AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 2004
REGISTRATION NO. 333-111009
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ISLAND PACIFIC, INC.
(formerly known as SVI Solutions, Inc.)
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0896617
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization Number)
7372
----
(Primary Standard Industrial Classification Code Number)
19800 MACARTHUR BOULEVARD, SUITE 1200
IRVINE, CALIFORNIA 92612
(949) 476-2212
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
HARVEY BRAUN
CHIEF EXECUTIVE OFFICER
ISLAND PACIFIC, INC.
19800 MACARTHUR BOULEVARD, SUITE 1200
IRVINE, CALIFORNIA 92612
(949) 476-2212
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies to:
Harry J. Proctor, Esq.
Solomon Ward Seidenwurm & Smith, LLP
401 B Street, Suite 1200
San Diego, CA 92101
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after this registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE (3)
---------- -------------- --------- --------- --------------------
Common Stock, $.0001
par value 15,415,770 N/A N/A $2,852
(1) The registrant is hereby registering a number of shares of common stock
equal to (a) 150% of the 3,180,645 shares of common stock held by Heartwood
Capital, LP, Blackstone Partners, LP, Ruth Moore Bypass Trust, Douglas
Moore IRA, Moore Family Trust, Burlingame Equity Investors, LP, 033 Growth
Partners I, L.P., 033 Growth Partners II, L.P., Oyster Pond Partners, L.P.,
033 Growth International Fund, Ltd., Passport Master Fund, LP, Passport
Master Fund II, LP and Deutsche Bank AG, London Branch, all of whom have
registration rights, plus (b) 115,226 shares of common stock and 282,065
shares of common stock underlying a warrant held by Roth Capital Partners,
LLC, who has registration rights, plus (c) 8,923,915 shares of common
stock, 71,812 shares of common stock underlying options and 624,281 shares
of common stock issuable upon conversion of the Series A Convertible
Preferred Stock held by The Sage Group plc, who has registration rights
with respect to the 624,281 shares issuable upon conversion of the Series A
Convertible Preferred Stock and has "piggy-back" registration rights with
respect to 8,923,915 shares of common stock and 71,812 shares of common
stock underlying options, plus (d) 100,000 shares of common stock held by
Cord Camera Centers, Inc., who has registration rights, plus (e) 204,319
shares of common stock held by Koyah Leverage Partners, L.P., Koyah
Partners, L.P. and Raven Partners, L.P., all of whom have registration
rights, (f) 114,849 shares of common stock held by Ronald Koren, David
Leacock, Augusto Rosero, Manuel Vicente, Cheryl Valencia, Randy Pagnotta,
Rachel Glicksman and Richardson & Patel, LLP, all of whom have "piggy-back"
registration rights, plus (g) 208,333 shares of common stock underlying the
warrant held by KBK Ventures, Inc., who has "piggy-back" registration
rights. This number of shares is subject to adjustment to prevent dilution
resulting from stock splits, stock dividends or similar events. Therefore,
pursuant to Rule 416, this Registration Statement also registers such
indeterminate number of shares as may be issuable in connection with stock
splits, stock dividends or similar transactions.
(2) It is not known how many of such shares of Common Stock will be purchased
under this Registration Statement or at what price such shares will be
purchased.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) promulgated under the Securities
Act of 1933, as amended (the "Securities Act") based upon the average of
the high and low prices of our common stock on December 4, 2003 as reported
on the American Stock Exchange, which was $2.05 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
PROSPECTUS
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
ISLAND PACIFIC, INC.
15,415,770 SHARES
COMMON STOCK
We are registering 15,415,770 shares of our common stock for resale by
the selling stockholders identified in this prospectus on pages 16 through 19.
The selling stockholders may sell the shares of common stock described in this
prospectus in public or private transactions, on or off the American Stock
Exchange, at prevailing market prices, or at privately negotiated prices. The
selling stockholders may sell shares directly to purchasers or through brokers
or dealers. Brokers or dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders. We will not
receive any of the proceeds from the sale of the shares by the selling
stockholders. The selling stockholders will receive all of the proceeds from the
sale of the shares and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the shares. We will pay the
expenses of registration of the sale of the shares.
Our common stock is listed on the American Stock Exchange under the
symbol "IPI." The closing sale price of our common stock as reported on the
American Stock Exchange on January 15, 2004 was $2.50 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is January 20, 2004, subject to completion.
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY............................................................................................ 1
THE OFFERING.................................................................................................. 2
SUMMARY CONSOLIDATED FINANCIAL DATA........................................................................... 3
RISK FACTORS.................................................................................................. 6
FORWARD LOOKING STATEMENTS.................................................................................... 16
SELLING STOCKHOLDERS.......................................................................................... 17
PLAN OF DISTRIBUTION.......................................................................................... 21
USE OF PROCEEDS............................................................................................... 22
DIVIDEND POLICY............................................................................................... 22
PRICE RANGE OF COMMON STOCK................................................................................... 22
RECENT TRANSACTIONS........................................................................................... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 24
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 48
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................................... 48
DESCRIPTION OF BUSINESS....................................................................................... 49
MANAGEMENT.................................................................................................... 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 71
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................ 73
DESCRIPTION OF CAPITAL STOCK.................................................................................. 75
LEGAL MATTERS................................................................................................. 77
EXPERTS....................................................................................................... 77
WHERE YOU CAN FIND MORE INFORMATION........................................................................... 77
FINANCIAL STATEMENTS.......................................................................................... F-1
PART II, INFORMATION NOT REQUIRED IN PROSPECTUS............................................................... II-1
EXHIBIT INDEX................................................................................................. II-18
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE ON THE COVER PAGE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS,
"IPI", "WE", "US", "OUR" AND "THE COMPANY" REFER TO ISLAND PACIFIC, INC., UNLESS
THE CONTEXT OTHERWISE REQUIRES.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS
BEFORE MAKING AN INVESTMENT DECISION.
We are a provider of software solutions and services to the retail
industry. We provide solutions that help retailers understand, create, manage
and fulfill consumer demand.
Our solutions and services have been developed specifically to meet the
needs of the retail industry. Our solutions help retailers improve the
efficiency and effectiveness of their operations and build stronger, longer
lasting relationships with their customers.
We market our software solutions through direct and indirect sales
channels primarily to retailers who sell to their customers through traditional
retail stores, catalogs and/or internet-enabled storefronts.
Our offerings consist of the following components:
The ISLAND PACIFIC MERCHANDISE MANAGEMENT suite of applications builds
on our long history in retail software design and development and provides our
customers with a comprehensive and fully integrated merchandise management
solution. Our complete enterprise-level offering of applications and services is
designed to assist our customers in maximizing their business potential. The
foundation of our application suite is the individual modules that comprise the
offering. The modules are:
o IP GLADIATOR;
o IP GLOBAL NETWORK;
o IP INTEGRATOR;
o IP BUYER'S WORKMATE;
o IP WEATHER IMPACT;
o IP BUSINESS PROCESS OPTIMIZATION;
o IP CONSUMER RESEARCH;
o IP PROFILING;
o IP FORECASTING AND REPLENISHMENT;
o IP OMNICARD;
o IP STORE PEOPLE PRODUCTIVITY;
o MERCHANDISING MANAGEMENT;
o THE EYE(TM) ANALYSIS AND PLANNING;
o REPLENISHMENT AND FORECASTING;
o PROMOTION AND EVENTS;
1
o WAREHOUSE;
o TICKETING; AND
o FINANCIALS.
The ISLAND PACIFIC STORE SOLUTION suite of applications builds on our
long history of providing multi-platform, client server in-store solutions. We
market this set of applications under the name "OnePointe," and "OnePointe
International" which is a full business to consumer software infrastructure
encompassing a range of integrated store solutions. "OnePointe" is a complete
application providing all point-of-sale ("POS") and in-store processor (server)
functions for traditional "brick and mortar" retail operations.
Our PROFESSIONAL SERVICES provide our customers with expert retail
business consulting, project management, implementation, application training,
technical and documentation services. This offering ensures that our customers'
technology selection and implementation projects are planned and implemented
timely and effectively. We also provide development services to customize our
applications to meet specific requirements of our customers and ongoing support
and maintenance services.
We market our applications and services through an experienced
professional direct sales force in the United States and in the United Kingdom.
We believe our knowledge of the complete needs of multi-channel retailers
enables us to help our customers identify the optimal systems for their
particular businesses. The customer relationships we develop build recurring
support, maintenance and professional service revenues and position us to
continuously recommend changes and upgrades to existing systems.
Our executive offices are located at 19800 MacArthur Boulevard, Suite
1200, Irvine, California, 92612, telephone number (949) 476-2212.
THE OFFERING
-------------------------------------- --------------------------------------
Common stock to be offered by 15,415,770 shares (1)
the selling stockholders
-------------------------------------- --------------------------------------
Common stock outstanding as of 47,683,626 shares
January 8, 2004
-------------------------------------- --------------------------------------
Use of proceeds We will not receive any proceeds from
the sale of shares of common stock
covered by this prospectus.
-------------------------------------- --------------------------------------
American Stock Exchange symbol IPI
-------------------------------------- --------------------------------------
(1) The registrant is hereby registering a number of shares of common stock
equal to (a) 150% of the 3,180,645 shares of common stock held by Heartwood
Capital, LP, Blackstone Partners, LP, Ruth Moore Bypass Trust, Douglas
Moore IRA, Moore Family Trust, Burlingame Equity Investors, LP, 033 Growth
Partners I, L.P., 033 Growth Partners II, L.P., Oyster Pond Partners, L.P.,
033 Growth International Fund, Ltd., Passport Master Fund, LP, Passport
Master Fund II, LP and Deutsche Bank AG, London Branch, all of whom have
registration rights, plus (b) 115,226 shares of common stock and 282,065
shares of common stock underlying a warrant held by Roth Capital Partners,
LLC, who has registration rights, plus (c) 8,923,915 shares of common
stock, 71,812 shares of common stock underlying options and 624,281 shares
of common stock issuable upon conversion of the Series A Convertible
Preferred Stock held by The Sage Group plc, who has registration rights
with respect to the 624,281 shares issuable upon conversion of the Series A
Convertible Preferred Stock and has "piggy-back" registration rights with
respect to 8,923,915 shares of common stock and 71,812 shares of common
stock underlying options, plus (d) 100,000 shares of common stock held by
Cord Camera Centers, Inc., who has registration rights, plus (e) 204,319
shares of common stock held by Koyah Leverage Partners, L.P., Koyah
Partners, L.P. and Raven Partners, L.P., all of whom have registration
rights, plus (f) 114,849 shares of common stock held by Ronald Koren, David
Leacock, Augusto Rosero, Manuel Vicente, Cheryl Valencia, Randy Pagnotta,
Rachel Glicksman and Richardson & Patel, LLP, all of whom have "piggy-back"
registration rights, plus (g) 208,333 shares of common stock underlying the
warrant held by KBK Ventures, Inc., who has "piggy-back" registration
rights. This number of shares is subject to adjustment to prevent dilution
resulting from stock splits, stock dividends or similar events. Therefore,
pursuant to Rule 416, this Registration Statement also registers such
indeterminate number of shares as may be issuable in connection with stock
splits, stock dividends or similar transactions.
2
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
The following financial information should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and unaudited
financial information and related notes included elsewhere in this prospectus.
SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE SIX-MONTH PERIODS ENDED SEPTEMBER
30, 2003 AND 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA):
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
------------ ------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales $ 12,145 8,690
Cost of sales 2,728 3,662
------------ ------------
Gross profit 9,417 5,028
Expenses:
Application development 683 2,244
Depreciation and amortization 1,766 2,082
Selling, general and administrative 5,797 3,827
------------ ------------
Total expenses 8,246 8,153
------------ ------------
Operating income (loss) 1,171 (3,125)
Other income (expense):
Interest income 9 1
Other expense (178) 2
Interest expense (521) (685)
------------ ------------
Total other expense (690) (682)
------------ ------------
Income (loss) before provision for income taxes 481 (3,807)
Provision for income taxes (503) 1
------------ ------------
Income (loss) before cumulative effect of a change in accounting principle 984 (3,808)
Cumulative effect of changing accounting principle - goodwill
valuation under SFAS 142 -- (627)
------------ ------------
Income (loss) from continuing operations 984 (4,435)
Income from discontinued operations of the SVI Training Products, Inc.
subsidiary net of applicable income taxes -- 159
------------ ------------
Net income (loss) 984 (4,276)
Cumulative preferred dividends 554 517
------------ ------------
Net income (loss) available to common stockholders $ 430 $ (4,793)
============ ============
Basic earnings (loss) per share:
Income (loss) before cumulative effect of a change in accounting principle $ 0.03 $ (0.13)
Cumulative effect of a change in accounting principle - goodwill
Valuation under SFAS 142 -- (0.02)
------------ ------------
Income (loss) from continuing operations 0.03 (0.15)
Income from discontinued operations -- --
Cumulative Preferred Dividends 0.02 0.02
------------ ------------
Net income (loss) available to common stockholders $ 0.01 $ (0.17)
============ ============
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in accounting principle $ 0.02 $ (0.13)
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- (0.02)
------------ ------------
Income (loss) from continuing operations 0.02 (0.15)
Income from discontinued operations -- --
Cumulative Preferred Dividends 0.01 0.02
------------ ------------
Net income (loss) available to common stockholders $ 0.01 $ (0.17)
============ ============
3
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
------------ ------------
(UNAUDITED)
Weighted-average common shares outstanding:
Basic 33,264 28,685
Diluted 61,718 28,685
BALANCE SHEET DATA:
Working capital $ 6,155 $ (12,243)
Total assets $ 43,538 $ 36,004
Long-term obligations $ 68 $ 1,375
Stockholders' equity $ 37,507 $ 19,273
4
SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE LAST 5 FISCAL YEARS(1):
YEAR ENDED MARCH 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 22,296 $ 26,715 $ 28,049 $ 25,027 $ 3,648
Cost of sales 8,045 11,003 10,815 6,176 1,206
--------- --------- --------- --------- ---------
Gross profit 14,251 15,712 17,234 18,851 2,442
Application development expenses 4,643 4,203 5,333 4,877 --
Depreciation and amortization 4,148 6,723 8,299 7,201 1,672
Selling, general and administrative expenses 8,072 12,036 16,985 13,769 3,181
Impairment of intangible assets -- -- 6,519 -- --
Impairment of note receivable received in
connection with the sale of IBIS Systems
Limited -- -- 7,647 -- --
--------- --------- --------- --------- ---------
Total expenses 16,863 22,962 44,783 25,847 4,853
--------- --------- --------- --------- ---------
Loss from operations (2,612) (7,250) (27,549) (6,996) (2,411)
Other income (expense):
Interest income 1 7 620 1,069 516
Other income (expense) 24 (56) 74 (202) 769
Interest expense (1,088) (3,018) (3,043) (1,493) (1)
--------- --------- --------- --------- ---------
Total other income (expense) (1,063) (3,067) (2,349) (626) 1,284
--------- --------- --------- --------- ---------
Loss before provision (benefit) for income taxes (3,675) (10,317) (29,898) (7,622) (1,127)
Provision (benefit) for income taxes 11 2 (4,778) (2,435) 30
--------- --------- --------- --------- ---------
Loss before extraordinary item and change
in accounting principle (3,686) (10,319) (25,120) (5,187) (1,157)
Extraordinary item- Gain on debt forgiveness 1,476 -- -- -- --
Cumulative effect of changing accounting principle
- Goodwill valuation under SFAS 142 (627) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (2,837) (10,319) (25,120) (5,187) (1,157)
Income (loss) from discontinued operations 119 (4,339) (3,825) 1,133 6,742
--------- --------- --------- --------- ---------
Net income (loss) (2,718) (14,658) (28,945) (4,054) 5,585
Cumulative preferred dividends 1,015 254 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) available to
common stockholders $ (3,733) $(14,912) $(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
Cumulative preferred dividends (0.03) (0.01) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) available to
common stockholders $ (0.12) $ (0.42) $ (0.83) $ (0.12) $ 0.20
========= ========= ========= ========= =========
5
YEAR ENDED MARCH 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(in thousands)
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
Cumulative preferred dividends (0.03) (0.01) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders $ (0.12) $ (0.42) $ (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
BALANCE SHEET DATA:
Working capital $ (4,056) $ (5,337) $ (2,782) $ 2,628 $ 26,387
Total assets $ 37,637 $ 40,005 $ 56,453 $ 94,083 $ 52,374
Long-term obligations $ 2,807 $ 8,013 $ 18,554 $ 21,586 $ 2,043
Stockholders' equity $ 23,842 $ 21,952 $ 26,993 $ 53,497 $ 45,270
(1) Except for the year ended March 31, 2003, certain reclassifications are
reflected in the above data since the filing of such annual reports on forms
10KSB, 10K and 10K/A. Such reclassifications did not result in changes in net
income (loss), net income (loss) per share or stockholders' equity.
RISK FACTORS
THE PURCHASE OF OUR SHARES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY
CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A DECISION TO BUY OUR COMMON
STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS COULD BE
HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE OTHER
INFORMATION IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES. EXCEPT FOR HISTORICAL INFORMATION, THE INFORMATION IN THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING" STATEMENTS ABOUT OUR EXPECTED FUTURE
BUSINESS AND PERFORMANCE. OUR ACTUAL OPERATING RESULTS AND FINANCIAL PERFORMANCE
MAY PROVE TO BE VERY DIFFERENT FROM WHAT WE MIGHT HAVE PREDICTED AS OF THE DATE
OF THIS PROSPECTUS. THE RISKS DESCRIBED BELOW ADDRESS SOME OF THE FACTORS THAT
MAY AFFECT OUR FUTURE OPERATING RESULTS AND FINANCIAL PERFORMANCE.
BUSINESS RISKS
WE INCURRED LOSSES FOR FISCAL YEARS 2003, 2002, 2001 AND 2000.
We incurred losses of $2.7 million, $14.7 million, $28.9 million and
$4.1 million in the fiscal years ended March 31, 2003, 2002, 2001, and 2000
respectively. The losses in the past four years have generally been due to
difficulties completing sales for new application software licenses, the
resulting change in sales mix toward lower margin services, and debt service
expenses. We will need to generate additional revenue to achieve profitability
in future periods. If we are unable to achieve profitability, or maintain
profitability if achieved, may have a material adverse effect on our business
and stock price and we may be unable to continue operations at current levels,
if at all.
WE HAD NEGATIVE WORKING CAPITAL IN PRIOR FISCAL YEARS, AND WE HAVE EXTENDED
PAYMENT TERMS WITH A NUMBER OF OUR SUPPLIERS.
At March 31, 2003, 2002 and 2001, we had negative working capital of
$4.1 million, $5.3 million and $2.8 million, respectively. We have had
difficulty meeting operating expenses, including interest payments on debt,
lease payments and supplier obligations. We have at times deferred payroll for
our executive officers, and borrowed from related parties to meet payroll
obligations. We have extended payment terms with our trade creditors wherever
possible.
6
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, and we may be
unable to obtain these products from other parties on terms acceptable to us, if
at all.
OUR NET SALES HAVE DECLINED IN RECENT FISCAL YEARS. WE EXPERIENCED A SUBSTANTIAL
DECREASE IN APPLICATION SOFTWARE LICENSE SALES. OUR GROWTH AND PROFITABILITY IS
DEPENDENT ON THE SALE OF HIGHER MARGIN LICENSES.
Our net sales decreased by 16% in the fiscal year ended March 31, 2003,
compared to the fiscal year ended March 31, 2002. Our net sales decreased by 5%
in the fiscal year ended March 31, 2002 compared to the fiscal year ended March
31, 2001. We experienced a substantial decrease in application license software
sales, which typically carry a much higher margin than other revenue sources. We
must improve new application license sales to become profitable. We have taken
steps to refocus our sales strategy on core historic competencies, but our
typically long sales cycles make it difficult to evaluate whether and when sales
will improve. We cannot be sure that the decline in sales has not been due to
factors which might continue to negatively affect sales.
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 past financial condition has made it 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 have 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.
7
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAKES IT DIFFICULT TO PREDICT
FUTURE RESULTS.
Factors outside our control that could cause our revenue to fluctuate
significantly from period to period include:
o The size and timing of individual orders, particularly with
respect to our larger customers;
o General health of the retail industry and the overall economy;
o Technological changes in platforms supporting our software
products; and
o Market acceptance of new applications and related services.
In particular, we usually deliver our software applications when
contracts are signed, so order backlog at the beginning of any quarter may
represent only a portion of that quarter's expected revenues. Application
license revenues in any quarter are substantially dependent on orders booked and
delivered in that quarter. Additionally, 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. As a result of these factors, it is difficult for us to predict
revenues and adjust costs as necessary.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD, WHICH COULD AFFECT QUARTERLY
RESULTS AND OUR STOCK PRICE.
If we incur additional expenses in a quarter in which we do not
experience increased revenue, our results of operations would be adversely
affected and we may incur losses for that quarter. Factors that could cause our
expenses to fluctuate from period to period include:
o The extent of marketing and sales efforts necessary to promote and
sell our applications and services;
o The timing and extent of our development efforts; and
o The timing of personnel hiring.
IT IS DIFFICULT TO EVALUATE OUR PERFORMANCE BASED ON PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
The many factors which can cause revenues and expenses to vary make
meaningful period to period comparisons of our results difficult. We do not
believe period to period comparisons of our financial performance are
necessarily meaningful, and you cannot rely on them as an indication of our
future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from
October through December of each year as a result of retailers' focus on the
holiday retail-shopping season. This can negatively affect revenues in our third
fiscal quarter and in other quarters, depending on our sales cycles.
WE 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, our former director, made short-term loans
to us in fiscal 2002 and in fiscal 2003 to meet payroll when cash on hand was
not sufficient. Softline Limited ("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 former Chairman. We borrowed
an additional $164,000 from Mr. Schechter in March 2001, which was repaid in
July 2001, for operational needs related to our Australian subsidiary.
We may not be able to obtain capital from related parties in the
future. No officer, director, stockholder or related party is under any
obligation to continue to provide cash to meet our future liquidity needs.
8
WE MAY NEED TO RAISE CAPITAL TO GROW OUR BUSINESS. OBTAINING THIS CAPITAL COULD
IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise 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 73% of our total assets as of
September 30, 2003. We may have to impair or write-off these assets, which will
cause a charge to earnings and could cause our stock price to decline.
Any such impairments will also reduce our assets, as well as the ratio
of our assets to our liabilities. These balance sheet effects could make it more
difficult for us to obtain capital, and could make the terms of capital we do
obtain more unfavorable to our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our
applications and services and our expenses, and foreign currency losses will
negatively affect profitability or increase losses. Approximately 12%, 9% and 8%
of our net sales from continuing operations 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.
HISTORICALLY WE HAVE BEEN DEPENDENT ON A SMALL NUMBER OF CUSTOMERS FOR A
SIGNIFICANT AMOUNT OF OUR BUSINESS.
Toys "R" Us ("Toys") accounted for 13% of our net sales for the six
month period ended September 30, 2003, and 31%, 47% and 33% of our net sales for
the fiscal years ended March 31, 2003, 2002 and 2001, respectively. QQQ Systems
Ltd. ("QQQ Systems") accounted for 32% of our net sales for the six months ended
September 30, 2003. In November 2003, Toys terminated their software development
and services agreement with us. We cannot provide any assurances that QQQ
Systems 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 our Chairman and Chief Executive Officer,
Harvey Braun, and our President and Chief Operating Officer, Steven Beck. We do
not have any written employment agreements with Mr. Braun or Mr. Beck. We are
also heavily dependent on our former Chairman, Barry Schechter, who remains a
consultant to us. We do not have a written consulting agreement with Mr.
Schechter. 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.
9
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. Uncertain economic conditions and the specter of terrorist activities
have adversely impacted sales of our software applications, and we believe
mid-tier specialty retailers may be reluctant during the current economic
climate to make the substantial infrastructure investment that generally
accompanies the implementation of our software applications, 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 who
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
10
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:
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 INITIATE
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 initiate 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 subject to 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.
11
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, and 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 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 material 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.
THE SAGE GROUP PLC (THE "SAGE GROUP") HAS THE RIGHT TO ACQUIRE A SIGNIFICANT
PERCENTAGE OF OUR COMMON STOCK, WHICH IF ACQUIRED BY THE SAGE GROUP, MAY ENABLE
THE SAGE GROUP TO EXERCISE EFFECTIVE CONTROL OF US.
On November 14, 2003, the Sage Group acquired substantially all of the
assets of Softline, including Softline's 141,000 shares of our Series A
Convertible Preferred Stock, which are convertible into 18,700,185 shares of our
common stock within 60 days of January 8, 2004 (the 18,700,185 shares consist of
18,478,789 shares issuable as of January 8, 2004 and 221,396 shares that will be
issuable within 60 days of January 8, 2004 on account of accrued and unpaid
dividends during that 60 day period), 8,923,915 shares of our common stock and
options to purchase 71,812 shares of our common stock. The Sage Group
beneficially owns approximately 41.7% of our outstanding common stock, including
shares the Sage Group has the right to acquire upon conversion of its Series A
Convertible Preferred Stock and exercise of its outstanding options. Although
the Series A Convertible Preferred Stock is redeemable by us and 25,125,000
shares of common stock beneficially owned by the Sage Group are subject to an
option held by Steven Beck, as trustee of a certain management group of the
Company, if the Sage Group converts its Series A Convertible Preferred Stock, it
may have effective control over all matters affecting us, including:
12
o The election of all of our directors;
o The allocation of business opportunities that may be suitable for
the Sage Group and us;
o Any determinations with respect to mergers or other business
combinations involving us;
o The acquisition or disposition of assets or businesses by us;
o Debt and equity financing, including future issuance of our common
stock or other securities;
o Amendments to our charter documents;
o The payment of dividends on our common stock; and
o Determinations with respect to our tax returns.
THE SAGE GROUP'S POTENTIAL INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR
ANOTHER COMPANY TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
The Sage Group beneficially owns a significant percentage of our common
stock. In addition, two of the current members of our board of directors are
employed by a subsidiary of the Sage Group. The Sage Group's potential effective
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, the Sage Group's potential
effective 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 ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common
stock. We anticipate that we will use our earnings and cash flow for repayment
of indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Holders of our Series
A Convertible Preferred Stock are entitled to dividends 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 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.
13
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 ISSUABLE UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND
CONVERTIBLE NOTES OR UNDER ANTI-DILUTION PROVISIONS IN CERTAIN AGREEMENTS COULD
DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our
employees and certain other persons at various prices, some of which are or may
in the future have exercise prices at below the market price of our stock. We
currently have outstanding options and warrants for 14,254,228 shares. Of these
options and warrants, as of January 8, 2004, 1,446,257 have exercise prices
above the recent market price of $1.92 per share (as of January 8, 2004), and
12,807,971 have exercise prices at or 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 2,284,217
shares available for issuance as of January 8, 2004. Future options issued under
the plan may have further dilutive effects.
We issued to Union Bank of California, N.A. an unsecured note that is
convertible into shares of common stock at a price per share of eighty percent
(80%) of the average share closing price of our common stock for the ten trading
day period immediately preceding the payoff date of the note, which is March 31,
2004. This note will have a dilutive effect on stockholders if converted. As of
September 30, 2003, the bank assigned this note to Roth Capital Partners, LLC.
Under a securities purchase agreement dated November 7, 2003 between
the Company and various institutional investors, for a six-month period the
Company is obligated to issue the investors additional shares of common stock,
if the Company or any subsidiary or affiliate of the Company sells any of the
Company's common stock for an aggregate purchase price of $1 million for a per
share price that is less than 120% of the then current per share purchase price
paid by such investors. The number of shares issued pursuant to the
anti-dilution provision when aggregated with all prior issuances pursuant to the
November 7, 2003 securities purchase agreement can not exceed 7,600,000 without
stockholder approval.
Sales of shares issued pursuant to exercisable options, warrants,
convertible notes or anti-dilution provisions 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.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS WITH PAGE DIGITAL
INCORPORATED ("PAGE DIGITAL") OR RETAIL TECHNOLOGIES INTERNATIONAL, INC. ("RTI")
OR REALIZE ALL OF THE ANTICIPATED BENEFITS OF THESE ACQUISITIONS.
On November 20, 2003, we executed an agreement pursuant to which we
will acquire Page Digital, subject to requisite regulatory, security holder and
other approvals, as well as satisfaction of customary closing conditions. On
January 6, 2004, we executed a Letter of Intent/Term Sheet pursuant to which we
intend to acquire RTI., subject to securing financing, due diligence, the
execution of a definitive agreement, the approval of the board of directors of
the Company and the approvals of the board of directors and shareholders of RTI.
These acquisitions involve integrating two companies that previously operated
independently into Island Pacific. These integrations will be complex, costly
and time-consuming processes. The difficulties of combining these companies'
operations include, among other things:
o Coordinating geographically disparate organizations, systems
and facilities;
o Strain on management resources due to integration demands;
o Integrating personnel with diverse business backgrounds;
o Consolidating corporate and administrative functions;
o Coordinating product development;
o Coordinating sales and marketing functions;
o Retaining key employees; and
o Preserving relationships with key customers.
14
SATISFYING CLOSING CONDITIONS MAY DELAY OR PREVENT COMPLETION OF THE PAGE
DIGITAL TRANSACTION.
The closing of the Page Digital acquisition is conditioned, among other
things, upon the California Commissioner of Corporations issuing us a permit
which is necessary to perfect our exemption under Section 3(a)(10) of the
Securities Act. Part of that process involves our participation in a Fairness
Hearing before the California Commissioner of Corporations. If the permit is not
issued, we will file a registration statement on Form S-4 and the closing will
occur immediately following the date of the Page Digital stockholders' meeting
called to approve the transaction. Filing a Form S-4 is costly and time
consuming. Dedicating the necessary financial and managerial resources to
prepare and file the Form S-4 could have a negative impact on our operations and
revenue.
SATISFYING CLOSING CONDITIONS MAY DELAY OR PREVENT THE COMPLETION OF THE RTI
TRANSACTION.
The closing of the RTI acquisition is conditioned, among other things,
upon our securing financing, completion of due diligence, executing definitive
agreements and securing the approval of the board of directors of Island Pacific
and the approvals of the board of directors and the shareholders of RTI.
Satisfying all these conditions is a complicated and time consuming process. We
will have to dedicate significant financial and managerial resources to
completing this transaction. It is possible that one of these conditions may
become difficult or impossible to satisfy delaying or frustrating the
consummation of the acquisition. There can be no assurance that the Company will
be able to secure the necessary financing to complete the acquisition of RTI.
BUSINESS RISKS FACED BY PAGE DIGITAL COULD DISADVANTAGE OUR BUSINESS.
Page Digital is a developer of multi-channel commerce software and
faces several business risks that could disadvantage our business if the
proposed transaction is consummated. These risks include many of the risks that
we face, described above, as well as:
o LONG AND VARIABLE SALES CYCLES MAKE IT DIFFICULT TO PREDICT
OPERATING RESULTS - Historically, the period between initial
contact with a prospective customer and the licensing of Page
Digital's products has ranged from one to twelve months. Page
Digital's average sales cycle is currently three months. The
licensing of Page Digital's products is often an enterprise wide
decision by customers that involves a significant commitment of
resources by Page Digital and its prospective customer. Customers
generally consider a wide range of issues before committing to
purchase Page Digital's products, including product benefits, cost
and time of implementation, ability to operate with existing and
future computer systems, ability to accommodate increased
transaction volume and product reliability. As a part of the sales
process, Page Digital spends a significant amount of resources
informing prospective customers about the use and benefits of Page
Digital products, which may not result in a sale, therefore
increasing operating expenses. As a result of this sales cycle,
Page Digital's revenues are unpredictable and could vary
significantly from quarter to quarter causing our operating
results to vary significantly from quarter to quarter.
o DEFECTS IN PRODUCTS COULD DIMINISH DEMAND FOR PRODUCTS AND RESULT
IN LOSS OF REVENUES - From time to time errors or defects may be
found in Page Digital's existing, new or enhanced products,
resulting in delays in shipping, loss of revenues or injury to
Page Digital's reputation. Page Digital's customers use its
products for business critical applications. Any defects, errors
or other performance problems could result in damage to Page
Digital's customers' businesses. These customers could seek
significant compensation from Page Digital for any losses.
Further, errors or defects in Page Digital's products may be
caused by defects in third-party software incorporated into Page
Digital products. If so, Page Digital may not be able to fix these
defects without the assistance of the software providers.
15
o FAILURE TO FORMALIZE AND MAINTAIN RELATIONSHIPS WITH SYSTEMS
INTEGRATORS COULD REDUCE REVENUES AND HARM PAGE DIGITAL'S ABILITY
TO IMPLEMENT PRODUCTS - A significant portion of Page Digital's
sales are influenced by the recommendations of systems
integrators, consulting firms and other third parties who assist
with the implementation and maintenance of Page Digital's
products. These third parties are under no obligation to recommend
or support Page Digital's products. Failing to maintain strong
relationships with these third parties could result in a shift by
these third parties toward favoring competing products, which
could negatively affect Page Digital's software license and
service revenues.
o PAGE DIGITAL'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, SO PAGE DIGITAL'S SUCCESS DEPENDS HEAVILY ON ITS 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. Page Digital must cost-effectively develop and
introduce new applications and related services that keep pace
with technological developments to compete. If Page Digital fails
to gain market acceptance for its existing or new offerings or if
Page Digital fails to introduce progressive new offerings in a
timely or cost-effective manner, our financial performance may
suffer.
o FAILURE TO PROTECT PROPRIETARY RIGHTS OR INTELLECTUAL PROPERTY, OR
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST PAGE DIGITAL
COULD RESULT IN PAGE DIGITAL LOSING VALUABLE ASSETS OR BECOMING
SUBJECT TO COSTLY AND TIME-CONSUMING LITIGATION - Page Digital's
success and ability to compete depend on its proprietary rights
and intellectual property. Page Digital relies on trademark, trade
secret and copyright laws to protect its proprietary rights and
intellectual property. Page Digital also has one issued patent.
Despite Page Digital's efforts to protect intellectual property, a
third party could obtain access to Page Digital's software source
code or other proprietary information without authorization, or
could independently duplicate Page Digital's software. Page
Digital may need to litigate to enforce intellectual property
rights. If Page Digital is unable to protect its intellectual
property it may lose a valuable asset. Further, third parties
could claim Page Digital has infringed their intellectual property
rights. Any claims, regardless of merit, could be costly and
time-consuming to defend.
o COMPETITION IN THE SOFTWARE MARKET IS INTENSE AND COULD REDUCE
PAGE DIGITAL'S SALES OR PREVENT THEM FROM ACHIEVING PROFITABILITY
- The market for Page Digital's products is intensely competitive
and subject to rapid technological change. Competition is likely
to result in price reductions, reduced gross margins and loss of
Page Digital's market share, any one of which could reduce future
revenues or earnings. Further, most of Page Digital's competitors
are large companies with greater resources, broader customer
relationships, greater name recognition and an international
presence. As a result, Page Digital's competitors may be able to
better respond to new and emerging technologies and customer
demands.
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS THE
WORDS MAY, WILL, SHOULD, EXPECT, PLAN, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT,
POTENTIAL OR CONTINUE, OR THE NEGATIVES OF SUCH WORDS OR OTHER COMPARABLE
TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO
THE ITEMS DISCUSSED UNDER "RISK FACTORS" AND OTHER SECTIONS OF THIS PROSPECTUS.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO OBLIGATION TO
UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE FILING OF THIS REPORT TO
CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
16
SELLING STOCKHOLDERS
We are registering 15,415,770 shares of our common stock for resale by
the selling stockholders named below. The term "selling stockholders" includes
each stockholder named below and such stockholder's transferees, pledgees,
donees or other successors. See "Registration Rights" and below for a more
complete description of our agreements with selling stockholders.
BACKGROUND
In this registration statement, 150% of 3,180,645 shares of common
stock held by Heartwood Capital, LP, Blackstone Partners, LP, Ruth Moore Bypass
Trust, Douglas Moore IRA, Moore Family Trust, Burlingame Equity Investors, LP,
033 Growth Partners I, L.P., 033 Growth Partners II, L.P., Oyster Pond Partners,
L.P., 033 Growth International Fund, Ltd., Passport Master Fund, LP, Passport
Master Fund II, LP and Deutsche Bank AG, London Branch are being registered
pursuant to a registration rights agreement dated November 7, 2003. We sold
these shares of common stock to various institutional investors in a private
placement under a Securities Purchase Agreement dated November 7, 2003 (the
"November 7, 2003 PIPE Transaction"). See "Managements' Discussion and Analysis
of Financial Condition and Results of Operations - Financing Transactions,
Common Stock Institutional Investors."
In connection with the November 7, 2003 PIPE Transaction we granted
Roth Capital Partners, LLC ("Roth Capital"), as compensation for services
rendered as placement agent in the transaction, 115,226 shares of our common
stock and a five-year warrant to purchase 282,065 shares of our common stock at
$1.71 per share. We also granted Roth Capital registration rights under our
registration rights agreement executed in connection with the November 7, 2003
PIPE Transaction. All the shares held by or issuable to Roth Capital in
connection with the November 7, 2003 PIPE Transaction are being registered in
this registration statement.
For the six-month period following the November 7, 2003 PIPE
Transaction, the Company is required to issue additional shares to the November
7, 2003 PIPE Transaction investors if the Company or any subsidiary or affiliate
of the Company sells any of the Company's common stock for an aggregate purchase
price of $1 million in any 30 day period for a per share price that is less than
120% of the then current per share purchase price paid by the November 7, 2003
PIPE Transaction investors. For example: If the original purchase price ($1.55
per share) would apply, 120% of $1.55 is $1.86. If the Company was to receive
proceeds of more than $1 million during any 30 day period through May 6, 2004,
from the sale of the Company's common stock at less than $1.86 per share, then
the investors would be entitled to additional shares. Under the formula, and for
illustration purposes only, if the Company sold common shares at $1.75 per
share, then the investors would be entitled to receive an additional 213,505
shares on a pro-rata basis. This would increase the number of shares purchased
by the investors for $4,930,000 to 3,394,148 ($1.245 per share.) The number of
shares issued pursuant to the anti-dilution provision when aggregated with all
prior issuances in the November 7, 2003 PIPE Transaction cannot exceed 7,600,000
without stockholder approval. After full negotiations with the investors, the
Company provided this anti-dilution provision as an incentive to the investors
for their participation in the PIPE Transaction. To provide for this potential
issuance of additional shares, the Company is required to register 150% of the
shares purchased in the November 7, 2003 PIPE Transaction.
In addition, we are registering (a) 8,923,915 shares of common stock,
71,812 shares of common stock underlying the stock options and 624,281 shares of
common stock issuable on the conversion of Series A Convertible Preferred Stock
held by the Sage Group, who has registration rights with respect to the 624,281
shares issuable upon conversion of the Series A Convertible Preferred Stock and
has "piggy-back" registration rights with respect to the 8,923,915 shares of
common stock and 71,812 shares of common stock underlying options; (b) 100,000
shares of common stock held by Cord Camera Centers, Inc., who has registration
rights; (c) 204,319 shares of common stock held by Koyah Leverage Partners,
L.P., Koyah Partners, L.P. and Raven Partners, L.P., all of whom have
registration rights; (d) 114,849 shares of common stock held by Ronald Koren,
David Leacock, Augusto Rosero, Manuel Vicente, Cheryl Valencia, Randy Pagnotta,
Rachel Glicksman and Richardson & Patel, LLP, all of whom have "piggy-back"
registration rights; and (e) 208,333 shares of common stock underlying the
warrant held by KBK Ventures, Inc., who has "piggy-back" registration rights.
17
The following table, which reflects stockholdings as of January 8,
2004, is based in part upon information provided by the selling stockholders and
sets forth (i) the names of the selling stockholders; (ii) the number of shares
of our common stock that the selling stockholders owned prior to the offering
for resale of any of the shares of our common stock being registered hereby;
(iii) the maximum number of shares of our common stock that may be offered for
resale for the accounts of the selling stockholders pursuant to this prospectus;
and (iv) the percentage of shares of common stock to be held by the selling
stockholders after the offering of the resale shares (assuming all of the resale
shares are sold by the selling stockholders).
NUMBER OF SHARES OF IPI NUMBER OF SHARES OF IPI NUMBER OF SHARES OF IPI PERCENTAGE OF COMMON
COMMON STOCK COMMON STOCK TO BE COMMON STOCK BENEFICIALLY STOCK BENEFICIALLY OWNED
SELLING STOCKHOLDERS BENEFICIALLY OWNED (1) RESOLD IN THE OFFERING OWNED AFTER THE OFFERING(2) AFTER THE OFFERING (2)
-------------------- ---------------------- ---------------------- --------------------------- ----------------------
Douglas Moore (3)* 280,500* 172,500 165,500 <1%
Blackstone Partners, LP (4)* 72,000* 52,500 37,000 <1%
Burlingame Equity Investors, LP (5)* 100,000* 150,000 0 0%
033 Growth Funds (6)* 5,354,700* 3,870,969 2,774,055 5.7%
Passport Master Funds (7)* 619,600* 375,001 369,600 <1%
Deutsche Bank AG, London Branch (8)* 100,000* 150,000 0 0%
Ronald Koren 3,085 2,685 400 <1%
David Leacock (9) 11,024 3,664 7,360 <1%
Augusto Rosero (10) 7,800 500 7,300 <1%
Manuel Vicente (11) 7,760 500 7,260 <1%
Cheryl Valencia 10,292 2,500 7,792 <1%
Randy Pagnotta 75,000 75,000 0 0%
Rachel Glicksman 74,120 15,000 59,120 <1%
Richardson & Patel, LLP (12) 15,000 15,000 0 0%
Cord Camera Centers, Inc. (13) 100,000 100,000 0 0%
The Sage Group plc (14) 27,695,912 9,620,008 18,075,904 37%
Roth Capital Partners, LLC (15) 924,791 397,291 527,500 1.1%
KBK Ventures, Inc. (16) 294,933 208,333 86,600 <1%
Koyah Leverage Partners, L.P. (17) 2,854,201 153,239 2,700,962 5.5%
Koyah Partners, L.P. (18) 641,881 30,648 611,233 1.3%
Raven Partners, L.P. (19) 274,464 20,432 254,032 <1%
18
* 150% of the shares of common stock purchased by this investor in the November
7, 2003 PIPE Transaction are being registered in accordance with related
registration rights agreement also dated November 7, 2003.
(1) The number of shares does not include an indeterminate number of additional
shares that may be registered and issued in accordance with Rule 416 under the
Securities Act to prevent dilution of the common stock resulting from stock
splits, stock dividends or other events.
(2) Percentage of shares of common stock beneficially owned by each stockholder
after the offering is (a) based upon 47,683,626 shares of our common stock
outstanding as of January 8, 2004, plus 1,186,491 shares of common stock
issuable upon the exercise of options and warrants, which shares are being
registered in this prospectus, plus all shares issuable to such investor within
60 days of January 8, 2004 pursuant to outstanding options, warrants and
preferred stock and (b) assumes that the selling stockholders sell all shares of
our common stock that are registered pursuant to this prospectus, excluding the
additional 50% of the shares of common stock purchased in the November 7, 2003
PIPE Transaction that are required to be registered by the related registration
rights agreement.
(3) Douglas Moore is the beneficial owner of 280,500 shares of common stock,
including 176,600 shares of common stock held by Heartwood Capital, LP, 15,500
shares of common stock held by the Ruth Moore Bypass Trust, 39,900 shares of
common stock held by the Moore Family Trust and 48,500 shares of common stock
held by the Douglas Moore IRA. Douglas Moore is the general partner of Heartwood
Capital, LP and has sole voting and dispositive power over the shares held by
Heartwood Capital, LP..
(4) Tom Tyson is the general partner of Blackstone Partners, LP and has sole
voting and dispositive power over these shares. Blackstone Partners, LP is a
broker-dealer. It acquired the shares being registered in the ordinary course of
business and it had no agreements, understandings or arrangements with any other
persons, either directly or indirectly, to dispose of the securities, at the
time of acquisition. Blackstone Partners, LP is an underwriter with respect to
the shares they are offering.
(5) Blair E. Sanford is the general partner of Burlingame Equity Investors, LP
and has sole voting and dispositive power over these shares.
(6) 033 Growth Partners I, L.P., 033 Growth Partners II, L.P., Oyster Pond
Partners, L.P. and 033 Growth International Fund, Ltd. are all beneficial owners
of 5,354,700 shares of common stock, comprised of 2,887,033 shares of common
stock held by 033 Growth Partners I, L.P., 806,244 shares of common stock held
by 033 Growth Partners II, L.P., 401,222 shares of common stock held by Oyster
Pond Partners, L.P. and 1,260,201 shares of common stock held by 033 Growth
International Fund, Ltd. 033 Asset Management, LLC has sole voting and
dispositive power over all these shares. Lawrence C. Longo, Jr. has sole voting
power and Michael T. Vigo has sole dispositive power with respect to all these
shares.
(7) Passport Master Fund, LP and Passport Master Fund II, LP are the beneficial
owners of 619,600 shares of common stock, comprised of 446,670 shares of common
stock held by Passport Master Fund, LP and 172,930 shares of common stock held
by Passport Master Fund II, LP. John Burbank and Ralph McCluskey have shared
voting and dispositive power over all these shares.
(8) Deutsche Bank AG is a broker-dealer. It acquired the shares being registered
in the ordinary course of business and it had no agreements, understandings or
arrangements with any other persons, either directly or indirectly, to dispose
of the securities, at the time of acquisition. Deutsche Bank AG is an
underwriter with respect to the shares they are offering.
(9) Includes 7,060 shares of common stock issuable upon exercise of options held
by Mr. Leacock.
(10) Includes 7,300 shares of common stock issuable upon exercise of options
held by Mr. Rosero.
(11) Includes 7,260 shares of common stock issuable upon exercise of option held
by Mr. Vicente.
19
(12) Erick Richardson is the managing partner of Richardson & Patel, LLP and has
sole voting and dispositive power over these shares.
(13) Steve Cordle is the president of Cord Camera Centers, Inc. and has sole
voting and dispositive power over these shares.
(14) Includes 8,923,915 shares of common stock and 71,812 shares of common stock
issuable upon exercise of options held by the Sage Group. Also includes
18,700,185 shares of common stock issuable upon conversion of Series A
Convertible Preferred Stock held by the Sage Group. The 18,700,185 shares
consist of 18,478,789 shares issuable as of January 8, 2004 and 221,396 shares
that will be issuable within 60 days of January 8, 2004 on account of accrued
and unpaid dividends during that 60 day period.
(15) Includes 809,565 shares of common stock issuable upon exercise of warrants
held by Roth Capital, of which we are registering 282,065 shares of common
stock. We are also registering 115,226 shares of common stock held by Roth
Capital. Byron Roth and Gordon Roth share voting and dispositive power over all
of these shares. Roth Capital is a broker-dealer. It acquired the shares being
registered in the ordinary course of business and it had no agreements,
understandings or arrangements with any other persons, either directly or
indirectly, to dispose of the securities, at the time of acquisition. Roth
Capital received the warrant as transaction based compensation for investment
banking services.
(16) Includes 208,333 shares of common stock issuable upon exercise of warrant
held by KBK Ventures, Inc. and 86,600 shares of common stock held by David
Bromberg, president of KBK Ventures Inc. David Bromberg has sole voting and
dispositive power over all these shares.
(17) Includes 1,257,925 shares of common stock issuable upon exercise of
warrants held by Koyah Leverage Partners, L.P. Koyah Ventures, LLC is the
general partner of Koyah Leverage Partners, L.P. and as a result has shared
voting and dispositive power over shares held by Koyah Leverage Partners, L.P.
ICM Asset Management, Inc. is the investment advisor to Koyah Leverage Partners,
L.P. and as a result has shared voting and dispositive power over shares held by
Koyah Leverage Partners, L.P. James M. Simmons is the managing member of Koyah
Ventures, LLC and the President and Chief Investment Officer and the controlling
shareholder of ICM Asset Management, Inc. and as a result has shared voting and
dispositive power over shares held by Koyah Leverage Partners, L.P. James M.
Simmons disclaims beneficial ownership of the shares held by Koyah Leverage
Partners, L.P.
(18) Includes 309,784 shares of common stock issuable upon exercise of warrants
held by Koyah Partners, L.P. Koyah Ventures, LLC is the general partner of Koyah
Partners, L.P. and as a result has shared voting and dispositive power over
shares held by Koyah Partners, L.P. ICM Asset Management, Inc. is the investment
advisor to Koyah Partners, L.P. and as a result has shared voting and
dispositive power over shares held by Koyah Partners, L.P. James M. Simmons is
the managing member of Koyah Ventures, LLC and the President and Chief
Investment Officer and the controlling shareholder of ICM Asset Management, Inc.
and as a result has shared voting and dispositive power over shares held by
Koyah Partners, L.P. James M. Simmons disclaims beneficial ownership of the
shares held by Koyah Partners, L.P.
(19) Includes 12,535 shares of common stock issuable upon exercise of warrants
held by Raven Partners, L.P. Koyah Ventures, LLC and Raven Ventures, LLC are the
general partners of Raven Partners, L.P. and as a result have shared voting and
dispositive power over shares held by Raven Partners, L.P. ICM Asset Management,
Inc. is the investment advisor to Raven Partners, L.P. and as a result has
shared voting and dispositive power over shares held by Raven Partners, L.P.
James M. Simmons is the managing member of Koyah Ventures, LLC and Raven
Ventures, LLC and the President and Chief Investment Officer and the controlling
shareholder of ICM Asset Management, Inc. and as a result has shared voting and
dispositive power over shares held by Raven Partners, L.P. James M. Simmons
disclaims beneficial ownership of the shares held by Raven Partners, L.P.
20
PLAN OF DISTRIBUTION
The shares of common stock offered for resale through this prospectus
may be sold from time to time by the selling stockholders in one or more
transactions at fixed prices, at market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The selling
stockholders may offer their shares of common stock in one or more of the
following transactions:
o On any national securities exchange or quotation service at which
the common stock may be listed or quoted at the time of sale,
including the American Stock Exchange;
o In the over-the-counter market;
o In private transactions;
o Through options;
o By pledge to secure debts and other obligations;
o In ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchases;
o In block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o Through purchases by a broker-dealer as principal and resale by
the broker-dealer for its account;
o Through an exchange distribution in accordance with the rules of
the applicable exchange;
o In settlement of short sales;
o Through the sale of a specified number of shares at a stipulated
price per share by agreement between broker-dealers and the
selling shareholders; or
o A combination of any of the above methods.
If required, we will distribute a supplement to this prospectus to
describe material changes in the terms of the offering.
The shares of common stock described in this prospectus may be sold
from time to time directly by the selling stockholders. Alternatively, the
selling stockholders may from time to time offer shares of common stock to or
through underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"). Any profits on
the resale of shares of common stock and any compensation received by any
underwriter, broker/dealer or agent may be deemed to be underwriting discounts
and commissions under the Securities Act.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares and, if they default in the
performance of any of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provisions of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders may also transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
Any shares covered by this prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares we are registering. The selling stockholders may transfer, devise or gift
such shares by other means not described in this prospectus.
21
To comply with the securities laws of certain jurisdictions, the common
stock must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the shares may not be offered or
sold unless they have been registered or qualified for sale or an exemption is
available and the selling stockholder complies with the exemption.
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), any person engaged in a distribution of the common stock may not
simultaneously engage in market-making activities with respect to the common
stock for nine business days prior to the start of the distribution. In
addition, each selling stockholder and any other person participating in a
distribution will be subject to the Exchange Act which may limit the timing of
purchases and sales of common stock by the selling stockholders or any such
other person. These factors may affect the marketability of the common stock and
the ability of brokers or dealers to engage in market-making activities.
We will pay all expenses of this registration. These expenses include
the filing fees of the Securities and Exchange Commission (the "SEC"), fees
under state securities or "blue sky" laws, and accounting and legal fees. We
estimate that our expenses in connection with this registration will be
approximately $40,000. All expenses for the issuance of any supplement to this
prospectus will be paid by us. The selling stockholders may pay selling
commissions or brokerage fees with respect to the sale of the resale shares by
them. Some of the selling stockholders will be indemnified by us against certain
civil liabilities under securities laws or will be entitled to contribution in
connection therewith. We will be indemnified by some of the selling stockholders
against certain liabilities under securities laws or will be entitled to
contribution in connection therewith.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale by the selling
stockholders of any of the shares of common stock covered by this prospectus.
All proceeds from the resale of the shares of our common stock described in this
prospectus will be for the accounts of the selling stockholders.
DIVIDEND POLICY
We have never declared any dividends on common stock. We currently
intend to retain any future earnings to discharge indebtedness and finance the
growth and development of the business. We therefore we do not anticipate paying
any cash dividends on common stock in the foreseeable future. Furthermore, our
Certificate of Designation restricts us from declaring dividends on our common
stock until we first declare and pay all accrued and unpaid dividends to the
holders of Series A Convertible Preferred Stock. Any future determination to pay
cash dividends on common stock when we are permitted to do so will be at the
discretion of the board of directors and will be dependent upon the future
financial condition, results of operations, capital requirements, general
business conditions and other factors that the board of directors may deem
relevant.
PRICE RANGE OF COMMON STOCK
Until July 15, 2003, our common stock was listed on the American Stock
Exchange under the symbol "SVI" and had traded on that exchange since July 8,
1998. Effective July 16, 2003, our common stock traded on the American Stock
Exchange under the symbol "IPI". The following table indicates the high and low
sales prices for our shares for each quarterly period for each of our two most
recent fiscal years and for the first and second quarter of the current fiscal
year.
YEAR ENDING MARCH 31, 2004 HIGH LOW
First Quarter $ 2.650 $ 0.880
Second Quarter $ 3.650 $ 2.100
Third Quarter $ 2.380 $ 1.770
YEAR ENDED MARCH 31, 2003 HIGH LOW
First Quarter $ 0.660 $ 0.300
Second Quarter $ 1.300 $ 0.210
Third Quarter $ 1.250 $ 0.400
Fourth Quarter $ 1.170 $ 0.550
22
YEAR ENDED MARCH 31, 2002 HIGH LOW
First Quarter $ 1.600 $ 0.650
Second Quarter $ 1.040 $ 0.690
Third Quarter $ 1.010 $ 0.670
Fourth Quarter $ 0.920 $ 0.580
YEAR ENDED MARCH 31, 2001 HIGH LOW
First Quarter $ 10.250 $ 5.125
Second Quarter $ 7.063 $ 4.760
Third Quarter $ 5.000 $ 0.950
Fourth Quarter $ 2.700 $ 0.910
As of January 8, 2004 there were 47,683,626 shares of our common stock
outstanding, which were held by approximately 185 stockholders of record. On
January 15, 2004 the closing price of our stock was $2.50 as reported on the
American Stock Exchange.
RECENT TRANSACTIONS
On January 6, 2004, we executed a Letter of Intent/Term Sheet pursuant
to which we intend to acquire RTI, a provider of management systems for
retailers, for a purchase price of $11 million, consisting of $5 million in
cash, and $6 million in shares of our common stock determined by dividing $6
million by the average closing price of the Company's common stock over the ten
day period immediately preceding the closing of the transaction. In addition, we
will assume approximately $2.5 million in debt owed to certain RTI security
holders. The closing of the transaction is subject to securing financing, due
diligence, the execution of a definitive agreement, the approval of the board of
directors of the Company and the approvals of the board of directors and
shareholders of RTI. There can be no assurance that the Company will be able to
secure the financing required to complete the acquisition of RTI. RTI has total
assets of approximately $4.3 million (un-audited) and generates annual revenues
of approximately $8.0 million (un-audited). RTI had 59 employees as of January
8, 2004, all based in the United States.
On November 20, 2003, we executed an agreement by which through a
merger transaction we would acquire Page Digital, a developer of multi-channel
commerce software for consideration of $7.0 million, consisting of $2.0 million
in cash and 2,500,000 shares of our common shares valued at $2.00. The agreement
also provides for a potential adjustment to the number of shares in the merger
exchange to the extent our common stock trades below $1.50 for the 20 trading
days immediately prior to the closing. We anticipate the closing will occur
immediately following a fairness hearing before the California Commissioner of
Corporations in order to perfect our exemption under Section 3(a)(10) of the
Securities Act, or, alternatively, if the fairness hearing does not result in
our ability to avail ourselves of that exemption, the closing would occur
immediately following the effectiveness of an S-4 registration statement which
we would file under the Securities Act. Page Digital has total assets of
approximately $2.0 million (unaudited) and generates annual revenues of
approximately $6.0 million (unaudited). Page Digital had 37 employees as of
September 30, 2003, all of whom were based in the United States.
An option agreement (the "Option Agreement") was prepared and agreed
upon by Softline Limited ("Softline") and Steven Beck, as trustee of a certain
management group of the Company (the "Optionees"). Under the Option Agreement
Softline agreed to grant the Optionee the right to purchase from Softline
8,000,000 shares of common stock of the Company and such number of shares of
Series A Convertible Preferred Stock convertible into 17,125,000 shares of
common stock of the Company (the "Option Shares") for a price of $0.80 per
Option Share. The Option Agreement would expire on the earlier of March 24, 2004
and the date on which an Optionee's full-time employment as an officer or
director of the Company is terminated for any reason. On September 17, 2003,
500,000 shares of common stock underlying the Series A Convertible Preferred
Stock were issued in the names of 033 Growth Partners I, L.P., 033 Growth
Partners II, L.P., Oyster Pond Partners, L.P. and 033 Growth International Fund
Ltd.
23
On November 14, 2003, the Sage Group acquired substantially all the
assets of Softline, including Softline's 141,000 shares of our Series A
Convertible Preferred Stock, which are convertible into 18,700,185 shares of
common stock within 60 days of January 8, 2004 (the 18,700,185 shares consist of
18,478,789 shares issuable as of January 8, 2004 and 221,396 shares that will be
issuable within 60 days of January 8, 2004 on account of accrued and unpaid
dividends during that 60 day period), 8,923,915 shares of our common stock and
71,812 shares of our common stock issuable on the exercise of options. The Sage
Group beneficially owns 41.7% of our common stock, including shares the Sage
Group has the right to acquire upon conversion of its Series A Convertible
Preferred Stock. In connection with the acquisition, certain agreements of
Softline, including the rights and obligations respecting and arising from the
Option Agreement, were also assigned to and assumed by the Sage Group.
Accordingly, the Optionees now have the right to purchase the Option Shares from
the Sage Group for a price of $0.80 per Option Share. The right to exercise the
Option is to be distributed as determined by the Company's Board to the
Optionees, who may include Mr. Beck and other members of the Company's
management, as an incentive to continue service for the Company. It is the
current intent of the Optionees to transfer their rights under the Option
Agreement to the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We are a provider of software solutions and services to the retail
industry. We provide solutions that help retailers understand, create, manage
and fulfill consumer demand.
Our solutions and services have been developed specifically to meet the
needs of the retail industry. Our solutions help retailers improve the
efficiency and effectiveness of their operations and build stronger, longer
lasting relationships with their customers.
We market our software solutions through direct and indirect sales
channels primarily to retailers who sell to their customers through traditional
retail stores, catalogs and/or internet-enabled storefronts. To date, we have
licensed our solutions to more than 200 retailers across a variety of retail
sectors.
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 ("IPSC") in April 1999 for $35
million cash.
We consider ourselves to be one of the leading providers of retail
enterprise applications. ARS was one of the leading providers of store
applications, and the technology we acquired and have subsequently enhanced now
forms the core of our Store Solutions.
We accounted for both the IPSC and ARS acquisitions using purchase
accounting, which has resulted in the addition of significant goodwill and
capitalized software assets on our balance sheet. See "Significant Accounting
Policies."
Effective April 1, 2002, we restructured our operations into three
strategic business units lead by experienced managers. The business units were
our retail management solutions (formerly referred to as our Island Pacific
unit), Store Solutions (formerly referred to as our SVI Store Solutions unit)
and SVI Training Products, Inc. (Training Products"). Effective April 1, 2003,
we sold the Training Products unit and discontinued the training product line of
business. Our operations are conducted principally in the United States and the
United Kingdom. Prior to February 2002, we also conducted business in Australia.
24
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
has historically ranged from three to twelve months, but new license sales were
limited during the past two fiscal years and sales cycles are now difficult to
estimate. Our long sales cycles have in the past caused our revenues to
fluctuate significantly from period to period. The reduction of new license
sales caused the revenues of our Australian subsidiary to decrease substantially
prior to discontinuation of operations in February 2002, and caused our sales
mix in the US and the UK to shift to lower margin services.
We manage long-lived assets by geographic region. The geographic
distribution of our revenues and long-lived assets for the six months ended
September 30, 2003 and 2002 and fiscal years ended March 31, 2003, 2002 and
2001, is as follows (in thousands):
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
---------- ----------
(UNAUDITED)
Net sales:
United States $ 11,114 $ 7,652
United Kingdom 1,031 1,038
---------- ----------
Total net sales $ 12,145 $ 8,690
========== ==========
September 30,
2003 2002
---------- ----------
(unaudited)
Identifiable assets:
United States $ 42,921 $ 35,584
United Kingdom 617 420
---------- ----------
Total identifiable assets $ 43,538 $ 36,004
========== ==========
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
-------- -------- --------
(in thousands)
Net Sales:
Continuing operations:
United States $19,616 $24,246 $25,930
United Kingdom 2,680 2,469 2,119
-------- -------- --------
22,296 26,715 28,049
-------- -------- --------
Discontinued operations:
United States 1,370 1,390 1,300
Australia -- 2,363 4,959
United Kingdom 147 146 216
-------- -------- --------
1,517 3,899 6,475
-------- -------- --------
Total net sales $23,813 $30,614 $34,524
======== ======== ========
Long-lived assets:
United States $31,595 $36,154 $48,270
Australia (discontinued operations) -- -- 1,370
United Kingdom 27 22 59
-------- -------- --------
Total long-lived assets $31,622 $36,176 $49,699
======== ======== ========
Up to April 1, 2002, we classified our operations into two lines of
business: retail solutions and training products. As revenues, results of
operations and assets related to our training products subsidiary were below the
threshold established for segment reporting, we considered our business for the
periods prior to April 1, 2002 to have consisted of one reportable operating
segment.
25
Effective April 1, 2002, we reorganized our operations into three
business units that have separate management teams and reporting
infrastructures. Each unit is evaluated primarily based on total revenues and
operating income excluding depreciation and amortization. Identifiable assets
are also managed by business units. The units are as follows:
o RETAIL MANAGEMENT SOLUTIONS - offers suite of applications, which
builds on our long history in retail software design and
development. We provide our customers with an extremely reliable,
widely deployed, comprehensive and fully integrated retail
management solutions. Retail Management Solutions includes
merchandise management that optimizes workflow and provides the
highest level of data integrity. This module supports all
operational areas of the supply chain including planning,
open-to-buy purchase order management, forecasting, warehouse and
store receiving distribution, transfers, price management,
performance analysis and physical inventory. In addition, Retail
Management Solutions includes a comprehensive set of tools for
analysis and planning, replenishment and forecasting, event and
promotion management, warehouse, ticketing, financials and sales
audit. Through collaborations with strategic partners, Retail
Management Solutions offers tools for loss prevention,
communication with stores and vendors, integration needs, purchase
and allocation decisions, analysis of weather impact, control and
management of business processes, consumer research, tracking
consumer shopping patterns, forecasting and replenishment, and
analyzing store people productivity.
o STORE SOLUTIONS - offers suite of applications builds on our long
history of providing multi-platform, client server in-store
solutions. We market this set of applications under the name
"OnePointe," and "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.
o TRAINING PRODUCTS, INC. ("Training Products") - developed and
distributed PC Courseware and skills assessment products for both
desktop and retail applications. This unit was sold and
discontinued effective April 1, 2003.
26
A summary of the revenues and operating income (loss), excluding depreciation
and amortization, attributable to each of these business units and identifiable
assets for the six months ended September 30, 2003 and twelve months ended March
31, 2003 is as follows (in thousands):
Six Months Twelve Months
Ended Ended
September 30, March 31,
2003 2003
------------- -------------
(unaudited)
Net sales:
Retail Management Solutions $ 11,370 $ 20,390
Store Solutions 775 1,906
Training Products -- 1,517
------------- -------------
Consolidated net sales $ 12,145 $ 23,813
============= =============
Operating income (loss):
Retail Management Solutions $ 4,819 3,129
Store Solutions (192) 129
Training Products -- 287
Other (see below) (3,456) (5,974)
------------- -------------
Consolidated operating loss $ 1,171 $ (2,429)
============= =============
Depreciation:
Retail Management Solutions $ 65 $ 192
Store Solutions 16 47
Other 25 91
------------- -------------
Consolidated depreciation $ 106 $ 330
============= =============
Other operating loss:
Amortization of intangible assets $ (1,660) $ (3,818)
Depreciation (106) (91)
Administrative costs and other non-allocated expenses (1,690) (2,065)
------------- -------------
Consolidated other operating loss $ (3,456) $ (5,974)
============= =============
Identifiable assets:
Retail Management Solutions $ 37,228 $ 31,953
Store Solutions 4,410 4,404
Training Products -- 381
------------- -------------
Consolidated identifiable assets $ 41,638 $ 36,738
============= =============
27
Operating income in Retail Management Solutions, Store Solutions and
Training Products includes direct expenses for software licenses, maintenance
services, programming and consulting services, sales and marketing expenses,
product development expenses, and direct general, administrative and
depreciation expenses. The "Other" caption includes amortization of intangible
assets, non-allocated costs and other expenses that are not directly identified
with a particular business unit and which we do not consider in evaluating the
operating income of the business unit.
Results of operations for fiscal 2003 reflect continued weakness in new
license sales of our application software suites. As a result of our net losses,
we experienced significant strains on our cash resources throughout the 2003
fiscal year. We have taken a number of affirmative steps to address our
operating situation and liquidity problems, and to position us for improved
results of operations.
o In July 2003, our Board of Directors appointed Ran Furman to the
position of Chief Financial Officer.
o In January 2003, we appointed Harvey Braun, a well-known and
highly-respected retail industry veteran, to the position of Chief
Executive Officer of Island Pacific, one of our business units. In
April 2003, our Board of Directors appointed Mr. Braun to the
positions of Chief Executive Officer and director and, in July
2003, to the position of Chairman of the Board.
o In October 2002, we appointed Steven Beck, a retail industry
expert, to the position of President of our Island Pacific unit.
In April 2003, our Board of Directors appointed Mr. Beck to the
positions of President and Chief Operating Officer and director.
o We are strengthening our product offerings through strategic
relationships with Planalytics, KMG Solutions, Raymark, Inc.,
Wazagua LLC, ANT USA, Inc. and IT Resources Inc.
o Under a partnership agreement with Planalytics Inc., Island
Pacific will market Impact LR, an internet-based application that
measures the specific effects of future weather on consumer demand
by product, location and time. Using Impact LR, our customers can
plan the timing of in-season markdowns, as well as the
season-to-season flow of merchandise into their stores with
maximum effectiveness.
o Under a marketing license agreement with KMG Solutions, Island
Pacific will integrate, market and support Traxion(TM) process
management solutions. Traxion's business process management
solution consists of three modules. Traxion ProcessEngine(TM) is
the real-time process management platform that retailers use to
actively manage and support their organizations' unique business
processes. Traxion ProcessModeler(TM), includes simulation
functions such as same-time comparison of process variations and
the use of actual cost data to produce process-based financial
estimates. Traxion OrganizationModeler(TM) simplifies the creation
of sophisticated models including inter-company workgroups,
payroll information, and roles.
o Under an OEM agreement with Raymark, Inc., we will integrate,
market and support Xpert Store point-of-sale ("POS") software
solution under the Island Pacific brand. Raymark's full-featured
POS solution streamlines the checkout process in order to increase
sales associate efficiency and augment customer satisfaction. The
software supports multi-channel, multi-language, multi-currency
and multi-taxation requirements.
o Under an 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.
28
o Under terms of a reseller agreement, we will market, sell,
install, interface to, and support ANT USA's products including
Buyer's Toolbox,(TM) a leading suite of merchandise and assortment
planning software that has been successfully implemented by over
140 retailers worldwide. The software will extend Island Pacific's
assortment and planning capabilities by providing a solid planning
methodology accessed through an easy-to-use interface, in a
cost-effective offering.
o A marketing license agreement with IT Resources Inc. enables
Island Pacific to market, sell, install, support and integrate IT
Resources' Buyer's WorkMate(r) Suite, an innovative decision
support software platform developed for merchandising
organizations. The software will bring mobility and other
timesaving benefits to the buying process.
o Under a marketing alliance agreement with BIGresearch, we will
provide retailers, suppliers and third party companies with an
end-to-end information solution to forecast consumer demand,
better utilize assets and merchandise, and develop strategy and
market position.
o As of April 1, 2002, we refocused the company into three strategic
business units each led by experienced managers. The units were
retail management solutions (formerly known as Island Pacific
division), Store Solutions (formerly known as our SVI Store
Solutions division), and SVI Training Products, Inc. Effective
April 1, 2003, we sold our shares of SVI Training Products, Inc.,
a wholly-owned subsidiary, to Arthur Klitofsky. Mr. Klitofsky
resigned from the Board in March 2003. See "Discontinued
Operations" below.
o We issued a total of $1.25 million in convertible notes to a
limited number of accredited investors related to ICM Asset
Management, Inc. of Spokane, Washington, a significant beneficial
owner of our common stock in fiscal 2001. In July 2002, we amended
the convertible notes to extend the maturity date to September 30,
2003 and we replaced the warrants issued to these investors. In
September 2003, the investors converted the outstanding balance of
principal and accrued interest totaling $1.4 million into
2,287,653 shares of our common stock. See "Financing Transactions
-- 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. Under this agreement, we paid the bank $2.8
million in cash and issued to the bank 1,000,000 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 Board decided that the
convertible note will be converted solely for equity and will not
be repaid in cash. In September 2003, the bank assigned the note
to Roth Capital Partners, LLC.
o In May 2002, we completed a series of transactions with 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 shares of Series A
Convertible Preferred Stock. Softline also transferred to us
10,700,000 shares of our common stock. Steven Cohen, then
Softline's Chief Operating Officer, and Gerald Rubenstein, then a
director of Softline, resigned from our board of directors in May
2002. Ivan Epstein, then Softline's Chief Executive Officer,
continues to serve on our board, and in June 2002, Robert P.
Wilkie, then Softline's Chief Financial Officer, was appointed to
our board of directors. On November 14, 2003, the Sage Group
acquired all of Softline's interest in our common stock, our
Series A Convertible Preferred Stock and options to purchase our
common stock. Messrs. Epstein and Wilkie are currently employed by
a subsidiary of the Sage Group. For a further discussion of the
terms of transactions with Softline during the 2002 fiscal year,
see "Financing Transactions - Softline/The Sage Group." For a
further discussion of the terms of the transaction between
Softline and the Sage Group, see "Recent Transactions" above.
29
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. In November 2003, we
entered into a agreement with Toys to terminate the software
development and services agreement. Pursuant to the agreement the
outstanding note was settled in full and the outstanding warrant
was cancelled. For a further details, see "Financing Transactions
-- Toys "R" Us Inc. 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. In August 2003, we exercised
our right to convert these debentures into shares of common stock
at the conversion rate of $1.0236. The conversion was deferred
until September 30, 2003, and the investors agreed to cease
accruing interest as of August 11, 2003. As of September 30, 2003,
the investors converted the remaining balance of their debentures
into an aggregate of 2,930,832 shares of common stock.
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". In August 2003, we
exercised our right to convert these debentures into shares of our
common stock at the conversion rate of $1.0236. As of September
2003, the investor converted its debenture into 390,777 shares of
our common stock.
o In March 2003, the Board adopted a resolution to change our name
to "Island Pacific, Inc.", and our shareholders approved this
change on July 9, 2003.
o In July 2003, our common stock began trading under the new ticker
symbol "IPI" on the American Stock Exchange.
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". Effective August 11, 2003, we exercised our right to
convert these debentures into shares of our common stock at the
conversion rate of $1.0236. As of September 30, 2003, the
investors converted their debentures in an aggregate of 293,082
shares of our common stock.
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 in a private placement transaction for an
aggregate purchase price of $7,912,500 (the "June 27, 2003 PIPE
Transaction"). See "Financing Transactions - Common Stock
Institutional Investors" below.
o In the November 7, 2003 PIPE Transaction, we sold an aggregate of
3,180,645 shares of common stock at a price of $1.55 per share to
various institutional investors in a private placement transaction
for an aggregate purchase price of $4.9 million. We also granted
the November 7, 2003 PIPE Transaction investors registration
rights under a registration rights agreement in which we agree to
file a registration statement with the Securities and Exchange
Commission for the resale of all of the shares sold in the
November 7, 2003 PIPE Transaction. If the registration statement
is not declared effective by February 5, 2007, we will be
obligated to pay on February 5, 2004, and each respective monthly
anniversary until the registration statement is filed or declared
effective, an amount in cash, as liquidated damages, equal to 2.0%
of the purchase price paid by the investors in the November 7,
2003 PIPE Transaction.
30
ACQUISITION OF PAGE DIGITAL
On November 20, 2003, we executed an agreement by which through a
merger transaction we would acquire Page Digital, a developer of multi-channel
commerce software for consideration of $7.0 million, consisting of $2.0 million
in cash and 2,500,000 shares of our common shares valued at $2.00. The agreement
also provides for a potential adjustment to the number of shares in the merger
exchange to the extent our common stock trades below $1.50 for the 20 trading
days immediately prior to the closing. We anticipate that there is a high
probability of closing this transaction. We anticipate the closing will occur
immediately following a fairness hearing before the California Commissioner of
Corporations in order to perfect our exemption under Section 3(a)(10) of the
Securities Act, or, alternatively, if the fairness hearing does not result in
our ability to avail ourselves of that exemption, the closing would occur
immediately following the effectiveness of an S-4 registration statement which
we would file under the Securities Act. Page Digital has total assets of
approximately $2.0 million (unaudited) and generates annual revenues of
approximately $6.0 million (unaudited). Page Digital had 37 employees as of
September 30, 2003, all of whom were based in the United States.
The legitimization of business to business and business to consumer
direct commerce (Internet, brick-and-mortar, catalog, and other) has rapidly
created a substantial market for the Page Digital suite of direct commerce
applications. According to the United States Department of Commerce, the market
for multi-channel direct commerce applications was just $15 billion in 1999,
grew to $27.28 billion in 2000, and to $32.6 billion in 2001, and it is growing
at a rate 2.5 times greater than traditional retailing (Source: Internet
Retailer, April 2002). The acquisition of Page Digital will enable us to
continue to provide our customers with Page Digital's e-commerce, customer
relations management, and Catalog Management solutions. We expect to further
integrate these solutions into our offerings to enable customers to complete the
multi-channel retail distribution and customer service chain. In addition, the
acquisition will also allow us to offer Page Digital's customers the IP
Merchandising solution, as well as Point of Sale, Loss Prevention, and IP's
other alliance solutions.
ACQUISITION OF RTI
On January 6, 2004, we executed a Letter of Intent/Term Sheet pursuant
to which we intend to acquire RTI, a provider of management systems for
retailers, for a purchase price of $11 million, consisting of $5 million in
cash, and $6 million in shares of our common stock determined by dividing $6
million by the average closing price of the Company's common stock over the ten
day period immediately preceding the closing of the transaction. In addition, we
will assume approximately $2.5 million in debt owed to certain RTI security
holders. The closing of the transaction is subject to securing financing, due
diligence, the execution of a definitive agreement, the approval of the board of
directors of the Company and the approvals of the board of directors and the
shareholders of RTI. There can be no assurance that the Company will be able to
secure the necessary financing to complete the acquisition of RTI. RTI has total
assets of approximately $4.3 million (un-audited)and generates annual revenues
of approximately $8.0 million (un-audited.) RTI had 59 employees as of January
8, 2004, all in the United States.
The combination of Island Pacific, RTI and Page Digital, will enable us
to offer a fully integrated solution to mid-tier retailers that will be unique
in the marketplace. As a result of this transaction, smaller retailers will now
be able to cost-effectively acquire a solution that provides both front and
back-end support. RTI will assume responsibility to market IP Express (formerly
known as Einstein in a box) through its distribution channel, including 64
resellers, which will expand our ability to effectively market IP Express, while
Island Pacific will continue to market our enterprise applications to our
traditional market, mid-tier retailers. The combination instantly expands our
products, services offerings and distribution channels.
31
DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold Training Products unit to Arthur
Klitofsky, a former director, for the sale price of $180,000 plus earn-out
payments equal to 20% of the total gross revenues of the Training Products unit
in each of its next two fiscal years, to the extent the revenues in each of
those years exceed certain targets. We received a promissory note for the amount
of $180,000 and the earn-out payments, if any, will be made in quarterly
installments following each fiscal year, bearing an annual interest rate of 5%.
The sale of Training Products resulted in a loss of $129,000, net of estimated
income taxes, which was accrued for at March 31, 2003. The operating results of
this subsidiary of $248,000 are shown as discontinued operations, net of the
loss on sale of the Training Products unit with the prior period results
restated. The balance of the note receivable was $162,000 as of January 8, 2004.
Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in April 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to the entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as our potential exposure. The
receiver has also claimed that we are obligated for inter-company balances of
$636,000. We do not believe any amounts are owed to the receiver, who has not as
of the date of this report acknowledged the monthly corporate overhead recovery
fees and other amounts charged by us to the Australian subsidiary offsetting the
amount claimed to be due. For further details, see "Liquidity and Capital
Resources -- Contractual Obligations -- National Australia Bank."
The disposal of our Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown on our
financial statements as discontinued operations with the prior period results
restated.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o REVENUE RECOGNITION. Our revenue recognition policy is significant
because our revenue is a key component of our results of
operations. In addition, our revenue recognition determines the
timing of certain expenses such as commissions and royalties. We
follow specific and detailed guidelines in measuring revenue;
however, certain judgments affect the application of our revenue
policy.
We license software under non-cancelable agreements and provide
related services, including consulting and customer support. We
recognize revenue in accordance with Statement of Position 97-2
(SOP 97-2), Software Revenue Recognition, as amended and
interpreted by Statement of Position 98-9, Modification of SOP
97-2, Software Revenue Recognition, with respect to certain
transactions, as well as Technical Practice Aids issued from time
to time by the American Institute of Certified Public Accountants.
32
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.
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 adopted SFAS No. 142 resulting in a change in the
way we value long-term intangible assets and goodwill. We
completed an initial transitional analysis of goodwill impairment
as of April 1, 2002 and recorded an impairment of $0.6 million as
a cumulative effect of a change in accounting principle in the
first quarter of fiscal 2003. We no longer amortize goodwill, but
instead test goodwill for impairment on an annual basis or more
frequently if certain events occur. Goodwill is to be measured for
impairment by reporting units, which currently consist of our
operating segments. At each impairment test for a business unit,
we are required to compare the carrying value of the business unit
to the fair value of the business unit. If the fair value exceeds
the carrying value, goodwill will not be considered impaired. If
the fair value is less than the carrying value, we will perform a
second test comparing the implied fair value of reporting unit
goodwill with the carrying amount of that goodwill. The difference
if any between the carrying amount of that goodwill and the
33
implied fair value will be recognized as an impairment loss, and
the carrying amount of the associated goodwill will be reduced to
its implied fair value. These tests require us to make estimates
and assumptions concerning prices for similar assets and
liabilities, if available, or estimates and assumptions for other
appropriate valuation techniques.
For our intangible assets with finite lives, including our
capitalized software and non-compete agreements, we assess
impairment at least annually or whenever events and circumstances
suggest the carrying value of an asset may not be recoverable
based on the net future cash flows expected to be generated from
the asset on an undiscounted basis. When we determine that the
carrying value of intangibles with finite lives may not be
recoverable, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model.
FINANCING TRANSACTIONS
AMRO INTERNATIONAL, S.A.
On October 24, 2000, the SEC declared effective a registration
statement registering up to 700,000 shares of our common stock for resale by
AMRO International, S.A. AMRO purchased 344,948 shares in March 2000 for
approximately $2.9 million, and under the terms of the purchase agreement, was
entitled to receive additional shares of our common stock if the average of the
closing price of our stock for the five days preceding the effective date of the
registration statement was less than $10.34. Pursuant to the repricing formula,
we issued to AMRO 375,043 additional shares of common stock. We became obligated
to pay to AMRO liquidated damages for late effectiveness of the registration
statement in the amount of $286,000. AMRO agreed in March 2001 to accept 286,000
shares of common stock in satisfaction of the liquidated damages, and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, we issued AMRO a two-year warrant to purchase up
to 107,000 shares of common stock at $1.50 per share, which has since expired.
We agreed to register all of the shares sold in March 2001, and those
that we may sell under the warrant, with the SEC. We became obligated to pay to
AMRO as liquidated damages the amount of $60,000. In April 2002, AMRO agreed to
accept 140,000 shares of common stock in satisfaction of the liquidated damages.
ICM ASSET MANAGEMENT, INC.
In December 2000, we entered into an agreement to sell up to 2,941,176
common shares to a limited number of accredited investors related to ICM Asset
Management, Inc. for cash at $0.85 per share. We sold 1,764,706 of such shares
in December 2000, for gross proceeds of $1.5 million, and an additional 588,235
shares in January 2001, for additional gross proceeds of $0.5 million. Two of
the investors exercised a right to purchase an additional 588,235 shares in
February 2001 for additional gross proceeds of $0.5 million.
We also agreed to issue to each investor a warrant to purchase one
common share at $1.50 for each two common shares purchased in the private
placement (aggregate warrants exercisable for 1,470,590 shares). We had the
right to call 50% of the warrants, subject to certain conditions, if our common
shares traded at a price above $2.00 per share for thirty consecutive days. We
had the right to call the remaining 50% of the warrants, subject to certain
conditions, if our common shares traded at a price above $3.00 per share for
thirty consecutive days.
We agreed to register all of the shares sold under the purchase
agreement or upon exercise of the warrants with the SEC. Our agreement with the
investors provided that if a registration statement was not effective on or
before April 21, 2001, we would be obligated to issue two-year warrants to each
investor, entitling the investor to purchase additional shares of our common
stock at $0.85 per share. We filed a registration statement in January 2001 to
register these shares, but it did not become effective. As of June 28, 2002, we
had issued the investors warrants to purchase 1,249,997 common shares under this
agreement.
In May and June 2001, we issued a total of $1.25 million in convertible
notes to a limited number of accredited investors related to ICM Asset
Management, Inc. The notes were originally due August 30, 2001, and required
interest at the rate of 12% per annum to be paid until maturity, with the
interest rate increasing to 17% in the event of a default in payment of
principal or interest. Any portion of the unpaid amount of principal and
interest was convertible at any time by the investors into common shares valued
at $1.35 per share. We also agreed to issue to the investors three-year warrants
to purchase 250 common shares for each $1,000 in notes purchased, at an exercise
price of $1.50 per share.
In July 2002, we agreed to amend the terms of the notes and warrants
issued to the investors related to ICM Asset Management, Inc. The investors
agreed to replace the existing notes with new notes having a maturity date of
September 30, 2003. The interest rate on the new notes was reduced to 8% per
annum, increasing to 13% in the event of a default in payment of principal or
interest. We are required to pay accrued interest on the new notes calculated
from July 19, 2002, in quarterly installments beginning September 30, 2002. The
investors agreed to reduce accrued interest and late charges on the original
notes by up to $16,000, and to accept the reduced amount in 527,286 shares of
our common stock valued at $0.41 per share which was the average closing price
of our shares on the American Stock Exchange for the 10 trading days prior to
July 19, 2002. The new notes were 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. In September 2003, the investors
converted the outstanding principal and accrued interest totaling $1.4 million
into 2,287,653 shares of our common stock.
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. We filed a registration statement
that was declared effective by the SEC on July 18, 2003.
We incurred approximately $40,000 in legal fees and costs to consummate
these transactions with the investors related to ICM Management.
34
SOFTLINE/THE SAGE GROUP
In May 2002, we entered into a series of transactions with Softline by
which:
1. We transferred to Softline the note received in connection with the
sale of IBIS Systems Limited.
2. We issued to Softline 141,000 shares of newly-designated Series A
Convertible Preferred Stock.
3. Softline released us from approximately $12.3 million in
indebtedness due to Softline under a promissory note.
4. Softline surrendered 10,700,000 shares of our common shares held by
Softline.
The Series A Convertible 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. Each share of
Series A Convertible Preferred Stock may be converted by the holder at any time
into the number of common shares determined by dividing the stated value plus
all accrued and unpaid dividends whether or not declared by the board, 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 conversion price is
$0.85723 as of January 8, 2004. The Series A Convertible 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 Convertible 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 Convertible Preferred Stock or common shares received on
conversion of the Series A Convertible Preferred Stock which Softline may
propose to sell to a third party, upon the same price and terms as the proposed
sale to the third party. We also granted Softline certain registration rights
for the common shares into which the Series A Convertible Preferred Stock is
convertible, including the right to demand registration on Form S-3 if such form
is available to us and certain other conditions were satisfied, and the right to
include shares issuable upon conversion of the Series A Convertible Preferred
Stock in other registration statements we propose to file. We filed a
registration statement covering the resale of 18,575,904 shares of our common
stock issuable upon conversion of the Series A Convertible Preferred Stock held
by Softline. The registration statement was declared effective by the SEC on
July 18, 2003.
These transactions were recorded for accounting purposes on January 1,
2002, the date when Softline took effective control of the IBIS note and we
ceased accruing interest on the Softline note. We did not recognize any gain or
loss in connection with the disposition of the IBIS note or the other components
of the transactions.
We incurred approximately $50,000 in legal fees and expenses to
consummate these transactions with Softline.
In September 2003, Softline converted $421,000 of dividends into
500,000 shares of our common stock.
On November 14, 2003, the Sage Group acquired substantially all of the
assets of Softline, which included 141,000 shares of our Series A Convertible
Preferred Stock, 8,923,915 shares of our common stock and 71,812 shares of our
common stock underlying stock options. In connection with this acquisition,
certain agreements of Softline were also assigned to and assumed by the Sage
Group, including the rights and obligations respecting and arising from the
Option Agreement between Softline and Steven Beck, as trustee of a certain
management group of the Company. Accordingly, the Optionees under the Option
Agreement now have the right to purchase 8,000,000 shares of common stock of the
Company and such number of shares of Series A Convertible Preferred Stock
convertible into 17,125,000 shares of common stock of the Company from the Sage
Group for a price of $0.80 per Option Share. The right to exercise the Option is
35
to be distributed as determined by the Company's Board to the Optionees, who may
include Mr. Beck and other members of the Company's management, as an incentive
to continue service for the Company. It is the current intent of the Optionees
to transfer their rights under the Option Agreement to the Company. On September
17, 2003, 500,000 shares of common stock underlying the Series A Convertible
Preferred Stock were issued in the names of 033 Growth Partners I, L.P., 033
Growth Partners II, L.P., Oyster Pond Partners, L.P. and 033 Growth
International Fund Ltd.
TOYS "R" US, INC.
In May 2002, 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 was non-interest bearing, and the face amount was either convertible into
shares of our common 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 would be converted solely for equity and would not be repaid in cash. The
note was 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 did not have the right to
prepay the convertible note before the due date. The face amount of the note was
16% of the $1.3 million purchase price as of May 29, 2002, and increased 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 was the full $1.3 million purchase
price. The face amount ceased to increase if Toys terminated its development
agreement with us for a reason other than our breach. The face amount would have
been zero if we had terminated the development agreement due to an uncured
breach by Toys of the development agreement.
The warrant entitled Toys to purchase up to 2,500,000 of our common
shares at $0.553 per share. The warrant was initially vested as to 400,000
shares as of May 29, 2002, and vested at the rate of 100,000 shares per month
until February 28, 2004. The warrant ceased to vest if Toys terminated its
development agreement with us for a reason other than our breach. The warrant
would have become entirely non-exercisable if we had terminated the development
agreement due to an uncured breach by Toys of the development agreement. Toys
could have elected a "cashless exercise" where a portion of the warrant was
surrendered to pay the exercise price.
The note conversion price and the warrant exercise price were each
subject to a 10% reduction in the event of an uncured breach by us of certain
covenants to Toys. These covenants did not include financial covenants.
Conversion of the note and exercise of the warrant each required 75 days advance
notice to us. As a result, under the rules of the SEC, Toys would not have been
considered the beneficial owner of the common shares into which the note was
convertible and the warrant was exercisable until 15 days after it had 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 would be convertible and the warrant would be
exercisable, including the right to demand registration on Form S-3 if such form
was available to us, and the right to include shares underlying the note and the
warrant in other registration statements we propose to file.
In November 2003, we entered into an agreement with Toys to terminate
the software development and services agreement. Pursuant to that agreement the
note was settled in full and the warrant was cancelled.
We incurred approximately $40,000 in legal fees and expenses to
consummate these transactions with Toys.
MIDSUMMER/OMICRON/ISLANDIA
On March 31, 2003, we entered into a Securities Purchase Agreement with
Midsummer Investment, Ltd. ("Midsummer"), Omicron Master Trust ("Omicron"), and
Islandia, L.P. ("Islandia") for the sale to these investors of 9% debentures,
convertible into shares of our common stock at a conversion price equal to
$1.0236 per share, for an aggregate amount of $3,500,000. The investors also
each received a warrant to purchase up to, in the aggregate, 1,572,858 shares of
common stock with an exercise price equal to $1.0236 per share.
36
The debentures bore an interest rate of 9% per annum, and they provided
for interest only payments on a quarterly basis, payable, at our option, in cash
or shares of common stock. The debentures would have matured in May 2005. If
certain conditions were met, we had the right, but not the obligation, to redeem
the debentures at 110% of their face value, plus accrued interest. Commencing on
February 1, 2004, we were required to redeem $218,750 per month of the
debenture. Furthermore, if the daily volume weighed average price ("VWAP") of
our common stock on the American Stock Exchange exceeded $1.0236 by more than
200% for 15 consecutive trading days, we had the option to cause the investors
to convert their debentures into common stock. In July 2003, Omicron converted
$500,000 of its debentures into 488,472 shares of our common stock. In August
2003, the VWAP exceeded $1.0236 by more than 200% for 15 consecutive trading
days. Therefore, we exercised our right to cause the investors to convert their
debentures into an aggregate of 2,930,832 shares of common stock as of September
30, 2003.
The warrants issued to the investors were for a 5-year term, with an
exercise price equal to $1.0236 per share.
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 by April 30, 2003, and to use best efforts to have the registration
statement declared effective at the earliest date. We filed a registration
statement that was declared effective by the SEC on July 18, 2003.
Additional debentures aggregating up to $2,000,000 will be sold to
these investors in a second closing if within one year after the date of first
sale of debentures there occurs a period of 15 consecutive trading days during
which the VWAP of our common stock is maintained at a price at or above $1.75
per share, subject to certain conditions. The shares of common stock underlying
these debentures and warrants are not included for registration in this
prospectus. Neither the investors nor we have participated in a second closing
as of January 8, 2004.
In connection with the sale of the debentures to Midsummer and Omicron,
Softline agreed that, during the Option Term, it would not sell the shares
issuable upon exercise of the Option except pursuant to the Option Agreement.
Further, if upon the expiration of the Option Term Midsummer and Omicron still
hold outstanding debentures, Softline may sell only that number of shares it
would be permitted to sell pursuant to Rule 144(e) under the Securities Act,
notwithstanding that any shares may be registered for resale at such time.
Midsummer and Omicron converted all their debentures into common stock in
September 2003; however, both Midsummer and Omicron are entitled to acquire
additional debentures in a second closing, if within one year of the date of the
first sale the daily volume weighted average closing price of our common stock
is maintained at or above $1.75. At the time it acquired substantially all the
assets of Softline, the Sage Group agreed to and assumed these restrictions.
We incurred approximately $23,000 in legal fees and expenses to
consummate these transactions with Midsummer, Islandia and Omicron.
MBSJ INVESTORS, LLC
On April 1, 2003, we entered into a Securities Purchase Agreement with
MBSJ Investors, LLC ("MBSJ") for the sale to MBSJ of a 9% debenture, convertible
to shares of our common stock at a conversion price of $1.0236, for $400,000.
This debenture was accompanied by a five-year warrant to purchase 156,311 shares
of common stock with an exercise price of $1.0236 per share. Interest was due on
a quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we would have been obligated to redeem $20,000
per month of the debenture. The debenture was to mature 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. Effective August 11, 2003, we exercised our right to convert these
debentures into 390,777 shares of common stock at the conversion rate of $1.0236
pursuant to the terms of the debentures. The conversion was completed as of
September 2003.
37
CRESTVIEW
On May 6, 2003, we entered into an agreement with Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. (collectively, the "Crestview Investors") for the sale to the
Crestview Investors of 9% debentures, convertible into shares of our common
stock at a conversion price of $1.0236, for $300,000. These debentures were
accompanied by five-year warrants to purchase an aggregate of 101,112 shares of
common stock with an exercise price of $1.0236 per share. Interest was due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we would have been obligated to redeem $19,000
per month of the debentures. The debentures were to mature in October 2005. The
Crestview Investors were also granted registration rights under a registration
rights agreement, and certain other rights similar to those granted to
Midsummer, Omnicron and Islandia. Effective August 11, 2003, we exercised our
right to convert these debentures into an aggregate of 293,082 shares of common
stock at the conversion rate of $1.0236 pursuant to the terms of the debentures.
The conversion was completed as of September 30, 2003.
We incurred approximately $1,200 in legal fees and expenses to
consummate these transactions with the Crestview Investors.
Additional debentures aggregating up to $300,000 will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have participated in a second closing as of
January 8, 2004.
COMMON STOCK INSTITUTIONAL INVESTORS
In the June 27, 2003 PIPE Transaction, we sold an aggregate of
5,275,000 shares of common stock at a per share price of $1.50 to various
institutional investors in a private placement transaction for an aggregate
purchase price of $7,912,500. We also granted the June 27, 2003 PIPE Transaction
investors registration rights under a registration rights agreement that
obligated us to file a separate registration statement registering their shares
by July 31, 2003 or pay cash penalties of 2% per month based on the amount
invested in the June 27, 2003 PIPE Transaction. In the event the registration
statement was not declared effective by the SEC on or before September 29, 2003,
or upon the occurrence of certain other events, we would have been be obligated
to pay cash penalties at the rate of 2% per month as liquidated damages. The
registration statement was declared effective by the SEC on September 26, 2003.
In connection with the June 27, 2003 PIPE Transaction, we paid Roth
Capital, as placement agent, cash compensation of 8% of the proceeds and issued
a warrant to purchase 527,500 shares of common stock at an exercise price of
$1.65 per share. We also issued warrants to purchase 375,000 shares of common
stock at an exercise price of $1.65 to Midsummer, Omicron, Islandia and the
Crestview Investors, each a holder of our 9% convertible debentures, in order to
obtain their requisite consents and waivers of rights they possessed to
participate in the June 27, 2003 PIPE Transaction. In accordance with the
warrant agreements, these warrants were adjusted to $1.55 due to the sale of
common stock at the price of $1.55 on November 7, 2003. Roth Capital, Midsummer,
Omicron, Islandia and the Crestview Investors were given registration rights
with respect to these warrants under our registration rights agreement executed
in connection with the June 27, 2003 PIPE Transaction.
We incurred approximately $29,000 in legal fees and costs to consummate
these transactions with the Common Stock Institutional Investors.
In the November 7, 2003 PIPE Transaction, we sold an aggregate of
3,180,645 shares of common stock at a price of $1.55 per share to various
institutional investors in a private placement transaction for an aggregate
purchase price of $4.9 million. We also granted the November 7, 2003 PIPE
Transaction investors registration rights under a registration rights agreement
in which we agree to file a registration statement with the SEC for the resale
of all shares sold in the November 7, 2003 PIPE Transaction. If the registration
statement is not declared effective by February 5, 2004, we will be obligated to
pay on February 5, 2004, and each respective monthly anniversary until the
registration statement is filed or declared effective, an amount in cash, as
liquidated damages, equal to 2.0% of the purchase price paid by the investors in
the November 7, 2003 PIPE Transaction.
38
In connection with the November 7, 2003 PIPE Transaction, we paid Roth
Capital, as placement agent, a compensation of $178,600 in cash and 115,226
shares of our common stock and issued a five-year warrant to purchase 282,065
shares of our common stock at an exercise price of $1.71 per share. Roth Capital
was granted the registration rights similar to those granted to the investors in
the November 7, 2003 PIPE Transaction.
We incurred approximately $214,000 in legal fees and costs to
consummate the November 7, 2003 PIPE Transaction.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear the net sales for the six
months ended September 30, 2003 and 2002 (in thousands):
SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2003 2002
--------------------- ---------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Net sales $ 12,145 100% $ 8,690 100%
Cost of sales 2,728 22% 3,662 42%
--------- --------- --------- ---------
Gross profit 9,417 78% 5,028 58%
Application development expense 683 5% 2,244 26%
Depreciation and amortization 1,766 15% 2,082 24%
Selling, general and administration expenses 5,797 48% 3,827 44%
Impairment of intangible assets -- -- -- --
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited -- -- -- --
--------- --------- --------- ---------
Total expenses 8,246 68% 8,153 94%
--------- --------- --------- ---------
Income (loss) from operations 1,171 10% (3,125) (36)%
Other income (expense)
Interest income 9 0% 1 0%
Other income (expense) (178) (2)% 2 0%
Interest expense (521) (4)% (685) (8)%
--------- --------- --------- ---------
Total other expense (690) (6)% (682) (8)%
--------- --------- --------- ---------
Income (loss) before provision for income taxes 481 4% (3,807) (44)%
Provision (benefit) for income taxes (503) 4% 1 0%
--------- --------- --------- ---------
Loss before extraordinary item and change in
accounting principle 984 8% (3,808) (44)%
Cumulative effect of changing accounting principle
- Goodwill valuation under SFAS 142 -- (627)
--------- ---------
Income (loss) from continuing operations 984 (4,435)
Income from discontinued operations,
net of taxes -- 159
--------- ---------
Net income (loss) 984 (4,276)
Cumulative preferred dividends 554 517
--------- ---------
Net Income (loss) available to common stockholders $ 430 $ (4,793)
========= =========
39
SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2002
NET SALES
Net sales increased by $3.4 million, or 39%, to $12.1 million in the
six months ended September 30, 2003 from $8.7 million in the six months ended
September 30, 2002 primarily due to an increase in license sales.
COST OF SALES/GROSS PROFIT
Cost of sales decreased by $1.0 million, or 27%, to $2.7 million in the
six months ended September 30, 2003 from $3.7 million in the six months ended
September 30, 2002. Gross profit as a percentage of net sales increased to 78%
in the six ended September 30, 2003 from 58% in the prior comparative period.
The decrease in cost of sales and the increase in gross profit as a percentage
of net sales were due to the increase in high-margin license revenues coupled
with the decrease in low margin software modification and professional services.
During the six months ended September 30, 2003 and 2002, application technology
license revenues represented 44% and 14% of net sales, respectively, and
modification and professional services revenues represented 25% and 48% of net
sales, respectively.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $1.5 million, or 68%, to
$0.7 million in the six months ended September 30, 2003 from $2.2 million in the
six months ended September 30, 2002. The decrease is primarily due to
capitalizing $1.8 million development costs for new products. We've made
significant investments in our new products in the first six months of the
current quarter. We anticipate these new products will be launched during the
second half of the fiscal 2004. In the prior comparative period, research and
development efforts was spent on enhancing existing products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.3 million, or 14%, to
$1.8 million in the six months ended September 30, 2003 from $2.1 million in the
six months ended September 30, 2002. The decrease is mainly due to a decrease in
amortization of purchased and capitalized software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $2.0 million,
or 53%, to $5.8 million in the six months ended September 30, 2003 from $3.8
million in the six months ended September 30, 2002. The first six months of
fiscal 2003 included a $0.6 million reversal of excess amount accrued in prior
periods for a litigation settlement. Additional, much of the first six months of
fiscal 2004 was spent building the infrastructure and developing our sales
organization.
OPERATING INCOME
Operating income from continuing operations, which included
depreciation and amortization expense, was $1.2 million for the six months ended
September 30, 2003, compared to a loss from continuing operations of $3.1
million for the comparable period in prior year. Earnings from continuing
operations before interest, provision for income taxes, depreciation,
amortization and change in accounting principle was $2.9 million for the six
months ended September 30, 2003 compared to a loss of $1.0 million for the six
months ended September 30, 2002.
INTEREST EXPENSE
Interest expense decreased by $0.2 million, or 29%, to $0.5 million in
the six months ended September 30, 2003 from $0.7 million in the six months
ended September 30, 2002. The decrease is due to $4.5 million decrease in
average balance of interest-bearing debts.
PROVISION FOR INCOME TAXES
Provision for income taxes represents $0.6 million income tax refund
and $0.1 million provision for state income taxes in the six months ended
September 30, 2003. No provision was made at in the six months ended September
30, 2002 due to the availability of tax losses. The income tax refund of $0.6
million at September 30, 2003 results from amending prior years' income tax
returns to carry back net operating losses incurred in the past 2 years.
40
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Pursuant to SFAS 142, we completed the transitional analysis of
goodwill impairment as of April 1, 2002 and recorded an impairment of $0.6
million as the cumulative effect of a change in accounting principle in the
quarter ended June 30, 2002. We also evaluated the remaining useful lives of our
intangibles in the quarter ended June 30, 2002 and no adjustments have been made
to the useful lives of our intangible assets. There have been no such charges in
the six months ended September 30, 2003.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to
the six months ended September 30, 2003 and 2002 were $0.6 million and $0.5
million, respectively.
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
fiscal years ended March 31, 2003, 2002, and 2001 (in thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- --------- --------- --------- --------- ---------
Net sales $ 22,296 100% $ 26,715 100% $ 28,049 100%
Cost of sales 8,045 36% 11,003 41% 10,815 39%
--------- --------- --------- --------- --------- ---------
Gross profit 14,251 64% 15,712 59% 17,234 61%
Application development expense 4,643 21% 4,203 16% 5,333 19%
Depreciation and amortization 4,148 19% 6,723 25% 8,299 30%
Selling, general and administration expenses 8,072 36% 12,036 45% 16,985 60%
Impairment of intangible assets -- -- -- -- 6,519 23%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited -- -- 7,647 27%
--------- --------- --------- --------- --------- ---------
Total expenses 16,863 76% 22,962 86% 44,783 159%
--------- --------- --------- --------- --------- ---------
Loss from operations (2,612) (12)% (7,250) (27)% (27,549) (98)%
Other income (expense)
Interest income 1 0% 7 0% 620 2%
Other income (expense) 24 0% (56) 0% 74 1%
Interest expense (1,088) (5)% (3,018) (11)% (3,043) (11)%
--------- --------- --------- --------- --------- ---------
Total other expense (1,063) (5)% (3,067) (11)% (2,349) (8)%
--------- --------- --------- --------- --------- ---------
Loss before provision (benefit) for income taxes (3,675) (17)% (10,317) (38)% (29,898) (106)%
Provision (benefit) for income taxes 11 0% 2 0% (4,778) 17%
--------- --------- --------- --------- --------- ---------
Loss before extraordinary item and change in
accounting principle (3,686) (17)% (10,319) (38)% (25,120) (89)%
Extraordinary item - gain on debt forgiveness 1,476 -- --
Cumulative effect of changing accounting principle
- Goodwill valuation under SFAS 142 (627) -- --
--------- --------- ---------
Loss from continuing operations (2,837) (10,319) (25,120)
Income (loss) from discontinued operations,
net of taxes 119 (4,339) (3,825)
--------- --------- ---------
Net loss (2,718) (14,658) (28,945)
Cumulative preferred dividends 1,015 254 --
--------- --------- ---------
Net loss available to
common stockholders $ (3,733) $(14,912) $(28,945)
========= ========= =========
41
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 caused 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, 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.
42
INTEREST EXPENSE
Interest expense decreased by $1.9 million, or 64%, to $1.1 million in
the fiscal year ended March 31, 2003 from $3.0 million in the fiscal year ended
March 31, 2002. Interest expense in fiscal 2002 included $1.2 million interest
expense on the $10 million note payable to Softline Limited. Our obligations
related to this note were released by Softline effective in January 1, 2002 in
connection with the integrated series of recapitalization transactions with
Softline. The decrease was also due to $0.7 million decrease in amortization of
debt discount.
DISCONTINUED OPERATIONS
Income from discontinued operations in fiscal 2003 represents a profit
of $0.2 million from operations of the Training Products subsidiary; offset in
part by $0.1 million accrual for loss on the sale of our Training Products
subsidiary. Our Training Products subsidiary was sold effective April 1, 2003.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to
the fiscal years ended March 31, 2003 and 2002 were $1.0 million and $0.3
million, respectively.
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.
43
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.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to
the fiscal years ended March 31, 2002 and 2001 were $0.3 million and $0,
respectively. The Series A Convertible Preferred Stock was issued in January
2002.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003
During the six months ended September 30, 2003, we financed our
operations using cash on hand, internally generated cash, proceeds from the sale
of common stock and proceeds from sale of convertible debentures. At September
30, 2003 and March 31, 2003, we had cash of $1.1 million and $1.3 million,
respectively.
Operating activities used cash of $5.6 million in the six months ended
September 30, 2003 and $1.9 million in the six months ended September 30, 2002.
Cash used for operating activities in the six months ended September 30, 2003
resulted from $4.5 million increase in accounts receivable and other receivables
and $3.9 million decrease in accounts payable and accrued expenses; offset in
part by $1.0 million net income and $1.8 million of non-cash depreciation and
amortization.
44
Investing activities used cash of $2.5 million in the six months ended
September 30, 2003 and $0.3 million in the six months ended September 30, 2002.
Cash used for investing activities in the current quarter was primarily for
capitalization of $2.2 million software development costs.
Financing activities provided cash of $7.8 million and $1.0 million in
the six months ended September 30, 2003 and 2002, respectively. The 2004
financing activities included net proceeds of $7.2 million from the sale of
common stock and $0.7 million from the issuance of convertible debentures.
Accounts receivable increased to $8.5 million at September 30, 2003
from $4.0 million at March 31, 2003. The increase is primarily due to $3.9
million increase in current receivable from new license sales.
We believe that our cash and cash equivalent and funds generated from
operations will provide adequate liquidity to meet our normal operating
requirements for at least the next twelve months.
CASH FLOWS FOR THE FISCAL YEAR ENDED MARCH 31, 2003
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 former Chairman. At March 31, 2003 and 2002, we had cash from
continuing operations of $1.3 million.
Operating activities used cash of $1.1 million in the fiscal year ended
March 31, 2003, provided cash of $1.6 million in the fiscal year ended March 31,
2002 and used cash of $2.4 million in the fiscal year ended March 31, 2001. Cash
used in fiscal 2003 resulted primarily from $2.7 million of net loss, $1.5
million non-cash gain on debt forgiveness, $2.0 million increase on accounts
receivable and other receivable and $2.0 million increase in deferred revenue;
offset in part by non-cash charges of $4.1 million in depreciation and
amortization and $0.6 million in a change in accounting principle, $1.0 million
increase in accounts payable and accrued expenses and $0.9 million increase in
accrued interest payable. Cash provided for operating activities in fiscal 2002
resulted primarily from $2.5 million decrease in accounts receivable and other
receivables, $1.6 million increase in deferred revenue, $7.1 million in non-cash
depreciation and amortization, $3.2 million of loss on disposal of Australian
operations, $2.3 million increase in interest payable and $1.0 million in
non-cash charges for stock-based compensation and interest related to
convertible notes due stockholders; offset by $14.7 million of net losses and
$1.9 million decrease in accounts payable and accrued expenses. Cash used for
operating activities in fiscal 2001 resulted primarily from $28.9 million of net
loss, a $4.4 million decrease in net deferred tax liability and a $4.4 million
decrease in deferred revenue; offset by $16.5 million in non-cash impairments of
assets, $9.5 million in non-cash depreciation and amortization, a $5.1 million
decrease in accounts receivable, and a $4.4 million increase in accounts payable
and accrued expenses.
Accounts receivable increased during fiscal year 2003 primarily due to
$2.5 million increase in unbilled receivables. The unbilled receivables
represents license and services revenue fully earned at March 31, 2003 that will
later be billed 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.
45
Financing activities provided cash of $1.3 million in the fiscal year
ended March 31, 2003, used cash of $0.8 million in the fiscal year ended March
31, 2002 and provided cash of $1.9 million in the fiscal year ended March 31,
2001. Financing activities during fiscal 2003 included proceeds of $3.5 million
from the issuance of convertible debentures, $1.4 million from issuance of
convertible note to our major customer and $0.1 million loan from an entity
affiliated with Donald S. Radcliffe, a director; offset in part by payments of
$3.3 million on a term loan, $0.3 million interest on stockholders' notes and
$0.1 million on loan from Mr. Radcliffe's affiliated entity. Financing
activities during fiscal year 2002 included $1.2 million in note payments and
$0.8 million decrease in amounts due to stockholders; offset in part by $1.3
million in proceeds from issuance of convertible notes. Financing activities
during fiscal year 2001 included $3.8 million in proceeds from the sale of
common stock, $9.9 million increase in amounts due to stockholders and $1.6
million in proceeds from lines of credit, offset by $13.2 million in note
payments.
Changes in the currency exchange rates of our foreign operations had
the effect of decreasing cash by an aggregate of $0.1 million in the fiscal
years ended March 31, 2003, 2002 and 2001.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including
purchase commitments at September 30, 2003, and the effect such obligations are
expected to have on our liquidity and cash flow in future periods.
For the fiscal years ending March 31,
-------------------------------------
Contractual Cash Obligations 2004 2005 2006 2007 Thereafter
---------------------------- ------ ------ ------ ------ ------
(in thousands)
Operating leases $ 445 $ 867 $ 360 $ 107 $ 13
Purchases 667 394
Payables aged over 90 days 398
------ ------ ------ ------ ------
Total contractual cash obligations $1,510 $1,261 $ 360 $ 107 $ 13
====== ====== ====== ====== ======
For the fiscal years ending March 31,
-------------------------------------
Other Commercial Commitments 2004 2005 2006 2007 Thereafter
---------------------------- ------ ------ ------ ------ ------
(in thousands)
Guarantees $ 187
------ ------ ------ ------ ------
Total commercial commitments $ 187
====== ====== ====== ====== ======
NATIONAL AUSTRALIA BANK LIMITED
Our Australian subsidiary maintained an AUS$1,000,000 (approximately
US$510,000) line of credit facility with National Australia Bank Limited. The
facility was secured by substantially all of the assets of our Australian
subsidiary, and we have guaranteed all amounts owing on the facility. In April
2001, we received a formal demand under our guarantee for the full AUS$971,000
(approximately US$495,000) then alleged by the bank to be due under the
facility. Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
Australian subsidiary's assets for $300,000 in May 2002 to the entity affiliated
with former management, and is actively pursuing the collection of receivables.
46
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.
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 working capital of $6.2 million at
September 30, 2003 and a negative working capital of $12.2 million at September
30, 2002. 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 have been in compliance
with the renegotiated terms. In July 2003, we terminated the lease for the
Carlsbad office. We are current with rent payments for our current leased
facilities.
We have been actively engaged in attempts to resolve our liquidity
problems. In the June 27, 2003 PIPE Transaction, we issued 5,275,000 shares of
our common stock for an aggregate amount of $7.9 million, less expenses and
placement fees. In the November 7, 2003 PIPE Transaction, we issued 3,180,645
shares of our common stock for an aggregate amount of $4.9 million, less
expenses and placement fees. We believe we will have sufficient cash to remain
in compliance with our debt obligations, and meet our critical operating
obligations, for the next twelve months. We may continue to seek a private
equity placement to help discharge aged payables, pursue growth initiatives and
prepay bank indebtedness. We have no binding commitments for funding at this
time. Financing may not be available on terms and conditions acceptable to us,
or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
updates, clarifies, and simplifies existing accounting pronouncements. This
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded.
SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends
SFAS No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in the same
manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The accounting prescribed in SFAS 145 was applied in connection with the gain
from extinguishment of our debt to Union Bank of California.
In November 2001, the FASB issued an Emerging Issues Task Force Issue
No. 01-14 ("EITF No. 01-14"), "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred". EITF No. 01-14
establishes that reimbursements received for out-of-pocket expenses should be
reported as revenue in the income statement. Currently, we classify reimbursed
out-of-pocket expenses as a reduction in cost of consulting services. We are
required to adopt the guidance of EITF No. 01-14 in the first quarter of fiscal
year 2003 and our consolidated statements of operations for prior periods will
be reclassified to conform to the new presentation. The adoption of EITF No.
01-14 results in an increase in reported net sales and cost of sales; however,
it does not affect net income or loss in any past or future periods.
47
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or
Disposal Activities". SFAS 146 replaces current accounting standards and
requires the recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. The provisions of the SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. We do not expect adoption
of SFAS No. 146 to have a significant effect on our results of operations or
financial condition.
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS 147"), "Acquisition of certain Financial Institutions".
SFAS 147 removes the requirement in SFAS 72 and Interpretation 9 thereto, to
recognize and amortize any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those transactions
be accounted for in accordance with SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". In addition, this
statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets, to include certain financial institution related intangibles.
We do not expect SFAS 147 to have a material impact on our financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. We do not expect SFAS 148
to have a material impact on our financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accountings and disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others", which clarifies the requirement of SFAS No. 5, "Accounting for
Contingencies", relating to a guarantor's accounting for and disclosures of
certain guarantee issues. FIN 45 was applied to our guarantee of a line of
credit facility from National Australia Bank Limited to our former Australian
subsidiary.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities".
Variable interest entities are defined as entities with a level of invested
equity that is not sufficient to fund future activities to permit it to operate
on a stand-alone basis. We do not participate in variable interest entities and
therefore have not applied FIN 46.
In November 2002, the FASB reached consensus on Emerging Issues Task
Force Issue No. 00-21 ("EITF No. 00-21"), "Accounting for Revenue Arrangements
with Multiple Deliverables." In general, this issue addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, this issue addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one earnings process and, if so, how to divide the arrangement into
separate units of accounting consistent with the identified earnings processes
for revenue recognition purposes. This issue also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. EITF Issue 00-21 is applicable to arrangements
entered into after June 15, 2003. We do not believe the application of EITF
Issuer 00-21 will have any material impact on our consolidated financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS 149 further clarifies accounting for
derivative instruments. We believe the adoption of this statement will have no
material impact on our consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We do not believe the adoption of SFAS 150 will have a material impact on
our consolidated financial statements.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 30, 2001, Deloitte & Touche LLP notified us that they were
resigning as our independent certified public accountants. On December 5, 2001,
we engaged Singer Lewak Greenbaum & Goldstein LLP ("Singer Lewak") as our new
independent auditors. Singer Lewak previously audited our financial statements
for the fiscal years ended March 31, 1998 and September 30, 1997, 1996, 1995 and
1994. The decision to engage Singer Lewak was recommended by the Audit Committee
of the Board of Directors and approved by the Board of Directors.
Deloitte & Touche's reports on the financial statements for the fiscal
years ended March 31, 2001 and 2000 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except as noted in the following sentence.
Deloitte & Touche's audit report on the financial statements for the year ended
March 31, 2001, dated July 13, 2001, expressed an unqualified opinion and
included an explanatory paragraph relating to substantial doubt about our
ability to continue as a going concern. Further, in connection with its audits
of our financial statements for the past two fiscal years and the subsequent
interim period immediately preceding the date of resignation of Deloitte &
Touche, we had no disagreements with Deloitte & Touche on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche, would have caused them to make a reference to the subject
matter of the disagreements in connection with their reports on our consolidated
financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our
consolidated financial position, results of operations or cash flows. We are
exposed to market risks, which include changes in interest rates, changes in
foreign currency exchange rate as measured against the U.S. dollar and changes
in the value of stock of a publicly traded company, which secures a promissory
note we hold.
48
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe.
Sales are typically denominated in the local foreign currency, which creates
exposures to changes in exchange rates. These changes in the foreign currency
exchange rates as measured against the U.S. dollar may positively or negatively
affect our sales, gross margins and retained earnings. We attempt to minimize
currency exposure risk through decentralized sales, development, marketing and
support operations, in which substantially all costs are local-currency based.
There can be no assurance that such an approach will be successful, especially
in the event of a significant and sudden decline in the value of the foreign
currency. We do not hedge against foreign currency risk. Approximately 8% and
12% of our total net sales were denominated in currencies other than the U.S.
dollar for the six months ended September 30, 2003 and 2002, respectively.
Approximately 12%, 9% and 8% of our total net sales were denominated in
currencies other than the U.S. dollar for the periods ended March 31, 2003, 2002
and 2001, respectively.
EQUITY PRICE RISK
We have no direct equity investments.
DESCRIPTION OF BUSINESS
GENERAL
We are a provider of software solutions and services to the retail
industry. We provide solutions that help retailers understand, create, manage
and fulfill consumer demand. Up until April 1, 2003, we also developed and
distributed PC courseware and skills assessment products for both desktop and
retail applications.
Our solutions and services have been developed specifically to meet the
needs of the retail industry. Our solutions help retailers improve the
efficiency and effectiveness of their operations and build stronger, longer
lasting relationships with their customers.
We market our software solutions through direct and indirect sales
channels primarily to retailers who sell to their customers through traditional
retail stores, catalogs and/or Internet-enabled storefronts. To date, we have
licensed our solutions to more than 200 retailers across a variety of retail
sectors.
ISLAND PACIFIC
Historically, retailers have relied upon custom-built systems, often
self-developed, to manage business processes and business information with both
trading partners and customers. These legacy systems are typically built on
1960's business models and 1970s technology. They are not Internet-enabled, and
do not permit collaboration among a retailer's customers, partners, suppliers
and other members of the supply/demand chain. Moreover, they reflect the
thinking of a seller's market.
Over the past few years, retailers have begun to purchase packaged
solutions designed specifically for the retail industry. Most of these systems
are very expensive to license, and very expensive, time-consuming and difficult
to implement. They have been primarily positioned to the largest companies, who
have enormous amounts of managerial, technical and financial resources at their
disposal- organizations for which distraction and mistakes are affordable.
These solutions ignore the needs of the small to medium sized
retailers, who have many of the same needs and face many of the same challenges
as do the larger retailers, but lack the managerial, financial and technological
capacity of the larger retailers.
Our solutions serve the small to medium sized market.
All retailers today face the challenge of operating in a very
competitive environment, an environment that can be best described as
over-stored and over-homogenized -- an environment in which power has shifted
from the seller to the buyer.
As retailers expand their businesses to include the Internet, catalog,
kiosk and other distribution channels, the complexity of managing inventory and
meeting customer demands places tremendous pressure on their business processes
and their technology infrastructure.
49
To meet an ever more mobile and demanding consumer's expectations,
retailers need to deliver on the customer's terms. This means having the right
product, at the right time and in the right place across multi-channel touch
points. To do this, retailers need valuable consumer insights, intelligence on
external factors that shape consumer response such as how the weather, the
economy and changing consumer attitudes will affect future buying patterns. This
intelligence, augmented by powerful communications, comprehensive loss
prevention, strong forecasting, planning, assortment planning, allocation, event
planning, replenishment and merchandising functions are critical to profitably
achieve this goal. These represent the content of our product offering.
Small to medium sized retailers need a cost-effective, easily
installed, affordable, comprehensive, integrated software infrastructure that
spans supplier to consumer and gives the retailer visibility, flexibility and
control of all business processes to meet all competitive challenges.
We believe a market opportunity exists to provide these retailers with
a software solution that is designed specifically for their needs. This solution
should be easy-to-use, leverage a retailer's existing investments in information
technology and be sufficiently flexible to meet the specific needs of a broad
range of retail sectors, such as fashion, hard-lines, mass merchandise or food
and drug.
We have developed and deployed software solutions that enable retailers
to manage the entire scope of their operations. These operations include
point-of-sale, customer relationship management, vendor relationship management,
merchandising, demand chain management, planning, and forecasting.
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
On January 6, 2004, we executed a Letter of Intent/Term Sheet pursuant
to which we intend to acquire RTI, a provider of management systems for
retailers, for a purchase price of $11 million, consisting of $5 million in
cash, and $6 million in shares of our common stock determined by dividing $6
million by the average closing price of the Company's common stock over the ten
day period immediately preceding the closing of the transaction. In addition, we
will assume approximately $2.5 million in debt owed to certain RTI security
holders. There can be no assurance we will be able to secure the necessary
financing to complete the acquisition of RTI. See "Recent Transactions" above.
On November 20, 2003, we executed an agreement pursuant to which we
will acquire Page Digital. Page Digital is a developer of multi-channel commerce
software. Upon the closing of the transaction, Page Digital stockholders will
receive $2,000,000 in cash and 2,500,000 shares of our common stock. See "Recent
Transactions" above.
50
In the November 7, 2003 PIPE Transaction, we sold 3,180,645 shares of
common stock at a price of $1.55 per share to various institutional investors in
a private placement transaction for an aggregate purchase price of $4.9 million.
We also granted the November 7, 2003 PIPE Transaction investors registration
rights under a registration rights agreement in which we agree to file a
registration statement with the SEC for the resale of all shares sold these
investors. If the registration statement is not declared effective by February
5, 2004, we will be obligated to pay on February 5, 2004, and each respective
monthly anniversary until the registration statement is filed or declared
effective, an amount in cash, as liquidated damages, equal to 2.0% of the
purchase price paid by the investors in the November 7, 2003 PIPE Transaction.
In connection with the November 7, 2003 PIPE Transaction we paid Roth
Capital, as placement agent, compensation of $178,600 in cash and 115,226 shares
of our common stock and issued a five-year warrant to purchase 282,065 shares of
our common stock at an exercise price of $1.71 per share. Roth Capital was
granted the registration rights similar to those granted to the investors in the
November 7, 2003 PIPE Transaction.
In October 2003, Donald Radcliffe resigned as a member of our Board of
Directors.
In July 2003, we appointed Ran Furman to the position of Chief
Financial Officer.
In the June 27, 2003 PIPE Transaction, we issued a total of 5,275,000
shares of common stock to various institutional investors in a private placement
transaction for an aggregate purchase price of $7.9 million. See "Financing
Transactions - Common Stock Institutional Investors."
In January 2003, we appointed Harvey Braun, a well-known and
highly-respected retail industry veteran, to the position of Chief Executive
Officer of Island Pacific, one of our business units. In April 2003, our Board
of Directors appointed Mr. Braun to the position of Chief Executive Officer and
director, and in July 2003 to the position of Chairman of the Board. Barry
Schechter remains as a consultant.
In October 2002, we appointed Steven Beck, a retail industry expert, to
the position of President of our Island Pacific 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
ever-changing needs of retailers worldwide. Mr. Beck's vision for our company is
to become the dominant provider of "Thoughtware" to the retail industry. Mr.
Beck's goals are to develop high value products and services to the retail
industry; using breakthrough technologies and processes, and to provide these
products and their associated services in partnership with major consulting
organizations and other best of breed solution providers. These products and
services will be offered to small and mid-size retailers. Our goal is to expand
alternatives to retailers, matching innovative solutions to emerging industry
complexities so retailers will realize ongoing successes. We will make available
to retailers at what we believe to be affordable prices a "dashboard" of
decision makers, and experienced minds in the industry, yielding a range of
velocity management alternatives for review and actions that span merchandising
and marketing activities from conception to consumption.
We are strengthening our product offerings through strategic
relationships with Planalytics, KMG Solutions, Raymark, Inc., Wazagua LLC, ANT
USA, Inc. and IT Resources Inc.
Under a partnership agreement with Planalytics Inc. ("Planalytics"),
Island Pacific will market Impact LR, an internet-based application that
measures the specific effects of future weather on consumer demand by product,
location and time. Using Impact LR, our customers can plan the timing of
in-season markdowns, as well as the season-to-season flow of merchandise into
their stores with maximum effectiveness.
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Under a marketing license agreement with KMG Solutions ("KMG"), Island
Pacific will integrate, market and support Traxion(TM) process management
solutions. Traxion's business process management solution consists of three
modules. Traxion ProcessEngine(TM) is the real-time process management platform
that retailers use to actively manage and support their organizations' unique
business processes. Traxion ProcessModeler(TM), includes simulation functions
such as same-time comparison of process variations and the use of actual cost
data to produce process-based financial estimates. Traxion
OrganizationModeler(TM) simplifies the creation of sophisticated models
including inter-company workgroups, payroll information, and roles.
Under an OEM agreement with Raymark, Inc., we will integrate, market
and support Xpert Store point-of-sale ("POS") software solution under the Island
Pacific brand. Raymark's full-featured POS solution streamlines the checkout
process in order to increase sales associate efficiency and augment customer
satisfaction. The software supports multi-channel, multi-language,
multi-currency and multi-taxation requirements.
Under an agreement with Wazagua LLC ("Wazagua"), we will exclusively
offer to retailers worldwide Wazagua's products and services including web-based
Loss Prevention Case Management Package, ASP Data Hosting and POS Exception
Reporting. WAZAGUA(TM) ASP Hosted Suite of Modules automates data management for
the Loss Prevention, Operations, Human Resources, Safety & Risk Management
community. These ASP-hosted productivity tools enable retailers to capture the
power of the internet. Retailers can create efficiencies, manage and share
information, make better use of their staff, eliminate redundant data entry -
and work from virtually any point in the world.
Under terms of a reseller agreement, we will market, sell, install,
interface to, and support ANT USA Inc.'s ("ANT") products including Buyer's
Toolbox(TM), a leading suite of merchandise and assortment planning software
that has been successfully implemented by over 140 retailers worldwide. The
software will extend Island Pacific's assortment and planning capabilities by
providing a solid planning methodology accessed through an easy-to-use
interface, in a cost-effective offering.
A marketing license agreement with IT Resources Inc. enables Island
Pacific to market, sell, install, support and integrate IT Resources' Buyer's
WorkMate(r) Suite, an innovative decision support software platform developed
for merchandising organizations. The software will bring mobility and other
timesaving benefits to the buying process.
Under a marketing alliance agreement with BIGresearch, we will provide
retailers, suppliers and third party companies with an end-to-end information
solution to forecast consumer demand, better utilize assets and merchandise, and
develop strategy and market position.
As of April 1, 2002, we refocused the company into three strategic
business units each lead by experienced managers. The units were our retail
management solutions unit (formerly known as Island Pacific division), our Store
Solutions division (formerly known as our SVI Store Solutions division), and SVI
Training Products, Inc. Effective April 1, 2003, we agreed to sell our shares of
SVI Training Products, Inc., our wholly-owned subsidiary, to Arthur Klitofsky.
Mr. Klitofsky resigned from the Board in March 2003. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Discontinued Operations" below.
We issued a total of $1.25 million in convertible notes to a limited
number of accredited investors related to ICM Asset Management, Inc. of Spokane,
Washington, a significant beneficial owner of our common stock in fiscal 2001.
In July 2002, we amended the convertible notes to extend the maturity date to
September 30, 2003 and we replaced the warrants issued to these investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Financing Transactions -- ICM Asset Management,
Inc." below. As of September 2003, the investors converted the outstanding
principal and accrued interest totaling $1.4 million into 2,287,653 shares of
our common stock.
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. This loan was assigned to Roth Capital Partners, LLC, as of September 30,
2003.
52
In May 2002, we completed a series of transactions with 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 shares of Series A Convertible Preferred Stock. Softline also
transferred to us 10,700,000 shares of our common stock. Steven Cohen, then
Softline's Chief Operating Officer, and Gerald Rubenstein, then a director of
Softline, resigned from our board of directors in May 2002. Ivan Epstein, then
Softline's Chief Executive Officer, continues to serve on our board, and in June
2002, Robert P. Wilkie, then Softline's Chief Financial Officer, was appointed
to our board of directors. On November 14, 2003, the Sage Group acquired
substantially all of the assets of Softline, including Softline's interest in
our common stock, options to purchase our common stock and our Series A
Convertible Preferred Stock. Messrs. Epstein and Wilkie are currently employed
by a subsidiary of the Sage Group. In connection with this acquisition, the Sage
Group was also assigned and assumed certain agreements of Softline, including
rights and obligations respecting and arising from the Option Agreement between
Softline and Steven Beck, as trustee of a certain management group of the
Company. Under the terms of the Option Agreement, the Optionees have the right
to purchase 8,000,000 shares of common stock of the Company and such number of
shares of Series A Convertible Preferred Stock convertible into 17,125,000
shares of common stock of the Company held by the Sage Group. The right to
exercise the Option is to be distributed as determined by the Company's Board to
the Optionees, who may include Mr. Beck and other members of the Company's
management, as an incentive to continue service for the Company. It is the
current intent of the Optionees to transfer their rights under the Option
Agreement to the Company. On September 17, 2003, 500,000 shares of common stock
underlying the Series A Convertible Preferred Stock were issued in the names of
033 Growth Partners I, L.P., 033 Growth Partners II, L.P., Oyster Pond Partners,
L.P. and 033 Growth International Fund Ltd. 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/The Sage Group."
For further discussion of the terms of the transaction between Softline and the
Sage Group see "Recent Transactions" above.
In May 2002, we entered into a new two-year software development and
services agreement with our largest customer, Toys. Toys also agreed to invest
$1.3 million for the purchase of a non-recourse convertible note and a warrant
to purchase up to 2,500,000 common shares. In November 2003, we entered into an
agreement with Toys to terminate the software development and services
agreement. Pursuant to that agreement the note was settled in full and the
warrant was cancelled. For a further details, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
Financing Transactions -- Toys "R" Us, Inc." 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Financing Transactions - Midsummer/Omicron/Islandia". In July 2003,
Omicron converted $500,000 of its debenture into 488,472 shares of our common
stock. We have since notified these investors that we are exercising our right
to convert these debentures into an aggregate of 2,930,832 shares of common
stock at the conversion rate of $1.0236 pursuant to the terms of the debentures.
The conversion was deferred until September 30, 2003, and the investors agreed
to cease accruing interest as of August 11, 2003. As of September 30, 2003, the
investors converted the remaining balance of their debentures into an aggregate
of 2,930,832 shares of our common stock.
In April 2003, we issued $400,000 in a 9% convertible debenture to MBSJ
Investors, LLC. Along with this debenture, a warrant to purchase 156,311 shares
of common stock was issued to this investor. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
"Financing Transactions - MBSJ". Effective August 11, 2003, we exercised our
right to convert this debenture into shares of common stock at the conversion
rate of $1.0236 pursuant to the terms of the debenture. In September 2003, the
investor converted its debenture into 390,777 shares of our common stock.
In March 2003, the Board adopted a resolution to change our name to
"Island Pacific, Inc.", and the resolution was approved by our shareholders on
July 9, 2003.
53
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". Effective August 11, 2003, we
exercised our right to convert these debentures into our common stock at the
conversion rate of $1.0236 pursuant to the terms of the debentures. As of
September 30, 2003, the investors converted their debentures into an aggregate
of 293,082 shares of our common stock.
In July 2003, our common stock began trading under the new ticker
symbol "IPI" on the American Stock Exchange (our ticker symbol was previously
"SVI").
STRATEGY
Our mission is to provide the small to medium sized retailer all the
intelligence, tools and infrastructure necessary to success in a highly
competitive environment.
Our mission is to make this information and these tools and
infrastructure useable, affordable and reliable for end-use in highly volatile
environments.
Our mission is to make our products and services easy to acquire, easy
to install and easy to live with.
Our mission is to create value for retailers by providing valuable
intelligence and innovative technology solutions that help to understand,
create, manage, and fulfill consumer demand.
Our strategies are as follows:
o INCREASE OUR MARKET SHARE. We believe we can continue to build and
expand our position of leadership within the retail packaged
software applications market as the retail industry increasingly
turns to packaged software applications as an alternative to
expensive in-house and custom developed applications.
o PROVIDE HIGH LEVELS OF CUSTOMER SATISFACTION. The retail industry
is strongly influenced by formal and informal references. We
believe we have the opportunity to expand market share by
providing high levels of customer satisfaction with our current
customers, thereby fostering strong customer references to support
sales activities.
o DELIVER VALUE TO OUR CUSTOMERS. We believe that maximizing our
customers' return on investment will help us compete in our market
space and increase our market share.
o BECAME THE PREFERRED APPLICATION AND TECHNOLOGY ARCHITECTURE FOR
THE SMALL TO MEDIUM SIZED RETAILERS GLOBALLY. By leveraging our 25
years of success, we believe we are uniquely positioned to become
the preferred application and technology architecture provider for
retail software and associated services to this market.
o FULFILL THE MULTI-CHANNEL REQUIREMENTS OF RETAILERS. Through the
acquisition of Page Digital, we believe we will be able to address
the expanding needs of retailers to cohesively manage their varied
channels of distribution.
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 helps
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]
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THE ISLAND PACIFIC RETAIL MANAGEMENT suite of applications builds on
our long history in retail software design and development and provides our
customers with an extremely reliable, widely deployed, comprehensive and fully
integrated retail management solution. Our complete enterprise-level offering of
applications and services is designed to assist our customers in maximizing
their business potential.
Our offerings are a combination of collaborations with partner
companies and solutions developed internally by us. They are all completely
integrated. Our offerings include:
o IP GLADIATOR: is a collaborative solution with Wazagua that
orchestrates a myriad of processes across retail enterprise to
deliver effective loss prevention. To do so, IP Gladiator enables
an integrated asset protection workflow spanning exception
management, investigation management, case management and civil
collection. The salient features of this solution include: (a)
availability in ASP or in-house modes, (b) advanced data mining to
recognize loss patterns, and (c) POS platform independence.
o IP GLOBAL NETWORK: is an offering that cost-effectively enables
retailer collaboration with vendors, including product design
collaboration, and facilitates improved communication with stores.
This will feature services such as teleconferencing,
voice-over-IP, and instant messaging to deliver the collaboration
capabilities.
o IP INTEGRATOR: is a common integration platform that seamlessly
unifies all IP applications with partner applications as well as
enables integrations to 3rd party and legacy applications of a
retailer. It leverages an industry proven technology to deliver
speed, reliability, maintainability and shorter implementation
cycles in addressing integration needs. This solution is jointly
developed with Bostech.
o IP BUYER'S WORKMATE: features a suite of integrated modules that
enable, automate and enforce best practices leading to sound
merchandise purchase and allocation decisions, in compliance with
the approved budgets. This suite, along with the range of
capabilities provided through IP Consumer Research, IP Weather
Impacts, IP Profiling and the IP Core Merchandising suite, enables
the retailer to plan and execute consumer-sensitive merchandising,
placement, pricing and promotion decisions. The suite consists of:
o IP DECISION SUPPORT: features an analytical processing tool
designed to provide retailers with relevant, timely and detailed
business information.
o IP ASSORTMENT PLANNING: enables retailer to arrive at a
well-researched and sound buying decisions - yielding merchandise
assortments that meet local consumer demand, minimize inventory
investment, accelerate sales, lessen inter-store transfers and
reduce markdowns.
o IP ALLOCATION: enables allocation of purchase order receipts,
advanced shipping notices and warehouse back-stock in a manner
sensitive to the assortment plan, merchandise performance, and
store stocking levels.
o IP WEATHER IMPACTS: is a collaborative offering with Planalytics
to enable retailers to understand and address the impact that
weather has had and will have on their businesses, helping them to
avoid surprises and improve bottom line profitability.
o IP BUSINESS PROCESS OPTIMIZATION: is a collaborative retail
process management solution offered in partnership with KMG that
enables the retailers to improve productivity and reduce
inefficiencies through better control and management of business
processes. The applications of interest to retailers can range
from operational activities such as new store construction and
opening, global sourcing, distribution center optimization and
promotions management to fiduciary responsibilities and processes
such tracking and control of financial reporting.
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o IP CONSUMER RESEARCH: is a collaborative offering with BIGresearch
to leverage syndicated consumer intelligence from over 8,000
shoppers each month to provide retailers a projected look at
consumers demand. The deep and proven consumer research insights
can enable retailers to anticipate consumer demand, correct market
focus, develop strategy and market positioning, to understand
simultaneous media usage and exposure to determine what they are
actually receiving from their media expenditures.
o IP PROFILING: is a collaborative offering to develop Sales
Profiles by recognizing common selling patterns from voluminous
sales history. It features an advanced statistical pattern coupled
with an interactive graphical approach to the creation,
maintenance and monitoring of seasonal profiles.
o IP FORECASTING AND REPLENISHMENT: is a collaborative offering of a
full feature forecasting and replenishment solution to address the
needs of retailers seeking a higher end solution in this area.
o IP OMNICARD: provides a loyalty card application, with advanced
features such as secure authentication, data storage, and radio
frequency identification, to retailers that enables them to
provide consumers with reason to carry a retailer loyalty card.
o IP STORE PEOPLE PRODUCTIVITY: application helps retailer analyze
store, people and item and transaction level sales productivity.
At the foundation of our application suite are the integrated modules
that comprise our core-merchandising solution. They are:
o MERCHANDISING MANAGEMENT
o The Island Pacific Merchandising module is a comprehensive
solution for management of core retail processes, which
optimizes workflow and provides the highest level of data
integrity.
o This module supports all operational areas of the supply
chain: Planning, Open-To-Buy, Purchase Order Management,
Forecasting, Warehouse and Store Receiving, Distribution,
Transfers, Price Management, Performance Analysis, and
Physical Inventory.
o THE EYE(TM) ANALYSIS AND PLANNING
o The Eye(TM), our datamart is a comprehensive analysis and
planning tool that provides answers to retailer's
merchandising questions. The specific "who, what, where, when
and why" are defined in a multi-dimensional format. The Eye
is completely integrated to IP Core Merchandising.
o This application enables the retailer to develop completely
user-defined inquiries and reports. The capacity of The Eye
to store, manipulate, and present information is limited only
by the retailer's imagination.
o REPLENISHMENT AND FORECASTING
o The Island Pacific Replenishment module is a tool that
ensures the retailer will have the right merchandise in the
right stores at the right time by dynamically forecasting
accurate merchandise need, reducing lost sales, increasing
stock turn, and reducing cost of sales.
o PROMOTIONS AND EVENTS
o The Island Pacific Event and Promotion Management tool
enables the retailer to manage, plan and track all
promotional and event related activities including price
management, in-store display, deal, and media related
promotions. The promotions addressed through this module can
include non-price promotions as well. The analysis includes
actual to plan comparisons prior to, during and after the
event.
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o WAREHOUSE
o The Island Pacific Warehouse module provides enhanced control
and visibility of product movement through the warehouse.
Item, quantity and bin integrity is ensured through directed
put away, task confirmation, RF procedures, automated cycle
counts and carton control.
o TICKETING
o The Island Pacific Ticketing module supports both merchandise
and warehouse location identification utilizing multiple
printers and bar codes. User-configured tickets may include
desired product characteristics, including but not limited to
retail price, compare at pricing, item, style, color and size
information.
o FINANCIALS
o The Island Pacific Financials module incorporates a General
Ledger that is synchronized with the Merchandising Stock
Ledger.
o This module also includes a robust Accounts Payable
application, which supports 3-way automated matching of
invoices, receipts, and purchase orders that streamline
workflow to optimize operations.
o SALES AUDIT
o This module is an integrated conduit between Point-of-Sale
applications and the Island Pacific Host System, which
manages the upload- and download- processes. The upload
process manages all transactional information that occurs at
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.
The PAGE DIGITAL suite of applications focuses on the multi-channel
requirements of retailers.
SYNARO(R) SOLUTION
Page Digital has designed its applications to specifically address
direct commerce business processes, which primarily relate to
interactions with the end-user. Having developed its software out of
necessity to manage its own former direct commerce operation, Page
Digital has been extremely attentive to functionality, usability and
scalability. Its software components include applications for customer
relations management, order management, call centers, fulfillment, data
mining and financial management. Specific activities like partial ship
orders, payments with multiple tenders, back order notification,
returns processing and continuum marketing (e.g., up sells based on
time coffee of the month club), represent just a few of the more than
1,000 parameterized direct commerce activities it has built into its
SYNARO(R) applications. Page Digital makes these components and its
interfacing technology available to customers, systems integrators and
independent software developers who may modify them to meet their
specific needs. This growing base of inherited functionality continues
to improve the market relevance of its products.
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SYNARO(R) PRODUCTS
Page Digital has designed a suite of SYNARO(R) products for
plug-and-play use to allow companies to rapidly capitalize on direct commerce
opportunities, both through the Internet as well as through call centers and
catalogs to augment Web-based components or as a complete integrated solution.
The table below provides a brief description the associated benefits of each of
Page Digital's products.
SYNARO(R) PRODUCT DESCRIPTIONS
--------------------------------------------------------------------------------
PRODUCT DESCRIPTION
------- -----------
INTEGRATOR A powerful middleware processor that seamlessly integrates
disparate front- and back-end business systems to allow
for the creation of best-of-breed solutions. Integrator is
specially tuned to provide real-time integration for high
volume and high performance requirements. SYNARO(R)
components are tightly integrated out-of-the-box for rapid
deployment of best practice functionality.
ERM A platform to manage communications between a company and
its customers across all mediums, which utilizes
segmentation, list management, campaign management and
forecasting functions that can be applied to both
interactive and traditional channels. ERM provides a
graphical user interface that allows our customers to
configure screens and keystrokes to accommodate their
specific requirements. It includes features such as
multi-channel order entry, e-mail management and response,
closed loop workflow and real-time communications with
customers to name a few.
WEBSTORE A real-time, online front-end for manufacturers,
retailers, wholesalers, direct marketers and other
businesses that seek to facilitate sales transactions
over the Internet. WebStore comes with preset templates, a
shopping cart metaphor, SSL security, search engine and
databases for configuring the site to handle product
information, special selling situations, etc. It is
compatible with multiple web servers such as BEA's
WebLogic, IBM's WebSphere, and Sun's iPlanet.
ORDER A multi-faceted component application, which ensures
MANAGEMENT proper accounting for orders e.g. back order, customer
hold, hold until complete, date sensitive orders,
continuity orders, etc.; exceptions are brought to
management's attention; and orders can be processed and
verified from any Web application. It includes a
comprehensive Call Center capability including Computer
Telephony Integration (CTI) and customer relations
management.
ORDER A comprehensive application that monitors and controls all
FULFILLMENT fulfillment parameters including specifications,
replenishment orders, continuity programs, drop ship
orders, ship complete orders, gift orders, backorders and
shipping and handling orders.
MARKETING Controls offer and promotion set-up, which includes
customer list segmentation, campaign management including
targeted e-mail capability, item selection and placement
and pricing. Targeted marketing promotions and offers
provide the opportunity to improve margins and accelerate
return on investment.
PRODUCT Controls inventory management issues such as item type and
MANAGEMENT attributes. Multiple item types such as configured, kits,
gift certificates, serialized, drop ship, special order,
and club membership allow for significant flexibility.
WAREHOUSE Provides pick ticket processing, cycle count physical
MANAGEMENT inventory, bin location control, cross docking and
location maintenance.
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WORK FLOW Provides for closed loop issues management and future
MANAGEMENT chain of events processing of marketing campaigns.
DATA ANALYSIS A report writer and query tool for mining, visualizing and
analyzing data that supports Business Objects, Crystal
Reports, FOCUS and ORACLEany SQL-compliant DB.
FORECASTING The Oracle-based Forecasting application allows for
flexible inventory and merchandise forecasting that
enables direct commerce companies to increase turns and
reduce back orders.
FINANCIALS A product suite that includes all financial components
necessary to run a business, including real-time or batch
credit card processing, accounts receivable and accounts
payable management and general ledger operations.
--------------------------------------------------------------------------------
RTI'S application Retail Pro provides a total solution for small to
mid-tier retailers. It is used in over 24,000 store sites in over 60 countries.
At its core Retail Pro is a high performance, 32-bit Windows application
offering point-of-sale, inventory management, e-commerce and business analytics.
Running on WindowsNT, Windows2000, Windows XP Professional and Windows.Net
platforms, Retail Pro combines a fully user-definable graphical interface with
support for a variety of input devices (from keyboard to touch screen). Its
Retail Business Analytics module includes an embedded Oracle(R) 9i database.
Retail Pro is fast and easy to implement out of the box, with the flexibility
for customization, and the power to manage retail enterprises. Its scalability
and enhanced database features make it an ideal solution for retailers of any
size.
In addition to inventory management and point-of-sale, Retail Pro also
provides:
o Customer history/relationship management
o Physical inventory interface
o Purchase order control
o EDI ordering
o Receiving/drop shipment support
o Store-to-store merchandise transfers
o Payment Processing: credit, debit, gift card, and check
o Accounting system links
o Multi-user/multi-store connectivity
o Real-time data exchange
o SQL report server/key performance indicators
o Custom reporting
o Custom programming (through Business Partners).
Our PROFESSIONAL SERVICES provide our customers with expert retail
business consulting, project management, implementation, application training,
technical and documentation services. This product offering ensures that our
customers' technology selection and implementation projects are planned and
implemented timely and effectively. We also provide development services to
customize our applications to meet specific requirements of our customers and
ongoing support and maintenance services.
We market our applications and services through an experienced
professional direct sales force in the United States and in the United Kingdom.
We believe our knowledge of the complete needs of multi-channel retailers
enables us to help our customers identify the optimal systems for their
particular businesses. The customer relationships we develop build recurring
support, maintenance and professional service revenues and position us to
continuously recommend changes and upgrades to existing systems.
Up until April 1, 2003, we also developed and distributed retail system
training products and general computer courseware and computer skills testing
products through our SVI Training Products, Inc. subsidiary. Effective April 1,
2003, we sold the SVI Training Products, Inc. subsidiary and discontinued this
line of business.
Our executive offices are located at 19800 MacArthur Boulevard, Suite
1200, Irvine, California 92612, telephone number (949) 476-2212.
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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 is 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
A sample of some of Page Digital's active customers is listed below:
IBM Lands' End Hershey Foods Mason Shoe Company
A&E Television Network Turner Broadcasting FAO Schwartz Michaels' Stores
A sample of some of RTI's active customers is listed below:
IKEA Play it Again Sports Patagonia Squaw Valley Ski Resort
SafeCo Field The Body Shop Staples Center The Luggage Center
MARKETING AND SALES
We sell our applications and services primarily through a direct sales
force that operates in the United States and the United Kingdom. Sales efforts
involve comprehensive consultations with current and potential customers prior
to completion of the sales process. Our Sales Executives, Retail Application
Consultants (who operate as part of the sales force) and Marketing and
Technology Management associates use their collective knowledge of the needs of
multi-channel retailers to help our customers identify the optimal solutions for
their individual businesses.
We maintain a comprehensive web site describing our applications,
services and company. We regularly engage in cooperative marketing programs with
our strategic alliance partners. We annually host a Users Conference in which
hundreds of our customers attend to network and to share experiences and ideas
regarding their business practices and implementation of our, and our partners'
technology. This Users Conference also provides us with the opportunity to meet
with many of our customers on a concentrated basis to provide training and
insight into new developments and to gather valuable market requirements
information.
We are aggressively focusing on our Product Marketing and Product
Management functions to better understand the needs of our markets in advance of
required implementation, and to translate those needs into new applications,
enhancements to existing applications and related services. These functions are
also responsible for managing the process of market need identification through
product or service launch and deployment. It is the goal of these functions to
position Island Pacific optimally with customers and prospects in our target
market.
We have established a Product Direction Council, comprised of leading
executives from our customers. The purpose of this Council is to help guide us
in the future development of our applications and services, to maximize our
opportunity to meet overall retail market trends and needs for a broad sector of
the industry, and to do so well in advance of our competitors.
COMPETITION
The markets for our application technology and services are highly
competitive, subject to rapid change and sensitive to new product introductions
or enhancements and marketing efforts by industry participants. We expect
competition to increase in the future as open systems architecture becomes more
common and as more companies compete in the emerging electronic commerce market.
The largest of our competitors offering end-to-end retail solutions is
JDA Software Group, Inc. Other suppliers offer one or more of the components of
our solutions. In addition, new competitors may enter our markets and offer
merchandise management systems that target the retail industry. For enterprise
solutions, our competitors include Retek Inc., SAP AG, nsb Retail Systems PLC,
Essentus, Inc., GERS, Inc., Marketmax, Inc., Micro Strategies Incorporated and
Evant, Inc., formerly NONSTOP Solutions. For Store Solutions, our competitors
include Datavantage, Inc., CRS Business Computers, NSB Retail Systems PLC,
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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. Page Digital's primary competitors in
the multi-channel market include Ecometry, CommercialWare and Sigma-Micro.
We believe the principal competitive factors in the retail solutions
industry are price, application features, performance, retail application
expertise, availability of expert professional services, quality, reliability,
reputation, timely introduction of new offerings, effective distribution
networks, customer service, and quality of end-user interface.
We believe we currently compete favorably with respect to these
factors. In particular, we believe that our competitive advantages include:
o Proven, single version technology, reducing implementation costs
and risks and providing continued forward migration for our
customers.
o Extensive retail application experience for all elements of the
customer's business, including Professional Services, Development,
Customer Support, Sales and Marketing/Technology Management.
o Ability to provide expert Professional Services.
o Large and loyal customer base.
o Hardware platform independent Store Solution (POS) application.
o Breadth of our application technology suite including our
multi-channel retailing capabilities.
o Our corporate culture focusing on the customer.
Many of our current and potential competitors are more established,
benefit from greater name recognition, have greater financial, technical,
production and/or marketing resources, and have larger distribution networks,
any or all of which could give them a competitive advantage over us. Moreover,
our current financial condition has placed us at a competitive disadvantage to
many of our larger competitors, as we are required to provide assurance to
customers that we have the financial ability to support the products we sell. We
believe strongly that we provide and will continue to provide excellent support
to our customers, as demonstrated by the continuing upgrade purchases by our
top-tier established customer base.
PROPRIETARY RIGHTS
Our success and ability to compete depend in part on our ability to
develop and maintain the proprietary aspects of our technologies. We rely on a
combination of copyright, trade secret and trademark laws, and nondisclosure and
other contractual provisions, to protect our various proprietary applications
and technologies. We seek to protect our source code, documentation and other
written materials under copyright and trade secret laws. We license our software
under license agreements that impose restrictions on the ability of the customer
to use and copy the software. These safeguards may not prevent competitors from
imitating our applications and services or from independently developing
competing applications and services, especially in foreign countries where legal
protections of intellectual property may not be as strong or consistent as in
the United States.
We hold no patents. Consequently, others may develop, market and sell
applications substantially equivalent to our applications, or utilize
technologies similar to those used by us, so long as they do not directly copy
our applications or otherwise infringe our intellectual property rights.
We integrate widely-available platform technology from third parties
for certain of our applications. These third-party licenses generally require us
to pay royalties and fulfill confidentiality obligations. Any termination of, or
significant disruption in, our ability to license these products could cause
delays in the releases of our software until equivalent technology can be
obtained and integrated into our applications. These delays, if they occur,
could have a material adverse effect on our business, operating results and
financial condition.
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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
As of September 30, 2003, we had a total of 127 employees, 109 of which
were based in the United States and 18 of which were based in the United
Kingdom. Of the total, 13% were engaged in sales and marketing, 40% were engaged
in application technology development projects, 26% were engaged in professional
services, and 21% were in general and administrative. We believe our relations
with our employees overall are good. We have never had a work stoppage and none
of our employees are subject to a collective bargaining agreement.
As of September 30, 2003, Page Digital had a total of 37 employees, all
of which are based in United States. Of the total employees, 11% were engaged in
sales and marketing, 46% were engaged in application technology development
projects, 32% were engaged in professional services, and 11% were engaged in
general and administrative responsibilities.
As of January 8, 2004, RTI had a total of 59 employees, based in the
United States. Of the total employees, 29% were engaged in sales and marketing,
44% were engaged in application technology development projects, 17% were
engaged in professional services, and 10% were engaged in general and
administrative responsibilities.
FACILITIES
Our principal corporate headquarters consists of 26,521 square feet in
a building located at 19800 MacArthur Blvd in Irvine, California. This facility
is occupied under a lease that expires on June 30, 2005. The current monthly
rent is $56,148. We also occupy administrative offices in La Jolla, California.
These offices are occupied under leases that expire in June 2007 and October
2005, and the monthly rent for these offices is $12,859 in the aggregate. We
also occupy premises in the United Kingdom located at The Old Building, Mill
House Lane, Wendens Ambo, Essex, England. The lease for this office building
expires August 31, 2003. Annual rent is $43,646 (payable quarterly) plus common
area maintenance charges and real estate taxes.
Page Digital's principal office consists of 44,505 square feet of
rentable space in a building located 6450 S. Revere Parkway, Englewood,
Colorado. Page Digital entered into a 10 year three-party lease agreement.
Pending resolution of certain building issues, Page Digital has leased the
building on a month-to-month basis, and monthly rent for the facility is
$64,717. Page Digital has sublet office space to two sub-tenants of
approximately 5,000 square feet, for a rental income of $7,500 per month.
RTI's principal office consists of 12,717 square feet of rentable space
in a building located at 2330 E. Bidwell Street, Suite 110, Folsom, California.
RTI has leased the space until January 2006 for $22,255 per month.
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LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand
with the California Labor Commissioner for $256,250 in severance benefits
allegedly due under a disputed employment agreement, plus attorney's fees and
costs. Mr. Dorosewicz's demand was later increased to $283,894. On June 18,
2002, we filed an action against Mr. Dorosewicz, Michelle Dorosewicz and an
entity affiliated with him in San Diego Superior Court, Case No. GIC790833,
alleging fraud and other causes of action relating to transactions Mr.
Dorosewicz caused us to enter into with his affiliates and related parties
without proper board approval. On July 31, 2002, Mr. Dorosewicz filed
cross-complaints in that action alleging breach of statutory duty, breach of
contract, fraud and other causes of action related to his employment with the
Company and other transactions he entered into with the Company. The parties
agreed to resolve all claims in binding arbitration. The dispute was heard by an
arbitrator the week of October 3, 2003. The arbitrator issued an award on
November 7, 2003, resolving most of the disputed issues in favor of the Company
as follows: (a) the Company was awarded a refund of rental payments amounting to
$66,950.76; (b) the excessive equipment leasing financing charges by Mr.
Dorosewicz were recast substantially reducing the Company's unpaid balance; (c)
Mr. Dorosewicz was ordered to repay attorneys' fees reimbursement he had
previously been provided by the Company; (d) Mr. Dorosewicz was denied severance
benefits; (e) Mr. Dorosewicz's claims with respect to options were denied; and
(f) Mr. Dorosewicz was awarded his unpaid bonus in the amount of $56,719. The
net amount awarded to Mr. Dorozewicz was $85,339.09, which was paid in January
2004.
Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of our
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have accrued $187,000 as our potential exposure.
The receiver has also claimed that we are obligated to it for inter-company
balances of $636,000, but we do not believe any amounts are owed to the
receiver, who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on
disability/worker's compensation leave, Debora Hintz, filed a claim with the
California Labor Commissioner seeking $41,000 in alleged unpaid commissions. In
or about December of 2002, Ms. Hintz filed a discrimination claim against the
Company with the Department of Fair Employment and Housing, alleging harassment
and sexual orientation discrimination. The Company has responded appropriately
to both the wage claim and the discrimination allegations, which the Company
believes lack merit based on present information. On December 1, 2003, the
Department of Fair Housing and Employment closed the case on the basis of no
probable cause to prove violation of statute, and gave notice of right to sue.
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. We settled this case on September 30, 2003. The terms of the settlement
agreement are subject to a confidentiality covenant.
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In mid-2002, we were the subject of an adverse judgment entered against
it in favor of Randall's Family Golf Centers, ("Randall") in the approximate sum
of $61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We settled matter by an
agreement to pay for $12,500 to Randall.
On December 16, 2002, Chapter 11 Debtors Natural Wonders, Inc. and
World of Science, Inc. (collectively "Debtors") filed an adversary proceeding
against our subsidiary SVI Retail, Inc. seeking to avoid and recover
preferential transfers. The Debtors sought recovery of approximately $84,000,
which it had previously paid to SVI Retail for goods and services rendered. On
March 12, 2003, the Debtors and SVI Retail settled the adversary proceeding for
$18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as
Shea Homes, Inc. served Sabica Ventures, Inc. ("Sabica"), our wholly owned
subsidiary and our then Island Pacific division (now are retail management
solutions division) with a cross-complaint for indemnity on behalf of an entity
identified in the summons as Pacific Cabinets. We filed a notice of motion and
motion to quash service of summons on the grounds that we have never done
business as Pacific Cabinets and have no other known relation to the
construction project that is the subject of the cross-complaint and underlying
complaint. A hearing on our motion to quash occurred on May 22, 2003 and was
subsequently denied.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Harvey Braun 64 Chief Executive Officer and Chairman of the Board
Steven Beck 63 President and Chief Operating Officer and Director
Ran Furman 34 Chief Financial Officer
Ivan M. Epstein 42 Director
Michael Silverman (1) (2) 59 Director
Ian Bonner (1) (2) 48 Director
Robert P. Wilkie 34 Director
George Brocco 56 Vice President, Sales North America
Michael Lenaghan 50 Vice President, Strategy and Business Development
Kavindra Malik 43 Executive Vice President, Product Management
Ronald Koren 49 Vice President, Marketing Communications
Mike Dotson 37 Managing Director, European Operations
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
64
Harvey Braun became our Chief Executive Officer in April 2003 and our
Chairman in July 2003, and he served as CEO of our retail management solutions
division (formerly our Island Pacific division), from January 2003 to February
2003. Prior to joining the Company, he was a Senior Partner in Deloitte &
Touche's Consulting Consumer Business Program. He worked for Deloitte & Touche
for over 20 years, and has acted as a consultant to many of the top retailers in
the country, including Ahold, ConAgra, Inc., Federated, Heilig-Meyers, Home
Depot, IBM, Kmart, Marmaxx, RJR Nabisco, Sears, The Gap, and The Limited. Mr.
Braun holds an engineering degree from Rensselaer Polytechnic Institute and a
Masters of Administration from Carnegie Mellon.
Steven Beck became our President, Chief Operating Officer and a
director in April 2003. He had been President and Chief Operating Officer of our
retail management solutions divisions (formerly our Island Pacific division)
since September, 2002. Since January 2002, he had 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 joined Island Pacific on July 23, 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.
Ivan M. Epstein became a director of the Company in May 1998. He is the
former Chief Executive Officer and Chairman of 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. Mr. Epstein is now an employee of a subsidiary of
the Sage Group.
Michael Silverman became a director in January 2001. Mr. Silverman
founded Advanced Remote Communications Solutions, Inc. (formerly known as
Boatracs, Inc.) in 1990 and serves on its board of directors. He previously
served as its Chairman until May 2002, and as Chief Executive Officer and
President until October 1997, and from November 1999 to May 2002. Mr. Silverman
is a Chartered Accountant (South Africa) and has an M.B.A. from Stanford
University. Mr. Silverman is a member of the Audit and Compensation Committees.
Ian Bonner became a director in May 1998. He is President and Chief
Executive Officer of Terraspring, Inc., a software and Internet infrastructure
company. From 1993 until April 2001, he held various positions with IBM
Corporation, including Vice President of Partner Marketing and Programs for the
IBM/Lotus/Tivoli Software Group. His responsibilities included the development
and implementation of marketing campaigns and programs designed to serve the
business partners of IBM, Lotus and Tivoli, including major accounts,
independent software vendors and global systems integrators. He also oversaw the
IBM BESTeam and the Lotus Business Partner programs which are designed to
provide enhanced opportunities, including education, marketing and training
support, to qualified providers of IBM's and Lotus's portfolio of network
solutions. Mr. Bonner received a Bachelor of Commerce from the University of the
Witwatersrand in 1976 and a graduate degree in Marketing Management and Market
Research and Advertising from the University of South Africa in 1978. Mr. Bonner
is a member of the Audit and Compensation Committees.
Robert P. Wilkie became a director in June 2002. He is the former the
Group Financial Director and director of Softline, which he joined in 1997 as
controller. Mr. Wilkie was 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). Mr. Wilkie is now an employee of a subsidiary of the
Sage Group.
George Brocco is Vice President, North America Sales, since May 2003.
Prior to joining Island Pacific Mr. Brocco was the IBM Retail Store Systems
Brand Manager for Americas Software from January 2002. From January 2001 to
January 2002 he managed the North American Retail Store Systems Software Sales
team. Since 1998 he managed IBM's Worldwide Host Integration Software Sales team
responsible for selling software that enabled large legacy systems to integrate
web technologies. Prior to that he held various marketing and sales roles at
IBM. Mr. Brocco received a B.A. from Colgate University.
65
Michael Lenaghan is Vice President Strategy and Business Development
for Island Pacific, since April, 2003. Mr. Lenaghan's role is to develop and
enhance business partner relations and create new business opportunities for
Island Pacific's clients, partners and stockholders. Mr. Lenaghan started his
retail career with the JC Penney Company in New York City as a Management
Trainee in Distribution Operations in the late 1970's, after graduating with a
BA from Iona College in New Rochelle, NY. His association with retailing
includes VP and COO of Tenn Ohio; a Columbus based logistic and supply chain
company. In 1994, he joined GE Capital as a Senior Vice President; in 1996
joined Value City Department Stores as a VP of Strategy and Store Operations
Support; became Practice Leader of Supply Chain for Origin Technology (Philips
BV) in 1999, and consulted with various technology investment organizations in
2001, to help preIPO companies gain market share. Mr. Lenaghan received his MBA
in Finance and Marketing from Wagner College in New York City.
Kavindra Malik became Executive Vice President in May 2003. Mr. Malik
served as Vice President from January 2003 to April 2003. Mr. Malik is
responsible for the product vision and roadmap for Island Pacific unit. Prior to
joining Island Pacific, Mr. Malik served as Vice President of Product Management
for Spotlight Solutions from 2002. From 1997 to 2002, Mr. Malik was the Director
of Retail and Consumer Goods Solutions Management for i2 Technologies. Mr. Malik
received a Ph. D. in Decision Sciences from the University of Pennsylvania in
1988.
Ronald Koren became Vice President in December 2002. Mr. Koren is
responsible for marketing communications. Prior to joining Island Pacific, Mr.
Koren was briefly in charge of Retail Solutions Marketing at Fujitsu. From April
2000 to May 2002, Mr. Koren was Director of Marketing for Raymark in Canada. His
responsibilities included web development, direct and web-based mail campaigns
as well as launching a branding strategy for newly developed hand-held products
for point-of-sale and inventory. From November 1994 to May 2000, Mr. Koren was
Director of Sales Support for Wincor Nixdorf. Mr. Koren received a B.A. in
Communications from San Francisco State University.
Mike Dotson became Managing Director of our United Kingdom Operations
since April 2001. Prior to that appointment, Mr. Dotson held various positions
with Island Pacific's United Kingdom office since January 1998. Mr. Dotson
received a B.A. in Political Science and Economy from University of California
at 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.
BOARD COMMITTEES
We have established a Compensation Committee and an Audit Committee.
The Board of Directors formed a Compensation Committee in April 1998.
The Compensation Committee's primary function is to establish the compensation
policies and recommend to the Board of Directors the compensation arrangements
for senior management and directors. The Compensation Committee also recommends
the adoption of compensation plans in which officers and directors are eligible
to participate and the granting of stock options or other benefits to executive
officers. The Compensation Committee is composed entirely of independent
directors (as "independence" is defined in Section 121(A) of the listing
standards of the American Stock Exchange). Current members of the Compensation
Committee are Ian Bonner and Michael Silverman. The Compensation Committee met
three times during the fiscal year ended March 31, 2003.
The Board of Directors also formed an Audit Committee in April 1998.
The purpose of the Audit Committee is to assist the Board of Directors in
fulfilling its responsibilities for our financial reporting. The Audit Committee
recommends the engagement and discharge of independent auditors, reviews with
independent auditors the audit plan and the results of the audit, reviews the
independence of the independent auditors, reviews internal accounting procedures
and discharges such other duties as may from time to time be assigned to it by
the Board of Directors. Current members of the Audit Committee are Ian Bonner
and Michael Silverman. The Audit Committee met four times during the fiscal year
ended March 31, 2003.
66
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ian Bonner and Michael Silverman served as the members of the
Compensation Committee during the fiscal year ended March 31, 2003. No member of
our Compensation Committee during the last completed fiscal year has ever been
an officer of the Company or any of its subsidiaries. During the last completed
fiscal year, no executive officer of the Company served as a member of a
compensation committee or board of directors of any entity that had one or more
of its executive officers serving as a member of our Compensation Committee.
COMPENSATION OF DIRECTORS
During fiscal 2003, we issued the following options to purchase shares
of our common stock to our directors: (a) 5,000 options with exercise prices of
$0.35 per share to each of Barry Schechter, Arthur Klitofsky, Ian Bonner,
Michael Silverman, Donald Radcliffe and Ivan Epstein, vesting immediately; (b)
20,000 options with exercises prices of $0.28 to each of Arthur Klitofsky,
Donald Radcliffe, Ian Bonner, Michael Silverman, Ivan Epstein, and Robert
Wilkie, vesting 1/3 on the first anniversary date of the grant and 2/3 in 24
equal monthly installments; (c) 100,000 options with exercise prices of $0.44 to
Donald Radcliffe, vesting 1/3 on the first anniversary date of the grant and 2/3
in 24 equal monthly installments; (d) 5,000 options with exercise prices of
$0.85 to each of Donald Radcliffe, Ian Bonner, Michael Silverman, Ivan Epstein,
and Robert Wilke, vesting immediately; (e) 25,000 options with exercises prices
of $0.85 to Donald Radcliffe, vesting immediately; (f) 50,000 options with
exercise prices of $0.85 to each of Michael Silverman and Ian Bonner, vesting
immediately.
On January 30, 2002, the Board adopted a plan to issue to each director
who attends a Board meeting an option under the 1998 Incentive Stock Plan to
purchase 5,000 shares at an exercise price equal to the fair market value on the
date of the meeting.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth summary information concerning the
compensation for the last three fiscal years received by each person who served
as Chief Executive Officer during the last completed fiscal year, the four other
most highly compensated persons serving as executive officers at the end of the
last completed fiscal year who earned more than $100,000 in salary and bonus in
the last completed fiscal year, and two other persons who were executive
officers during the last completed fiscal year and earned more than $100,000 in
salary and bonus, but who were not executive officers at the end of the last
completed fiscal year. These individuals are referred to as the "named executive
officers."
67
LONG TERM
ANNUAL COMPENSATION COMPENSATION
SECURITIES ALL OTHER
NAME AND OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS ($) (1)
------------------ ---- --------- -------- --------------- ------------ -------
Barry M. Schechter 2003 369,314 -- -- 505,000 --
(Former Chairman of the 2002 337,486 -- -- 505,000 4,263
Board and Chief 2001 312,492 -- -- 321,429 4,995
Executive Officer)
Harvey Braun (2) 2003 162,764 -- -- 2,000,000 --
(Chairman of the Board and
Chief Executive Officer)
Steven Beck (3) 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
& Pres. of SVI Training) 2001 152,400 -- -- 90,000 4,572
Randy Pagnotta 2003 237,828 -- -- -- --
(Former Vice President) 2002 40,000 100,000 --
Mike Dotson 2003 154,410 -- -- -- 6,176
(Vice President) 2002 143,100 25,000 5,272
2003 148,290 14,000 2,723
___________
(1) We also provide certain compensatory benefits and other non-cash
compensation to the named executive officers. Except as set forth above, our
incremental cost of all such benefits and other compensation paid in the years
indicated to each such person was less than 10% of his or her reported
compensation and also less than $50,000.
(2) Mr. Braun began his employment with Island Pacific, Inc. in January
2003.
(3) Mr. Beck began his employment with Island Pacific, Inc. in October
2002.
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named executive
officers.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM ($)
----------------------------------------------------------------------- ------------------------
EXERCISE OR
DATE OF OPTIONS BASE PRICE EXPIRATION
NAME GRANT GRANTED(#) % OF TOTAL ($/SH.) DATE 5% 10%
---- ----- ---------- ---------- ------- ---- -- ---
Barry M. Schechter 06/24/02 5,000(2) 0.09% 0.35 06/24/12 1,101 2,789
09/03/02 500,000(1) 8.61% 0.28 09/03/12 88,045 223,124
Arthur S. Klitofsky 06/24/02 5,000(1) 0.09% 0.35 06/24/12 1,101 2,789
09/03/02 60,000(2) 1.03% 0.28 09/03/12 10,566 26,775
Harvey Braun 09/03/02 2,000,000(3) 34.42% 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
68
(1) Options vest on the date of grant and subject to continuing service.
(2) Options vest as to one-third of the shares on the first anniversary of
the grant and the remaining two-thirds of the shares in 24 equal
monthly installments after the first vesting date, subject to
continuing service.
(3) Options granted outside of the plan and vest on the date of grant.
The potential realizable value is calculated based on the term of the
option at its time of grant and the number of shares underlying the grant at
fiscal year end. It is calculated based on assumed annualized rates of total
price appreciation from the market price at the date of grant of 5% and 10%
(compounded annually) over the full term of the grant with appreciation
determined as of the expiration date. The 5% and 10% assumed rates of
appreciation are mandated by SEC rules and do not represent our estimate or
projections of future common stock prices. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not be
achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth the information concerning the fiscal
year end value of unexercised options held by the named executive officers. None
of the named executive officers exercised options during the last fiscal year.
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY END (#) OPTIONS AT FY END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- -----------------------------
Barry M. Schechter 1,315,926/200,928 525,193/3,807
Arthur S. Klitofsky 162,549/122,151 3,867/46,783
Harvey Braun 2,000,000/0 1,540,000/0
Steven Beck 2,000,000/0 1,540,000/0
Randy Pagnotta 41,375/58,625 14,068/19,933
Mike Dotson 21,471/18,529 4,226/4,774
(1) Based upon the market price of $1.05 per share, determined on the basis of
the closing sale price per share of our common stock on the American Stock
Exchange on the last trading day of the 2003 fiscal year, less the option
exercise price payable per share.
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
employment 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 will be fully vested when issued and exercisable for ten years after the
date of the grant. Mr. Schechter remains a consultant to us. A consulting
agreement with Mr. Schechter is currently being drafted. For the six months
ended September 30, 2003, Mr. Schechter was paid $74,000 for consulting
services.
69
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. The parties agreed to resolve all claims in arbitration. This dispute
was heard by an arbitrator the week of October 4, 2003. The arbitrator issued an
award on November 7, 2003, resolving most of the disputed issues in favor of the
Company as follows: (a) the Company was awarded a refund of rental payments
amounting to $66,950.76; (b) the excessive equipment leasing financing charges
by Mr. Dorosewicz were recast substantially reducing the Company's unpaid
balance; (c) Mr. Dorosewicz was ordered to repay attorneys' fees reimbursement
he had previously been provided by the Company; (d) Mr. Dorosewicz was denied
severance benefits; (e) Mr. Dorosewicz's claims with respect to options were
denied; and (f) Mr. Dorosewicz was awarded his unpaid bonus in the amount of
$56,719. The net amount awarded to Mr. Dorozewicz was $85,339.09, which was paid
in January 2004.
LONG TERM INCENTIVE PLANS
We do not have any long-term incentive plans, as those terms are
defined in SEC regulations. During the fiscal years ended March 31, 2002 and
2003, we did not adjust or amend the exercise price of stock options awarded to
the named executive officers. We have no defined benefit or actuarial plans
covering any named executive officer.
STOCK INCENTIVE PLANS
We have two stock incentive plans. Our Incentive Stock Option Plan
("1989 Plan") terminated in October 1999. It provided for issuance of incentive
stock options to purchase up to 1,500,000 shares of common stock to employees.
438,735 of such shares remain subject to option as of January 8, 2004. The
1989 Plan was administered by the Board of Directors, which established the
terms and conditions of each option grant.
The 1998 Incentive Stock Plan ("1998 Plan") authorizes the issuance of
shares of common stock through incentive stock options, non-statutory options,
stock bonuses, stock appreciation rights and stock purchase agreements. The 1998
Plan was amended in August 2000 to increase the number of shares reserved from
3,500,000 to 4,000,000. The August 2000 amendments authorized a further
automatic annual increase in reserved shares to take place on the first trading
day of each fiscal year. The amount of the automatic annual increase is 2% of
the total number of shares of common stock outstanding on the last trading day
of the immediately prior fiscal year. The automatic annual increase cannot
however be more than 600,000 shares, and the Board may in its discretion provide
for a lesser increase. The 1998 Plan was further amended in August 2002 to
increase the number of shares reserved from 4,600,000 to 5,600,000. The August
2000 amendments also implemented a limit on stock awards to any one person in
excess of 500,000 shares in any calendar year, which limit was increased to
1,000,000 shares in August 2002. Our stockholders approved the August 2000
70
amendments at our annual meeting held November 16, 2000 and the August 2002
amendments at our annual meeting held September 19, 2002. On April 1, 2002 and
April 1, 2003, the automatic increase of 565,872 and 600,000 shares,
respectively, was effected, so that the total number of shares reserved under
the 1998 Plan is currently 6,765,872. The exercise price of options is
determined by the Board of Directors, but the exercise price may not be less
than 100% of the fair market value on the date of the grant, in the case of
incentive stock options, or 85% of the fair market value on the date of the
grant, in the case of non-statutory stock options.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership of shares of our common
stock as of January 8, 2004 (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 January 8, 2004, there were 47,683,626 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*
-------------------- -------------------- -----------------
The Sage Group plc 27,695,912 (2) 41.7%
Sage House
Benton Park Road
Newcastle upon Tyne NE7 7LZ, England
033 Growth Fund I, L.P.
033 Growth Fund II, L.P.
033 Growth Fund International, Ltd.
Oyster Pond Partners, L.P. 5,354,700 (3) 11.2%
Attn: Larry Longo, COO
125 High Street, Suite 1405
Boston, MA 02110
ICM Asset Management, Inc. 3,803,924 (4) 7.7%
601 W. Main Ave., Suite 600
Spokane, WA 99201
Steven Beck 2,000,000 (5) 4.0%
Harvey Braun 2,000,000 (5) 4.0%
Kavindra Malik 79,167 (6) <1%
Ronald Koren 3,085 <1%
Mike Dotson 34,138 (5) <1%
Michael Silverman 182,194 (7) <1%
345 S. Reeves Drive, #203
Beverly Hills, CA 90212
Ian Bonner 125,194 (5) <1%
5527 Inverrary Court
Dallas, Texas 75287
Ivan M. Epstein 138,472 (5) <1%
2 Victoria Eastgate Extension 13
Sandton 2148
South Africa
Robert P. Wilkie 25,000 (5) <1%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
All directors and executive officers as 4,587,250 (8) 8.8%
a group (9 persons)
71
* Percent of shares of common stock beneficially owned by each investor
(a) is based upon 47,683,626 shares of our common stock outstanding
as of January 8, 2004, plus all shares of common stock issuable to
such investor within 60 days of January 8, 2004 pursuant to
outstanding options, warrants and preferred stock.
(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 71,812 shares issuable pursuant to outstanding options
exercisable within 60 days of January 8, 2004 and 18,700,185 shares
issuable upon conversion of Series A Convertible Preferred Stock
within 60 days of January 8, 2004. The 18,700,185 shares consist of
18,478,789 shares issuable as of January 8, 2004 and 221,396 shares
that will be issuable within 60 days of January 8, 2004 on account of
accrued and unpaid dividends during that 60 day period.
(3) Includes 2,887,033 shares of common stock held by 033 Growth Partners
I, L.P., 806,244 shares of common stock held by 033 Growth Partners
II, L.P., 401,222 shares of common stock held by Oyster Pond
Partners, L.P. and 1,260,201 shares of common stock held by 033
Growth International Fund, Ltd.
(4) In addition to 28,328 shares held by ICM Asset Management, Inc.,
includes 1,596,276 shares held by Koyah Leverage Partners, L.P.,
332,097 shares held by Koyah Partners, L.P., and 261,929 shares held
by Raven Partners, L.P. Also includes 1,257,925 shares issuable upon
exercise of outstanding warrants held by Koyah Leverage Partners,
L.P., 309,784 shares issuable upon exercise of outstanding warrants
held by Koyah Partners, L.P., and 12,535 shares issuable upon
exercise of outstanding warrants 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 dispositive 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
dispositive 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 dispositive power over shares held by
all three entities. Also includes 5,050 shares held by other clients
of ICM Asset Management, Inc. ICM Asset Management, Inc. has
discretionary authority over these shares held by its other clients
and as a result has shared voting and dispositive power over these
shares. James M. Simmons is the managing member of Koyah Ventures,
LLC and Raven Ventures, LLC and the President and Chief Investment
Officer and the controlling stockholder of ICM Asset Management, Inc.
and as a result has shared voting and dispositive power over shares
held by Koyah Leverage Partners, L.P., Koyah Partners, L.P., Raven
Partners, L.P., ICM Asset Management, Inc. and these 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) Consists of outstanding options exercisable within 60 days of
January 8, 2004.
(6) Includes 29,167 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of January 8, 2004.
(7) Includes 173,194 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of January 8, 2004.
(8) Includes 4,525,165 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of January 8, 2004.
72
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 the Company and such
individuals. Although these persons may owe fiduciary duties to our
stockholders, there is a risk that such conflicts of interest may not be
resolved in our favor.
We borrowed $10 million from Softline in July 2000 in order to pay the
same amount to Union Bank as a mandatory reduction of principal owing to Union
Bank. In July 2001, we amended and restated the Softline note. The restated note
was in the original principal amount of $11.4 million and accrued interest at
14% per annum. All unpaid principal and interest was due May 1, 2003, unless our
term loan from Union Bank of California, N.A. was not extended to November 1,
2002, in which case the note would have been due and payable on November 1,
2002. The restated note was subordinate to our bank indebtedness, and we were
not required or permitted to make any payments of principal or interest under
the restated note so long as the bank indebtedness was outstanding.
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
Convertible Preferred Stock.
o Softline released us from approximately $12.3 million then due
under the promissory note to Softline.
o Softline transferred to us 10,700,000 shares of our common stock
held by Softline.
On November 14, 2003, the Sage Group acquired substantially all the
assets of Softline, including 141,000 shares of our Series A Convertible
Preferred Stock, 8,923,915 shares of our common stock and options exercisable
for 71,812 shares of our common stock. As a result of this transaction the Sage
Group became the beneficial owner of 41.7% of our outstanding common stock.
The Sage Group was also assigned and assumed certain agreements of
Softline, including the rights and obligations respecting and arising from the
Option Agreement between Softline and Steven Beck, as trustee of a certain
management group of the Company. Under the Option Agreement the Optionees have
the right to purchase up to 8,000,000 shares of common stock of the Company and
such number of shares of Series A Convertible Preferred Stock convertible into
17,125,000 shares of common stock of the Company. The right to exercise the
Option is to be distributed as determined by the Company's Board to the
Optionees, who may include Mr. Beck and other members of the Company's
management, as an incentive to continue service for the Company. It is the
current intent of the Optionees to transfer their rights under the Option
Agreement to the Company. On September 17, 2003, 500,000 shares of common stock
underlying the Series A Convertible Preferred Stock were issued in the names of
033 Growth Partners I, L.P., 033 Growth Partners II, L.P., Oyster Pond Partners,
L.P. and 033 Growth International Fund Ltd.
In December 2000, we entered into an agreement to sell up to 2,941,176
common shares to a limited number of accredited investors related to ICM Asset
Management, Inc. ("ICM") for cash at $0.85 per share. We sold 1,764,706 of such
shares in December 2000, for gross proceeds of $1.5 million, and an additional
588,235 shares in January 2001, for additional gross proceeds of $0.5 million.
Two of the investors exercised a right to purchase an additional 588,235 shares
in February 2001 for additional gross proceeds of $0.5 million. We also agreed
to issue to each investor a warrant to purchase one common share at $1.50 for
each two common shares purchased in the private placement (aggregate warrants
exercisable for 1,470,590 shares). We had the right to call 50% of the warrants,
subject to certain conditions, if our common stock traded at a price above $2.00
per share for thirty consecutive days. We also had the right to call the
73
remaining 50% of the warrants, subject to certain conditions, if our common
stock traded at a price above $3.00 per share for thirty consecutive days. We
also agreed to register all of the shares sold under the purchase agreement or
upon exercise of the warrants with the SEC. The agreement with the investors
provided that if a registration statement was not effective on or before April
21, 2001, we would be obligated to issue two-year warrants to each investor,
entitling the investor to purchase additional shares of our common stock at
$0.85 per share. We filed a registration statement in January 2001 to register
these shares, but it did not become effective. As of June 28, 2002, we had
issued the investors warrants to purchase 1,249,997 shares of common stock under
this agreement. At the time of these investments, none of the investors were
affiliated with us, but ICM and related persons became greater than 5%
beneficial owners of our common stock as a result of such transactions.
In May and June 2001, we issued a total of $1.25 million in convertible
notes to a limited number of accredited investors related to ICM. The notes were
originally due August 30, 2001, and required interest at the rate of 12% per
annum to be paid until maturity, with the interest rate increasing to 17% in the
event of a default in payment of principal or interest. Any portion of the
unpaid amount of principal and interest was convertible at any time by the
investors into shares of common stock valued at $1.35 per share. We also agreed
to issue to the investors three-year warrants to purchase 250 common shares for
each $1,000 in notes purchased, at an exercise price of $1.50 per share.
In July 2002, the terms of the notes and warrants issued to the
investors related to ICM were amended. The investors agreed to replace the
existing notes with new notes having a maturity date of September 30, 2003. The
interest rate on the new notes was reduced to 8% per annum, increasing to 13% in
the event of a default in payment of principal or interest. We are required to
pay accrued interest on the new notes calculated from July 19, 2002, in
quarterly installments beginning September 30, 2002. In December 2002, the
investors agreed to extend the accrued interest payments on the new notes to
September 30, 2003. The investors agreed to reduce accrued interest and late
charges on the original notes by $16,000, and to accept the reduced amount in
527,286 shares of our common stock valued at $0.41 per share, which was the
average closing price of our shares on the American Stock Exchange for the ten
trading days prior to July 19, 2002. The new notes were convertible at the
option of the holders into shares of common stock valued at $0.60 per share. In
September 2003, the investors converted the outstanding balance and accrued
interest totaling $1.4 million into 2,287,653 shares of our common stock.
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. No warrants have been exercised as of January 8, 2004.
We also agreed to file a registration statement for the resale of all
shares held by or issuable to these investors. We filed a registration
statement, which was declared effective by the SEC 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. These amounts were repaid together with interest at the
then-effective prime rate, promptly as revenues were received, and had been paid
in full as of November 2002.
We began occupying our previous principal executive offices in
Carlsbad, California 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 the new
owner from May 2002 to July 2003. Our current principal executive offices are in
Irvine, California.
During fiscal 2003, we paid a total of $122,959 in interest and
principal to Claudav Holdings Ltd. B.V., an entity affiliated with Barry
Schechter, our former Chairman. 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.
74
In the June 27, 2003 PIPE Transaction, we sold an aggregate of
5,275,000 shares of common stock at a per share price of $1.50 to various
institutional investors in a private placement transaction for an aggregate
purchase price of $7,912,500. We also granted the June 27, 2003 PIPE Transaction
investors registration rights under a registration rights agreement that
obligated us to file a separate registration statement respecting their shares
by July 31, 2003 or pay cash penalties of 2% per month based on the amount
invested in the June 27, 2003 PIPE Transaction. We filed a registration
statement that was declared effective by the SEC on September 26, 2003.
In connection with the June 27, 2003 PIPE Transaction, 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 Midsummer,
Omicron, Islandia and the Crestview Investors, each a holder of our 9%
convertible debentures, five-year warrants to purchase 375,000 shares of common
stock at an exercise price of $1.65 in order to obtain their requisite consents
and waivers of rights they possessed to participate in the June 27, 2003 PIPE
Transaction. Roth Capital, Midsummer, Omicron, Islandia and the Crestview
Investors were given registration rights with respect to these warrants under
our registration rights agreement executed in connection with the June 27, 2003
PIPE Transaction.
We incurred approximately $29,000 in legal fees and costs to consummate
the June 27, 2003 PIPE Transaction.
We retain Radcliffe & Associates, an entity affiliated with Donald S.
Radcliffe, our former director, to perform financial advisory services. During
the fiscal years ended March 31, 2003, we incurred $36,000 in fees and costs to
Radcliffe & Associates. 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%. The balance of the note receivable is $162,000 as of January 8,
2004.
In the November 7, 2003 PIPE Transaction, we sold 3,180,645 shares of
common stock at a price of $1.55 per share to various institutional investors in
a private placement transaction for an aggregate purchase price of $4.9 million.
We also granted the November 7, 2003 PIPE Transaction investors registration
rights under a registration rights agreement in which we agree to file a
registration statement with the SEC for the resale of all shares sold these
investors. If the registration statement is not declared effective by February
5, 2004, we will be obligated to pay on February 5, 2004, and each respective
monthly anniversary until the registration statement is filed or declared
effective, an amount in cash, as liquidated damages, equal to 2.0% of the
purchase price paid by the investors in the November 7, 2003 PIPE Transaction.
In connection with the November 7, 2003 PIPE Transaction, we paid Roth
Capital, as placement agent, a compensation of $178,600 in cash and 115,226
shares of our common stock and issued a five-year warrant to purchase 282,065
shares of our common stock at an exercise price of $1.71 per share. Roth Capital
was granted the registration rights similar to those granted to the investors in
the November 7, 2003 PIPE Transaction.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of (1) 100,000,000 authorized
shares of common stock, $0.001 par value, and (2) 5,000,000 shares of preferred
stock of which 141,000 are designated Series A Convertible Preferred Stock. As
of January 8, 2004, there were 47,683,626 shares of common stock outstanding
and 141,000 shares of Series A Convertible Preferred Stock outstanding. The
following description of our capital stock is a summary and is qualified by the
provisions of our amended and restated certificate of incorporation, as amended
and our bylaws, as amended, copies of which have been filed as exhibits to the
registration statement.
75
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on
all matters submitted to a shareholder vote. Holders of our common stock have no
conversion, preemptive or subscription rights and there are no redemption
provisions applicable to our common stock. The rights of the holders of common
stock are subject to the rights of holders of preferred stock. All outstanding
shares of common stock are, and the shares underlying all options and warrants
will be, duly authorized, validly issued, fully paid and non-assessable.
WARRANTS
282,065 shares of our common stock underlying a Roth Capital's warrant
are being registered in this statement. The warrant expires on November 7, 2008
and has an exercise price of $1.71 per share. The exercise price is subject to
adjustment to reflect stock dividends, splits, reverse splits, and other similar
events.
PREFERRED STOCK
The Series A Convertible Preferred has an original issue price of $100
per share and may be redeemed at our option any time prior to the maturity date
of December 31, 2006 for 107% of the original issue price plus accrued and
unpaid dividends. The Series A Convertible Preferred shares are entitled to
cumulative dividends of 7.2% per annum, payable semi-annually. The holders may
convert each share of Series A Convertible Preferred at any time into the number
of shares of our common stock determined by dividing the original issue price
plus all accrued and unpaid dividends, whether or not declared by the Company's
board, 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
conversion price as of January 8, 2004 is $0.85723. The Series A Convertible
Preferred is entitled upon liquidation to an amount equal to its original issue
price plus accrued and unpaid dividends in preference to any distributions to
common stockholders. The Series A Convertible Preferred has no voting rights
prior to conversion into common stock, except with respect to proposed
impairments of the Series A Convertible 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 Convertible 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 any proposed sale to a third party.
REGISTRATION RIGHTS
GENERAL
The following is only a summary of the terms and conditions of the agreements
involving parties which have registration rights. Copies of the actual
agreements have been filed as exhibits to this registration statement. We will
pay for all expenses incurred in connection with these registrations, other than
underwriting discounts and commissions.
GRANTED TO THE NOVEMBER 7, 2003 PIPE TRANSACTION INVESTORS AND OTHER
STOCKHOLDERS
We granted Heartwood Capital, LP, Blackstone Partners, LP, the Ruth
Moore Bypass trust, the Douglas Moore, IRA, the Moore Family Trust, Burlingame
Equity Investors, LP, 033 Growth partners I, L.P., 033 Growth Partners II, L.P.,
Oyster Pond Partners, L.P., 033 Growth International Fund, Ltd., Passport Master
Fund, L.P., Passport Master Fund II, L.P., Deutsche Bank Ag, London Branch,
registration rights under the registration rights agreement executed in
connection with the November 7, 2003 PIPE Transaction. We are registering 150%
of these shares as required by the registration rights agreement.
Roth Capital Partners, LLC was also granted registration rights with
respect to 115,226 shares of common stock and 282,065 shares of common stock
underlying a warrant in the November 7, 2003 PIPE Transaction registration
rights agreement. We are registering 100% of these shares.
Cord Camera Centers, Inc. ("Cord") was granted registration rights with
respect to 100,000 shares of common stock in connection with the settlement
agreement between Cord and the Company dated September 30, 2003. We are
registering 100% of these shares.
Koyah Leverage Partners, L.P., Koyah Partners, L.P. and Raven Partners,
L.P. were granted registration rights with respect to 204,319 shares of common
stock. We are registering 100% of these shares.
76
The Sage Group acquired 8,923,915 shares of common stock, options
exercisable for 71,812 shares of common stock and 141,000 shares of Series A
Convertible Preferred Stock, which are convertible into 18,700,185 shares of
common stock within 60 days of January 8, 2004 (the 18,700,185 shares consist of
18,478,789 shares issuable as of January 8, 2004 and 221,396 shares that will be
issuable within 60 days of January 8, 2004 on account of accrued and unpaid
dividends during that 60 day period). The Sage Group acquired registration
rights with respect to 624,281 shares of common stock issuable upon conversion
of the Series A Convertible Preferred Stock. The Sage Group also has
"piggy-back" registration rights with respect to the 8,923,915 shares of common
stock acquired from Softline and 71,812 shares of common stock underlying
options. We are registering 9,620,008 shares of common stock held by or issuable
to the Sage Group.
Ronald Koren, David Leacock, Augusto Rosero, Manuel Vicente, Cheryl
Valencia, Randy Pagnotta, Rachel Glicksman and Richardson & Patel, LLP were
granted "piggy-back" registration rights with respect to 114,849 shares of
common stock. We are registering 100% of these shares.
KBK Ventures was granted "piggy-back" registration rights with respect
to 208,333 shares issued pursuant to consulting agreement. We are registering
100% of these shares.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will by
passed on for us by Solomon Ward Seidenwurm & Smith, LLP, 401 B Street, Suite
1200, San Diego, California 92101.
EXPERTS
The consolidated financial statements of Island Pacific, Inc. for the
years ended March 31, 2003 and March 31, 2002 appearing in this Prospectus and
Registration Statement have been audited by Singer Lewak Greenbaum Goldstein
LLP, independent accountants and auditors as set forth in their report thereof
appearing elsewhere herein and are included in reliance upon such report and
given upon their authority of such firm as experts in accounting and auditing.
The consolidated statements of operations, stockholders' equity and
cash flows of Island Pacific, Inc. (formerly, SVI Solutions, Inc.) for the year
ended March 31, 2001 included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
(which report expresses an unqualified opinion and includes an explanatory
paragraph relating to the Company's ability to continue as a going concern), and
are included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 under the Act with
the SEC with respect to the shares offered hereby. This prospectus filed as part
of the registration statement does not contain all of the information contained
in the registration statement and exhibits thereto and reference is hereby made
to such omitted information. Statements made in this registration statement are
summaries of the terms of such referenced contracts, agreements or documents and
are not necessarily complete. Reference is made to each such exhibit for a more
complete description of the matters involved and such statements shall be deemed
qualified in their entirety by such reference.
You can read the registration statement and our future SEC filings,
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any document we file with the SEC at its public reference facility at
450 Fifth Street, N.W., Washington, DC 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.
77
ISLAND PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
SEPTEMBER 30, MARCH 31,
2003 2003
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,052 $ 1,319
Accounts receivable, net of allowance for doubtful accounts of
$203 and $372, respectively 8,514 3,974
Income tax refund receivable 846 --
Other receivables, including $0 and $3 from related parties, respectively 87 97
Inventories 84 91
Current portion of non-compete agreements 917 917
Net assets from discontinued operations -- 309
Prepaid expenses and other current assets 618 225
--------- ---------
Total current assets 12,118 6,932
Note receivable 171 --
Property and equipment, net 370 380
Purchased and capitalized software, net 15,846 14,804
Goodwill, net 14,795 14,795
Non-compete agreements, net 209 668
Other assets 29 58
--------- ---------
Total assets
$ 43,538 $ 37,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due to stockholders $ -- $ 1,320
Convertible note 500 500
Current portion of long-term debts -- 149
Accounts payable 483 2,941
Accrued expenses 2,896 4,517
Deferred revenue 1,686 1,561
Income tax payable 398 --
--------- ---------
Total current liabilities 5,963 10,988
Convertible debentures, net of debt discount of $0 and $625, respectively -- 2,726
Other long-term liabilities 68 81
--------- ---------
Total liabilities 6,031 13,795
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred, 7.2% cumulative 141,100 shares authorized and
outstanding with a stated value of $100 per share, dividends in arrears of
$1,439 and $1,269, respectively 14,100 14,100
Committed common stock - 2,500,000 shares 1,383 1,383
Common stock, $.0001 par value; 100,000,000 shares authorized; 43,987,176 and
42,199,632 shares issued; and 43,987,176 and 31,499,632 shares outstanding 4 4
Additional paid in capital 61,526 57,751
Accumulated deficit (39,506) (40,490)
Treasury stock, at cost; shares - 10,700,000 -- (8,906)
--------- ---------
Total stockholders' equity 37,507 23,842
--------- ---------
Total liabilities and stockholders' equity $ 43,538 $ 37,637
========= =========
The accompanying notes are an integral
part of these condensed consolidated financial statements.
F-1
ISLAND PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Six Months Ended
September 30,
2003 2002
--------- ---------
(unaudited) (unaudited)
Net sales $ 12,145 $ 8,690
Cost of sales 2,728 3,662
--------- ---------
Gross profit 9,417 5,028
Expenses:
Application development 683 2,244
Depreciation and amortization 1,766 2,082
Selling, general and administrative 5,797 3,827
--------- ---------
Total expenses 8,246 8,153
--------- ---------
Income (loss) from operations 1,171 (3,125)
Other income (expense):
Interest income 9 1
Other income (expense) (178) 2
Interest expense (521) (685)
--------- ---------
Total other expenses (690) (682)
--------- ---------
Income (loss) before provision for income taxes 481 (3,807)
Provision for income taxes (benefits) (503) 1
--------- ---------
Income (loss) before cumulative effect of a change in accounting
principle 984 (3,808)
Cumulative effect of changing accounting principle - goodwill
valuation under SFAS 142 -- (627)
--------- ---------
Income (loss) from continuing operations 984 (4,435)
Income from discontinued operations of the SVI Training
Products Inc, subsidiary, net of applicable income taxes -- 159
--------- ---------
Net income (loss) 984 (4,276)
Cumulative preferred dividends 554 517
--------- ---------
Net income (loss) available to common stockholders $ 430 $ (4,793)
========= =========
Basic earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.03 $ (0.13)
Cumulative effect of a change in accounting principle - goodwill
Valuation under SFAS 142 -- (0.02)
--------- ---------
Income (loss) from continuing operations 0.03 (0.15)
Income (loss) from discontinued operations -- --
Cumulative preferred dividends 0.02 0.02
--------- ---------
Net income (loss) available to common stockholders $ 0.01 $ (0.17)
========= =========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.02 $ (0.13)
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- (0.02)
--------- ---------
Income (loss) from continuing operations 0.02 (0.15)
Income from discontinued operations -- --
Cumulative preferred dividends 0.01 0.02
--------- ---------
Net income (loss) available to common stockholders $ 0.01 $ (0.17)
========= =========
Weighted-average common shares outstanding:
Basic 33,264 28,685
Diluted 61,718 28,685
The accompanying notes are an integral
part of these condensed consolidated financial statements.
F-2
ISLAND PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands, except share amounts)
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ 984 $(4,276)
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization 1,766 2,082
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- 627
Gain on disposal of furniture and equipment 169 --
Amortization of debt discount and conversion option 267 171
Stock-based compensation 126 8
Common stock issued for services rendered 25 64
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (4,530) 417
Income tax refund receivable (846) --
Inventories 7 7
Prepaid expenses and other assets (363) (34)
Accounts payable and accrued expenses (3,880) 348
Income tax payable 398 (106)
Accrued interest on stockholders' loans, convertible notes and term loan 187 465
Deferred revenue 125 (1,696)
-------- --------
Net cash used for operating activities (5,565) (1,923)
-------- --------
Cash flows from investing activities:
Payment received from note receivable 9 --
Purchases of furniture and equipment (264) (26)
Capitalized software development costs (2,243) (255)
-------- --------
Net cash used for investing activities (2,498) (281)
-------- --------
Cash flows from financing activities:
Sale of common stock, net of offering costs 7,232 --
Decrease in amount due to stockholders, net -- (287)
Proceeds from committed stock 700 1,383
Payments on term loan and debentures (135) (125)
Proceeds from short-term loan from related party -- 120
Payments on short-term loan from related party -- (70)
-------- --------
Net cash provided by financing activities 7,797 1,021
-------- --------
Effect of exchange rate changes on cash (1) (2)
-------- --------
Net decrease in cash and cash equivalents (267) (1,185)
Cash and cash equivalents, beginning of period 1,319 1,309
-------- --------
Cash and cash equivalents, end of period $ 1,052 $ 124
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 134 $ 246
Supplemental schedule of non-cash investing and financing activities:
Issued 4,103,161 shares of common stock upon conversion of the 9% debentures $ 4,200 --
Issued 2,287,653 shares of common stock upon conversion of the note due to
stockholders $ 1,374 --
Issued 500,000 shares of common stock as payment for dividend on preferred
stock $ 421 --
Retired 1,070,000 shares of treasury stock $(8,905) --
Issued 100,000 shares of common stock for services in connection with an
equity financing in December 2000 -- $ 45
Issued 140,000 shares of common stock to pay for penalty for late
effectiveness of the registration statement -- $ 60
Received 262,500 shares of common stock related to early termination
of a service contract -- $ (210)
Issued 84,849 and 568,380 shares of common stock as payments for bonuses
and services rendered in prior periods $ 83 $ 237
The accompanying notes are an integral
part of these condensed consolidated financial statements.
F-3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2003 and for all
the periods presented have been made.
Certain amounts in the prior periods have been reclassified to conform to the
presentation for the six months ended September 30, 2003. The financial
information included in this quarterly report should be read in conjunction with
the consolidated financial statements and related notes thereto in our Form
10-K/A for the year ended March 31, 2003.
The results of operations for the six months ended September 30, 2003 and 2002
are not necessarily indicative of the results to be expected for the full year.
NOTE 2 - DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our wholly-owned subsidiary, SVI Training
Products, Inc. ("Training Products"), to its former president, for the sale
price of $180,000 plus earn-out payments equal to 20% of the total gross
revenues of Training Products in each of its next two fiscal years, to the
extent the revenues in each of those years exceed certain target. We received a
promissory note for the amount of $180,000 and the earn-out payments, if any,
will be made in quarterly installments following each fiscal year, bearing an
annual interest rate of 5%. The note has a balance of $171,000 at September 30,
2003.
The sale of the Training Products subsidiary resulted in a loss of $129,000, net
of estimated income taxes, which was accrued for at March 31, 2003. Accordingly,
the operating results of the Training Products subsidiary for the three and six
months ended September 30, 2002 were restated as discontinued operations.
NOTE 3 - INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost or
market, on a first-in, first-out basis.
NOTE 4 - CONVERTIBLE DEBTS
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
During the quarter ended June 30, 2001, we entered into subscription agreements
with a limited number of accredited investors related to existing stockholders
for gross proceeds of $1.3 million. Each unit consisted of a convertible
promissory note to purchase 250 shares of our common stock for each $1,000
borrowed by us. The holders of the notes had the option to convert the unpaid
principal and interest to common stock at any time at a conversion price of
$0.60 per share. The notes matured on September 30, 2003 and earned interest at
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest, to be paid at maturity. We did not have a right to prepay
the notes. In September 2003, these investors converted all outstanding balances
of principal and accrued interest totaling $1.4 million into 2,287,653 shares of
our common stock.
We also issued to these investors warrants to purchase an aggregate of 1,600,000
shares at $0.60 per share, expiring July 19, 2007. The warrants are not callable
by us. No warrants have currently been exercised.
We filed a registration statement for the resale of all shares held by or
obtainable by these and other investors. The registration statement was declared
effective on July 18, 2003.
F-4
CONVERTIBLE NOTE DUE TO UNION BANK OF CALIFORNIA
Pursuant to the Discounted Loan Payoff Agreement dated March 31, 2003, we issued
to Union Bank of California a $500,000 unsecured, non-interest bearing
convertible note payable in either cash or shares of common stock, at our
option. If we elect to pay the principal amount or any portion thereof in shares
of common stock, the shares will be computed on a price per share of 80% of the
average share closing price of our common stock for the ten trading day period
immediately preceding the payoff date. The maturity date is March 31, 2004. As
of September 30, 2003, the bank had assigned the note to Roth Capital Partners,
LLC, who was the placement agent for the financings in June and November 2003.
CONVERTIBLE DEBENTURES
In March 2003, we entered into a Securities Purchase Agreement for the sale of
convertible debentures to a group of investors (the "March `03 Debenture
Investors"). The debentures were convertible into shares of our common stock at
a conversion price of $1.02 per share, for the total proceeds of $3.5 million.
The debentures would have matured in May 2005 and bore an interest rate of 9%
per annum. Interest was payable on a quarterly basis commencing on June 1, 2003,
in cash or shares of common stock, at our option. If certain conditions were
met, we had the right, but not the obligation, to redeem the debentures at 110%
of their face value, plus accrued interest. Commencing in February 2004, we
would have been obligated to redeem $219,000 per month of the debentures. In
August 2003, the daily volume weighted average price of our common stock on the
American Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive
trading days; therefore, we exercised our option to cause the investors to
convert their debentures into common stock. As a result, the investors converted
all of their debentures into an aggregate of 3,419,304 shares of our common
stock in the quarter ended September 30, 2003.
We filed a registration statement covering 130% of the common stock issuable
upon the conversion of the debentures and warrants. The registration statement
was declared effective on July 18, 2003.
Additional debentures, aggregating up to $2 million, will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of September
30, 2003.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. It was recognized
in the statement of operations during the period from the issuance of the debt
to the time at which the debt first became convertible. We recognized this
interest expense of $715,000 in March 2003.
The March `03 Debenture Investors also received warrants to purchase up to, in
the aggregate, 1,572,858 shares of common stock with an exercise price equal to
$1.02 per share. The warrants expire five years from the date of issuance. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants was $625,000 and was being
amortized as interest expense over the life of the convertible debentures. For
the six months ended September 30, 2003, we recorded an interest expense of
$144,000. At the date of the conversion of the debentures to equity, $481,000 of
the expense remained unamortized and has been debited to additional paid in
capital. The value of the detachable warrants of $481,000 has been recorded as
an offering cost at September 30, 2003. As such, there is no effect on our
statement of operations.
In April 2003, we entered into a Securities Purchase Agreement with an investor
(the "April `03 Debenture Investor") for the sale of a 9% debenture, convertible
to shares of our common stock at a conversion price of $1.02, for the gross
proceeds of $400,000. Interest was due on a quarterly basis commencing on June
1, 2003, payable in cash or shares of common stock at our option. Commencing on
February 1, 2004, we would have been obligated to redeem $20,000 per month of
the debenture. The debenture would have matured in October 2005. In August 2003,
the daily volume weighted average price of our common stock on the American
F-5
Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive trading days;
therefore, we exercised the option to cause this investor to convert its
debenture into common stock. As a result, the April `03 Debenture Investor
converted its debenture into 390,777 shares of our common stock in the quarter
ended September 30, 2003.
The April `03 Debenture Investor was also granted registration rights under a
registration rights agreement, and certain other rights similar to those granted
to the March `03 Debenture Investors.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. We recognized this
interest expense of $69,000 in the quarter ended June 30, 2003.
The debenture issued to the April `03 Debenture investor was accompanied by a
five-year warrant to purchase 156,311 shares of our common stock with an
exercise price of $1.02 per share. We allocated the proceeds received from debt
or convertible debt with detachable warrants using the relative fair value of
the individual elements at the time of issuance. The amount allocated to the
warrants was determined to be $63,000 and was being amortized as interest
expense over the life of the convertible debentures. We recorded an interest
expense of $11,000 in the six months ended September 30, 2003. At the date of
the conversion of the debentures to equity, $52,000 of the expense remained
unamortized and has been debited to additional paid in capital. The value of the
detachable warrants of $52,000 has been recorded as an offering cost at
September 30, 2003. As such, there is no effect on our statement of operations.
In May 2003, we entered into an agreement with a group of investors (the "May
`03 Debenture Investors") for the sale of 9% debentures, convertible into shares
of our common stock at a conversion price of $1.02 for the gross proceeds of
$300,000. Interest was due on a quarterly basis commencing on June 1, 2003,
payable in cash or shares of common stock at our option. Commencing on February
1, 2004, we would have been obligated to redeem $19,000 per month of the
debentures. In August 2003, the daily volume weighted average price of our
common stock on the American Stock Exchange exceeded $1.02 by more than 200% for
15 consecutive trading days; therefore, we exercised the option to cause the
investors to convert their debentures into common stock. As a result, the May
`03 Debenture Investors converted their debentures into an aggregate of 293,083
shares of our common stock in the quarter ended September 30, 2003.
The debentures would have been matured in May 2005. The May `03 Debenture
Investors were also granted registration rights under a registration rights
agreement, and certain other rights similar to those granted to the March `03
Debenture Investors.
Additional debentures aggregating up to $300,000 will be sold to the May `03
Debenture Investors in a second closing, if within one year after the date of
first sale of debentures there occurs a period of 15 consecutive trading days
during which the daily volume weighted average closing price of our common stock
is maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of the date of
this report.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. We recognized this
interest expense of $38,000 in the quarter ended June 30, 2003.
These debentures were accompanied by five-year warrants to purchase an aggregate
of 101,112 shares of common stock with an exercise price of $1.02 per share. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants is $39,000 and was being
F-6
amortized as interest expense over the life of the convertible debentures. We
recorded an interest expense of $5,000 in the six months ended September 30,
2003. At the date of the conversion of the debentures to equity, $34,000 of the
expense remained unamortized and has been debited to additional paid in capital.
The value of the detachable warrants of $34,000 has been recorded as an offering
cost at September 30, 2003. As such, there is no effect on our statement of
operations.
In June 2003, we entered into an agreement with various institutional investors
("Common Stock Institutional Investors") for the sale of 5,275,000 shares of
common stock at a per share price of $1.50 for an aggregate purchase price of
$7.9 million. In connection with this financing, we paid Roth Capital Partners,
LLC, as placement agent, cash compensation of 8% of the proceeds and issued a
five-year warrant to purchase 527,500 shares of common stock at an exercise
price of $1.65 per share. We also issued five-year warrants to purchase 375,000
shares of common stock at an exercise price of $1.65 to the March `04 Debenture
Investors and May `04 Debenture Investors in order to obtain their requisite
consents and waivers of rights they possessed to participate in the financing.
We filed a registration statement covering the shares sold and warrants issued
in connection with this transaction. The registration statement was declared
effective September 26, 2003.
NOTE 5 - INCOME TAX BENEFITS
Income tax benefits for the six months ended September 30, 2003 include $846,000
income tax refund receivable; offset in part by income tax payable relating to
prior periods of $271,000. The net amount of $570,000 has been recorded as
income under provision for income taxes in the consolidated statement of
operations in the six months ended September 30, 2003. The income tax refund
resulted from carrying back net operating losses in the last three years to
prior periods.
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could indicate
that their value has diminished or been impaired. Other intangible assets will
continue to be amortized over their estimated useful lives. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.
Effective April 1, 2002, we adopted SFAS 142 and ceased amortization of goodwill
recorded in business combinations prior to June 30, 2001. We evaluate the
remaining useful lives of these intangibles on an annual basis to determine
whether events or circumstances warrant a revision to the remaining period of
amortization.
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $627,000 as a
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002.
F-7
NOTE 7 - PREFERRED STOCK
The Series A Preferred has a stated value of $100 per share and is redeemed at
our option any time prior to the maturity date of December 31, 2006 for 107% of
the stated value and accrued and unpaid dividends. The preferred shares are
entitled to cumulative dividends of 7.2% per annum, payable semi-annually, and
have accumulative dividends of $1.4 million and $10.21 and $777,000 of $5.46 per
share, at September 30, 2003 and 2002, respectively. The holders may convert
each share of Series A Preferred at any time into the number of shares of our
common stock determined by dividing the stated value plus all accrued and unpaid
dividends, by a conversion price initially equal to $0.80. The conversion price
will increase at an annual rate of 3.5% calculated on a semi-annual basis. The
conversion price as of September 30, 2003 is $0.84. The Series A Preferred is
entitled upon liquidation to an amount equal to its stated value plus accrued
and unpaid dividends in preference to any distributions to common stockholders.
The Series A Preferred has no voting rights prior to conversion into common
stock, except with respect to proposed impairments of the Series A Preferred
rights and preferences, or as provided by law. We have the right of first
refusal to purchase all but not less than all of any shares of Series A
Preferred or shares of common stock received on conversion which the holder may
propose to sell to a third party, upon the same price and terms as the proposed
sale to a third party.
NOTE 8 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common shares ("diluted EPS") reflect the
potential dilutive effect, determined by the treasury method, of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. Earnings per share for six months ended September 30,
2003 and 2002 is calculated as follows (in thousands):
Six months ended September 30,
2003 2002
--------- ---------
Net income (loss) available to
common stockholders $ 430 $ (4,793)
========= =========
Basic weighted average shares 33,264 28,685
Dilutive common stock equivalent 28,454 --
--------- ---------
Diluted weighted average shares 61,718 28,685
========= =========
Basic earnings (loss) per share $ 0.01 $ (0.17)
Diluted earnings (loss) per share $ 0.01 $ (0.17)
The following potential common shares have been excluded from the computation of
diluted net loss per share for the six months ended September 30, 2002, because
the effect would have been anti-dilutive:
Outstanding options under our stock option plans 5,181,082
Outstanding options granted outside our stock option plans 5,074,312
Warrants issued in conjunction with private placements 4,232,000
Warrants issued for services rendered 804,002
Convertible notes due to stockholders 2,083,333
Convertible note due to a major customer 2,500,000
Series A Convertible Preferred Stock 18,576,750
-------------
Total 38,451,479
=============
F-8
NOTE 9 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a leading provider of software solutions and services to the retail
industry. We provide high value innovative solutions that help retailers
understand, create, manage and fulfill consumer demand. Our solutions and
services have been developed specifically to meet the needs of the retail
industry. Our solutions help retailers improve the efficiency and effectiveness
of their operations and build stronger, longer lasting relationships with their
customers. We currently operate in the United States and the United Kingdom. The
geographic distribution of our net sales and long-lived assets are as follows
(in thousands):
Six months ended September 30,
2003 2002
------------- -------------
Net sales:
United States $ 11,114 $ 7,652
United Kingdom 1,031 1,038
------------- -------------
Total net sales $ 12,145 $ 8,690
============= =============
September 30,
2003 2002
------------- -------------
Identifiable assets from continuing operations:
United States $ 42,921 $ 35,584
United Kingdom 617 420
------------- -------------
Total identifiable assets $ 43,538 $ 36,004
============= =============
For the six months ended September 30, 2003 and 2002, net sales to major
customers are as follows (in thousands):
Six months ended September 30,
2003 2002
------------ --------------
QQQ Systems Ltd. 32% --
Toys `R' Us 13% 35%
The account receivable balances from Toys `R' Us at September 30, 2003 and 2002
represent 25% and 9% of total accounts receivable. The account receivable
balance from QQQ Systems Ltd. at September 30, 2003 represents 46% of total
accounts receivable.
F-9
We organize our business into two segments as follows:
o RETAIL MANAGEMENT SOLUTIONS - offer suite of applications,
which builds on our long history in retail software design and
development. We provide our customers with an extremely
reliable, widely deployed, comprehensive and fully integrated
retail management solutions. Retail Management Solutions
include merchandise management that optimizes workflow and
provides the highest level of data integrity. This module
supports all operational areas of the supply chain including
planning, open-to-buy purchase order management, forecasting,
warehouse and store receiving distribution, transfers, price
management, performance analysis and physical inventory. In
addition, Retail Management Solutions include a comprehensive
set of tools for analysis and planning, replenishment and
forecasting, event and promotion management, warehouse,
ticketing, financials and sales audit. Through collaborations
with strategic partners, Retail Management Solutions offer
tools for loss prevention, communication with stores and
vendors, integration needs, purchase and allocation decisions,
analysis of weather impact, control and management of business
processes, consumer research, tracking consumer shopping
patterns, forecasting and replenishment, and analyzing store
people productivity.
o STORE SOLUTIONS - offer suite of applications builds on our
long history of providing multi-platform, client server
in-store solutions. We market this set of applications under
the name "OnePointe," and "OnePointe International" which is a
full business to consumer software infrastructure encompassing
a range of integrated store solutions. "OnePointe" is a
complete application providing all point-of-sale ("POS") and
in-store processor (server) functions for traditional "brick
and mortar" retail operations.
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):
F-10
Six months ended
September 30,
2003 2002
--------- ---------
Net sales:
Retail Management Solutions $ 11,370 $ 7,972
Store Solutions 775 728
--------- ---------
Total net sales $ 12,145 $ 8,690
========= =========
Operating income (loss):
Retail Management Solutions $ 4,819 $ 535
Store Solutions (192) (341)
Other (see below) (3,456) (3,319)
--------- ---------
Total operating income (loss) $ 1,171 $ (3,125)
========= =========
Depreciation:
Retail Management Solutions $ 65 $ 100
Store Solutions 16 26
Other (see below) 25 47
--------- ---------
Total depreciation $ 106 $ 173
========= =========
Other operating loss:
Amortization of intangible assets $ (1,660) $ (1,909)
Depreciation (106) (173)
Administrative costs and other non-allocated
expenses (1,690) (1,237)
--------- ---------
Total other operating loss $ (3,456) $ (3,319)
========= =========
Identifiable assets:
Retail Management Solutions $ 37,228 $ 30,634
Store Solutions 4,410 4,756
--------- ---------
Total identifiable assets $ 41,638 $ 35,390
========= =========
Operating income (loss) in Retail Management Solutions and Store Solutions
includes direct expenses for software licenses, maintenance services,
programming and consulting services, sales and marketing expenses, product
development expenses, and direct general and administrative expenses. The
"Other" caption includes depreciation, amortization of intangible assets,
non-allocated costs and other expenses that are not directly identified with a
particular business unit and which management does not consider in evaluating
the operating income of the business unit.
F-11
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
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 are currently evaluating which
method of transition to fair value accounting we will elect.
The following table presents pro forma disclosures required by SFAS No. 148 of
net income (loss) and basic and diluted earnings (loss) per share as if
stock-based employee compensation had been recognized during the six months
ended September 30, 2003 and 2002. The compensation expense for these periods
has been determined under the fair value method using the Black-Scholes pricing
model, and assumes graded vesting.
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
----------- -----------
(in thousands, except per share amounts)
(unaudited)
Net income (loss) as reported $ 984 $ (4,276)
Less: stock-based compensation expense,
net of related tax effects (986) (857)
----------- -----------
Pro forma net loss $ (2) $ (5,133)
=========== ===========
Basic earnings (loss) per share - as reported $ 0.03 $ (0.15)
Diluted earnings (loss) per share - as reported $ 0.02 $ (0.15)
Basic earnings (loss) per share - pro forma $ 0.00 $ (0.18)
Diluted earnings (loss) per share - pro forma $ 0.00 $ (0.18)
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.
F-12
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In June 2003, we entered into a development and marketing license agreement with
a software and services company affiliated with one of our officers. Under this
agreement, we obtain an exclusive right to sell and distribute this company's
software. In return, we committed to fund $1.2 million toward development of
this product. We also agreed to pay a royalty of 30% of the software license
sales up until we have recuperated all the development funding, at which point
the royalty will increase to 50% thereafter. As of September 30, 2003, we've
funded $275,000 toward development.
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. This dispute was heard before an arbitrator during the week ended
October 3, 2003. The arbitrator issued an award on November 7, 2003, resolving
most of the disputed issues in favor of the Company as follows: (a) the Company
was awarded a refund of rental payments amounting to $66,950.76; (b) the
excessive equipment leasing financing charges by Mr. Dorosewicz were recast
substantially reducing the Company's unpaid balance; (c) Mr. Dorosewicz was
ordered to repay attorneys' fees reimbursement he had previously been provided
by the Company; (d) Mr. Dorosewicz was denied severance benefits; (e) Mr.
Dorosewicz's claims with respect to options were denied; and (f) Mr. Dorosewicz
was awarded his unpaid bonus in the amount of $56,719. The net amount awarded to
Mr. Dorozewicz was $85,339.09, which was paid in January 2004.
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 December 1, 2003, the Department of Fair Housing and Employment
closed the case on the basis of no probable cause to prove violation of statute,
and gave notice of right to sue.
F-13
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claimed damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertained to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. The parties settled this matter in September 2003. The terms of the
settlement agreement are subject to a confidentiality covenant.
In mid-2002, we were the subject of an adverse judgment entered against us in
favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We settled this matter
by an agreement to pay $12,500 to Randall.
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.
NOTE 12 - RELATED-PARTY TRANSACTIONS
We retain our former CEO and Chairman of the Board to provide consulting
services starting August 2003. For the quarter and six months ended September
30, 2003, the expense for this service was $74,000.
We retained an entity owned by an immediate family member of our CEO and
Chairman to provide recruiting services. For the six months ended September 30,
2003, the expense for this service was $108,000.
In June 2003, we entered into a development and marketing license agreement with
a software and services company affiliated with one of our officers. Under this
agreement, we obtain an exclusive right to sell and distribute this company's
software. In return, we committed to fund $1.2 million toward development of
this product. We also agreed to pay a royalty of 30% of the software license
sales up until we have recuperated all the development funding, at which point
the royalty will increase to 50% thereafter. As of September 30, 2003, we've
funded $275,000 toward development.
NOTE 13 - SUBSEQUENT EVENTS
In October 2003, Donald Radcliffe resigned as a member of our Board Directors.
F-14
In the November 7, 2003 PIPE Transaction, we sold 3,180,645 shares of common
stock at a price of $1.55 per share to various institutional investors in a
private placement transaction for an aggregate purchase price of $4.9 million.
We also granted the November 7, 2003 PIPE Transaction investors registration
rights under a registration rights agreement in which we agree to file a
registration statement with the SEC for the resale of all shares sold in the
November 7, 2003 PIPE Transaction. If the registration statement is not declared
effective by February 5, 2004, we will be obligated to pay on February 5, 2004,
and each respective monthly anniversary until the registration statement is
filed or declared effective, an amount in cash, as liquidated damages, equal to
2.0% of the purchase price paid by the investors in the November 7, 2003 PIPE
Transaction.
In connection with the November 7, 2003 PIPE Transaction, we paid Roth Capital
Partners, LLC ("Roth Capital"), as placement agent, a compensation of $178,600
in cash and 115,226 shares of our common stock and issued a five-year warrant to
purchase 282,065 shares of our common stock at an exercise price of $1.71 per
share. Roth Capital was granted the registration rights similar to those granted
to the November 7, 2003 PIPE Transaction investors.
On November 13, 2003, we entered into an agreement with Toys "R" Us to terminate
the software and services development agreement. Under the agreement the
outstanding note was settled in full and the warrant to purchase 2.5 million
shares of our common stock was cancelled.
On November 20, 2003, we executed an agreement by which through a merger
transaction we would acquire Page Digital, a developer of multi-channel commerce
software for consideration of $7.0 million, consisting of $2.0 million in cash
and 2,500,000 shares of our common shares valued at $2.00. The agreement also
provides for a potential adjustment to the number of shares in the merger
exchange to the extent our common stock trades below $1.50 for the 20 trading
days immediately prior to the closing. We anticipate that there is a high
probability of closing this transaction. We anticipate the closing will occur
immediately following a fairness hearing before the California Commissioner of
Corporations in order to perfect our exemption under Section 3(a)(10) of the
Securities Act, or, alternatively, if the fairness hearing does not result in
our ability to avail ourselves of that exemption, the closing would occur
immediately following the effectiveness of an S-4 registration statement which
we would file under the Securities Act. Page Digital has total assets of
approximately $2.0 million (unaudited) and generates annual revenues of
approximately $6.0 million (unaudited). As of September 30, 2003, Page Digital
had 37 employees, all of whom were based in the United States.
An option agreement (the "Option Agreement") was prepared and agreed upon by
Softline Limited and Steven Beck, as trustee of a certain management group of
the Company (the "Optionees"). Under the Option Agreement Softline agreed to
grant the Optionees the right to purchase from Softline 8,000,000 shares of
common stock of the Company and such number of shares of Series A Convertible
Preferred Stock convertible into 17,125,000 shares of common stock of the
Company (the "Option Shares") for a price of $0.80 per Option Share. The Option
Agreement would expire on the earlier of March 24, 2004 and the date on which an
Optionee's full-time employment as an officer or director of the Company is
terminated for any reason. On September 17, 2003, 500,000 shares of common stock
underlying the Series A Convertible Preferred Stock were issued in the names of
033 Growth Partners I, L.P., 033 Growth Partners II, L.P., Oyster Pond Partners,
L.P. and 033 Growth International Fund Ltd.
F-15
On November 14, 2003, The Sage Group plc (the "Sage Group") acquired
substantially all the assets of Softline, including Softline's 141,000 shares of
our Series A Convertible Preferred Stock, which are convertible into 18,700,185
shares of common stock within 60 days of January 8, 2004 (the 18,700,185 shares
consist of 18,478,789 shares issuable as of January 8, 2004 and 221,396 shares
that will be issuable within 60 days of January 8, 2004 on account of accrued
and unpaid dividends during that 60 day period), 8,923,915 shares of our common
stock and options exercisable for 71,812 shares of our common stock. In
connection with the acquisition, certain agreements of Softline, including the
rights and obligations respecting and arising from the Option Agreement, were
also assigned to and assumed by the Sage Group. Accordingly, the Optionees now
have the right to purchase the Option Shares from the Sage Group for a price of
$0.80 per Option Share. The right to exercise the Option is to be distributed as
determined by the Company's Board to the Optionees, who may include Mr. Beck and
other members of the Company's management, as an incentive to continue service
for the Company. It is the current intent of the Optionees to transfer their
rights under the Option Agreement to the Company.
On January 6, 2004, we executed a Letter of Intent/Term Sheet pursuant to which
we intend to acquire RTI, a provider of management systems for retailers, for a
purchase price of $11 million, consisting of $5 million in cash, and $6 million
in shares of our common stock determined by dividing $6 million by the average
closing price of the Company's common stock over the ten day period immediately
preceding the closing of the transaction. In addition, we will assume
approximately $2.5 million in debt owed to certain RTI security holders. The
closing of the transaction is subject to securing financing, due diligence, the
execution of a definitive agreement, the approval of the board of directors of
the Company and the approvals of the board of directors and the shareholders of
RTI. There can be no assurance that the Company will be able to secure the
necessary financing to complete the acquisition of RTI. RTI has total assets of
approximately $4.3 million (un-audited)and generates annual revenues of
approximately $8.0 million (un-audited.) RTI had 59 employees as of January 8,
2004, based in the United States.
F-16
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Island Pacific, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Island Pacific,
Inc. (formerly known as 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 Island
Pacific, 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-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Island Pacific, Inc. and subsidiaries:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Island Pacific, Inc. (formerly known as
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-18
ISLAND PACIFIC, 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-19
ISLAND PACIFIC, 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)
Cumulative preferred dividends 1,015 254 --
--------- --------- ---------
Net loss available to common stockholders $ (3,733) $(14,912) $(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)
Cumulative preferred dividends 0.03 0.01 --
--------- --------- ---------
Net loss available to common stockholders $ (0.12) $ (0.42) $ (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-20
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL RETAINED OTHER OTHER
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS COMPREHENSIVE COMPREHENSIVE
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-21
ISLAND PACIFIC, 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
========== ======== ======= ========= ======== ======== ========= ======== =========
The accompanying notes are an integral
part of these consolidated financial statements.
F-22
ISLAND PACIFIC, 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-23
ISLAND PACIFIC, 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-24
ISLAND PACIFIC, 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 Island
Pacific, 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 was sold 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.
F-25
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.
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.
F-26
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.
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.
F-27
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.
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.
F-28
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
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.
F-29
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.
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.
F-30
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 our former president
of Training Products 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
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
F-31
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).
F-32
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
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 transferred to us 10,700,000 shares of our
common stock.
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
============== ==============
F-33
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
============== ==============
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.
F-34
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, 2003, 2002
and 2001 was zero, $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).
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.
F-35
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
============== ==============
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.
F-36
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.
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.
F-37
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.
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.
F-38
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. On June 27, 2003,
the investors agreed to extend the due date for the effectiveness of
the registration statement to July 31, 2003. 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 are 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 debenture. 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.
The investors also each received a warrant to purchase up to, in the
aggregate, 1,572,858 shares of common stock with an exercise price
equal to $1.02 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.
F-39
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-40
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
arbitration, scheduled for September 2003. We cannot at this time
predict what will be the outcome of these matters.
F-41
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.
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
counterclaims. 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 our then Island Pacific operating division
("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.
F-42
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.
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.
F-43
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. On July 27, 2003,
the investors agreed to extend the due date for the effectiveness of
the registration statement to July 31, 2003. 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 amounted 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.
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 Series A Convertible
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).
F-44
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. Each share of Series A Preferred Stock
may be converted by the holder 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 of the Series A
Convertible Preferred Stock 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 certain other conditions are satisfied and the
right to include shares issuable 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.
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).
F-45
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-46
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-47
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
F-48
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.
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)
=============== ================ ===============
F-49
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-50
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 $ (3,733) 29,598,518 $ (0.12)
========== ========== =========
FISCAL YEAR ENDED MARCH 31, 2002
------------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic and diluted EPS:
Loss available to common stockholders $ (14,912) 35,697,999 $ (0.42)
========== ========== =========
FISCAL YEAR ENDED MARCH 31, 2001
------------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic and Diluted EPS:
Loss available to common stockholders $ (28,945) 34,761,386 $ (0.83)
========== ========== =========
F-51
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.
F-52
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 retain 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.
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.
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. Island
Pacific provides 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.
F-53
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.
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.
F-54
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):
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
================ ================ ===============
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.
F-55
19. 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.
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.
20. FINANCING AND NEW AGREEMENTS (UNAUDITED)
In June 2003, we entered into an agreement with various institutional
investors (the "Institutional Investors") for the sale to these
investors of 5,275,000 shares of common stock at a price of $1.50 per
share for an aggregate purchase price of $7.9 million. We also granted
the Institutional Investors registration rights under a registration
rights agreement, we filed a separate registration statement covering
their shares on July 31, 2003. If this registration statement is not
declared effective by the SEC by September 29, 2003, 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 the 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 consent
and waivers of rights they possessed to participate in the financing.
In accordance with the warrant agreements, the exercise price of
375,000 warrants were adjusted to $1.55 due to the sale of our common
stock in November 2003.
In the November 7, 2003 PIPE Transaction we sold 3,180,645 shares of
common stock at a price of $1.55 per share in a private placement
transaction to various institutional and accredited investors for an
aggregate purchase price of $4.9 million. We also granted the November
7, 2003 PIPE Transaction investors registration rights under a
registration rights agreement in which we agree to file a registration
statement with the SEC for the resale of all shares sold these
investors. If the registration statement is not declared effective by
February 5, 2004, we will be obligated to pay on February 5, 2004, and
each monthly anniversary until the registration statement is filed or
declared effective, an amount in cash, as liquidated damages, equal to
2.0% of the purchase price paid by the investors in November 7, 2003
PIPE Transaction.
F-56
In connection with the November 7, 2003 PIPE Transaction, we paid the
placement agent cash compensation of $179,000, 115,226 shares of common
stock and issued a five-year warrant to purchase 282,065 shares of
common stock at an exercise price of $1.71 per share.
In November 2003, we entered an agreement with Toys "R" Us to terminate
the software development and services agreement. Pursuant to the
agreement the outstanding note was settled in full and the warrant to
purchase 2,500,000 shares of our common stock was cancelled.
On November 20, 2003, we executed an agreement by which through a
merger transaction we would acquire Page Digital, a developer of
multi-channel commerce software for consideration of $7.0 million,
consisting of $2.0 million in cash and 2,500,000 shares of our common
shares valued at $2.00. The agreement also provides for a potential
adjustment to the number of shares in the merger exchange to the extent
our common stock trades below $1.50 for the 20 trading days immediately
prior to the closing. We anticipate that there is a high probability of
closing this transaction. We anticipate the closing will occur
immediately following a fairness hearing before the California
Commissioner of Corporations in order to perfect our exemption under
Section 3(a)(10) of the Securities Act, or, alternatively, if the
fairness hearing does not result in our ability to avail ourselves of
that exemption, the closing would occur immediately following the
effectiveness of an S-4 registration statement which we would file
under the Securities Act. Page Digital has total assets of
approximately $2.0 million (unaudited) and generates annual revenues of
approximately $6.0 million (unaudited). As of September 30, 2003, Page
Digital had 37 employees, all of whom were based in the United States.
An option agreement (the "Option Agreement") was prepared and agreed
upon by Softline Limited and Steven Beck, as trustee of a certain
management group of the Company (the "Optionees"). Under the Option
Agreement Softline agreed to grant the Optionees the right to purchase
from Softline 8,000,000 shares of common stock of the Company and such
number of shares of Series A Convertible Preferred Stock convertible
into 17,125,000 shares of common stock of the Company (the "Option
Shares") for a price of $0.80 per Option Share. The Option Agreement
would expire on the earlier of March 24, 2004 and the date on which an
Optionee's full-time employment as an officer or director of the
Company is terminated for any reason.
On November 14, 2003, The Sage Group plc (the "Sage Group") acquired
substantially all the assets of Softline, including Softline's 141,000
shares of our Series A Convertible Preferred Stock, 8,923,915 shares of
our common stock and options exercisable for 71,812 shares of our
common stock. In connection with the acquisition, certain agreements of
Softline, including the rights and obligations respecting and arising
from the Option Agreement, were also assigned to and assumed by the
Sage Group. Accordingly, the Optionees now have the right to purchase
the Option Shares from the Sage Group for a price of $0.80 per Option
Share. The right to exercise the Option is to be distributed as
determined by the Company's Board to the Optionees, who may include Mr.
Beck and other members of the Company's management, as an incentive to
continue service for the Company. It is the current intent of the
Optionees to transfer their rights under the Option Agreement to the
Company. On September 17, 2003, 500,000 shares of common stock
underlying the Series A Convertible Preferred Stock were issued in the
names of 033 Growth Partners I, L.P., 033 Growth Partners II, L.P.,
Oyster Pond Partners, L.P. and 033 Growth International Fund Ltd.
On January 6, 2004, we executed a Letter of Intent/Term Sheet pursuant
to which we intend to acquire RTI, a provider of management systems for
retailers, for a purchase price of $11 million, consisting of $5
million in cash, and $6 million in shares of our common stock
determined by dividing $6 million by the average closing price of the
Company's common stock over the ten day period immediately preceding
the closing of the transaction. In addition, we will assume
approximately $2.5 million in debt owed to certain RTI security
holders. The closing of the transaction is subject to securing
financing, due diligence, the execution of a definitive agreement, the
approval of the board of directors of the Company and the approvals of
the board of directors and the shareholders of RTI. There can be no
assurance that the Company will be able to secure the necessary
financing to complete the acquisition of RTI. RTI has total assets of
approximately $4.3 million (un-audited) and generates annual revenues
of approximately $8.0 million (un-audited). RTI had 59 employees as of
January 8, 2004, all in the United States.
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21. SETTLEMENTS OF LITIGATION (UNAUDITED)
The dispute with Mr. Dorosewitz was heard by an arbitrator the week of
October 3, 2003. The arbitrator issued an award on November 7, 2003,
resolving most of the disputed issues in our favor as follows: (a) we
were awarded a refund of rental payments amounting to $66,950.76; (b)
the excessive equipment leasing financing charges by Mr. Dorosewicz
were recast substantially reducing our unpaid balance; (c) Mr.
Dorosewicz was ordered to repay attorneys' fees reimbursement he had
previously been provided by us; (d) Mr. Dorosewicz was denied severance
benefits; (e) Mr. Dorosewicz's claims with respect to options were
denied; and (f) Mr. Dorosewicz was awarded his unpaid bonus in the
amount of $56,719. The net amount awarded to Mr. Dorosewicz was
$85,339.09, which was paid in January 2004.
On December 1, 2003, the Department of Fair Housing and Employment
closed the case, filed by an employee who is currently out on
disability/worker's compensation leave, Debora Hintz, on the basis of
no probable cause to prove violation of statute, and gave notice of
right to sue.
The case of Cord Camera Centers, Inc. litigation was settled on
September 30, 2003. The terms of the settlement agreement are subject
to a confidentiality covenant.
We settled the Randall case by an agreement to pay $12,500 to Randall.
F-58
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the securities
being registered are set forth in the following table (all amounts except the
registration fee are estimated):
SEC Registration Fee.......................... $ 2,852
Legal fees and expenses....................... $ 259,000*
Accounting fees and expenses.................. $ 30,000
Printing & Engraving.......................... $ 4,000
* includes $214,000 in fees incurred in the November 7, 2003 PIPE Transaction.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. Our Restated Certificate of Incorporation contains provisions permitted
by Section 102(b)(7) of the DGCL.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such director, officer, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal actions or
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify directors and/or officers in an action or
suit by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the director
or officer is adjudged to be liable to the corporation. Where a director or
officer is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such director or officer actually and reasonably incurred.
Our Restated Certificate of Incorporation provides indemnification of
our directors and officers to the fullest extent permitted by the DGCL. Our
Restated Bylaws provides for indemnification by the Company of its directors,
officers and certain non-officer employees under certain circumstances against
expenses, including attorney's fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with any threatened,
pending or completed action, suit or proceeding, in which such person was or is
a party or is threatened to be made a party by reason of the fact that such
person is or was an employee or agent of the Company.
We have obtained liability insurance for each of our directors and
officers for certain losses arising from claims or charges made against them
while acting in their capacities as our directors or officers.
The above discussion of our Restated Certificate of Incorporation and
Restated Bylaws and Sections 102(b)(7) and 145 of the DGCL is not intended to be
exhaustive and is qualified in its entirety by such Restated Certificate of
Incorporation, Restated Bylaws and statutes.
At present, there is no pending litigation or proceeding involving our
directors or officers as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
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ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following unregistered securities within the last
three years.
1. In May 2002, we issued 141,000 shares of our Series A Convertible
Preferred Stock to Softline Limited. The issuance of the Series A
Convertible Preferred Stock was part of a series of transactions
with Softline to (a) repay our subordinated note to Softline and
(b) to transfer to Softline our note received in connection with
the sale of IBIS Systems Limited, in exchange for 10,700,000 of
our common shares. The foregoing securities were offered and sold
without registration under the Securities Act to a sophisticated
investor 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/or
Regulation D thereunder.
2. In May 2002, Toys "R" Us agreed to invest $1.3 million for the
purchase of a non-recourse convertible note and a warrant to
purchase 2,500,000 of our common shares. The note is non-interest
bearing, and the face amount is payable in shares of our common
stock valued at $0.553 per share. In November 2003, we entered
into a termination agreement with Toys where the convertible note
was settled in full and the warrant was canceled. The foregoing
securities were offered and sold without registration under the
Securities Act to a sophisticated investor 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/or Regulation D thereunder.
3. During the last three years, we granted 6,417,729 options to
purchase shares of our common stock to employees and consultants
pursuant to our 1998 Incentive Stock Plan, in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
4. During the last three years, we issued an aggregate of 251,257
shares of our common stock to employees, at per share prices
ranging from $0.25 to $1.25, in lieu of cash payments for
commissions and bonuses totaling $183,175, in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
5. During the last three years, we granted 174,845 shares to Norman
Smith, at per share prices ranging from $0.50 to $1.61, as
payment for past due legal fees totaling $130,000. The foregoing
securities were offered and sold without registration under the
Securities Act to a sophisticated investor 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/or Regulation D thereunder.
6. In March 2000, we sold 337,448 shares of common stock to AMRO
International, S.A. ("AMRO") for gross proceeds of $3 million and
issued 7,500 shares of common stock to AMRO in lieu of $85,000
commission payment. We agreed to register the shares with the
Securities and Exchange Commission ("SEC") by June 30, 2000. 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 additional 375,043 shares of common
stock to AMRO in satisfaction of the repricing right. The
registration statement was declared effective in October 2000. We
became obligated to pay to AMRO liquidated damages for late
effectiveness of the registration statement in the amount of
$286,000. In March 2001, we issued 286,000 shares of common stock
in satisfaction of the liquidated damages and sold additional
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214,000 shares of common stock for gross proceeds of $214,000 to
AMRO. In connection with this sale of shares, we granted AMRO a
two-year warrant to purchase 107,000 shares of common stock at
$1.50 per share We may call warrants for $0.001 per share upon
the occurrence of certain events. 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 it may sell under the warrant, with
the SEC. We became obligated to pay to AMRO liquidated damages in
the amount of $60,000. In April 2002, we issued 140,000 shares of
common stock in satisfaction of the liquidated damages. The
foregoing securities were offered and sold without registration
under the Securities Act to a sophisticated investor 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/or Regulation D thereunder.
7. 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. The foregoing securities were
offered and sold without registration under the Securities Act to
accredited 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/or Regulation D thereunder.
8. We also agreed to issue to each investor related to ICM a warrant
to purchase one common share at $1.50 for each two common shares
purchased in the private placement (aggregate warrants
exercisable for 1,470,590 shares). We had the right to call 50%
of the warrants, subject to certain conditions, if our common
shares traded at a price above $2.00 per share for thirty
consecutive days. We had the right to call the remaining 50% of
the warrants, subject to certain conditions, if our common shares
traded at a price above $3.00 per share for thirty consecutive
days. We agreed to register all of the shares sold under the
purchase agreement or 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.
We had issued the investors warrants to purchase 1,249,997 common
shares under this agreement. In July 2002, these warrants were
cancelled and replaced by new warrants pursuant to the amended
agreements. See Item 11. The foregoing securities were offered
and sold without registration under the Securities Act to
accredited 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/or Regulation D thereunder.
9. 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 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. The foregoing securities were offered and sold without
II-3
registration under the Securities Act to accredited 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/or Regulation D
thereunder.
10. In July 2002, we agreed to amend the terms of the notes and
warrants issued to the investors related to ICM. 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 2003. The
investors reduced accrued interest and late charges on the
original notes by $16,000, and accepted payment of the reduced
amount with 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. In July 2002, we issued 358,863 common shares to the
investors as payment for $147,493 in accrued interest. In August
2002, we issued 168,423 common shares to the investors as payment
for $69,222 in accrued interest. The new notes were convertible
at the option of the holders into shares of our common stock
valued at $0.60 per share. We did not have a right to prepay the
notes. The foregoing securities were offered and sold without
registration under the Securities Act to accredited 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/or Regulation D
thereunder.
11. We also agreed that the warrants previously issued to the
investors related to ICM 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.
12. We also agreed to file a registration statement for the resale
of all shares held by or obtainable by the investors related to
ICM. We filed a registration statement covering these shares
that was declared effective by the SEC on July 18, 2003.
13. In January 2000, we issued 5,000 shares of common stock to Tara
Trust, an unrelated party, upon exercise of non-qualified option
at an exercise price of $5.00 per share. This option was granted
outside of the option plans in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
14. During the period January 2000 through June 2000, we issued
300,000 shares of common stock to Gala Trust, an unrelated
party, upon exercise of non-qualified option at an exercise
price of $1.75 per share. This option was granted outside of the
option plan in reliance upon the exemption provided by Section
4(2) under the Securities Act.
15. In March 2000, we issued 93,023 shares to Jay Fisher, a former
stockholder of MarketPlace Systems Corporation, valued at $1
million, as partial consideration for the acquisition of the
assets of that company. The foregoing securities were offered
and sold without registration under the Securities Act to an
accredited investor 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/or Regulation D thereunder.
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16. In March 2000, we issued 46,774 shares of common stock, valued at
$213,000, to Softline, our majority stockholder, as reimbursement
for a portion of the purchase price for Triple-S Computers
pursuant to our agreement with Softline dated May 27, 1998. We
also issued 56,718 shares of common stock to Softline upon
exercise of non-qualified option for an exercise price of
$113,000. This option was granted outside of the incentive stock
option plans. In October 2002, we issued to Softline 500,000
shares of common stock, valued at $325,000, for payment of past
due refinancing fees related to a note payable to Softline and
95,200 shares of common stock, valued at $64,000, for payment of
past due services provided in prior periods by Softline's
subsidiary. The foregoing securities were offered and sold
without registration under the Securities Act to an accredited
investor 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/or
Regulation D thereunder.
17. In March 2000, we issued an aggregate of 10,000 shares of common
stock to Donald Radcliffe, a Board director, upon exercise of
non-qualified options at exercise prices of $0.30 and $2.00 per
share for an aggregate exercise price of $11,500. In June 2002,
we issued 75,000 shares of common stock to Mr. Radcliffe for
payment of services provided in previous periods, valued at
$24,750. The foregoing securities were offered and sold without
registration under the Securities Act to an accredited investor
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/or Regulation D
thereunder.
18. In May 2000, we issued 5,000 shares of common stock to Gerald
Bagg, an unrelated party, upon exercise of non-qualified option
at an exercise price of $0.75 per share. This option was granted
outside of the incentive stock option plans in reliance upon the
exemption provided by Section 4(2) under the Securities Act
19. In July 2000, we issued 3,700 shares of common stock to Clive
Klugman, a former employee, upon exercise of non-qualified option
at an exercise price of $2.75 per share. This option was granted
outside of the incentive stock option plans in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
20. In September 2000, we issued 11,308, 22,918, 11,000 and 12,500
shares of common stock to Mr. A. Speck, Mr. R. Rosenblatt,
Madison Leasing and Mr. J. Bloom, respectively, unrelated
parties, upon exercise of non-qualified options at an exercise
price of $2.00 per share. These options were granted outside of
the incentive stock option plans in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
21. In October 2002, we issued 1,010,000 shares of common stock,
valued at $389,000, to Stonehage S.A. as full settlement of a
note payable acquired in connection with the acquisition of our
business unit, Island Pacific. The foregoing securities were
offered and sold without registration under the Securities Act to
an accredited investor 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/
or Regulation D thereunder.
22. In May 2001 and July 2001, we issued 5,000 and 17,157 shares of
common stock to Stephenson & Stephenson LLP for payments of past
due invoices for recruiting fees, valued at $8,000 and $17,000,
respectively, in reliance upon the exemption provided by Section
4(2) under the Securities Act.
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23. In August 2001 and September 2001, we issued 5,000 shares of
common stock each to Job Dr. for payments of past due invoices
for recruiting fees, valued at $4,000 and $3,000, respectively,
in reliance upon the exemption provided by Section 4(2) under the
Securities Act.
24. In October 2001, we issued 10,000 shares of common stock to
Donner Corp. International for payment of past due invoices for
investor relation services, valued at $10,000 in reliance upon
the exemption provided by Section 4(2) under the Securities Act.
25. In October 2001, we issued 100,000 shares of common stock to
Western Financial Communications, Inc. ("Western Financial") for
payment of consulting services provided, valued at $72,000. We
also granted Western Financial a two-year warrant to purchase
100,000 shares of common stock at an exercise price of $1.00 in
reliance upon the exemption provided by Section 4(2) under the
Securities Act.
26. In June 2003, we issued 59,838 shares of common stock to Western
Financial upon exercise of this warrant.
27. In October 2001, we issued 31,575 shares of common stock to
Research Works, Inc. for payment of past due invoices for
recruiting fees, valued at $24,000 in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
28. In December 2001, we issued 187,500 shares of common stock to KBK
Ventures, Inc. for payment of public relation services provided,
valued at $150,000. We also granted KBK Ventures, Inc. a
three-year warrant to purchase up to 208,333 shares of common
stock at an exercise price of $1.00 in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
29. In December 2001, we issued 30,000 shares of common stock to
Roger Howland for payment of past due invoices for recruiting
fees, valued at $28,000 in reliance upon the exemption provided
by Section 4(2) under the Securities Act.
30. In January 2002, we issued 40,000 shares of common stock to
Displayworks for payment of past due invoices for tradeshow
exhibit services, valued at $36,000 in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
31. In January 2002, we issued 11,800 shares of common stock to
Retail Search Group for payment of past due invoices for
recruiting fees, valued at $10,000 in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
32. In April 2002, we issued 33,332 shares of common stock to Richard
Singer for payment of consulting fees provided, valued at $19,000
in reliance upon the exemption provided by Section 4(2) under the
Securities Act.
33. In April 2002, we issued 100,000 shares of common stock, valued
at $45,000, to Aura (Pvt) Limited for investment relations
services in reliance upon the exemption provided by Section 4(2)
under the Securities Act.
34. In June 2002, we issued 15,000 shares of common stock to Robert
Pomerantz for payment for legal services provided, valued at
$7,000 in reliance upon the exemption provided by Section 4(2)
under the Securities Act.
35. In September 2002, we issued 5,000 shares of common stock to RCG
Capital Markets Group, Inc. for payment of consulting services
provided, valued at $3,000 in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
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36. In October 2002, we issued 50,000 shares of common stock to Tribe
Communications, Inc. for payment of public relation services
provided, valued at $8,000 in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
37. In January 2003 and April 2003, we issued 25,000 and 48,000,
respectively, shares of common stock to CEOcast, Inc. for payment
of investor relation services provided, valued at $8,000 and
$25,000, respectively, in reliance upon the exemption provided by
Section 4(2) under the Securities Act. CEOcast, Inc. assigned
rights to 70,080 shares to Rachel Glicksman and 2,920 shares to
Gary Nash.
38. In September 2002, we granted Steven Beck, President of Island
Pacific, and Harvey Braun, CEO of Island Pacific, each a
non-qualified option to purchase up to 2 million shares of common
stock at an exercise price of $0.28 per share. The option vests
immediately and expires in September 2005. The option was granted
outside of the incentive stock option plans. The foregoing
securities were offered and sold without registration under the
Securities Act to accredited 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/or Regulation D thereunder.
39. In March 2003, we issued 1,000,000 shares of common stock to
Union Bank of California as part of a settlement for a term loan
acquired in June 1999. The foregoing securities were offered and
sold without registration under the Securities Act to an
accredited investor 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/or Regulation D thereunder.
40. In March 2003, we issued an aggregate of $3.5 million in
debentures convertible into shares of common stock and warrants
to purchase an aggregate of 1,572,858 shares of common stock to
Midsummer Investment, Ltd., Omicron Master Trust, and Islandia,
L.P. The debentures have a conversion price of $1.0236, and the
warrants have an exercise price of $1.0236. These debentures were
offered and sold without registration under the Securities Act to
accredited 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/or Regulation D thereunder.
41. In March 2003, we issued 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 Borrower's
common stock for the ten trading day period immediately preceding
the maturity date of the note, in reliance upon the exemption
provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
42. On April 1, 2003, we issued an aggregate of $400,000 in
debentures convertible into and warrants to purchase an aggregate
of 547,089 shares of common stock to MBSJ Investors LLC. The
debentures are have a conversion price of $1.0236, and the
warrants have an exercise price of $1.0236. These debentures and
warrants were offered and sold without registration under the
Securities Act to an accredited investor 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/or Regulation D thereunder.
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43. On May 6, 2003, we issued an aggregate of $300,000 in debentures
convertible into and warrants to purchase an aggregate of 394,195
shares of common stock to Crestview Capital Fund I, L.P.,
Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. The debentures are have a conversion price of $1.0236,
and the warrants have an exercise price of $1.0236. These
debentures and warrants were offered and sold without
registration under the Securities Act to accredited 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/or Regulation D
thereunder.
44. On June 27, 2003, we issued an aggregate of 5,275,000 shares of
common stock to Bonanza Master Fund, Ltd., The Pinnacle Fund,
L.P., Sandor Capital Master Fund, L.P., Southwell Partners, LP,
Westpark Capital, L.P., Microcapital Fund LP, Atlas Capital
(Q.P.) L.P., Atlas Capital Master Fund, Ltd., Gruber & McBain
International, Lagunitas Partners, LP, Jon D. Gruber and Linda W.
Gruber, J. Patterson McBaine and Glacier Partners. The foregoing
securities were offered and sold without registration under the
Securities Act to accredited 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/or Regulation D thereunder.
45. On June 27, 2003, we issued to Roth Capital Partners, LLC a
warrant to purchase 527,500 shares of common stock at an exercise
price of $1.65 per share. This warrant was offered and sold
without registration under the Securities Act, in reliance upon
the exemption provided by Section 4(2) under the Securities Act.
46. On June 27, 2003, we issued to the current holders of our 9%
convertible debentures warrants to purchase an aggregate of
375,000 shares of common stock at an exercise price of $1.65 per
share. These warrants were offered and sold without registration
under the Securities Act, in reliance upon the exemption provided
by Section 4(2) under the Securities Act.
47. We also agreed to file a registration statement for the resale of
all shares held by or obtainable by the investors that
participated in the June 27, 2003 transaction, including the
debenture holders who were issued warrants. We filed a
registration statement covering these shares that was declared
effective by the SEC on September 26, 2003.
48. On March 31, 2003, we issued to Century Capital a warrant to
purchase 50,000 shares of common stock for services rendered. In
July 2003, we issued 35,428 to Century Capital upon cashless
exercise of its warrant. This warrant was offered and sold
without registration under the Securities Act, in reliance upon
the exemption provided by Section 4(2) under the Securities Act.
49. In May 2003 and July 2003, we issued an aggregate of 84,849
shares of common stock to our employees in lieu of cash payment
for past due commissions totaling $83,000, in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
50. In the quarter ended June 30, 2003, we issued an aggregate of
14,171 shares of common stock to our employees upon exercise of
their incentive stock options with the exercise prices ranging
from $0.86 to $1.75, in reliance upon exemption provided by
Section 4(2) under the Securities Act.
51. In July 2003, we issued 1,914 shares of common stock to an
employee upon exercise of his incentive stock options with the
exercise prices of $1.00 and $1.61, in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
II-8
52. In July 2003 and August 2003, we issued 488,472 and 293,083,
respectively, shares of common stock to Omicron Master Trust upon
the conversion of $500,000 and $300,000, respectively, of its
debenture, in reliance upon the exemption provided by Section
4(2) under the Securities Act and/or Regulation D thereunder.
53. In August 2003, we issued 4,116 shares of common stock to a
former employee upon exercise of his incentive stock options with
the exercise prices of $1.00 and $1.61, in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
54. In September 2003, we issued 7,048 shares of common stock to a
former employee upon exercise of her incentive stock options with
the exercise prices ranging from $0.90 to $1.61, in reliance upon
the exemption provided by Section 4(2) of the Securities Act.
55. In August 2003, we issued 390,777 shares of common stock to MBSJ
Investors pursuant to our right to convert a $400,000 debenture
in reliance upon the exemption provided by Section 4(2) under the
Securities Act and/or Regulation D thereunder.
56. In August 2003, we issued 293,082 shares of common stock to
Crestview Capital Fund I, L.P., Crestview Capital Fund II, L.P.
and Crestview Capital Offshore Fund, Inc. pursuant to our right
to convert their $300,000 debentures in reliance upon the
exemption provided by Section 4(2) under the Securities Act
and/or Regulation D thereunder.
57. In September 2003, we issued 2,637,747 shares of common stock to
Midsummer Investment Ltd., Omicron Master Trust and Islandia,
L.P. pursuant to our right to convert their $3.5 million
debentures in reliance upon the exemption provided by Section
4(2) under the Securities Act and/or Regulation D thereunder.
58. In October 2003, we issued 100,000 shares of common stock to Cord
Camera Centers, Inc. The foregoing securities were offered and
sold without registration under the Securities Act to an
accredited investor 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/or Regulation D thereunder.
59. In September 2003, we issued 2,287,653 shares of common stock to
investors related to ICM pursuant to their right to convert their
$1.4 million debentures in reliance upon the exemption provided
by Section 4(2) under the Securities Act and/or Regulation D
thereunder.
60. On November 7, 2003, we issued an aggregate of 3,180,645 shares
of common stock to 033 Growth Partners I, L.P., 033 Growth
International Fund, Ltd., 033 Growth Partners II, L.P., Deutsche
Bank AG, London Branch, Oyster Pond Partners, L.P., Heartwood
Capital, L.P., Blackstone Partners, LP, Passport Master Fund, LP,
Passport Master Fund II, LP, Burlingame Equity Investors, LP, the
Moore Family Trust, the Douglas Moore, IRA and the Ruth Moore
Bypass Trust. The foregoing securities were offered and sold
without registration under the Securities Act to an accredited
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/or
Regulation D thereunder.
61. On November 7, 2003, we issued Roth Capital Partners, LLC 115,226
shares of common stock and a warrant to purchase 282,065 shares
of common stock at an exercise price of $1.71 per share. The
foregoing securities were offered and issued without registration
under the Securities Act, in reliance upon the exemption provided
by Section 4(2) under the Securities Act and/or Regulation D
thereunder.
II-9
62. On November 25, 2003, we issued Richardson & Patel, LLP, Page
Digital's legal counsel, 15,000 shares of common stock as payment
for legal services provided in connection with the Page Digital
acquisition. The foregoing securities were offered and sold
without registration under the Securities Act, in reliance upon
the exemption provided by Section 4(2) under the Securities Act
and/or Regulation D thereunder.
63. In December 2003, we issued 15,000 shares of common stock to
CEOcast, Inc. for payment of investor relation services valued at
$20,000. The foregoing securities were offered and sold without
registration under the Securities Act, in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
CEOcast, Inc. assigned rights to 14,400 shares to Rachel
Glicksman and 600 shares to Gary Nash.
64. In December 2003, we issued 4,255 shares of common stock to
ProFinance Associates, Inc., an unrelated party, upon exercise of
warrant at an exercise price of $1.08 per share. This warrant was
granted in reliance upon the exemption provided by Section 4(2)
under the Securities Act.
65. In November and December 2003, we issued Liolios Group, Inc.
warrants to purchase 16,000 and 75,000 shares of common stock at
the exercise prices of $2.10 and $2.50 per share, respectively.
These warrants were offered and sold without registration under
the Securities Act, in reliance upon the exemption provided by
Section 4(2) under the Securities Act.
ITEM 16. EXHIBITS.
EXHIBIT DESCRIPTION
------- -----------
2.1 Agreement of Merger and Plan of Reorganization dated as of
July 1, 1998 among the Company and its wholly-owned
subsidiary; Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's 8-K filed on
September 16, 1998.
2.2 First Amendment to the Agreement and Plan of Reorganization
dated January 28, 1999 among the Company and its wholly- owned
subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's Form 10-QSB for
the quarter ended December 31, 1998.
2.3 Second Amendment to the Agreement and Plan of Reorganization
dated May 24, 1999 among the Company and its wholly-owned
subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.12 to the Company's 10-KSB for the
fiscal year ended March 31, 1999.
2.4 Stock Purchase Agreement dated June 1, 1999 among the Company,
Island Pacific Systems Corporation, and the shareholders of
Island Pacific Systems Corporation, incorporated by reference
to exhibit 2.1 to the Company's Form 8-K filed on June 18,
1999.
2.5 Asset Purchase Agreement dated March 16, 2000 among the
Company, MarketPlace Systems Corporation and Jay Fisher,
incorporated by reference to exhibit 2.15 to the Company's
10-K for the fiscal year ended March 31, 2000.
2.6 Agreement and Plan of Merger of Island Pacific, Inc. and SVI
Holdings, Inc. dated February 20, 2001, incorporated by
reference to exhibit 2.8 to the Company's 10-K for the fiscal
year ended March 31, 2001.
2.7 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.
2.8 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 filed July 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.
II-10
2.9 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 filed July 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.
2.10 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.
2.11 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.
2.12 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 Form S-1 filed on
May 12, 2003.
2.13 Securities Purchase Agreement dated June 27, 2003 by and among
the Company and the purchasers named therein, incorporated by
reference to exhibit 2.1 to the Company's Form 8-K filed on
July 2, 2003.
2.14 Securities Purchase Agreement dated November 7, 2003 by and
among the Company and the purchasers named therein,
incorporated by reference to exhibit 2.1 to the Company's Form
8-K filed on November 12, 2003.
3.1 Amended and Restated Certificate of Incorporation,
incorporated by reference to exhibit 3.1 to the Company's 8-K
filed on July 15, 2003.
3.2 Certificate of Designation, incorporated by reference to
exhibit 4.1 of the Company's 8-K filed May 16, 2002.
3.3 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's 10-K for the fiscal year ended March 31, 2001.
4.1 Registration Rights Agreement dated as of March 31, 2003 by
and among the Company, Midsummer Investment, Ltd., Omicron
Master Trust, and Islandia, L.P., incorporated by reference to
exhibit 4.1 to the Company's Form 8-K filed April 15, 2003.
4.2 Registration Rights Agreement dated as of April 1, 2003
between the Company and MBSJ Investors LLC., incorporated by
reference to exhibit 4.2 to the Company's Form 8-K filed April
15, 2003.
4.3 Registration Rights Agreement dated June 27, 2003 by and among
the Company and the parties named therein, incorporated by
reference to exhibit 4.1 to the Company's Form 8-K filed on
July 2, 2003.
4.4 Registration Rights Agreement dated November 7, 2003 by and
among the Company and the parties named therein, incorporated
by reference to exhibit 4.1 to the Company's Form 8-K filed on
November 12, 2003.
4.5 Settlement Agreement, Mutual Release and Covenant Not to Sue
by and among the Company and Cord Camera Centers, Inc. dated
September 30, 2003, incorporated by reference to exhibit 4.5
to the Company's Form S-1 filed on December 8, 2003.
5.1 Opinion of Solomon Ward Seidenwurm & Smith, LLP.
II-11
10.1 Incentive Stock Option Plan, as amended April 1, 1998,
incorporated by reference to exhibit 10.1 to the Company's
10-QSB for the quarter ended September 30, 1998.
10.2 1998 Incentive Stock Plan, as amended, incorporated by
reference to exhibit 10.4 to the Company's 10-K for the fiscal
year ended March 31, 2001.
10.3 Employment Agreement of Barry M. Schechter dated effective
October 1, 2000, incorporated by reference to exhibit 10.2 to
the Company's 10-K for the fiscal year ended March 31, 2001.
10.4 Term Loan Agreement dated June 3, 1999 between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.1 to the Company's 8-K filed on June 18, 1999.
10.5 Amendment No. 1 to Term Loan Agreement between the Company and
Union Bank of California, N.A., dated May 31, 2000,
incorporated by reference to exhibit 10.24 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.6 Revolving Note between the Company and Union Bank of
California, N.A., dated May 31, 2000, incorporated by
reference to exhibit 10.25 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.7 Amendment No. 2 to Term Loan Agreement between the Company and
Union Bank of California, N.A., dated July 13, 2000,
incorporated by reference to exhibit 10.26 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.8 Term Loan Note of the Company in favor of Union Bank of
California, N.A. dated July 13, 2000, incorporated by
reference to exhibit 10.27 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.9 Common Stock Purchase Agreement dated December 22, 2000
between the Company, Koyah Leverage Partners, L.P., Koyah
Partners, L.P., Nigel Davey, and Brian Cathcart, incorporated
by reference as exhibit 10.2 to the Company's 8-K filed on
January 8, 2001.
10.10 Amendment No. 3 to Term Loan Agreement, incorporated by
reference to exhibit 10.6 to the Company's 10-Q filed February
14, 2001.
10.11 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 10-K for the
fiscal year ended March 31, 2001.
10.12 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 10-K for the
fiscal year ended March 31, 2001.
10.13 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
10-K for the fiscal year ended March 31, 2001.
10.14 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,
each incorporated by reference to exhibit 10.4 to the
Company's 10-K filed on July 16, 2002.
II-12
10.15 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 10-K filed on July 16, 2002.
10.16 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 10-K filed on July 16, 2002.
10.17 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.
10.18 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.
10.19 Common Stock Purchase Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.28 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.20 Registration Rights Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.29 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.21 Letter Agreement between the Company and AMRO International,
S.A. dated March 1, 2000, incorporated by reference to exhibit
10.23 to the Company's 10-K for the fiscal year ended March
31, 2001.
10.22 Common Stock Option Agreement dated May 24, 1999 between the
Company and Softline Limited, incorporated by reference to
exhibit 10.30 to the Company's 10-K for the fiscal year ended
March 31, 2000.
10.23 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
10-K for the fiscal year ended March 31, 2001.
10.24 Investor Rights Agreement between the Company and Softline
Limited dated as of January 1, 2002, incorporated by reference
to exhibit 4.2 to the Company's 8-K filed May 16, 2002.
10.25 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 Form S-1 filed on May 12, 2003.
10.26 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P., dated
December 22, 2000, incorporated by reference to exhibit 10.3
to the Company's 8-K filed January 8, 2001.
10.27 Amendment Agreement 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 filed on July
16, 2002.
10.28 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.
10.29 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 Form S-1 filed on May 12,
2003.
II-13
10.30 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 Form S-1 filed on May 12,
2003.
10.31 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 2.12 to the Company Form S-1 filed on May 12, 2003.
10.32 Fifth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated June 27, 2003 (included herewith).
10.33 Convertible Promissory Note and Grant of Security Interest
between SVI Holdings, Inc. and Koyah Leverage Partners L.P.,
dated December 14, 2000, incorporated by reference to exhibit
10.1 to the Company's 8-K filed January 8, 2001.
10.34 Form of Warrant To Purchase Common Stock, incorporated by
reference to exhibit 10.4 to the Company's 8-K filed January
8, 2001.
10.35 Form of Convertible Promissory Note for entities related to
ICM Asset Management, Inc., incorporated by reference to
exhibit 10.31 to the Company's 10-K for the fiscal year ended
March 31, 2001.
10.36 Loan Note in Favor of Datafaction, as amended, incorporated by
reference to exhibit 10.5 to the Company's 10-Q filed February
14, 2001.
10.37 Promissory Note in favor of Barry Schechter, dated February
13, 2001, incorporated by reference to exhibit 10.33 to the
Company's 10-K for the fiscal year ended March 31, 2001.
10.38 Umbrella Agreement with Toys `R Us, incorporated by reference
to exhibit 10.34 to the Company's 10-K for the fiscal year
ended March 31, 2001. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.39 License Agreement for Software Products with Toys `R Us,
incorporated by reference to exhibit 10.35 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.40 Modification Agreement with Toys `R Us, as amended,
incorporated by reference to exhibit 10.36 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.41 Services Agreement with Toys "R" Us, incorporated by reference
to exhibit 10.37 of the Company's 10-K for the fiscal year
ended March 31, 2001. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.42 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by reference to
exhibit 10.2 to the Company's 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 under the
Securities Exchange Act of 1934.
II-14
10.43 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 10-K filed on July 16, 2002.
10.44 Convertible Note in favor of Toys "R" Us, Inc. dated May 29,
2002, incorporated by reference to exhibit 10.15 to the
Company's 10-K filed on July 16, 2002.
10.45 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's
10-K filed on July 16, 2002.
10.46 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 10-K filed on July 16, 2002. Portions
of this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934.
10.47 Discounted Loan Payoff Agreement dated March 31, 2003 by and
among Union Bank of California, N.A., the Company, 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 April 15, 2003.
10.48 Unsecured Promissory Note dated March 31, 2003 in favor of
Union Bank of California, incorporated by reference to exhibit
10.48 to the Company Form S-1 filed on May 12, 2003.
10.49 Summary of loan transactions between the Company and World
Wide Business Centres, incorporated by reference to exhibit
10.12 to the Company's 10-K filed on July 16, 2002.
10.50 Option Agreement between Softline Limited and Steven Beck, as
trustee of a certain management group of Island Pacific, Inc.
21.1 List of Subsidiaries (included herewith).
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP, independent
auditors.
23.3 Consent of Solomon Ward Seidenwurm & Smith, LLP. Reference is
made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to the signature page
hereof.
II-15
ITEM 17. UNDERTAKINGS
We hereby undertake:
(1) To file, during any period in which offers or sales are being
made pursuant to this registration statement, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a) (3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or in
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase of decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in this registration statement
as effective; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions referenced above or otherwise, we
have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered
hereunder, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed by the
final adjudication of such issue.
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Irvine,
State of California, on January 20, 2004.
ISLAND PACIFIC, INC., A DELAWARE CORPORATION
By: /s/ Harvey Braun
---------------------------------------
Harvey Braun, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
By: /s/ Ran Furman
---------------------------------------
Ran Furman, Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
The registrant and each person whose signature appears below
constitutes and appoints Harvey Braun and Ran Furman and any agent for service
named in this registration statement and each of them, his, her, or its true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him, her, or it and in his, her, or its name, place and
stead, in any and all capacities, to sign and file (i) any and all amendments
(including post-effective amendments) to this registration statement, with all
exhibits thereto, and other documents in connection therewith, and (ii) a
registration statement, and any and all amendments thereto, relating to the
offering covered hereby filed under Rule 462(b) under the Securities Act of
1933, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he, she, or it
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITY DATE
/s/ Harvey Braun Chief Executive Officer and Chairman 1/20/04
------------------------
Harvey Braun
/s/ Steven Beck President, Chief Operating Officer 1/20/04
------------------------ and Director
Steven Beck
/s/ Ivan M. Epstein Director 1/20/04
------------------------
Ivan M. Epstein
/s/ Ian Bonner Director 1/20/04
------------------------
Ian Bonner
/s/ Michael Silverman Director 1/20/04
------------------------
Michael Silverman
/s/ Robert P. Wilkie Director 1/20/04
------------------------
Robert P. Wilkie
II-17
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
2.1 Agreement of Merger and Plan of Reorganization dated as of
July 1, 1998 among the Company and its wholly-owned
subsidiary; Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's 8-K filed on
September 16, 1998.
2.2 First Amendment to the Agreement and Plan of Reorganization
dated January 28, 1999 among the Company and its wholly- owned
subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's Form 10-QSB for
the quarter ended December 31, 1998.
2.3 Second Amendment to the Agreement and Plan of Reorganization
dated May 24, 1999 among the Company and its wholly-owned
subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.12 to the Company's 10-KSB for the
fiscal year ended March 31, 1999.
2.4 Stock Purchase Agreement dated June 1, 1999 among the Company,
Island Pacific Systems Corporation, and the shareholders of
Island Pacific Systems Corporation, incorporated by reference
to exhibit 2.1 to the Company's Form 8-K filed on June 18,
1999.
2.5 Asset Purchase Agreement dated March 16, 2000 among the
Company, MarketPlace Systems Corporation and Jay Fisher,
incorporated by reference to exhibit 2.15 to the Company's
10-K for the fiscal year ended March 31, 2000.
2.6 Agreement and Plan of Merger of Island Pacific, Inc. and SVI
Holdings, Inc. dated February 20, 2001, incorporated by
reference to exhibit 2.8 to the Company's 10-K for the fiscal
year ended March 31, 2001.
2.7 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.
2.8 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 filed July 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.
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2.9 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 filed July 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.
2.10 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.
2.11 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.
2.12 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 Form S-1 filed on
May 12, 2003.
2.13 Securities Purchase Agreement dated June 27, 2003 by and among
the Company and the purchasers named therein, incorporated by
reference to exhibit 2.1 to the Company's Form 8-K filed on
July 2, 2003.
2.14 Securities Purchase Agreement dated November 7, 2003 by and
among the Company and the purchasers named therein,
incorporated by reference to exhibit 2.1 to the Company's Form
8-K filed on November 12, 2003.
3.1 Amended and Restated Certificate of Incorporation,
incorporated by reference to exhibit 3.1 to the Company's 8-K
filed on July 15, 2003.
3.2 Certificate of Designation, incorporated by reference to
exhibit 4.1 of the Company's 8-K filed May 16, 2002.
3.3 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's 10-K for the fiscal year ended March 31, 2001.
4.1 Registration Rights Agreement dated as of March 31, 2003 by
and among the Company, Midsummer Investment, Ltd., Omicron
Master Trust, and Islandia, L.P., incorporated by reference to
exhibit 4.1 to the Company's Form 8-K filed April 15, 2003.
4.2 Registration Rights Agreement dated as of April 1, 2003
between the Company and MBSJ Investors LLC., incorporated by
reference to exhibit 4.2 to the Company's Form 8-K filed April
15, 2003.
4.3 Registration Rights Agreement dated June 27, 2003 by and among
the Company and the parties named therein, incorporated by
reference to exhibit 4.1 to the Company's Form 8-K filed on
July 2, 2003.
4.4 Registration Rights Agreement dated November 7, 2003 by and
among the Company and the parties named therein, incorporated
by reference to exhibit 4.1 to the Company's Form 8-K filed on
November 12, 2003.
4.5 Settlement Agreement, Mutual Release and Covenant Not to Sue
by and among the Company and Cord Camera Centers, Inc. dated
September 30, 2003, incorporated by reference to exhibit 4.5
to the Company's Form S-1 filed on December 8, 2003.
5.1 Opinion of Solomon Ward Seidenwurm & Smith, LLP.
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10.1 Incentive Stock Option Plan, as amended April 1, 1998,
incorporated by reference to exhibit 10.1 to the Company's
10-QSB for the quarter ended September 30, 1998.
10.2 1998 Incentive Stock Plan, as amended, incorporated by
reference to exhibit 10.4 to the Company's 10-K for the fiscal
year ended March 31, 2001.
10.3 Employment Agreement of Barry M. Schechter dated effective
October 1, 2000, incorporated by reference to exhibit 10.2 to
the Company's 10-K for the fiscal year ended March 31, 2001.
10.4 Term Loan Agreement dated June 3, 1999 between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.1 to the Company's 8-K filed on June 18, 1999.
10.5 Amendment No. 1 to Term Loan Agreement between the Company and
Union Bank of California, N.A., dated May 31, 2000,
incorporated by reference to exhibit 10.24 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.6 Revolving Note between the Company and Union Bank of
California, N.A., dated May 31, 2000, incorporated by
reference to exhibit 10.25 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.7 Amendment No. 2 to Term Loan Agreement between the Company and
Union Bank of California, N.A., dated July 13, 2000,
incorporated by reference to exhibit 10.26 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.8 Term Loan Note of the Company in favor of Union Bank of
California, N.A. dated July 13, 2000, incorporated by
reference to exhibit 10.27 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.9 Common Stock Purchase Agreement dated December 22, 2000
between the Company, Koyah Leverage Partners, L.P., Koyah
Partners, L.P., Nigel Davey, and Brian Cathcart, incorporated
by reference as exhibit 10.2 to the Company's 8-K filed on
January 8, 2001.
10.10 Amendment No. 3 to Term Loan Agreement, incorporated by
reference to exhibit 10.6 to the Company's 10-Q filed February
14, 2001.
10.11 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 10-K for the
fiscal year ended March 31, 2001.
10.12 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 10-K for the
fiscal year ended March 31, 2001.
10.13 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
10-K for the fiscal year ended March 31, 2001.
10.14 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,
each incorporated by reference to exhibit 10.4 to the
Company's 10-K filed on July 16, 2002.
II-20
10.15 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 10-K filed on July 16, 2002.
10.16 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 10-K filed on July 16, 2002.
10.17 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.
10.18 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.
10.19 Common Stock Purchase Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.28 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.20 Registration Rights Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.29 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.21 Letter Agreement between the Company and AMRO International,
S.A. dated March 1, 2000, incorporated by reference to exhibit
10.23 to the Company's 10-K for the fiscal year ended March
31, 2001.
10.22 Common Stock Option Agreement dated May 24, 1999 between the
Company and Softline Limited, incorporated by reference to
exhibit 10.30 to the Company's 10-K for the fiscal year ended
March 31, 2000.
10.23 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
10-K for the fiscal year ended March 31, 2001.
10.24 Investor Rights Agreement between the Company and Softline
Limited dated as of January 1, 2002, incorporated by reference
to exhibit 4.2 to the Company's 8-K filed May 16, 2002.
10.25 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 Form S-1 filed on May 12, 2003.
10.26 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P., dated
December 22, 2000, incorporated by reference to exhibit 10.3
to the Company's 8-K filed January 8, 2001.
10.27 Amendment Agreement 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 filed on July
16, 2002.
10.28 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.
10.29 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 Form S-1 filed on May 12,
2003.
II-21
10.30 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 Form S-1 filed on May 12,
2003.
10.31 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 2.12 to the Company Form S-1 filed on May 12, 2003.
10.32 Fifth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated June 27, 2003 (included herewith).
10.33 Convertible Promissory Note and Grant of Security Interest
between SVI Holdings, Inc. and Koyah Leverage Partners L.P.,
dated December 14, 2000, incorporated by reference to exhibit
10.1 to the Company's 8-K filed January 8, 2001.
10.34 Form of Warrant To Purchase Common Stock, incorporated by
reference to exhibit 10.4 to the Company's 8-K filed January
8, 2001.
10.35 Form of Convertible Promissory Note for entities related to
ICM Asset Management, Inc., incorporated by reference to
exhibit 10.31 to the Company's 10-K for the fiscal year ended
March 31, 2001.
10.36 Loan Note in Favor of Datafaction, as amended, incorporated by
reference to exhibit 10.5 to the Company's 10-Q filed February
14, 2001.
10.37 Promissory Note in favor of Barry Schechter, dated February
13, 2001, incorporated by reference to exhibit 10.33 to the
Company's 10-K for the fiscal year ended March 31, 2001.
10.38 Umbrella Agreement with Toys `R Us, incorporated by reference
to exhibit 10.34 to the Company's 10-K for the fiscal year
ended March 31, 2001. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.39 License Agreement for Software Products with Toys `R Us,
incorporated by reference to exhibit 10.35 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.40 Modification Agreement with Toys `R Us, as amended,
incorporated by reference to exhibit 10.36 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.41 Services Agreement with Toys "R" Us, incorporated by reference
to exhibit 10.37 of the Company's 10-K for the fiscal year
ended March 31, 2001. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.42 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by reference to
exhibit 10.2 to the Company's 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 under the
Securities Exchange Act of 1934.
II-22
10.43 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 10-K filed on July 16, 2002.
10.44 Convertible Note in favor of Toys "R" Us, Inc. dated May 29,
2002, incorporated by reference to exhibit 10.15 to the
Company's 10-K filed on July 16, 2002.
10.45 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's
10-K filed on July 16, 2002.
10.46 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 10-K filed on July 16, 2002. Portions
of this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934.
10.47 Discounted Loan Payoff Agreement dated March 31, 2003 by and
among Union Bank of California, N.A., the Company, 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 April 15, 2003.
10.48 Unsecured Promissory Note dated March 31, 2003 in favor of
Union Bank of California, incorporated by reference to exhibit
10.48 to the Company Form S-1 filed on May 12, 2003.
10.49 Summary of loan transactions between the Company and World
Wide Business Centres, incorporated by reference to exhibit
10.12 to the Company's 10-K filed on July 16, 2002.
10.50 Option Agreement between Softline Limited and Steven Beck, as
trustee of a certain management group of Island Pacific, Inc.
21.1 List of Subsidiaries (included herewith).
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP, independent
auditors.
23.3 Consent of Solomon Ward Seidenwurm & Smith, LLP. Reference is
made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to the signature page
hereof.
II-23