Back to GetFilings.com
================================================================================
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, 2002
--------------
[ ] 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
-------
SVI SOLUTIONS, INC.
-------------------
(Exact Name of Registrant as specified in its charter)
DELAWARE 33-0896617
- ---------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5607 PALMER WAY, CARLSBAD, CA 92008
- ---------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (877) 784-7978
--------------
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
- ------------------------------- -----------------------
Securities registered under Section 12(g) of the Act
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. [ ]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates* as of June 28, 2002 was approximately $6.4 million, based on the
closing sale price on the American Stock Exchange on that date.
The number of shares outstanding of the registrant's Common Stock was 28,716,941
on June 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement for the annual meeting to
be held in 2002, to be filed with the Securities Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the registrant's
fiscal year, are incorporated by reference under Part III of this Form 10-K.
- ------------------
* Excludes the Common Stock beneficially held by executive officers, directors
and stockholders whose beneficial ownership exceeds 10% of the Common Stock
outstanding at June 28, 2002.
================================================================================
PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO
FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE OF THE REGISTRANT, SVI SOLUTIONS,
INC. ("WE" OR "US"). IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS
BY TERMINOLOGY SUCH AS THE WORDS MAY, WILL, SHOULD, EXPECT, PLAN, ANTICIPATE,
BELIEVE, ESTIMATE, PREDICT, POTENTIAL OR CONTINUE, OR THE NEGATIVES OF SUCH
WORDS OR OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS.
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IMPORTANT FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS ARE
DESCRIBED IN THE SECTION ENTITLED "BUSINESS RISKS" IN ITEM 7 IN THIS REPORT, AND
OTHER RISKS IDENTIFIED FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, PRESS RELEASES AND OTHER COMMUNICATIONS.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO OBLIGATION TO UPDATE ANY
OF THE FORWARD-LOOKING STATEMENTS AFTER THE FILING OF THIS REPORT TO CONFORM
SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
We are an independent provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solution. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
Our offerings consist of the following components:
The ISLAND PACIFIC MERCHANDISE MANAGEMENT suite of applications builds on
our long history in retail software design and development and provides our
customers with a comprehensive and fully integrated merchandise management
solution. Our complete enterprise-level offering of applications and services is
designed to assist our customers in maximizing their business potential. The
foundation of our application suite is the individual modules that comprise the
offering. The core modules are:
o Merchandising;
o The Eye(TM), datamart, planning and reporting tool;
o Trends, forecasting and dynamic replenishment tool;
o Events;
o Warehouse;
o Ticketing;
o Financials; and
o Sales Audit.
The ISLAND PACIFIC DIRECT SOLUTION supports Web-based and traditional mail
order and catalog retailing. Direct allows our customers to offer multi-channel
merchandise management within one integrated application tool set to manage
order entry, order processing, customer service, purchasing, inventory planning
and forecasting, fulfillment and shipping. The core modules are:
o Call Center;
o Customer Relationship Management (CRM);
o Planning and Forecasting; and
o Fulfillment.
The SVI STORE SOLUTION suite of applications builds on our long history of
providing multi-platform, client server in-store solutions. We market this set
of applications under the name "OnePointe," which is a full business to consumer
software infrastructure encompassing a range of integrated store solutions.
OnePointe is a complete application providing all point-of-sale ("POS") and
in-store processor (server) functions for traditional "brick and mortar" retail
operations.
Our PROFESSIONAL SERVICES provide our customers with expert retail business
consulting, project management, implementation, application training, technical
and documentation services. This offering ensures that our customers' technology
selection and implementation projects are planned and implemented timely and
effectively. We also provide development services to customize our applications
to meet specific requirements of our customers and ongoing support and
maintenance services.
We market our applications and services through an experienced professional
direct sales force in the United States and 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.
We also develop and distribute retail system training products and general
computer courseware and computer skills testing products through our SVI
Training Products, Inc. subsidiary.
Our executive offices are located at 5607 Palmer Way, Carlsbad, California
92008, telephone number (877) 784-7978.
RECENT DEVELOPMENTS
In October 2001, we completed an analysis of our operations and concluded
that it was necessary to restructure the composition of our management and
personnel. We were concerned that the new management team appointed during the
fourth quarter of fiscal 2001 had not been able to close a number of new
business opportunities or to raise capital. We were also concerned with general
economic conditions, especially after the terrorist attacks of September 11,
2001, and the resulting ongoing hostilities in the world. Our CEO, Thomas A.
Dorosewicz, and our CFO, Kevin M. O'Neill, elected to leave to pursue other
interests, and both resigned from our board of directors. We appointed Barry M.
Schechter, our Chairman, as Chief Executive Officer, and Jackie Tran, our
Controller, as acting Chief Financial Officer. We also reduced our staff by a
total of 20%, and restructured and refocused our sales force toward
opportunities available in the current economic climate.
As of April 1, 2002, we have refocused the company into three strategic
business units each lead by experienced managers. The units are Island Pacific,
SVI Store Solutions, Inc. and SVI Training Products, Inc.
In May 2002, Steven Cohen, Softline's Chief Operating Officer, and Gerald
Rubenstein, a director of Softline, resigned from our board of directors. Ivan
Epstein, Softline's Chief Executive Officer, continues to serve on our board,
and in June 2002, Rob Wilkie, Softline's Chief Financial Officer, was appointed
to our board of directors. For a further discussion of the terms of transactions
with Softline during the 2002 fiscal year, see "Management's Discussion and
Analysis of Financial Condition and Results of Operation" under the heading
"Financing Transactions -- Softline."
Due to the declining performance of our Australian subsidiary, the
subsidiary ceased operations in February 2002. For further details, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" under the heading "Liquidity and Capital Resources -- Contractual
Obligations -- National Australia Bank" below.
In May 2002, we entered into a new two-year software development and
services agreement with our largest customer, Toys "R" Us, Inc. Toys also agreed
to invest $1.3 million for the purchase of a non-recourse convertible note and a
warrant to purchase 2,500,000 common shares. For a further details, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Liquidity and Capital Resources -- Financing
Transactions -- Toys "R" Us" below.
We issued a total of $1.25 million in convertible notes to a limited number
of accredited investors related to ICM Asset Management, Inc. of Spokane,
Washington, a significant beneficial owner of our common stock. We amended these
notes to extend the maturity date and other provisions, and we replaced warrants
issued to these investors in July 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
"Financing Transactions -- ICM Asset Management, Inc." below.
We negotiated an extension of our senior bank lending facility to August
31, 2003. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the heading "Liquidity and Capital Resources -
Contractual Obligations -- Union Bank" below.
2
INDUSTRY OVERVIEW - RETAIL APPLICATION SOFTWARE
The rapid development of the retail application software market has
increasingly allowed the retail industry to track, analyze and implement its
information on a virtually real-time basis. Modern applications and technology
capture sales information as a sale occurs and quickly provide that information
to the enterprise's retail management system. This information is available
daily both to local management and to the retailer's headquarters functions for
purposes of inventory tracking and sales analysis. These systems have become
increasingly important for multi-channel retail enterprises that need to
disseminate sales information throughout the enterprise to better manage
inventory, costs, pricing and manufacturing requirements. Multi-channel
retailers also require sophisticated, integrated point-of-sale retail management
systems that can reliably and efficiently capture and manage large numbers of
individual transactions generated from diversified points of sale.
Retail software applications were initially custom-designed to satisfy
business needs of individual retailers. These initial applications were
proprietary, with software and support services developed either internally or
provided by a single supplier. Due to the custom nature of the applications,
little opportunity existed for suppliers to leverage their niche success into
market-wide success. In addition, custom solutions, whether internally developed
by the retailer or offered by external suppliers, often did not provide a
long-term return on investment (ROI). However, standard, scalable, extensible
applications that are provided by suppliers such as us, offer both near- and
long-term ROI, as these solutions are continuously developed and evolve over
time. Outside suppliers such as us, with our single version philosophy and
built-in upgrade path to the future, provide the retailer with a solution that
continues to provide a consistent return on its application investment.
The retail application-specific software industry has developed from
proprietary, customized, single platform systems to open architecture systems in
which a variety of hardware and software products from different manufacturers
can be combined to obtain the mix of features desired by the individual retail
enterprise. Correspondingly, application software suppliers can leverage their
investment in design, development and expertise across standard platforms and
multiple customers. When scalable technology is included in the offering, the
result is a growing market for retail applications that includes smaller as well
as larger retailers.
The retail industry we serve is currently experiencing significant
structural changes. These changes are driven by a variety of factors including
evolving consumer preferences, technological advances, globalization and more
intense competition. The rapid growth of the Internet as a means of commerce is
affecting the retail industry. The Internet is a business-to-consumer (B2C)
sales channel and a means of creating and managing customer relationships. The
Internet is also transforming business-to-business (B2B) supply chain
communications and management. These changes have forced traditional "brick and
mortar" retailers to re-evaluate their business models and to also develop
e-commerce strategies in order to maximize their competitive position. We
believe the industry changes and trends include:
o MULTI-CHANNEL RETAILING. Retailers of all types are changing their
business models to service their customers using multiple channels of
distribution, including traditional brick and mortar stores, the Web,
catalog, and mail order methods. In addition, manufacturers can now
directly market their merchandise more efficiently and compete with
the retailers who were formerly their partners.
o PRESSURE ON PROFIT MARGINS. The wide availability and accessibility of
competitive price quotes on the Internet and intense competition from
other retailers' places price pressure on both online retailers and
brick and mortar retailers, forcing lower profit margins. This
pressure on margins has forced retailers to focus on maximizing the
cost structure and profit opportunity across their entire enterprise,
from the supply chain process, through the enterprise and at the store
level.
o CENTRALIZED FULFILLMENT. The emergence of online retailing has created
significantly higher demand for centralized on demand, order
fulfillment solutions.
o PRODUCT LEVEL INFORMATION. Because of additional retail channels like
e-commerce sites, the ability to have a single view of a product
across all retail channels is critical for the accuracy of inventory
management and maximizing profit opportunities.
3
o NEED FOR TECHNOLOGY. Traditional retailers have historically been
relatively slow to introduce new technologies. Retailers are now
moving at a faster pace to utilize technology to compete effectively.
o WIRELESS APPLICATIONS. There is a growing demand for in-store wireless
communications based applications, utilizing various handheld and POS
devices.
All of these changes are leading to new approaches to retail systems
architecture. These approaches include movement away from traditional
distributed models and toward more centralized control environments with limited
capability in-store devices also known as "thin clients." The thin clients
include point-of-sale devices, kiosks and wireless in-store devices.
We believe these changes have accelerated the trend away from internally
developed and supported retail application software. The increasingly
competitive and technologically evolving environment has made it very difficult
for companies that use internal, proprietary or prior generation
supplier-provided software to keep up with the rapidly improving products that
are available from external suppliers. At the same time, these changes have put
pressure on outside suppliers such as us to continuously enhance our existing
applications and develop new applications under new technologies on a more rapid
timetable. We further believe that as retailers move forward with the selection
and implementation of applications such as ours, they will increasingly require
expert consulting, system integration, and other technical professional and
support services. Further, we see that retailers are increasingly looking to
experts, not generalists, to provide these services.
MISSION AND STRATEGY
Our mission is to become the leading global provider of retail application
technology and related services using our single version philosophy which offers
our customers a built-in upgrade path to the future. To fulfill our mission, our
strategy is to provide our current and new customers the tools, infrastructure
and expert services necessary for them to compete effectively in the global,
multi-channel marketplace. Key elements of our strategy include:
o LEVERAGING OUR RETAIL EXPERIENCE AND PRESENCE IN SELLING TO NEW AND
EXISTING CUSTOMERS. Over 200 retailers in the US, Canada, Europe,
South America and Australia use some or all of our solutions. Our
management, marketing, sales, development, quality assurance,
professional services and support teams have an in-depth understanding
of the retail industry through having delivered widely accepted
products and services for more than 25 years. We believe our single
version philosophy, the sophistication and stability of our
applications, and our experience and presence in the retail industry
give us a significant competitive advantage in marketing new and
enhanced applications and services to the industry. Our refocused
marketing strategy involves an emphasis on our core competencies, the
high degree of customer satisfaction and loyalty of our existing
customers and our built-in upgrade path to the future. Our training
products subsidiary has also focused development and marketing efforts
on producing training products for our retail customer base.
o EXPANDING AND ENHANCING OUR APPLICATIONS. We are engaged in an
aggressive application technology development effort to expand and
enhance our applications for use both domestically in the US and
internationally. We are also continuing our strategy of offering new
solutions that are complementary to our applications, primarily
through strategic alliances. Our application technology enhancement
program is designed to anticipate trends in the retail industry
through constant consultation with our customers, strategic alliance
partners and research analysts. Our goal is to introduce timely new
applications and enhancements to our existing applications that will
allow us to better compete for new customers and continued to be
attractive to our existing customers.
o INCREASING FOCUS ON THE SMALLER RETAILER. We recently introduced a new
standard merchandising management and store solution application set
based on our large tier retailer experience and application base. We
can supply this application with little or no modification to smaller
Tier 2, Tier 3 and Tier 4 retailers at a competitive price point. The
application set offers these retailers a fast implementation schedule
and short ROI. We intend to market more aggressively to Tier 3 and
Tier 4 retailers as part of our strategy to locate and exploit market
opportunities available to us in the current economic client,
especially those opportunities which are undeserved by our larger
competitors.
4
o EMPHASIZING MULTI-CHANNEL SOLUTIONS. An important part of our
application technology enhancement program is the integration of
Web-based, catalog and mail order solutions with our historic suite of
applications focused on the traditional brick and mortar retail
business.
o GROWING PROFESSIONAL SERVICES. An increasingly important part of our
solutions are the expert services we provide including retail business
consulting, project management, implementation, integration, training
and documentation services. We intend to continue to grow and market
our Professional Services to support close relationships with our
customers and to assist them in successful implementation of both our
application technology and that of our strategic partners. We expect,
as a result, to receive recurring revenues from our professional
service agreements, and application customization services. We believe
that an expansion of this revenue base can create a more stable
revenue and cash flow base, reducing our reliance on application
software license sales, which tend to fluctuate over time based on
economic and other conditions.
o GROWING RECURRING REVENUES. Using our single version philosophy and by
offering our existing and new customers a built-in upgrade path to the
future, we are able and expect to grow our recurring revenue from our
maintenance and support agreements. We believe that an expansion of
this revenue base can create a more stable revenue and cash flow base,
reducing our reliance on application software license sales, which
tend to fluctuate over time based on economic and other conditions.
o INCREASING INTERNATIONAL SALES. We intend to increase our
international sales efforts, focusing on the European market. Our
development efforts with Toys "R" Us, Inc. have added significant
functionality to our Island Pacific Merchandise Management suite,
making us even more competitive internationally.
APPLICATION TECHNOLOGY AND SERVICES
We have three operating business units: Island Pacific, SVI Store Solutions
and SVI Training Products, Inc.
ISLAND PACIFIC
OVERVIEW
Island Pacific is a leading provider of application software solutions and
professional services for multi-channel retailers in the specialty, mass
merchandising and department store markets. Our applications and services
provide retailers with a robust enterprise business solution.
Our Island Pacific applications and services include the following major
offerings:
o ISLAND PACIFIC MERCHANDISE MANAGEMENT suite of applications, including
Merchandising, The Eye(TM) datamart tool set, Trends forecasting and
dynamic replenishment tools, Events, Warehouse, Ticketing, Financials,
and Sales Audit.
o ISLAND PACIFIC DIRECT, including support for Web-based, mail-order and
traditional catalog retailing, which can be integrated with our
Merchandise Management suite or implemented independently.
o ISLAND PACIFIC PROFESSIONAL SERVICES, including retail business
consulting, project management, implementation, application training,
and technical and documentation services.
o ISLAND PACIFIC DEVELOPMENT, MAINTENANCE AND SUPPORT SERVICES,
including: custom application development to tailor our software to
meet the specific needs of our customers, and Maintenance and Support
Services whereby we offer Help Desk, product release upgrade and error
correction services to our customer base using our applications.
5
Our application technology and services provide the following benefits to
our customers:
MULTI-CHANNEL RETAILING. Our solutions integrate the various storefronts of
retailers, from point-of-sale devices to Web-based storefronts to mail order
catalogs.
INTEGRATION. Our solutions are fully integrated applications that address
the complete information and management requirements of the retail enterprise.
In addition, our applications are designed for ease of implementation and
operation. This means that our customers can quickly install, train and become
operational with our products, thus minimizing the cost and time required to
achieve true return on their investment. All of our applications are open
systems, allowing integration with many third-party applications used by our
customers.
SERVICES. We are able to provide expert, retail-savvy professional services
to plan and implement our application solutions with our customers. We also
customize our solutions to the unique needs of particular retailers. In
addition, our standard applications contain a number of tools and features that
allow our customers to tailor their systems continuously to their changing
needs.
MARKETS AND CUSTOMERS
Island Pacific software is installed in over 200 retailers worldwide. Our
applications are used by the full spectrum of retailers including specialty
goods sellers, mass merchants and department stores. Most of our U.S. customers
are in the Tier 1 to Tier 3 retail market sectors.
A sample of some of our active customers are listed below:
Nike Limited Brands American Eagle Outfitters Disney
Phillips-Van Heusen Signet (UK) Shoefayre (UK) Pacific Sunwear
Toys "R" Us Timberland Vodaphone (UK) Academy Sports
MARKETING AND SALES
We sell our applications and services primarily through a direct sales
force that operates in the United States and the United Kingdom. Sales efforts
involve comprehensive consultations with current and potential customers prior
to completion of the sales process. Our Sales Executives, Retail Application
Consultants (who operate as part of the sales force) and Marketing and
Technology Management associates use their collective knowledge of the needs of
multi-channel retailers to help our customers identify the optimal solutions for
their individual businesses.
We maintain a comprehensive web site describing our applications, services
and company. We regularly engage in cooperative marketing programs with our
strategic alliance partners. We annually host a Users Conference in which
hundreds of our customers attend to network and to share experiences and ideas
regarding their business practices and implementation of our, and our partners'
technology. This Users Conference also provides us with the opportunity to meet
with many of our customers on a concentrated basis to provide training and
insight into new developments and to gather valuable market requirements
information.
We are aggressively focusing on our Product Marketing and Product
Management functions to better understand the needs of our markets in advance of
required implementation, and to translate those needs into new applications,
enhancements to existing applications and related services. These functions are
also responsible for managing the process of market need identification through
product or service launch and deployment. It is the goal of these functions to
position Island Pacific optimally with customers and prospects in our target
market.
We have established a Product Direction Council, comprised of leading
executives from our customers. The purpose of this Council is to help guide us
in the future development of our applications and services, to maximize our
opportunity to meet overall retail market trends and needs for a broad sector of
the industry, and to do so well in advance of our competitors.
6
DESCRIPTION OF APPLICATIONS AND SERVICES
We have carefully assembled our Island Pacific Applications such that the
modules work together as a single solution. Our customers can mix and match the
modules to create a solution tailored to their businesses. We also offer
comprehensive professional services, custom development, maintenance and support
services.
ISLAND PACIFIC ENTERPRISE SOLUTION
Island Pacific's Enterprise Solution application suite provides a
methodology for retail chains that integrates the flow of data from the planning
phase, through budgeting, to purchasing, allocation and distribution. The
application then takes retail sales data for evaluation and feedback to the
sales audit and planning phase. This suite of applications operates on the IBM
iSeries computing platform, which is widely installed and extremely popular in
the retail industry. The diagram below provides a graphic representation of the
Island Pacific applications suite, including the integration of the optional
Direct and Store Solutions applications.
[Island Pacific Applications Suite Graphic Here]
MERCHANDISING. The Merchandising module is the core of the Island Pacific
Enterprise Solution application suite. This extensive module includes management
planning and real time open to buy, forecasting, purchase order management,
merchandise receiving, allocation, transfers, basic stock replenishment,
physical inventory, price management and merchandise stock ledger. Merchandising
has multiple language and currency capabilities for international operations.
Merchandising is offered as a single version application. Most
modifications we perform on the application are incorporated into future
releases of the base. This methodology reduces implementation risks for our
customers, shortens the implementation cycle and reduces software bugs. It also
reduces training requirements. Moreover, customers who continue to use our
services for maintenance of the application are able to take advantage of
improvements requested by other retailers. Finally, it gives us the ability to
present a very stable application and support it with smaller focused
infrastructure.
7
THE EYE(TM) (DATAMART). The Eye complements the Merchandising application
by offering user-definable datamarts and information retrieval. The Eye uses
innovative storage techniques that provide quick access to data and graphical
drag-and-drop movement of elements and data. The Eye can also be used for data
generated by applications outside the Island Pacific Enterprise Solution suite.
FINANCIALS. Financials includes accounts payable with automatic invoice
matching, general ledger and fixed assets functions.
WAREHOUSE. Warehouse is a user-definable locator application for
controlling the physical flow of merchandise. Warehouse employs a number of
special features designed for retailers. Warehouse also includes support for
radio frequency (RF) technology to allow for access to the application from the
warehouse floor using a range of wireless devices.
EVENTS. The Events module plans and analyzes the performance of events and
promotions. The module is linked to The Eye datamart application to provide
sophisticated and customizable implementation of an event or promotion and
analysis and reports of its success.
Island Pacific Enterprise Solution Suite also includes sales audit,
forecast and dynamic replenishment and merchandise ticketing modules.
ISLAND PACIFIC DIRECT SOLUTION
Our Direct application suite provides fully integrated tools including
order entry, order processing, customer service, purchasing, inventory planning
and forecasting, warehouse management, fulfillment and shipping, as well as
marketing and circulation management to support Internet, catalog and mail-order
retailing. We support these tools using our single version development
philosophy, offering constant evolution and improvement to features and
functions. Used in combination with our Island Pacific Merchandise Management
suite of applications, Island Pacific Direct provides a system to fully
integrate the fulfillment functions of multiple distribution channels, including
local outlets, e-commerce and catalog and mail order.
PROFESSIONAL SERVICES
We offer a variety of consulting implementation and upgrade services to our
customers. We perform services on an as needed basis and as part of project
plans. We typically render services at the customer's site to provide the best
overall understanding of the customer's environment and business.
RETAIL BUSINESS CONSULTING. We employ a staff of highly qualified,
experienced retailers who provide a variety of business consulting services. Our
consulting staff members have an average of over ten years experience in the
retail industry as buyers, merchandise planners, store managers, IT managers,
and retail business owners. They combine their retail experience with their
knowledge of the SVI application solutions to offer advice on how best to
integrate our solutions into the latest retail practices for a cost-effective,
smooth implementation of change within an organization.
Our RETAIL CONSULTANTS assist with:
o requirements definitions; o business process review;
o work process re-engineering; o understanding of business benefits; and
o organizational change management; o job definition and staffing requirements.
PROJECT MANAGEMENT. Our experienced project management teams assist with:
o work product definition; o coordination with suppliers;
o business and technical coordination; o project assessment documentation;
o application testing and conference room pilots; o system integration; and
o overall implementation planning; o project timelines.
8
APPLICATION TRAINING. We train the customer's internal training staff and
we offer training for the customer's end users. Through our SVI Training
Products subsidiary, we also offer certain software-training modules for our
solutions.
IMPLEMENTATION SERVICES. Our technical experts provide implementation
consulting and programming services. Implementation services include:
o interface and conversion o design, modification and
between systems; customization; o programming; and
o testing; o problem resolution; o system management.
o upgrade planning, testing
o software installation; and implementation;
DOCUMENTATION SERVICES. We provide customized documentation for all
elements of our solutions.
SVI STORE SOLUTIONS
SVI Store Solutions offers retailers a complete application providing
point-of-sale and in-store processor (server) functions through its OnePointe
application. OnePointe is a full business-to-consumer (B2C) integrated, in-store
application, encompassing a range of integrated store solutions. It can also
incorporate a third-party provided retail customer relationship management
system and a complete performance measurement system with loss prevention
features. The major benefits of OnePointe to a retailer are as follows:
o OnePointe is POS hardware platform independent, functioning on IBM,
NCR, Fujitsu, Wincorp or PC-CD platforms.
o Thick or thin client versions of the product are available, allowing
retailers to have software continuity as hardware platforms evolve.
o OnePointe's functionality reflects over 15 years of customized
development for a wide variety of large and medium retailers.
o OnePointe offers multi-channel applications and hardware. Kiosk and
web applications allow retailers to access their customers via several
channels.
o OnePointe uses Internet protocol data transfer for peer to peer
communications.
o OnePointe includes advanced development toolset, including TAG, a
customer useable development environment.
o OnePointe is offered on a variety of hardware configurations, and is
able to run on many different operating system platforms. The
application employs a graphical user interface, optional touch screen
input and wireless communication support. The application also
provides an on-demand reference source for employees, including store
policies, an on-screen calculator, instructions for forms usage,
package pricing, frequent shopper information, gift cards, training
mode, auditing features and e-mail. The application is fully
customizable, either by the customer using included tools, or by our
technical team as part of our implementation and support services.
o OnePointe provides a reliable, high-performance management platform to
administer store applications. The architecture is designed to
maintain data integrity while allowing full integration with our
Island Pacific suite or third-party enterprise software products used
by the individual customer.
9
SVI TRAINING PRODUCTS, INC.
Our training products subsidiary develops and distributes PC courseware and
skills assessment products. The courseware is designed for use in instructor-led
and self-study training environments. We sell courseware either as individual
manuals and instructor guides, or on a limited site license basis. We have
developed more than 210 training courses for desktop and retail applications.
Site licensing allows a customer to print an unlimited number of course
manuals for a fixed annual fee, and renewals provide us with a recurring annual
revenue stream. In excess of 80% of the annual training site licenses are
renewed. We provide the site-licensed courseware on the Internet through our
website, or on CD-ROM, allowing customization of the instructor-led course
materials.
We use a network of specialized consultants to develop courseware products.
We hire consultants on a project basis. This allows for the fast, simultaneous
development of multiple courses and gives us access to diverse skills without
fixed overhead commitments.
We market training products through a direct sales force. We also advertise
and sell the training product range through the Internet, direct mail and trade
shows. SVI Training Products uses both in-house and independent representatives,
and has representation in California, Texas, Indiana, Florida, New Jersey,
Ireland, the United Kingdom and South Africa. Customers include Fortune 1000
corporations, K-12 school districts, universities, military facilities,
government agencies and training schools.
Our training subsidiary is also a reseller of multimedia and hardcopy
self-study materials for desktop and technical computer software applications.
In addition, we resell on-line training products.
We also market the "compAssess On-Line" skills testing administration
system and test center. compAssess On-Line is a multi-faceted software product
that consists of three main applications. It includes a comprehensive
administration system for registering students, assigning tests and monitoring
results, a built-in collection of more than 1,500 performance based software
test questions, and a facility to develop multiple-choice, true/false, hotspot
and simulated questions on any subject regardless of the discipline. The
compAssess built-in questions enable employers to evaluate the computer skills
of their employees and provides assistance in selecting the appropriate course
modules for trainees. We market this package to personnel agencies,
universities, schools, training companies and corporations.
Our training subsidiary also provides courseware for our Store Solutions
Group. The courseware is designed to provide in store training to all levels of
store personnel from management to POS data entry clerks. We also provide custom
courseware development services to support additional retail applications.
APPLICATION TECHNOLOGY DEVELOPMENT
We believe it is imperative to our long-term success that we maintain
aggressive application technology development programs to improve our existing
applications and to develop new applications. We believe that the core
functionality that already exists in our technology will continue to serve many
of the important retailing functions, but that additional functionality and
flexibility will be required in the constantly challenging, competitive
environment.
Our future performance will depend in large part on our ability to enhance
our current application technology and develop new applications. In order to
achieve market acceptance, these new applications must anticipate and respond to
the latest trends in business-to-consumer and business-to-business commerce. Our
applications must also offer clearly perceived advantages over the offerings of
our competitors.
As of March 31, 2002, 39% of our employees were engaged in application
technology development. Most of these employees are located in our southern
California offices. Company-sponsored application technology development
expenses were $4.1 million, $6.6 million and $6.7 million , respectively, for
the fiscal years 2002, 2001 and 2000. Customer-sponsored application technology
development expenses were $5.5 million, $5.5 million and $1.5 million,
respectively, for the fiscal years 2002, 2001 and 2000.
10
OUR CURRENT APPLICATION DEVELOPMENT PROJECTS INCLUDE:
o INFOCUS 2.0 OF OUR ISLAND PACIFIC MERCHANDISE MANAGEMENT APPLICATION
SUITE. This release will offer significant enhancements to our current
release 1.5, which continues to be deployed by the majority of our
customers. InFocus 2.0 is expected to be released late in calendar
year 2002 and to be generally available at the beginning of calendar
2003.
o DEVELOPMENT OF THE ISLAND PACIFIC APPLICATION ARCHITECTURE USING THE
JAVA PROGRAMMING LANGUAGE. Several of our Java-based applications will
be able to operate on virtually any hardware platform, and will allow
for greater centralization of the control system environment. We are
continuing to redevelop other portions and modules of the solution in
Java as new features and enhancements are introduced.
o INVISION 1.5. InVision 1.5 is our affordable and scaleable, yet
complete merchandise management system designed to meet the needs of
the regional retailing entrepreneur. Through the launch of InVision
1.5, Island Pacific will penetrate the Tier 3 and 4 retail sectors, a
market that has been typically ignored by the competition due to the
size of the businesses.
o THE CONTINUED IMPROVEMENT OF OUR SINGLE VERSION STORE SOLUTION
APPLICATION, ONEPOINTE. We introduced this offering in the fourth
quarter of fiscal 2000, and we are continuing to enhance its features
and functions.
COMPETITION
The markets for our application technology and services are highly
competitive, subject to rapid change and sensitive to new product introductions
or enhancements and marketing efforts by industry participants. We expect
competition to increase in the future as open systems architecture becomes more
common and as more companies compete in the emerging electronic commerce market.
The largest of our competitors offering end-to-end retail solutions is JDA
Software Group, Inc. Other suppliers offer one or more of the components of our
solution. In addition, new competitors may enter our markets and offer
merchandise management systems that target the retail industry. For enterprise
solutions, our competitors include Retek Inc., SAP AG, nsb Retail Systems PLC,
Essentus, Inc., GERS, Inc., Marketmax, Inc., Micro Strategies Incorporated and
NONSTOP Solutions. For SVI Store Solutions, our competitors include Datavantage,
Inc., CRS Business Computers, nsb Retail Systems PLC, Triversity, ICL, NCR and
IBM. Our Direct applications compete with Smith Gardner & Associates, Inc., and
CommercialWare, Inc. Our professional services offerings compete with the
professional service groups of our competitors, major consulting firms
associated or formerly associated with the "Big 5" 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.
11
o Large and loyal customer base.
o Hardware platform independent Store Solution (POS) application.
o Breadth of our application technology suite including its
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 advantages could give them a competitive advantage over us. Moreover, our
current financial condition has placed us at a competitive disadvantage to many
of our larger competitors, as we are required to provide assurance to customers
that we have the financial ability to support the products we sell. We believe
strongly that we provide and will continue to provide excellent support to our
customers, as demonstrated by the continuing upgrade purchases by our top-tier
established customer base.
Our training products subsidiary competes with a large number of companies
offering similar products. The market for courseware and skills assessment
products is characterized by low barriers to entry. Many existing and potential
competitors have greater financial, technical, production and/or marketing
resources than we have. Our training subsidiary competes on the basis of its
existing breadth of products, timely introduction of new products and value
pricing. We believe that these factors give us an advantage over many of our
competitors. We further believe that larger competitors will find it difficult
to compete with us on the basis of price due to their higher development costs
and larger overhead structures.
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
12
rights may require our management to redirect our human and monetary resources
to address these claims. In addition, these actions could cause delivery delays
or require us to enter into royalty or license agreements. Royalty or license
agreements, if required, may not be available on terms acceptable to us, if they
are available at all. Any or all of these outcomes could have a material adverse
effect on our business, operating results and financial condition.
EMPLOYEES
At March 31,2002, we had a total of 175 employees, 160 of which were based
in the United States and 15 of which were based in the United Kingdom. Of the
total, 16% were engaged in sales and marketing, 39% were engaged in application
technology development projects, 27% were engaged in professional services, and
18% were in general and administrative. We believe our relations with our
employees are good. We have never has a work stoppage and none of our employees
are subject to a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal corporate headquarters consists of 13,003 square feet in a
building located at 5607 Palmer Way, Carlsbad, California. The lease for this
facility is currently being negotiated. The current monthly rent is $13,680. Our
primary operational office is in Irvine, California, where we occupy 26,521
square feet in a building located at 19800 MacArthur Blvd. This facility is
occupied under a lease that expires on June 30, 2005. The current monthly rent
is $55,620. We also occupy premises in the United Kingdom located at The Old
Building, Mill House Lane, Wendens Ambo, Essex, England. The lease for this
office building expires August 31, 2003. Annual rent is $43,646 (payable
quarterly) plus common area maintenance charges and real estate taxes.
ITEM 3. LEGAL PROCEEDINGS
In April of 2002 our former CEO, Thomas A. 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. On
June 18, 2002, we filed an action against Mr. Dorosewicz and an entity
affiliated with him in San Diego Superior Court, Case No. GIC790833, alleging
fraud and other causes of action relating to transactions Mr. Dorosewicz caused
us to enter into with his affiliates and related parties without proper board
approval. We expect one or more cross-claims from Mr. Dorosewicz in that action.
We do not believe we have any obligation to pay the severance benefits alleged
by Mr. Dorosewicz to be due, and we intend to vigorously pursue our causes of
action against Mr. Dorosewicz. We cannot at this time predict what will be the
outcome of these matters, as discovery has not yet commenced in either action.
Due to the declining performance of our Australian subsidiary, we decided
in the third quarter of fiscal 2002 to sell certain assets of our Australian
subsidiary to the former management of such subsidiary, and then cease
Australian operations. Such sale was however subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to 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.
13
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
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange under the symbol
"SVI" and has traded on that exchange since July 8, 1998. The following table
indicates the high and low sales prices for our shares for each quarterly period
for each of our two most recent fiscal years.
YEAR ENDED MARCH 31, 2002 HIGH LOW
First Quarter $ 1.600 $ 0.650
Second Quarter $ 1.040 $ 0.690
Third Quarter $ 1.010 $ 0.670
Fourth Quarter $ 0.920 $ 0.580
YEAR ENDED MARCH 31, 2001 HIGH LOW
First Quarter $ 10.250 $ 5.125
Second Quarter $ 7.063 $ 4.760
Third Quarter $ 5.000 $ 0.950
Fourth Quarter $ 2.700 $ 0.910
We have never declared any dividends. Our agreement with Union Bank
prohibits us from paying dividends while the term loan from Union Bank is
outstanding. We are also required to pay dividends on our Series A Convertible
Preferred Stock in preference and priority to dividends on our common stock. We
currently intend to retain any future earnings to discharge indebtedness and
finance the growth and development of the business. We therefore we do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends when we are permitted to do so will be at
the discretion of the board of directors and will be dependent upon the future
financial condition, results of operations, capital requirements, general
business conditions and other factors that the board of directors may deem
relevant.
As of June 28, 2002 there were 28,716,941 shares of our common stock
outstanding, which were held by approximately 128 stockholders of record.
During the quarter ended March 31, 2002, we issued the following securities
without registration under the Securities Act of 1933
o 45,133 shares of common stock to outside service providers for payment
of services rendered in previous periods, valued at $36,000.
o In conjunction with the Softline transactions described below under
"Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Financing Transactions -- Softline," we issued
to Softline an aggregate of 141,000 shares of newly-designated Series
A Convertible Preferred Stock at a deemed purchase price of $100 per
share in exchange for 10,700,000 SVI common shares held by Softline
and the discharge of a $12.3 million note payable to Softline. We also
transferred to Softline our note received in connection with the sale
of IBIS Systems Ltd.
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.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of, each of our last six fiscal years (including the six months ended March 31,
1998) are derived from our consolidated financial statements. The consolidated
financial statements as of March 31, 2002, 2001, and 2000 and the independent
auditors' report thereon, are included elsewhere in this report.
SIX MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, SEPTEMBER 30,
--------------------------------------------------- --------- ---------
2002 2001 2000 1999 1998 1997
--------- --------- --------- --------- --------- ---------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 27,109 $ 27,713 $ 26,652 $ 5,010 $ 414 $ 800
Cost of sales 10,036 9,188 6,421 1,401 37 66
--------- --------- --------- --------- --------- ---------
Gross profit 17,073 18,525 20,231 3,609 377 734
Expenses:
Application development 4,203 5,333 4,877
Depreciation and amortization 6,723 8,616 7,250 1,672 1,611 1,018
Selling, general and administrative 13,144 18,037 14,817 4,265 418 1,312
Impairment of intangible assets 6,519
Impairment of note receivable
received in connection with the
sale of IBIS Systems Limited 7,647
--------- --------- --------- --------- --------- ---------
Total expenses 24,070 46,152 26,944 5,937 2,029 2,330
--------- --------- --------- --------- --------- ---------
Income (loss) from operations (6,997) (27,627) (6,713) (2,328) (1,652) (1,596)
Other income (expense):
Interest income 10 628 1,074 520 274 33
Other income (expense) (46) 63 (206) 828 49 627
Interest Expense (3,018) (3,043) (1,493) (1) (35) (102)
Gain on disposals of Softline Limited shares 4,388 3,974
Gain (loss) on foreign currency transaction (9) 2 (10) (58) (14) (120)
--------- --------- --------- --------- --------- ---------
Total other income (expense) (3,063) (2,350) (635) 1,289 4,662 4,412
--------- --------- --------- --------- --------- ---------
Income (loss) before provision (benefit)
For income taxes (10,060) (29,977) (7,348) (1,039) 3,010 2,816
Provision (benefit) for income taxes 39 (4,778) (2,414) 30 887 190
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations (10,099) (25,199) (4,934) (1,069) 2,123 2,626
Income (loss) from discontinued operations (4,559) (3,746) 880 6,654 3,696 2,222
--------- --------- --------- --------- --------- ---------
Net income (loss) $(14,658) $(28,945) $ (4,054) $ 5,585 $ 5,819 $ 4,848
========= ========= ========= ========= ========= =========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.28) $ (0.72) $ (0.15) $ (0.04) $ 0.08 $ 0.19
Income (loss) from discontinued operations (0.13) (0.11) 0.03 0.24 0.13 0.16
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (0.41) $ (0.83) $ (0.12) $ 0.20 $ 0.21 $ 0.35
========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.28) $ (0.72) $ (0.15) $ (0.03) $ 0.07 $ 0.17
Income (loss) from discontinued operations (0.13) (0.11) 0.03 0.20 0.12 0.14
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (0.41) $ (0.83) $ (0.12) $ 0.17 $ 0.19 $ 0.31
========= ========= ========= ========= ========= =========
Weighted average common shares:
Basic 35,698 34,761 32,459 28,600 27,768 13,971
Diluted 35,698 34,761 32,459 33,071 31,046 15,618
BALANCE SHEET DATA:
Working capital $ (5,337) $ (2,782) $ 2,628 $ 26,387 $ 9,763 $ 596
Total assets $ 40,005 $ 56,453 $ 94,083 $ 52,374 $ 46,481 $ 19,230
Long-term obligations $ 8,013 $ 18,554 $ 21,586 $ 2,043 $ 771 $ 545
Stockholders' equity $ 21,952 $ 26,993 $ 53,497 $ 45,270 $ 37,075 $ 10,885
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO
FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN
IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS THE WORDS MAY, WILL,
SHOULD, EXPECT, PLAN, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT, POTENTIAL OR
CONTINUE, OR THE NEGATIVES OF SUCH WORDS OR OTHER COMPARABLE TERMINOLOGY. THESE
STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY.
IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS ARE DESCRIBED UNDER THE HEADING "BUSINESS RISKS"
BELOW, AND MAY BE IDENTIFIED FROM TIME TO TIME IN OUR FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, PRESS RELEASES AND OTHER COMMUNICATIONS.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO OBLIGATION TO UPDATE ANY
OF THE FORWARD-LOOKING STATEMENTS AFTER THE FILING OF THIS REPORT TO CONFORM
SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
OVERVIEW
We are an independent provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solution. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
We developed our retail application software technology and services
business through acquisitions. The largest and most important of these
acquisitions were:
o Applied Retail Solutions, Inc. (ARS) in July 1998 for aggregate
consideration of $7.9 million in cash and stock paid to the former
stockholders; and
o Island Pacific Systems Corporation in April 1999 for $35 million cash.
Island Pacific is one of the leading providers of retail enterprise
applications. ARS was one of the leading providers of store applications, and
the technology we acquired and have subsequently enhanced now forms the core of
our SVI Store Solutions.
We accounted for both the Island Pacific and ARS acquisitions using
purchase accounting, which has resulted in the addition of significant goodwill
and capitalized software assets on our balance sheet. We amortized capitalized
software and goodwill from both of these acquisitions using ten year lives
through March 31, 2002. See "Significant Accounting Policies" below.
Effective April 1, 2002, we restructured our operations into three
strategic business units lead by experienced managers. The business units are
Island Pacific, SVI Store Solutions and SVI Training Products, Inc. Our
operations are conducted principally in the United States and the United
Kingdom. Prior to February 2002, we also conducted business in Australia.
We currently derive the majority of our revenues from the sale of
application software licenses and the provision of related professional and
support services. Application software license fees are dependent upon the sales
volume of our customers, the number of users of the application(s), and/or the
number of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds additional users
and/or adds additional locations, we charge additional license fees. We
typically charge for support, maintenance and software updates on an annual
basis pursuant to renewable maintenance contracts. We typically charge for
professional services including consulting, implementation and project
management services on an hourly basis. Our sales cycles for new license sales
historically ranged from three to twelve months, but new license sales were
limited during the past two fiscal years and sales cycles are now difficult to
estimate. Our long sales cycles have in the past caused our revenues to
fluctuate significantly from period to period. The reduction of new license
sales caused the revenues of our Australian subsidiary to decrease substantially
prior to discontinuation of operations in February 2002, and our sales mix in
the US and the UK to shift to lower margin services.
16
We evaluate local operations primarily based on total revenues and earnings
before interest expense, provision for income taxes, depreciation and
amortization and impairment charges as shown below.
YEAR ENDED MARCH 31,
2002 2001 2000
------------------------ ------------------------ ------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
------ ---------- ------ ---------- ------ ----------
Net sales $ 27,109 100% $ 27,713 100% $ 26,652 100%
Cost of sales 10,036 37% 9,188 33% 6,421 24%
--------- --------- ---------- --------- ---------- ---------
Gross profit 17,073 63% 18,525 67% 20,231 76%
Application development expense 4,203 16% 5,333 19% 4,877 18%
Selling, general and administration expenses 13,144 48% 18,037 65% 14,817 56%
Other income (expense) (45) 0% 694 3% 858 3%
--------- --------- ---------- --------- ---------- ---------
Income (loss) before interest expense,
provision for income taxes, depreciation
and amortization and impairment (319) (1)% (4,151) (14)% 1,395 5%
Depreciation and amortization (6,723) (25)% (8,616) (31)% (7,250) (27)%
Impairment of intangible assets (6,519) (24)%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Ltd. (7,647) (28)%
Interest expense (3,018) (11)% (3,043) (11)% (1,493) (6)%
Provision (benefit) for income taxes 39 0% (4,778) 17% (2,414) 9%
--------- --------- ---------- --------- ---------- ---------
(Loss) from continuing operations (10,099) (37)% (25,199) (91)% (4,934) (19)%
Income (loss) from discontinued operations,
net of taxes (4,559) (3,746) 880
--------- ---------- ----------
Net (loss) $(14,658) $(28,945) $ (4,054)
========= ========= =========
We also manage long-lived assets by geographic region. The geographic
distribution of our revenues and long-lived assets for the fiscal years ended
March 31, 2002, 2001, and 2000 is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
(in thousands)
Net Sales:
United States $ 24,559 $ 25,457 $ 22,820
Australia (discontinued operations) 2,363 4,959 8,372
South Africa (discontinued operations) 1,090
United Kingdom 2,550 2,256 3,832
--------------- ---------------- ---------------
Total net sales $ 29,472 $ 32,672 $ 36,114
=============== ================ ===============
Long-lived assets:
United States $ 35,280 $ 48,270 $ 60,909
Australia (discontinued operations) 1,370 11,471
United Kingdom 22 59 75
--------------- ---------------- ---------------
Total long-lived assets $ 35,302 $ 49,699 $ 72,455
=============== ================ ===============
Up to March 31, 2002, we classified our operations into two lines of
business: retail solutions and training products. As revenues, results of
operations and assets related to our training products subsidiary were below the
threshold established for segment reporting, we consider our business for the
fiscal year ended March 31, 2002 to have consisted of one reportable operating
segment. Effective April 1, 2002, we operate under three strategic business
units. Each of these units will be measured separately against their individual
business plans.
Results of operations for fiscal 2002 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
2002 fiscal year.
We have taken a number of affirmative steps to address our operating
situation and liquidity problems, and to position us for improved results of
operations.
o In the third quarter of 2002, we completed an analysis of our
operations and concluded that it was necessary to restructure the
composition of our management and personnel. We were concerned that
the new management team had not been able to close a number of new
business opportunities or to raise capital. We were also concerned
17
with general economic conditions, especially after the terrorist
attacks of September 11, 2001, and the resulting ongoing hostilities
in the world. Our CEO, Thomas A. Dorosewicz, and our CFO, Kevin M.
O'Neill, elected to leave to pursue other interests, and both resigned
from our board of directors. We appointed Barry M. Schechter, our
Chairman, as Chief Executive Officer, and Jackie Tran, our Controller,
as acting Chief Financial Officer. We also reduced our staff by a
total of 20%, and restructured and refocused our sales force toward
opportunities available in the current economic climate. This
reorganization resulted in costs savings of approximately $3 million
per year.
o In the fourth quarter of 2001, we appointed experienced managers to
manage our Island Pacific and SVI Store Solutions operations. We also
appointed an experienced vice president of sales to the team.
o We developed measurable budgets for each divisional operation so as to
measure performance directly and maintain control over expenditures.
o We restructured our application development efforts in concert with
our new Marketing and Technology Management team to work more closely
with customers for improvements to our offerings. We expect the result
will be application technology that more closely meets the needs of
our customers. Additionally, more of the costs of development may be
offset against customer specific revenues.
o We issued a total of $1.25 million in convertible notes to a limited
number of accredited investors related to ICM Asset Management, Inc.
of Spokane, Washington, a significant beneficial owner of our common
stock. In July 2002, we amended these notes to extend the maturity
date and other provisions, and we replaced the warrants issued to
these investors. See "Financing Transactions -- ICM Asset Management,
Inc." below.
o We relocated our principal executive offices to smaller and less
expensive premises in Carlsbad, California.
o We negotiated an extension of our senior bank lending facility to
August 31, 2003. See "Liquidity and Capital Resources -- Contractual
Obligations -- Union Bank" below.
o We completed an integrated series of transaction with Softline to
repay our subordinated note to Softline, to transfer to Softline our
note received in connection with the sale of IBIS Systems Limited, and
to issue new Series A Convertible Preferred securities in exchange for
10,700,000 SVI common shares. See "Financing Transactions -- Softline"
below.
o Our Australian subsidiary ceased operations in February 2002. See
"Discontinued Operations" below.
o In May 2002, we entered into a new two-year software development and
services agreement with our largest customer, Toys "R" Us, Inc. Toys
also agreed to invest $1.3 million for the purchase of a non-recourse
convertible note and a warrant to purchase 2,500,000 common shares.
For a further details, see "Financing Transactions -- Toys "R" Us"
below.
For a further discussion of our plans to address our net losses and negative
working capital, see Note 1 to our Financial Statements included with this
report.
DISCONTINUED OPERATIONS
Due to the declining performance of our Australian subsidiary, we decided
in the third quarter of fiscal 2002 to sell certain assets of the Australian
subsidiary to the former management of such subsidiary, and then cease
Australian operations. Such sale was however subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to the entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as the maximum amount of our
potential exposure. The receiver has also claimed that we are obligated to it
for inter-company balances of $636,000, but we do not believe any amounts are
owed to the receiver, who has not as of the date of this report acknowledged the
monthly corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due. For further
details, see "Liquidity and Capital Resources -- Contractual Obligations --
National Australia Bank" below.
18
The disposal of our Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown on our
financial statements as discontinued operations with the prior period results
restated.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements:
o REVENUE RECOGNITION. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of certain
expenses such as commissions and royalties. We follow specific and
detailed guidelines in measuring revenue; however, certain judgments
affect the application of our revenue policy.
We license software under non-cancelable agreements and provide related
services, including consulting and customer support. We recognize
revenue in accordance with Statement of Position 97-2 (SOP 97-2),
Software Revenue Recognition, as amended and interpreted by Statement
of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with respect to certain transactions, as well as Technical
Practice Aids issued from time to time by the American Institute of
Certified Public Accountants. We adopted Staff Accounting Bulletin No.
101 (SAB 101), Revenue Recognition in Financial Statements, during the
first quarter of 2000. SAB 101 provides further interpretive guidance
for public companies on the recognition, presentation, and disclosure
of revenue in financial statements. The adoption of SAB 101 did not
have a material impact on our licensing or revenue recognition
practices.
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
19
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. We assess
the impairment of identifiable intangibles, long-lived assets and
related goodwill whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. When we determine that
the carrying value of intangibles, long-lived assets and related
goodwill 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. Net intangible assets, long-lived assets, and
goodwill amounted to $35.5 million as of March 31, 2002.
In our 2003 fiscal year, Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets became effective
and as a result, we will cease to amortize approximately $14.8 million
of goodwill. We had recorded approximately $2.2 million of amortization
during fiscal 2002 and would have recorded approximately $2.2 million
of amortization during fiscal 2003.
FINANCING TRANSACTIONS
AMRO INTERNATIONAL, S.A.
On October 24, 2000, the SEC declared effective a registration statement
registering up to 700,000 shares of our common stock for resale by AMRO
International, S.A. AMRO purchased 344,948 shares in March 2000 for
approximately $2.9 million, and under the terms of the purchase agreement, was
entitled to receive additional shares of our common stock if the average of the
closing price of our stock for the five days preceding the effective date of the
registration statement was less than $10.34. Pursuant to the repricing formula,
we issued to AMRO 375,043 additional shares of common stock. We became obligated
to pay to AMRO liquidated damages for late effectiveness of the registration
statement in the amount of $286,000. AMRO agreed in March 2001 to accept 286,000
shares of common stock in satisfaction of the liquidated damages, and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, we issued AMRO a two-year warrant to purchase up
to 107,000 shares of common stock at $1.50 per share. We may call the warrant
for $0.001 per share if our common stock trades above $2.00 per share for twenty
consecutive trading days and the warrant shares are registered with the SEC for
resale or otherwise salable by AMRO without restriction. AMRO will have thirty
days after the call to exercise the warrant, after which time the warrant will
expire.
We agreed to register all of the shares sold in March 2001, and those that
we may sell under the warrant, with the SEC. We became obligated to pay to AMRO
as liquidated damages the amount of $60,000. In April 2002, AMRO agreed to
accept 140,000 shares of common stock in satisfaction of the liquidated damages.
20
ICM ASSET MANAGEMENT, INC.
In December 2000, we entered into an agreement to sell up to 2,941,176
common shares to a limited number of accredited investors related to ICM Asset
Management, Inc. for cash at $0.85 per share. We sold 1,764,706 of such shares
in December 2000, for gross proceeds of $1.5 million, and an additional 588,235
shares in January 2001, for additional gross proceeds of $0.5 million. Two of
the investors exercised a right to purchase an additional 588,235 shares in
February 2001 for additional gross proceeds of $0.5 million.
We also agreed to issue to each investor a warrant to purchase one common
share at $1.50 for each two common shares purchased in the private placement
(aggregate warrants exercisable into 1,470,590 option shares). We had the right
to call 50% of the warrants, subject to certain conditions, if our common shares
traded at a price above $2.00 per share for thirty consecutive days. We had the
right to call the remaining 50% of the warrants, subject to certain conditions,
if our common shares traded at a price above $3.00 per share for thirty
consecutive days.
We agreed to register all of the shares sold under the purchase agreement
or the warrants with the SEC. Our agreement with the investors provided that if
a registration statement was not effective on or before April 21, 2001, we would
be obligated to issue two-year warrants to each investor, entitling the investor
to purchase additional shares of our common stock at $0.85 per share. We filed a
registration statement in January 2001 to register these shares, but it did not
become effective. As of June 28, 2002, we had issued the investors warrants to
purchase 1,249,997 common shares under this agreement.
In May and June 2001, we issued a total of $1.25 million in convertible
notes to a limited number of accredited investors related to ICM. The notes were
originally due August 30, 2001, and required interest at the rate of 12% per
annum to be paid until maturity, with the interest rate increasing to 17% after
maturity. Any portion of the unpaid amount of principal and interest was
convertible at any time by the investors into common shares valued at $1.35 per
share. We also agreed to issue to the investors three-year warrants to purchase
250 common shares for each $1,000 in notes purchased, at an exercise price of
$1.50 per share.
In July 2002, we agreed to amend the terms of the notes and warrants issued
to the investors related to ICM. The investors agreed to replace the existing
notes with new notes having a maturity date of September 30, 2003. The interest
rate on the new notes was reduced to 8% per annum, increasing to 13% in the
event of a default in payment of principal or interest. [We are required to pay
accrued interest on the new notes calculated from July 19, 2002, in quarterly
installments beginning September 30, 2002.] The investors agreed to reduce
accrued interest and late charges on the original notes up to $85,000, and to
accept the reduced amount in shares of our common stock valued at the average
closing price of our shares on the American Stock Exchange for the 10 trading
days prior to July 19, 2002. The new notes are convertible at the option of the
holders into shares of our common stock valued at $0.60 per share. We do not
have a right to prepay the notes.
We also agreed that the warrants previously issued to the investors to
purchase an aggregate of 2,996,634 shares at exercise prices ranging from $0.85
to $1.50, and expiring on various dates between December 2002 and June 2004,
would be replaced by new warrants to purchase an aggregate of 1,580,244 shares
at $0.60 per share, expiring July 19, 2007. We anticipate that warrants for an
additional 36,451 shares will be exchanged for warrants for 19,756 shares on
substantially identical terms. The replacement warrants are not callable by us.
We also agreed to file a registration statement for the resale of all
shares held by or obtainable by these investors. In the event such registration
statement is not declared effective by the SEC within 120 days after July 17,
2002, we will be obligated to issue five-year penalty warrants for the purchase
of 5% of the total number of registrable securities at an exercise price of
$0.60 per share. We will be obligated to issue additional penalty warrants for
each 30 day period after such date in which the registration statement is not
effective. No further penalty warrants will accrue from our original
registration obligation.
SOFTLINE
In May 2002, we entered into an integrated series of transactions with
Softline by which:
1. We transferred to Softline the note received in connection with the
sale of IBIS Systems Ltd.
2. We issued to Softline 141,000 shares of newly-designated Series A
Convertible Preferred Stock.
3. Softline released us from approximately $12.3 million in indebtedness
due to Softline under a promissory note.
4. Softline surrendered 10,700,000 shares of the our common shares held
by Softline.
The Series A Preferred Stock has a stated value of $100 per share and is
redeemable at our option any time prior to the maturity date of December 31,
2006 for 107% of the stated value and accrued and unpaid dividends. The shares
are entitled to cumulative dividends of 7.2% per annum, payable semi-annually
when, as and if declared by the board of directors. Softline may convert each
share of Series A Preferred at any time into the number of common shares
determined by dividing the stock stated value plus all accrued and unpaid
dividends, by a conversion price initially equal to $0.80. The conversion price
21
increases at an annual rate of 3.5% calculated on a semi-annual basis. The
Series A Preferred Stock is entitled upon liquidation to an amount equal to its
stated value plus accrued and unpaid dividends in preference to any
distributions to our common stockholders. The Series A Preferred Stock has no
voting rights prior to conversion into common stock, except with respect to
proposed impairments of the Series A Preferred rights and preferences, or as
provided by law. We have the right of first refusal to purchase all but not less
than all of any shares of Series A Preferred Stock or common shares received on
conversion which Softline may propose to sell to a third party, upon the same
price and terms as the proposed sale to a third party. We also granted Softline
certain registration rights for the common shares into which the Series A
Preferred is convertible, including the right to demand registration on Form S-3
if such form is available to us and Softline proposes to sell at least $5
million of registrable common shares, and the right to include shares obtainable
upon conversion of the Series A Preferred Stock in other registration statements
we propose to file.
These transactions were recorded for accounting purposes on January 1,
2002, the date when Softline took effective control of the IBIS note and ceased
accruing interest on the Softline note. We did not recognize any gain or loss in
connection with the disposition of the IBIS note or the other components of the
transactions.
TOYS "R" US
In May 2002, Toys "R" Us agreed to invest $1.3 million for the purchase of
a non-recourse convertible note and a warrant to purchase 2,500,000 common
shares. The purchase price is payable in installments through September 27,
2002. The note is non-interest bearing, and the face amount is payable in shares
of our stock valued at $0.553 per share. The note is due May 29, 2009, or if
earlier than that date, three years after the completion of the development
project contemplated in the development agreement between us and Toys entered
into at the same time. We do not have the right to prepay the convertible note
before the due date, but upon the due date, we may at our option pay the
principal amount in cash rather than shares to the extent Toys did not earlier
convert the note to shares. The face amount of the note is 16% of the $1.3
million purchase price as of May 29, 2002, and increases by 4% of the $1.3
million purchase price on the last day of each succeeding month, until February
28, 2004, when the face amount is the full $1.3 million purchase price. The face
amount will cease to increase if Toys terminates its development agreement with
us for a reason other than our breach. The face amount will be zero if we
terminate the development agreement due to an uncured breach by Toys of the
development agreement.
The warrant entitles Toys to purchase up to 2,500,000 of our common shares
at $0.553 per share. The warrant is initially vested as to 400,000 shares as of
May 29, 2002, and vests at the rate of 100,000 shares per month until February
28, 2004. The warrant will cease to vest if Toys terminates its development
agreement with us for a reason other than our breach. The warrant will become
entirely non-exercisable if we terminate the development agreement due to an
uncured breach by Toys of the development agreement. Toys may elect a "cashless
exercise" where a portion of the warrant is surrendered to pay the exercise
price.
The note conversion price and the warrant exercise price are each subject
to a 10% reduction in the event of an uncured breach by us of certain covenants
to Toys. These covenants do not include financial covenants. Conversion of the
note and exercise of the warrant each require 75 days advance notice to us. As a
result, under the rules of the SEC, Toys will not be considered the beneficial
owner of the common shares into which the note is convertible and the warrant is
exercisable until 15 days after it has given notice of conversion or exercise,
and then only to the extent of such noticed conversion or exercise. We also
granted Toys certain registration rights for the common shares into which the
note is convertible and the warrant is exercisable, including the right to
demand registration on Form S-3 if such form is available to us, and the right
to include shares into which the note is convertible and the warrant is
exercisable in other registration statements we propose to file.
22
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
YEAR ENDED MARCH 31,
2002 2001 2000
----------------------- ---------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- --------- --------- --------- --------- ---------
Net sales $ 27,109 100% $ 27,713 100% $ 26,652 100%
Cost of sales 10,036 37% 9,188 33% 6,421 24%
--------- --------- --------- --------- --------- ---------
Gross profit 17,073 63% 18,525 67% 20,231 76%
Expenses:
Application development 4,203 16% 5,333 19% 4,877 18%
Depreciation and amortization 6,723 25% 8,616 31% 7,250 27%
Selling, general and administration 13,144 48% 18,037 65% 14,817 56%
Impairment of intangible assets 6,519 24%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Ltd. 7,647 (28)%
--------- --------- --------- --------- --------- ---------
Total expenses 24,070 89% 46,152 167% 26,944 101%
--------- --------- --------- --------- --------- ---------
Loss from operations (6,997) (26)% (27,627) (100)% (6,713) (25)%
Other income (expense)
Interest income 10 0% 628 2% 1,074 4%
Other income (expense) (46) 0% 63 0% (206) (1%)
Interest expense (3,018) (11)% (3,043) (11)% (1,493) (6)%
Gain (loss) on foreign currency translation (9) 0% 2 0% (10) 0%
--------- --------- --------- --------- --------- ---------
Total other expense (3,063) (11)% (2,350) (8)% (635) (2)%
--------- --------- --------- --------- --------- ---------
Loss before provision (benefit) for
income taxes (10,060) (37)% (29,977) (108)% (7,348) (28)%
Provision (benefit) for income taxes 39 0% (4,778) 17% (2,414) 9%
--------- --------- --------- --------- --------- ---------
(Loss) from continuing operations (10,099) (37)% (25,199) (91)% (4,934) (19)%
Income (loss) from discontinued operations,
net of taxes (4,559) (3,746) 880
--------- --------- ---------
Net (loss) $(14,658) $(28,945) $ (4,054)
========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2001
NET SALES
Net sales decreased slightly by $0.6 million, or 2%, to $27.1 million in
the fiscal year ended March 31, 2002 from $27.7 million in the fiscal year ended
March 31, 2001. Fiscal year 2001 revenues included recognition of $2.0 million
in revenue from a one-time sale of technology rights which was signed in fiscal
2000.
Fiscal 2002 was a challenging year in which to close new application
license sales. We believe our difficulties initially arose from insufficient
staffing of our sales force. Although we significantly increased the staffing of
our sales force in the first quarter of fiscal 2002, the economic slowdown and
the terrorist attacks of September 11, 2001, and the ongoing hostilities in the
world increased the challenges faced by our sales force. In addition, our
financial condition may have interfered with our ability to sell new application
software licenses, as implementation of our applications generally requires
extensive future services and support, and some potential customers have
expressed concern about our financial ability to provide these ongoing services.
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.
In October 2001, we took aggressive steps designed to improve sales of new
application software licenses, and to streamline our operations around services
to our existing customers. These steps included a restructuring of our
operations and repositioning of the sales force to better focus on the
historical markets of our retail enterprise solution and our retail store
solution. This strategy has permitted us to reduce overhead expenses, while
allowing us to target those markets most likely to result in sales in the
current economic climate. Our newly focused sales force has also begun to
aggressively market individual modules within our suites. These modules have
been improved through modification services performed for existing customers,
and may now be marketed as separate applications to new customers. These modules
are suited to those potential customers looking for incremental upgrades to
their systems at a substantially lower cost, and with a substantially reduced
implementation commitment, than an upgrade to our full suite would require. We
intend to add additional sales personnel at such time as the economic climate
and market for our products permits.
23
In July 2001, we entered into an agreement to expand our current
professional services activities with Toys "R" Us significantly through
September 2003. In May 2002, we entered into a new development agreement with
Toys for the provision of development services through February 2004. We expect
the overall dollar amount of professional services we perform for Toys in 2003
to be comparable to fiscal 2002, and to continue to be a significant source of
professional services revenues in fiscal 2004. Toys accounted for 42% of our net
sales in fiscal 2002 compared to 29% of net sales in fiscal 2001.
COST OF SALES/GROSS PROFIT
Cost of sales increased $0.8 million, or 9%, to $10.0 million in the fiscal
year ended March 31, 2002 from $9.2 million in the fiscal year ended March 31,
2001. Gross profit as a percentage of net sales decreased to 63% in fiscal 2002
from 67% in fiscal 2001. The decrease in gross profit margin was due to a
further shift in the sales mix from high margin application licenses to lower
margin software modification and professional services. During fiscal 2002,
application technology license revenues represented 17% of net sales and related
services represented 76% of net sales, compared to 25% and 69% of net sales,
respectively, of net sales during fiscal 2001.
Cost of sales for fiscal 2002 and 2001 included $3.6 million and $3.4
million, respectively, in costs associated with the development or modification
of modules for Toys "R" Us, including the use of higher cost outsource
development services (subcontractors) for certain components of the overall
project. These costs are neither capitalized nor included in application
technology development expenses, but we consider them to be part of our overall
application technology development program.
APPLICATION DEVELOPMENT EXPENSE
Application development expense for the fiscal year ended March 31, 2002
was $4.2 million as most development expenditures were client funded compared to
$5.3 million for the fiscal year ended March 31, 2001, a decrease of 21%. The
decrease reflects a shift toward customer-funded development expenses. For a
further discussion of our application technology development program, see
"Description of Business" under the heading "Application Technology
Development" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $4.9 million, or
27%, to $13.1 million compared to $18.0 million in the fiscal year ended March
31, 2001. The decrease was due to the following:
o Personnel reduction implemented in the fourth quarter of 2001 and
third quarter of 2002 and control of expenditures.
o A $0.9 million reserve for bad debts in fiscal 2001.
During the third quarter of 2002, we completed an analysis of our
operations and concluded that it was necessary to restructure the composition of
our management and personnel. We anticipated that the restructuring would result
in an approximately $3.0 million annual reduction in our expense levels compared
to expenses prior to implementation of the plan. To the extent resources are
available, we expect to slowly increase our expense levels in fiscal 2003 from
the reduced level after the reductions in the third quarter of fiscal 2002.
Additional planned expenditures are for the building of our sales force and for
additions to our Professional Services group for US and UK retail operations as
new licenses and services are sold.
EARNINGS (LOSS) FROM CONTINUING OPERATIONS AND BEFORE INTEREST EXPENSE,
INCOME TAXES, DEPRECIATION, AMORTIZATION AND IMPAIRMENTS
The loss from continuing operations and before interest expense, income
taxes, depreciation, amortization, and impairments of intangible assets and
notes receivable was $0.3 million for the year ended March 31, 2002 as compared
to a comparable loss from continuing operations of $4.2 million in the year
ended March 31, 2001, representing an improvement of $3.9 million. The gross
profit for the year decreased by $1.5 million and other income by $3.9 million,
but was offset by improvements primarily from reduced application development
expenses in the amount of $1.1 million, and reduced selling, general and
administrative expenses of $4.9 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $1.9 million, or 22%, to $6.7
million in the fiscal year ended March 31, 2002 from $8.6 million in the fiscal
year ended March 31, 2001. The decrease reflected the reduction in the base
amounts of goodwill and capitalized software assets resulting from the
recognition of impairments of those assets in the fourth quarter of fiscal 2001.
As a result of the implementation of SFAS No. 142, we will not amortize goodwill
in fiscal 2003. We will likely however record impairment charges based upon the
transitional analysis of goodwill impairment required by SFAS 142, and we may
record impairment charges based upon the impairment testing procedures required
by SFAS 144.
24
INTEREST INCOME AND EXPENSE
Interest expense was $3.0 million in the fiscal years ended March 31, 2002
and 2001.
Interest income decreased $0.6 million to $0.1 million in fiscal 2002,
compared to $0.7 million in fiscal 2001 due to cessation of the accrual of
interest income on the note receivable received in connection with the sale of
IBIS after the second quarter of fiscal 2001.
DISCONTINUED OPERATIONS
Loss from discontinued operations in fiscal 2002 was $4.6 million, which
included $1.4 million of net loss from Australian operations and $3.2 million of
loss on disposal. Loss from discontinued operations in fiscal 2001 was $3.7
million. Net sales from Australian operations decreased from $5.0 million in
fiscal 2001 to $2.4 million in fiscal 2002.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
NET SALES
Net sales increased by $1.0 million, or 4%, to $27.7 million in the fiscal
year ended March 31, 2001 from $26.7 million in the fiscal year ended March 31,
2000. Fiscal year 2001 revenues included recognition of $2.0 million in revenue
from a one-time sale of technology rights which was signed in fiscal 2000. In
addition to those factors, the decrease in net sales was principally due to a
$1.6 million decrease in revenue from our United Kingdom retail operations
reflecting a substantial decrease in new application license sales.
The substantial decrease in new application license sales was due in part
to our inability to close several larger application license transactions in our
sales pipeline.
COST OF SALES/GROSS PROFIT
Cost of sales increased $2.8 million, or 43%, to $9.2 million in the fiscal
year ended March 31, 2001 from $6.4 million in the fiscal year ended March 31,
2000. Gross profit as a percentage of net sales decreased to 67% in fiscal 2001
from 76% in fiscal 2000. The decrease in gross profit margin was due to a shift
in the sales mix from high margin application licenses to lower margin software
modification and professional services. During fiscal 2001, application
technology license revenues represented 23% of net sales and related services
represented 77% of net sales, compared to 30% and 70% of net sales,
respectively, of net sales during fiscal 2000.
Cost of sales for fiscal 2001 included $4.9 million in costs associated
with the development or modification of modules for Toys "R" Us, including the
use of higher cost outsource development services (subcontractors) for certain
components of the overall project. These costs are neither capitalized nor
included in application technology development expenses, but we consider them to
be part of our overall application technology development program.
APPLICATION DEVELOPMENT EXPENSE
Application development expense for the fiscal year ended March 31, 2001
was $5.3 million compared to $4.9 million for the fiscal year ended March 31,
2000, an increase of 8%. During fiscal 2001, we continued our application
technology development program begun in fiscal 2000 to improve and integrate our
application software. For a further discussion of our application technology
development program, see "Description of Business" under the heading
"Application Technology Development" above.
25
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $3.2 million, or
22%, to $18.0 million compared to $14.8 million in the fiscal year ended March
31, 2000. The increase was due to the following:
o One-time personnel reduction charge of $0.9 million in the fourth
quarter associated with the reorganization of our SVI Retail
operations in Irvine and San Diego, California.
o An increase in professional fees and allowances of $1.1 million.
o Increased personnel expense, in part due to our acquisition of
MarketPlace Systems Corporation.
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME
TAXES, DEPRECIATION, AMORTIZATION AND IMPAIRMENTS
The loss from continuing operations before interest expense, income taxes,
depreciation, amortization and impairments of intangible assets and notes
receivable was $4.2 million for the year ended March 31, 2001 as compared to a
comparable profit from continuing operations of $1.4 million in the year ended
March 31, 2000, representing a reduction of $5.6 million. The gross profit for
the year decreased by $1.7 million and other income by $0.2 million; application
development expenses increased by $0.5 million and selling, general and
administrative expenses increased by $3.2 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $1.3 million, or 18%, to $8.6
million in the fiscal year ended March 31, 2001 from $7.3 million in the fiscal
year ended March 31, 2000. The increase was due to the amortization of software
purchased in connection with the acquisition of MarketPlace Systems Corporation
in March 2000, and to amortization of capitalized software that was made
available for sale in fiscal 2001.
IMPAIRMENT OF ASSETS
Our March 31, 2001 balance sheet includes a $7.0 million note receivable.
This note was secured by 1,536,000 shares or approximately 11% of the
outstanding common stock of Integrity Software, Inc. We do not believe the
obligor under the note has significant assets other than the Integrity shares
securing the note. The obligor is an entity affiliated with Integrity, and its
ability to sell the Integrity shares to repay the note is limited by law and by
market conditions. During the fiscal year ended March 31, 2001, we determined
that the value of this note receivable was impaired, and we wrote off a total of
$7.6 million as a valuation allowance. We obtained an independent valuation of
the Integrity shares securing the note at March 31, 2001, which supported the
value shown on our March 31, 2001 balance sheet. This note and the shares
securing it were transferred to Softline effective January 1, 2002. See
"Financing Transactions -- Softline" above.
We also recorded in the fourth quarter of fiscal 2001 an impairment of $6.5
million in capitalized software and goodwill associated with Australian
operations. In determining the amount of impairment, we compared the net book
value of the long-lived assets associated with the Australian subsidiary,
primarily consisting of recorded goodwill and software intangibles, to their
estimated fair values. Fair values were estimated based on anticipated future
cash flows of the Australian operations, discounted at a rate commensurate with
the risk involved.
INTEREST INCOME AND EXPENSE
Interest expense increased $1.5 million, or 100%, to $3.0 million in the
fiscal year ended March 31, 2001 from $1.5 million in the fiscal year ended
March 31, 2000. The increase was due to inclusion for the full 2001 fiscal year
of interest from indebtedness incurred in June 1999 to purchase Island Pacific,
and an increase in our average interest rate to 12% in fiscal 2001 compared to
9% in fiscal 2000. The increase also included $0.5 million in amortized loan
refinancing costs, including $0.2 million of amortized loan cost reimbursement
to Softline.
Interest income decreased $0.5 million to $0.6 million in fiscal 2001,
compared to $1.1 million in fiscal 2000 due to decreased cash and cash
equivalents.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the fiscal year ended March 31, 2002, we financed our operations
using cash on hand, internally generated cash, cash from the issuance of
convertible notes and loans from an entity affiliated with Donald S. Radcliffe,
a director. During the fiscal year ended March 31, 2001, we financed our
operations using cash on hand, internally generated cash, cash from the sale of
26
common stock, proceeds from the exercise of options, lines of credit and loans
from each of Softline, a subsidiary of Softline and Barry M. Schechter, our
Chairman. During the fiscal year ended March 31, 2000, we financed our
operations through internally generated cash, proceeds from bank and other loans
(including a loan from a major stockholder), proceeds from the sale of common
stock and the exercise of options, and bank lines of credit. At March 31, 2002
and 2001, we had cash of $1.3 million.
Operating activities provided cash of $1.6 million in the fiscal year ended
March 31, 2002 and used cash of $2.4 million in the fiscal year ended March 31,
2001 and $2.3 million in the fiscal year ended March 31, 2000. Cash provided for
operating activities in fiscal 2002 resulted primarily from $2.5 million
decrease in accounts receivable and other receivables, $1.6 million increase in
deferred revenue, $7.1 million in non-cash depreciation and amortization, $3.2
million of loss on disposal of Australian operations, $2.3 million increase in
interest payable and $1.0 million in non-cash charges for stock-based
compensation and interest related to convertible notes due stockholders; offset
by $14.7 million of net losses and $1.9 million decrease in accounts payable and
accrued expenses. Cash used for operating activities in fiscal 2001 resulted
primarily from $28.9 million of net losses, a $4.4 million decrease in net
deferred tax liability and a $4.4 million decrease in deferred revenue; offset
by $16.5 million in non-cash impairments of assets, $9.5 million in non-cash
depreciation and amortization, a $5.1 million decrease in accounts receivable,
and a $4.4 million increase in accounts payable and accrued expenses. Cash used
for operating activities during fiscal year 2000 primarily resulted from a $4.1
million net loss, a $4.6 million increase in accounts receivable and other
receivables, a $0.6 million decrease in accounts payable and accrued expenses, a
$0.8 million increase in interest receivable, a $2.6 million decrease in income
tax payable, and a $2.6 million increase in deferred income taxes liability;
offset in part by $7.9 million of non-cash depreciation and amortization expense
and a $5.0 million increase in deferred revenue.
Accounts receivable decreased during fiscal year 2002 primarily due to a
write-off of $367,000 in receivables in connection with the discontinuation of
Australian operations in February 2002 and a significant improvement in
collection efforts. Accounts receivable decreased during fiscal year 2001
primarily due to payment during fiscal 2001 of $2.0 million from the one-time
sale of technology rights during fiscal 2000, the write-off during the fourth
quarter of fiscal 2001 of the $1.6 million outstanding balance remaining from
the one-time sale of technology rights and a decrease in trade receivables aged
over 30 days as a result of improvement in collection efforts. Accounts
receivable increased during fiscal year 2000 primarily due to the inclusion of
Island Pacific accounts receivable of $4.0 million at March 31, 2000 and the
$3.3 million total receivable associated with the non-recurring sale of
technology rights. Accounts receivable balances fluctuate significantly due to a
number of factors including acquisitions and dispositions, seasonality, shifts
in customer buying patterns, contractual payment terms, the underlying mix of
applications and services sold, and geographic concentration of revenues.
Investing activities used cash of $0.7 million, $3.0 million, and $36.5
million in the fiscal years ended March 31, 2002, 2001 and 2000. Investing
activities during fiscal 2002 included a $0.4 million increase in capitalized
software development costs and $0.3 million in furniture and equipment
purchases. Investing activities during fiscal year 2001 included a $2.5 million
increase in purchase of software and capitalized software development costs and
$0.5 million in furniture and equipment purchases. Investing activities during
fiscal year 2000 included a $33.8 million net cash payment for the acquisition
of Island Pacific, $1.8 million in software purchases and capitalized software
development costs and $0.8 million in capital expenditures.
Financing activities used cash of $0.8 million in the fiscal year ended
March 31, 2002 and provided cash of $1.9 million and $30.9 million in the fiscal
years ended March 31, 2001 and 2000. Financing activities during fiscal year
2002 included $1.2 million in note payments and $0.8 million decrease in amounts
due to stockholders; offset in part by $1.3 million in proceeds from issuance of
convertible notes. Financing activities during fiscal year 2001 included $3.8
million in proceeds from the sale of common stock, $9.9 million increase in
amounts due to stockholders and $1.6 million in proceeds from lines of credit,
offset by $13.2 million in note payments. Financing activities during fiscal
year 2000 included $18.5 million in proceeds from loans obtained to acquire
Island Pacific, $9.6 million in proceeds from the exercise of options and
private sale of common stock and $2.3 million in proceeds from lines of credit,
offset in part by $1.5 million in loan payments.
Changes in the currency exchange rates of our foreign operations had the
effect of decreasing cash by $0.1 million in the fiscal years ended March 31,
2002 and 2001 and $0.3 million in the fiscal year ended March 31, 2000.
27
CONTRACTUAL OBLIGATIONS
THE FOLLOWING TABLE SUMMARIZES OUR CONTRACTUAL OBLIGATIONS, INCLUDING
PURCHASE COMMITMENTS AT MARCH 31, 2002, AND THE EFFECT SUCH OBLIGATIONS ARE
EXPECTED TO HAVE ON OUR LIQUIDITY AND CASH FLOW IN FUTURE PERIODS.
For the fiscal years ending March 31,
-------------------------------------
Contractual Obligations 2003 2004 2005 2006 Thereafter
- ----------------------- ---- ---- ---- ---- ----------
(in thousands)
Operating leases $ 752 $ 724 $ 704 $ 192 $ 7
Capital leases $ 73 $ 18
Term loans $ 833 $7,345
Convertible notes due stockholders $ $1,421
Demand loans due stockholders $ 618
Payables aged over 90 days $ 449
Other long-term obligations $ 200
------ ------ ------ ------ ------
Total contractual obligations $2,925 $9,508 $ 704 $ 192 $ 7
====== ====== ====== ====== ======
For the fiscal years ending March 31,
-------------------------------------
Other Commercial Commitments 2003 2004 2005 2006 Thereafter
- ---------------------------- ---- ---- ---- ---- ----------
(in thousands)
Guarantees $ 187
UNION BANK
On June 29, 2001, we entered into an amended and restated loan agreement with
Union Bank with respect to the $7.4 million owing under the our term loan. The
maturity date under the restated agreement was May 1, 2002, but we had a right
to extend that date to November 1, 2002 if we satisfied certain conditions,
including our achieving certain earnings targets. We are required to pay monthly
interest at 5% over the bank reference rate, increased by an additional 2% for
late payments of principal and interest. We were required to make an initial
$210,000 principal payment in August 2001, and monthly principal payments of
$50,000 beginning October 1, 2001. Monthly principal payments were to increase
to $100,000 on May 1, 2002 upon an extension of the maturity date. We had
difficulty making both interest and principal payments during fiscal 2002, and
the bank extended on several occasions the due dates for required payments. We
are required to use any proceeds in excess of $6 million we receive from private
equity placements to reduce principal under the loan. We are also prohibited
from making any payments on certain subordinated obligations, including the ICM
convertible notes. The entire amount owed to the bank is secured by
substantially all of our assets and those of our subsidiaries and 10,700,000
shares of our treasury stock. The restated agreement also contains limitations
on acquisitions, investments and other borrowings.
We agreed to pay the bank a loan restructuring fee of $200,000, originally
due May 1, 2002 (or if the maturity date is extended, $150,000 on May 1, 2002
and $50,000 on November 1, 2002), but the fee would be waived if we discharged
the loan before May 1, 2002. We are also required to reimburse the bank for
certain other expenses incurred during the term of the loan.
On March 18, 2001, the loan agreement was amended to release certain
collateral from the pledge to Union Bank, and to instead pledge to the bank the
10,700,000 shares of our common stock surrender by Softline in the related
recapitalization transactions with Softline described above under the heading
"Financing Transactions -- Softline." The released collateral was our shares in
our Australian subsidiary, and the IBIS note and related shares of Integrity
Software.
28
On May 21, 2002, the bank further amended the agreement to extend the
maturity date to May 1, 2003 and to revise other terms and conditions. We agreed
to pay to the bank $100,000 as a loan extension fee, payable in four monthly
installments of $25,000 each commencing on June 30, 2002. If we failed to pay
any installment when due, the loan extension fee was to increase to $200,000,
and the monthly payments were to 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 16, 2002, the bank further amended the restated term loan
agreement, and waived the then existing defaults. Under this third amendment to
the restated agreement, the bank agreed to waive the application of the
additional 2% interest rate for late payments of principal and interest, and to
waive the additional $100,000 refinance fee required by the second amendment.
The bank also agreed to convert $361,000 in accrued and unpaid interest and
fees to term loan principal, and we executed a new term note in total principal
amount of $7.2 million. We are 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 is due August 31, 2003. The bank
also agreed to eliminate certain financial covenants and to ease others, and we
are in compliance with the revised covenants.
We also agreed to issue a contingent warrant to an affiliate of the bank to
purchase up to 4.99% of the number of outstanding common shares on January 2,
2003 for $0.01 per share. The warrant will be issued exercisable for shares
equal to 1% of our outstanding common stock on January 2, 2003, and will become
exercisable for shares equal to an additional 0.5% of our outstanding common
stock on the first day each month thereafter, until it is exercisable for the
full 4.99% of our outstanding common stock. The warrant will not become
exercisable to the extent that we have discharged in full our bank indebtedness
prior to a vesting date. Accordingly, the warrant will not become exercisable
for any shares if we discharge our bank indebtedness in full prior to January 2,
2003; and if the warrant does become partially exercisable on such date, it will
cease further vesting as of the date we discharge in full the bank indebtedness.
NATIONAL AUSTRALIA BANK LIMITED
Our Australian subsidiary maintained an AUS$1,000,000 (approximately
US$510,000) line of credit facility with National Australia Bank Limited. The
facility was secured by substantially all of the assets of our Australian
subsidiary, and we have guaranteed all amounts owing on the facility. In April
2001, we received a formal demand under our guarantee for the full AUS$971,000
(approximately US$495,000) then alleged by the bank to be due under the
facility. Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was however subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to the entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have accrued $187,000 as the maximum amount of our
potential exposure. The receiver has also claimed that we are obligated to it
for inter-company balances of $636,000, but we do not believe any amounts are
owed to the receiver, who has not as of the date of this report acknowledged the
monthly corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
OTHER INDEBTEDNESS, INCLUDING RELATED PARTIES
In connection with our acquisition of Island Pacific, we also borrowed $2.3
million with no stated maturity date from three entities in June 1999. $1.5
million of such amount was borrowed from Claudav Holdings Ltd. B.V., a
significant stockholder. The balance due on these loans at March 31, 2002 was
$0.6 million. The loans bear interest at the prime rate and are due upon demand.
We issued convertible notes to entities related to ICM Asset Management,
Inc., which notes are to be amended in July 2002. See "Financing Transactions --
ICM Asset Management, Inc." above.
In May 2001, December 2001 and May 2002, we borrowed $50,000, $125,000 and
$70,000 from World Wide Business Centres, a company affiliated with Donald S.
Radcliffe, a director, to meet payroll expenses. These amounts were repaid
together with interest at the then-effective prime rate, promptly as revenues
were received, and are paid in full as of the date of this report.
CASH POSITION
As a result of our indebtedness and net losses for the past three years, we
have experienced significant strains on our cash resources. In order to manage
our cash resources, we reduced expenses and discontinued our Australian
operations. We have also extended payment terms with many of our trade creditors
wherever possible, and we have diligently focused our collection efforts on our
accounts receivable. We had a negative working capital of $5.3 million and $2.8
million at March 31, 2002 and 2001, respectively.
We were unable to make timely, monthly rent payments due for our Irvine and
Carlsbad facilities during the first quarter of fiscal 2003. We renegotiated
rent terms with the landlords of our Irvine and Carlsbad facilities in June
2002, and we are currently in compliance with the renegotiated terms.
29
As discussed above, we renegotiated on several occasions our agreements
with Union Bank after we were unable to make payments which would have otherwise
been required under these agreements. Other than cash on hand, we have no unused
sources of liquid assets.
Management has been actively engaged in attempts to resolve our liquidity
problems. We negotiated extensions of the maturity of our major indebtedness to
the second quarter of fiscal 2004, and as a result, we believe we will have
sufficient cash to remain in compliance with our debt obligations, and meet our
critical operating obligations, for the next twelve months. We are nonetheless
actively seeking a private equity placement to help discharge aged payables,
pursue growth initiatives and prepay bank indebtedness. We have no binding
commitments for funding at this time. Financing may not be available on terms
and conditions acceptable to us, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a significant
impact on our financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after December 15, 2001. SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could indicate
that their value has diminished or been impaired. Other intangible assets will
continue to be amortized over their estimated useful lives. We evaluate the
remaining useful lives of these intangibles on an annual basis to determine
whether events or circumstances warrant a revision to the remaining period of
amortization. Pursuant to SFAS 142, amortization of goodwill and assembled
workforce intangible assets recorded in business combinations prior to June 30,
2001 ceased effective March 31, 2002. Goodwill resulting from business
combinations completed after June 30, 2001, will not be amortized. We recorded
amortization expense of approximately $2.2 million on goodwill during the fiscal
year ended March 31, 2002. We currently estimate that application of the
non-amortization provisions of SFAS 142 will reduce amortization expense and
increase net income by approximately $2.2 million in fiscal 2003.
We will test goodwill and intangible assets with indefinite lives for
impairment during the 2003 fiscal year and any resulting impairment charge will
be reflected as a cumulative effect of a change in accounting principle. Under
SFAS 142, we are required to screen goodwill for potential impairment by
September 30, 2002 and measure the amount of impairment, if any, by March 31,
2003. As of July 16, 2002, we have completed the transitional analysis of
intangible asset impairment required by SFAS 142, and we will record in the
first quarter of fiscal 2003 impairments of $0.6 million, $1.2 million and $0.2
million to goodwill, capitalized software and non-compete agreements,
respectively, as a cumulative change in accounting principles.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." This
statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of long-lived assets, except for certain obligations
of lessees. The adoption of SFAS No. 143 did not have a significant impact on
our consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 applies
to all long-lived assets (including discontinued operations) and consequently
amends APB Opinion 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale. SFAS
144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value cost to sell. Additionally
SFAS 144 expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The accounting prescribed in SFAS 144 was applied in
connection with the disposal of our Australian subsidiary.
30
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
updates, clarifies, and simplifies existing accounting pronouncements. This
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded.
SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends
SFAS No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in the same
manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
We do not expect adoption of SFAS No. 145 to have material impact, if any, on
its financial position or results or operations.
In November 2001, the FASB issued a Staff Announcement Topic D-103 ("Topic
D-103"), "Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred". Topic D-103 establishes that reimbursements
received for out-of-pocket expenses should be reported as revenue in the income
statement. Currently, we classify reimbursed out-of-pocket expenses as a
reduction in cost of consulting services. We are required to adopt the guidance
of Topic D-103 in the first quarter of fiscal year 2003 and our consolidated
statements of operations for prior periods will be reclassified to conform to
the new presentation. The adoption of Topic D-103 will result in an increase in
reported net sales and cost of sales; however, it will not affect net income or
loss in any past or future periods.
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.
WE INCURRED LOSSES IN FISCAL YEARS 2002, 2001 AND 2000.
We incurred losses of $14.7 million, $28.9 million and $4.1 million in the
fiscal years ended March 31, 2002, 2001 and 2000. The losses in the past two
years have generally been due to difficulties completing sales for new
application software licenses, the resulting change in sales mix toward lower
margin services, and debt service expenses. We will need to generate additional
revenue to achieve profitability in future periods. Failure to achieve
profitability, or maintain profitability if achieved, may have a material
adverse effect on our business and stock price.
WE HAVE NEGATIVE WORKING CAPITAL, AND WE HAVE EXTENDED PAYMENT TERMS WITH A
NUMBER OF OUR SUPPLIERS.
At March 31, 2002 and 2001, we had negative working capital of $5.3 million
and $2.8 million, respectively. We have had difficulty meeting operating
expenses, including interest payments on debt, lease payments and supplier
obligations. We have at times deferred payroll for our executives offices, and
borrowed from related parties to meet payroll obligations. We have extended
payment terms with our trade creditors wherever possible.
31
As a result of extended payment arrangements with suppliers, we may be
unable to secure products and services necessary to continue operations at
current levels from these suppliers. In that event, we will have to obtain these
products and services from other parties, which could result in adverse
consequences to our business, operations and financial condition.
OUR NET SALES HAVE DECLINED. WE EXPERIENCED A SUBSTANTIAL DECREASE IN
APPLICATION SOFTWARE LICENSE SALES. OUR GROWTH AND PROFITABILITY IS DEPENDENT ON
THE SALE OF HIGHER MARGIN LICENSES.
Our net sales decreased by 2% in the fiscal year ended March 31, 2002
compared to the fiscal year ended March 31, 2001. Net sales for the fiscal year
ended March 31, 2001 decreased 4% compared to the fiscal year ended March 31,
2000. We experienced a substantial decrease in application license software
sales, which typically carry a much higher margin than other revenue sources. We
must improve new application license sales to become profitable. We have taken
steps to refocus our sales strategy on core historic competencies, but our
typically long sales cycles make it difficult to evaluate whether and when sales
will improve. We cannot be sure that the decline in sales has not been due to
factors which might continue to negatively affect sales.
OUR FINANCIAL CONDITION MAY INTERFERE WITH OUR ABILITY TO SELL NEW APPLICATION
SOFTWARE LICENSES.
Future sales growth may depend on our ability to improve our financial
condition. Our current financial condition has made it more difficult for us to
complete sales of new application software licenses. Because our applications
typically require lengthy implementation and extended servicing arrangements,
potential customers require assurance that these services will be available for
the expected life of the application. These potential customers may defer buying
decisions until our financial condition improves, or may choose the products of
our competitors whose financial condition is or is perceived to be stronger.
Customer deferrals or lost sales will adversely affect our business, financial
conditions and results of operations.
OUR SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS MAKES IT DIFFICULT
FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of sales cycles in our business makes it difficult to evaluate
the effectiveness of our sales strategies. Our sales cycles historically ranged
from three to twelve months, which caused significant fluctuations in revenues
from period to period. Due to our difficulties in completing new application
software sales in recent periods and our refocused sales strategy, it is
difficult to predict revenues and properly budget expenses.
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND THEY MAY
CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the
past and may fluctuate in the future as a result of several factors, many of
which are outside of our control. If revenue declines in a quarter, our
operating results will be adversely affected because many of our expenses are
relatively fixed. In particular, sales and marketing, application development
and general and administrative expenses do not change significantly with
variations in revenue in a quarter. It is likely that in some future quarter our
net sales or operating results will be below the expectations of public market
analysts or investors. If that happens, our stock price will likely decline.
32
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAKES IT DIFFICULT TO PREDICT
FUTURE RESULTS.
Factors outside our control that could cause our revenue to fluctuate
significantly from period to period include:
o the size and timing of individual orders, particularly with respect to
our larger customers;
o general health of the retail industry and the overall economy;
o technological changes in platforms supporting our software products;
o customer order deferrals in anticipation of our and our competitors'
new offerings; and
o market acceptance of new applications and related services.
The factors within our control include:
o acquisitions and dispositions of businesses;
o changes in our strategies; and
o non-recurring sales of assets and technologies.
In particular, we usually deliver our software applications when contracts
are signed, so order backlog at the beginning of any quarter may represent only
a portion of that quarter's expected revenues. As a result, application license
revenues in any quarter are substantially dependent on orders booked and
delivered in that quarter, and this makes it difficult for us to accurately
predict revenues. We have experienced, and we expect to continue to experience,
quarters or periods where individual application license or services orders are
significantly larger than our typical application license or service orders.
Because of the nature of our offerings, we may get one or more large orders in
one quarter from a customer and then no orders the next quarter.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD, WHICH COULD AFFECT QUARTERLY
RESULTS AND OUR STOCK PRICE.
If we incur additional expenses in a quarter in which we do not experience
increased revenue, our results of operations would be adversely affected and we
may incur losses for that quarter. Factors that could cause our expenses to
fluctuate from period to period include:
o the extent of marketing and sales efforts necessary to promote and
sell our applications and services;
o the timing and extent of our development efforts; and
o the timing of personnel hiring.
IT IS DIFFICULT TO EVALUATE OUR PERFORMANCE BASED ON PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
The many factors which can cause revenues and expenses to vary make
meaningful period to period comparisons of our results difficult. We do not
believe period to period comparisons of our financial performance are
necessarily meaningful, and you cannot rely on them as an indication of our
future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from
October through December of each year as a result of retailers' focus on the
holiday retail-shopping season. This can negatively affect revenues in our third
fiscal quarter and in other quarters, depending on our sales cycles.
WE HAVE SUBSTANTIAL DEBT WHICH ADVERSELY AFFECTS US.
We have a substantial amount of debt, including the following as of July
15, 2002:
o A $7.2 million term loan from Union Bank due August 31, 2003. The term
loan is secured by substantially all of our assets and 10,700,000
shares of our treasury stock.
33
o $0.6 million due to stockholders on demand.
o $1.25 million in convertible notes to be reissued in July 2002 to
entities related to ICM Asset Management due September 30, 2003.
The substantial amount of our indebtedness impacts us in a number of ways:
o We have to dedicate a portion of cash flow from operations to
principal and interest payments on the debt, which reduces funds
available for other purposes.
o We may not have sufficient funds to pay monthly principal and interest
payments, which could lead to a default.
o The existing debt makes it difficult for us to obtain additional
financing for working capital or other purposes.
o The debt detracts from our ability to successfully withstand downturns
in our business or in the economy.
o If we default on our Union Bank indebtedness, the bank could take
control of the substantial majority of our assets.
These factors generally place us at a disadvantage to our less leveraged
competitors. Any or all of these factors could cause our stock price to decline.
During the past three fiscal years, we renegotiated on several occasions
our agreements with Union Bank after we were unable to make payments required
under these agreements. Union Bank may not be willing to renegotiate our
indebtedness in the future if we are unable to make required payments. We will
likely need outside sources of capital to make the required pay our Union Bank
obligations upon maturity.
OUR BANK LOAN IMPOSES RESTRICTIONS ON US AND ON OUR ABILITY TO TAKE IMPORTANT
ACTIONS. THESE RESTRICTIONS MAY AFFECT OUR ABILITY TO SUCCESSFULLY OPERATE OUR
BUSINESS.
We are restricted by the terms of our outstanding Union Bank loan agreement
from taking various actions, such as incurring additional indebtedness, paying
dividends, paying subordinated obligations, entering into transactions with
affiliates, merging with other entities and selling all or substantially all of
our assets. These restrictions could also limit our ability to obtain future
34
financing, make needed capital expenditures, withstand a future downturn in our
business or the economy in general, or otherwise conduct our business. We may
also be prevented from taking advantage of business opportunities that arise
because of the limitations imposed on us by the restrictive covenants under the
Union Bank loan. A breach of any of these provisions could result in a default
under the loan agreement, and upon a default, Union Bank could declare all
indebtedness immediately due and payable. If we were unable to pay those
amounts, Union Bank could take control of the substantial majority of our
assets.
FLUCTUATIONS IN INTEREST RATES COULD INCREASE OUR INTEREST EXPENSE AND REDUCE
CASH AVAILABLE FOR OTHER PURPOSES.
Our indebtedness with Union Bank and some of our other indebtedness require
us to pay interest based on a rate which floats with market interest rates. If
market interest rates increase, our interest expense will increase, which will
reduce our earnings and reduce cash available for other purposes. At March 31,
2002, our total borrowings subject to variable interest rates was $7.5 million.
Based on this balance, a one percent increase in interest rates would cause a
change in interest expense of approximately $75,000 on an annual basis.
WE HAVE RELIED ON CAPITAL CONTRIBUTED BY RELATED PARTIES, AND SUCH CAPITAL MAY
NOT BE AVAILABLE IN THE FUTURE.
Our cash from operations has not been sufficient to meet our operational
needs, and we have relied on capital from related parties. A company affiliated
with Donald S. Radcliffe, one of our directors, made short-term loans to us in
fiscal 2002 and in the first quarter of fiscal 2003 to meet payroll when cash on
hand was not sufficient. Softline loaned us $10 million to make a required
principal payment on our Union Bank term loan in July 2000. A subsidiary of
Softline loaned us an additional $600,000 in November 2000 to meet working
capital needs. This loan was repaid in February 2001, in part with $400,000 we
borrowed from Barry M. Schechter, our Chairman. We borrowed an additional
$164,000 from Mr. Schechter in March 2001 for operational needs related to our
Australian subsidiary.
We may not be able to obtain capital from related parties in the future.
Neither Softline, Mr. Schechter, Mr. Radcliffe nor any other officers,
directors, stockholders or related parties are under any obligation to continue
to provide cash to meet our future liquidity needs.
WE NEED TO RAISE CAPITAL TO REPAY DEBT AND GROW OUR BUSINESS. OBTAINING THIS
CAPITAL COULD IMPAIR THE VALUE OF YOUR INVESTMENT.
We need to raise capital to discharge our aged payables and grow our
business. We will also likely need to raise capital to pay our Union Bank
obligations upon maturity in August 2003. We may also need to raise further
capital to:
o support unanticipated capital requirements;
o take advantage of acquisition or expansion opportunities;
o continue our current development efforts;
o develop new applications or services; or
o address working capital needs.
Our future capital requirements depend on many factors including our
application development, sales and marketing activities. We do not know whether
additional financing will be available when needed, or available on terms
acceptable to us. If we cannot raise needed funds for the above purposes on
acceptable terms, we may be forced to curtail some or all of the above
activities and we may not be able to grow our business or respond to competitive
pressures or unanticipated developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience substantial dilution and the new
equity 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 89% of our total assets as of March 31, 2002 and represent more
than our stockholders' equity. We may have to impair or write-off these assets,
which will cause a charge to earnings and could cause our stock price to
decline.
Any such impairments will also reduce our assets, as well as the ratio of
our assets to our liabilities. These balance sheet effects could make it more
difficult for us to obtain capital, and could make the terms of capital we do
obtain more unfavorable to our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our
applications and services and our expenses, and foreign currency losses will
negatively affect profitability or increase losses. Approximately 17%, 22% and
37% of our net sales were outside North America, principally in Australia and
the United Kingdom, in the fiscal years ended March 31, 2002, 2001 and 2000,
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.
IF WE CANNOT MANAGE ADDITIONAL CHALLENGES PRESENTED BY OUR INTERNATIONAL
OPERATIONS, OUR REVENUES AND PROFITABILITY MAY SUFFER.
A portion of our net sales are outside the United States and part of our
growth strategy depends on increasing international sales. If we cannot increase
our international sales, we may not be able to achieve our business objectives.
We have already devoted resources to, and expect to continue to devote resources
to, our expansion into foreign countries, particularly to expand our sales
force. To increase international sales in the future, we must establish
additional foreign operations, hire additional personnel and further exploit
strategic relationships. The countries in which we operate may not have a
sufficient pool of qualified personnel from which to hire, and we may not be
successful at hiring, training or retraining personnel.
There are many risks inherent in our international business activities. For
example:
o we are subject to many foreign regulatory requirements which may
change without notice;
o our expenses related to sales and marketing and development may
increase;
o localizing products for foreign countries involves costs and risks of
non-acceptance;
o we are subject to various export restrictions, and export licenses may
not always be available;
o we are subject to foreign tariffs and other trade barriers;
o we may become subject to higher tax rates or taxation in more than one
jurisdiction;
o some of the foreign countries that we deal with suffer from political
and economic instability;
o we may have less protection for our intellectual property rights;
o consulting, maintenance and service revenues may have lower margins in
foreign countries;
o we may not be able to move earnings back to the United States;
o it can be more difficult to staff and manage our foreign operations;
and
o we may have difficulty collecting accounts receivable.
Any of these factors could negatively affect our financial performance and
results of operations and cause our stock price to decline.
WE HAVE A SINGLE CUSTOMER REPRESENTING A SIGNIFICANT AMOUNT OF OUR BUSINESS.
Toys "R" Us, accounted for 42%, 29% and 15% of our net sales for the fiscal
years ended March 31, 2002, 2001 and 2000, respectively. While we have a
development agreement with this customer, Toys has the right to terminate the
agreement without cause with limited advance notice. A reduction, delay or
cancellation of orders from Toys "R" Us would significantly reduce our revenues
36
and force us to substantially curtail operations. We cannot provide any
assurances that Toys "R" Us or any of our current customers will continue at
current or historical levels or that we will be able to obtain orders from new
customers.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on Barry M. Schechter, our CEO, and on other key
management personnel. Mr. Schechter has an employment agreement with us. Mr.
Schechter's employment agreement expires September 30, 2003 and may be
terminated on 14 days notice. We also believe our future success will depend
largely upon our ability to attract and retain highly-skilled software
programmers, managers, and sales and marketing personnel. Competition for
personnel is intense, particularly in international markets. The software
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. We compete against numerous companies,
including larger, more established companies, for our personnel. We may not be
successful in attracting or retaining skilled sales, technical and managerial
personnel. The loss of key employees or our inability to attract and retain
other qualified employees could negatively affect our financial performance and
cause our stock price to decline.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY DECLINE, OUR REVENUES MAY DECLINE. RETAIL SALES MAY BE SLOWING.
Our future growth is critically dependent on increased sales to the retail
industry. We derive the substantial majority of our revenues from the licensing
of software applications and the performance of related professional and
consulting services to the retail industry. Demand for our applications and
services could decline in the event of consolidation, instability or downturns
in the retail industry. This decline would likely cause reduced sales and could
impair our ability to collect accounts receivable. The result would be reduced
earnings and weakened financial condition, each or both of which would likely
cause our stock price to decline.
The success of our customers is directly linked to economic conditions in
the retail industry, which in turn are subject to intense competitive pressures
and are affected by overall economic conditions. In addition, the retail
industry may be consolidating, and it is uncertain how consolidation will affect
the industry. The retail industry as a whole is currently experiencing increased
competition and weakening economic conditions that could negatively impact the
industry and our customers' ability to pay for our products and services. Such
consolidation and weakening economic conditions have in the past, and may in the
future, negatively impact our revenues, reduce the demand for our products and
may negatively impact our business, operating results and financial condition.
Weakening economic conditions and the September 11, 2001 terrorist attack have
adversely impacted sales of our software applications, and we believe mid-tier
specialty retailers may be reluctant during the current economic slowdown to
make the substantial infrastructure investment that generally accompanies the
implementation of our software applications.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS
We have in the past and may in the future be impacted by customer
bankruptcies. During weak economic conditions, such as those currently being
experienced in many geographic regions around the world, there is an increased
risk that certain of our customers will file bankruptcy. When our customers file
bankruptcy, we may be required to forego collection of pre-petition amounts
owed, and to repay amounts remitted to us during the 90-day preference period
preceding the filing. Accounts receivable balances related to pre-petition
amounts may in certain of these instances be large due to extended payment terms
for software license fees, and significant billings for consulting and
implementation services on large projects. The bankruptcy laws, as well as the
specific circumstances of each bankruptcy, may severely limit our ability to
collect pre-petition amounts, and may force us to disgorge payments made during
the 90-day preference period. We also face risk from international customers
which file for bankruptcy protection in foreign jurisdictions, in that the
application of foreign bankruptcy laws may be less certain or harder to predict.
Although we believe that we have sufficient reserves to cover anticipated
customer bankruptcies, there can be no assurance that such reserves will be
adequate, and if they are not adequate, our business, operating results and
financial condition would be adversely affected.
37
OUR GROWTH IS DEPENDENT ON DEVELOPING OUR DIRECT SALES OR EXPANDING INTO OTHER
DISTRIBUTION CHANNELS. OTHER DISTRIBUTION CHANNELS CREATE RISKS THAT WE MAY NOT
MANAGE SUCCESSFULLY.
In order to grow, we may find it necessary to expand our distribution
channels beyond direct sales, which constitute the majority of our sales. If we
begin to use resellers, they may compete with our direct sales. If we cannot
expand our direct sales, develop additional distribution channels, or manage any
potential channel conflicts, our sales may not grow.
IF WE CANNOT EXPAND INTO CERTAIN MARKET SECTORS, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS.
In order to grow our business, we need to expand our customer base and the
types and size of retailers we serve. We currently serve only the specialty
goods, mass merchants and department store markets. Our applications and
services may not gain acceptance in or meet the expectations and needs of other
types and size of retailer or other sectors.
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" above under the heading "Competition."
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological
change, evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
The success of application enhancements and new applications depends on a
variety of factors, including technology selection and specification, timely and
efficient completion of design, and effective sales and marketing efforts. In
developing new applications and services, we may:
o fail to respond to technological changes in a timely or cost-effective
manner;
38
o encounter applications, capabilities or technologies developed by
others that render our applications and services obsolete or
non-competitive or that shorten the life cycles of our existing
applications and services;
o experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new applications and
services; or
o fail to achieve market acceptance of our applications and services.
The life cycles of our applications are difficult to estimate, particularly
in the emerging electronic commerce market. As a result, new applications and
enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our success and competitive position is dependent in part upon our ability
to develop and maintain the proprietary aspects of our intellectual property.
Our intellectual property includes our trademarks, trade secrets, copyrights and
other proprietary information. Our efforts to protect our intellectual property
may not be successful. Effective copyright and trade secret protection may be
unavailable or limited in some foreign countries. We hold no patents.
Consequently, others may develop, market and sell applications substantially
equivalent to ours or utilize technologies similar to those used by us, so long
as they do not directly copy our applications or otherwise infringe our
intellectual property rights.
We may find it necessary to bring claims or litigation against third
parties for infringement of our proprietary rights or to protect our trade
secrets. These actions would likely be costly and divert management resources.
These actions could also result in counterclaims challenging the validity of our
proprietary rights or alleging infringement on our part. The ultimate outcome of
any litigation will be difficult to predict.
OUR APPLICATIONS MAY INFRINGE ON THE PROPRIETARY RIGHTS OF THIRD PARTIES, WHICH
MAY EXPOSE US TO LITIGATION.
We may become involved in litigation involving patents or proprietary
rights. Patent and proprietary rights litigation entails substantial legal and
other costs, and we do not know if we will have the necessary financial
resources to defend or prosecute our rights in connection with any such
litigation. Responding to and defending claims related to our intellectual
property rights, even ones without merit, can be time consuming and expensive
and can divert management's attention from other business matters. In addition,
these actions could cause application delivery delays or require us to enter
into royalty or license agreements. Royalty or license agreements, if required,
may not be available on terms acceptable to us, if they are available at all.
Any or all of these outcomes could have a material adverse effect on our
business, operating results and financial condition.
IF OUR APPLICATIONS ARE NOT COMPATIBLE WITH HARDWARE OR SOFTWARE PRODUCTS, OUR
SALES COULD SUFFER.
Software sales can often be driven by advances in hardware or operating
system technology. If providers do not, or are unable to, continue to provide
state-of-the-art POS and enterprise hardware which runs our applications, our
financial performance may suffer. We do not develop hardware or operating
systems, so we are dependent upon third-party providers to develop the hardware
platforms and operating systems on which our applications run.
DEVELOPMENT AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources
necessary to develop and market our offerings to their target markets, our
business strategy substantially depends on our strategic relationships. While
some of these relationships are governed by contracts, most are non-exclusive
and all may be terminated on short notice by either party. If these
relationships terminate or fail to deliver the intended benefits, our
development and marketing efforts will be impaired and our revenues may decline.
39
We may not be able to enter into new strategic relationships, which could put us
at a disadvantage to those of our competitors which do successfully exploit
strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Substantially all of our primary computer and telecommunications systems
are located in two geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business interruption
insurance may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product liability
or other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our applications are highly complex and sophisticated and they may
occasionally contain design defects or software errors that could be difficult
to detect and correct. In addition, implementation of our applications may
involve customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
We are not currently aware of any defects in our applications that might
give rise to future lawsuits. However, errors or integration problems may be
discovered in the future. Such defects, errors or difficulties could result in
loss of sales, delays in or elimination of market acceptance, damage to our
brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing costs. In
addition, third-party products, upon which our applications are dependent, may
contain defects which could reduce or undermine entirely the performance of our
applications.
Our customers typically use our applications to perform mission-critical
functions. As a result, the defects and problems discussed above could result in
significant financial or other damage to our customers. Although our sales
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims, we do not know if these
limitations of liability are enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
applications or the performance of our services. Our product liability insurance
may not cover all claims brought against us.
SOFTLINE LIMITED OWNS OR HAS THE RIGHT TO ACQUIRE A CONTROLLING PERCENTAGE OF
OUR COMMON STOCK, SO WE MAY BE EFFECTIVELY CONTROLLED BY SOFTLINE AND OUR OTHER
STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING.
40
Softline Limited beneficially owns 56.7% of our outstanding common stock,
including shares Softline has the right to acquire upon conversion of its Series
A Convertible Preferred Stock. Ivan M. Epstein, Softline's Chief Executive
Officer, and Rob Wilkie, Softline's Chief Financial Officer, serve on our board
of directors. If Softline converts its Series A Preferred Stock, it may have
effective control over all matters affecting us, including:
o the election of all of our directors;
o the allocation of business opportunities that may be suitable for
Softline and us;
o any determinations with respect to mergers or other business
combinations involving us;
o the acquisition or disposition of assets or businesses by us;
o debt and equity financing, including future issuance of our common
stock or other securities;
o amendments to our charter documents;
o the payment of dividends on our common stock; and
o determinations with respect to our tax returns.
OUR BUSINESS MAY BE DISADVANTAGED OR HARMED IF SOFTLINE'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have and will continue to arise between Softline and
us in a number of areas relating to our past and ongoing relationships.
Conflicts may not be resolved in a manner that is favorable to us, and such
conflicts may result in harmful consequences to our business or prospects.
SOFTLINE'S INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY
TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Softline's potential voting control could discourage others from initiating
any potential merger, takeover or other change of control transaction that may
otherwise be beneficial to our business or our stockholders. As a result,
Softline's control could reduce the price that investors may be willing to pay
in the future for shares of our stock, or could prevent any party from
attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE, AND HAS RECENTLY DECLINED.
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 "Market for Company's Common Equity and Related
Stockholder Matters" above.
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common stock.
We anticipate that we will use our earnings and cash flow for repayment of
indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Our agreement with
Union Bank prohibits us from paying dividends, and Softline is entitled to
dividends on its Series A Convertible Preferred Stock in preference and priority
to common stockholders. Future equity financing(s) may further restrict our
ability to pay dividends.
THE TERMS OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock in one
or more series. We issued 141,000 shares of Series A Convertible Preferred Stock
to Softline in May 2002. Our board of directors may determine the terms of
subsequent series of preferred stock without further action by our stockholders.
If we issue additional preferred stock, it could affect your rights or reduce
the value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. We are actively seeking capital, and some of the
arrangements we are considering may involve the issuance of preferred stock.
41
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The Exchange
has published certain guidelines it uses in determining whether a security
warrants continued listing. These guidelines include financial, market
capitalization and other criteria, and as a result of our financial condition or
other factors, the Exchange could in the future determine that our stock does
not merit continued listing. If our stock were delisted from the American Stock
Exchange, the ability of our stockholders to sell our common stock could become
limited, and we would lose the advantage of some state and federal securities
regulations imposing lower regulatory burdens on exchange-traded issuers.
DELAWARE LAW AND SOME PROVISIONS OF OUR CHARTER AND BYLAWS MAY ADVERSELY AFFECT
THE PRICE OF YOUR STOCK.
Special meetings of our stockholders may be called only by the Chairman of
the Board, the Chief Executive Officer or the Board of Directors. Stockholders
have no right to call a meeting and may not act by written consent. Stockholders
must also comply with advance notice provisions in our bylaws in order to
nominate directors or propose matters for stockholder action. These provisions
of our charter documents, as well as certain provisions of Delaware law, could
delay or make more difficult certain types of transactions involving a change in
control of the company or our management. Delaware law also contains provisions
that could delay or make more difficult change in control transactions. As a
result, the price of our common stock may be adversely affected.
SHARES ISSUED UPON THE EXERCISE OF OPTIONS AND WARRANTS 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 be below the market price of our stock. If exercised in the money,
these options and warrants will cause immediate and possibly substantial
dilution to our stockholders. We currently have all of the outstanding options
and warrants for 12,282,838 million shares at prices above the recent market
price of $0.50 per share, and if the current market price increases, these
options and warrants could have a dilutive effect on stockholders if exercised.
Our existing stock option plan currently has approximately 689,000 shares
available for issuance. Future options issued under the plan may have further
dilutive effects.
Sales of shares pursuant to exercisable options and warrants could lead to
subsequent sales of the shares in the public market, and could depress the
market price of our stock by creating an excess in supply of shares for sale.
Issuance of these shares and sale of these shares in the public market could
also impair our ability to raise capital by selling equity securities.
ITEM 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
Our exposure to market risk for changes in interest rates relates to our
variable rate term loans, which totaled $7.5 million at March 31, 2002. Based on
this balance, a change in one percent in the interest rate would cause a change
in interest expense of approximately $75,000 or less than $0.01 per basic and
diluted share, on an annual basis.
42
These instruments were not entered into for trading purposes and carry
interest at a pre-agreed upon percentage point spread from the bank's prime
interest rate. Our objective in maintaining these variable rate borrowings is
the flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe and
until February 2002, Australia. Sales are typically denominated in the local
foreign currency, which creates exposures to changes in exchange rates. These
changes in the foreign currency exchange rates as measured against the U.S.
dollar may positively or negatively affect our sales, gross margins and retained
earnings. We attempt to minimize currency exposure risk through decentralized
sales, development, marketing and support operations, in which substantially all
costs are local-currency based. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the value of the foreign currency. We do not hedge against foreign currency
risk. Approximately 17%, 22%, and 37% of our total net sales were denominated in
currencies other than the U.S. dollar for the periods ended March 31, 2002, 2001
and 2000, respectively.
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements at March 31, 2001, March 31, 2000,
and March 31, 1999 and the reports of Singer Lewak Greenbaum & Goldstein LLP and
Deloitte & Touche LLP, independent accountants, are included in this report on
pages beginning F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 30, 2001, Deloitte & Touche LLP notified us that they were
resigning as our independent certified public accountants. On December 5, 2001,
we engaged Singer Lewak Greenbaum & Goldstein LLP ("Singer Lewak") as our new
independent auditors. Singer Lewak previously audited our financial statements
for the fiscal years ended March 31, 1998 and September 30, 1997, 1996, 1995 and
1994. The decision to engage Singer Lewak was recommended by the Audit Committee
of the Board of Directors and approved by the Board of Directors.
Deloitte & Touche's reports on the financial statements for the fiscal
years ended March 31, 2001 and 2000 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except as noted in the following sentence.
Deloitte & Touche's audit report on the financial statements for the year ended
March 31, 2001, dated July 13, 2001, expressed an unqualified opinion and
included an explanatory paragraph relating to substantial doubt about our
ability to continue as a going concern. Further, in connection with its audits
of our financial statements for the past two fiscal years and the subsequent
interim period immediately preceding the date of resignation of Deloitte &
Touche, we had no disagreements with Deloitte & Touche on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche, would have caused them to make a reference to the subject
matter of the disagreements in connection with their reports on our consolidated
financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information under the captions "Elections of Directors" and "Compliance with
Section 16(a) of the Exchange Act" of our definitive proxy statement and notice
of annual meeting of stockholders which we will file with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this report.
43
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" of our definitive proxy
statement and notice of annual meeting of stockholders which we will file with
the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this report
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" of our definitive proxy statement and notice of annual meeting
of stockholders which we will file with the Securities and Exchange Commission
within 120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Relations and Related Transactions" of
our definitive proxy statement and notice of annual meeting of stockholders
which we will file with the Securities and Exchange Commission within 120 days
after the end of the fiscal year coverage by this report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules
Independent Auditors' Report of Singer Lewak Greenbaum & Goldstein LLP. F-1
Independent Auditors' Report of Deloitte & Touche LLP.................. F-2
Consolidated Balance Sheets as of March 31, 2002 and 2001.............. F-3
Consolidated Statements of Operations for the Fiscal Years ended March
31, 2002, 2001, and 2000............................................... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended March 31, 2002, 2001 and 2000.................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended March
31, 2002, 2001 and 2000................................................ F-7
Notes to Consolidated Financial Statements............................. F-9
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not considered necessary and therefore have been
omitted.
(b) Reports on Form 8-K
During the quarter ended March 31, 2002, we filed the following:
o Form 8-K filed February 14, 2002 reporting in Item 8 the
determination not to change our fiscal year as previously
announced.
44
(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 (included
herewith). 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.
2.3 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 (included herewith). 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.
3.1 Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
3.2 Certificate of Designation, incorporated by reference to
exhibit 4.1 of the Company's Form 8-K filed May 16, 2002.
3.3 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's Form 10-K for the fiscal year ended March 31,
2001.
4.1 Form of Stock Certificate, incorporated by reference to
exhibit 4.1 to the Company's Form 10-K for the fiscal year
ended March 31, 2001.
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.
45
EXHIBIT DESCRIPTION
- ------- -----------
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 (included herewith), 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 (included herewith).
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 (included herewith).
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 (included herewith).
10.7 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.
10.8 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.
10.9 Investors' Rights Agreement, incorporated by reference to
exhibit 10.3 to the Company's Form 8-K filed January 8, 2001.
10.10 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.
10.11 Amendment Agreement between the Company, Koyah Leverage
Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated July 15, 2002 (included
herewith).
10.12 Summary of loan transactions between the Company and World
Wide Business Centres (included herewith).
10.13 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by referenced to
exhibit 10.2 to the Company's Form 10-Q for the quarter ended
September 30, 2001. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.
10.14 Purchase Agreement between the Company and Toys "R" Us, Inc.
dated May 29, 2002 (included herewith).
46
EXHIBIT DESCRIPTION
- ------- -----------
10.15 Convertible Note in favor of Toys "R" Us, Inc. dated May 29,
2002 (included herewith).
10.16 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002
(included herewith).
10.17 Development Agreement between the Company and Toys "R" Us,
Inc. dated May 29, 2002 (included herewith). Portions of this
exhibit (indicated by asterisks) have been omitted pursuant to
a request for confidential treatment pursuant to Rule 24b-2 of
the Securities Exchange Act of 1934.
10.20 Summary of lease terms for Carlsbad facility (included
herewith).
21 List of Subsidiaries (included herewith).
47
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: July 16, 2002 SVI SOLUTIONS, INC., A DELAWARE CORPORATION
By: /s/ Barry M. Schechter
----------------------------------------
Barry M. Schechter, Chairman and Chief
Executive Officer
(Principal Executive 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/ Barry M. Schechter Chairman of the Board July 16, 2002
- --------------------------------------- and Chief Executive Officer
Barry M. Schechter
/s/ Jackie Tran Acting Chief Financial Officer July 16, 2002
- --------------------------------------- (Principal Financial Officer)
Jackie Tran
/s/ Arthur S. Klitofsky Vice President and Director July 16, 2002
- ---------------------------------------
Arthur S. Klitofsky
/s/ Donald S. Radcliffe Director July 16, 2002
- ---------------------------------------
Donald S. Radcliffe
/s/ Ivan M. Epstein Director July 16, 2002
- ---------------------------------------
Ivan M. Epstein
/s/ Ian Bonner Director July 16, 2002
- ---------------------------------------
Ian Bonner
/s/ Michael Silverman Director July 16, 2002
- ---------------------------------------
Michael Silverman
/s/ Rob Wilkie Director July 16, 2002
- ---------------------------------------
Rob Wilkie
48
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
SVI Solutions, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of SVI Solutions,
Inc. and subsidiaries as of March 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SVI Solutions, Inc.
and subsidiaries as of March 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 30, 2002
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SVI Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of SVI Solutions,
Inc. and subsidiaries (collectively, the "Company") (a majority owned subsidiary
of Softline Limited) as of March 31, 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2001,
and the results of its operations and its cash flows for each of the two years
in the period then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and
negative working capital raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
July 13, 2001
F-2
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
2002 2001
------------ ------------
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 1,309 $ 1,208
Accounts receivable, net of allowance for doubtful
accounts of $446 and $790, respectively 1,946 3,394
Income tax refund receivable -- 380
Other receivables, including $31 and $61 from related parties, respectively 255 253
Inventories 126 138
Current portion - non-compete agreements 917 1,017
Net assets from discontinued operations -- 1,441
Prepaid expenses and other current assets 150 293
------------ ------------
Total current assets 4,703 8,124
Note receivable, net -- 7,000
Property and equipment, net 641 976
Purchased and capitalized software, net 17,612 20,074
Goodwill, net 15,422 17,642
Non-compete agreements, net 1,585 2,597
Other assets 42 40
------------ ------------
Total assets $ 40,005 $ 56,453
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand loans due to stockholders $ 618 $ 1,333
Current portion of term loans 435 --
Accounts payable 1,497 2,868
Accrued expenses 3,864 4,911
Deferred revenue 3,528 1,794
Income tax payable 98 --
------------ ------------
Total current liabilities 10,040 10,906
Term loans refinanced in July 2002 and May 2001 6,472 7,325
Convertible notes due to stockholders 1,421 --
Subordinated term loan due to stockholder -- 11,037
Other long-term liabilities 120 192
------------ ------------
Total liabilities 18,053 29,460
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred stock, 7.2% cumulative convertible 141,100
shares authorized and outstanding with a stated value of $100 per
share, dividends in arrears of $254 14,100 --
Common stock, $.0001 par value; 100,000,000 shares authorized;
28,293,609 and 37,836,669 shares issued and outstanding 4 4
Additional paid-in capital 54,685 57,108
Retained (deficit) earnings (37,772) (23,114)
Treasury stock, at cost; shares - 10,700,000 in 2002 and 444,641 in 2001 (8,580) (4,306)
Shares receivable (485) --
Accumulated other comprehensive loss -- (2,699)
------------ ------------
Total stockholders' equity 21,952 26,993
------------ ------------
Total liabilities and stockholders' equity $ 40,005 $ 56,453
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands, except per share data)
Net sales $ 27,109 $ 27,713 $ 26,652
Cost of sales 10,036 9,188 6,421
--------- --------- ---------
Gross profit 17,073 18,525 20,231
--------- --------- ---------
Expenses:
Application development 4,203 5,333 4,877
Depreciation and amortization 6,723 8,616 7,250
Selling, general and administrative 13,144 18,037 14,817
Impairment of capitalized software and goodwill -- 6,519 --
Impairment of note receivable received in
connection with the sale of IBIS Systems Limited -- 7,647 --
--------- --------- ---------
Total expenses 24,070 46,152 26,944
--------- --------- ---------
Loss from operations (6,997) (27,627) (6,713)
Other income (expense):
Interest income 10 628 1,074
Other income (expense) (46) 63 (206)
Interest expense, including $1,988, $1,391 and $114 to
related parties (3,018) (3,043) (1,493)
Gain (loss) on foreign currency transaction (9) 2 (10)
--------- --------- ---------
Total other expense (3,063) (2,350) (635)
--------- --------- ---------
Loss before provision (benefit) for income taxes (10,060) (29,977) (7,348)
Provision (benefit) for income taxes 39 (4,778) (2,414)
--------- --------- ---------
Loss from continuing operations (10,099) (25,199) (4,934)
Income (loss) from discontinued Australian operations,
net of estimated income taxes expense (benefit)
of $0, ($833) and $2 (4,559) (3,746) 880
--------- --------- ---------
Net loss $(14,658) $(28,945) $ (4,054)
========= ========= =========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.28) $ (0.72) $ (0.15)
Discontinued operations (0.13) (0.11) 0.03
--------- --------- ---------
Net loss $ (0.41) $ (0.83) $ (0.12)
========= ========= =========
Basic and diluted weighted average common shares outstanding 35,698 34,761 32,459
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share amounts)
Balance, March 31, 1999 -- $ 3 $ 39,436 $ (951) $ (2,142) $ 9,885 -- $ (961) $ 45,270
Issuance of common stock
in connection with the
purchase of technology
rights and subsidiaries -- -- 3,654 -- -- -- -- -- 3,654
Exercise of stock options -- -- 6,992 -- -- -- -- -- 6,992
Income tax benefit on
stock options exercised -- -- 424 -- -- -- -- -- 424
Compensation expense for
stock options granted -- -- 55 -- -- -- -- -- 55
Repurchase of common stock -- -- -- (1,213) -- -- -- -- (1,213)
Shares receivable from
stockholder in connection
with the sale of
IBIS Systems Limited -- -- -- (2,142) 2,142 -- -- -- --
Issuance of common stock
for services -- -- 20 -- -- -- -- -- 20
Private placement of common
stock -- -- 2,873 -- -- -- -- -- 2,873
Comprehensive loss:
Net loss -- -- -- -- -- (4,054) $ (4,054) -- (4,054)
Other comprehensive loss:
Translation adjustment -- -- -- -- -- -- (524) (524) (524)
----------
Comprehensive loss -- -- -- -- -- -- $ (4,578) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2000 -- $ 3 $ 53,454 $ (4,306) $ -- $ 5,831 -- $ (1,485) $ 53,497
Exercise of stock options -- -- 792 -- -- -- -- -- 792
Income tax benefit on stock
options exercised -- -- 84 -- -- -- -- -- 84
Compensation expense for
stock options -- -- 28 -- -- -- -- -- 28
Issuance of common stock
warrants for services -- -- 6 -- -- -- -- -- 6
Issuance of common stock
(net of financing costs
of $40,035) -- 1 2,460 -- -- -- -- -- 2,461
Issuance of common stock
(net of $286,000 late
registration fees) -- -- 214 -- -- -- -- -- 214
Issuance of common stock
for services -- -- 70 -- -- -- -- -- 70
Comprehensive loss:
Net loss -- -- -- -- -- (28,945) $ (28,945) -- (28,945)
Other comprehensive loss:
Translation adjustment -- -- -- -- -- -- (1,214) (1,214) (1,214)
----------
Comprehensive loss -- -- -- -- -- -- $ (30,159) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2001 -- $ 4 $ 57,108 $ (4,306) $ -- $ (23,114) -- $ (2,699) $ 26,993
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share amounts)
Balance, March 31, 2001 -- $ 4 $ 57,108 $ (4,306) $ -- $ (23,114) -- $ (2,699) $ 26,993
Issuance of common stock
for services and
severance payments -- -- 441 -- -- -- -- -- 441
Common stock to be returned -- -- 485 -- (485) -- -- -- --
Compensation expense for
warrants granted -- -- 579 -- -- -- -- -- 579
Interest charges on
convertible notes due to
stockholders -- -- 438 -- -- -- -- -- 438
Warrants issued for late
effectiveness of the
registration for common
stock sold in a private
placement in fiscal 2001 -- -- 711 -- -- -- -- -- 711
Offering costs -- -- (711) -- -- -- -- -- (711)
Liquidated damages for late
effectiveness of the
registration statement -- -- (60) -- -- -- -- -- (60)
Issuance of Series A
Preferred stock in
exchange for common
stock, sale of IBIS note
receivable and settlement
of Softline note payable $ 14,100 -- -- (8,580) -- -- -- -- 5,520
Retired treasury stock -- -- (4,306) 4,306 -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- (14,658) $ (14,658) -- (14,658)
Other comprehensive loss:
Disposal of Australian
operation -- -- -- -- -- -- 2,699 2,699 2,699
----------
Comprehensive loss -- -- -- -- -- -- $ (11,959) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2002 $ 14,100 $ 4 $ 54,685 $ (8,580) $ (485) $ (37,772) -- $ -- $ 21,952
========== ========== ========== ========== ========== ========== ========== ==========
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands, except share amounts)
Cash flows from operating activities:
Net loss $ (14,658) $ (28,945) $ (4,054)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization 7,069 9,540 7,942
Impairment of note receivable -- 7,647 --
Impairment of intangible assets associated with discontinued operations -- 8,886 --
Loss on disposal of Australian operations 3,171
(Gain)/Loss on foreign currency transactions 41 (9) 12
Compensation expense for stock options and warrants 579 112 55
Interest charges on convertible notes due to stockholders 438 -- --
Common stock issued for services rendered and severance
payments 245 -- --
Deferred income tax provision (149) (4,396) (2,614)
Loss on sale of furniture and equipment 64 3 177
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable and other receivables 2,548 5,126 (4,586)
Accrued interest on note receivable -- (555) (840)
Inventories 61 (8) (34)
Prepaid expenses and other current assets 60 157 (197)
Accounts payable and accrued expenses (1,892) 3,506 (576)
Accrued interest on stockholders' loans and note payable 2,295 944 --
Deferred revenue 1,642 (4,438) 5,023
Income taxes payable 98 -- (2,576)
---------- ---------- ----------
Net cash provided by (used for) operating activities 1,612 (2,430) (2,268)
---------- ---------- ----------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- -- (33,898)
Purchase of furniture and equipment (301) (534) (849)
Proceeds from sale of furniture and equipment 13 -- 83
Purchase of software and capitalized software development costs (409) (2,471) (1,831)
---------- ---------- ----------
Net cash used for investing activities (697) (3,005) (36,495)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 3,754 9,615
Increase (decrease) in amounts due to stockholders, net (844) 9,855 1,982
Proceeds from lines of credit -- 1,555 2,281
Proceeds from convertible notes due to stockholders 1,260 -- --
Proceeds from term loans -- -- 18,500
Payments on term loans (1,243) (13,231) (1,458)
---------- ---------- ----------
Net cash provided by (used for) financing activities (827) 1,933 30,920
---------- ---------- ----------
Effect of exchange rate changes on cash (46) (69) (325)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 42 (3,571) (8,168)
Cash and cash equivalents, beginning of year 1,267 4,838 13,006
---------- ---------- ----------
Cash and cash equivalents, end of year $ 1,309 $ 1,267 $ 4,838
========== ========== ==========
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
(in thousands, except share amounts)
Supplemental disclosure of non-cash information:
Interest paid $ 1,194 $ 1,990 $ 1,417
Income taxes paid -- $ 665 $ 2,163
Supplemental disclosure of non-cash investing and financing activities:
Issued 38,380 shares of common stock for services to be
provided $ 31 -- --
644,715 shares of common stock to be returned for services
canceled after shares were issued $ 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 46,774 shares of common stock in connection
with the acquisition of Triple-S -- -- $ 213
Issued 168,208 and 54,845 shares of common stock for
services rendered $ 165 $ 70 --
Issued 500,000 shares of common stock for $214,000 in cash
and $286,000 in accrued costs related to penalty for
late effectiveness of the registration statement -- $ 286 --
Issued 5,000 warrants in connection with an equity financing -- $ 8 --
Received 178,500 treasury shares as settlement for a
Receivable -- -- $ (2,142)
Issued 220,000 shares of common stock in connection
with prior acquisitions -- -- $ 2,402
Received 78,241 shares from Softline for Triple-S -- -- $ (665)
Issued 93,023 shares of common stock in connection
with acquisition of MarketPlace Systems Corporation -- -- $ 1,000
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SVI SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS CONDITIONS - SVI Solutions, Inc. (the "Company") is a holding
company which, through its subsidiaries, is an independent provider of
multi-channel application software technology and associated services
for the retail industry. The Company also develops and distributes PC
courseware and skills assessment products for both desktop and retail
applications.
MANAGEMENT'S PLAN TO CONTINUE AS A GOING CONCERN - The accompanying
consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. As shown in the
accompanying consolidated financial statements, the Company has
incurred net losses of $14.7 million, $28.9 million and $4.1 million
from operations for the years ended March 31, 2002, 2001 and 2000,
respectively.
The loss for the year ended March 31, 2002 included a $4.6 million
loss from the discontinued Australian operations and non-cash charges
of $6.7 million in depreciation and amortization. While net sales
decreased slightly by 2%, the selling, general and administrative
expense decreased by 25%.
The loss for the year ended March 31, 2001 included a non-cash
impairment of charges totaling $14.2 million for goodwill and
capitalized software write-downs related to its discontinued Australian
subsidiary and its note receivable in connection with a prior sale of a
foreign subsidiary. In addition, the Company recorded a $3.7 million
loss from the discontinued Australian operations, non-cash charges of
$8.6 million in depreciation and amortization, which related primarily
to its intangible assets, and $900,000 for severance and related
personnel reductions in the fourth quarter of the year ended March 31,
2001. Overall, the Company's general and administrative expense
increased 22% during fiscal 2001.
In addition, the Company's balance sheet reflects negative working
capital of $5.3 million and $2.8 million as of March 31, 2002 and 2001,
respectively. At March 31, 2002, the Company has a substantial amount
of debt, including $6.9 million due to Union Bank of California and
$2.0 million due to other stockholders. The Company experienced
significant strains on its cash resources during the years ended March
31, 2002 and 2001, and had difficulty meeting its current obligations,
including principal and interest payments on indebtedness and lease
payments due on its two facilities in the US.
The Company experienced a reduction in sales of its high margin
application software licenses in its U.S. and U.K. operations. The
Company believes its difficulties initially arose from insufficient
staffing of its sales force. Although the Company significantly
increased the staffing of the sales force in the first quarter of
fiscal 2002, the economic slowdown and the terrorist attacks of
September 11, 2001, and the ongoing hostilities in the world, increased
the challenges faced by the sales force. In addition, the Company's
financial condition may have interfered with its ability to sell new
application software licenses. The Company was dependent on one
customer for 42% of its net sales in fiscal 2002. The Company needs to
generate additional sales and revenue and to control expenditures to
return to profitability and to achieve positive cash flow.
In October 2001, the Company completed an analysis of its operations
and concluded that it was necessary to restructure the composition of
management and personnel. The CEO, CFO and general manager of the
Company's retail operations elected to leave to pursue other interests.
The Company appointed the Chairman as the Chief Executive Officer. The
Company reduced its staff by a total of 20%, and restructured and
refocused the sales force toward opportunities available in the current
economic climate.
As of April 2, 2002, the Company has refocused the company into three
strategic business units lead by experienced managers. The units are
Island Pacific, SVI Store Solutions and SVI Training Products, Inc.
F-9
The management team developed and presented to the Board of Directors
in June 2002, an operating plan for the current fiscal year that, if
achieved, will return the Company to positive cash flow from
operations. This improvement is based on a restructuring of the
Company's debt with Union Bank of California ("Union Bank"), on an
aggressive sales campaign for its applications and related services and
on rigorous management of its costs and expenses.
In May and July 2002, the Company extended its term loan facility with
Union Bank (see Note 10). In May 2002, the Company also entered into an
agreement with its major customer, Toys "R" Us ("Toys"), to issue a
$1.3 million non-interest bearing convertible note, a warrant to
purchase up to 2.5 million shares of the Company's common stock at the
exercise price of $0.553 per share and to provide development and
professional services to Toys through February 2004. In July 2002, the
Company extended its notes payable to certain stockholders which were
in default (see Note 11).
Management is now actively seeking additional financing to provide
needed working capital for operations and to reduce its overall debt
burden. Management believes additional financings, if completed, would
provide the cash required for operations during the current fiscal
year, thus enabling the Company the opportunity to increase sales of
its applications and services. However, there can be no assurance that
the Company will be successful in obtaining new financing, increasing
sales or producing incremental profits and cash flow.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION - The
consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, SVI Retail, Inc. and SVI Training
Products, Inc., based in US and SVI Retail (Pty) Limited based in
Australia. Effective February 2002, the Australian subsidiary ceased
operation (see Note 3). All material intercompany balances and
transactions have been eliminated in consolidation.
RECLASSIFICATIONS - Certain amounts in the prior periods have been
reclassified to conform to the presentation for the fiscal year ended
March 31, 2002. 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 management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
highly liquid investments with original maturities of not more than
three months.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of short-term
financial instruments, including cash and cash equivalents, trade
accounts receivable, other receivables, prepaid expenses, other assets,
accounts payable, accrued expenses, lines of credit and demands due to
stockholders approximate their carrying amounts in the financial
statements due to the short maturity of and/or the variable nature of
interest rates associated with such instruments.
The fair value of the long-term note receivable is discussed in Note 5.
The amounts shown for term loans and convertible notes due to
stockholders approximate fair value because current interest rates
offered to the Company for debt of similar maturity are substantially
the same or the difference is immaterial.
INVENTORIES - Inventories consist of finished goods and are stated at
the lower of cost or market, on a first-in, first-out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally ranging from 4 to 10
years.
Leasehold improvements are amortized using the straight-line method,
over the shorter of the life of the improvement or lease term.
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized.
GOODWILL - Goodwill, the excess of cost over the fair value of net
assets acquired, is being amortized using the straight-line method over
various periods not exceeding 10 years. The Company periodically
F-10
reviews goodwill to evaluate whether changes have occurred that would
suggest that goodwill may be impaired based on the estimated
undiscounted cash flows of the assets acquired over the remaining
amortization period. If this review indicates that the remaining
estimated useful life of goodwill requires revision or that the
goodwill is not recoverable, the carrying amount of the goodwill is
reduced to its fair value, generally using the estimated shortfall of
cash flows on a discounted basis. As described in Note 8 to the
consolidated financial statements, effective April 1, 1999, the Company
revised its estimate of the useful life of goodwill from twenty years
to ten years.
PURCHASED AND CAPITALIZED SOFTWARE COSTS - Pursuant to the provisions
of Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," the Company capitalizes 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, the
Company evaluates on a product-by-product basis the unamortized
capitalized cost of computer software compared to the net realizable
value of that product. The amount by which the unamortized capitalized
costs of a computer software product exceed its net realizable value is
written off (see Note 7).
NON-COMPETE AGREEMENTS - Non-compete agreements represent agreements to
retain key employees of acquired subsidiaries for a certain period of
time and prohibit those employees from competing with the Company
within a stated period of time after terminating employment with the
Company. The amounts incurred are capitalized and amortized over the
life of the agreements, generally ranging from two to six years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
such assets or intangibles may not be recoverable. Recoverability of
assets to be held and used is 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 are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets (see
Notes 4, 7, 8 and 9). Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
REVENUE RECOGNITION - The Company recognizes revenues in accordance
with the provisions of the American Institute of Certified Public
Accountants Statement of Position 97-2, "Software Revenue Recognition."
The Company licenses its software products under nonexclusive,
nontransferable license agreements. For software arrangements that
require significant production, modification or customization, the
entire arrangement is accounted for in conformity with Accounting
Research Bulletin No. 45, "Long-term Construction-Type Contracts",
using the relevant guidance Statement of Position 81-1, "Accounting for
Performance of Construction-Type Contracts and Certain Production-Type
Contracts". For those arrangements that do not require significant
production, modification or customization, revenue is recognized when a
license agreement has been signed, delivery of the software product has
occurred, the related fee is fixed or determinable and collectibility
is probable. The Company also licenses non-software training products
under nonexclusive, nontransferable licenses. Revenue related to such
license agreements is recognized ratably over the license agreement, or
at such time that no further obligation to the customer exists.
Professional services are billed on an hourly basis and revenue is
recognized as the work is performed.
In December 1999, SEC Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" was issued. SAB 101
provides the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues, including
software revenue recognition. There was no impact on the financial
statements as a result of the adoption of SAB 101. Therefore, no
adjustment was recorded.
In November 2001, the Financial Accounting Standards Board ("FASB")
issued a Staff Announcement Topic D-103 ("Topic D-103"), "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred". Topic D-103 establishes that reimbursements
received for out-of-pocket expenses should be reported as revenue in
the income statement. Currently, the Company classifies reimbursed
out-of-pocket expenses as a reduction in cost of consulting services.
The Company is required to adopt the guidance of Topic D-103 in the
first quarter of fiscal year 2003 and its consolidated statements of
operations for prior periods will be reclassified to conform to the new
presentation. The adoption of Topic D-103 will result in an increase in
reported net sales and cost of sales; however, it will not affect the
net income or loss in any past or future periods.
F-11
NET INCOME (LOSS) PER SHARE - As required by Statement of Financial
Accounting Standards No. 128, "Earnings per Share," the Company has
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 - The Company utilizes Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
TRANSLATION OF FOREIGN CURRENCY - The financial position and results of
operations of the Company's foreign subsidiaries are measured using
local currency as the functional currency. Revenues and expenses of
such subsidiaries have been translated into U.S. dollars at average
exchange rates prevailing during the period. Assets and liabilities
have been translated at the rates of exchange at the balance sheet
date. Transaction gains and losses are deferred as a separate component
of stockholders' equity, unless there is a sale or complete liquidation
of the underlying foreign investments. Aggregate foreign currency
transaction gains and losses are included in determining net earnings.
ADVERTISING AND PROMOTIONAL EXPENSES - Advertising and promotional
expenses are charged to expense as incurred and amounted to $38,000,
$198,000 and $497,000 for the years ended March 31, 2002, 2001 and
2000, respectively.
COMPREHENSIVE INCOME - The Company utilizes Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities and are included as a component
of stockholders' equity.
STOCK-BASED COMPENSATION - As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for costs of stock based
compensation in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly, discloses the pro forma effect on net income (loss) and
related per share amounts using the fair-value method defined in SFAS
No. 123.
In April 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB No. 25," which is effective July 1, 2000 except
for certain conclusions which cover specific events after either
December 15, 1998 or January 12, 2000. FIN No. 44 clarifies the
application of APB No. 25 related to modifications of stock options,
changes in grantee status, and options issued on a business
combination, among other things. The adoption of FIN No. 44 did not
have a significant impact on the consolidated financial position or
results of operations.
CONCENTRATIONS - The Company maintains 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, 2002, the uninsured portion of these
balances held at financial institutions aggregated to approximately
$973,000. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
For the fiscal years ended March 31, 2002, 2001 and 2000, sales to one
customer accounted for 42%, 29% and 15%, respectively, of total
consolidated net revenues. As of March 31, 2002 and 2001, the Company's
trade receivables from this customer accounted for 40% and 26%,
respectively, of total consolidated receivables. As of March 31, 2002,
deferred revenues from this customer accounted for 48% of total
consolidated deferred revenue.
F-12
RECENT ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a
significant impact on the Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets,"
which is effective for fiscal years beginning after December 15, 2001.
SFAS 142 prohibits the amortization of goodwill and intangible assets
with indefinite useful lives but requires that these assets be reviewed
for impairment at least annually or on an interim basis if an event
occurs or circumstances change that could indicate that their value has
diminished or been impaired. Other intangible assets will continue to
be amortized over their estimated useful lives. The Company evaluates
the remaining useful lives of these intangibles on an annual basis to
determine whether events or circumstances warrant a revision to the
remaining period of amortization. Pursuant to SFAS 142, amortization of
goodwill and assembled workforce intangible assets recorded in business
combinations prior to June 30, 2001 ceased effective March 31, 2002.
Goodwill resulting from business combinations completed after June 30,
2001 will not be amortized. The Company recorded amortization expense
of approximately $2.2 million on goodwill during the fiscal year ended
March 31, 2002. The Company currently estimates that application of the
non-amortization provisions of SFAS 142 will reduce amortization
expense and increase net income by approximately $2.2 million in fiscal
2003.
The Company will test goodwill and intangible assets with indefinite
lives for impairment during the fiscal year beginning April 1, 2002 and
any resulting impairment charge will be reflected as a cumulative
effect of a change in accounting principle. Under SFAS 142, the Company
is required to screen goodwill for potential impairment by September
30, 2002 and measure the amount of impairment, if any, by March 31,
2003. Subsequent to March 31, 2002, the Company completed the
transitional analysis of intangible asset impairment required by the
adoption of SFAS 142 in fiscal 2003, and the Company will record in the
first quarter of fiscal 2003 impairments of $627,000, $1,182,000 and
$161,000 to goodwill, capitalized software and non-compete agreements,
respectively, as a cumulative effect of a change in accounting
principles.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of
long-lived assets, except for certain obligations of lessees. The
adoption of SFAS No. 143 did not have a material impact on the
Company's consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends APB Opinion
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by
sale. SFAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value cost to
sell. Additionally SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that
(1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The accounting prescribed in SFAS 144 was applied in
connection with the disposal of the Australian operations.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies, and simplifies existing
accounting pronouncements. This statement rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in APB No. 30
will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary.
SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sale-lease
transactions. This statement also makes technical corrections to
existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice. The
Company does not expect adoption of SFAS No. 145 to have material
impact, if any, on its financial position or results or operations.
F-13
2. ACQUISITIONS
MARKETPLACE SYSTEM CORPORATION - Effective March 16, 2000, Island
Pacific acquired certain assets and liabilities of Marketplace System
Corporation ("Marketplace"), a privately-held software development and
consulting firm headquartered in Austin, Texas. The purchase price for
the acquisition was $750,000 in cash and 93,023 shares of the Company's
common stock with the fair value of $1 million at the date of
acquisition. The acquisition has been accounted for as a purchase.
The fair value of assets acquired and liabilities assumed were as
follows (in thousands):
Assets acquired, including goodwill $ 1,621
Liabilities assumed -
Common stock issued (1,000)
Liability for purchase consideration (500)
--------------
Net cash paid for acquisition $ 121
==============
3. DISCONTINUED OPERATIONS
The Company's 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 the Company has
guaranteed all amounts owing on the facility. The facility became due
in February of each year, but had renewed annually. In April 2001, the
Company 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, management decided in the third quarter of
fiscal 2002 to sell certain assets of the Australian subsidiary to the
former management of such subsidiary, and then cease Australian
operations. Such sale was however subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002.
The bank caused a receiver to be appointed in February 2002 to sell
substantially all of the assets of the Australian subsidiary and pursue
collections on any outstanding receivables. The receiver proceeded to
sell substantially all of the assets for $300,000 in May 2002 to the
entity affiliated with former management, and is actively pursuing the
collection of receivables. If the sale proceeds plus collections on
receivables are insufficient to discharge the indebtedness to National
Australia Bank, the Company may be called upon to pay the deficiency
under its guarantee to the bank. The Company has accrued $187,000 as
the maximum amount of our potential exposure. The receiver has also
claimed that the Company is obligated to it for inter-company balances
of $636,000, but the Company does not believe any amounts are owed to
the receiver, who has not as of the date of this report acknowledged
the monthly corporate overhead recovery fees and other amounts charged
by us to the Australian subsidiary offsetting the amount claimed to be
due.
The disposal of the Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown
as discontinued operations with the prior period results restated. The
operating results reflected in loss from discontinued operations are
summarized as follows (in thousands):
Year ended March 31,
2002 2001 2000
---- ---- ----
Net sales $ 2,363 $ 4,959 $ 9,462
Income (loss) before taxes $ (1,056) $ (4,580) $ 882
Provision (benefit) for income taxes 332 (833) 2
Net income (loss) $ (1,388) $ (3,746) $ 880
Net income (loss) per share of common stock $ (0.04) $ (0.11) $ 0.03
Net assets from discontinued operations at March 31, 2001 consisted of
the following (in thousands):
Net assets available for sale $ 1,595
Current assets 1,102
Line of credit (485)
Current liabilities (771)
---------
$ 1,441
=========
F-14
4. ASSET IMPAIRMENT CHARGES
In fiscal year ended March 31, 2001, the Company evaluated the
recoverability of the long-lived assets in accordance with the
evaluation of its long-lived assets as described in Note 1. In
determining the amount of impairment, the Company compared the net book
value of the long-lived assets associated with the Australian
operations, primarily consisting of recorded goodwill and software
intangibles, to their estimated fair values. Fair values were estimated
based on anticipated future cash flows of the Company's operations
consistent with the assets' remaining useful lives. The anticipated
future cash flows were then discounted at 13%, which approximates the
Company's interest rate on its amended and restated loan agreement in
fiscal year ended March 31, 2001. Accordingly, the Company recorded
impairment of goodwill of $2.3 million and capitalized software of $6.6
million in the fiscal year ended March 31, 2001.
The Company also recorded an impairment charge to its note receivable
in the fiscal year ended March 31, 2001 (See Note 5.).
Subsequent to March 31, 2002, the Copmany completed the transitional
analysis of intangible asset impairment required by the adoption of
Statement of Financial Accounting Standards No. 147 in fiscal 2003, and
the Company will record in the first quarter of fiscal 2003 impairments
of $627,000, $1,182,000 and $161,000 to goodwill, capitalized software
and non-compete agreements, respectively, as a cumulative effect of a
change in accounting principles.
5. NOTE RECEIVABLE
In connection with the sale of its United Kingdom subsidiary, IBIS
Systems Limited ("IBIS") to Kielduff Investments Limited ("Kielduff")
in the fourth quarter of fiscal 1999, the Company recorded a note
receivable (the "Note") of $13.6 million. The Note bore interest at 2%
over the base prime rate for United States dollar deposits quoted by
the Hong Kong Shanghai British Columbia Bank plc, and principal and
interest were originally due October 1, 1999. In September 1999, the
Note was extended to February 15, 2000 to allow Kielduff sufficient
time to complete a combination of several companies under a common
name, Integrity Software, Inc. ("Integrity"), and register this newly
formed entity for trading on a United States exchange. The Note was
further extended to November 15, 2000 to accommodate the registration
and underwriting process related to Integrity. In September 2000, the
Company discontinued accruing interest on the Note. The Note was
secured by approximately 11% of the outstanding shares of Integrity.
The Company also had the right to convert all sums due from Kielduff
into shares of Integrity at its option. The Company did not exercise
its option to convert any amount of the Note into shares of Integrity.
Kielduff did not pay the Note on the November 15, 2000 due date. Given
the Company's lack of ability to enforce collection on the due date,
the Company classified the Note as long term. The Company engaged
Business Valuation Services, Inc. ("BVS") to perform an analysis of the
fair value of the Note's underlying collateral at each quarter during
fiscal year 2001. After consideration of the BVS reports and other
relevant data, the Company concluded that the fair value of the
collateral underlying the Note was impaired. Thus, during the fiscal
year ended March 31, 2001, the Company recorded an impairment of $7.6
million. The carrying value of the Note at March 31, 2001 was $7.0
million.
Effective January 1, 2002, the Company transferred the Note to Softline
Limited ("Softline"), a major stockholder, in connection with an
integrated series of transactions with Softline (see Notes 10 and 13).
The transactions with Softline were as follows:
1. The Company transferred to Softline the note received
in connection with the sale of IBIS.
2. The Company 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 the
Company from its obligations related to the note and
financing costs payable due to Softline. Softline
also surrendered 10,700,000 shares of the Company's
common stock held by Softline.
No gain or loss was recognized in connection with the disposition of
the Note or the other components of the transactions.
6. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2002 and 2001 consisted of the
following (in thousands):
2002 2001
-------------- --------------
Computer equipment and purchased software $ 2,299 $ 2,451
Furniture and fixtures 473 492
Auto mobiles 29
Leasehold improvements 400 338
-------------- --------------
3,172 3,281
Less accumulated depreciation and amortization 2,531 2,305
-------------- --------------
Total $ 641 $ 976
============== ==============
F-15
Depreciation and amortization expense from continuing operations for
the fiscal years ended March 31, 2002, 2001 and 2000 was $520,000,
$698,000 and $414,000, respectively. Depreciation and amortization
expense from discontinued operations for the fiscal years ended March
31, 2002, 2001 and 2000 was $46,000, $173,000 and $241,000,
respectively
7. CAPITALIZED SOFTWARE
Capitalized software at March 31, 2002 and 2001 consisted of the
following (in thousands):
2002 2001
-------------- --------------
Software $ 28,128 $ 27,873
Less accumulated amortization 10,516 7,799
-------------- --------------
Total $ 17,612 $ 20,074
============== ==============
Amortization expense from continuing operations for the fiscal years
ended March 31, 2002, 2001 and 2000 was $2.9 million, $3.4 million and
$2.8 million, respectively. Amortization expense from discontinued
operations for the fiscal years ended March 31, 2002, 2001 and 2001 was
$300,000, $751,000 and $451,000, respectively. The Company recorded an
impairment of $6.6 million to the capitalized software associated with
its discontinued Australian subsidiary at 2001 (see Note 4).
8. GOODWILL
In evaluating the economic benefit and useful lives of goodwill
obtained in connection with the Company's acquisition of Divergent
Technologies Pty. Ltd., Chapman Computers Pty. Ltd., Applied Retail
Solutions, Inc. and Island Pacific Systems Corporation, management
determined that the period of amortization should be revised from
twenty years to ten years effective April 1, 1999. Accordingly, the
unamortized cost of such assets at April 1, 1999 have been allocated to
the reduced number of remaining periods in the revised useful life.
Goodwill at March 31, 2002 and 2001 consisted of the following (in
thousands):
2002 2001
-------------- --------------
Cost $ 21,915 $ 21,914
Less accumulated amortization 6,493 4,272
-------------- --------------
Total $ 15,422 $ 17,642
============== ==============
The amortization expense for twelve months ended March 31, 2002, 2001
and 2000 was $2.2 million, $2.6 million, and $2.4 million,
respectively. The Company recorded an impairment to the goodwill
associated with its discontinued Australian subsidiary of approximately
$2.3 million at March 31, 2001 (see Note 4).
9. NON-COMPETE AGREEMENTS
Non-compete agreements as of March 31, 2002 and 2001 are as follows (in
thousands):
2002 2001
-------------- --------------
Cost $ 6,986 $ 6,986
Less accumulated amortization 4,484 3,372
-------------- --------------
Total 2,502 3,614
Current portion 917 1,017
-------------- --------------
Long-term portion $ 1,585 $ 2,597
============== ==============
F-16
The amortization expense for the twelve months ended March 31, 2002,
2001 and 2000 was $1.1 million , $1.6 million and $1.5 million,
respectively.
10. TERM LOANS
TERM LOANS DUE TO BANK
The Company's term loans at March 31, 2002 and 2001 consist of the
following (in thousands):
2002 2001
-------------- --------------
Term loans payable to bank $ 6,907 $ 7,325
Less term loans payable to bank classified
as long-term as discussed below 6,472 7,325
-------------- --------------
Current portion of term loans $ 435 $ -
============== ==============
In June 1999, the Company obtained two term loans from Union Bank of
California, N.A. (the "Bank") in the aggregate amount of $18.5 million
as partial funding for the acquisition of Island Pacific Systems
Corporation. During the first quarter of fiscal 2001, the Company
agreed to consolidate the approximately $14.75 million balance of the
two loans into a single term loan, and to extend the maturity date of
the renegotiated loan to August 1, 2000. The Company also agreed to
reduce the outstanding principal amount by $10 million. During the
second quarter of fiscal 2001, Softline loaned the Company $10 million
for the purpose of making this $10 million principal reduction. The
Company then refinanced the $4.75 million balance due on the term loan.
Under the terms of this arrangement, the Company was required beginning
August 1, 2000 to pay interest on the outstanding balance at the rate
of 5% over the Bank's prime rate, increasing to 6.25% over the Bank's
prime rate after December 31, 2000. The Company was also required to
pay $200,000 per month toward reduction of principal, and to pay as
further reduction of principal one half of amounts received from a
$1.75 million contract receivable, any amounts received from sale of
shares of Integrity Software, Inc. which secure a related note
receivable (see Note 4), and any amounts received from the issuance of
debt or equity securities other than stock option exercises. The
Company's $3 million revolving line of credit with the Bank also became
subject to the terms of this agreement. The entire amount of
indebtedness was due April 1, 2001.
During the third quarter of fiscal 2001, the Bank agreed to waive the
required $200,000 monthly principal payments and to allow the Company
to pay a reduced monthly interest rate of 2% over prime, with the
balance of the contractual interest accruing and payable upon maturity.
The Bank also agreed to permit the Company to apply up to $2.5 million
in private placement proceeds (see Note 12) and the full $100,000 paid
on the contract receivable during the third quarter of the fiscal year
toward working capital instead of reduction of principal. The Company
also agreed to terminate the revolving line of credit arrangement,
which as of December 31, 2000, was fully drawn, and to a restriction on
payments toward subordinated loan obligations until the Bank
obligations are discharged. The restriction did not apply to the
repayment of amounts due to a subsidiary of Softline (see Note 17).
The entire amount owed to the Bank is secured by the Company's assets,
10,700,000 shares of the Company's common stock and stock of its U.S.
retail and training products subsidiaries. The loan is subject to
certain financial covenants and contains limitations on acquisitions,
investments and other borrowings.
Effective June 28, 2001, the term loan was amended and restated. Under
the restated term loan agreement, the Bank extended the maturity date
to May 1, 2002. The restated agreement also provided for the Company,
at its option, to receive a further extension of six months (i.e.,
until November 1, 2002), subject to certain conditions. Interest on the
term loan accrues and is payable monthly at a rate per annum equal to
the Bank's reference rate plus five percentage points. The restated
agreement includes affirmative covenants regarding the Company
maintaining and obtaining certain financial ratios. The Company was
required to make monthly principal payments of $50,000 starting October
1, 2001.
On March 18, 2001, the loan agreement was amended to release certain
collateral from the pledge to the Bank, and to instead pledge to the
Bank 10,700,000 shares of the Company's common stock surrender by
F-17
Softline in the related recapitalization transactions with Softline
described in Notes 5, 10 and 13. The release collateral consisted of
shares of capital stock of our Australian subsidiary, and the IBIS note
and related shares of Integrity Software.
On May 21, 2002, the Bank further amended the loan agreement to extend
the maturity date to May 1, 2003 and to revise other terms and
conditions. We agreed to pay to the Bank $100,000 as a loan extension
fee, payable in four monthly installments of $25,000 each commencing on
June 30, 2002. If we fail to pay any installment when due, the loan
extension fee increases to $200,000, and the monthly payments 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.
The Company was not able to make the payments required in June 2002.
The Company was also out of compliance with certain financial covenants
as of June 28, 2002. Effective July 16, 2002, the Bank further amended
the restated term loan agreement, and waived the then existing
defaults. Under this third amendment to the restated agreement, the
Bank agreed to waive the application of the additional 2% interest rate
for late payments of principal and interest, and to waive the
additional $100,000 refinance fee required by the second amendment. The
Bank also agreed to convert $361,000 in accrued and unpaid interest
and fees to term loan principal, and the Company executed a new term
note in total principal amount of $7.2 million. The Company is 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 is due August 31, 2003. The Bank also
agreed to eliminate certain financial covenants and to ease others, and
the Company is in compliance with the revised covenants.
The Company also agreed to issue a contingent warrant to an affiliate
of the Bank to purchase up to 4.99% of the number of outstanding shares
of common stock on January 2, 2003 for $0.01 per share. The warrant
will be issued and exercisable for shares equal to 1% of the
outstanding common stock on January 2, 2003, and will become
exercisable for shares equal to an additional 0.5% of the outstanding
common stock on the first day each month thereafter, until it is
exercisable for the full 4.99% of the outstanding common stock. The
warrant will not become exercisable to the extent that the Company
discharged in full the Bank indebtedness prior to a vesting date.
Accordingly, the warrant will not become exercisable for any shares if
the Company discharges its bank indebtedness in full prior to January
2, 2003; and if the warrant does become partially exercisable on such
date, it will cease further vesting as of the date the Company
discharges in full the bank indebtedness.
SUBORDINATED TERM LOAN DUE TO STOCKHOLDER
During the second quarter of fiscal 2001, Softline loaned the Company
$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. The Company 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.
The Company 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. These costs were to be amortized over the initial 13 month
life of the loan.
Effective January 1, 2002, the Company entered into an integrated
series of transactions with Softline where Softline agreed to release
the Company's obligations relating to this loan, including the $326,000
refinancing costs. As a result, the Company recorded a reduction of
refinancing cost equal to the $224,000 previously amortized. For
further discussion of the transactions with Softline, see Notes 5 and
13.
During the fiscal year ended March 31, 2001, the Company borrowed $0.6
million from a subsidiary of Softline on a short-term basis (see Note
16).
Interest expense included interest due to Softline and its subsidiary
for the fiscal years ended March 31, 2002, 2001 and 2000 of $1.3
million, $1.0 million and $0, respectively. Interest expense for the
fiscal years ended March 31, 2002, 2001 and 2000 also included interest
due to other stockholders in the amount of $56,000, $130,000 and
$31,000, respectively.
11. CONVERTIBLE NOTES
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
In May and June 2001, the Company entered into Subscription Agreements
with a limited number of accredited investors related to existing
stockholders for gross proceeds of $1.3 million. Each unit consisted of
a convertible promissory note and warrants to purchase 250 shares of
the Company's common stock for each $1,000 borrowed by the Company. The
holders of the notes had the option to convert the unpaid principal and
interest at any time at a conversion price of $1.35. The notes matured
on August 30, 2001 and earned interest at 12% per annum to be paid at
maturity. The notes were not paid or converted at March 31, 2002.
F-18
The interest rate increased to 17% per annum on August 30, 2001 as a
result of the non-payment on the maturity date. As of March 31, 2002,
the balance of these convertible notes is $1.4 million, including
$171,000 in accrued interest.
In accordance with generally accepted accounting principles, the
difference between the conversion price of $1.35 and the Company's
stock price on the date of issuance of the notes is considered to be
interest expense. It is recognized in the statement of operations
during the period from the issuance of the debt to the time at which
the debt first becomes convertible. The Company 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 the Company's
common stock at an exercise price of $1.50. The warrants were to expire
three years from the date of issuance. The Company allocates 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 is included in interest expense in the
accompanying statement of operations for the year ended March 31, 2002.
Interest expense for the fiscal year ended March 31, 2002 was $609,000.
Subsequent to March 31, 2002, the Company agreed to amend the terms of
the notes and warrants issued to these investors. The investors agreed
to replace the existing notes with new notes having a maturity date of
September 30, 2003. The interest rate on the new notes was reduced to
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest. The Company is 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
$85,000, and to accept the reduced amount in shares of the Company's
common stock valued at the average closing price of the shares on the
American Stock Exchange for the 10 trading days prior to July 19, 2002.
The new notes are convertible at the option of the holders into shares
of the Company's common stock valued at $0.60 per share.
The Company also agreed that the warrants previously issued to the
investors to purchase an aggregate of 2,996,634 shares of common stock
at exercise prices ranging from $0.85 to $1.50, and expiring on various
dates between December 2002 and June 2004, would be replaced by new
warrants to purchase an aggregate of 1,580,244 shares at $0.60 per
share, expiring July 19, 2007. The Company anticipates that warrants
for an additional 36,451 shares will be exchanged for 19,756 shares on
substantially identical terms. The Company also agreed to file a
registration statement with the Securities and Exchange Commission for
the resale of all shares held by or obtainable by these investors. In
the event such registration statement is not declared effective within
120 days after July 19, 2002, the Company will be obligated to issue
five-year penalty warrants for the purchase of 5% of the total number
of registrable securities at an exercise price of $0.60 per share. The
Company will be obligated to issue additional penalty warrants for each
30 day period after such date in which the registration statement is
not effective. No further penalty warrants will accrue from the
original registration obligation to these investors (see Note 13).
CONVERTIBLE NOTES DUE TO MAJOR CUSTOMER
Subsequent to March 31, 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 shares of common stock. In connection with this
transaction, Toys signed a two-year software development and services
agreement (the "Development Agreement") that expires in February 2004.
The purchase price is payable in installments through September 27,
2002. The note is non-interest bearing, and the face amount is payable
in shares of common stock valued at $0.553 per share. The note is due
May 29, 2009, or if earlier than that date, three years after the
completion of the development project contemplated in the Development
Agreement. The Company does not have the right to prepay the
convertible note before the due date, but upon the due date, the
Company may at its option pay the principal amount in cash rather than
shares of common stock to the extent Toys did not earlier convert the
note to shares of common stock. The face amount of the note is 16% of
the $1.3 million purchase price as of May 29, 2002, and increases by 4%
of the $1.3 million purchase price on the last day of each succeeding
month, until February 28, 2004, when the face amount is the full $1.3
million purchase price. The face amount will cease to increase if Toys
terminates the Development Agreement for a reason other than the
Company's breach. The face amount will be zero if the Company
terminates the Development Agreement due to an uncured breach by Toys
of the Development Agreement.
The warrant entitles Toys to purchase up to 2,500,000 of shares of our
common stock at $0.553 per share. The warrant is initially vested as to
400,000 shares as of May 29, 2002, and vests at the rate of 100,000
shares per month until February 28, 2004. The warrant will cease to
vest if Toys terminates the Development Agreement for a reason other
than the Company's breach. The warrant will become entirely
non-exercisable if the Company terminates the Development Agreement due
to an uncured breach by Toys of the Development Agreement. Toys may
elect a "cashless exercise" where a portion of the warrant is
surrendered to pay the exercise price.
The note conversion price and the warrant exercise price are each
subject to a 10% reduction in the event of an uncured breach by the
Company of certain covenants to Toys. These covenants do not include
financial covenants. Conversion of the note and exercise of the warrant
each require 75 days advance notice. The Company also granted Toys
certain registration rights for the shares of common stock into which
the note is convertible and the warrant is exercisable.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases office space and various
automobiles under non-cancelable operating leases that expire at
various dates through the year 2006. Certain leases contain renewal
options. Future annual minimum lease payments for non-cancelable
operating leases at March 31, 2002 are summarized as follows (in
thousands):
YEAR ENDING MARCH 31:
2003 $ 753
2004 724
2005 704
2006 192
2007 7
--------------
$ 2,380
==============
Rent expense was $1.2 million, $1.5 million and $1.3 million for the
fiscal years ended March 31, 2002, 2001 and 2000, respectively.
F-19
EMPLOYEE BENEFIT PLAN - Effective January 1, 1999, the Company adopted
a defined contribution plan under Section 401(k) of the Internal
Revenue Code covering all eligible employees employed in the United
States ("401(k) Plan"). Eligible participants may contribute up to
$10,000 or 20% of their total compensation, whichever is lower. The
Company matched 50% of the employee's contributions, up to 3% of the
employee's total compensation, and may make discretionary contributions
to the plan. Participants will be immediately vested in their personal
contributions and over a six year graded schedule for amounts
contributed by the Company. Effective, July 1, 2000, the Company
amended the 401(k) Plan to for the following items: (a) Company
matching contribution equal to 50% of the employee's contributions, up
to 6% of the employee's total compensation and (b) eligible
participants may defer up to $10,500 or 18% of their total
compensation, whichever is lower. Effective January 1, 2002, the
Company ceased matching contributions. The Company made matching
contributions to the 401(k) Plan of approximately $125,000, $359,000
and $192,000 in the fiscal years ended March 31, 2002, 2001 and 2000,
respectively.
LITIGATION -In April of 2002, the Company's 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. On June 18, 2002,
the Company filed an action against Mr. Dorosewicz and an entity
affiliated with him in San Diego Superior Court, Case No. GIC790833,
alleging fraud and other causes of action relating to transactions Mr.
Dorosewicz caused the Company to enter into with his affiliates and
related parties without proper board approval. The Company expects one
or more cross-claims from Mr. Dorosewicz in that action. The Company
does not believe it has any obligation to pay the severance benefits
alleged by Mr. Dorosewicz to be due, and it intends to vigorously
pursue its causes of action against Mr. Dorosewicz. The Company cannot
at this time predict what will be the outcome of these matters, as
discovery has not yet commenced in either action.
13. PREFERRED STOCK, COMMON STOCK, TREASURY STOCK, STOCK OPTIONS AND
WARRANTS
PRIVATE PLACEMENTS - In March 2000, the Company received $2.9 million
from the sale of common stock to an investor. The Company agreed to
register the shares with the Securities and Exchange Commission
("SEC"). The shares carried a "repricing right" which entitled the
investor to receive additional shares upon the occurrence of certain
events. In October 2000, the Company issued 375,043 shares in
satisfaction of the repricing right.
In October 2000, the SEC declared effective the registration statement.
The Company became obligated to pay to the investor liquidated damages
for late effectiveness of the registration statement in the amount of
$286,000. The investor agreed in March 2001 to accept 286,000 shares of
common stock in satisfaction of the liquidated damages and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, the Company issued the investor a
two-year warrant to purchase up to 107,000 shares of common stock at
$1.50 per share. The Company may call the warrants for $0.001 per share
upon the occurrence of certain events. The investor will have thirty
days after the call to exercise the warrant, after which time the
warrant will expire.
The Company agreed to register all of the shares sold in March 2001,
and those that it may sell under the warrant, with the SEC. The Company
became obligated to pay to the investor liquidated damages in the
amount of $60,000. Subsequent to March 31, 2002, the investor agreed to
accept 140,000 shares of common stock in satisfaction of the liquidated
damages.
In December 2000, the Company 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. The
Company 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. The Company agreed
to register the common shares purchased and the common shares issuable
upon the exercise of warrants with the Securities and Exchange
Commission. The Company filed a registration statement in January 2001
to register these shares, but it did not become effective. As of March
31, 2002, the Company has not registered these shares and has issued
1,029,410 penalty warrants with a strike price of $0.85 per share, with
fair value of $711,000, as required under an agreement with the
investors. The Company was 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.
Subsequent to March 31, 2002, the Company and the investors agreed to
revise the terms of the foregoing warrants, and to cease accruing
penalty warrants (see Note 11).
PREFERRED STOCK - The Series A Preferred has a stated value of $100 per
share and is redeemed at the option of the Company any time prior to
the maturity date of December 31, 2006 for 107% of the stated value and
accrued and unpaid dividends. The shares are entitled to cumulative
dividends of 7.2% per annum, payable semi-annually. At March 31, 2002,
dividends in arrears amount to $254,000 or $1.80 per share. The holders
may convert each share of Series A Preferred at any time into the
number of shares of the Company's common stock determined by dividing
the stated value plus all accrued and unpaid dividends, by a conversion
price initially equal to $0.80. The conversion price will increase at
an annual rate of 3.5% calculated on a semi-annual basis. The Series A
Preferred is entitled upon liquidation to an amount equal to its stated
value plus accrued and unpaid dividends in preference to any
distributions to common stockholders. The Series A Preferred has no
voting rights prior to conversion into common stock, except with
respect to proposed impairments of the Series A Preferred rights and
preferences, or as provided by law. The Company has the right of first
refusal to purchase all but not less than all of any shares of Series A
Preferred or shares of common stock received on conversion which the
holder may propose to sell to a third party, upon the same price and
terms as the proposed sale to a third party.
F-20
COMMON STOCK - During fiscal year ended March 31, 2002, the Company
issued the following:
o An aggregate of 573,845 shares of common stock for
services rendered and severance payments totaling
$490,000.
o 38,380 shares of common stock for investor relations
services. The $31,000 value of these shares was
recorded subsequent to year end when the services
were performed.
o 644,715 shares of common stock totaling $485,000
which are to be returned as a result of early
termination of investor relations service contracts.
The value of these shares is recorded as a share
receivable component of stockholders' equity.
TREASURY STOCK - In November 1998, the Board of Directors authorized
the Company to purchase up to 1,000,000 shares of the Company's common
stock. As of March 31, 2001 and 2000, the Company had repurchased
444,641 shares of its common stock at a cost of $4.3 million. The
purchased shares were canceled as of March 31, 2002.
The Company received 10,700,000 shares of the Company's common stock
valued at $8.6 million from Softline in connection with the
transactions between the Company and Softline described in Notes 5, 10
and 13. These shares are pledged to the Bank as collateral for the term
loans (see Note 10).
STOCK OPTION PLAN - The Company adopted an incentive stock option plan
during fiscal year 1990 (the "1989 Plan"). Options under this plan may
be granted to employees and officers of the Company. 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, certain of
the amendments were approved by the shareholders. 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.
F-21
The following summarizes the Company's stock option transactions under
the stock option plans:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
----------- -----------
Options outstanding, April 1, 1999 1,369,285 $ 4.05
Exercised (190,075) $ 3.63
Granted 730,150 $ 7.87
Expired/canceled (119,100) $ 7.28
-----------
Options outstanding, March 31, 2000 1,790,260 $ 5.44
Exercised (131,300) $ 6.24
Granted 2,891,929 $ 1.35
Expired/canceled (589,855) $ 4.88
-----------
Options outstanding, March 31, 2001 3,961,034 $ 2.55
Granted 2,117,300 $ 0.89
Expired/canceled (1,592,445) $ 1.84
-----------
Options outstanding March 31, 2002 4,485,889 $ 2.05
===========
Exercisable, March 31, 2000 1,169,160 $ 4.37
===========
Exercisable, March 31, 2001 922,885 $ 4.01
===========
Exercisable, March 31, 2002 2,030,673 $ 2.63
===========
In addition to options issued pursuant to the stock option plans
described above, the Company issued additional options outside the
plans to employees, consultants, and third parties. The following
summarizes the Company's other stock option transactions:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
----------- -----------
Options outstanding, April 1, 1999 5,388,700 $ 1.95
Exercised (3,247,188) $ 1.92
Granted 15,000 $ 9.50
-----------
Options outstanding, March 31, 2000 2,156,512 $ 2.02
Exercised (289,700) $ 1.82
Granted 300,000 $ 0.95
Expired/Canceled (800,000) $ 1.25
-----------
Options outstanding, March 31, 2001 1,366,812 $ 2.28
Expired/Canceled (320,000) $ 1.08
-----------
Options outstanding, March 31, 2002 1,046,812 $ 2.61
===========
Exercisable, March 31, 2000 2,156,512 $ 2.02
===========
Exercisable, March 31, 2001 1,166,812 $ 2.51
===========
Exercisable, March 31, 2002 1,046,812 $ 2.61
===========
During the fiscal years ended March 31, 2001 and 2000, the Company
recognized compensation expense of $28,000 and $55,000, respectively,
for stock options granted to non-employees for services provided to the
Company.
F-22
The following table summarizes information as of March 31, 2002
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)
$0.50 - 1.75 4,020,664 8.28 $ 1.15 1,720,728 $ 1.13
$1.76 - 4.00 631,812 5.32 $ 2.45 631,812 $ 2.45
$4.01 - 7.00 464,575 4.06 $ 5.36 444,575 $ 5.32
$7.01 - 11.75 415,650 4.25 $ 7.83 280,370 $ 7.87
----------------------------------------------------------------------------------------
5,532,701 7.28 $ 2.16 3,077,485 $ 2.62
========================================================================================
The Company has adopted the disclosure-only provision of SFAS No. 123.
The following pro forma information presents net income and basic and
diluted earnings per share as if compensation expense had been
recognized for stock options granted in the fiscal years ended March
31, 2002, 2001 and 2000, as determined under the fair value method
prescribed by SFAS No. 123 (in thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
------------ ------------ ------------
Net loss:
As reported $ (14,658) $ (28,945) $ (4,054)
Pro forma $ (15,963) $ (29,408) $ (5,305)
Basic and diluted loss per share:
As reported $ (0.41) $ (0.83) $ (0.12)
Pro forma $ (0.45) $ (0.85) $ (0.16)
Weighted average assumptions:
Dividend yield None None None
Volatility 77% 140% 49%
Risk free interest rate 3.9% 5.8% 5.8%
Expected life of options 4 years 10 years 1-4 years
For options granted during the year ended March 31, 2002 where the
exercise price was greater than the stock price at the date of grant,
the weighted-average fair value of such options was $0.46, and the
weighted-average exercise price of such options was $0.89. For options
granted during the year ended March 31, 2002 where the exercise price
was equal to the stock price at the date of grant, the weighted average
fair value of such options was $0.53, and the weighted-average exercise
price of such options was $0.89. No options granted during the year
ended March 31, 2002 where the exercise price was less than the stock
price at the date of grant.
WARRANTS - At March 31, 2002 and 2001, the Company had outstanding
warrants to purchase 4,040,168 and 1,614,925 shares of common stock,
respectively, at exercise prices ranging from $0.79 to $7.00 per share.
The lives of the warrants range from two to five years from the grant
date. During the fiscal year ended March 31, 2002, the Company
recognized compensation expense of $579,000 for warrants granted to
non-employees for services provided to the Company. Subsequent to March
31, 2002, the Company agreed to replace warrants 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 of common stock at $0.60 per share, expiring July
17, 2007 (see Note 11).
F-23
14. INCOME TAXES [SLGG TO PREPARE]
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,
2002 2001 2000
--------------- ---------------- ---------------
Current:
Federal $ 39 $ (1,261) $ 681
State - 45 103
Foreign - 1,048
--------------- ---------------- ---------------
Total 39 (1,216) 1,832
--------------- ---------------- ---------------
Deferred:
Federal - (3,523) (3,325)
State - (774) 261
Foreign - (99) (1,180)
--------------- ---------------- ---------------
Total 39 (4,396) (4,244)
--------------- ---------------- ---------------
Provision (benefit) for income taxes $ 39 $ (5,612) $ (2,412)
=============== ================ ===============
Significant components of the Company's deferred tax assets and
liabilities at March 31, 2002 and 2001 are as follows (in
thousands):
MARCH 31,
--------------------------------
2002 2001
-------------- --------------
Current deferred tax assets/(liabilities):
Deferred revenue $
Research and expenditure credits
Excess capital loss over gain
Net operating loss
State taxes $ - 1
Accrued expenses 1,107 728
Related party interest 852 511
Prepaid services 284 -
Warrants for services 344 -
Allowance for bad debts 191 99
-------------- --------------
Net current deferred tax assets 2,778 1,339
-------------- --------------
Non-current deferred tax assets/(liabilities):
Research and expenditure credits - 1,656
Net operating loss 11,040 3,994
Fixed assets - 117
Other credits - 123
Deferred rent 82 82
Accrued expenses 84 3,567
-------------- --------------
Total non-current deferred tax assets 11,206 9,539
Intangible assets (9,908) (5,678)
Accumulated capitalized research and development costs (749) (749)
Other (17) (227)
-------------- --------------
Total non-current deferred tax liability (10,674) (6,654)
-------------- --------------
Net non-current deferred tax asset/(liability) 3,310 2,885
-------------- --------------
Valuation allowance (3,310) (2,885)
-------------- --------------
Net deferred tax liability $ - $ -
============== ==============
F-24
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, 2002, 2001 and 2000 is
attributable to the following:
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
Provision (benefit) computed at statutory rate (34.0)% (34.0)% (34.0)%
Nondeductible goodwill 5.1 4.8 12.8
Change in valuation allowance 20.4 9.1
Foreign income taxed at different rates 9.7 5.0 (4.7)
Tax credits (2.9)
State income tax, net of federal tax benefit (0.7) (1.4) (4.3)
Other 2.4 0.3 (7.1)
--------------- ---------------- ----------------
Total provision (benefit) for income taxes ( -)% (16.2)% (37.3)%
=============== ================ ================
At March 31, 2001, the Company had Federal and California tax net
operating loss carryforwards of approximately $12.3 million and $5.7
million, respectively. The Federal and California tax net operating
loss carryforwards will begin expiring after 2008 and 2001,
respectively.
The Company also has Federal and California research and development
tax credit carryforwards of approximately $960,000 and $696,000,
respectively. The Federal credits will begin expiring after 2008. The
California credits may be carried forward indefinitely.
15. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the fiscal years ended March 31, 2002,
2001 and 2000, are as follows (in thousands, except share amounts and
per share data):
FISCAL YEAR ENDED MARCH 31, 2002
---------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and diluted EPS:
Loss available to common stockholders $ (14,658) 35,697,999 $ (0.41)
=========== =========== ===========
FISCAL YEAR ENDED MARCH 31, 2001
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and diluted EPS:
Loss available to common stockholders $ (28,945) 34,761,386 $ (0.83)
=========== =========== ===========
FISCAL YEAR ENDED MARCH 31, 2000
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and Diluted EPS:
Loss available to common stockholders $ (4,054) 32,458,902 $ (0.12)
=========== =========== ===========
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:
F-25
For the years ended March 31,
2002 2001 2000
---- ---- ----
Options outstanding under the Company's
stock option plans 4,485,889 3,961,034 1,790,260
Options granted outside the Company's
stock option plans 1,046,812 1,366,812 2,156,212
Warrants issued in conjunction with private placements 2,944,499 1,602,590 25,000
Warrants issued for services rendered 1,095,669 12,336
Convertible notes due to stockholders 1,037,037
Series A Convertible Preferred Stock 17,625,000
16. RELATED PARTIES
Included in other receivables at March 31, 2002 and 2001 are amounts
due from officers and employees of the Company in the amount of $31,000
and $65,000, respectively.
The office space for the Company's Sydney office was leased from a
former officer of the Company. During the year ended March 31, 2000,
the Company paid $163,000 in rent to this related party. The former
officer was terminated in fiscal year ended March 31, 2001.
The Company began occupying its current principal executive offices in
July 2001. At that time, the premises were owned by an affiliate of the
Company's then Chief Executive Officer. Monthly rent for these premises
was set at $13,783. In April, 2002, the premises were sold to an entity
unrelated to the former Chief Executive Officer. As of the date of this
report, the Company is negotiating the terms of a written lease with
the new owner.
In November 2000, the Company borrowed $600,000 from a wholly-owned
subsidiary of Softline to help meet operating expenses. This loan
called for interest at 10% per annum, and was discharged in full in
February 2001. Interest expense under this loan was $3,000 for the year
ended March 31, 2001. In order to discharge the remaining balance of
that loan while meeting other critical operational expenses, the
Company borrowed $400,000 from Barry M. Schechter, the Company's
Chairman. The Company borrowed an additional $164,000 from Mr.
Schechter in March 2001, which funds were needed to meet operational
requirements of our Australian subsidiary. The advances from Mr.
Schechter bore interest at prime rate and were due on demand, subject
to a limit on demand rights of $50,000 per payment. Interest expense
under the loans from Mr. Schechter was $0 and $7,000 for the fiscal
year ended March 31, 2002 and 2001, respectively. The loans were paid
in full in June 2001.
Included in demand loans due to stockholders totaling $618,000 and $1.3
million as of March 31, 2002 and 2001, respectively, was $0 and
$63,000, respectively, owed to a stockholder who together with Barry M.
Schechter and an irrevocable trust forms a beneficial ownership group.
The original loan amounts totaling $2.3 million were borrowed in June
1999 to fund the acquisition of Island Pacific Systems Corporation on
April 1, 1999. Interest is calculated monthly at the current prime rate
with no stated maturity date. Interest expense under these loans for
the years ended March 31, 2002 and 2001 was $56,000 and $123,000,
respectively.
The Company retains an entity affiliated with a director of the board
to provide financial advisory services. During the years ended March
31, 2002, 2001 and 2000, the expenses for these services were $42,000,
$112,000 and $36,000, respectively. The Company also incurred $19,000
and $25,000 in expenses to the same director for accounting services
during the fiscal years ended March 31, 2002 and 2001, respectively.
The Company borrowed $50,000 and $125,000 from another entity
affiliated with this director in May 2001 and December 2001,
respectively, to meet payroll expenses. The Company also borrowed
$70,000 from this entity subsequent to March 31, 2002 for the same
purpose. These amounts were repaid together with interest at the
then-effective prime rate, promptly as revenues were received, and are
paid in full as of the date of this report.
Effective October 1, 1999, the Company sold its Triple-S Computers
(Pty) Limited subsidiary ("Triple-S") to Softline. Triple-S developed
and installed retail point of sale systems throughout Southern Africa.
Softline transferred 78,241 shares of the Company's common stock valued
at the October 1, 1999 closing price of $8.50 per share as
consideration for the acquisition. The transfer of Triple-S was
recorded at the Company's historical book basis and was not material to
the operations of the Company.
F-26
17. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company classifies its operations into two lines of business,
retail solutions and training products. As revenues, reported
profit/(loss) and assets related to the Company's training products
subsidiary are below the threshold established for segment reporting,
the Company considers its business to consist of one reportable
operating segment.
The Company currently operates 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). In the fiscal year ended March 31,
2000, the Company also had limited operations in South Africa. 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,
2002 2001 2000
--------------- ---------------- ---------------
Net sales:
United States $ 24,559 $ 25,457 $ 22,820
Australia (discontinued
operations) 2,363 4,959 8,372
South Africa (discontinued
operations 1,090
United Kingdom 2,550 2,256 3,832
--------------- ---------------- ---------------
Total net sales $ 29,472 $ 32,672 $ 36,114
=============== ================ ===============
Long-lived assets:
United States $ 35,280 $ 48,270 $ 60,909
Australia (discontinued
operations) 1,370 11,471
South Africa - -
United Kingdom 22 59 75
--------------- ---------------- ---------------
Total long-lived assets $ 35,302 $ 49,699 $ 72,455
=============== ================ ===============
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31, 2002 JUNE 30 SEP 30 DEC 31 MAR 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 7,851 $ 8,419 $ 6,317 $ 6,885 $ 29,472
GROSS PROFIT 4,376 5,195 3,795 4,918 18,284
NET LOSS (3,514) (3,588) (2,970) (4,586) (14,658)
DILUTED LOSS PER SHARE $ (0.09) $ (0.09) $ (0.08) $ (0.16) $ (0.41)
MARCH 31, 2001 JUNE 30 SEP 30 DEC 31 MAR 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 11,000 $ 7,993 $ 7,737 $ 5,942 $ 32,672
GROSS PROFIT 8,314 4,004 3,861 4,824 21,003
NET INCOME (LOSS) 546 (4,741) (5,997) (18,753) (28,945)
DILUTED (LOSS) PER SHARE $ 0.02 $ (0.14) $ (0.17) $ (0.54) $ (0.83)
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-27