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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
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[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _________ TO _________.
Commission file number 0-23049
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ISLAND PACIFIC, INC.
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(FORMERLY KNOWN AS SVI SOLUTIONS, INC.)
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(Exact Name of Registrant as specified in its charter)
DELAWARE 33-0896617
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
19800 MACARTHUR BLVD, SUITE 1200, IRVINE, CA 92612
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 476-2212
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.0001 Par Value American Stock Exchange
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Securities registered under Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates, based on the closing sale price of the
registrant's common stock on September 30 2003 as reported on the American Stock
Exchange, was approximately $65.5 million. Excludes shares of common stock held
by directors, officers and each person who holds 5% or more of the registrant's
common stock.
The number of shares outstanding of the registrant's Common Stock was 53,974,532
on June 1, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I
Item 1. Business............................................................................................2
Item 2. Properties.........................................................................................14
Item 3. Legal Proceedings..................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders................................................15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................15
Item 6. Selected Financial Data............................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............18
Business Risks.....................................................................................33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................43
Item 8. Financial Statements and Supplementary Data........................................................44
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures..............44
Item 9A. Controls and Procedures............................................................................44
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................44
Item 11. Executive Compensation.............................................................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................51
Item 13. Certain Relationship and Related Transactions......................................................54
Item 14. Principal Accountant Fees and Services.............................................................57
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................58
Signatures.........................................................................................64
Certifications.....................................................................................
INTRODUCTORY NOTE
THE ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934 AND THE COMPANY INTENDS THAT CERTAIN
MATTER DISCUSSED IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS" INTENDED TO
QUALIFY FOR THE SAFE HARBOR FROM LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE
IDENTIFIED BY THE CONTEXT OF THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE
COMPANY ("ISLAND PACIFIC", "IPI", "WE" OR "US") "BELIEVES", "ANTICIPATES",
"EXPECTS", "FORECASTS", "ESTIMATES" OR OTHER WORDS SIMILAR MEANING AND CONTEXT.
SIMILARLY, STATEMENTS THAT DESCRIBE FUTURE PLANS, OBJECTIVES, OUTLOOKS, TARGETS,
MODELS, OR GOALS ARE ALSO DEEMED FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE FORECASTED OR
ANTICIPATED AS OF THE DATE OF THIS REPORT. CERTAIN OF SUCH RISKS AND
UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY TO SUCH STATEMENTS AND ELSEWHERE
IN THIS REPORT, INCLUDING ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." STAKEHOLDERS, POTENTIAL
INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE FACTORS IN EVALUATING
THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
SUCH FORWARD-LOOKING STATEMENTS OR CONSTRUE SUCH STATEMENTS TO BE A
REPRESENTATION BY US THAT OUR OBJECTIVES OR PLANS WILL BE ACHIEVED. THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE MADE ONLY AS OF THE DATE
OF THIS REPORT, AND WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
ITEM 1. 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. The Company is organized in three strategic
business units - Retail Management Solutions, Store Solutions and Multi-channel
Retail Solutions.
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
1960s 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.
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As retailers expand their businesses to include the Internet, catalog,
kiosk and other distribution channels, the complexity of managing inventory and
meeting customer demands places tremendous pressure on their business processes
and their technology infrastructure.
To meet an ever more mobile and demanding consumer's expectations,
retailers need to deliver on the customer's terms. This means having the right
product, at the right time and in the right place across multi-channel touch
points. To do this, retailers need valuable consumer insights, intelligence on
external factors that shape consumer response such as how the weather, the
economy and changing consumer attitudes will affect future buying patterns. This
intelligence, augmented by powerful communications, comprehensive loss
prevention, strong forecasting, planning, assortment planning, allocation, event
planning, replenishment and merchandising functions are critical to profitably
achieve this goal. These represent the content of our product offering.
Small to medium sized retailers need a cost-effective, easily
installed, affordable, comprehensive, integrated software infrastructure that
spans supplier to consumer and gives the retailer visibility, flexibility and
control of all business processes to meet all competitive challenges.
We believe a market opportunity exists to provide these retailers with
a software solution that is designed specifically for their needs. This solution
should be easy-to-use, leverage a retailer's existing investments in information
technology and be sufficiently flexible to meet the specific needs of a broad
range of retail sectors, such as fashion, hard-lines, mass merchandise or food
and drug.
We have developed and deployed software solutions that enable retailers
to manage the entire scope of their operations. These operations include
point-of-sale, customer relationship management, vendor relationship management,
merchandising, demand chain management, planning, and forecasting.
Key areas, which differentiate our software solutions, include:
o VALUE - Our integrated and modular architecture helps
retailers meet return on investment 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.
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:
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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 BECOME 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.
RECENT DEVELOPMENTS
OPERATIONAL IMPROVEMENTS
In recent periods, we have taken a number of steps designed to improve
our balance sheet and operations, including:
o Purchased complementary businesses, with substantial revenues
and earnings potential.
o Revamped our management team by adding a new President and COO
and CTO with longstanding industry experience, as well as a
new CFO.
o Recapitalized our balance sheet, eliminating substantial debt
and raising new equity in its place.
o Improved our IBM-based core products through continuing
internal research and development.
o Obtained the rights to distribute complementary products,
including a new easy-to-install and easy-to-use,
open-architecture software system for very small retailers,
which we will introduce in 2004.
o Established partnerships with several value added resellers to
provide a variety of options and product extensions.
o Improved our distribution capabilities by adding new third
party channels, such as IBM and IBM's resellers, and
professional service firms such as CGI and LakeWest.
We believe that these actions have positioned us for a return to sustained
revenue growth and profitability.
ACQUISITION OF PAGE DIGITAL
As part of our strategy to meet the expanding needs of multi-channel
retailers, on January 30, 2004, we acquired Page Digital Incorporated ("Page
Digital" through a merger transaction for total 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 per share. Page Digital develops multi-channel commerce software
solutions and has a suite of direct commerce applications that complete the
multi-channel retail distribution and customer service chain for Internet,
telephone, brick and mortar, catalog and other direct commerce channels. Our
acquisition of Page Digital will continue to enhance our ability to provide our
combined customer bases with e-commerce, customer relationship management and
catalog management solutions. In connection with the Page Digital acquisition,
we added approximately 40 employees. Page Digital had total assets of $2.1
million as of October 31, 2003 and generated annual revenues of $5.3 million in
the fiscal year ended October 31, 2003.
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 $27.3 billion in 2000, grew 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
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Merchandising solution, as well as Point of Sale, Loss Prevention, and IP's
other alliance solutions.
ACQUISITION OF RTI
Pursuant to an agreement dated June 1, 2004, we acquired Retail
Technologies International, Inc. ("RTI") from Michael Tomczak, Jeffrey Boone and
Intuit Inc. ("Intuit") in a merger transaction. On March 12, 2004, we, RTI, IPI
Merger Sub, Inc., ("Merger Sub") and Michael Tomczak and Jeffrey Boone (the
"Shareholders") entered the initial Agreement of Merger and Plan of
Reorganization (the "March 12, 2004 Merger Agreement") which provided we would
acquire RTI in a merger transaction in which RTI would merge with and into
Merger Sub. The merger consideration contemplated by the March 12, 2004 Merger
Agreement was a combination of cash and shares of our common stock. The March
12, 2004 Merger Agreement was amended by the Amended and Restated Agreement of
Merger and Plan of Reorganization, dated June 1, 2004, by and between us, RTI,
Merger Sub, IPI Merger Sub II, Inc. ("Merger Sub II") and the Shareholders (the
"Amended Merger Agreement").
Pursuant to the Amended Merger Agreement, the Merger (as defined below)
was completed with the following terms: (i) we assumed RTI's obligations under
those certain promissory notes issued by RTI on December 20, 2002 with an
aggregate principal balance of $2.3 million; (ii) the total consideration paid
at the closing of the Merger was $10.0 million paid in shares of our common
stock and newly designated Series B convertible preferred stock ("Series B
Preferred") and promissory notes; (iii) the Shareholders and Intuit are entitled
to price protection payable if and to the extent that the average trading price
of our common stock is less than $0.76 at the time the shares of our common
stock issued in the Merger and issuable upon conversion of the Series B
Preferred are registered pursuant to the registration rights agreement dated
June 1, 2004 between us, the Shareholders and Intuit (the "Registration Rights
Agreement"); and (iv) the merger consisted of two steps (the "Merger"), first,
Merger Sub merged with and into RTI, Merger Sub's separate corporate existence
ceased and RTI continued as the surviving corporation (the "Reverse Merger"),
immediately thereafter, RTI merged with and into Merger Sub II, RTI's separate
corporate existence ceased and Merger Sub II continued as the surviving
corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares
of Series B Preferred and a promissory note payable monthly over two years in
the principal amount of $1,295,000 bearing interest at 6.5% per annum. As a
result of the Merger, Intuit, the holder of all of the outstanding shares of
RTI's Series A Preferred stock, received 1,546,733 shares of our common stock
and a promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights.
Under the Registration Rights Agreement, we agreed to register the common stock
issuable upon conversion of the Series B Preferred issued to the Shareholders
within 30 days of the automatic conversion of the Series B Preferred into common
stock. The automatic conversion will occur upon us filing an amendment to our
certificate of incorporation with the Delaware Secretary of State increasing the
authorized number of shares of our common stock ("Certificate of Amendment")
after securing shareholder approval for the Certificate of Amendment. Under the
Registration Rights Agreement, Intuit is entitled to demand registration or to
have its shares included on any registration statement filed prior the
registration statement covering the Shareholders' shares, subject to certain
conditions and limitations, or if not previously registered to have its shares
included on the registration statement registering the Shareholders' shares. The
Shareholders and Intuit are entitled to price protection payments of up to a
maximum of $0.23 per share payable by promissory note, if and to the extent that
the average closing price of our common stock for the 10 days immediately
preceding the date the registration statement covering their shares is declared
effective by the Securities and Exchange Commission, is less than the 10 day
average closing price as of June 1, 2004, which was $0.76.
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well
as certain officers and directors signed voting agreements that provide they
will not dispose of or transfer their shares of our capital stock and that they
will vote their shares of our capital stock in favor of the Certificate of
Amendment and the Amended Merger Agreement and transactions contemplated
therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone.
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
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be able to cost-effectively acquire a solution that provides both front and
back-end support. The combination instantly expands our products, services
offerings and distribution channels.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
We currently structure our operations into three strategic business
units. The business units are retail management solutions, store solutions and
multi-channel retail solutions. Our operations are conducted principally in the
United States and the United Kingdom. In addition, we manage long-lived assets
by geographic region. The business units are as follows:
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") - offers a
suite of applications, which builds on our long history in
retail software design and development. We provide our
customers with 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 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 a suite of applications that builds
on our long history of providing multi-platform, client server
in-store solutions. We market this set of applications under
the name "OnePointe," which is a feature-rich application
created with the specialty retailer in mind. More than 15
years of development has resulted in a solution with a high
degree of fit and value out of the box. Additionally, the
software was designed for easy customization, enabling our
development team to quickly develop solutions to meet
retailers' specific point-of-sale ("POS")and in-store
processor (server) requirements.
In connection with our acquisition of RTI, Store Solutions
also offers POS application under the name "Retail Pro(R)"
which provides a total solution for small to mid-tier
retailers worldwide. Today, Retail Pro(R) is used by
approximately 9,000 businesses in over 24,000 stores in 63
countries. The product is translated into fourteen languages
making it one of the few quality choices for the global
retailer. At its core, Retail Pro(R) is a high performance,
32-bit Windows application offering point-of-sale, inventory
control and customer relations management. Running on
WindowsNT, Windows2000, Windows XP Professional and
Windows.Net platforms, Retail Pro(R) 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(R) is fast and easy to implement. The
software has been developed to be very flexible and adaptable
to the way a retailer runs its business.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL RETAIL") - Page
Digital designs its application 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
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order notification, returns processing and continuum marketing
represent just a few of the more than 1,000 parameterized
direct commerce activities that have been built into its
"Synaro"(TM)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.
For further financial information about our business segments and geographic
areas see our Financial Statements section and "Notes to Consolidated Financial
Statements for the Year Ended March 31, 2004 - Note 15" thereunder.
PRODUCTS
We develop, partner 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:
THE RETAIL MANAGEMENT SOLUTIONS 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 retailers to arrive
at a well-researched and sound buying decisions -
yielding merchandise assortments that meet local
consumer demand, minimize inventory investment,
accelerate sales, reduce 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 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 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 STORE PEOPLE PRODUCTIVITY: application helps retailers
analyze the productivity of stores, people and items, and
transaction level sales productivity.
At the foundation of our application suite are the integrated modules
that comprise our core-merchandising solution. They are as follows:
1. Merchandising Management
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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.
2. The Eye(TM) Analysis and Planning
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o The Eye(TM), our datamart is a comprehensive analysis
and planning tool that provides answers to retailers'
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 retailers to develop
completely user-defined inquiries and reports. The
capacity of The Eye to store, manipulate, and present
information is limited only by a retailer's
imagination.
3. Replenishment and Forecasting
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o The Island Pacific Replenishment module is a tool
that ensures retailers 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.
4. Promotions and Events
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o The Island Pacific Event and Promotion Management
tool enables retailers 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.
5. Warehouse
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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.
6. Ticketing
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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.
7. Financials
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o The Island Pacific Financials module incorporates a
General Ledger that is synchronized with the
Merchandising Stock Ledger.
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o This module also includes a robust Accounts Payable
application, which supports 3-way automated matching
of invoices, receipts, and purchase orders that
streamline workflow to optimize operations.
8. 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 STORE SOLUTIONS offers applications under the names "OnePointe,"
and "Retail Pro(R)."
"OnePointe" is a complete application providing all point-of-sale and
in-store processor (server) features along with multi-channel capability
(peer-to-peer) for traditional "brick and mortar" retail operations. The
features are as follows:
o POS Terminal is a robust, easy to use system. Some of key
features are transaction processing, merchandise recording,
handling tendering, handling exceptions and administrative
functions
o In-Store Processor houses the back-office functions and allows
central management of the store and POS system. This is a
full-featured, easy-to-use application. Functions supported by
the system include modifiable parameters, reports, store
operations, back office operations and maintenance functions.
o For Multi-Channel capability, "OnePointe" utilizes advanced
communications technology that provides connectivity between
different retail touch points in real time, allowing any
devise on the network, via LAN, WAN, internet or intranet, the
ability to access another at any time.
Retail Pro(R) is a leading point-of-sale and inventory management
software used by specialty retailers worldwide. The following is brief
description of some of the functionality of Retail Pro(R):
POINT OF SALE
-------------
CASH DRAWER AND RECEIPT Data is captured for analysis and inventory is
FUNCTIONS updated in real time. Drives all required hardware at
point of sale.
INTEGRATED CREDIT CARD Supports authorization and processing of all major
PROCESSING payment types including credit, debit and gift cards.
CUSTOMER DATA Customer name and address information is entered at
point of sale where buying history can be viewed.
Purchase history can aid in controlling merchandise
returns and discounts.
LAYAWAYS AND SPECIAL Layaways are tracked and special orders can be
ORDERS created for out-of-stock merchandise or custom item.
ITEM QUANTITY AND PRICE Retail Pro(R) allows an instant view of whether an
LOOKUP item is in stock at any location and of correct
price.
POS SUMMARY REPORTS Daily x/z out report provides summary of each day's
activity for each clerk and store and reconciles the
cash drawer.
INVENTORY CONTROL
-----------------
STOCK ON HAND, IN Inventory information can be sorted in variety of
TRANSIT, ON ORDER ways and viewed in a matrix based on user-defined
filters. This information can be viewed either in a
report or while generating a purchase order or other
activity.
PURCHASE ORDERS, Purchase orders can be created and are integrated
RECEIVING AND TICKETING with data from the inventory files. Merchandise may
be received against the purchase order and returns
can be generated. Bar codes for the merchandise can
be generated based on receiving information.
9
PRICING AND MARKDOWNS Retail Pro(R) displays margin % by item number to aid
in determining price. Alternate pricing levels can be
set up for employees, preferred customers and
wholesale accounts.
MULTI-STORE DISTRIBUTION Retail Pro(R) will automatically inform all the
AND TRANSFERS sending and receiving stores as part of the daily
polling process. By comparing days of supply the
system can recommend transfers to optimize sales.
PRE-SET AND USER DEFINED Retail Pro(R) comes with a variety of pre-designed
REPORTS reports for any store or group of stores and a
built-in report designer. Retail Pro(R) also allows
for a retailer to set preferences as to how it will
view reports.
PHYSICAL INVENTORY Physical inventories can be taken with a portable
terminal or PDA to promote accuracy and speed.
CUSTOMER FUNCTIONS
------------------
CUSTOMER LISTS AND Information by customer such as total amount spent,
MAILINGS time since last visit, size, birthday, etc. can be
sorted and viewed. In a multi-store operation, names
can be distributed to all stores so each customer can
be recognized
PREFERRED CUSTOMER Retail Pro(R) allows pricing to be based on a
PRICING customers level. It can also plan for a predetermined
markdown schedule for preferred customers.
GIFT REGISTRY The system will keep track of a list of items that
someone would like other people to buy for them and
keep track of those items already purchased.
The MULTI-CHANNEL RETAIL SOLUTIONS offered through our SYNARO(R) products were
designed 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 that augment Web-based components or as a complete
integrated solution. The table below provides a brief description of the
associated benefits of each of SYNARO(R) 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 who 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 MANAGEMENT A multi-faceted component application, which ensures 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 and
customer relations management.
ORDER FULFILLMENT A comprehensive application that monitors and controls all
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.
10
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.
WORK FLOW Provides for closed loop issues management and future chain
MANAGEMENT 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 any ORACLE 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.
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.
Our executive offices are located at 19800 MacArthur Boulevard, Suite
1200, Irvine, California 92612, telephone number (949) 476-2212.
MARKETS AND CUSTOMERS
Our software is installed in over 200 retailers. With the acquisition
of Page Digital in January 2004 and Retail Technologies, Inc. in June 2004, our
software is installed in over 9,000 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
Timberland Vodaphone (UK) Academy Sports Michaels' Stores
IBM Lands' End Hershey Foods Mason Shoe Company
A&E Television Network Turner Broadcasting Betsey Johnson The Luggage Center
IKEA Play it Again Sports Patagonia Squaw Valley Ski Resort
SafeCo Field The Body Shop Staples Center Gucci Group
Swarovsky Louis Vuitton Fashion Group
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.
11
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 distribute our Retail Pro(R) products in North America, South
America, Europe, Asia, Australia, and Africa via a network of value-added
resellers (VARs). In general, each VAR is responsible for a particular
geographical region. Currently, RTI has 27 VARs in North America, 7 in South
America, 19 in Europe and the Middle East, 11 in Asia, 2 in Australia/New
Zealand and 1 in Africa. These resellers are trained and certified on Retail
Pro(R) and provide users with technical expertise, and a localized and
translated product.
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,
Triversity, ICL, NCR and IBM. Our Direct applications compete with Smith Gardner
& Associates, Inc., and CommercialWare, Inc. Our primary competitors in the
multi-channel retail market include Ecometry, CommercialWare and Sigma-Micro.
RTI's primary competitors include Celerant Technology Corp., 360 Commerce, CRS
Business Computers, NSB Retail Systems PLC, Micro Strategies Incorporated,
Retek, Inc. and JDA Software Group, Inc. Our professional services offerings
compete with the professional service groups of our competitors, major
consulting firms associated or formerly associated with the "Big 4" accounting
firms, as well as locally based service providers in many of the territories in
which we do business. Our strategic partners, including IBM, NCR and Fujitsu,
represent potential competitors as well.
We believe the principal competitive factors in the retail solutions
industry are price, application features, performance, retail application
expertise, availability of expert professional services, quality, reliability,
reputation, timely introduction of new offerings, effective distribution
networks, customer service, and quality of end-user interface. We believe we
currently compete favorably with respect to these factors. In particular, we
believe that our competitive advantages include:
o Proven, single version technology, reducing implementation
costs and risks and providing continued forward migration for
our customers.
o Extensive retail application experience for all elements of
the customer's business, including Professional Services,
Development, Customer Support, Sales and Marketing/Technology
Management.
o Ability to provide expert Professional Services.
o Large and loyal customer base.
o Hardware platform independent Store Solution (POS)
application.
o Breadth of our application technology suite including our
multi-channel retailing capabilities.
o Our corporate culture focusing on the customer.
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
12
customers that we have the financial ability to support the products we sell. We
believe strongly that we provide and will continue to provide excellent support
to our customers, as demonstrated by the continuing upgrade purchases by our
top-tier established customer base.
PROPRIETARY RIGHTS
Our success and ability to compete depend in part on our ability to
develop and maintain the proprietary aspects of our technologies. We rely on a
combination of copyright, trade secret and trademark laws, and nondisclosure and
other contractual provisions, to protect our various proprietary applications
and technologies. We seek to protect our source code, documentation and other
written materials under copyright and trade secret laws. We license our software
under license agreements that impose restrictions on the ability of the customer
to use and copy the software. These safeguards may not prevent competitors from
imitating our applications and services or from independently developing
competing applications and services, especially in foreign countries where legal
protections of intellectual property may not be as strong or consistent as in
the United States.
We hold no patents. Consequently, others may develop, market and sell
applications substantially equivalent to our applications, or utilize
technologies similar to those used by us, so long as they do not directly copy
our applications or otherwise infringe our intellectual property rights.
We integrate widely-available platform technology from third parties
for certain of our applications. These third-party licenses generally require us
to pay royalties and fulfill confidentiality obligations. Any termination of, or
significant disruption in, our ability to license these products could cause
delays in the releases of our software until equivalent technology can be
obtained and integrated into our applications. These delays, if they occur,
could have a material adverse effect on our business, operating results and
financial condition.
Intellectual property rights are often the subject of large-scale
litigation in the software and Internet industries. We may find it necessary to
bring claims or litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. These actions would likely
be costly and divert management resources. These actions could also result in
counterclaims challenging the validity of our proprietary rights or alleging
infringement on our part. We cannot guarantee the success of any litigation we
might bring to protect our proprietary rights.
Although we believe that our application technology does not infringe
on any third-party's patents or proprietary rights, we cannot be certain that we
will not become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to, defending or bringing claims related to our intellectual property
rights may require our management to redirect our human and monetary resources
to address these claims. In addition, these actions could cause delivery delays
or require us to enter into royalty or license agreements. Royalty or license
agreements, if required, may not be available on terms acceptable to us, if they
are available at all. Any or all of these outcomes could have a material adverse
effect on our business, operating results and financial condition.
Our application Retail Pro(R) is licensed from a third party. On
December 6, 2002, RTI sold certain intellectual property for $7,500,000 to the
third party. In connection with the sale, RTI also sold certain property and
equipment for proceeds of $44,000 and 1,445,000 shares of series A preferred
stock at $0.346 per share, for $500,000 respectively. RTI recognized a total
gain of $7.5 million on the sale of the intellectual property and property and
equipment due to the tangible assets being fully depreciated as of the date of
sale. The third party also entered into employment agreements with several of
RTI's employees and a covenant not-to-compete with one of the original
stockholders. Under a license agreement, the third party granted back to RTI the
right to sell various products and licenses. Under the terms of the license
agreement, RTI is obligated to pay royalties equal to 75% of the sales made to
certain customers. The terms of the license agreement vary depending on the
product with the minimum term being approximately three years. Any termination
of, or disruption in this license could have a material adverse affect on RTI's
business.
EMPLOYEES
As of June 4, 2004, following the acquisition of RTI, we had a total of
224 employees, 208 of which were based in the United States. Of the total, 14%
were engaged in sales and marketing, 45% were engaged in application technology
development projects, 24% were engaged in professional services, and 17% were in
general and administrative. We believe our relations with our employees overall
are good. We have never had a work stoppage and none of our employees are
subject to a collective bargaining agreement.
We file registration statements, periodic and current reports, proxy
statements and other materials with the Securities and Exchange Commission. You
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site at WWW.SEC.GOV that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including our filings.
Our Internet address is WWW.ISLANDPACIFIC.COM. We make available, free
of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to those reports filed pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 through our
website, as soon as reasonably practicable after they are electronically filed
with or furnished to the SEC. The contents of our website are not incorporated
into, or otherwise to be regarded as a part of, this Annual Report on Form 10-K.
13
ITEM 2. PROPERTIES
Our principal corporate headquarters consists of 26,521 square feet in
a building located in Irvine, California. The corporate headquarters is also
used for certain of our sales, marketing, consulting, customer support, training
and product development functions. This facility is occupied under a lease that
expires on June 30, 2005. The current monthly rent is $56,000. 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 June
30, 2008. Annual rent is $72,000 (payable quarterly) plus common area
maintenance charges and real estate taxes. We also lease 44,505 square-foot
office space in Englewood, Colorado for our Page Digital subsidiary. This lease
commenced on January 1, 2004 and expires on December 31, 2013 with a five-year
renewal option. The monthly rent is $71,000. We assumed this lease in connection
with the acquisition of Page Digital. Prior to our assumption, the lease was
entered between CAH Investments, LLC ("CAH"), which is wholly owned by the
spouse of Lawrence Page, Page Digital's former president and our current
Executive Vice President - Special Projects and director, and Southfield
Crestone, LLC. We also lease an office that consists of 12,717 square feet of
rentable space in a building located in Folsom, California for our RTI
subsidiary. This lease expires in January 2006 and has a monthly rent of
$22,000.
ITEM 3. LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand
with the California Labor Commissioner for $256,250 in severance benefits
allegedly due under a disputed employment agreement, plus attorney's fees and
costs. Mr. Dorosewicz's demand was later increased to $283,894. On June 18,
2002, we filed an action against Mr. Dorosewicz, Michelle Dorosewicz and an
entity affiliated with him in San Diego Superior Court, Case No. GIC790833,
alleging fraud and other causes of action relating to transactions Mr.
Dorosewicz caused us to enter into with his affiliates and related parties
without proper board approval. On July 31, 2002, Mr. Dorosewicz filed
cross-complaints in that action alleging breach of statutory duty, breach of
contract, fraud and other causes of action related to his employment with 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
$66,951; (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, which was paid in January 2004.
The sale of our Australian subsidiary in the third quarter of fiscal
2002 was 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 was 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 had responded appropriately to both the wage claim and the
discrimination allegations, which we believed 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. In January 2004, we terminated Ms Hintz's
employment with us and, as a result, her medical insurance was terminated. On
February 12, 2004, Ms. Hintz filed a petition for violation of Labor Code
Section 132(a) before the Workers' Compensation Appeals Board of the State of
California.
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
14
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.
In mid-2002, we were the subject of an adverse judgment entered 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 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"), our wholly owned
subsidiary and then our 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.
On April 2, 2004, we filed a federal court action in the Southern
District of California against 5R Online, Inc. ("5R"), John Frabasile, Randy
Pagnotta, and Terry Buckley for fraud, breach of fiduciary duty, breach of
contract, and unfair business practice arising from their evaluation of,
recommendation for, and ultimately engagement in a development arrangement
between IPI and 5R. Pursuant to the development agreement entered into in June
2003 upon reliance of the representations of the individual defendants that
product development was progressing, we paid $640,000 in development payments
but received no product. Responsive pleadings will be served shortly, and the
parties are exploring a business solution to the dispute. For fiscal year ended
March 31, 2004, we have expensed payments of $640,000 and shown as other
expense.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during fourth
quarter of fiscal year ended March 31, 2004.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the American Stock Exchange since July 8,
1998 under the symbol "IPI". Up until July 16, 2003, our common stock was traded
under the symbol "SVI". The following table indicates the high and low sales
prices for our shares for each quarterly period for each of our two most recent
fiscal years.
YEAR ENDING MARCH 31, 2004 HIGH LOW
First Quarter $ 2.65 $ 0.88
Second Quarter $ 3.65 $ 2.10
Third Quarter $ 2.38 $ 1.77
Fourth Quarter $ 2.93 $ 0.84
YEAR ENDED MARCH 31, 2003 HIGH LOW
First Quarter $ 0.66 $ 0.30
Second Quarter $ 1.30 $ 0.21
Third Quarter $ 1.25 $ 0.40
Fourth Quarter $ 1.17 $ 0.55
15
As of June 1, 2004, the last reported sale price on the American Stock
Exchange for our common stock was $0.77. On this date, there were approximately
204 holders of record of our common stock. That number does not include
beneficial owners of common stock whose shares are held in the name of banks,
brokers, nominees or other fiduciaries.
We have never declared any dividends on our common stock. We are
required to pay dividends on our Series A Convertible Preferred Stock in
preference and priority to dividends on our common stock. We currently intend to
retain any future earnings to discharge indebtedness and finance the growth and
development of the business. We, therefore, do not anticipate paying any cash
dividends on our common stock in the foreseeable future. Any future
determination to pay cash dividends on our 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.
During the quarter ended March 31, 2004, we issued the following
securities without registration under the Securities Act of 1933:
o 239,739 shares of common stock upon conversion of a
convertible note initially issued to Union Bank of California
pursuant to a Loan Discount Payout agreement, valued at
$500,000.
o 9% Debentures to Omicron Master Trust and Midsummer
Investment, Ltd. convertible into our common stock at a
conversion price of $1.32 per share, for aggregate proceeds of
$3.0 million. These debentures were accompanied by five-year
warrants to purchase up to 1,043,479 shares of our common
stock at an exercise price of $1.15 per share and warrants to
purchase up to 8,500,000 shares of our common stock at an
exercise price of $5.00 per share with an expiration date of
the earlier of the six-month anniversary of the effective date
of a registration statement or September 15, 2005.
o warrants to an investor relations consulting firm to purchase
up to an aggregate of 103,000 shares of our common stock at
exercise prices ranging from $1.50 to $1.75 per share.
The foregoing securities were offered and sold without registration
under the Securities Act to sophisticated investors who had access to all
information, which would have been in a registration statement, in reliance upon
the exemption provided by Section 4(2) under the Securities Act and Regulation D
thereunder, and an appropriate legend was placed on the shares.
Information concerning securities authorized for issuance under our
equity compensation plans is included below under Item 12 under the heading
"Security Ownership of Certain Beneficial Owners and Management."
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with our consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated financial data presented below under the
captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of
the end of, each of our last five fiscal years are derived from our consolidated
financial statements. The consolidated financial statements as of March 31,
2004, 2003, and 2002 and the independent auditors' report thereon, are included
elsewhere in this report.
YEAR ENDED MARCH 31, (1)
------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ---------- ----------- ----------- -----------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 21,739 $ 22,296 $ 26,715 $ 28,049 $ 25,027
Cost of sales 5,252 8,045 11,003 10,815 6,176
----------- ---------- ----------- ----------- -----------
Gross profit 16,487 14,251 15,712 17,234 18,851
Application development expenses 1,043 4,643 4,203 5,333 4,877
Depreciation and amortization 3,896 4,148 6,723 8,299 7,201
Selling, general and administrative expenses 14,798 8,072 12,036 16,985 13,769
Impairment of intangible assets -- -- -- 6,519 --
Impairment of note receivable received in
connection with the sale of IBIS Systems
Limited -- -- -- 7,647 --
----------- ---------- ----------- ----------- -----------
Total expenses 19,737 16,863 22,962 44,783 25,847
----------- ---------- ----------- ----------- -----------
Loss from operations (3,250) (2,612) (7,250) (27,549) (6,996)
Other income (expense):
Interest income 20 1 7 620 1,069
Other income (expense) (647) 24 (56) 74 (202)
Interest expense (937) (1,088) (3,018) (3,043) (1,493)
----------- ---------- ----------- ----------- -----------
Total other expense (1,564) (1,063) (3,067) (2,349) (626)
----------- ---------- ----------- ----------- -----------
Loss before provision (benefit) for income taxes (4,814) (3,675) (10,317) (29,898) (7,622)
Provision (benefit) for income taxes (586) 11 2 (4,778) (2,435)
----------- ---------- ----------- ----------- -----------
Loss before extraordinary item and change
in accounting principle (4,228) (3,686) (10,319) (25,120) (5,187)
Extraordinary item - Gain on debt forgiveness -- 1,476 -- -- --
Cumulative effect of changing accounting
principle
- Goodwill valuation under SFAS No. 142 -- (627) -- -- --
----------- ---------- ----------- ----------- -----------
Loss from continuing operations (4,228) (2,837) (10,319) (25,120) (5,187)
Income (loss) from discontinued operations -- 119 (4,339) (3,825) 1,133
----------- ---------- ----------- ----------- -----------
Net loss (4,228) (2,718) (14,658) (28,945) (4,054)
Cumulative preferred dividends (1,024) (1,015) (254) -- --
----------- ---------- ----------- ----------- -----------
Net loss available to common stockholders $ (5,252) $ (3,733) $ (14,912) $ (28,945) $ (4,054)
=========== ========== =========== =========== ===========
17
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- ----------- --------- --------- ---------
(in thousands)
Basic and diluted earnings (loss) per share:
Loss before extraordinary item and
change in accounting principle $ (0.10) $ (0.12) $ (0.29) $ (0.72) $ (0.15)
Extraordinary item - gain on debt forgiveness -- 0.05 -- -- --
Loss from change in accounting principle -- (0.02) -- -- --
--------- ----------- --------- --------- ---------
Loss from continuing operations (0.10) (0.09) (0.29) (0.72) (0.15)
Income (loss) from discontinued operations -- -- (0.12) (0.11) 0.13
Cumulative preferred dividends (0.03) (0.04) (0.01) -- --
--------- ----------- --------- --------- ---------
Net loss available to common stockholders $ (0.13) $ (0.13) $ (0.42) $ (0.83) $ (0.12)
========= =========== ========= ========= =========
Weighted average common shares:
Basic 41,450 29,599 35,698 34,761 32,459
Diluted 41,450 29,599 35,698 34,761 32,459
BALANCE SHEET DATA:
Working capital $ 802 $ (4,056) $ (5,337) $ (2,782) $ 2,628
Total assets $ 51,762 $ 37,637 $ 40,005 $ 56,453 $ 94,083
Long-term obligations $ 2,319 $ 2,807 $ 8,013 $ 18,554 $ 21,586
Stockholders' equity $ 42,200 $ 23,842 $ 21,952 $ 26,993 $ 53,497
(1) Except for the year ended March 31, 2004, certain reclassifications are
reflected in the above data since the filing of such annual reports on forms 10K
and 10K/A. Such reclassifications did not result in changes in net income
(loss), net income (loss) per share or stockholders' equity.
ITEM 7. 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. We 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.
In recent periods, we have maintained relatively flat period over
period revenues and suffered operating and net losses, largely attributable to
general economic and competitive conditions. However, as economic conditions
have improved, we have begun to experience an increase in revenues and
profitability. In this regard, we have taken a number of steps designed to
improve our balance sheet and operations, including:
o Acquired two complementary companies with substantial revenues
and earnings potential;
o Revamped our management team by adding a new President and COO
and CTO, as well as a new CFO;
o Recapitalized our balance sheet, eliminating substantial debt
and raising new equity in its place;
o Improved our IBM-based core products through continuing
internal research and development;
o Obtained the rights to distribute complementary products,
including a new easy-to-install and easy-to-use,
open-architecture software system for very small retailers,
which we will introduce in 2004;
o Established partnerships with several value added resellers to
provide a variety of options and product extensions;
o Improved our distribution capabilities by adding new third
party channels, such as IBM and IBM's resellers, and
professional service firms, such as CGI and LakeWest.
18
We believe that these actions have positioned us to achieve sustained revenue
growth and profitability.
RECENT ACQUISITIONS
ACQUISITION OF PAGE DIGITAL
On January 30, 2004, we acquired Page Digital, a developer of
multi-channel commerce software, through a merger transaction for total
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 per share. The acquisition was
accounted for as a purchase, and accordingly, the operating results of Page
Digital have been included in our consolidated financial statements from the
date of acquisition. In connection with the Page Digital acquisition, we added
approximately 40 employees and recorded $6.1 million of goodwill, $1.4 million
in software technology, $904,000 in customer relationships and $285,000 in
trademark. For pro forma operating results, see "Notes to Consolidated Financial
Statements - Note 2" in the Financial Statements section.
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 $27.3 billion in 2000, grew 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
Pursuant to an agreement dated June 1, 2004, we acquired RTI from
Michael Tomczak, Jeffrey Boone and Intuit in a merger transaction. On March 12,
2004, we, RTI, Merger Sub and the Shareholders entered the March 12, 2004 Merger
Agreement which provided we would acquire RTI in a merger transaction in which
RTI would merge with and into Merger Sub. The merger consideration contemplated
by the March 12, 2004 Merger Agreement was a combination of cash and shares of
our common stock. The March 12, 2004 Merger Agreement was amended by the Amended
Merger Agreement dated June 1, 2004.
Pursuant to the Amended Merger Agreement, the Merger was completed with
the following terms: (i) we assumed RTI's obligations under those certain
promissory notes issued by RTI on December 20, 2002 with an aggregate principal
balance of $2.3 million; (ii) the total consideration paid at the closing of the
Merger was $10.0 million paid in shares of our common stock and newly designated
Series B Preferred and promissory notes; (iii) the Shareholders and Intuit are
entitled to price protection payable if and to the extent that the average
trading price of our common stock is less than $0.76 at the time the shares of
our common stock issued in the Merger and issuable upon conversion of the Series
B Preferred are registered pursuant to the Registration Rights Agreement dated
June 1, 2004 between us, the Shareholders and Intuit; and (iv) the merger
consisted of two steps (the "Merger"), first, Merger Sub merged with and into
RTI, Merger Sub's separate corporate existence ceased and RTI continued as the
surviving corporation (the "Reverse Merger"), immediately thereafter, RTI merged
with and into Merger Sub II, RTI's separate corporate existence ceased and
Merger Sub II continued as the surviving corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares
of Series B Preferred and a promissory note payable monthly over two years in
the principal amount of $1,295,000 bearing interest at 6.5% per annum. As a
result of the Merger, Intuit, the holder of all of the outstanding shares of
RTI's Series A Preferred stock, received 1,546,733 shares of our common stock
and a promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights.
Under the Registration Rights Agreement, we agreed to register the common stock
issuable upon conversion of the Series B Preferred issued to the Shareholders
within 30 days of the automatic conversion of the Series B Preferred into common
stock. The automatic conversion will occur upon us filing the Certificate of
Amendment with the Delaware Secretary of State increasing the authorized number
of shares of our common stock after securing shareholder approval for the
Certificate of Amendment. Under the Registration Rights Agreement, Intuit is
entitled to demand registration or to have its shares included on any
registration statement filed prior the registration statement covering the
19
Shareholders' shares, subject to certain conditions and limitations, or if not
previously registered to have its shares included on the registration statement
registering the Shareholders' shares. The Shareholders and Intuit are entitled
to price protection payments of up to a maximum of $0.23 per share payable by
promissory note, if and to the extent that the average closing price of our
common stock for the 10 days immediately preceding the date the registration
statement covering their shares is declared effective by the Securities and
Exchange Commission, is less than the 10 day average closing price as of June 1,
2004, which was $0.76.
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well
as certain officers and directors signed voting agreements that provide they
will not dispose of or transfer their shares of our capital stock and that they
will vote their shares of our capital stock in favor of the Certificate of
Amendment and the Amended Merger Agreement and transactions contemplated
therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone.
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. The combination instantly expands our products, services
offerings and distribution channels.
DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our subsidiary, SVI Training Products
("Training Products") to its president and our former director, Arthur
Klitofsky, 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, if 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 as of March
31, 2003. Training Product's $248,000 of operating results are shown as
discontinued operations, net of the loss on sale of the Training Products unit
at March 31, 2003. In April 2004, we agreed to defer the payments due in January
2004 and April 2004 until April 2008. The balance of the note receivable was
$153,000 as of June 22, 2004.
Due to the declining performance of our Australian subsidiary, we sold
certain assets of the Australian subsidiary to its former management and ceased
Australian operations in February 2002. However, the sale was subject to the
approval of National Australia Bank, the subsidiary's secured lender. The bank
did not approve the sale and 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 sold 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 but could be subject to further liability.
The disposal of our Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown on our
financial statements as discontinued operations at March 31, 2002.
RESULTS OF OPERATIONS
Results of operations for the fiscal year ended March 31, 2004 ("Fiscal
2004") 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 Fiscal 2004. 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 On June 4, 2004, we completed the acquisition of RTI, a
provider of management systems for retailers. See "Recent
Transactions - Acquisition of RTI" above.
o Upon completion of RTI's acquisition, Michael Tomczak, RTI's
CEO and President, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's CTO,
was appointed our Chief Technology Officer. Mr. Tomczak
replaced Steve Beck, who was serving as our president and Mr.
20
Page, who was serving as our COO and CTO. Mr. Beck served as
our President from April 2003 to June 2004 and our COO from
April 2003 to February 2004. Mr. Page served as our CTO from
January 2004 to June 2004 and as our COO from February 2004 to
June 2004.
o Effective January 30, 2004, we completed the acquisition of
Page Digital, a provider of direct commerce solutions to
retailers. See "Recent Transactions - Acquisition of Page
Digital" above.
o In February 2004, Michael Silverman was appointed to the
position of Chairman of the Board of Directors. Mr. Silverman
has been on our board of directors since January 2001. He
founded Advanced Remote Communication Solutions, Inc.
(formerly known as Boatracs, Inc.) in 1990. He served as its
Chairman until May 2002, and as Chief Executive Officer and
President until October 1997, and again from November 1999 to
May 2002. Mr. Silverman replaced Harvey Braun who was serving
as Chief Executive Officer and Chairman of the board. Mr.
Braun was our Chief Executive Officer from January 2003
through May 2004 and our Chairman of the board from July 2004
to February 2004.
o In January 2004, David Joseph, Page Digital's Senior Vice
President of Sales, was appointed our Senior Vice President of
Sales. Mr. Joseph has over 20 years of sales and marketing
experience in the software industry.
o In July 2003, our Board of Directors appointed Ran Furman to
the position of Chief Financial Officer.
o We completed a number of debt and equity financing
transactions. See "Liquidity and Capital Resources - Financing
Transactions" below.
21
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, 2004, 2003 and 2002 (in thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- ---------- --------- ---------- --------- ----------
Net sales $ 21,739 100% $ 22,296 100% $ 26,715 100%
Cost of sales 5,252 24% 8,045 36% 11,003 41%
--------- ---------- --------- ---------- --------- ----------
Gross profit 16,487 76% 14,251 64% 15,712 59%
Application development expense 1,043 5% 4,643 21% 4,203 16%
Depreciation and amortization 3,896 18% 4,148 19% 6,723 25%
Selling, general and administration expenses 14,798 68% 8,072 36% 12,036 45%
Impairment of intangible assets -- -- -- -- -- --%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited -- -- -- -- -- --%
--------- ---------- --------- ---------- --------- ----------
Total expenses 19,737 91% 16,863 76% 22,962 86%
--------- ---------- --------- ---------- --------- ----------
Loss from operations (3,250) (15)% (2,612) (12)% (7,250) (27)%
Other income (expense)
Interest income 20 --% 1 0% 7 --%
Other income (expense) (647) --% 24 0% (56) --%
Interest expense (937) (4)% (1,088) (5)% (3,018) (11)%
--------- ---------- --------- ---------- --------- ----------
Total other expense (1,564) (4)% (1,063) (5)% (3,067) (11)%
--------- ---------- --------- ---------- --------- ----------
Loss before provision (benefit) for income taxes (4,814) (19)% (3,675) (17)% (10,317) (38)%
Provision (benefit) for income taxes (586) (2)% 11 0% 2 --%
--------- ---------- --------- ---------- --------- ----------
Loss before extraordinary item and
change in accounting principle (4,228) (17)% (3,686) (17)% (10,319) (38)%
Extraordinary item - gain on debt forgiveness -- 1,476 --
Cumulative effect of changing accounting
principle - Goodwill valuation under
SFAS No. 142 -- (627) --
--------- --------- ---------
Loss from continuing operations (4,228) (2,837) (10,319)
Income (loss) from discontinued operations,
net of taxes -- 119 (4,339)
--------- --------- ---------
Net loss (4,228) (2,718) (14,658)
Cumulative preferred dividends (1,024) (1,015) (254)
--------- --------- ---------
Net loss available to
common stockholders $ (5,252) $ (3,733) $(14,912)
========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2003
NET SALES
Net sales was $21.7 million and $22.3 million in the fiscal years ended
March 31, 2004 and 2003, respectively. Net sales included $1.5 million and $7.5
million in fiscal 2004 and 2003, respectively, from Toys R Us, Inc. ("Toys").
Net sales in fiscal 2004 also included a one-time sale of software technology
rights of $3.9 million. Excluding Toys and the one-time software license sale,
net sales increased $1.5 million, or 10%, to $16.3 million in the fiscal year
ended March 31, 2004 from $14.8 in the fiscal year ended March 31, 2003. The
increase is mainly due to an increase in sales on partner products.
Fiscal 2004 and 2003 were challenging years for the sale of new
application licenses. The slow down in the U.S. and world economies 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
22
decreases 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 $2.7 million, or 35%, to $5.3 million in the
fiscal year ended March 31, 2004 from $8.0 million in the fiscal year ended
March 31, 2003. Gross profit as a percentage of net sales increased to 76% in
fiscal 2004 from 64% in fiscal 2003. The increase in gross profit margin was due
to a decrease in modification and professional services sales, which have low
margins. Modification and professional services sales represented 20% and 45%,
respectively, of total net sales during fiscal 2004 and 2003.
Cost of sales for fiscal 2004 and 2003 included $0.4 million and $2.4
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 decreased by $3.6 million, or 78%, to
$1.0 million in fiscal year ended March 31, 2004 from $4.6 million in the fiscal
year ended March 31, 2003. The decrease in application development expense is
primarily due to capitalization of $3.1 million development costs on our new
modules and products which have reached technological feasibility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $6.7 million,
or 83%, to $14.8 million compared to $8.1 million in the fiscal year ended March
31, 2003 due to the following:
o $4.8 million increase in sales and administrative expenses as
we focused on developing our sales organization, increasing
marketing efforts and building infrastructure in the current
year,
o $0.3 million operating expenses for Page Digital which was
acquired on January 31, 2004,
o $0.7 million increase in bad debt expense resulted from a
write-off of an account receivable due to the termination of
Toys agreement,
o $0.5 million accounting and legal costs for acquisitions of
Page Digital and RTI and
o $0.4 million increase in audit, accounting and legal fees
relating to financing activities during fiscal 2003 and 2004.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.2 million, or 5%, to $3.9
million in the fiscal year ended March 31, 2004 from $4.1 million in the fiscal
year ended March 31, 2003. The decrease is mainly due to a decrease in
amortization of purchased software as it became fully amortized.
OTHER EXPENSE
Other expense included a write-off of development payments totaling
$0.6 million paid to a software development company. For further discussion, see
Item 3 under heading "Legal Proceedings".
INTEREST EXPENSE
Interest expense decreased by $0.2 million, or 18%, to $0.9 million in
the fiscal year ended March 31, 2004 from $1.1 million in the fiscal year ended
March 31, 2003. The decrease is due to $0.5 million decrease in interest expense
due to 72% decrease in average balance of interest-bearing loans as compared to
prior year; offset in part by $0.3 million increase in amortization of debt
discounts on convertible debts.
23
PROVISION FOR INCOME TAXES
Provision for income taxes produced an income of $0.6 million in the
fiscal year ended March 31, 2004. The income tax refund of $0.6 million in the
fiscal 2004 resulted from amending prior years' income tax returns to carry back
net operating losses incurred in the past two years.
EXTRAORDINARY ITEM - GAIN ON DEBT FORGIVENESS
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement
with Union Bank of California (the "Bank"), our senior lender. Under this
agreement, we paid the Bank $2.8 million acquired from the sale of 9%
convertible debentures to certain investors. We also issued to the Bank 1
million shares of our common stock and a $500,000 one-year unsecured,
non-interest bearing convertible note payable in either cash or stock, at our
option. The cash payment, shares and convertible note were accepted by the Bank
in full satisfaction of our debt to the Bank. The Bank also canceled the warrant
to purchase 1.5 million shares of our common stock and returned all collateral
held, including 10.7 million shares of our common stock pledged as security. In
connection with the settlement of the debt to the Bank, we reported an
extra-ordinary gain of $1.5 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The cumulative effect of accounting change in the fiscal year end March
31, 2003 was a non-cash, net-of-tax transitional goodwill impairment charge of
$0.6 million which relates to the adoption of SFAS No. 142.
CUMULATIVE PREFERRED DIVIDEND
Cumulative dividends on the outstanding Series A convertible preferred
stock attributable to the fiscal years ended March 31, 2004 and 2003 were $1.0
million. During fiscal 2004, a dividend of $.04 million on Series A convertible
preferred stock was declared and paid by issuing 500,000 shares of our common
stock.
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. Net sales included $7.5 million and $13.4 million in fiscal 2003
and 2002, respectively, from Toys. Excluding Toys, net sales increased $1.5
million, or 11%, to $14.8 million in the fiscal year ended March 31, 2003 from
$13.3 million in the fiscal year ended March 31, 2002.
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 an increase in software license sales, which have high margin, combined with
a decrease in modification and professional services sales, which have lower
margins 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.
24
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, the 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 to a reduction of
$2.2 million in amortization pursuant to the non-amortization provisions of
Statement Financial Accounting Standard ("SFAS") No. 142 for goodwill with
indefinite useful lives.
INTEREST EXPENSE
Interest expense decreased by $1.9 million, or 64%, to $1.1 million in
the fiscal year ended March 31, 2003 from $3.0 million in the fiscal year ended
March 31, 2002. Interest expense in fiscal 2002 included $1.2 million interest
expense on the $10.0 million note payable to Softline. 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.
EXTRAORDINARY ITEM - GAIN ON DEBT FORGIVENESS
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement
with Union Bank of California (the "Bank"), our senior lender. Under this
agreement, we paid the Bank $2.8 million acquired from the sale of 9%
convertible debentures to certain investors. We also issued to the Bank 1
million shares of our common stock and a $500,000 one-year unsecured,
non-interest bearing convertible note payable in either cash or stock, at our
option. The cash payment, shares and convertible note were accepted by the Bank
in full satisfaction of our debt to the Bank. The Bank also canceled the warrant
to purchase 1.5 million shares of our common stock and returned all collateral
held, including 10.7 million shares of our common stock pledged as security. In
connection with the settlement of the debt to the Bank, we reported an
extra-ordinary gain of $1.5 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The cumulative effect of accounting change in the fiscal year end March
31, 2003 was a non-cash, net-of-tax transitional goodwill impairment charge of
$0.6 million which relates to the adoption of SFAS No. 142.
CUMULATIVE PREFERRED DIVIDEND
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.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 2004, 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 March 31, 2004 and
2003, we had cash of $2.1 million and $1.3 million, respectively.
Operating activities used cash of $9.1 million in the fiscal year ended
March 31, 2004 and $1.1 million in the fiscal year ended March 31, 2003. Cash
used for operating activities in the fiscal year ended March 31, 2004 resulted
from $4.2 million net loss, $6.0 million increase in accounts receivable and
other receivables and $4.6 million decrease in accounts payable and accrued
expenses; offset in part by non-cash charges of $3.9 million for depreciation
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and amortization, $0.8 million for provision for allowance for doubtful accounts
and $0.5 million for amortization of debt discount on convertible debts.
Investing activities used cash of $5.5 million in the fiscal year ended
March 31, 2004 and $0.1 million in the fiscal year ended March 31, 2003. Cash
used for investing activities in the current year was primarily for
capitalization of $3.1 million software development costs, acquisition of Page
Digital totaling $1.9 million and $0.5 million purchases of furniture and
equipment.
Financing activities provided cash of $15.3 million and $1.3 million in
the fiscal years ended March 31, 2004 and 2003, respectively. The financing
activities in the current year included net proceeds of $11.8 million from the
sale of common stock and $3.7 million from the issuance of convertible
debentures.
Changes in the currency exchange rates of our foreign operation had the
effect of decreasing cash by $.01 million in the fiscal years ended March 31,
2004, 2003 and 2002.
Accounts receivable increased to $4.6 million at March 31, 2004 from
$4.0 million at March 31, 2003. The increase is primarily due to receivables
acquired in connection with the acquisition of Page Digital.
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 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 have extended payment terms with many of our
trade creditors wherever possible, have diligently focused our collection
efforts on our accounts receivable and have been actively engaged in raising
capital. See "Financing Transactions" below. We had a working capital of $0.8
million at March 31, 2004 compared to a negative working capital of $4.1 million
at March 31, 2003.
During fiscal 2003 and the first half of fiscal 2004, we were unable to
make timely, monthly rent payments due for our Irvine and Carlsbad facilities.
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 all our presently leased facilities.
We have been actively engaged in attempts to resolve our liquidity
problems. In April and May 2003, we sold 9% convertible debentures for an
aggregate of $0.7 million. On June 27, 2003, we sold 5,275,000 shares of our
common stock for an aggregate of $7.9 million, less expenses and placement fees,
in a private placement transaction. On November 7, 2003, we sold 3,180,645
shares of our common stock for an aggregate of $4.9 million, less expenses and
placement fees, in a private placement transaction. On March 15, 2004, we issued
9% convertible debentures and warrants for an aggregate of $3.0 million, less
expenses, in a private placement transaction. 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
private or public equity and/or debt placements to help discharge aged payables,
pursue growth initiatives and prepay bank indebtedness. We have no binding
commitments for funding at this time. If we do decide to seek financing, it may
not be available on terms and conditions acceptable to us, or at all.
FINANCING TRANSACTIONS
ICM ASSET MANAGEMENT, INC.
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. The notes were originally due August 30, 2001, and accrued 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.
We also issued 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 replaced 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 were 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
26
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.
In July 2002, we also replaced 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, with 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. None of the warrants have been exercised as of June 1, 2004.
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.
SOFTLINE/THE SAGE GROUP
In May 2002, we entered into a series of transactions with Softline by
which:
1. We transferred Softline the note received in connection with the
sale of IBIS Systems Limited ("IBIS Note").
2. We issued Softline 141,000 shares of newly-designated Series A
Convertible Preferred Stock ("Series A Preferred").
3. Softline released us from approximately $12.3 million in
indebtedness due to Softline under a promissory note.
4. Softline transferred us 10,700,000 shares of our common shares.
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.
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
("Maturity Date") 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 June 1, 2004, cumulative dividends amount to $2.2 million. 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. As of June 1, 2004, the conversion price is $0.86 per share.
On the Maturity Date, any outstanding shares of Series A Preferred will be
automatically converted into shares of our common stock at a conversion price
equal to 95% of the average closing price of our common stock for the last ten
business days. 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.
On September 17, 2003, an aggregate 500,000 shares of common stock,
consisting of accrued dividends on the Series A Convertible Preferred Stock,
were issued to certain institutional investors.
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 had 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 Option expired, unexercised, on
March 24, 2004.
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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 of our common
shares. The purchase price was received in installments through September 27,
2002. The note was non-interest bearing, and the face amount, which was 16% of
the $1.3 million purchase price as of May 29, 2002 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. 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. In November 2002, the Board decided that this note would be
converted solely for equity and would not be repaid in cash and the $1.3 million
balance was presented as committed common stock on our consolidated balance
sheet at March 31, 2003. The warrant entitled Toys to purchase up to 2,500,000
of our common shares at $0.553 per share. 400,000 shares had vested as of May
29, 2002, and continued to vest at the rate of 100,000 shares per month until
February 28, 2004.
In November 2003, we entered an agreement with Toys to terminate the
software development and services agreement. Pursuant to the agreement, the $1.3
million outstanding convertible note due to Toys, which would have been
converted solely for equity, was settled in full by offsetting against accounts
receivable due to us from Toys and the warrant to purchase 2,500,000 shares of
our common stock was cancelled.
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, 2004 and 2003, we recorded a charge of $0 and
$151,000, respectively, representing a proportion of the total debt discount.
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 in the fiscal year
ended March 31, 2003 and as such, there is no effect on our consolidated
statement of operations.
9% CONVERTIBLE DEBENTURES
On March 15, 2004, we sold Omicron and Midsummer (collectively, the
"Purchasers") convertible debentures (the "March 2004 Debentures") for an
aggregate price of $3.0 million pursuant to a securities purchase agreement (the
"Purchase Agreement"). The March 2004 Debentures bear an interest rate of 9% per
annum, and provide for interest only payments on a quarterly basis, payable, at
our option, in cash or shares of our common stock. The March 2004 Debentures
mature on May 15, 2006. The March 2004 Debentures are convertible into shares of
our common stock at a conversion price of $1.32 per share, subject to adjustment
if we offer or sell any securities for an effective per share price that is less
than 87% of the then current conversion price, negatively restate any of our
financial statements or make any public disclosure that negatively revises or
supplements any prior disclosure regarding a material transaction consummated
prior to March 15, 2004 or trigger other customary anti-dilution protections. If
certain conditions are met, we have the option to redeem the 9% Debentures at
110% of their face value, plus accrued but unpaid interest.
We must redeem the March 2004 Debentures at the initial monthly amount
of $233,333 commencing on February 1, 2005. If the daily volume weighted average
price of our common stock on the American Stock Exchange exceeds $1.15 by more
than 200% for 15 consecutive trading days, we have the option to cause the
Purchasers to convert the then outstanding principal amount of the March 2004
Debentures into our common stock at the conversion price then in effect.
We also issued the Purchasers two warrants as follows: (1) Series A
Warrants to purchase up to an aggregate of 1,043,479 shares of our common stock
at an exercise price of $1.15 per share with a five-year term, exercisable at
anytime after September 16, 2004, subject to adjustment if the we offer or sell
any securities for an effective per share price that is less than the then
current exercise price, negatively restate any of our financial statements or
make any public disclosure that negatively revises or supplements any prior
disclosure regarding a material transaction consummated prior to March 15, 2004
or trigger other customary anti-dilution protections and (2) Series B Warrants
to purchase up to 8,500,000 shares of our common stock with an exercise price of
$5 per share, these warrants are immediately exercisable and expire on the
earlier of the six-month anniversary of the effective date of a registration
statement that is required to be filed or 18 months from March 15, 2004, subject
to adjustment upon the issuance or sale of securities in a public offering for
an effective per share price that is less than the then-current exercise price
and upon the trigger of other customary anti-dilution protections.
For a period of one hundred eighty (180) days following the date the
registration statement is declared effective ("Effective Date"), each Purchaser
has the right, in its sole discretion, to elect to purchase such Purchaser's pro
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rata portion of additional Debentures and Series A Warrants for an aggregate
purchase price of up to $2.0 million in a second closing (the "Second Closing").
The terms of the Second Closing shall be identical to the terms set forth in the
Purchase Agreement and related documents, except that, the conversion price for
the additional debentures and the exercise price for the additional warrants
shall be equal to 115% of the ten day average of the daily volume weighted
average price of our common stock on the American Stock Exchange preceding the
Second Closing ("Second Closing Price"). The Series A Warrant coverage for the
Second Closing shall be 40% of each Purchaser's subscription amount in the
Second Closing divided by the Second Closing Price.
For a period of one hundred eighty (180) days following the Effective
Date, if the daily volume weighted average price of our common stock for twenty
(20) consecutive trading days exceeds $2.00, subject to adjustment, we may, on
one occasion, in our sole determination, require the Purchasers to purchase each
such Purchaser's pro rata portion of additional debentures and Series A Warrants
for an aggregate purchase price of up to $2.0 million. Any such additional
investment shall be under the terms set forth in the Purchase Agreement and
related documents, except that, the conversion price for the additional
debentures and the exercise price for the additional warrants shall be equal to
the then current conversion price and warrant exercise price for the March 2004
Debentures and warrants purchased on March 15, 2004.
For a period of six (6) months following the Effective Date, the
Purchasers have a right of first refusal to participate in certain future
financings by us involving the sale of our common stock or equivalent
securities. The Purchasers were also granted registration rights under a
Registration Rights Agreement dated March 15, 2004, pursuant to which we were
required to file a registration statement respecting the common stock issuable
upon the conversion of the debentures and exercise of the warrants within thirty
(30) days after March 15, 2004, and to use best efforts to have the registration
statement declared effective at the earliest date. If a registration statement
was not filed within such thirty (30) day period or declared effective within
such ninety (90) day period (or within one hundred twenty (120) days in the
event of a full review by the SEC), we became obligated to pay liquidated
damages to the Purchasers equal to 2% per month of each such Purchasers'
subscription amount under the Purchase Agreement plus the value of any warrants
issued pursuant to the Purchase Agreement then held by such Purchaser. Omicron
and Midsummer waived their registration rights with respect to the shares
issuable upon exercise of the Series B Warrant. The registration statement has
not been filed as of June 15, 2004; therefore, $120,000 in liquidated damages
has been accrued and included in accrued expenses at March 31, 2004.
In accordance with generally accepted accounting principles, the
difference between the conversion price of $1.32 and our stock price of 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 $265,000 in the fiscal year ended March 31, 2004.
We allocated the proceeds received from convertible debt with
detachable warrants using the relative fair market value of the individual
elements at the time of issuance. The amount allocated to the warrants was
$720,000 and is being amortized as interest expense over the life of the
convertible debentures. We recorded an interest expense of $14,000 in the fiscal
year ended March 31, 2004.
In March 2003, we entered into a Securities Purchase Agreement for the
sale of convertible debentures (the "March '03 Debentures") to Omicron,
Midsummer and Islandia, L.P. ("Islandia") for the total proceeds of $3.5
million. The March '03 Debentures were convertible into shares of our common
stock at a conversion price of $1.02 per share. The March '03 Debentures were
due to mature in May 2005 and bore an interest rate of 9% per annum. Interest
was payable on a quarterly basis beginning June 1, 2003, at our option, in cash
or shares of common stock. 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 debenture. 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, all outstanding balances of the March '03 Debentures
were converted into an aggregate of 3,419,304 shares of our common stock during
the second quarter of fiscal year ended March 31, 2004.
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 Union Bank of California,
in the accompanying statement of operations for the fiscal year ended March 31,
2003.
Omicron, Midsummer and Islandia 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
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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.
We recorded an interest expense of $144,000 in the fiscal year ended March 31,
2004. 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 had been recorded as an
offering cost in the fiscal year ended March 31, 2004. As such, there is no
effect on our statement of operations.
In April 2003, we entered into a Securities Purchase Agreement with
MBSJ, LLC for a sale of convertible debenture (the "April '03 Debenture"). The
debenture was convertible into shares of our common stock at a conversion price
of $1.02 per share, for the total 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 April '03 Debenture
was due to mature in October 2005. In August 2003, the daily volume weighted
average price of our common stock on the American Stock Exchange exceeded $1.02
by more than 200% for 15 consecutive trading days; therefore, we exercised the
option to cause the investors to convert their debentures into common stock. As
a result, all outstanding balance of the April '03 Debenture was converted into
390,777 shares of our common stock during the second quarter of fiscal year
ended March 31, 2004.
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 $69,000 in the fiscal year ended March 31, 2004.
The April '03 Debenture 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 fiscal
year ended March 31, 2004. At the date of the conversion of the debenture 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 in the fiscal year ended March 31, 2004. As
such, there is no effect on our statement of operations.
In May 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 of 9% debentures,
convertible into shares of our common stock at a conversion price of $1.02 for
the gross proceeds of $300,000 (the "May '03 Debentures"). Interest was due on a
quarterly basis commencing on June 1, 2003, payable in cash or shares of common
stock at our option. The debentures were due to mature in May 2005. 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, all
outstanding balance of the May '03 Debentures were converted into an aggregate
of 293,083 shares of our common stock in the second quarter of fiscal year ended
March 31, 2004.
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 fiscal year ended March 31, 2004.
The May '03 Debentures were accompanied by five-year warrants to
purchase an aggregate of 101,112 shares of common stock with an exercise price
of $1.02 per share. We allocated the proceeds received from debt or convertible
debt with detachable warrants using the relative fair value of the individual
elements at the time of issuance. The amount allocated to the warrants is
$39,000 and was being amortized as interest expense over the life of the
convertible debentures. We recorded an interest expense of $5,000 in the fiscal
year ended March 31, 2004. 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 had
been recorded as an offering cost at March 31, 2004. As such, there is no effect
on our statement of operations.
In connection with the financing in June 2003, we also issued five-year
warrants to purchase 375,000 shares of common stock at an exercise price of
$1.65 to Omicron, Midsummer, Islandia and the Crestview 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 shares
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sold and warrants issued in connection with this transaction. 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 $69,000 in
the fiscal year ended March 31, 2004.
COMMON STOCK INSTITUTIONAL INVESTORS
On June 27, 2003, we sold an aggregate of 5,275,000 shares of common
stock at a $1.50 per share to various institutional investors in a private
placement transaction for an aggregate purchase price of $7.9 million (the "June
27, 2003 PIPE Transaction").
On November 7, 2003, 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
(the "November 7, 2003 PIPE Transaction" and together with the June 27, 2003
PIPE Transaction, the "PIPE Transactions"). We also granted registration rights
to the PIPE Transactions investors under registration rights agreements in which
we agreed to file registration statements with the SEC for the resale of the
shares sold in the PIPE Transactions. A registration statement covering the
shares sold in the June 27, 2003 PIPE Transaction was declared effective by the
SEC on September 26, 2003. A registration statement covering shares sold in the
November 7, 2003 PIPE Transaction was declared effective by the SEC on February
3, 2004.
In connection with the PIPE Transactions, we paid Roth Capital, as
placement agent, an aggregate of $812,000 as cash compensation and five-year
warrants to purchase an aggregate of 809,565 shares of common stock, 527,500
shares at $1.65 per share and 282,065 shares at $1.71 per share. We also granted
Roth Capital 115,226 shares of our common stock in connection with the November
7, 2003 PIPE Transaction. In connection with the June 27, 2003 PIPE Transaction
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, all holders of the March 2003 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 that price on
November 7, 2003 and further adjusted to $1.32 due to the sale of March 2004
Debentures on March 15, 2004. We also issued an additional 1,509,227 shares of
common stock to the November 7, 2003 PIPE investors in connection with the sale
of March 2004 Debentures on March 15, 2004 pursuant to anti-dilution provision
in the securities purchase agreement for the November 7, 2003 PIPE Transaction.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including
purchase commitments at March 31, 2004, and the effect such obligations are
expected to have on our liquidity and cash flow in future periods.
PAYMENT DUE BY PERIOD
---------------------
LESS THAN
CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR -13 YEARS 3-5 YEARS THEREAFTER
---------------------------- ----- ------ --------- --------- ----------
(in thousands)
Long-term debt obligations $ 3,371 $ 723 $ 2,648 $ -- $ --
Capital lease obligations 274 182 91 -- --
Operating leases 10,678 1,786 2,277 1,922 4,693
Purchase obligations 862 852 10 -- --
-------- -------- -------- -------- ---------
Total contractual cash obligations $15,185 $ 3,543 $ 5,026 $ 1,922 $ 4,693
======== ======== ======== ======== =========
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
31
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 Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition", updated by SAB's
103 and 104, "Update of Codification of Staff Accounting
Bulletins", and 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.
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.
Starting 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.
32
We no longer amortize goodwill, but instead test goodwill for
impairment on an annual basis or more frequently if certain
events occur. Goodwill is to be measured for impairment by
reporting units, which currently consist of our operating
segments. At each impairment test for a business unit, we are
required to compare the carrying value of the business unit to
the fair value of the business unit. If the fair value exceeds
the carrying value, goodwill will not be considered impaired.
If the fair value is less than the carrying value, we will
perform a second test comparing the implied fair value of
reporting unit goodwill with the carrying amount of that
goodwill. The difference if any between the carrying amount of
that goodwill and the implied fair value will be recognized as
an impairment loss, and the carrying amount of the associated
goodwill will be reduced to its implied fair value. These
tests require us to make estimates and assumptions concerning
prices for similar assets and liabilities, if available, or
estimates and assumptions for other appropriate valuation
techniques.
For our intangible assets with finite lives, including our
capitalized software and non-compete agreements, we assess
impairment at least annually or whenever events and
circumstances suggest the carrying value of an asset may not
be recoverable based on the net future cash flows expected to
be generated from the asset on an undiscounted basis in
accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". 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.
o APPLICATION DEVELOPMENT. The costs to develop new software
products and enhancements to existing software products are
expensed as incurred until technological feasibility has been
established. Technological Feasibility has occurred when all
planning, designing, coding and testing have been completed
according to design specifications. Once technological
feasibility is established, any additional costs would be
capitalized, in accordance with SFAS No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed".
o STOCK-BASED COMPENSATION. We do not record compensation
expense for options granted to our employees as all options
granted under our stock option plans have an exercise price
equal to the market value of the underlying common stock on
the date of grant. In addition, we do not record compensation
expense for shares issued under our employee stock purchase
plan. As permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", 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, updated by SFAS No. 148.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 further
clarifies accounting for derivative instruments. The adoption of this statement
did not have a material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 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 No. 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. The adoption of SFAS No. 150 did not have a material impact on our
consolidated financial statements.
BUSINESS RISKS
Investors should carefully consider the following risk factors and all
other information contained in this Form 10-K. Investing in our common stock
involves a high degree of risk. In addition to those described below, risks and
uncertainties that are not presently known to us or that we currently believe
are immaterial may also impair our business operations. If any of the following
risks occur, our business could be harmed, the price of our common stock could
decline and our investors may lose all or part of their investment. See the note
regarding forward-looking statements included at the beginning of this Form
10-K.
33
WE INCURRED LOSSES FOR FISCAL YEARS 2004, 2003 AND 2002.
We incurred losses of $4.2 million, $2.7 million and $14.7 million in
the fiscal years ended March 31, 2004, 2003, and 2002 respectively. The losses
in the past three years have generally been due to difficulties completing sales
for new application software licenses, the resulting change in sales mix toward
lower margin services, and debt service expenses. We will need to generate
additional revenue to achieve profitability in future periods. If we are unable
to achieve profitability, or maintain profitability if achieved, our business
and stock price may be adversely effected and we may be unable to continue
operations at current levels, if at all.
WE HAD NEGATIVE WORKING CAPITAL IN PRIOR FISCAL YEAR, AND WE HAVE EXTENDED
PAYMENT TERMS WITH A NUMBER OF OUR SUPPLIERS.
At March 31, 2003, we had negative working capital of $4.1 million. 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.
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 2% in the fiscal year ended March 31, 2004,
compared to the fiscal year ended March 31, 2003. Our net sales decreased by 16%
in the fiscal year ended March 31, 2003 compared to the fiscal year ended March
31, 2002. We experienced a substantial decrease in application license software
sales in fiscal year 2003 and 2002, 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 conditions are, or are 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.
34
OUR OPERATING RESULTS AND REVENUES 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, which are
outside of our control including: the size and timing of orders, the general
health of the retail industry, the length of our sales cycles and technological
changes. 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.
Further, due to these fluctuations, we do not believe period to period
comparisons of our financial performance are necessarily meaningful nor should
they be relied on 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. 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 provide cash to meet our future liquidity needs.
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.
35
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other
intangible assets represent approximately 84% of our total assets as of March
31, 2004. We may have to impair or write-off these assets, which will cause a
charge to earnings and could cause our stock price to decline.
Any such impairment will also reduce our assets, as well as the ratio
of our assets to our liabilities. These balance sheet effects could make it more
difficult for us to obtain capital, and could make the terms of capital we do
obtain more unfavorable to our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our
applications and services and our expenses, and foreign currency losses will
negatively affect profitability or increase losses. Approximately 17%, 12% and
9% 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, 2004, 2003 and 2002, respectively. Many of our expenses related to foreign
sales, such as corporate level administrative overhead and development, are
denominated in U.S. dollars. When accounts receivable and accounts payable
arising from international sales and services are converted to U.S. dollars, the
resulting gain or loss contributes to fluctuations in our operating results. We
do not hedge against foreign currency exchange rate risks.
HISTORICALLY WE HAVE BEEN DEPENDENT ON A SMALL NUMBER OF CUSTOMERS FOR A
SIGNIFICANT AMOUNT OF OUR BUSINESS.
QQQ Systems Ltd. ("QQQ Systems") accounted for 18% of our net sales for
the fiscal year ended March 31, 2004. The software license sale to QQQ Systems
was a one-time transaction. Toys "R" Us ("Toys") accounted for 7%, 31% and 47%
of our net sales from continuing operations for the fiscal years ended March 31,
2004, 2003 and 2002, respectively. 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 President and Chief Operating Officer,
Michael Tomczak and our Chief Technology Officer, Jeffrey Boone. We are also
heavily dependent on our former Chairman, Barry Schechter, who remains as 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, which could
negatively affect our financial performance and cause our stock price to
decline.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES
HAVE BEEN AND MAY CONTINUE TO BE SLOW.
Our future growth is critically dependent on increased sales to the
retail industry. We derive the substantial majority of our revenues from the
licensing of software applications and the performance of related professional
and consulting services to the retail industry. 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. In addition, the retail industry may be
consolidating, and it is uncertain how consolidation will affect the industry.
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. Specifically, 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.
36
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
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 "Description of Business - Competition" below.
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
37
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,
including licensing software and technology that is integrated into our
applications. While some of these relationships are governed by contracts, most
are non-exclusive and all may be terminated on short notice by either party. If
these relationships terminate or fail to deliver the intended benefits, our
development and marketing efforts will be impaired and our revenues may decline.
We may not be able to enter into new strategic relationships, which could put us
at a disadvantage to those of our competitors which do successfully exploit
strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Substantially all of our primary computer and telecommunications
systems are located in two geographic areas, 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.
38
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. 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 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 18,905,269 shares of our
common stock within 60 days of June 1, 2004, 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 38.2% 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 non-voting as to most matters and is
redeemable by us, if the Sage Group converts its Series A Convertible Preferred
Stock to common stock, it may have effective control over all matters affecting
us, including:
o The election of all of our directors;
o The allocation of business opportunities that may be suitable
for 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.
39
THE SAGE GROUP'S POTENTIAL INFLUENCE ON US 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" below.
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 on our common stock 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 and 2,517,232 shares of Series B Convertible Preferred Stock
in June 2004. Our board of directors may determine the terms of subsequent
series of preferred stock without further action by our stockholders. If we
issue additional preferred stock, it could affect your rights or reduce the
value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. We are actively seeking capital, and some of the
arrangements we are considering may involve the issuance of preferred stock.
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The
Exchange has published certain guidelines it uses in determining whether a
security warrants continued listing. Pursuant to these guidelines the Exchange
will consider suspending trading in a listed security or delisting a security
when, in the opinion of the Exchange: (i) the financial condition and/or
operating results of the issuer appear to be unsatisfactory; (ii) the aggregate
market value of the security has become so reduced as to make further dealings
on the Exchange inadvisable; (iii) the issuer has sold or otherwise disposed of
its principal operating assets, or has ceased to be an operating company; (iv)
the issuer has failed to comply with its listing agreements with the Exchange;
or (v) any other event shall occur or any condition shall exist which makes
further dealings on the Exchange unwarranted. 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.
SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS OR WARRANTS, CONVERSION OF
DEBENTURES OR DIVIDENDS ON CONVERTIBLE PREFERRED STOCK 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 28,965,623 shares as of June
1, 2004. Of these options and warrants, as of June 1, 2004, 17,596,785 have
exercise prices above the recent market price of $0.77 per share (as of June 1,
2004), and 11,368,838 have exercise prices at or below that recent market price.
40
Our existing stock option plan currently has approximately 906,663
shares available for issuance as of June 1, 2004. Future options issued under
the plan may have further dilutive effects.
The issuance of additional shares pursuant to these options, warrants,
convertible debentures or anti-dilution provisions will cause immediate and
possibly substantial dilution to our stockholders. Further, subsequent sales of
the shares in the public market 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.
SUBSTANTIALLY ALL OF OUR AUTHORIZED COMMON STOCK IS ISSUED AND OUTSTANDING OR IS
RESERVED FOR ISSUANCE PURSUANT TO EXERCISE OF OUTSTANDING OPTIONS OR WARRANTS OR
CONVERSION OF DEBENTURES OR PREFERRED STOCK. OUR INABILITY TO ISSUE
ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE MAY LIMIT OUR ABILITY TO RAISE
CAPITAL, ENTER STRATEGIC TRANSACTIONS AND SATISFY CONTRACTUAL OBLIGATIONS.
Our authorized capital stock under our Amended and Restated Certificate
of Incorporation is 100,000,000 shares of common stock, 53,974,532 of which were
issued and outstanding as of June 1, 2004 and 5,000,000 shares of preferred
stock consisting of 141,000 shares of Series A Preferred, all of which were
issued and outstanding as of June 1, 2004, and 2,517,232 Series B Preferred
Stock, all of which were issued and outstanding as of June 4, 2004. In addition,
we have 43,856,654 shares of common stock reserved for issuance upon exercise of
options or warrants or conversion of debentures or preferred stock. As a result,
we only have 2,168,814 authorized shares of common Stock that are not reserved
and that may be issued for any future business purposes. We intend to submit a
proposal to amend our Certificate of Incorporation to increase the number of
shares of Common Stock we are authorized to issue from 100,000,000 to
250,000,000 to our stockholders at our next annual meeting and certain of our
stockholders and members of management have signed voting agreements obligating
them to vote their shares in favor of such amendment at the meeting. However,
there can be no assurances that such a proposal will be approved by the
requisite vote of the stockholders. If we are unable to increase our authorized
Common Stock our ability to obtain additional capital through sales of our
common stock, to engage in acquisitions or other strategic transactions and to
satisfy contractual commitments will be severely limited.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS WITH PAGE DIGITAL OR
RTI OR REALIZE ALL OF THE ANTICIPATED BENEFITS OF THESE ACQUISITIONS.
On January 30, 2004, we acquired Page Digital and on June 1, 2004, we
acquired Retail Technologies, Inc. (see "Recent Transactions" below). 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.
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.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.
41
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.
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.
BUSINESS RISKS FACED BY RTI COULD DISADVANTAGE OUR BUSINESS.
RTI is a provider of retail management store solutions to small through
mid-tier retailers via an international network of retailers and faces several
business risks that could disadvantage our business. These risks include many of
the risks that we face, described above, as well as:
o RTI FACES INTENSE COMPETITION IN THE RETAIL POINT OF SALE
INDUSTRY - RTI operates in an extremely competitive industry,
which is subject to rapid technological and market changes. We
anticipate that the competition will increase as more
companies focus on providing technology solutions to small and
mid-tier retailers. Many of our current and potential
competitors, such as Microsoft, have more resources to devote
to product development, marketing and distribution. While RTI
42
believes that it has competitive strengths in its market,
there can be no assurance that RTI will continue to compete
successfully against larger more established competitors.
o RTI IS DEPENDENT ON THEIR VALUE-ADDED RESELLLERS (VARS) - RTI
does not have a direct sales force and relies on VARs to
distribute and sell its products. RTI currently has
approximately 67 VARs - 27 in North America, 7 in South
America, 11 in Asia, 19 in Europe and the Middle East, 1 in
Africa, and 1 each in Australia and New Zealand. Combined,
RTI's four largest VARs account for approximately 35% of its
revenues, although no one is over 15%. RTI's VARs are
independently owned businesses and there can be no assurance
that one or more will not go out of business or cease to sell
RTI products. Until a replacement VAR could be recruited, and
trained, or until an existing VAR could expand into the
vacated territory, such a loss could result in a disruption in
RTI's revenue and profitability. Furthermore, there can be no
assurance that an adequate replacement could be located.
o A PROLONGED SLOWDOWN IN THE GLOBAL ECONOMY COULD ADVERSELY
IMPACT RTI'S REVENUES - A slowdown in the global economy might
lead to decreased capital spending, fewer new retail business
start ups, and slower new store expansion at existing retail
businesses. Such conditions, even on a regional basis could
severely impact one or more of RTI's VARs and result to a
disruption in RTI's revenues, and profitability.
o RTI'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, SO RTI'S SUCCESS DEPENDS HEAVILY ON ITS ABILITY TO
DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED SERVICES -
We believe RTI's ability to succeed in its market is partially
dependent on its ability to identify new product opportunities
and rapidly, cost-effectively bring them to market. However,
there is no guarantee that they will be able to gain market
acceptance for any new products. In addition, there is no
guarantee that one of RTI competitors will not be able to
bring competing applications to market faster or market them
more effectively. Failure to successfully develop new
products, bring them to market and gain market acceptance
could result in decreased market share and ultimately have a
material adverse affect on RTI.
o RTI DOES NOT HOLD ANY PATENTS OR COPYRIGHTS, ANY TERMINATION
OF OR ADVERSE CHANGE TO RTI'S LICENSE RIGHTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS BUSINESS - RTI has a license to
develop, modify, market, sell, and support its core technology
from a third party. Any termination of, or disruption in this
license could have a material adverse affect on RTI's
business. Further, we believe that most of the technology used
in the design and development of RTI's core products is widely
available to others. Consequently, there can be no assurance
that others will not develop, and market applications that are
similar to RTI's, or utilize technologies that are equivalent
to RTI's. Likewise, while RTI believes that its products do
not infringe on any third party's intellectual property, there
can be no assurance that they will not become involved in
litigation involving intellectual property rights. If such
litigation did occur, it could have a material adverse affect
on RTI's business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our
consolidated financial position, results of operations or cash flows. We are
exposed to market risks, which include changes in interest rates and changes in
foreign currency exchange rate as measured against the U.S. dollar.
INTEREST RATE RISK
We do not have financial instruments with variable interest rates or
investment securities.
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 17%, 12%
and 9% of our total net sales from continuing operations were denominated in
currencies other than the U.S. dollar for the periods ended March 31, 2004, 2003
and 2002, respectively.
43
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements at March 31, 2004, 2003 and 2002
and the reports of Singer Lewak Greenbaum & Goldstein LLP, independent
accountants, are included in this report on pages beginning on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal
financial and accounting officer, have conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that were in effect at the end of the period
covered by this report. Based on their evaluation, our principal executive
officer and principal financial and accounting officer have concluded that our
disclosure controls and procedures that were in effect on March 31, 2004 were
effective to ensure that all material information relating to us that is
required to be included in the reports that we file with the SEC is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. There have been no changes in internal controls over
financial reporting that were identified during the evaluation that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers, and their ages as of June 1,
2004, are as follows:
NAME AGE POSITION
---- --- --------
Michael Silverman (1) (2) 59 Chairman of the Board
Michael Tomczak 49 President, Chief Operating Officer
and Director
Jeffrey Boone 40 Chief Technology Officer
Ran Furman 34 Chief Financial Officer
Steven Beck 63 Executive Vice President - Product
Visionary and Director
Lawrence Page 49 Executive Vice President - Special
Projects and Director
Ivan M. Epstein 43 Director
Ian Bonner (1) (2) 49 Director
Robert P. Wilkie 34 Director
David S. Joseph 55 Senior Vice President, Sales and
Marketing
Kavindra Malik 43 Executive Vice President, Product
Management
Mike Dotson 37 Managing Director, European Operations
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
44
Michael Silverman became a director in January 2001 and Chairman in
February 2004. 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.
Michael Tomczak became our President, Chief Operating Officer and
director in June 2004 after our acquisition of RTI. Mr. Tomczak served as RTI's
CEO and President since December 2002 and its CFO for the previous two years.
Mr. Tomczak has been an executive with high-growth firms for the past twelve
years including having served as Chief Financial Officer of a publicly traded
technology company. Previously, Mr. Tomczak served as head director of Ernst &
Young's Sacramento office's Entrepreneurial Services Group. Mr. Tomczak holds a
Bachelor of Science degree in business administration from Western Michigan
University and is a Certified Public Accountant in both California and Michigan.
Jeffrey Boone became the Chief Technical Officer of Island Pacific in
June 2004, following the acquisition of RTI. Mr. Boone served as Chief Technical
Officer since 2001. Previously, Mr. Boone served as VP of Products and
Technology and later CIO for Objective Systems Integrators ("OSI"), before its
acquisition by Agilent Technologies, where he directed product development and
information services. Before joining OSI, he held key technical positions with
Systems Center and IBM. Mr. Boone received his Bachelor of Science degree in
computer science from California State University, Sacramento.
Ran Furman joined Island Pacific in July 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.
Steven Beck became a director in April 2003. Mr. Beck currently serves
as Executive Vice President - Product Visionary. He served as President from
April 2003 to June 2004 and as Chief Operating Officer from April 2003 to
February 2004. He had been President and Chief Operating Officer of our Retail
Management Solutions division (formerly our Island Pacific division) from
September 2002 to March 2003. 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 the retail 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.
Lawrence Page became a director in March 2004 after our acquisition of
Page Digital. Mr. Page currently serves as Executive Vice President - Special
Projects. He served as Chief Technology Officer from January 2004 to June 2004
and as Chief Operating Officer from February 2004 to June 2004. He is the former
Chief Executive Officer and Chairman of the board of Page Digital, which he
founded in 1980. Mr. Page has over 25 years of direct commerce experience. Mr.
Page attended the California Institute of Technology for three years, when he
departed to pursue his business interests in software.
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
45
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.
Ivan M. Epstein became a director of the Company in May 1998. He is
Chief Executive Officer of Softline PTY Ltd, a subsidiary of Sage Group, plc.
Softline PTY Ltd is one of the leading accounting software vendors in the world.
Mr. Epstein co-founded Softline Limited in 1988 and served as its CEO and
chairman until November 2003, when it was acquired by Sage Group plc.
Robert P. Wilkie became a director in June 2002. He is Chief Financial
Officer of Softline PTY Ltd, a subsidiary of Sage Group plc. Prior to this, Mr.
Wilkie was CFO and director of Softline Limited, which he joined in 1997 as
controller. 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).
David S. Joseph became Senior Vice President of Sales and Marketing in
January 2004 after our acquisition of Page Digital. He is the former Executive
Vice President and director of Page Digital. Prior to joining Page Digital he
served as senior Vice President of Sales at Computer Systems Dynamics, a
software solution provider to the retail lumber and building materials industry,
which he joined in 1980. At Page Digital, Mr. Joseph was responsible for
establishing markets for new products through sales to major accounts such as
IBM, Lands' End, FAO Schwarz and Hershey Foods. He received a B.A. in English
from Michigan State University and has completed graduate level coursework in
Computer Science.
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.
Mike Dotson became Managing Director of our United Kingdom Operations
in 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.
CODE OF ETHICS AND BUSINESS CONDUCT
We have adopted a Code of Ethics and Business Conduct ("Code of
Ethics") that applies to all of our employees, officers and directors. The Code
of Ethics meets the requirements of the rules of the SEC.
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 compensation arrangements for senior management and
directors to the Board of 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). The Audit Committee is composed
entirely of independent directors. Current members of the Compensation Committee
are Ian Bonner and Michael Silverman. The Compensation Committee met 4 times
during the fiscal year ended March 31, 2004
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 the
audit plan and the results of the audit with independent auditors, 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 4 times during Fiscal 2004.
46
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ian Bonner and Michael Silverman served as the members of the
Compensation Committee during Fiscal 2004. No member of our Compensation
Committee has ever been an officer of the Company or any of its subsidiaries.
During the last completed fiscal year, none of our executive officers 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 2004, we issued the following options to purchase shares
of our common stock to our directors: (a) Ian Bonner and Michael Silverman each
5,000 options at exercise price of $2.55 per share, 5,000 options at $2.17 per
price, 5,000 options at $2.23 per share, 5,000 options at $1.34 per share and
5,000 options at $0.92 per share, vesting immediately; (b) Ivan Epstein 5,000
options with exercise price of $2.55 per share, 5,000 options at $2.17 per share
and 5,000 options at $0.92 per share, vesting immediately; and (c) Robert Wilkie
5,000 options at exercise price of $2.55 per share, 5,000 options at $2.17 per
share, 5,000 options at $1.34 per share and 5,000 options at $0.92 per share,
vesting immediately. We also paid cash compensation totaling $154,000 to Barry
Schechter, who served as the Chairman of the Board until July 2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires our officers, directors and persons who own more than
10% of a class of our securities registered under Section 12 of the Exchange Act
to file reports of ownership and changes in ownership with the SEC and the
National Association of Securities Dealers. Officers, directors and greater than
10% stockholders are required by SEC regulations to furnish us with copies of
all Section 16(a) forms they file.
Based solely on a review of copies of such reports furnished to us and
written representations that no Form 5 report was required for the fiscal year
ended March 31, 2004, we believe that all persons subject to the reporting
requirements of Section 16(a) were complied with during the fiscal year ended
March 31, 2004, except as follows: David Joseph was late in filing initial Form
3 report; Ivan Epstein and Robert Wilkie, each of whom were late in filing Form
4 reports reporting two grants of options to each such individual; Ian Bonner
was late in filing Form 4 reports reporting three option grants, exercises of
two options and sale of 30,000 shares; Michael Silverman was late in filing Form
4 reports reporting three option grants and shares gifted; Donald Radcliffe, our
former director, was late in filing Form 4 reporting two option grants and
exercise of an option; and Michael Lenaghan and George Brocco, our former
officers, were late in filing Form 4 reports reporting two option grants to each
such individual.
47
ITEM 11. EXECUTIVE COMPENSATION
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, and two other persons who were executive officers during
the last completed fiscal year but were not executive officers at the end of the
last completed fiscal year. These individuals are referred to as the "named
executive officers."
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------------- ------------
SECURITIES ALL OTHER
NAME AND OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS ($) (1)
------------------ ---- --------- -------- --------------- ------------ -------------
Harvey Braun (2) 2004 598,000 -- -- -- --
(Former Chief 2003 163,000 -- -- 2,000,000 --
Executive Officer)
Steven Beck (3) 2004 651,000 -- -- -- --
(Excecutive Officer) 2003 379,431 -- -- 2,000,000 --
Ran Furman (4) 2004 100,000 -- -- 100,000 --
(Chief Financial
Officer)
Kavindra Malik (5) 2004 212,000 -- -- 20,000 --
(Executive Vice 2003 41,000 11,000 -- 75,000 --
President)
Mike Dotson 2004 170,000 -- -- -- 7,000
(Vice President) 2003 154,000 -- -- -- 6,000
2002 143,000 -- -- 25,000 5,000
Cheryl Valencia (6) 2004 121,000 -- -- -- --
(Former Vice 2003 69,000 17,000 -- 40,000 --
President)
George Brocco (7) 2004 169,000 -- -- 50,000 --
(Former Vice
President)
---------
(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 $50,000.
(2) Mr. Braun was employed with us from January 2003 to May 2004.
(3) Mr. Beck began his employment with us in October 2002.
(4) Mr. Furman began his employment with us in August 2003.
(5) Mr. Malik began his employment with us in January 2002.
(6) Ms. Valencia was employed with us from September 2002 to November
2003.
(7) Mr. Brocco was employed with us from May 2003 to May 2004.
48
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named executive
officers.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM ($)
----------------------------------------------------------------------- --------------------------
EXERCISE OR
DATE OF OPTIONS BASE PRICE EXPIRATION
NAME GRANT GRANTED(#) % OF TOTAL ($/SH.) DATE 5% 10%
---- ----- ---------- ---------- ------- ---- -- ---
Ran Furman 08/04/03 94,041(1) 7.02% 3.19 08/04/13 189,000 478,000
Ran Furman 08/04/03 5,959(2) 0.44% 3.19 08/04/13 12,000 30,000
Kavindra Malik 05/01/03 20,000(1) 1.49% 0.98 05/01/13 12,000 31,000
George Brocco 05/16/03 40,000(1) 2.99% 1.12 05/16/13 28,000 71,000
George Brocco 06/10/03 10,000(1) 0.75% 2.17 06/10/13 14,000 35,000
(1) Options vest as to one-third of the shares on the first anniversary of
the grant and the remaining two-thirds of the shares in 24 equal
monthly installments after the first vesting date, subject to
continuing service.
(2) Options granted outside of the plan and vest on the first anniversary
of the grant, subject to continuing service.
The potential realizable value is calculated based on the term of the
option at its time of grant and the number of shares underlying the grant at
fiscal year end. It is calculated based on assumed annualized rates of total
price appreciation from the market price at the date of grant of 5% and 10%
(compounded annually) over the full term of the grant with appreciation
determined as of the expiration date. The 5% and 10% assumed rates of
appreciation are mandated by SEC rules and do not represent our estimate or
projections of future common stock prices. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not be
achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth the information concerning the fiscal
year end value of unexercised options held by the named executive officers. None
of the named executive officers exercised options during the last fiscal year.
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY END (#) OPTIONS AT FY END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- -----------------------------
Harvey Braun 2,000,000/-- 1,460,000/--
Steven Beck 1,620,754/-- 1,183,000/--
Ran Furman --/100,000 --/--
Kavindra Malik 29,167/65,833 8,000/14,000
Mike Dotson 34,138/5,862 6,000/2,000
George Brocco --/50,000 --/--
(1) Based upon the market price of $1.01 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 2004 fiscal year, less the option
exercise price payable per share.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Lawrence Page on January
30, 2004. The term of the agreement is two years. Under the agreement, Mr. Page
is entitled to $190,000 in annual compensation and was granted an option to
49
purchase 200,000 shares of our common stock. Mr. Page's right to purchase 66,666
of the shares subject to the option shall vest on the first anniversary date of
the agreement, thereafter, the option shall vest at the rate of 5,556 shares per
month during the second year of this agreement. The remaining unvested option
shares shall either: (i) vest at the second anniversary date of this agreement,
or (ii) vest at the rate of 5,556 shares per month if Mr. Page continues to be
our employee after the second anniversary date of this agreement in accordance
with and subject to our current Stock Option Plan. If Mr. Page's employment with
us is terminated without cause during the term of the agreement, he will receive
severance in the amount of the greater of $190,000 or the balance of his base
compensation for the remaining term of the agreement. We also entered a
non-competition agreement with Mr. Page, pursuant to which Mr. Page agreed not
to engage in any business or activity that in any way competes with us for a
period of two years after the termination of his employment with us.
We entered into an employment agreement with David S. Joseph on January
30, 2004. The term of the agreement is two years. Under the agreement, Mr.
Joseph is entitled to $170,000 in annual compensation. He also received an
option to purchase 150,000 shares of our common stock. Mr. Joseph's right to
purchase 50,000 of the shares subject to the option shall vest at the first
anniversary date of this agreement, thereafter, the option shall vest at the
rate of 4,166 shares per month during the second year of this agreement. The
remaining unvested options shall either: (i) vest at the second anniversary date
of this agreement, or (ii) vest at the rate of 4,166 shares per month if Mr.
Joseph continues to be employed by us after the second anniversary date of this
agreement, all in accordance with and subject to our current Stock Option Plan.
If Mr. Joseph's employment with us is terminated without cause during the term
of the agreement, he will receive severance in the amount of the greater of
$170,000 or the balance of his compensation payable over the remaining term of
the agreement.
We entered into an employment agreement with Michael Tomczak on June 1,
2004. The term of the agreement is two years. Under the agreement, Mr. Tomczak
is entitled to $360,000 in annual compensation. He also received an option to
purchase 1,772,354 shares of our common stock. Mr. Tomczak's right to purchase
886,178 of the shares subject to the option shall vest at the first anniversary
date of this agreement, thereafter, the remaining option shall vest at the rate
of 73,848 shares per month during the second year of this agreement. If Mr.
Tomczak's employment with us is terminated without cause during the term of the
agreement, he will receive severance in the amount of the lesser of $360,000 or
the balance of compensation payable over the remaining term of the agreement,
but in no event should the amount be less than $180,000. We also entered into
non-competition agreement with Mr. Tomczak, pursuant to which Mr. Tomczak agreed
not to engage in any business or activity that in any way competes with us for a
period of two years after the termination of his employment with us.
We entered into an employment agreement with Jeffrey Boone on June 1,
2004. The term of the agreement is two years. Under the agreement, Mr. Boone is
entitled to $240,000 in annual compensation. He also received an option to
purchase 1,572,354 shares of our common stock. Mr. Boone's right to purchase
786,179 of the shares subject to the option shall vest at the first anniversary
date of this agreement, thereafter, the remaining option shall vest at the rate
of 65,514 shares per month during the second year of this agreement. If Mr.
Boone's employment with us is terminated without cause during the term of the
agreement, he will receive severance in the amount of the lesser of $240,000 or
the balance of his compensation payable over the remaining term of the
agreement, but in no event should the amount be less than $120,000. We also
entered into non-competition agreement with Mr. Boone, pursuant to which Mr.
Boone agreed not to engage in any business or activity that in any way competes
with us for a period of two years after the termination of his employment with
us.
We entered into an employment agreement with Barry M. Schechter
effective October 1, 2000. 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. This agreement was
terminated in July 2003 upon Mr. Schechter's resignation from the position of
Chairman of the Board. Mr. Schechter remains as a consultant to us. .The expense
for Mr. Schechter's consulting services was $295,000 in the fiscal year ended
March 31, 2004.
LONG TERM INCENTIVE PLANS/BENEFIT OR ACTUARIAL PLANS
We do not have any long-term incentive plans, as those terms are
defined in SEC regulations. We have no defined benefit or actuarial plans
covering any named executive officer.
50
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 June 1, 2004. The 1989
Plan was administered by the Board of Directors, which established the terms and
conditions of each option grant.
Our 1998 Incentive Stock Plan ("1998 Plan") authorizes the issuance of
shares of common stock through incentive stock options, non-statutory options,
stock bonuses, stock appreciation rights and stock purchase agreements. The 1998
Plan was amended in August 2000 to increase the number of shares reserved for
issuance 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 for issuance from 4,600,000 to 5,600,000.
The August 2000 amendment 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 amendment at our annual meeting held November 16, 2000 and the
August 2002 amendment at our annual meeting held September 19, 2002. On April 1,
2003 and April 1, 2004, the automatic increase of 600,000 shares was effected,
so that the total number of shares reserved under the 1998 Plan is currently
7,365,872. 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership of shares of our common
stock as of June 1, 2004 (except as otherwise stated below) (i) by all persons
known by us to beneficially own more than 5% of such stock, (ii) by each
director, (iii) each of the named executive officers, and (iv) 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 June 1, 2004, there were 53,974,532shares 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 27,900,996(2) 38.2%
Sage House
Benton Park Road
Newcastle upon Tyne NE7 7LZ, England
ICM Asset Management, Inc. 2,766,275(3) 5.0%
601 W. Main Ave., Suite 600
Spokane, WA 99201
Omicron Master Trust 7,106,199(4) 11.6%
c/o Omicron Capital L.P.
810 Seventh Avenue, 39th Floor
New York, New York 10019
Midsummer Investments, Ltd. 5,255,937(5) 8.9%
485 Madison Avenue
23rd Floor
New York, NY 10022
Michael Tomczak 3,775,848(6) 6.5%
Jeffrey Boone 3,775,848(6) 6.5%
Steven Beck 1,920,754(7) 3.5%
Harvey Braun 2,033,000(8) 3.6%
Kavindra Malik 95,278(9) <1%
51
Mike Dotson 36,916(10) <1%
Lawrence Page 1,755,784 3.3%
David S. Joseph 249,649 <1%
Michael Silverman 81,654(11) <1%
345 S. Reeves Drive, #203
Beverly Hills, CA 90212
Ian Bonner 150,054(10) <1%
5527 Inverrary Court
Dallas, Texas 75287
Ivan M. Epstein 151,388(10) <1%
2 Victoria Eastgate Extension 13
Sandton 2148
South Africa
Robert P. Wilkie 42,222(10) <1%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
All directors and executive officers as 14,068,395(12) 21.4%
a group (13 persons)
* Percent of shares of common stock beneficially owned by each investor
is based upon 53,974,532 shares of our common stock outstanding as of
June 1, 2004, plus all shares of common stock issuable to such
investor within 60 days of June 1, 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 June 1, 2004 and 18,905,269 shares
issuable upon conversion of Series A Convertible Preferred Stock
within 60 days of June 1, 2004, based on the July 1, 2004 conversion
price of $0.87224.
(3) In addition to 28,328 shares held by ICM Asset Management Inc.,
includes 851,627 shares held by Koyah Leverage Partners, L.P.,
228,197 shares held by Koyah Partners, L.P., and 72,829 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.
52
(4) Includes 5,708,441 shares issuable pursuant to outstanding warrants
exercisable and 1,325,758 shares issuable upon conversion of the 9%
Debenture within 60 days of June 1, 2004. Omicron Capital, L.P., a
Delaware limited partnership ("Omicron Capital"), serves as
investment manager to Omicron, a trust formed under the laws of
Bermuda, Omicron Capital, Inc., a Delaware corporation ("OCI"),
serves as general partner of Omicron Capital, and Winchester Global
Trust Company Limited ("Winchester") serves as the trustee of
Omicron. By reason of such relationships, Omicron Capital and OCI may
be deemed to share dispositive power over the shares of our common
stock owned by Omicron, and Winchester may be deemed to share voting
and dispositive power over the shares of our common stock owned by
Omicron. Omicron Capital, OCI and Winchester disclaim beneficial
ownership of such shares of our common stock. Omicron Capital has
delegated authority from the board of directors of Winchester
regarding the portfolio management decisions with respect to the
shares of common stock owned by Omicron and, as of April 21, 2003,
Mr. Olivier H. Morali and Mr. Bruce T. Bernstein, officers of OCI,
have delegated authority from the board of directors of OCI regarding
the portfolio management decisions of Omicron Capital with respect to
the shares of common stock owned by Omicron. By reason of such
delegated authority, Messrs. Morali and Bernstein may be deemed to
share dispositive power over the shares of our common stock owned by
Omicron. Messrs. Morali and Bernstein disclaim beneficial ownership
of such shares of our common stock and neither of such persons has
any legal right to maintain such delegated authority. No other person
has sole or shared voting or dispositive power with respect to the
shares of our common stock owned by Omicron, as those terms are used
for purposes under Regulation 13D-G of the Exchange Act, Omicron and
Winchester are not "affiliates" of one another, as that term is used
for purposes of the Exchange Act, or of any other person named in
this prospectus as a selling stockholder. No person or "group" (as
that term is used in Section 13(d) of the Exchange Act, or the SEC's
Regulation 13D-G) controls Omicron and Winchester. Omicron's
beneficial ownership is limited to 4.99% pursuant to limitations in
the March 2004 Debentures and warrants sold on March 15, 2004.
(5) Includes 4,308,698 shares issuable pursuant to outstanding warrants
exercisable and 946,970 shares issuable upon conversion of the 9%
Debenture within 60 days of June 1, 2004. Midsummer Capital, LLC is
the investment manager to Midsummer. By virtue of such relationship,
Midsummer Capital, LLC may be deemed to have dispositive power over
the shares owned by Midsummer. Midsummer Capital, LLC disclaims
beneficial ownership of such shares. Mr. Michel Amsalem and Mr. Scott
Kaufman have delegated authority from the members of Midsummer
Capital, LLC with respect to the shares of common stock owned by
Midsummer. Messrs. Amsalem and Kaufman may be deemed to share
dispositive power over the shares of our common stock owned by
Midsummer. Messrs. Amsalem and Kaufman disclaim beneficial ownership
of such shares of our common stock and neither person has any legal
right to maintain such delegated authority. Midsummer's beneficial
ownership is limited to 4.99% pursuant to limitations in the March
2004 Debentures and warrants sold on March 15, 2004.
(6) Consist of shares issuable upon conversion of Series B Convertible
Preferred Stock within 60 days of June 1. 2004.
(7) Includes 1,620,754 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of June 1, 2004.
(8) Includes 2,000,000 shares of common stock issuable pursuant to
outstanding option exercisable within 60 days of June 1, 2004. Mr.
Braun terminated his employment with us effective May 11, 2004.
(9) Includes 45,278 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of June 1, 2004.
(10) Consists of outstanding options exercisable within 60 days of June 1,
2004.
(11) Includes 44,027 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of June 1, 2004.
(12) Includes 4,090,639 shares of common stock issuable pursuant to
outstanding options exercisable and 7,551,696 shares of common stock
issuable upon conversion of Series B Convertible Preferred Stock
within 60 days of June 1, 2004.
53
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We have two equity incentive plans under which our equity securities are or have
been authorized for issuance to our employees or directors: the Incentive Stock
Option Plan (1989 Plan), which terminated in October 1999, but under which
options remain outstanding, and the 1998 Incentive Stock Plan (1998 Plan). Both
the 1989 Plan and the 1998 Plan have been approved by our stockholders. In
addition, from time to time we issue non-employee options and warrants to
service providers to purchase shares of our common stock, and these grants have
not been approved by our stockholders. The following table sets forth
information as of March 31, 2004 concerning securities that are authorized under
our equity compensation plans.
(a) (b) (c)
Number of
securities
remaining
available for
Number of future issuance
securities to be Weighted-average under equity
issued upon exercise price compensation
exercise of of outstanding plans
outstanding options, (excluding
options, warrants securities
warrants and and reflected in
Plan Category rights rights column (a))
------------- ------ -----------
Equity compensation plans approved by security
holders 4,788,942 $1.70 2,336,826
Equity compensation plans not approved by security
holders 18,382,245 $2.66 --
----------- ----- ----------
Total 23,171,187 $2.46 2,336,826
=========== ===== ==========
(1) Does not include an automatic increase of 600,000 shares available for
issuance under the 1998 Plan, which occurred April 1, 2004. After such increase,
we had 2,936,826 shares available for grant under our 1998 Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions since April 1, 2003 to
which we have been a party, 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.
On November 14, 2003, the Sage Group acquired substantially all the
assets of Softline, who was our majority shareholder from October 1997 through
November 2003, 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 as of
November 14, 2003 and remains the beneficial owner of 38.2% of our outstanding
common stock as of March 31, 2004. On September 17, 2003, an aggregate of
500,000 shares of common stock, consisting of accrued dividends on the Series A
Convertible Preferred Stock, were issued to institutional investors. Cumulative
preferred dividends was $2.2 million as of June 1, 2004.
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 had
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 was to be distributed as determined by the Company's Board to the
Optionees, who may have included Mr. Beck and other members of the Company's
management, as an incentive to continue service for the Company. The Option
expired, unexercised, on March 24, 2004.
54
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 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.
In July 2002, we also replaced 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, with 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 June 1,
2004.
During fiscal year 2004, we retained an entity owned by an immediate
family member of our former CEO to provide recruiting and marketing services.
The expense for this service was $138,000 in the fiscal year ended March 31,
2004.
We retain Radcliffe & Associates, an entity affiliated with Donald S.
Radcliffe, our former director, to perform financial advisory services. During
fiscal year 2004, we incurred $22,000 in fees and costs to Radcliffe &
Associates. We also incurred $6,000 in expenses to this former director for
accounting services. The former director is currently employed with us on a
part-time basis.
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%. We agreed to defer the payments due in January 2004 and April 2004
until July 2004. The balance of the note receivable is $162,000 as of June 1,
2004.
In June 2003, we entered into a development and marketing license
agreement with 5R Online, Inc., a software and services company affiliated with
John Frabasile and Randy Pagnotta, our two former officers (the "Former
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. We paid
$640,000 toward this development but received no product. In April 2004, we
filed a federal court action against 5R Online, Inc. and the Former Officers.
For further discussion, see Item 3 under the heading "Legal Proceedings" above.
On January 30, 2004, we acquired Page Digital for a total 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. Upon the consummation of this transaction
Lawrence Page and David S. Joseph became executive officers of Island Pacific.
Mr. Page received a total consideration of $1.4 million and 1,755,784 shares of
our common stock in connection with the acquisition. Mr. Joseph received a total
consideration of $200,000 and 249,649 shares of our common stock in connection
with the acquisition. We also entered two year employment agreements with both
Mr. Page and Mr. Joseph. For a further description of the terms of these
employment agreements see "Employment Agreements" above.
On March 15, 2004, we sold Omicron and Midsummer the March 2004
Debentures for an aggregate price of $3.0 million pursuant to a securities
purchase agreement (the "Purchase Agreement"). The March 2004 Debentures bear an
interest rate of 9% per annum, and provide for interest only payments on a
quarterly basis, payable, at our option, in cash or shares of our common stock.
The March 2004 Debentures mature on May 15, 2006. The March 2004 Debentures are
convertible into shares of our common stock at a conversion price of $1.32 per
share, subject to adjustment if we offer or sell any securities for an effective
55
per share price that is less than 87% of the then current conversion price,
negatively restate any of our financial statements or make any public disclosure
that negatively revises or supplements any prior disclosure regarding a material
transaction consummated prior to March 15, 2004 or trigger other customary
anti-dilution protections. If certain conditions are met, we have the option to
redeem the 9% Debentures at 110% of their face value, plus accrued but unpaid
interest.
We must redeem the March 2004 Debentures at the initial monthly amount
of $233,333 commencing on February 1, 2005. If the daily volume weighted average
price of our common stock on the American Stock Exchange exceeds $1.15 by more
than 200% for 15 consecutive trading days, we have the option to cause the
Purchasers to convert the then outstanding principal amount of the March 2004
Debentures into our common stock at the conversion price then in effect.
We also issued the Purchasers two warrants as follows: (1) Series A
Warrants to purchase up to an aggregate of 1,043,479 shares of our common stock
at an exercise price of $1.15 per share with a five-year term , exercisable at
anytime after September 16, 2004, subject to adjustment if we offer or sell any
securities for an effective per share price that is less than the then current
exercise price, negatively restate any of our financial statements or make any
public disclosure that negatively revises or supplements any prior disclosure
regarding a material transaction consummated prior to March 15, 2004 or trigger
other customary anti-dilution protections and (2) Series B Warrants to purchase
up to 8,500,000 shares of our common stock with an exercise price of $5 per
share, these warrants are immediately exercisable and expire on the earlier of
the six-month anniversary of the effective date of the registration statement
that is required to be filed or 18 months from March 15, 2004, subject to
adjustment upon the issuance or sale of securities in a public offering for an
effective per share price that is less than the then-current exercise price and
upon the trigger of other customary anti-dilution protections.
We previously sold the March 2003 Debentures to Omicron, Midsummer and
Islandia, L.P. ("Islandia") on March 31, 2003, MBSJ Investors, LLC on April 1,
2003 and the Crestview Investors on May 6, 2003 for an aggregate amount of $3.5
million for Omicron, Midsummer and Islandia, $400,000 for MBSJ and $300,000 for
the Crestview Investors. The March 2003 Debentures were convertible into shares
of our common stock at a conversion price equal to $1.0236 per share. We also
issued Omicron, Midsummer and Islandia 5-year warrants to purchase an aggregate
of 1,572,858 shares of common stock at an exercise price of $1.0236.
In August 2003, we exercised our rights to convert the March 2003
Debentures into an aggregate of 4,103,164 shares of common stock at the
conversion rate of $1.0236 pursuant to their terms. The conversions were
completed as of September 30, 2003.
Pursuant to an agreement dated June 1, 2004, we acquired RTI from
Michael Tomczak, Jeffrey Boone and Intuit in a merger transaction. On March 12,
2004, we, RTI, Merger Sub and the Shareholders entered the March 12, 2004 Merger
Agreement, which provided we would acquire RTI in a merger transaction in which
RTI would merge with and into Merger Sub. The merger consideration contemplated
by the March 12, 2004 Merger Agreement was a combination of cash and shares of
our common stock. The March 12, 2004 Merger Agreement was amended by the Amended
Merger Agreement dated June 1, 2004.
Pursuant to the Amended Merger Agreement, the Merger was completed with
the following terms: (i) we assumed RTI's obligations under those certain
promissory notes issued by RTI on December 20, 2002 with an aggregate principal
balance of $2.3 million; (ii) the total consideration paid at the closing of the
Merger was $10.0 million paid in shares of our common stock and newly designated
Series B Preferred and promissory notes; (iii) the Shareholders and Intuit are
entitled to price protection payable if and to the extent that the average
trading price of our common stock is less than $0.76 at the time the shares of
our common stock issued in the Merger and issuable upon conversion of the Series
B Preferred are registered pursuant to the Registration Rights Agreement dated
June 1, 2004 between us, the Shareholders and Intuit; and (iv) the Merger
consisted of two steps, first, Merger Sub merged with and into RTI, Merger Sub's
separate corporate existence ceased and RTI continued as the surviving
corporation (the "Reverse Merger"), immediately thereafter, RTI merged with and
into Merger Sub II, RTI's separate corporate existence ceased and Merger Sub II
continued as the surviving corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares
of Series B Preferred and a promissory note payable monthly over two years in
the principal amount of $1,295,000 bearing interest at 6.5% per annum. As a
result of the Merger, Intuit, the holder of all of the outstanding shares of
RTI's Series A Preferred, received 1,546,733 shares of our common stock and a
promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
56
The Shareholders and Intuit were also granted registration rights.
Under the Registration Rights Agreement, we agreed to register the common stock
issuable upon conversion of the Series B Preferred issued to the Shareholders
within 30 days of the automatic conversion of the Series B Preferred into common
stock. The automatic conversion will occur upon us filing the Certificate of
Amendment with the Delaware Secretary of State increasing the authorized number
of shares of common stock after securing shareholder approval for the
Certificate of Amendment. Under the Registration Rights Agreement, Intuit is
entitled to demand registration or to have its shares included on any
registration statement filed prior the registration statement covering the
Shareholders' shares, subject to certain conditions and limitations, or if not
previously registered to have its shares included on the registration statement
registering the Shareholders' shares. The Shareholders and Intuit are entitled
to price protection payments of up to a maximum of $0.23 per share payable by
promissory note, if and to the extent that the average closing price of our
common stock for the 10 days immediately preceding the date the registration
statement covering their shares is declared effective by the Securities and
Exchange Commission is less than the 10 day average closing price as of June 1,
2004, which was $0.76.
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well
as certain officers and directors signed voting agreements that provide they
will not dispose of or transfer their shares of our capital stock and that they
will vote their shares of our capital stock in favor of the Certificate of
Amendment and the Amended Merger Agreement and transactions contemplated
therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone. For a further description of the terms of these employment agreements,
see "Employment Agreements" above.
On June 27, 2003, we sold an aggregate of 5,275,000 shares of common
stock at a $1.50 per share to various institutional investors in a private
placement transaction for an aggregate purchase price of $7.9 million (the "June
27, 2003 PIPE Transaction"). On November 7, 2003, 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 (the "November 7, 2003 PIPE Transaction" and
together with the June 27, 2003 PIPE Transaction, the "PIPE Transactions").
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
During fiscal years ended March 31, 2004 and 2003, we retained our
principal auditors, Singer Lewak Greenbaum and Goldstein LLP in several
capacities (in thousands):
2004 2003
-------------- --------------
Audit fees $ 262 $ 84
Audit-related fees 308 6
Tax fees 31 16
All other fees 9 --
-------------- --------------
Total $ 610 $ 106
============== ==============
AUDIT FEES
Audit Fees represent aggregate fees billed, including out-of-pocket
expenses, associated with the annual audits of our consolidated financial
statements and review of consolidated financial statements included in our Forms
10-Q.
AUDIT-RELATED FEES
Audit-Related Fees represent fees billed, including out-of-pocket
expenses, for services rendered during the fiscal years ended March 31, 2004 and
2003, for assistance with acquisitions and financing transactions, review of all
other documents filed with the Securities and Exchange Commission.
TAX FEES
Tax fees represent amounts billed primarily for tax compliance services
and include assistance with tax audits.
57
ALL OTHER FEES
All other fees represent the aggregate fees billed for services
rendered by our principal auditors, other than "audit fees," "audit-related
fees," and "tax fees," as defined above.
All of the audit and non-audit services listed above under the
categories "Audit Fees," "Audit-Related Fees," "Tax Fees" or "All Other Fees"
were pre-approved by the Audit Committee for the fiscal year ended March 31,
2004. Because pre-approval of audit and permitted non-audit services of the
independent auditor was a new requirement beginning in fiscal year 2004, none of
the non-audit services listed above under the categories "Audit-Related Fees,"
"Tax Fees" or "All Other Fees" were pre-approved by the Audit Committee for the
fiscal year ended March 31, 2003.
POLICY FOR APPROVING AUDIT AND PERMITTED NON-AUDIT SERVICES OF THE INDEPENDENT
AUDITOR
The Audit Committee has established procedures to pre-approve all audit
and permitted non-audit services provided by our independent auditor. These
services may include audit services, audit-related services, certain tax
services and other services. Under our policy, pre-approval is generally
provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. Although the rules of the SEC permit DE MINIMIS exceptions, it
is our policy to pre-approve all audit and permitted non-audit services
performed by our independent auditor. The Audit Committee has delegated
pre-approval authority to the Chairman of the Audit Committee when expedition of
services is necessary and such service has not been previously pre-approved
under our pre-approval policy or when, pursuant to our pre-approval policy,
pre-approval is required on a case-by-case basis. The Chairman is required to
report any such pre-approval decisions to the full Audit Committee at its next
regularly scheduled meeting.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules
Independent Auditor's Report of Singer Lewak Greenbaum &
Goldstein LLP.............................................................. F-1
Consolidated Balance Sheets as of March 31, 2004 and 2003.................. F-2
Consolidated Statements of Operations for the Fiscal Years ended
March 31, 2004, 2003, and 2002............................................. F-3
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended March 31, 2004, 2003 and 2002........................................ F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended
March 31, 2004, 2003 and 2002.............................................. F-6
Notes to Consolidated Financial Statements................................. F-8
Supplemental Information
Independent Auditor's Report on Financial Statement Schedule.......... F-36
Valuation and Qualifying Accounts - Schedule II....................... F-37
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not considered necessary and therefore have been
omitted.
58
(b) Reports on Form 8-K
We filed a Form 8-K dated January 30, 2004 with the Securities and
Exchange Commission on February 4, 2004 to report the completion of our
acquisition of Page Digital Incorporated.
We filed a Form 8-K/A dated January 30, 2004 with the Securities and
Exchange Commission on March 5, 2004 to report financial statements and
exhibits in connection with our acquisition of Page Digital
Incorporated.
We filed a Form 8-K dated March 10, 2004 with the Securities and
Exchange Commission on March 10, 2004 to report the appointment of
Lawrence Page to the position of director of the Board.
We filed a Form 8-K dated March 14, 2004 with the Securities and
Exchange Commission on March 17, 2004 to report that we executed an
agreement to acquire Retail Technologies International, Inc. and issued
$3.0 million in 9% convertible debentures to Omicron Master Trust and
Midsummer Investment, Ltd.
We filed a Form 8-K dated June 1 , 2004 with the Securities and
Exchange Commission on June 14, 2004 to report the completion of our
acquisition of Retail Technologies, Inc.
(c) Exhibits
EXHIBIT DESCRIPTION
------- -----------
2.1 Purchase and Exchange Agreement dated as of January 1, 2002
between the Company and Softline Limited, incorporated by
reference to exhibit 2.1 to the Company's 8-K filed May 16,
2002. Exhibits and schedules have been omitted pursuant to
Item 601(b)(2) of Regulation S-K, but a copy will be furnished
supplementally to the Securities and Exchange Commission upon
request.
2.2 Deed of Appointment dated February 20, 2002 between the bank
and the receivers of SVI Retail (Pty) Limited, incorporated by
reference to exhibit 2.2 to the Company's 10-K for fiscal year
ended March 31, 2002.
2.3 Business Sale Agreement dated May 3, 2002 among the receivers
and managers of the assets of SVI Retail (Pty) Limited and QQQ
Systems PTY Limited, incorporated by reference to exhibit 2.3
to the Company's 10-K for fiscal year ended March 31, 2002.
2.4 Securities Purchase Agreement dated March 31, 2003 by and
among the Company, Midsummer Investment, Ltd., Omicron Master
Trust, and Islandia, L.P., incorporated by reference to
exhibit 2.1 to the Company's Form 8-K filed April 15, 2003.
2.5 Securities Purchase Agreement dated April 1, 2003 by and among
the Company and MBSJ Investors, LLC, incorporated by reference
to exhibit 2.2 to the Company's Form 8-K filed on April 15,
2003.
2.6 Agreement dated May 6, 2003 by and among the Company,
Crestview Capital Fund I, L.P., Crestview Capital Fund II,
L.P. and Crestview Capital Offshore Fund, Inc., incorporated
by reference to exhibit 2.12 to the Company's Form S-1 filed
on May 12, 2003.
2.7 Stock Purchase Agreement effective April 1, 2003 between SVI
Solutions, Inc. and Arthur Klitofsky, incorporated by
reference to exhibit 4.1 to the Company's Form 8-K filed on
May 21, 2003.
59
2.8 Pledge Agreement effective April 1, 2003 between SVI
Solutions, Inc. and Arthur Klitofsky, incorporated by
reference to exhibit 4.2 to the Company's Form 8-K filed on
May 21, 2003.
2.9 Securities Purchase Agreement dated June 27, 2003 by and among
the Company and the purchasers named therein, incorporated by
reference to exhibit 2.1 to the Company's Form 8-K filed on
July 2, 2003.
2.10 Securities Purchase Agreement dated November 7, 2003 by and
among the Company and the purchasers named within,
incorporated by reference to exhibit 2.1 to the Company's Form
8-K filed on November 12, 2003.
2.11 Agreement of Merger and Plan of Reorganization dated November
20, 2003 by and among the Company, Page Digital Incorporated
and IPI Acquisition, Inc, incorporated by reference to exhibit
2.1 to the Company's Form 8-K filed on November 24, 2003.
2.12 Agreement of Merger and Plan of Reorganization dated March 12,
2004 by and among the Company, Retail Technologies
International, Inc. and IPI Merger Sub, Inc., incorporated by
reference to the Company's Form 8-K filed on March 17, 2004.
2.13 Amended and Restated Agreement of Merger and Plan of
Reorganization dated June 1, 2004 by and between Island
Pacific, Inc., Retail Technologies International, Inc., IPI
Merger Sub, Inc., IPI Merger Sub II, Inc., Michael Tomczak and
Jeffrey Boone, incorporated by reference to exhibit 2.1 to the
Company's Form 8-K filed on June 14, 2004.
2.14 Agreement of Merger dated June 1, 2004 between IPI Merger Sub
II, Inc. and Retail Technologies International, Inc.,
incorporated by reference to exhibit 2.2 to the Company's Form
8-K filed on June 14, 2004.
2.15 Securities Purchase Agreement dated March 15, 2004 by and
among the Company, Omicron Master Trust and Midsummer
Investments, Ltd, incorporated by reference to exhibit 4.1 to
the Company's Form 8-K filed on March 17, 2004.
3.1 Amended and Restated Certificate of Incorporation,
incorporated by reference to exhibit 3.1 to the Company's Form
10-K for the fiscal year ended March 31, 2001.
3.2 Certificate of Designation for Series A of Convertible
Preferred Stock, incorporated by reference to exhibit 4.1 of
the Company's Form 8-K filed May 16, 2002.
3.3 Certificate of Designation for Series B of Convertible
Preferred Stock, incorporated by reference to exhibit 3.1 to
the Company's Form 8-K filed on June 14, 2004.
3.4 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's Form 10-K for the fiscal year ended March 31,
2001.
4.1 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.
60
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 be reference to exhibit 4.5
to the Company's Form S-1 filed on December 8, 2003.
4.6 Registration Rights Agreement dated March 15, 2004 by and
among the Company, Omicron Master Trust and Midsummer
Investments, Ltd., incorporated by reference to exhibit 4.2 to
the Company's Form 8-K filed on March 17, 2004.
4.7 Registration Rights Agreement dated June 1, 2004 by and
between Island Pacific, Inc., Michael Tomczak, Jeffrey Boone
and Intuit, Inc., incorporated by reference to exhibit 4.1 to
the Company's Form 8-K filed on June 14, 2004.
4.8 Form of Voting Agreement, incorporated by reference to exhibit
4.2 to the Company's Form 8-K filed on June 14, 2004.
10.1 Letter Agreement between the Company and Union Bank of
California, N.A. dated April 24, 2001, incorporated by
reference to exhibit 10.18 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
10.2 Letter Agreement between the Company and Union Bank of
California, N.A. dated June 22, 2001, incorporated by
reference to exhibit 10.19 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
10.3 Amended and Restated Term Loan Agreement between the Company
and Union Bank of California, N.A. dated as of June 29, 2001,
incorporated by reference to exhibit 10.20 to the Company's
Form 10-K for the fiscal year ended March 31, 2001.
10.4 First Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of March 18, 2002, and First Amendment to Amended and
Restated Pledge Agreement between the Company, Sabica
Ventures, Inc., SVI Retail, Inc., SVI Training Products, Inc.,
and Union Bank of California, N.A. dated as of March 18, 2002,
incorporated by reference to exhibit 10.4 to the Company's
form 10-K for fiscal year ended March 31, 2002.
10.5 Second Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of May 21, 2001, incorporated by reference to exhibit 10.5
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.6 Third Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of July 15, 2002, incorporated by reference to exhibit 10.6
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.7 Fourth Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of November 15, 2002, incorporated by reference to exhibit
10.3 to the Company's 10-Q filed on February 14, 2003.
10.8 Warrant in favor of UNIONBANCAL EQUITIES, Inc. dated January
2, 2003, incorporated by reference to exhibit 10.4 to the
Company's 10-Q filed on February 14, 2003.
10.9 Discounted Loan Payoff Agreement dated March 31, 2003 by and
among Union Bank of California, N.A., SVI, SVI Retail, Inc.,
Sabica Ventures, Inc. and SVI Training Products, Inc.,
incorporated by reference to exhibit 10.3 to the Company's
Form 8-k filed on April 15, 2003.
61
10.10 Unsecured Promissory Note dated March 31, 2003 in favor of
Union Bank of California, incorporated by reference to exhibit
10.47 to the Company's Form S-1 filed on May 12, 2003.
10.11 Amended and Restated Subordinated Promissory Note of the
Company in favor of Softline Limited dated June 30, 2001,
incorporated by reference to exhibit 10.26 to the Company's
Form 10-K for the fiscal year ended March 31, 2001.
10.12 Investor Rights Agreement between the Company and Softline
Limited dated as of January 1, 2002, incorporated by reference
to exhibit 4.2 of the Company's Form 8-K filed May 16, 2002.
10.13 Investors' Rights Agreement between the Company, Koyah
Leverage Partners, L.P. and Koyah Partners, L.P., incorporated
by reference to exhibit 10.3 to the Company's Form 8-K filed
January 8, 2001.
10.14 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P. dated July
19, 2002, incorporated by reference to exhibit 10.25 to the
Company's Form S-1 filed on May 12, 2003.
10.15 Form of Convertible Promissory Note, incorporated by reference
to exhibit 10.31 to the Company's Form 10-K for the fiscal
year ended March 31, 2001.
10.16 Amendment Agreement to between the Company, Koyah Leverage
Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated July 15, 2002, incorporated by
reference to exhibit 10.11 to the Company's 10-K for fiscal
year ended March 31, 2002.
10.17 First Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., Raven Partners,
L.P., Nigel Davey, and Brian Cathcart dated December 5, 2002,
incorporated by reference to exhibit 10.6 to the Company's
10-Q filed on February 14, 2003.
10.18 Second Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 14, 2003, incorporated by reference
to exhibit 10.29 to the Company's Form S-1 filed on May 12,
2003.
10.19 Third Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 28, 2003, incorporated by reference
to exhibit 10.30 to the Company's Form S-1 filed on May 12,
2003..
10.20 Fourth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated April 3, 2003, incorporated by reference
to exhibit 10.31 to the Company's Form S-1 filed on May 12,
2003.
10.21 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).
10.22 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by referenced to
exhibit 10.2 to the Company's Form 10-Q for the quarter ended
September 30, 2001. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.
62
10.23 Purchase Agreement between the Company and Toys "R" Us, Inc.
dated May 29, 2002, incorporated by reference to exhibit 10.14
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.24 Convertible Note in favor of Toys "R" Us, Inc. dated May 29,
2002, incorporated by reference to exhibit 10.15 to the
Company's form 10-K for fiscal year ended March 31, 2002.
10.25 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's
form 10-K for fiscal year ended March 31, 2002.
10.26 Development Agreement between the Company and Toys "R" Us,
Inc. dated May 29, 2002, incorporated by reference to exhibit
10.17 to the Company's form 10-K for fiscal year ended March
31, 2002.
10.27 Summary of lease terms for Carlsbad facility, incorporated by
reference to exhibit 10.20 to the Company's form 10-K for
fiscal year ended March 31, 2002.
10.28 Termination Agreement between the Company and Toys "R" Us,
Inc. dated November 13, 2003 (included herewith).
10.29 Option Agreement between Softline Ltd. and Steven Beck, as
trustee of a certain management group of Island Pacific, Inc.
(included herewith).
10.30 Employment Agreement dated January 30, 2004 by and between
Island Pacific, Inc. and Larry Page (included herewith).
10.31 Employment Agreement dated January 30, 2004 by and between
Island Pacific, Inc. and David Joseph (included herewith).
10.32 Employment Agreement dated June 1, 2004 by and between Island
Pacific, Inc. and Michael Tomczak, incorporated by reference
to exhibit 10.1 to the Company's form 8-K filed on June 14,
2004.
10.33 Employment Agreement dated June 1, 2004 by and between Island
Pacific, Inc. and Jeffrey Boone, incorporated by reference to
exhibit 10.2 to the Company's form 8-K on June 14, 2004.
10.34 Option Agreement dated September 3, 2003 by and between SVI
Solutions, Inc. and Harvey Braun (included herewith).
10.35 Option Agreement dated September 3, 2003 by and between SVI
Solutions, Inc. and Steven Beck (included herewith).
10.36 Code of Ethics and Business Conduct (included herewith).
10.37 Summary of loan transactions between the Company and World
Wide Business Centres, incorporated by reference to exhibit
10.12 to the Company's form 10-K for fiscal year ended March
31, 2002.
21 List of Subsidiaries.
23.1 Consent of Independent Auditor
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
63
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: June 29, 2004 ISLAND PACIFIC, INC., A DELAWARE CORPORATION
By: /S/ MICHAEL SILVERMAN
---------------------------------------
Michael Silverman, Chairman of the Board
(Principal Executive Officer)
By: /S/ RAN FURMAN
---------------------------------------
Ran Furman, Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURES CAPACITY DATE
/s/ Michael Silverman Chairman of the Board June 29, 2004
---------------------------------------
Michael Silverman
/s/ Michael Tomczak President, Chief Operating Officer June 29, 2004
--------------------------------------- and Director
Michael Tomczak
/s/ Steven Beck Executive Vice President - Product June 29, 2004
--------------------------------------- Visionary and Director
Steven Beck
/s/ Lawrence Page Executive Vice President - Special June 29, 2004
--------------------------------------- Projects and Director
Lawrence Page
/s/ Ivan M. Epstein Director June 29, 2004
---------------------------------------
Ivan M. Epstein
/s/ Ian Bonner Director June 29, 2004
---------------------------------------
Ian Bonner
/s/ Robert P. Wilkie Director June 29, 2004
---------------------------------------
Robert P. Wilkie
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Island Pacific, Inc. and subsidiaries
Irvine, California
We have audited the accompanying consolidated balance sheets of Island Pacific,
Inc. and subsidiaries as of March 31, 2004 and 2003, 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 financial position of Island Pacific, Inc.
and subsidiaries as of March 31, 2004 and 2003, and the results of their
operations and their cash flows for years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
------------------------------------------
Los Angeles, California
June 11, 2004
F-1
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
2004 2003
--------- ---------
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 2,108 $ 1,319
Accounts receivable, net of allowance for doubtful
accounts of $409 and $364, respectively 4,572 3,974
Other receivables, including $37 and $3 from related
parties, respectively 143 97
Inventories 46 91
Current portion of non-compete agreements 668 917
Current portion of note receivable 36 --
Net assets from discontinued operations -- 309
Prepaid expenses and other current assets 472 225
--------- ---------
Total current assets 8,045 6,932
Note receivable, less current maturities, net 126 --
Property and equipment, net 821 380
Goodwill, net 20,469 14,795
Other intangibles, net 22,099 15,472
Other assets 202 58
--------- ---------
Total assets $ 51,762 $ 37,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt due to stockholders $ -- $ 1,320
Current portion of long-term debts 146 649
Current portion of capital leases 169 --
Accounts payable 1,255 2,941
Accrued expenses 3,016 4,517
Deferred revenue 2,657 1,561
--------- ---------
Total current liabilities 7,243 10,988
Convertible debentures, less current maturities 2,160 2,726
Capital lease obligations, less current maturities 89 --
Deferred rent 70 81
--------- ---------
Total liabilities 9,562 13,795
--------- ---------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $0.0001 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 $2,002 and $1,269 14,100 14,100
Committed common stock - 2,500,000 shares -- 1,383
Common stock, $.0001 par value; 100,000,000 shares authorized;
52,427,799 and 42,199,632 shares issued and 52,427,799 and
31,499,632 shares outstanding 5 4
Additional paid-in capital 72,813 57,751
Retained (deficit) earnings (44,718) (40,490)
Treasury stock, at cost - 10,700,000 shares -- (8,906)
--------- ---------
Total stockholders' equity 42,200 23,842
--------- ---------
Total liabilities and stockholders' equity $ 51,762 $ 37,637
========= =========
F-2
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
------------------------------------
2004 2003 2002
--------- --------- ---------
(in thousands, except per share data)
Net sales $ 21,739 $ 22,296 $ 26,715
Cost of sales 5,252 8,045 11,003
-------- -------- --------
Gross profit 16,487 14,251 15,712
-------- -------- --------
Expenses:
Application development 1,043 4,643 4,203
Depreciation and amortization 3,896 4,148 6,723
Selling, general and administrative 14,798 8,072 12,036
--------- --------- ---------
Total expenses 19,737 16,863 22,962
--------- --------- ---------
Loss from operations (3,250) (2,612) (7,250)
Other income (expense):
Interest income 20 1 7
Other income (expense) (647) 24 (56)
Interest expense, including $52, $128 and
$1,988 to related parties (937) (1,088) (3,018)
--------- --------- ---------
Total other expenses (1,564) (1,063) (3,067)
--------- --------- ---------
Loss before provision (benefit) for income taxes (4,814) (3,675) (10,317)
Provision (benefit) for income taxes (586) 11 2
--------- --------- ---------
Loss before extraordinary item and change in accounting principle (4,228) (3,686) (10,319)
Extraordinary item - Gain on debt forgiveness, net of taxes -- 1,476 --
Cumulative effect of changing accounting principle - Goodwill
valuation under SFAS No. 142 -- (627) --
--------- --------- ---------
Loss from continuing operations (4,228) (2,837) (10,319)
Discontinued operations:
Income (loss) from operations of SVI Training
Products, Inc., net of estimated income
tax expense (benefit) of $0, ($57) and $37 -- 119 220
Loss from Australian operations, net of estimated
income taxes benefit of $0 -- -- (4,559)
--------- --------- ---------
Income (loss) from discontinued operations -- 119 (4,339)
--------- --------- ---------
Net loss (4,228) (2,718) (14,658)
Cumulative preferred dividends (1,024) (1,015) (254)
--------- --------- ---------
Net loss available to common stockholders $ (5,252) $ (3,733) $(14,912)
========= ========= =========
Basic and diluted earnings (loss) per share:
Loss before change in accounting principle $ (0.10) $ (0.12) $ (0.29)
Gain on debt forgiveness -- 0.05 --
Loss from change in accounting principle -- (0.02) --
--------- --------- ---------
Loss from continuing operations (0.10) (0.09) (0.29)
Discontinued operations -- -- (0.12)
Cumulative preferred dividends (0.03) (0.04) (0.01)
--------- --------- ---------
Net loss available to common stockholders $ (0.13) $ (0.13) $ (0.42)
========= ========= =========
Basic and diluted weighted average common shares outstanding 41,450 29,599 35,698
========= ========= =========
F-3
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except share amounts)
Balance, April 1, 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 -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- (14,658) $(14,658) -- (14,658)
Other comprehensive
loss:
Translation adjustment -- -- -- -- -- -- -- 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
stockholders' 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
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
F-4
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)
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
Exercise of
stock options -- -- -- 144 -- -- -- -- -- 144
Issuance of
common stock
for services -- -- -- 74 -- -- -- -- -- 74
Issuance of
common stock
for commissions
and bonuses
due to employees -- -- -- 83 -- -- -- -- -- 83
Sale of common
stock -- -- 1 12,842 -- -- -- -- -- 12,843
Offering costs -- -- -- (1,213) -- -- -- -- -- (1,213)
Issuance of
common stock
in connection
with
acquisition of
Page Digital
Incorporated -- -- -- 5,000 -- -- -- -- -- 5,000
Conversion of
convertible
notes -- -- -- 1,872 -- -- -- -- -- 1,872
Conversion of
convertible
debentures -- -- 1 4,200 -- -- -- -- -- 4,201
Debt discount on
convertible
debentures -- -- -- 628 -- -- -- -- -- 628
Issuance of
common stock
for settlement
cost -- -- -- 120 -- -- -- -- -- 120
Compensation
expense for
stock options
and warrants
granted -- -- -- 217 -- -- -- -- -- 217
Declared
dividend on
Series A
Preferred -- -- -- (421) -- -- -- -- -- (421)
Conversion of
accrued
dividend into
common stock -- -- -- 421 -- -- -- -- -- 421
Settlement by
offsetting
against-
receivable due
from Toys "R"
Us, Inc. -- (1,383) -- -- -- -- -- -- -- (1,383)
Retirement of
treasury stock -- -- (1) (8,905) 8,906 -- -- -- -- --
Comprehensive
loss:
Net loss -- -- -- -- -- -- (4,228) $ (4,228) -- (4,228)
Comprehen- ---------
sive loss -- -- -- -- -- -- -- $ (4,228) -- --
--------- --------- --------- --------- --------- --------- --------- ========= --------- ---------
Balance,
March 31, 2004 $ 14,100 $ -- $ 5 $ 72,813 $ -- $ -- $(44,718) $ -- $ 42,200
========= ========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
-------------------------------------
2004 2003 2002
--------- --------- ---------
(in thousands, except share amounts)
Cash flows from operating activities:
Net loss $ (4,228) $ (2,718) $(14,658)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization 3,896 4,148 7,069
Cumulative effect of a change in accounting principle -
Goodwill valuation under SFAS No. 142 -- 627 --
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 217 8 579
Interest charges on convertible debt 547 171 438
Provision for allowance for doubtful accounts, net of recoveries 823 159 (3)
Common stock issued for services rendered, severance and
interest payments 75 115 245
Deferred income tax provision -- -- (149)
Loss on sale of furniture and equipment 170 -- 64
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable and other receivables (6,031) (2,205) 2,551
Accrued interest on note receivable -- -- --
Inventories 52 24 61
Prepaid expenses and other current assets (212) (286) 60
Accounts payable and accrued expenses (4,638) 1,394 (1,892)
Accrued interest on stockholders' loans and note payable 200 853 2,295
Deferred revenue 61 (1,967) 1,642
Income taxes payable -- (98) 98
--------- --------- ---------
Net cash provided by (used for) operating activities (9,068) (1,122) 1,571
--------- --------- ---------
Cash flows from investing activities:
Acquisition of Page Digital Incorporated, net (1,907) -- --
Purchase of furniture and equipment (509) (67) (301)
Proceeds from sale of furniture and equipment -- -- 13
Payment received on note receivable 18 -- --
Purchase of software and capitalized software development costs (3,053) (93) (409)
--------- --------- ---------
Net cash used for investing activities (5,451) (160) (697)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 11,774 -- --
Increase (decrease) in amounts due to stockholders, net -- (287) (844)
Proceeds from committed stock -- 1,383 --
Proceeds from convertible notes due to stockholders -- -- 1,260
Proceeds from convertible debentures 3,700 3,500 --
Payments on convertible debentures (135) -- --
Payments on capital lease obligations (28) -- --
Payments on term loans -- (3,303) (1,243)
Proceeds from short-term loan from related party -- 120 --
Payments on short-term loan from related party -- (120) --
--------- --------- ---------
Net cash provided by (used for) financing activities 15,311 1,293 (827)
--------- --------- ---------
(Continued)
F-6
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31,
----------------------------------
2004 2003 2002
-------- -------- --------
(in thousands, except share amounts)
Effect of exchange rate changes on cash (3) (1) (5)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 789 10 42
Cash and cash equivalents, beginning of year 1,319 1,309 1,267
-------- -------- --------
Cash and cash equivalents, end of year $ 2,108 $ 1,319 $ 1,309
======== ======== ========
Supplemental disclosure of non-cash information:
Interest paid $ 146 $ 492 $ 1,194
Income taxes paid $ 4 $ 40 $ --
Supplemental disclosure of non-cash investing and financing activities:
Issued 84,849 shares of common stock to employees in lieu of
cash payments for commissions and bonuses $ 83 -- --
Issued 2,509,543 shares of common stock in connection with
acquisition of Page Digital Incorporated $ 5,014 -- --
Purchased software technology rights by offsetting against
accounts receivable due from customer $ 3,900 -- --
Issued 4,103,161shares of common stock upon conversion of
convertible debentures $ 4,200 -- --
Issued 2,287,653 shares of common stock upon conversion of
convertible notes due to stockholders $ 1,372 -- --
Issued 239,739 shares of common stock upon conversion of
convertible note $ 500 -- --
Wrote-off committed stock by offsetting against accounts
receivable due from Toys "R" Us, Inc. $ 1,383 -- --
Issued 100,000 shares of common stock and re-purchased
our software license from a customer pursuant to a settlement
agreement $ 600 -- --
Issued 500,000 shares of common stock in lieu of cash payment
for declared dividends on Series A Preferred stock $ 421 -- --
Retired 10,700,000 shares of treasury stock $ 8,906 -- --
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 stockholder'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 78,000, 1,223,580 and 168,208 shares of common stock
for services rendered and interest payments $ 60 $ 657 $ 165
Issued 140,000 shares of common stock for accrued liquidated
damages for late effectiveness of the registration statement -- $ 60 --
(Concluded)
F-7
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. Our solutions and services have been developed
specifically to meet the needs of the retail industry. Our solutions
help retailers improve the efficiency and effectiveness of their
operations and build stronger, longer lasting relationships with their
customers. Up until April 1, 2003, we also developed and distributed PC
courseware and skills assessment products for both desktop and retail
applications through our SVI Training Products subsidiary. 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., Page
Digital Incorporated, Sabica Ventures, Inc., SVI Training Products,
Inc. ("Training Products"), based in U.S., and SVI Retail (Pty) Limited
based in Australia. The Australian subsidiary ceased operations
effective February 2002 and the Training Products ceased operations
effective April 1, 2003 (see Note 3). All material intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements are stated in U.S. dollars and are
prepared under accounting principles generally accepted in the United
States of America.
RECLASSIFICATIONS - Certain amounts in the prior periods have been
reclassified to conform to the presentation for the fiscal year ended
March 31, 2004. 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 amounts shown for convertible notes due to stockholders and
convertible debentures approximate fair value because current interest
rates offered to us 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 three to
ten years.
Leasehold improvements are amortized using the straight-line method,
over the shorter of the life of the improvement or lease term.
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized.
GOODWILL - Goodwill represents the excess of the purchase price over
the fair value of net assets acquired in our business combinations.
Beginning April 1, 2002, we adopted Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and
ceased amortization of goodwill recorded in business combinations prior
to June 30, 2001 (see Note 5). 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
F-8
or been impaired. Goodwill recorded in business combinations prior to
June 30, 2001 was amortized using the straight-line method through
March 31, 2002 over various periods not exceeding 10 years.
INTANGIBLE ASSETS - Intangible assets consist of the values allocated
to purchased and capitalized software costs, non-compete agreements,
customer relationships and trademark in connection with various
business combinations.
Pursuant to the provisions of SFAS 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 5).
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.
Amortization of customer relationships is computed on a straight-line
basis over estimated useful lives of five years.
Our capitalized trademark was acquired in connection with the
acquisition of Page Digital Incorporated in January 2004 (see Note 2).
Trademark has indefinite useful life and is not subject to
amortization. However, in accordance with SFAS No. 142, we will test
trademark for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- We adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment of disposal of long-lived assets, and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 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 No. 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS No. 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 No. 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 No. 144 is effective for fiscal years beginning after December 15,
2001. The accounting prescribed in SFAS No. 144 was applied in
connection with the disposal of the Australian operations in fiscal
2002 and the Training Products subsidiary sold on April 1, 2003.
Prior to the adoption of SFAS No. 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 3 and 5).
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 ("SOP") 97-2, "Software Revenue Recognition", as amended and
interpreted by SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition", with respect to certain transactions, as well as Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition", updated by
SAB's 103 and 104, "Update of Codification of Staff Accounting
Bulletins", and Technical Practice Aids issued from time to time by the
American Institute of Certified Public Accountants.
F-9
Software license revenue is generally recognized when a license
agreement has been signed, the software product has been delivered,
there are no uncertainties surrounding product acceptance, the fees are
fixed and determinable, and collection is considered probable. If a
software license contains an undelivered element, the fair value of the
undelivered element is deferred and the revenue recognized once the
element is delivered. In addition, if a software license contains
customer acceptance criteria or a cancellation right, the software
revenue is recognized upon the earlier of customer acceptance or the
expiration of the acceptance period or cancellation right. Typically,
payments for our software licenses are due in installments within
twelve months from the date of delivery. Where software license
agreements call for payment terms of twelve months or more from the
date of delivery, revenue is recognized as payments become due and all
other conditions for revenue recognition have been satisfied. Deferred
revenue consists primarily of deferred license, prepaid services
revenue and maintenance support revenue.
Consulting services are separately priced, are generally available from
a number of suppliers, and are not essential to the functionality of
our software products. Consulting services, which include project
management, system planning, design and implementation, customer
configurations, and training are billed on both an hourly basis and
under fixed price contracts. Consulting services revenue billed on an
hourly basis is recognized as the work is performed. On fixed price
contracts, consulting services revenue is recognized using the
percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. We have from
time to time provided software and consulting services under fixed
price contracts that require the achievement of certain milestones. The
revenue under such arrangements is recognized as the milestones are
achieved.
Customer support services include post contract support and the rights
to unspecified upgrades and enhancements. Maintenance revenues from
ongoing customer support services are billed on a monthly basis and
recorded as revenue in the applicable month, or on an annual basis with
the revenue being deferred and recognized ratably over the maintenance
period. If an arrangement includes multiple elements, the fees are
allocated to the various elements based upon vendor-specific objective
evidence of fair value.
REIMBURSABLE OUT-OF-POCKET EXPENSES - We adopted Financial Accounting
Standards Board Emerging Issues Task Force No. 01-14 ("EITF 01-14"),
"Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred". EITF 01-14 establishes that
reimbursements received for out-of-pocket expenses should be reported
as revenue in the income statement. Through March 31, 2002, we
classified reimbursed out-of-pocket expenses as a reduction in cost of
consulting services. The adoption of EITF 01-14 increased reported net
sales and cost of sales; however, it did not affect the net income or
loss in any past or future periods. Reimbursed expenses of $275,000 and
$615,000 have been classified in both net sales and cost of sales for
the years ended March 31, 2004 and 2003, respectively, and we have
reclassified reimbursed expenses of $1.1 million to net sales and cost
of sales in the consolidated statement of operations for the year ended
March 31, 2002.
NET INCOME (LOSS) PER SHARE - As required by SFAS 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 SFAS 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.
F-10
ADVERTISING AND PROMOTIONAL EXPENSES - Advertising and promotional
expenses are charged to expense as incurred and amounted to $129,000,
$60,000 and $38,000 for the years ended March 31, 2004, 2003 and 2002,
respectively.
COMPREHENSIVE INCOME - We utilize SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from
net income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities and are
included as a component of stockholders' equity.
STOCK-BASED COMPENSATION - As permitted under 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 December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This Statement
amends SFAS No. 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 No. 148 amends the disclosure
requirements of SFAS No. 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 No. 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.
The following table presents pro forma disclosures required by SFAS No.
123 and 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 fiscal years ended March 31, 2004 and 2003.
The compensation expense for these periods has been determined under
the fair value method using the Black-Scholes pricing model, and
assumes graded vesting.
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002
--------- --------- ---------
(in thousands, except per share data)
Net loss as reported $ (4,228) $ (2,718) $(14,658)
Less: stock-based compensation expense,
net of related tax effects (2,162) (1,713) (1,305)
--------- --------- ---------
Pro forma net loss $ (6,390) $ (4,431) $(15,963)
========= ========= =========
Basic and diluted loss per share:
As reported $ (0.10) $ (0.09) $ (0.41)
Pro forma $ (0.15) $ (0.15) $ (0.45)
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, 2004, the uninsured portion of these balances held at
financial institutions aggregated to approximately $2.0 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.
In the fiscal year ended March 31, 2004, sales to one customer
accounted for 18% of total consolidated net sales. Trade receivable and
deferred revenue from this customer was $0 as of March 31, 2004. For
the fiscal years ended March 31, 2004, 2003 and 2002, sales to another
customer accounted for 7%, 31% and 47%, respectively, of total
consolidated net sales. As of March 31, 2004 and 2003, our trade
receivables from this customer accounted for 0% and 43%, respectively,
of total consolidated receivables. As of March 31, 2004 and 2003,
deferred revenues from this customer accounted for 0% and 0%,
respectively, of total consolidated deferred revenue.
F-11
RECENT ACCOUNTING PRONOUNCEMENTS - In April 2003, the FASB issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 further clarifies accounting for
derivative instruments. The adoption of SFAS No. 149 did not have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 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 No. 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. The adoption of SFAS No.
150 did not have a material impact on our consolidated financial
statements.
2. ACQUISITION
Effective January 30, 2004, we acquired all of the issued and
outstanding shares of Page Digital Incorporated ("Page Digital"), a
Colorado-based developer of multi-channel commerce software, through a
merger with our newly-formed wholly-owned subsidiary. The purchase
price for the acquisition was $7.0 million, consisting of $2.0 million
in cash and 2.5 million shares of our common stock valued at $2.00 per
share. Upon the consummation of this transaction, we entered into
two-year employment agreements for executive officer positions with two
of the principals of Page Digital and a two-year non-compete agreement
with one of the two principals of Page Digital.
The acquisition has been accounted for as a purchase. The results of
the operations of Page Digital have been included in the consolidated
financial statements since the date of the acquisition. The excess of
purchase price over the fair values of net assets acquired was
approximately $5.7 million and has been recorded as goodwill. The fair
value of assets acquired and liabilities assumed were as follows (in
thousands):
Accounts receivable $ 694
Inventory 7
Property and equipment 366
Other assets 2,932
Liabilities assumed (2,673)
--------
Net assets 1,326
Excess of cost over fair value of net
assets acquired 5,674
--------
Total purchase price $ 7,000
========
The following unaudited pro forma consolidated results of continuing
operations for the twelve months ended March 31, 2004 and 2003 assume
the Page Digital acquisition occurred as of April 1, 2003 and 2002,
respectively. The pro forma results are not necessarily indicative of
the actual results that would have occurred had the acquisition been
completed as of the beginning of the period presented, nor are they
necessarily indicative of future consolidated results.
Fiscal Years Ended
March 31,
2004 2003
-------- --------
(unaudited)
(in thousands, except per share data)
Net sales $ 25,941 $ 28,749
Net loss $ (6,450) $ (4,194)
Net loss available to common stockholders $ (7,473) $ (5,209)
Basic and diluted loss per share of common stock $ (0.16) $ (0.13)
Basic and diluted loss per share available to
common stockholders $ (0.18) $ (0.16)
F-12
3. 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 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%. We agreed to defer the payments due in
January 2004 and April 2004 until April 2008. As of March 31, 2004, the
note has a balance of $162,000, with current maturities of $36,000. We
evaluated recoverability of the note and consider it collectible.
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
---- ----
Net sales $ 1,517 $ 1,537
Income before taxes $ 191 $ 257
Income tax (benefits) on loss (57) 37
Net income $ 248 $ 220
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
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 for
the fiscal year ended March 31, 2002 are summarized as follows (in
thousands, except per share data):
Net sales $ 2,363
Loss before taxes $(1,056)
Taxes (benefits) on loss 332
Net loss $(1,388)
Net loss per share of common stock $ (0.04)
F-13
4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2004 and 2003 consisted of the
following (in thousands):
2004 2003
------- -------
Computer and office equipment and
purchased software $2,731 $2,321
Furniture and fixtures 467 474
Leasehold improvements 316 406
Automobile 8 --
------- -------
3,522 3,201
Less accumulated depreciation and
amortization 2,701 2,821
------- -------
Total $ 821 $ 380
======= =======
Included in property and equipment above are $285,000 of assets under
capital leases, which are net of accumulated amortization of $23,000 at
March 31, 2004.
Depreciation and amortization expense from continuing operations for
the fiscal years ended March 31, 2004, 2003 and 2002 was $269,000,
$330,000 and $520,000, respectively. Depreciation and amortization
expense from discontinued operations for the fiscal years ended March
31, 2004, 2003 and 2002 was $0, $0 and $46,000, respectively.
5. GOODWILL AND OTHER INTANGIBLES
At March 31, 2004 and 2003, goodwill and other intangibles consist of
the following (in thousands):
March 31, 2004 March 31,2003
------------------------------------------- -------------------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Net amount amortization Net
------------- ------------- ------------- ------------- ------------- -------------
Goodwill $ 26,962,000 $ (6,493) $ 20,469 $ 21,287 $ (6,492) $ 14,795
------------- ------------- ------------- ------------- ------------- -------------
Other intangibles:
Amortized intangible
assets
Software technology 34,257 (13,317) 20,940 28,221 (13,417) 14,804
Non-compete agreements 6,986 (6,318) 668 6,986 (5,401) 1,585
Customer relationships 904 (30) 874 -- -- --
Unamortized intangible
Trademark 285 -- 285 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
42,432 (19,665) 22,767 35,207 (18,818) 16,389
Less: current portion of
non-Compete agreements 668 -- 668 917 -- 917
------------- ------------- ------------- ------------- ------------- -------------
Long-term portion of other
Intangibles 41,764 (19,665) 22,099 34,290 (18,818) 15,472
------------- ------------- ------------- ------------- ------------- -------------
Long-term portion of
goodwill and other
intangibles $ 68,726 $ (26,158) $ 42,568 $ 55,577 $ (25,311) $ 30,266
============= ============= ============= ============= ============= =============
During the fiscal year ended March 31, 2004, we recorded approximately
$5.7 million goodwill, $1.4 million software, $904,000 customer
relationships and $285,000 trademark in connection with the acquisition
of Page Digital. Software and customer relationships are amortized on a
straight-line basis over their useful lives of five years. The goodwill
and the trademark have indefinite useful lives and are not subject to
amortization.
In December 2003, we entered into an agreement to purchase from QQQ
Systems Pty Limited ("QQQ Systems") exclusive ownership and rights to
use, market, reproduce and license QQQ Systems' point of sale software
(the "Technology") in Europe and North and South America for the
purchase price of $3.9 million. In addition, a portion of the future
F-14
revenues from our sales of the Technology will be payable to QQQ
Systems as follows: (a) $150,000 for unlimited number of copies from
December 31, 2004 through June 30, 2004; (b) $150,000 for unlimited
number of copies from July 1, 2004 through April 30, 2005; (c) $150,000
for unlimited number of copies from May 1, 2005 through April 30, 2006;
(d) 20% of net revenue per copy thereafter; and (e) effective from the
third anniversary of December 31, 2003, 20% of the net revenue earned
by us during the previous year. We will continue sharing revenue until
the total of all such shared revenue paid to QQQ Systems has reached
$2,850,000. However, at any time after April 30, 2006, we may elect in
our sole discretion to either to continue paying 20% revenue split
until the total of all shared revenues paid is equal to $2,850,000 or
make a final, single payment to QQQ Systems of $200,000. The $3.9
million purchase price was paid by offsetting it against the
outstanding account receivable due to us from QQQ Systems.
We adopted SFAS No. 142 effective April 1, 2002 and ceased amortization
of goodwill we recorded in business combinations prior to June 30,
2001. SFAS No. 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 No. 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 2004 and 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
2005.
We also evaluated the remaining useful lives of our intangible assets
in the quarter ended June 30, 2002 and during the fourth quarter 2004
and 2003. No adjustments have been made to the useful lives of our
intangible assets.
Amortization expense from continuing operations for fiscal years ended
March 31, 2004, 2003 and 2002 was $3.6 million, $3.8 million and $6.5
million, respectively. Amortization expense from discontinued
operations for fiscal years ended March 31, 2004, 2003 and 2002 was $0,
$0 and $300,000, respectively. We expect amortization expense for the
next five years to be as follows (in thousands):
Year Ending March 31:
2005 $4,198
2006 $3,445
2007 $3,190
2008 $3,159
2009 $3,017
The following table reconciles net loss and loss per share as reported
for the years ended March 31, 2004, 2003 and 2002 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,
2004 2003 2002
--------- --------- ---------
Reported net loss $ (4,228) $ (2,718) $(14,658)
Add back: Goodwill amortization -- -- 2,220
--------- --------- ---------
Adjusted net loss $ (4,228) $ (2,718) $(12,438)
========= ========= =========
Basic and diluted loss per share:
Reported net loss $ (0.10) $ (0.09) $ (0.41)
Goodwill amortization -- -- 0.07
--------- --------- ---------
Adjusted net loss $ (0.10) $ (0.09) $ (0.35)
========= ========= =========
Basic and diluted weighted average
common shares outstanding 41,450 29,599 35,698
F-15
6. CONVERTIBLE NOTES
CONVERTIBLE NOTE DUE TO STOCKHOLDERS
In May and June 2001, we issued a total of $1.3 million in convertible
notes to a limited number of accredited investors related to existing
stockholders. The notes were originally due on August 30, 2001, and
accrued 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. We also issued 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
holders of the notes had the option to convert the unpaid principal and
interest at any time at a conversion price of $1.35.
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 replaced 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 were 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 were
convertible at the option of the holders into shares of our common
stock valued at $0.60 per share. We did 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 replaced 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, with new warrants to purchase an
aggregate of 1,600,000 shares at $0.60 per share, expiring July 19,
2007. The replacement warrants were not callable by us. None of the
warrants have been exercised as of March 31, 2004.
In September 2003, the investors converted all outstanding balances of
principal and accrued interest totaling $1.4 million into 2,287,653
shares of our common stock.
As of March 31, 2004 and 2003, the balance of these convertible notes
was $0 and $1.3 million, respectively, which included accrued interest
of $0 and $70,000, respectively. Interest expense related to these
convertible notes was $52,000 and $115,000 in the fiscal years ended
March 31, 2004 and 2003, respectively.
CONVERTIBLE NOTE DUE TO UNION BANK OF CALIFORNIA
On May 21, 2002, Union Bank of California (the "Bank") agreed to amend
the term loan 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 would increase to $200,000, and the
monthly payments would increase 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
F-16
principal and interest, and to waive the additional $100,000 refinance
fee required by the second amendment. The Bank also agreed to convert
$361,000 in accrued and unpaid interest and fees to term loan
principal, and we executed a new term note in total principal amount of
$7.2 million. We were required to make a principal payment of $35,000
on October 15, 2002, principal payments of $50,000 on each of November
15, 2002 and December 15, 2002, and consecutive monthly principal
payments of $100,000 each on the 15th day of each month thereafter
through August 15, 2003. The entire amount of principal and accrued
interest was due August 31, 2003. The Bank also agreed to eliminate
certain financial covenants and to ease others, and we were in
compliance with the revised covenants.
On January 2, 2003, we issued a warrant to an affiliate of the Bank to
purchase up to 1.5 million shares of our common stock for $0.01 per
share. The warrant was exercisable for shares equal to 1% of our
outstanding common stock on January 2, 2003, and would become
exercisable for shares equal to an additional 0.5% of outstanding
common stock on the first day of each month thereafter, until it was
exercisable for the full 4.99% of the outstanding common stock. The
warrant would not become exercisable to the extent that the Company
discharged in full the Bank indebtedness prior to a vesting date.
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement
with the Bank. Under this agreement, we paid the Bank $2.8 million from
the sale of 9% convertible debentures to certain investors (see Note
7). We also issued to the Bank 1.0 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 would be converted solely for equity and
would not be repaid in cash. However, as the conversion price could not
be determined; therefore, this convertible note had been reported as
current liability at March 31, 2003 as it became 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.
In September 2003, the Bank assigned the note to Roth Capital Partners,
LLC ("Roth Capital"), who was the placement agent for the financings in
June and November 2003. In January 2004, we elected to repay the note
in shares of our common stock and issued 239,739 shares at a price of
$2.08 per share, which was 80% of the average share closing price of
our common stock for the ten trading day period immediately preceding
the payoff date.
Interest expense related to the Bank's convertible note was $0,
$728,000 and $825,000 in the fiscal years ended March 31, 2004, 2003
and 2002, respectively.
7. CONVERTIBLE DEBENTURES
Convertible debentures at March 31, 2004 and 2003 consist of the
following (in thousands):
2004 2003
------- -------
9% convertible debentures, due May 2006, net of
unamortized debt discount of $706 and $0, respectively $2,306 $ --
9% convertible debentures, due May 2005, net of
unamortized debt discount of $0 and $625, respectively -- 2,875
------- -------
2,306 2,875
Less: current maturities 146 149
------- -------
Current portion of term loans $2,160 $2,726
======= =======
In March 2003, we entered into a Securities Purchase Agreement for the
sale of convertible debentures (the "March '03 Debentures") to a group
of 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. $2.8 million of the proceeds were used to pay our debt
to the Bank (see Note 6). The debentures were due to mature in May 2005
and bore an interest rate of 9% per annum. Interest was payable on a
quarterly basis beginning June 1, 2003, at our option, in cash or
shares of common stock. 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,
F-17
we would have been obligated to redeem $219,000 per month of the
debenture. 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 March '03 Debenture investors converted all of
their debentures into an aggregate of 3,419,304 shares of our common
stock during the second quarter of fiscal year ended March 31, 2004.
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 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. We
recorded an interest expense of $144,000 in the fiscal year ended March
31, 2004. 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 had been recorded as an offering cost in the fiscal year ended
March 31, 2004. As such, there is no effect on our statement of
operations.
In April 2003, we entered into a Securities Purchase Agreement with an
investor for the sale of convertible debentures (the "April '03
Debentures"). The debenture was convertible into shares of our common
stock at a conversion price of $1.02 per share, for the total 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 April '03 Debenture was due to
mature in October 2005. In August 2003, the daily volume weighted
average price of our common stock on the American Stock Exchange
exceeded $1.02 by more than 200% for 15 consecutive trading days;
therefore, we exercised the option to cause the investors to convert
their debentures into common stock. As a result, the April '03
Debenture investors converted all of their debentures into 390,777
shares of our common stock during the second quarter of fiscal year
ended March 31, 2004.
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 $69,000 in
the fiscal year ended March 31, 2004.
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 fiscal year ended March 31, 2004. At the date
of the conversion of the debenture 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 in the fiscal year ended March 31, 2004.
As such, there is no effect on our statement of operations.
In May 2003, we entered into an agreement with a 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 (the
"May '03 Debentures"). Interest was due on a quarterly basis commencing
on June 1, 2003, payable in cash or shares of common stock at our
option. The debentures were due to mature in May 2005. 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 Debentures
investors converted their debentures into an aggregate of 293,083
shares of our common stock in the second quarter of fiscal year ended
March 31, 2004.
F-18
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 fiscal
year ended March 31, 2004.
These debentures were accompanied by five-year warrants to purchase an
aggregate of 101,112 shares of common stock with an exercise price of
$1.02 per share. We allocated the proceeds received from debt or
convertible debt with detachable warrants using the relative fair value
of the individual elements at the time of issuance. The amount
allocated to the warrants is $39,000 and was being amortized as
interest expense over the life of the convertible debentures. We
recorded an interest expense of $5,000 in the fiscal year ended March
31, 2004. 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 had been recorded as an offering cost at March 31, 2004. As
such, there is no effect on our statement of operations.
In connection with the financing in June 2003, we also issued five-year
warrants to purchase 375,000 shares of common stock at an exercise
price of $1.65 to the March '03 Debentures investors and May '03
Debentures 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 shares sold and warrants issued
in connection with this transaction.
In March 2004, we entered into a Securities Purchase Agreement for the
sale of convertible debentures (the "March '04 Debentures") to two
investors (the "Purchasers") for the total gross proceeds of $3.0
million. The debentures mature in May 2006, bear an interest rate of 9%
per annum and provide for interest only payments on a quarterly basis,
payable, at our option, in cash or shares of our common stock. The
debentures are convertible into shares of our common stock at a
conversion price of $1.32 per share, subject to adjustment if we offer
or sell any securities for an effective per share price that is less
than 87% of the then current conversion price, negatively restate any
of our financial statement or make any public disclosure that
negatively revises or supplements any prior disclosure regarding a
material transaction consummated prior to March 15, 2004 or trigger
other customary anti-dilution protections. If certain conditions are
met, we have the option to redeem the March '04 Debentures at 110% of
their face value, plus accrued but unpaid interest.
We must redeem the debentures at the initial monthly amount of $233,333
commencing on February 1, 2005. If the daily volume weighted average
price of our common stock on the American Stock Exchange exceeds $1.15
by more than 200% for 15 consecutive trading days, we have the option
to cause the Purchasers to convert the then outstanding principal
amount of March '04 Debentures into our common stock at the conversion
price then in effect.
We also issued the Purchasers two warrants as follows: (1) Series A
Warrants to purchase up to an aggregate of 1,043,479 shares of our
common stock at an exercise price of $1.15 per share with a five-year
term, exercisable at anytime after September 16, 2004, subject to
adjustment if the we offer or sell any securities for an effective per
share price that is less than the then current exercise price,
negatively restate any of our financial statements or make any public
disclosure that negatively revises or supplements any prior disclosure
regarding a material transaction consummated prior to March 15, 2004 or
trigger other customary anti-dilution protections and (2) Series B
Warrants to purchase up to 8,500,000 shares of our common stock with an
exercise price of $5 per share, these warrants are immediately
exercisable and expire on the earlier of the six-month anniversary of
the effective date of the registration statement that is required to be
filed or 18 months from March 15, 2004, subject to adjustment upon the
issuance or sale of securities in a public offering for an effective
per share price that is less than the then-current exercise price and
upon the trigger of other customary anti-dilution protections.
For a period of one hundred eighty (180) days following the date the
registration statement is declared effective ("Effective Date"), each
Purchaser has the right, in its sole discretion, to elect to purchase
such Purchaser's pro rata portion of additional Debentures and Series A
Warrants for an aggregate purchase price of up to $2,000,000 in a
second closing (the "Second Closing"). The terms of the Second Closing
shall be identical to the terms set forth in the Purchase Agreement and
related documents, except that, the conversion price for the additional
debentures and the exercise price for the additional warrants shall be
equal to 115% of the average of the daily volume weighted average price
of our common stock on the American Stock Exchange for the ten (10)
days preceding the Second Closing ("Second Closing Price"). The Series
A Warrant coverage for the Second Closing shall be 40% of each
Purchaser's subscription amount divided by the Second Closing Price.
For a period of one hundred eighty (180) days following the Effective
Date, if the daily volume weighted average price of our common stock
for twenty (20) consecutive trading days exceeds $2.00, subject to
adjustment, we may, on one occasion, in our sole determination, require
the Purchasers to purchase each such Purchaser's pro rata portion of
F-19
additional debentures and Series A Warrants for an aggregate purchase
price of up to $2,000,000. Any such additional investment shall be
under the terms set forth in the Purchase Agreement and related
documents, except that, the conversion price for the additional
Debentures and the exercise price for the additional warrants shall be
equal to the then current conversion price and warrant exercise price
for the 9% Debentures and warrants purchased on March 15, 2004.
For a period of six (6) months from the Effective Date, the Purchasers
have a right of first refusal to participate in certain future
financings by us involving the sale of our common stock or equivalent
securities. The Purchasers were also granted registration rights under
a Registration Rights Agreement dated March 15, 2004, pursuant to which
we were required to file a registration statement respecting the common
stock issuable upon the conversion of the debentures and exercise of
the warrants within thirty (30) days after March 15, 2004, and to use
best efforts to have the registration statement declared effective at
the earliest date. If a registration statement was not filed within
such thirty (30) day period or declared effective within such ninety
(90) day period (or within one hundred twenty (120) days in the event
of a full review by the SEC), we became obligated to pay liquidated
damages to the Purchasers equal to 2% per month of each such
Purchasers' subscription amount under the Purchase Agreement plus the
value of any warrants issued pursuant to the Purchase Agreement then
held by such Purchaser. The registration statement has not been filed
as of June 15, 2004; therefore, $120,000 in liquidated damages has been
accrued and included in accrued expenses at March 31, 2004.
In accordance with generally accepted accounting principles, the
difference between the conversion price of $1.32 and our stock price of
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
$265,000 in the fiscal year ended March 31, 2004.
We allocated the proceeds received from convertible debt with
detachable warrants using the relative fair market value of the
individual elements at the time of issuance. The amount allocated to
the warrants was $720,000 and is being amortized as interest expense
over the life of the convertible debentures. We recorded an interest
expense of $14,000 in the fiscal year ended March 31, 2004.
8. CAPITAL LEASES
In connection with the acquisition of Page Digital, we assumed capital
lease obligations on certain office equipment and fixtures leases
expiring from November 2004 through November 2006. The capital leases
bear interest at rates between 7% and 11% per annum and monthly lease
payments range between approximately $1,000 to $8,000.
The future minimum lease payments under capital lease obligations,
together with the present value of the net minimum lease payments at
March 31, 2004 are as follows (in thousands):
Fiscal Year ending March 31,
2005 $ 183
2006 91
----------
Total minimum least payments 274
Less amount representing interest 16
----------
Present payment value of net
minimum lease payments $ 258
==========
Current maturities $ 169
Non-current portion 89
----------
$ 258
==========
9. 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
would have expired in February 2004. The purchase price was payable in
installments through September 27, 2002. The note was non-interest
F-20
bearing, and the face amount was 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 would have due on May 29,
2009, or if earlier than that date, three years after the completion of
the development project contemplated in the Development Agreement. 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 would cease to increase if Toys terminated the
Development Agreement for a reason other than our breach. The face
amount would be zero if we 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 shares of our
common stock at $0.553 per share. 400,000 shares had vested as of May
29, 2002, and continued to vest at the rate of 100,000 shares per month
until February 28, 2004. The warrant would cease to vest if Toys
terminated the Development Agreement for a reason other than our
breach. The warrant would become entirely non-exercisable if we
terminated the Development Agreement due to an uncured breach by Toys
of the Development Agreement. Toys could elect 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. We also granted Toys certain
registration rights for the shares of common stock into which the note
would have been convertible and the warrant would have been
exercisable.
In November 2002, the Board decided that this note would be converted
solely for equity and would not be repaid in cash and the $1.3 million
was presented as committed common stock on our consolidated balance
sheet at March 31, 2003.
In November 2003, we entered into an agreement with Toys to terminate
the Development Agreement (the "Termination Agreement"). Pursuant to
the Termination Agreement, the $1.3 million outstanding convertible
note, which would have been converted solely for equity, was settled in
full by offsetting against accounts receivable due to us from Toys, as
opposed to issuance of common stock, and the warrant to purchase
2,500,000 shares of our common stock was cancelled. Consequently, we
wrote off $684,000 account receivable as bad debt in the fiscal year
ended March 31, 2004.
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, 2004 and 2003, we
recorded a charge of $0 and $151,000, respectively, representing a
proportion of the total debt discount.
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 in the fiscal year ended March 31, 2003 and as such,
there is no effect on our consolidated statement of operations.
F-21
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - We lease office spaces, automobile and various
equipment under non-cancelable operating leases that expire at various
dates through the fiscal year 2014. Certain leases contain renewal
options. Future annual minimum lease payments for non-cancelable
operating leases at March 31, 2004 are summarized as follows (in
thousands):
YEAR ENDING MARCH 31:
2005 $ 1,786
2006 1,252
2007 1,025
2008 982
2009 940
Thereafter 4,693
-----------
$ 10,678
===========
Rent expense was $1.0 million, $891,000 and $1.2 million for the fiscal
years ended March 31, 2004, 2003 and 2002, 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"). Participant contributions vest immediately and are subject to
the limits established from time-to-time by the Internal Revenue
Service. 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. Effective, July 1, 2000, we
amended the 401(k) Plan as follows: (a) our matching contribution equal
to 50% of the employee's contributions, up to 6% of the employee's
total compensation. Our matching contributions vest over a six year
graded schedule. Effective January 1, 2002, we ceased matching
contributions. We made matching contributions to the 401(k) Plan of
approximately $125,000 in the fiscal year ended March 31, 2002.
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, 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 $66,951; (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, which was paid in January 2004.
On May 15, 2002, an employee who was 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 had responded
appropriately to both the wage claim and the discrimination
allegations, which we believed 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. In January 2004, we
terminated Ms Hintz's employment with us and, as a result, her medical
insurance was terminated. On February 12, 2004, Ms. Hintz filed a
petition for violation of Labor Code Section 132(a) before the Workers'
Compensation Appeals Board of the State of California.
F-22
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. We settled this
case on September 30, 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 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 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"), our wholly
owned subsidiary and then our 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.
On April 2, 2004, we filed a federal court action in the Southern
District of California against 5R Online, Inc., John Frabasile, Randy
Pagnotta, our former officers, and Terry Buckley for fraud, breach of
fiduciary duty, breach of contract, and unfair business practice
arising from their evaluation of, recommendation for, and ultimately
engagement in a development arrangement between IPI and 5R. Pursuant to
the development agreement entered into in June 2003 and upon reliance
of the representations of the individual defendants that product
development was progressing, we paid $640,000 in development payments
but received no product. Responsive pleadings will be served shortly,
and the parties are exploring a business solution to the dispute. For
fiscal year ended March 31, 2004, we have expensed payments of $640,000
and shown as other expense.
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.
11. PREFERRED STOCK, COMMON STOCK, TREASURY STOCK, STOCK OPTIONS AND
WARRANTS
PRIVATE PLACEMENTS - 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 SEC. 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
F-23
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.
In June 2003, we entered into an agreement with various institutional
investors ("June 2003 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 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
Debentures investors and May '04 Debentures investors in order to
obtain their requisite consents and waivers of rights they possessed to
participate in the financing.
In November 2003, we sold to various institutional investors ("November
2003 Institutional Investors") 3,180,645 shares of common stock at a
price of $1.55 per share for an aggregate purchase price of $4.9
million. In connection with this financing, we paid Roth Capital, as
placement agent, compensation of $179,000 in cash and 115,226 shares of
our common stock and issued a five-year warrant to purchase 282,065
shares of common stock at an exercise price of $1.71 per share, with a
fair market value of $388,000.
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 ("Maturity Date") 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, 2004
and 2003, dividends in arrears amount to $2.0 million or $14.19 per
share and $1.3 million or $9.00 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. As of March 31,
2004, the conversion price is $0.86 per share. On the Maturity Date,
any outstanding shares of Series A Preferred will be automatically
converted into shares of our common stock at a conversion price equal
to 95% of the average closing price of our common stock for the last
ten business days. 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.
In fiscal year ended March 31, 2004, we declared $421,000 dividend on
Series A Preferred, which was paid by issuing 500,000 shares of common
stock.
COMMON STOCK - During fiscal year ended March 31, 2004, we issued the
following:
o an aggregate of 4,103,161 shares of common stock
totaling $4.2 million upon conversion of convertible
debentures.
o an aggregate of 2,527,392 shares of common stock
totaling $1.9 million upon conversion of convertible
notes.
o 500,000 shares of common stock totaling $421,000 upon
conversion of accrued dividends on Series A Preferred
stock.
o an aggregate of 8,455,645 shares of common stock to
June 2003 Institutional Investors and November 2003
Institutional Investors for total gross proceeds of
$12.8 million. Offering costs associated with these
transactions were $1.2 million, which included
115,226 shares of common stock, with a fair value of
$179,000, to Roth Capital as placement agent's
compensation. o an aggregate of 1,509,226 shares of
common stock, with fair value totaling $1.6 million,
to November 2003 Institutional Investors pursuant to
an anti-dilutive provision of the Securities Purchase
Agreement for the sale of 3,180,645 shares of common
stock in November 2003.
o 100,000 shares of common stock, with fair value of
$300,000, to Cord Camera for payment pursuant to the
settlement agreement.
F-24
o an aggregate of 2,499,959 shares of common stock,
with a fair value of $5.0 million, to the
shareholders of Page Digital in connection with the
acquisition of Page Digital.
o 84,849 shares of common stock to employees for bonus
payment of $84,000 earned in the prior year.
o 9,584 shares of common stock, with a fair value of
$14,000, for legal fees provided in the current year.
o 78,000 shares to common stock, fair value of $60,000,
to a consultant for investor relation services
provided in the current year.
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 Note 14. Up until March 31, 2003, these
shares were pledged to the Bank as collateral for the term loans (see
Note 6). The 10.7 million treasury shares were canceled and retired in
May 2003.
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-25
The following summarizes our stock option transactions under the stock
option plans:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
---------- ----------
Options outstanding, April 1, 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
Granted 1,718,000 $ 0.51
Exercised (150,000) $ 0.50
Expired/canceled (1,224,483) $ 1.91
-----------
Options outstanding, March 31, 2003 4,829,406 $ 1.56
Granted 1,355,580 $ 1.91
Exercised (652,378) $ 0.71
Expired/canceled (743,666) $ 1.97
-----------
Options outstanding March 31, 2004 4,788,942 $ 1.70
===========
Exercisable, March 31, 2002 2,030,673 $ 2.63
===========
Exercisable, March 31, 2003 3,096,559 $ 1.84
===========
Exercisable, March 31, 2004 3,296,860 $ 1.70
===========
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, 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
Granted 400,000 $ 1.75
Expired/Canceled (439,246) $ 0.37
----------
Options outstanding, March 31, 2004 5,015,066 $ 0.80
==========
Exercisable, March 31, 2002 1,046,812 $ 2.61
==========
Exercisable, March 31, 2003 5,054,312 $ 0.69
==========
Exercisable, March 31, 2004 5,015,066 $ 0.80
==========
During the fiscal years ended March 31, 2004, 2003 and 2002, we
recognized compensation expense of $126,000, $8,000, and $0,
respectively, for stock options granted to non-employees for services
provided to us.
F-26
The following table summarizes information as of March 31, 2004
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 - 0.50 4,323,265 2.48 $ 0.28 4,263,681 $ 0.28
$0.51 - 1.00 1,598,544 6.80 $ 0.81 1,332,556 $ 0.80
$1.01 - 1.50 1,114,492 7.87 $ 1.30 610,712 $ 1.34
$1.51 - 2.00 1,359,912 3.16 $ 1.79 1,301,612 $ 1.80
$2.01 - 4.00 877,500 7.99 $ 2.68 280,000 $ 2.94
$4.01 - 11.75 530,295 4.42 $ 6.42 523,365 $ 7.44
---------- ------ --------- ---------- ---------
9,804,008 3.54 $ 1.24 8,311,926 $ 1.15
========== ====== ========= ========== =========
WARRANTS - At March 31, 2004 and 2003, we had outstanding warrants to
purchase 14,560,658 and 6,018,527 shares of common stock, respectively,
at exercise prices ranging from $0.60 to $5.00 per share. The lives of
the warrants range from two to five years from the grant date.
The following summarizes our warrant transactions:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
---------- ---------
Options outstanding, April 1, 2001 1,614,925 $ 1.59
Granted 2,425,243 $ 0.96
-----------
Options outstanding, March 31, 2002 4,040,168 $ 1.21
Granted 7,449,109 $ 0.55
Expired/canceled (5,470,750) $ 0.83
-----------
Options outstanding, March 31, 2003 6,018,527 $ 0.74
Granted 11,229,467 $ 4.12
Exercised (160,000) $ 2.77
Expired/canceled (2,527,336) $ 0.62
-----------
Options outstanding March 31, 2004 14,560,658 $ 3.36
===========
Exercisable, March 31, 2002 4,040,168 $ 1.21
===========
Exercisable, March 31, 2003 6,018,527 $ 0.74
===========
Exercisable, March 31, 2004 13,367,179 $ 3.55
===========
During the fiscal years ended March 31, 2004 and 2003, we recognized
compensation expense of $91,000 and $43,000, respectively, for warrants
granted to non-employees for services provided to us.
F-27
12. 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,
2004 2003 2002
------------ ------------ ------------
Current:
Federal $ (586) $ -- $ 39
State -- 4 --
Foreign -- -- --
------------ ------------ ------------
Total (586) 4 39
------------ ------------ ------------
Deferred:
Federal -- -- --
State -- -- --
Foreign -- -- --
------------ ------------ ------------
Total -- -- --
------------ ------------ ------------
Provision (benefit) for income taxes $ (586) $ 4 $ 39
============ ============ ============
Significant components of our deferred tax assets and liabilities at
March 31, 2004 and 2003 are as follows (in thousands):
MARCH 31,
2004 2003
-------- --------
Current deferred tax assets/(liabilities):
State taxes $ 231 $ 300
Accrued expenses 764 913
Prepaid services 92 92
Deferred revenue 1,138 669
Warrants for services 43 298
Allowance for bad debts 175 159
-------- --------
Net current deferred tax assets 2,443 2,431
-------- --------
Non-current deferred tax assets/(liabilities):
Research and expenditure credits 2,541 2,005
Net operating loss 7,618 7,571
Fixed assets 27 117
Deferred rent -- 35
State taxes (343) (575)
-------- --------
Total non-current deferred tax assets 9,843 9,153
Intangible assets (5,527) (6,415)
-------- --------
Total non-current deferred tax liability (5,527) (6,415)
-------- --------
Net non-current deferred tax asset/(liability) 6,759 5,169
-------- --------
Valuation allowance (6,759) (5,169)
-------- --------
Net deferred tax asset (liability) $ -- $ --
======== ========
F-28
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, 2004, 2003 and 2002 is
attributable to the following:
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2004 2003 2002
-------- -------- -------
Provision (benefit) computed at statutory rate (34.0)% (34.0)% (34.0)%
Nondeductible goodwill -- 7.9 5.1
Interest expense 5.1 -- --
Change in valuation allowance 39.4 73.9 20.4
Foreign income taxed at different rates (16.2) (0.3) 9.7
Tax credits -- (24.2) (2.9)
State income tax, net of federal tax benefit (1.7) (2.5) (0.7)
Other (8.7) (20.8) 2.4
-------- -------- -------
Total provision (benefit) for income taxes (16.1)% (--)% (--)%
======== ======== =======
At March 31, 2004, we had Federal and California tax net operating loss
carryforwards of approximately $20.8 million and $12.0 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 $1.8 million and $739,000, respectively.
The Federal credits will begin expiring after 2008. The California
credits may be carried forward indefinitely.
13. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the fiscal years ended March 31, 2004,
2003 and 2002, are as follows (in thousands, except share amounts and
per share data):
FISCAL YEAR ENDED MARCH 31, 2004
-----------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic and diluted EPS:
Loss available to common stockholders $ (5,252) 41,450,427 $ (0.13)
=========== =========== =========
FISCAL YEAR ENDED MARCH 31, 2003
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic and diluted EPS:
Loss available to common stockholders $ (3,733) 29,598,518 $ (0.13)
=========== =========== =========
FISCAL YEAR ENDED MARCH 31, 2002
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic and diluted EPS:
Loss available to common stockholders $ (14,912) 35,697,999 $ (0.42)
=========== =========== =========
F-29
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 FISCAL YEARS ENDED MARCH 31,
2004 2003 2002
----------- ----------- -----------
Options outstanding under our stock option plans 4,788,942 4,829,406 4,485,889
Options granted outside our stock option plans 5,015,066 5,054,312 1,046,812
Warrants issued in conjunction with private placements 1,730,714 1,625,000 2,944,499
Warrants issued for services rendered 1,211,898 320,669 1,095,669
Warrants issued in conjunction with convertible note
due to major customer -- 2,500,000 --
Warrants issued in conjunction with convertible
debentures 11,618,043 1,572,858 --
Convertible notes due to stockholders -- 2,200,338 1,037,037
Series A Convertible Preferred Stock 18,783,284 18,561,594 17,625,000
Convertible debentures 2,272,727 3,419,304 --
Committed Stock -- 2,976,190 --
----------- ----------- -----------
Total 45,420,674 43,059,671 28,234,906
=========== =========== ===========
14. RELATED PARTIES
Included in other receivables at March 31, 2004 and 2003 are amounts
due from our officers and employees in the amount of $37,000 and
$3,000, respectively.
In connection with the Page Digital acquisition, we assumed a
three-party lease agreement for our Colorado offices between CAH
Investments, LLC ("CAH"), wholly owned by Mr. Page's spouse, and
Southfield Crestone, LLC, whereby Page Digital agreed to lease offices
for ten years expiring on December 31, 2013. CAH and Southfield
Crestone LLC are equal owners of the leased property. Rent expense
related to this lease was $166,000 in fiscal year ended March 31, 2004.
Security deposit of $170,000 relating to this lease is included in
other long-term assets at March 31, 2004.
We began occupying our Carlsbad 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. We relocated our
principal executive offices to Irvine, California and terminated the
Carlsbad lease in July 2003.
We retain our former CEO and Chairman of the Board, Barry M. Schechter,
to provide consulting services starting August 2003. The expense for
these services was $295,000 in the fiscal year ended March 31, 2004.
During fiscal year 2004, we retained an entity owned by an immediate
family member of our former CEO and Chairman, Harvey Braun, to provide
recruiting and marketing services. The expenses for these services were
$138,000 in the fiscal year ended March 31, 2004.
During fiscal year ended March 31, 2003, we had loan due to a
stockholder who together with Barry M. Schechter, our former CEO and
Chairman of the Board, and an irrevocable trust forms a beneficial
ownership group. The original loan from the stockholder included in the
group described above was $1.5 million and borrowed in June 1999 to
fund the acquisition of Island Pacific Systems Corporation on April 1,
1999. This loan was 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,
2004, 2003 and 2002 was $0, $12,000 and $26,000, respectively.
We retain an entity affiliated with a former director of the board to
provide financial advisory services. This former director resigned in
October 2003. During the years ended March 31, 2004, 2003 and 2002, the
expenses for these services were $22,000, $47,000 and $42,000,
respectively. We also incurred $6,000, $0 and $19,000 in expenses to
the same former director for accounting services during the fiscal
years ended March 31, 2004, 2003 and 2002, respectively. We borrowed
$50,000, $125,000, $70,000 and $50,000 from another entity affiliated
F-30
with this former 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 March
31, 2003.
During the second quarter of fiscal 2001, Softline Limited
("Softline"), our former major stockholder, 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 as follows:
1. We transferred to Softline a note received in
connection with the sale of IBIS (the "IBIS Note")
with a carrying value of $7.0 million.
2. We issued to Softline 141,000 shares of
newly-designated Series A Convertible Preferred Stock
("Series A Preferred").
3. In consideration of the above, Softline released us
from our obligations related to the note payable due
to Softline. Softline also surrendered 10,700,000
shares of our common stock held by Softline.
No gain or loss was recognized in connection with the disposition of
the IBIS Note or the other components of the transactions.
Interest expense included interest due to Softline and its subsidiary
for the fiscal years ended March 31, 2004, 2003, and 2002 of $0, $0 and
$1.3 million, respectively.
An option agreement (the "Option Agreement") was prepared and agreed
upon by Softline and our president and director, as trustee of a
certain group of our management (the "Optionees"). Under the Option
Agreement, Softline granted the Optionees the right to purchase from
Softline 8,000,000 shares of our common stock and such number of shares
of Series A Preferred convertible into 17,125,000 shares of our common
stock for a price of $0.80 per option share. The Option Agreement
expired, unexercised on March 24, 2004.
In November 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 Preferred, 8,923,915 shares of our common stock
and options to purchase 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.
15. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a leading provider of software solutions and services to the
retail industry. Our solutions and services have been developed
specifically to meet the needs of the retail industry. We provide high
value innovative solutions that help retailers understand, create,
manage and fulfill consumer demand. Our solutions help retailers
improve the efficiency and effectiveness of their operations and build
stronger, longer lasting relationships with their customers. We
structured our operations into three business units that have separate
reporting infrastructures. Effective January 31, 2004, we acquired Page
Digital subsidiary which offers multi-channel retail solutions.
Up until April 1, 2003, through our Training Products subsidiary we
also developed and distributed PC courseware and skills assessment
products for both desktop and retail applications. Effective April 1,
2003, we sold the Training Products subsidiary.
Up to March 31, 2002, we considered our business to consist of one
reportable operating segment.
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 from continuing operations
are as follows:
F-31
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") -
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 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 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 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,"(TM) which
is a feature-rich application created with the
specialty retailer in mind. More than 15 years of
development has resulted in a solution with a high
degree of fit and value out of the box. Additionally,
the software was designed for easy customization,
enabling our development team to quickly develop
solutions to meet retailers' specific point-of-sale
("POS")and in-store processor (server) requirements.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL
RETAIL") - Page Digital designs its application 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 that
have been built into its "Synaro"(TM)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.
F-32
A summary of the net sales and operating income (loss), excluding
depreciation and amortization expense, and identifiable assets
attributable to each of these business units from continuing operations
are as follows (in thousands):
Year Ended Year Ended
March 31, March 31,
2004 2003
--------- ---------
Net sales from continuing operations:
Retail Management $ 19,089 $ 20,390
Store Solutions 1,620 1,906
Multi-channel Retail 1,030 --
--------- ---------
Consolidated net sales $ 21,739 $ 22,296
========= =========
Operating income (loss):
Retail Management $ 4,371 $ 3,321
Store Solutions (60) 176
Multi-channel Retail 175 --
Other (see below) (7,736) (6,109)
--------- ---------
Consolidated operating loss $ (3,250) $ (2,612)
========= =========
Other operating loss:
Amortization of intangible assets $ (3,628) $ (3,818)
Depreciation (268) (330)
Administrative costs and other
non-allocated expenses (3,840) (1,961)
--------- ---------
Consolidated other operating loss $ (7,736) $ (6,109)
========= =========
Identifiable assets:
Retail Management $ 36,184 $ 31,953
Store Solutions 3,790 4,404
Multi-channel Retail 9,955 --
--------- ---------
Consolidated identifiable assets $ 49,929 $ 36,357
========= =========
Operating income (loss) in Retail Management, Store Solutions and
Multi-channel Retail 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
depreciation, 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-33
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,
2004 2003 2002
--------- --------- ---------
(in thousands)
Net Sales:
Continuing operations:
United States $17,982 $19,616 $24,246
United Kingdom 3,757 2,680 2,469
-------- -------- --------
21,739 22,296 26,715
-------- -------- --------
Discontinued operations:
United States -- 1,370 1,390
Australia -- -- 2,363
United Kingdom -- 147 146
-------- -------- --------
-- 1,517 3,899
-------- -------- --------
Total net sales $21,739 $23,813 $30,614
======== ======== ========
Long-lived assets:
United States $44,228 $31,595 $36,154
United Kingdom 30 27 22
-------- -------- --------
Total long-lived assets $44,258 $31,622 $36,176
======== ======== ========
16. SIGNIFICANT FOURTH QUARTER ADJUSTMENT
During the fourth quarter of fiscal 2004, we:
o impaired prepaid assets by $640,000 in relation to funding
paid to 5R during the year.
o reduced net sales by $556,000, of which $238,000 related to
the third quarter of fiscal 2004.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31, 2004 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 TOTAL
----------------------------------------------------------------------------------------------------------------
Net Sales $ 5,466 $ 6,679 $ 4,890 $ 4,704 $ 21,739
Gross Profit 3,812 5,605 3,479 3,591 16,487
Net Income (Loss) 285 699 (584) (4,628) (4,228)
Net Income (Loss) Available to
Common Stockholders 13 417 (768) (4,914) (5,252)
Basic and diluted Income (Loss)
Per Share 0.01 0.01 (0.01) (0.09) (0.10)
Basic and diluted Income (Loss)
Available To Common Stockholders $ -- $ 0.01 $ (0.02) $ (0.10) $ (0.13)
MARCH 31, 2003 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 TOTAL
----------------------------------------------------------------------------------------------------------------
Net Sales $ 4,893 $ 3,798 $ 7,118 $ 6,487 $ 22,296
Gross Profit 2,840 2,190 4,945 4,276 14,251
Net Income (Loss) from continuing
operations (2,067) (2,368) 391 1,207 (2,837)
Net Income (Loss) (2,017) (2,259) 384 1,174 (2,718)
Net Income (Loss) Available To
Common Stockholders (2,271) (2,522) 131 929 (3,733)
Basic and diluted Earnings (Loss)
Per Share (0.07) (0.08) 0.01 0.04 (0.09)
Basic and diluted Earnings (Loss)
Available To Common Stockholders
Per Share $ (0.08) $ (0.09) $ -- $ 0.03 $ (0.12)
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-34
18. SUBSEQUENT EVENTS
In May 2004, Harvey Braun resigned from the position as Chief Executive
Officer.
Pursuant to an agreement dated June 1, 2004, we acquired Retail
Technologies International, Inc. ("RTI") from Michael Tomczak, Jeffrey
Boone and Intuit Inc. ("Intuit") in a merger transaction. On March 12,
2004, we, RTI, IPI Merger Sub, Inc., ("Merger Sub") and Michael Tomczak
and Jeffrey Boone (the "Shareholders") entered the initial Agreement of
Merger and Plan of Reorganization (the "March 12, 2004 Merger
Agreement") which provided we would acquire RTI in a merger transaction
in which RTI would merge with and into Merger Sub. The merger
consideration contemplated by the March 12, 2004 Merger Agreement was a
combination of cash and shares of our common stock. The March 12, 2004
Merger Agreement was amended by the Amended and Restated Agreement of
Merger and Plan of Reorganization, dated June 1, 2004, by and between
us, RTI, Merger Sub, IPI Merger Sub II, Inc. ("Merger Sub II") and the
Shareholders (the "Amended Merger Agreement").
Pursuant to the Amended Merger Agreement, the Merger (as defined below)
was completed with the following terms: (i) we assumed RTI's
obligations under those certain promissory notes issued by RTI on
December 20, 2002 with an aggregate principal balance of $2.3 million;
(ii) the total consideration paid at the closing of the Merger was
$10.0 million paid in shares of our common stock and newly designated
Series B convertible preferred stock ("Series B Preferred") and
promissory notes; (iii) the Shareholders and Intuit are entitled to
price protection payable if and to the extent that the average trading
price of our common stock is less than $0.76 at the time the shares of
our common stock issued in the Merger and issuable upon conversion of
the Series B Preferred are registered pursuant to the registration
rights agreement dated June 1, 2004 between us, the Shareholders and
Intuit (the "Registration Rights Agreement"); and (iv) the merger
consisted of two steps (the "Merger"), first, Merger Sub merged with
and into RTI, Merger Sub's separate corporate existence ceased and RTI
continued as the surviving corporation (the "Reverse Merger"),
immediately thereafter, RTI merged with and into Merger Sub II, RTI's
separate corporate existence ceased and Merger Sub II continued as the
surviving corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares
of Series B Preferred and a promissory note payable monthly over two
years in the principal amount of $1,295,000 bearing interest at 6.5%
per annum. As a result of the Merger, Intuit, the holder of all of the
outstanding shares of RTI's Series A Preferred stock, received
1,546,733 shares of our common stock and a promissory note payable
monthly over two years in the principal amount of $530,700 bearing
interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights.
Under the Registration Rights Agreement, we agreed to register the
common stock issuable upon conversion of the Series B Preferred issued
to the Shareholders within 30 days of the automatic conversion of the
Series B Preferred into common stock. The automatic conversion will
occur upon us filing an amendment to our certificate of incorporation
with the Delaware Secretary of State increasing the authorized number
of shares of our common stock ("Certificate of Amendment") after
securing shareholder approval for the Certificate of Amendment. Under
the Registration Rights Agreement, Intuit is entitled to demand
registration or to have its shares included on any registration
statement filed prior the registration statement covering the
Shareholders' shares, subject to certain conditions and limitations, or
if not previously registered to have its shares included on the
registration statement registering the Shareholders' shares. The
Shareholders and Intuit are entitled to price protection payments of up
to a maximum of $0.23 per share payable by promissory note, if and to
the extent that the average closing price of our common stock for the
10 days immediately preceding the date the registration statement
covering their shares is declared effective by the Securities and
Exchange Commission, is less than the 10 day average closing price as
of June 1, 2004, which was $0.76.
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well
as certain officers and directors signed voting agreements that provide
they will not dispose of or transfer their shares of our capital stock
and that they will vote their shares of our capital stock in favor of
the Certificate of Amendment and the Amended Merger Agreement and
transactions contemplated therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President,
Chief Operating Officer and director and Jeffrey Boone, RTI's former
Chief Technology Officer, was appointed our Chief Technology Officer.
We entered into two-year employment agreements and non-competition
agreements with Mr. Tomczak and Mr. Boone.
The following unaudited pro forma consolidated results of continuing
operations for the twelve months ended March 31, 2004 and 2003 assume
the acquisitions of RTI and Page Digital occurred as of April 1, 2003
and 2002, respectively. The pro forma results are not necessarily
indicative of the actual results that would have occurred had the
acquisitions been completed as of the beginning of the period
presented, nor are they necessarily indicative of future consolidated
results.
Fiscal Years Ended
March 31,
2004 2003
---- ----
(unaudited)
(in thousands, except per share data)
Net sales $ 34,532 $ 37,273
Net loss $ (7,835) $ (683)
Net loss available to common stockholders $ (8,858) $ (1,698)
Basic and diluted loss per share of
common stock $ (0.18) $ (0.02)
Basic and diluted loss per share
available to common stockholders $ (0.21) $ (0.05)
F-35
SUPPLEMENTAL INFORMATION
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Island Pacific, Inc. and subsidiaries
Irvine, California
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
------------------------------------------
Los Angeles, California
June 11, 2004
F-36
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
FOR THE FISCAL YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Additions
Balance, (Deductions) Additions
Beginning of Charged to (Deductions) Balance,
Year Operations from Reserve End of Year
Allowance for doubtful accounts
March 31, 2004 $ 364 $ 823 $(777) $ 409
March 31, 2003 $ 435 $ 159 $(230) $ 364
March 31, 2002 $ 627 $ (3) $(189) $ 435
F-37