidiary of approximately $2.3 million at March 31, 2001 (see Note
2).
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The following table reconciles net loss and loss per share as reported
for the years ended March 31, 2003, 2002 and 2001 to net loss and loss
per share as adjusted to exclude amortization expense, net of taxes,
related to goodwill that are no longer being amortized (in thousands).
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
------------ ------------ ------------
Reported net loss $ (2,718) $ (14,658) $ (28,945)
Add back: Goodwill amortization -- 2,220 2,618
------------ ------------ ------------
Adjusted net loss $ (2,718) $ (12,438) $ (26,327)
============ ============ ============
Basic and diluted loss per share:
Reported net loss $ (0.09) $ (0.41) $ (0.83)
Goodwill amortization -- 0.06 0.07
------------ ------------ ------------
Adjusted net loss $ (0.09) $ (0.35) $ (0.76)
============ ============ ============
Basic and diluted weighted
average common shares outstanding 29,599 35,698 34,761
8. NON-COMPETE AGREEMENTS
Non-compete agreements as of March 31, 2003 and 2002 are as follows (in
thousands):
2003 2002
-------------- --------------
Cost $ 6,986 $ 6,986
Less accumulated amortization 5,401 4,484
-------------- --------------
Total 1,585 2,502
Current portion 917 917
-------------- --------------
Long-term portion $ 668 $ 1,585
============== ==============
The amortization expense for the twelve months ended March 31, 2003,
2002 and 2001 was $917,000, $1.1 million and $1.6 million,
respectively.
9. TERM LOANS
TERM LOAN DUE TO BANK
Our term loans at March 31, 2003 and 2002 consist of the following (in
thousands):
2003 2002
-------------- --------------
Term loans payable to bank $ -- $ 6,907
Less term loans payable to bank classified
as long-term as discussed below -- 6,472
-------------- --------------
Current portion of term loans $ -- $ 435
============== ==============
F-18
Effective June 29, 2001, the term loan was amended and restated. Under
the restated term loan agreement, the Bank extended the maturity date
to May 1, 2002. The restated agreement also provided for us, at our
option, to receive a further extension of six months (i.e., until
November 1, 2002), subject to certain conditions. Interest on the term
loan accrued and was payable monthly at a rate per annum equal to the
Bank's reference rate plus five percentage points. The restated
agreement included affirmative covenants regarding our maintaining and
obtaining certain financial ratios. We were required to make monthly
principal payments of $50,000 starting October 1, 2001.
On March 18, 2002, the loan agreement was amended to release certain
collateral from the pledge to the Bank, and to instead pledge to the
Bank 10,700,000 shares of our common stock surrendered by Softline in
the related recapitalization transactions with Softline described in
Notes 4, 9 and 13. The release collateral consisted of shares of
capital stock of our Australian subsidiary, and the IBIS note and
related shares of Integrity Software.
On May 21, 2002, the Bank further amended the loan agreement to extend
the maturity date to May 1, 2003 and to revise other terms and
conditions. We agreed to pay to the Bank $100,000 as a loan extension
fee, payable in four monthly installments of $25,000 each commencing on
June 30, 2002. If we failed to pay any installment when due, the loan
extension fee increased to $200,000, and the monthly payments increased
accordingly. We also agreed to pay all overdue interest and principal
by June 30, 2002, and to pay monthly installments of $24,000 commencing
on June 30, 2002 and ending April 30, 2003 for the Bank's legal fees.
We were not able to make the payments required in June 2002. We were
also out of compliance with certain financial covenants as of June 28,
2002. Effective July 15, 2002, the Bank further amended the restated
term loan agreement, and waived the then existing defaults. Under this
third amendment to the restated agreement, the Bank agreed to waive the
application of the additional 2% interest rate for late payments of
principal and interest, and to waive the additional $100,000 refinance
fee required by the second amendment. The Bank also agreed to convert
$361,000 in accrued and unpaid interest and fees to term loan
principal, and we executed a new term note in total principal amount of
$7.2 million. We were required to make a principal payment of $35,000
on October 15, 2002, principal payments of $50,000 on each of November
15, 2002 and December 15, 2002, and consecutive monthly principal
payments of $100,000 each on the 15th day of each month thereafter
through August 15, 2003. The entire amount of principal and accrued
interest was due August 31, 2003. The Bank also agreed to eliminate
certain financial covenants and to ease others, and we were in
compliance with the revised covenants.
On January 2, 2003, we issued a warrant to an affiliate of the Bank to
purchase up to 1.5 million shares of our common stock for $0.01 per
share. The warrant was exercisable for shares equal to 1% of our
outstanding common stock on January 2, 2003, and would become
exercisable for shares equal to an additional 0.5% of outstanding
common stock on the first day of each month thereafter, until it was
exercisable for the full 4.99% of the outstanding common stock. The
warrant would not become exercisable to the extent that the Company
discharged in full the Bank indebtedness prior to a vesting date.
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement
with the Bank. Under this agreement, we paid the Bank $2.8 million from
the sale of 9% convertible debentures to certain investors (see Note
10). We also issued to the Bank 1 million shares of our common stock,
valued at $788,000, and a $500,000 one-year unsecured, non-interest
bearing convertible note payable in either cash or stock, at our
option. The cash payment, shares and convertible note were accepted by
the Bank in full satisfaction of our debt to the Bank. The Bank also
canceled the warrant to purchase 1.5 million shares of our common stock
and returned all collateral held, including 10.7 million shares of our
common stock pledged as security. The 10.7 million shares were canceled
and retired in May 2003. In March 2003, the Board decided that the
$500,000 convertible note will be converted solely for equity and will
not be repaid in cash. However, as the conversion price cannot be
determined at the date of this report; therefore, this convertible note
has been reported as current liability as it becomes payable on March
31, 2004. In connection with the settlement of the debt to the Bank, we
reported as extra-ordinary gain of $1.5 million.
F-19
SUBORDINATED TERM LOAN DUE TO STOCKHOLDER
During the second quarter of fiscal 2001, Softline loaned us $10
million for the purpose of making a $10 million principal reduction on
the Bank term loan. This loan was unsecured and was subordinated to the
term loan. The loan bore interest at 14% per annum, payable monthly,
and had a stated due date of August 1, 2001. We did not pay monthly
interest and had accrued $1.0 million interest as of March 31, 2001.
There were no financial covenants or restrictions related to the
Softline loan. Effective June 30, 2001, the terms of the loan with
Softline were amended. Included in the amendment was an extension of
the maturity date to November 1, 2002.
We agreed to reimburse Softline for costs associated with this loan in
the amount of $326,000, which was fully accrued for as of March 31,
2001 and was paid off in fiscal 2003. These costs were to be amortized
over the initial 13-month life of the loan.
Effective January 1, 2002, we entered into an integrated series of
transactions with Softline where Softline agreed to release our
obligations relating to this loan. For further discussion of the
transactions with Softline (see Notes 4 and 13).
During the fiscal year ended March 31, 2001, we borrowed $0.6 million
from a subsidiary of Softline on a short-term basis (see Note 16).
Interest expense included interest due to Softline and its subsidiary
for the fiscal years ended March 31, 2003, 2002 and 2001 of $0, $1.3
million and $1.0 million, respectively. Interest expense for the fiscal
years ended March 31, 2003, 2002 and 2001 also included interest due to
other stockholders in the amount of $128,000, $56,000 and $130,000
respectively.
10. CONVERTIBLE DEBT
CONVERTIBLE NOTE DUE TO STOCKHOLDERS
In May and June 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 and warrants 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 at any time
at a conversion price of $1.35. The notes matured on August 30, 2001
and earned interest at 12% per annum to be paid at maturity.
The interest rate increased to 17% per annum on August 30, 2001 as a
result of the non-payment on the maturity date.
In accordance with generally accepted accounting principles, the
difference between the conversion price of $1.35 and our stock price on
the date of issuance of the notes was considered to be 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 interest expense of $191,000 in
the accompanying statement of operations for the fiscal year ended
March 31, 2002.
Each warrant entitled the holder to purchase one share of our common
stock at an exercise price of $1.50. The warrants were to expire three
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 determined to be $247,000 and
was included in interest expense in the accompanying statement of
operations for the year ended March 31, 2002.
F-20
In July 2002, we agreed to amend the terms of the notes and warrants
issued to these investors. 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 the 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 the 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 of common stock 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.
We also agreed to file a registration statement with the Securities and
Exchange Commission for the resale of all shares held by or obtainable
by these investors. The registration statement was filed on May 12,
2003. In the event such registration statement is not declared
effective by the SEC by June 30, 2003, we will be obligated to issue
five-year penalty 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 and second 30 day periods after June 30, 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 penalty
warrants for the purchase of 2.5% of total number of registrable
securities at an exercise price of $0.60 per share. No further penalty
warrants will accrue from the original registration obligation to these
investors (see Note 13).
As of March 31, 2003 and 2002, the balance of these convertible notes
was $1.3 million and $1.4 million, respectively, which included accrued
interest of $70,000 and $171,000, respectively. Interest expense
related to these convertible notes was $115,000 and $609,000 in the
fiscal years ended March 31, 2003 and 2002, respectively.
CONVERTIBLE DEBENTURES
On March 31, 2003, we entered into a Securities Purchase Agreement for
the sale to a group of investors convertible debentures, convertible
into shares of our common stock at a conversion price of $1.02 per
share, for the total proceeds of $3.5 million. $2.8 million of the
proceeds were used to pay our debt to the Bank (see Note 9). The
debentures mature in May 2005 and bear an interest rate of 9% per
annum. Interest is payable on a quarterly basis beginning June 1, 2003,
at our option, in cash or shares of common stock. 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 in February 2004, we must 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 $1.02 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 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 notes was considered to be 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 interest expense of $715,000
against the extra-ordinary gain of debt forgiveness, related to the
payoff of our debt to the Bank, in the accompanying statement of
operations for the fiscal year ended March 31, 2003.
F-21
The investors also received a warrant 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 are to 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 determined to be $625,000 and will be
amortized as interest expense over the life of the convertible
debentures.
As of March 31, 2003, the balance of these convertible debentures was
as follows (in thousands):
Convertible debentures $ 3,500
Less: unamortized debt discount 625
---------------
2,875
Current portion 149
---------------
Long-term portion $ 2,726
===============
11. COMMITTED STOCK
In May 2002, Toys "R" Us, Inc. ("Toys"), our major customer, agreed to
invest $1.3 million for the purchase of a non-recourse convertible note
and a warrant to purchase 2,500,000 shares of common stock. In
connection with this transaction, Toys signed a two-year software
development and services agreement (the "Development Agreement") that
expires in February 2004. The purchase price is payable in installments
through September 27, 2002. The note is non-interest bearing, and the
face amount is either convertible into shares of common stock valued at
$0.553 per share or payable in cash at our option, at the end of the
term. 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. 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 the Development Agreement 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. At March 31, 2003, we had received the full
proceeds of $1.3 million and the face amount of the note is $774,000.
The warrant entitles Toys to purchase up to 2,500,000 of shares of our
common stock 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 the Development Agreement 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. At
March 31, 2003, 1.4 million shares of the warrant are exercisable.
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. We also granted Toys certain
registration rights for the shares of common stock into which the note
is convertible and the warrant is exercisable.
In November 2002, the Board decided that this note will converted
solely for equity and will not be repaid in cash. The note therefore
has been classified as equity at March 31, 2003.
In accordance with generally accepted accounting principles, the
difference between the conversion price of the note of $0.553 and our
stock price on the date of issuance of the note was considered to be
interest expense. For the year ended March 31, 2003, we recorded a
charge of $151,000 representing a proportion of the total debt
discount.
F-22
We have also 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. For the year ended March
31, 2003, we recognized $20,000 as interest expense. The remaining
value of the detachable warrants of $574,000 has been recorded as an
offering cost and as such, there is no effect on our consolidated
statement of operations.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - We lease office space and various automobiles under
non-cancelable operating leases that expire at various dates through
the year 2006. Certain leases contain renewal options. Future annual
minimum lease payments for non-cancelable operating leases at March 31,
2002 are summarized as follows (in thousands):
YEAR ENDING MARCH 31:
2004 $ 736
2005 708
2006 195
2007 7
--------------
$ 1,646
==============
Rent expense was $891,000, $1.2 million and $1.5 million for the fiscal
years ended March 31, 2003, 2002 and 2001, respectively.
EMPLOYEE BENEFIT PLAN - Effective January 1, 1999, we adopted a defined
contribution plan under Section 401(k) of the Internal Revenue Code
covering all eligible employees employed in the United States ("401(k)
Plan"). Eligible participants may contribute up to $10,000 or 20% of
their total compensation, whichever is lower. Up until July 1, 2000, we
matched 50% of the employee's contributions, up to 3% of the employee's
total compensation and made discretionary contributions to the plan.
Participants will be immediately vested in their personal contributions
and over a six year graded schedule for amounts contributed by us.
Effective, July 1, 2000, we amended the 401(k) Plan to for the
following items: (a) our matching contribution equal to 50% of the
employee's contributions, up to 6% of the employee's total compensation
and (b) eligible participants may defer up to $12,000 or 18% of their
total compensation, whichever is lower. Effective January 1, 2002, we
ceased matching contributions. We made matching contributions to the
401(k) Plan of approximately $125,000 and $359,000 in the fiscal years
ended March 31, 2002 and 2001, respectively.
LITIGATION -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 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. These matters are still pending
and the parties have agreed to resolve all claims in binding
arbitrations, scheduled for September 2003. We cannot at this time
predict what will be the outcome of these matters.
On May 15, 2002, an employee who is currently out on
disability/worker's compensation leave filed a claim with the
California Labor Commissioner seeking $41,000 in alleged unpaid
commissions. In or about December of 2002, the employee 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.
F-23
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation
("Cord Camera"), filed a lawsuit against one of our subsidiaries, SVI
Retail, Inc. ("SVI Retail") 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 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 commenced. However, SVI Retail intends
to defend vigorously the action and possibly file one or more
counter-claims. The U.S. District Court of Ohio has proper jurisdiction
over us, and 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 we 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 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 Island Pacific, Inc., 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 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.
13. PREFERRED STOCK, COMMON STOCK, TREASURY STOCK, STOCK OPTIONS AND
WARRANTS
PRIVATE PLACEMENTS - In March 2000, we received $2.9 million from the
sale of common stock to an investor. We agreed to register the shares
with the Securities and Exchange Commission ("SEC"). The shares carried
a "repricing right" which entitled the investor to receive additional
shares upon the occurrence of certain events. In October 2000, we
issued 375,043 shares in satisfaction of the repricing right.
In October 2000, the SEC declared effective the registration statement.
We became obligated to pay to the investor liquidated damages for late
effectiveness of the registration statement in the amount of $286,000.
The investor 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 the investor a two-year
warrant to purchase up to 107,000 shares of common stock at $1.50 per
share. This warrant had expired and was canceled at March 31, 2003.
F-24
We agreed to register all of the shares sold in March 2001, and those
that it may sell under the warrant, with the SEC. We became obligated
to pay to the investor liquidated damages in the amount of $60,000. In
April 2002, we issued to the investor 140,000 shares of common stock in
satisfaction of the liquidated damages.
In December 2000, we received $1.5 million from the sale of common
stock and warrants to a limited number of accredited investors. As part
of the same transaction, the investors purchased in January 2001 an
additional $0.5 million of common stock and warrants, and two of the
investors purchased in February 2001 an additional $0.5 million of
common stock and warrants on the same terms and conditions. We issued a
total of 2,941,176 shares of common stock and 1,470,590 warrants to
purchase common stock at an exercise price of $1.50 as a result of the
aforementioned transaction. We agreed to register the common shares
purchased and the common shares issuable upon the exercise of warrants
with the Securities and Exchange Commission. We filed a registration
statement in January 2001 to register these shares, but it did not
become effective. We issued 1,249,997 penalty warrants with a strike
price of $0.85 per share, with a fair value of $740,000, as required
under an agreement with the investors. We were obligated to issue to
each investor a warrant for an additional 2.5% of the number of shares
purchased by that investor in the private placement for each continuing
30-day period during which a registration statement is not effective.
In July 2002, we and the investors agreed to revise the terms of the
foregoing warrants and to cease accruing penalty warrants from the
original obligation. We also agreed that the warrants previously issued
to the investors to purchase an aggregate of 3,033,085 shares of common
stock 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.
We also agreed to file a registration statement with the Securities and
Exchange Commission for the resale of all shares held by or obtainable
by these investors. The registration statement was filed on May 12,
2003. In the event such registration statement is not declared
effective by the SEC by June 30, 2003, we will be obligated to issue
five-year penalty 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 and second 30 day periods after June 30, 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 penalty
warrants for the purchase of 2.5% of total number of registrable
securities at an exercise price of $0.60 per share. No further penalty
warrants will accrue from the original registration obligation to these
investors (see Note 10).
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 shares are entitled to cumulative dividends of
7.2% per annum, payable semi-annually. At March 31, 2003 and 2002,
dividends in arrears amount to $1.3 million or $9.00 per share and
$254,000 or $1.80 per share, 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 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.
F-25
COMMON STOCK - During fiscal year ended March 31, 2003, we issued the
following:
o an aggregate of 91,666 shares of common stock
totaling $36,000 to consultants for services rendered
in the prior periods.
o an aggregate of 96,666 shares of common stock
totaling $26,000 to consultants for services rendered
in the current year.
o an aggregate of 120,000 shares of common stock
totaling $60,000 to our attorney for legal services
rendered in prior periods.
o 15,000 shares of common stock, with fair value of
$7,000 to an attorney for legal services provided in
the current year.
o 140,000 shares of common stock in satisfaction of the
liquidated damages relating to late registration of
the shares sold to AMRO International, S.A. in March
2001.
o In conjunction with the recapitalization transactions
with Softline Limited, we issued in May 2002 an
aggregate of 141,000 shares of newly-designated
Series A Preferred Stock at a deemed purchase price
of $100 per share in exchange for 10,700,000 of our
common shares held by Softline and the discharge of a
$12.3 million note payable to Softline. We also
transferred to Softline our note received in
connection with the sale of IBIS Systems Limited. The
transactions had an effective date of January 1, 2002
(see Note 4).
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 in
priority and preference to dividends declared on our
common shares. 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.
o an aggregate of 527,286 shares of common stock
totaling $217,000 to stockholders as payment of
accrued interest on the convertible notes due to
stockholders.
F-26
o an aggregate of 595,200 shares of common stock
totaling $390,000 to Softline Limited, our majority
stockholder, as payments for past due loan
refinancing fees and payables.
o 1,010,000 shares of common stock to a stockholder as
repayment of a loan with the outstanding balance of
$388,000. This loan was acquired in connection with
the acquisition of Island Pacific.
o 100,000 shares of common stock to an employee as
bonus payment of $25,000 earned in the current year.
o 1,000,000 shares of common stock with the fair market
value of $787,000, to Union Bank of California as
partial payment of loan payoff (see Note 9).
We also received 367,000 shares of our common stock returning from a
consultant as a result of early termination of investor relations
service contracts. These shares were recorded as share receivable
component of stockholders' equity at March 31, 2002. These shares were
canceled and retired at March 31, 2003.
TREASURY STOCK - In November 1998, the Board of Directors authorized us
to purchase up to 1,000,000 shares of our common stock. As of March 31,
2001, we had repurchased 444,641 shares of our common stock at a cost
of $4.3 million. The purchased shares were canceled as of March 31,
2002.
We received 10,700,000 shares of our common stock valued at $8.6
million from Softline in connection with the transactions between us
and Softline described in Notes 5, 10 and 13. Up until March 31, 2003,
these shares were pledged to the Bank as collateral for the term loans
(see Note 10). Subsequent to March 31, 2003, the 10.7 million treasury
shares were canceled and retired.
STOCK OPTION PLAN - We adopted an incentive stock option plan during
fiscal year 1990 (the "1989 Plan"). Options under this plan may be
granted to our employees and officers. There were initially 1,000,000
shares of common stock reserved for issuance under this plan. Effective
April 1, 1998, the board of directors approved an amendment to the 1989
Plan increasing the number of shares of common stock authorized under
the 1989 Plan to 1,500,000. The exercise price of the options is
determined by the board of directors, but the exercise price may not be
less than the fair market value of the common stock on the date of
grant. Options vest immediately and expire between three to ten years
from the date of grant. The 1989 Plan terminated in October 1999.
On October 5, 1998, the board of directors and stockholders approved a
new plan entitled the 1998 Incentive Stock Plan (the "1998 Plan"). The
1998 Plan authorizes 3,500,000 shares to be issued pursuant to
incentive stock options, non-statutory options, stock bonuses, stock
appreciation rights or stock purchases agreements. The options may be
granted at a price not less than the fair market value of the common
stock at the date of grant. The options generally become exercisable
over periods ranging from zero to five years, commencing at the date of
grant, and expire in one to ten years from the date of grant. The 1998
Plan terminates in October 2008. On August 18, 2000, the Board approved
certain amendments to the 1998 Plan. On November 16, 2000, the
shareholders approved certain amendments. These amendments: (a)
increased number of shares authorized in the Plan from 3,500,000 to
4,000,000, (b) authorized an "automatic" annual increase in the number
of shares reserved for issuance by an amount equal to the lesser of 2%
of total number of shares outstanding on the last day of the fiscal
year, 600,000 shares, or an amount approved by the Board of Directors,
and (c) to limit the number of stock awards of any one participant
under the 1998 Plan to 500,000 shares in any calendar year. On
September 19, 2002, the shareholders approved to increase the number of
shares authorized in the 1998 Plan by 1,000,000 shares and to increase
the number of stock awards that may be granted to any one participant
in any calendar year under the 1998 Plan from 500,000 shares to
1,000,000 shares.
F-27
The following summarizes our stock option transactions under the stock
option plans:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
-------------- --------------
Options outstanding, April 1, 2000 1,790,260 $ 5.44
Exercised (131,300) $ 6.24
Granted 2,891,929 $ 1.35
Expired/canceled (589,855) $ 4.88
--------------
Options outstanding, March 31, 2001 3,961,034 $ 2.55
Granted 2,117,300 $ 0.89
Expired/canceled (1,592,445) $ 1.84
--------------
Options outstanding, March 31, 2002 4,485,889 $ 2.05
Exercised (150,000) $ 0.50
Granted 1,718,000 $ 0.51
Expired/canceled (1,224,483) $ 1.91
--------------
Options outstanding March 31, 2003 4,829,406 $ 1.56
==============
Exercisable, March 31, 2001 922,885 $ 4.01
==============
Exercisable, March 31, 2002 2,030,673 $ 2.63
==============
Exercisable, March 31, 2003 3,096,559 $ 1.84
==============
In addition to options issued pursuant to the stock option plans
described above, we issued additional options outside the plans to
employees, consultants, and third parties. The following summarizes our
other stock option transactions:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
-------------- --------------
Options outstanding, April 1, 2000 2,156,512 $ 2.02
Exercised (289,700) $ 1.82
Granted 300,000 $ 0.95
Granted (800,000) $ 1.25
--------------
Options outstanding, March 31, 2001 1,366,812 $ 2.28
Expired/Canceled (320,000) $ 1.08
--------------
Options outstanding, March 31, 2002 1,046,812 $ 2.61
Granted 4,132,500 $ 0.32
Expired/Canceled (125,000) $ 4.60
--------------
Options outstanding, March 31, 2003 5,054,312 $ 0.69
==============
Exercisable, March 31, 2001 1,166,812 $ 2.51
==============
Exercisable, March 31, 2002 1,046,812 $ 2.61
==============
Exercisable, March 31, 2003 5,054,312 $ 0.69
==============
F-28
During the fiscal years ended March 31, 2003, 2002 and 2001, we
recognized compensation expense of $8,000, $0 and $28,000,
respectively, for stock options granted to non-employees for services
provided to us.
The following table summarizes information as of March 31, 2003
concerning currently outstanding and exercisable options:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range Of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ------------ ------------- ----------- ------------ --------
(years)
$0.28 - 0.30 4,835,000 3.64 $ 0.28 4,500,000 $ 0.28
$0.30 - 1.00 2,157,819 7.68 $ 0.79 1,420,202 $ 0.79
$1.01 - 3.00 2,150,454 6.38 $ 1.62 1,527,984 $ 1.72
$3.01 - 7.00 438,175 4.36 $ 4.74 433,175 $ 4.72
$7.01 - 11.75 302,270 3.80 $ 7.87 269,510 $ 7.88
------------------------------------------------------ ----------------------------------
9,883,718 5.04 $ 0.87 8,150,871 $ 0.87
====================================================== ==================================
We have adopted the disclosure-only provision of SFAS No. 123. The
following pro forma information presents net income and basic and
diluted earnings per share as if compensation expense had been
recognized for stock options granted in the fiscal years ended March
31, 2003, 2002 and 2001, as determined under the fair value method
prescribed by SFAS No. 123 (in thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
----------- ----------- -----------
Net loss:
As reported $ (2,718) $ (14,658) $ (28,954)
Pro forma $ (4,431) $ (15,963) $ (29,408)
Basic and diluted loss per share:
As reported $ (0.09) $ (0.41) $ (0.83)
Pro forma $ (0.15) $ (0.45) $ (0.85)
Weighted average assumptions:
Dividend yield None None None
Volatility 117% 77% 140%
Risk free interest rate 2.25% 3.9% 5.8%
Expected life of options 4 years 4 years 10 years
For options granted during the year ended March 31, 2003 where the
exercise price was equal to the stock price at the date of grant, the
weighted average fair value of such options was $0.39, and the
weighted-average exercise price of such options was $0.51. No options
granted during the year ended March 31, 2003 where the exercise price
was greater than or less than the stock price at the date of grant.
WARRANTS - At March 31, 2003 and 2002, we had outstanding warrants to
purchase 6,018,527 and 4,040,168 shares of common stock, respectively,
at exercise prices ranging from $0.55 to $7.28 per share. The lives of
the warrants range from two to seven years from the grant date. During
the fiscal year ended March 31, 2003 and 2002, we recognized
compensation expense of $43,000 and $579,000, respectively, for
warrants granted to non-employees for services provided to us.
F-29
14. INCOME TAXES
The provision (benefit) for income taxes consisted of the following
components (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
--------------- ---------------- ---------------
Current:
Federal $ -- $ 39 $ (1,261)
State 4,000 -- 45
Foreign -- -- --
--------------- ---------------- ---------------
Total 4,000 39 (1,216)
--------------- ---------------- ---------------
Deferred:
Federal -- -- (3,523)
State -- -- (774)
Foreign -- -- (99)
--------------- ---------------- ---------------
Total -- -- (4,396)
--------------- ---------------- ---------------
Provision (benefit) for income taxes $ -- $ 39 $ (5,612)
=============== ================ ===============
Significant components of our deferred tax assets and liabilities at
March 31, 2003 and 2002 are as follows (in thousands):
MARCH 31,
--------------------------------
2003 2002
-------------- --------------
Current deferred tax assets/(liabilities):
State taxes $ 300 $ --
Accrued expenses 913 1,107
Related party interest -- 852
Prepaid services 92 284
Deferred revenue 669 --
Warrants for services 298 344
Allowance for bad debts 159 191
-------------- --------------
Net current deferred tax assets 2,431 2,778
-------------- --------------
Non-current deferred tax assets/(liabilities):
Research and expenditure credits 2,005 --
Net operating loss 7,571 11,040
Fixed assets 117 --
Other credits -- --
Deferred rent 35 82
State taxes (575) --
Accrued expenses -- 84
-------------- --------------
Total non-current deferred tax assets 9,153 11,206
Intangible assets (6,415) (9,908)
Accumulated capitalized research and development costs -- (749)
Other -- (17)
-------------- --------------
Total non-current deferred tax liability (6,415) (10,674)
-------------- --------------
Net non-current deferred tax asset/(liability) 5,169 3,310
-------------- --------------
Valuation allowance (5,169) (3,310)
-------------- --------------
Net deferred tax liability $ -- $ --
============== ==============
F-30
The difference between the actual provision (benefit) and the amount
computed at the statutory United States federal income tax rate of 34%
for the fiscal years ended March 31, 2003, 2002 and 2001 is
attributable to the following:
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
--------------- ---------------- ---------------
Provision (benefit) computed at statutory rate (34.0)% (34.0)% (34.0)%
Nondeductible goodwill 7.9 5.1 4.8
Change in valuation allowance 73.9 20.4 9.1
Change in valuation allowance for NOL (20.8) -- --
Foreign income taxed at different rates (0.3) 9.7 5.0
Tax credits (24.2) (2.9) --
State income tax, net of federal tax benefit (2.5) (0.7) (1.4)
Other -- 2.4 0.3
--------------- ---------------- ----------------
Total provision (benefit) for income taxes ( --)% (--)% (16.2)%
=============== ================ ================
At March 31, 2003 and 2002, we had Federal and California tax net
operating loss carryforwards of approximately $19.6 million and $10.1
million, respectively. The Federal and California tax net operating
loss carryforwards will begin expiring after 2008.
We also have Federal and California research and development tax credit
carryforwards of approximately $1.2 million and $696,000, respectively.
The Federal credits will begin expiring after 2008. The California
credits may be carried forward indefinitely.
15. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the fiscal years ended March 31, 2003,
2002 and 2001, are as follows (in thousands, except share amounts and
per share data):
FISCAL YEAR ENDED MARCH 31, 2003
-------------------------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ---------------
Basic and diluted EPS:
Loss available to common stockholders $ (2,718) 29,598,518 $ (0.09)
=============== =============== ===============
FISCAL YEAR ENDED MARCH 31, 2002
-------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ---------------
Basic and diluted EPS:
Loss available to common stockholders $ (14,658) 35,697,999 $ (0.47)
=============== =============== ===============
FISCAL YEAR ENDED MARCH 31, 2001
-------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ---------------
Basic and Diluted EPS:
Loss available to common stockholders $ (28,945) 34,761,386 $ (0.83)
=============== =============== ===============
F-31
The following potential common shares have been excluded from the
computation of diluted net loss per share for the periods presented
because the effect would have been anti-dilutive:
FOR THE YEARS ENDED MARCH 31,
2003 2002 2001
---- ---- ----
Options outstanding under our stock option plans 4,829,406 4,485,889 3,961,034
Options granted outside our stock option plans 5,054,312 1,046,812 1,366,812
Warrants issued in conjunction with private placements 1,625,000 2,944,499 1,602,590
Warrants issued for services rendered 320,669 1,095,669 12,336
Warrants issued in conjunction with convertible note
due to major customer 2,500,000 -- --
Warrants issued in conjunction with convertible
debentures 1,572,858 -- --
Convertible notes due to stockholders 2,200,338 1,037,037 --
Series A Convertible Preferred Stock 18,561,594 17,625,000 --
Convertible debentures 3,419,304 -- --
Committed Stock 2,976,190 -- --
--------------- -------------- --------------
Total 43,059,671 28,234,906 6,942,772
=============== ============== ==============
16. RELATED PARTIES
Included in other receivables at March 31, 2003 and 2002 are amounts
due from our officers and employees in the amount of $3,000 and
$31,000, respectively.
We began occupying our current principal executive offices in July
2001. At that time, the premises were owned by an affiliate of our
Chief Executive Officer at that time. Monthly rent for these premises
was set at $13,783. In April, 2002, the premises were sold to an entity
unrelated to the former Chief Executive Officer. As of the date of this
report, we are negotiating the terms of a written lease with the new
owner.
In November 2000, we borrowed $600,000 from a wholly-owned subsidiary
of Softline to help meet operating expenses. This loan called for
interest at 10% per annum, and was discharged in full in February 2001.
Interest expense under this loan was $3,000 for the year ended March
31, 2001. In order to discharge the remaining balance of that loan
while meeting other critical operational expenses, we borrowed $400,000
from Barry M. Schechter, our Chairman. We borrowed an additional
$164,000 from Mr. Schechter in March 2001, which funds were needed to
meet operational requirements of our Australian subsidiary. The
advances from Mr. Schechter bore interest at prime rate and were due on
demand, subject to a limit on demand rights of $50,000 per payment.
Interest expense under the loans from Mr. Schechter was $0, $0 and
$7,000 for the fiscal year ended March 31, 2003, 2002 and 2001,
respectively. The loans were paid in full in June 2001.
Included in loans due to stockholders totaling $1.3 million and
$618,000 as of March 31, 2003 and 2002, respectively, was $0 and
$122,000, respectively, owed to a stockholder who together with Barry
M. Schechter and an irrevocable trust forms a beneficial ownership
group. The original loan amounts totaling $2.3 million ($1.5 million of
which was from the stockholder included in the group described above)
were borrowed in June 1999 to fund the acquisition of Island Pacific
Systems Corporation on April 1, 1999. These loans were repaid in full
at March 31, 2003. Interest was calculated monthly at the current prime
rate with no stated maturity date. Interest expense under these loans
for the years ended March 31, 2003, 2002 and 2000 was $12,000, $26,000
and $74,000, respectively.
We retains an entity affiliated with a director of the board to provide
financial advisory services. During the years ended March 31, 2003,
2002 and 2001, the expenses for these services were $47,000, $42,000
and $112,000, respectively. We also incurred $0, $19,000 and $25,000 in
expenses to the same director for accounting services during the fiscal
years ended March 31, 2003, 2002 and 2001, respectively. We borrowed
$50,000, $125,000, $70,000 and $50,000 from another entity affiliated
with this director in May 2001, December 2001, May 2002 and September
2002, respectively, to meet payroll expenses. These amounts were repaid
together with interest at the then-effective prime rate, promptly as
revenues were received, and are paid in full as of the date of this
report.
F-32
17. 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. 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.
Up to March 31, 2002, we considered our business to consist of one
reportable operating segment. 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. Island Pacific 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, Island Pacific Retail Management 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, Island Pacific Retail Management 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 SVI 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.
F-33
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):
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.
We currently operate in the United States and the United Kingdom. In
February 2002, the Australian subsidiary ceased operations after
National Australian Bank, the subsidiary's secured lender, placed it in
receivership (see Note 3). The following is a summary of local
operations by geographic area (in thousands):
F-34
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
---------------- ---------------- ---------------
Dicontinued 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
================ ================ ================
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31, 2003 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 5,321 $ 4,205 $ 7,391 $ 6,896 $ 23,813
GROSS PROFIT 3,209 2,538 5,173 4,646 15,566
NET INCOME (LOSS) (2,017) (2,259) 384 1,174 (2,718)
DILUTED INCOME (LOSS) PER SHARE $ (0.07) $ (0.08) $ 0.01 $ 0.04 $ (0.09)
MARCH 31, 2002 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 7,509 $ 7,966 $ 5,971 $ 6,806 $ 28,252
GROSS PROFIT 3,914 4,666 3,619 4,874 17,073
NET INCOME (LOSS) (3,514) (3,588) (2,970) (4,586) (14,658)
DILUTED (LOSS) PER SHARE $ (0.09) $ (0.09) $ (0.08) $ (0.16) $ (0.41)
The summation of quarterly net income (loss) per share may not equate
to the year-end calculation as quarterly calculations are performed on
a discrete basis.
20. SUBSEQUENT EVENTS
In April 2003, we appointed Messrs. Harvey Braun and Steven Beck to the
positions of Chief Executive Officer and Chief Operating Officer,
respectively. Mr. Barry M. Schechter remains as Chairman of the Board.
In April 2003, we entered into a Securities Purchase Agreement with an
unrelated investor for the sale of a 9% debenture, convertible to
shares of our common stock at a conversion price of $1.02, for the
proceeds of $400,000. This debenture matures in October 2005 and was
accompanied by a five-year warrant to purchase 156,311 shares of common
stock with an exercise price of $1.02 per share. Interest is due on a
quarterly basis, payable in cash or shares of common stock at our
option.
F-35
In May 6, 2003, we entered into an agreement with another unrelated
group of 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. These debentures mature in October 2005 and
are 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 our common stock at our option.
21. FINANCING (Unaudited)
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 $7.9
million. Pursuant to a registration rights agreement, we filed a
separate registration statement respecting their shares on July 31,
2003. As of the date of this report, the registration statement has not
been declared effective.
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 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.
F-36