Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ________
Commission file number 0-23049
-------
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, CALIFORNIA 92008
- ------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(877) 784-7978
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $0.0001 Par Value - 28,813,304 shares as of July 31, 2002.
================================================================================
TABLE OF CONTENTS
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 (Unaudited)
and March 31, 2002 (Audited)................................................ 3
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2002 and 2001 (Unaudited)............................. 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2002 and 2001 (Unaudited)............................ 5
Notes to Condensed Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................16
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................17
Item 2. Changes in Securities and Use of Proceeds.........................................17
Item 6. Exhibits and Reports on Form 8-K..................................................17
Signatures...................................................................................18
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, 2002 MARCH 31, 2002
------------- -------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 520 $ 1,309
Accounts receivable, net 2,932 1,946
Other receivables, including $19 and $31 from related parties, respectively 235 255
Inventories 122 126
Current portion of non-compete agreements 917 917
Prepaid expenses and other current assets 193 150
------------- -------------
Total current assets 4,919 4,703
Property and equipment, net 581 641
Purchased and capitalized software, net 17,089 17,612
Goodwill, net 14,795 15,422
Non-compete agreements, net 1,356 1,585
Other assets 58 42
------------- -------------
Total assets $ 38,798 $ 40,005
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Demand loans due to stockholders $ 555 $ 618
Current portion of term loan 735 435
Accounts payable 1,741 1,497
Accrued expenses 3,801 3,864
Deferred revenue 3,178 3,528
Income tax payable 97 98
------------- -------------
Total current liabilities 10,107 10,040
Term loan refinanced in July 2002 6,376 6,472
Convertible notes, net of debt discount of $779 and $0, respectively, and
including $1,482 and $1,421 due to stockholders, respectively 1,578 1,421
Other long-term liabilities 108 120
------------- -------------
Total liabilities 18,169 18,053
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred, 7.2% cumulative 141,100 shares authorized and
outstanding with a stated value of $100 per share, dividends in arrears
of $508 and $254, respectively 14,100 14,100
Common stock, $.0001 par value; 100,000,000 shares authorized; 39,154,441 and
38,993,609 issued; and 28,454,441 and 28,293,609 shares outstanding 4 4
Additional paid in capital 55,495 54,685
Accumulated deficit (39,789) (37,772)
Treasury stock, at cost; shares - 10,700,000 (8,906) (8,580)
Shares receivable (275) (485)
------------- -------------
Total stockholders' equity 20,629 21,952
------------- -------------
Total liabilities and stockholders' equity $ 38,798 $ 40,005
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED JUNE 30,
2002 2001
------------ ------------
Net sales $ 5,321 $ 7,509
Cost of sales 2,112 3,595
------------ ------------
Gross profit 3,209 3,914
Expenses:
Application development 901 489
Depreciation and amortization 1,034 1,613
Selling, general and administrative 2,262 3,910
------------ ------------
Total expenses 4,197 6,012
------------ ------------
Operating loss (988) (2,098)
------------ ------------
Other income (expense):
Interest income 1
Other income (expense) 1 (6)
Interest expense (408) (1,062)
Gain on foreign currency transactions 4 18
------------ ------------
Total other expense (402) (1,050)
----------- -----------
Loss before provision for income taxes (1,390) (3,148)
Provision for income taxes 37
------------ ------------
Loss before cumulative effect of a change in accounting principle (1,390) (3,185)
Cumulative effect of changing accounting principle - goodwill
valuation under SFAS 142 (627)
------------ ------------
Loss from continuing operations (2,017) (3,185)
Loss from discontinued Australian operations, net of applicable income taxes (329)
------------ ------------
Net loss $ (2,017) $ (3,514)
============ ============
Basic and diluted loss per share:
Loss before cumulative effect of a change in accounting principle $ (0.05) $ (0.08)
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 (0.02)
------------ ------------
Loss from continuing operations (0.07) (0.08)
Loss from discontinued operations (0.01)
------------ ------------
Net loss $ (0.07) $ (0.09)
============ ============
Basic and diluted weighted-average common shares outstanding 28,512 37,883
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
THREE MONTHS ENDED JUNE 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (2,017) $ (3,514)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 1,034 1,783
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 627
Amortization of debt discount and conversion option 99 319
Loss on disposal of furniture and equipment 22
Gain on foreign currency transactions (4) (19)
Common stock issued for services rendered 15
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (965) (3,102)
Inventories 4 23
Prepaid expenses and other current assets (59) 34
Accounts payable and accrued expenses (29) (558)
Accrued interest on stockholders' loans, convertible notes and term loan 271 489
Deferred revenue (350) 3,599
Income taxes payable (1)
------------ ------------
Net cash used for operating activities (1,375) (924)
------------ ------------
Cash flows from investing activities:
Purchases of furniture and equipment (26) (36)
Capitalized software development costs (194)
------------ ------------
Net cash used for investing activities (220) (36)
------------ ------------
Cash flows from financing activities:
Decrease in amount due to stockholders, net (70) (212)
Payments on line of credit (46)
Proceeds from convertible notes 874 1,250
Proceeds from short-term loan from related party 70
Payments on short-term loan from related party (70)
------------ ------------
Net cash provided by financing activities 804 992
------------ ------------
Effect of exchange rate changes on cash 2
------------ ------------
Net increase (decrease) in cash and cash equivalents (789) 32
Cash and cash equivalents, beginning of period 1,309 1,267
------------ ------------
Cash and cash equivalents, end of period $ 520 $ 1,299
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 10 $ 178
Supplemental schedule of non-cash investing and financing activities:
Issued 100,000 shares of common stock for services in connection
with an equity financing in December 2000 $ 45
Issued 140,000 shares of common stock to pay for penalty for late
effectiveness of the registration statement $ 60
Received 262,500 shares of common stock related to early termination
of a service contract $ 210
Issued 151,666 and 78,075 shares of common stock as payments for
bonuses and services rendered in prior periods $ 66 $ 95
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SVI SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at June 30, 2002 and for all the
periods presented have been made.
Certain amounts in the prior period have been reclassified to conform to the
presentation for the three months ended June 30, 2002. The financial information
included in this quarterly report should be read in conjunction with the
consolidated financial statements and related notes thereto in the Company's
Form 10-K (as amended) for the year ended March 31, 2002.
The results of operations for the three months ended June 30, 2002 and 2001 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2 - DISCONTINUED OPERATIONS
Due to the declining performance of the Company's wholly-owned 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. At June 30, 2002, 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 the Company 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,
which was recorded in the fiscal year ended March 31, 2002. Accordingly, the
operating results of the Australian subsidiary for the three months ended June
30, 2001 are restated as discontinued operations.
NOTE 3 - TERM LOAN
UNION BANK OF CALIFORNIA, N.A.
The Company's term loan at June 30, 2002 and March 31, 2002 consist of the
following (in thousands):
June 30, March 31,
2002 2002
----------- -----------
Term loan payable to bank $ 7,111 $ 6,907
Less term loan payable to bank classified
as long-term as discussed below 6,376 6,472
----------- -----------
Current portion of term loan $ 735 $ 435
=========== ===========
On May 21, 2002, the Company and the bank entered into a second amendment to the
restated term loan. The second amendment extended the maturity date of the loan
to May 1, 2003 and revised other terms and conditions. The Company agreed to pay
the bank up to $200,000 refinance fee in connection with the second amendment.
6
Effective July 15, 2002, the bank further amended the restated term loan
agreement. 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 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 common shares on
January 2, 2003 for $0.01 per share. The warrant will be issued and exercisable
for shares equal to 1% of the Company's 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 has discharged in full its
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.
NOTE 4 - CONVERTIBLE NOTES
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
During the quarter ended June 30, 2001, the Company raised gross proceeds of
$1.3 million from the sale of the convertible notes and warrants to a limited
number of accredited investors related to existing stockholders. The investors
received a convertible promissory note for the amount of their investments 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 to common stock at any time at a conversion price
of $1.35 per share. 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
June 30, 2002. 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 June 30, 2002, the
balance of these convertible notes is $1.5 million, including $232,000 in
accrued interest.
In July 2002, the Company and the investors agreed to amend the terms of the
notes and warrants. 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 $16,000, and to
accept payment of the reduced amount in 527,286 shares of the Company's common
stock valued at $0.41 per share, which was the average closing price of its
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 does not have
a right to prepay the notes.
The Company also agreed that the warrants previously issued to certain of the
investors to purchase an aggregate of 3,033,085 shares at exercise prices
ranging from $0.85 to $1.50, and expiring on various dates between December 2002
and June 2004, would be replaced by new warrants to purchase an aggregate of
1,600,000 shares at $0.60 per share, expiring July 19, 2007. These warrants were
issued in connection with private placement transactions in the third and fourth
quarters of fiscal 2001, and included warrants issued in connection with
registration obligations. The replacement warrants are not callable by the
Company.
The Company 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 150 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 warrants will accrue from
the Company's original registration obligations.
7
CONVERTIBLE NOTE DUE TO MAJOR CUSTOMER
In May 2002, Toys "R" Us ("Toys"), the Company's major customer, agreed to
invest $1.3 million for the purchase of a non-recourse convertible note and a
warrant to purchase 2,500,000 shares of common stock. In connection with this
transaction, Toys signed a two-year software development and services agreement
(the "Development Agreement") that expires in February 2004. The purchase price
is payable in installments through September 27, 2002. The note is non-interest
bearing, and the face amount is convertible into 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. 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. As of June 30, 2002, the Company had received
proceeds of $874,000.
The warrant entitles Toys to purchase up to 2,500,000 of shares of the Company's
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. As of June 30, 2002, 500,000 shares of the warrant are
exercisable.
The note conversion price and the warrant exercise price are each subject to a
10% reduction in the event of an uncured breach by 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.
In accordance with generally accepted accounting principles, the difference
between the conversion price of the note of $0.553 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
recorded a debt discount of $473,000 and the debt discount will be amortized
over the period in which the note becomes convertible. For the quarter ended
June 30, 2002, the Company amortized the debt discount and recognized $94,000 as
interest expense.
The Company also allocated the proceeds received from debt or convertible debt
with detachable warrants using the relative fair value of the individual
elements at the time of issuance. The amount allocated to the warrants was
determined to be $406,000 and this amount will be amortized on a straight-line
basis until the note matures. For the quarter ended June 30, 2002, the Company
amortized the amount allocated to warrant and recognized $5,000 as interest
expense.
NOTE 5 - CHANGE IN ACCOUNTING PRINCIPLE
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could indicate
that their value has diminished or been impaired. Other intangible assets will
continue to be amortized over their estimated useful lives. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.
Effective April 1, 2002, the Company adopted SFAS 142 and ceased amortization of
goodwill recorded in business combinations prior to June 30, 2001. The Company
recorded amortization expenses of $555,000 on goodwill during the three months
ended June 30, 2001. The Company currently estimates that application of the
non-amortization provisions of SFAS 142 will reduce amortization expense and
decrease net loss by approximately $2.2 million in fiscal 2003. 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.
8
Pursuant to SFAS 142, the Company completed the transitional analysis of
goodwill impairment as of April 1, 2002 and recorded an impairment of $627,000
as a cumulative effect of a change in accounting principle in the quarter ended
June 30, 2002. The Company also evaluated the remaining useful lives of its
intangibles in the quarter ended June 30, 2002 and no adjustments have been made
to the useful lives of its intangible assets.
NOTE 6 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common shares ("diluted EPS") reflect the
potential dilutive effect, determined by the treasury method, of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. 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:
Quarters Ended June 30,
2002 2001
------------ ------------
Outstanding options under the Company's stock option plans 4,318,346 3,667,809
Outstanding options granted outside the Company's stock option plans 1,046,812 1,366,812
Warrants issued in conjunction with private placements 5,665,086 2,282,738
Warrants issued for services rendered 804,002 12,336
Convertible notes due to stockholders 1,098,047 935,304
Convertible note 2,500,000
Series A Convertible Preferred Stock 18,259,500
------------ ------------
Total 33,691,793 8,264,999
============ ============
NOTE 7 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company is a leading provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and in-store solutions and related training products and
professional and support services. The Company also develops and distributes PC
courseware and skills assessment products. Up to March 31, 2002, the Company
considered its business to consist of one reportable operating segment.
Effective April 1, 2002, the Company reorganized its operations into three
business units that have separate management teams and reporting
infrastructures. Each unit is evaluated primarily based on total revenues and
operating income excluding depreciation and amortization. Identifiable assets
are also managed by business units. The units are as follows:
o ISLAND PACIFIC - provides Retail Enterprise Solutions and associated
professional services for multi-channel retailers in the specialty,
mass merchandising and department store markets.
o SVI STORE SOLUTIONS - offers retailers multi-platform, client server
In-Store Solutions providing all point-of-sale and in-store processor
functions.
o SVI TRAINING PRODUCTS, INC. - develops and distributes PC Courseware
and skills assessment products for both desktop and retail
applications.
A summary of the revenues and operating income (loss), excluding depreciation
and amortization, attributable to each of these business units and identifiable
assets is as follows (in thousands):
Quarter Ended
June 30, 2002
-------------
Net sales:
Island Pacific $ 4,445
SVI Store Solutions 448
SVI Training Products, Inc. 428
-------------
Total consolidated net sales $ 5,321
=============
Operating income (loss):
Island Pacific $ 784
SVI Store Solutions (160)
SVI Training Products, Inc. 104
Other (see below) (1,716)
-------------
Consolidated operating loss $ (988)
=============
9
Depreciation:
Island Pacific $ 49
SVI Store Solutions 13
Other 25
-------------
Consolidated depreciation $ 87
=============
Other Operating loss:
Amortization of intangible assets $ (947)
Depreciation (87)
Administrative costs and other non-
allocated expenses (682)
-------------
Total other operating loss $ (1,716)
=============
Identifiable assets:
Island Pacific $ 32,971
SVI Store Solutions 5,104
SVI Training Products, Inc. 360
-------------
Total identifiable assets $ 38,435
=============
Operating income (loss) in Island Pacific, SVI Store Solutions and SVI Training
Products, Inc. includes direct expenses for software licenses, maintenance
services, programming and consulting services, sales and marketing expenses,
product development expenses, and direct general and administrative expenses.
The "Other" caption includes depreciation, amortization of intangible assets,
non-allocated costs and other expenses that are not directly identified with a
particular business unit and which management does not consider in evaluating
the operating income of the business unit.
The Company currently operates in the United States and the United Kingdom.
Prior to February 2002, the Company also had operations in Australia. The
following is a summary of local operations by geographic area (in thousands):
Quarters Ended June 30,
2002 2001
------------- -------------
Net sales:
United States $ 4,823 $ 6,991
United Kingdom 498 518
Australia (discontinued operations) 721
------------- -------------
Total net sales $ 5,321 $ 8,230
============= =============
June 30,
2002 2001
------------- -------------
Long-lived assets:
United States $ 34,760 $ 46,751
United Kingdom 36 33
Australia (discontinued operations) 1,209
------------- -------------
Total long-lived assets $ 34,796 $ 47,993
============= =============
For the three months ended June 30, 2002 and 2001, net sales to one customer,
Toys "R" Us, accounted for 38% and 50% of total net sales, respectively.
10
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2001, the FASB issued the guidance of Financial Accounting Standards
Board Emerging Issues Task Force Issue No. 01-14 ("EITF No. 01-14"), "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred". EITF No. 01-14 establishes that reimbursements received for
out-of-pocket expenses should be reported as revenue in the income statement.
The Company adopted EITF No. 01-14 in its consolidated statement of operations
beginning April 1, 2002 and its consolidated statement of operations for prior
periods was reclassified to conform to the new presentation. The Company
previously classified reimbursed out-of-pocket expenses as a reduction in cost
of consulting services. The adoption of EITF No. 01-14 does not impact the
Company's total gross profit or operating income, but it will increase net sales
and cost of sales and as a result reduce gross profit and operating margin
percentages. Reimbursed expenses were $211,000 in the three months ended June
30, 2002. In addition, the Company has reclassified $379,000 in reimbursed
expenses to net sales and costs of net sales in the consolidated statement of
operations for the three months ended June 30, 2001.
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 a material impact on its consolidated financial
position or results of operations.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company's former Chief Executive Officer, Thomas A. Dorosewicz, filed in
April, 2002 a demand with the California Labor Commissioner for $256,250 in
severance benefits allegedly due under a disputed employment agreement, plus
attorney's fees and costs. Mr. Dorosewicz's demand was later increased to
$283,893.53. On June 18, 2002, the Company filed an action against Mr.
Dorosewicz, Michelle Dorosewicz, and an entity affiliated with him in the 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. On July
31, 2002, Mr. Dorosewicz filed cross-complaints in that action alleging breach
of statutory duty, breach of contract, fraud and other causes of action relating
his employment with the Company and other transactions he entered into with the
Company. The Company does not believe it has any obligation to pay the severance
benefits alleged by Mr. Dorosewicz to be due, and the Company 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 in these matters is still in its preliminary stage.
11
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS ABOUT SVI SOLUTIONS, INC. ("WE"
OR "US"). 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.
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. MOREOVER, NEITHER WE, NOR ANY OTHER
PERSON, ASSUMES RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THE
FORWARD-LOOKING STATEMENTS. 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.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS FORM 10-Q. READERS ARE ALSO URGED TO CAREFULLY
REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE FACTORS WHICH AFFECT OUR BUSINESS, INCLUDING WITHOUT
LIMITATION THE DISCLOSURES MADE UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN OUR ANNUAL
REPORT FILED ON FORM 10-K (AS AMENDED) FOR THE YEAR ENDED MARCH 31, 2002, AND
THE DISCLOSURES UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K, AS WELL AS
OTHER REPORTS AND FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
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 solutions. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
Our operations are conducted principally in the United States and the United
Kingdom.
Up to March 31, 2002, we considered our business to consist of one reportable
operating segment. Effective April 1, 2002, we reorganized our operations into
three business units with separate management teams and reporting
infrastructures. Each unit is evaluated primarily based on total revenues and
operating income. Identifiable assets are also managed by business units. The
units are as follows:
o ISLAND PACIFIC - provides Retail Enterprise Solutions and associated
professional services for multi-channel retailers in the specialty,
mass merchandising and department store markets.
o SVI STORE SOLUTIONS - offers retailers multi-platform, client server
In-Store Solutions providing all point-of-sale and in-store processor
functions.
o SVI TRAINING PRODUCTS, INC. - develops and distributes PC Courseware
and skills assessment products for both desktop and retail
applications.
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 professional
services sales in the first quarter of fiscal 2003 caused the sales in US to
decrease and our sales mix to shift to higher margin software license .
RECENT DEVELOPMENTS
We issued a total of $1.25 million in convertible notes to a limited number of
accredited investors related to ICM Asset Management, Inc. of Spokane,
Washington, a significant beneficial owner of our common stock in fiscal 2001.
In July 2002, we amended the convertible notes to extend the maturity date to
September 30, 2003 and we replaced the warrants issued to these investors. See
"Liquidity and Capital Resources -- Indebtedness -- ICM Asset Management, Inc."
below.
12
In July 2002, we negotiated an extension of our senior bank lending facility to
August 31, 2003. See "Liquidity and Capital Resources -- Indebtedness -- Union
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"). Toys also
agreed to invest $1.3 million for the purchase of a non-recourse convertible
note and a warrant to purchase up to 2,500,000 common shares. For a further
details, see "Liquidity and Capital Resources - Indebtedness -- Toys "R" Us"
below.
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
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.
13
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 the customer's ability to pay and general
economic conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. For fiscal
2003, we have adopted SFAS No. 142 resulting in a change in the way we
value long-term intangible assets and goodwill. We were required to
perform an initial transitional analysis of goodwill impairment. We
concluded this analysis in July 2002 and recorded an impairment of $0.6
million as a cumulative effect of a change in accounting principle. We
will no longer amortize goodwill, but will instead test goodwill for
impairment on an annual basis or more frequently if certain events
occur. Goodwill is to be measured for impairment by reporting units,
which currently consist of our operating segments. At each impairment
test for a business unit, we are required to compare the carrying value
of the business unit to the fair value of the business unit. If the
fair value exceeds the carrying value, goodwill will not be considered
impaired. If the fair value is less than the carrying value, we will
perform a second test comparing the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. The difference
if any between the carrying amount of that goodwill and the implied
fair value will be recognized as an impairment loss, and the carrying
amount of the associated goodwill will be reduced to its implied fair
value. These tests require us to make estimates and assumptions
concerning prices for similar assets and liabilities, if available, or
estimates and assumptions for other appropriate valuation techniques.
For our intangible assets with finite lives, including our capitalized
software and non-compete agreements, we assess impairment at least
annually or whenever events and circumstances suggest the carrying
value of an asset may not be recoverable based on the net future cash
flow expected to be generated from the asset on an undiscounted basis.
When we determine that the carrying value of intangibles with finite
lives may not be recoverable, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined
by our management to be commensurate with the risk inherent in our
current business model.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
NET SALES
Net sales decreased by $2.2 million, or 29%, to $5.3 million in the three months
ended June 30, 2002 from $7.5 million in the three months ended June 30, 2001
primarily due to decreases in modification and professional service revenues of
$1.4 million and $0.7 million, respectively, from Toys "R" Us. In May 2002, we
entered into a new development agreement with Toys for the provision of
development services through February 2004. We continue to expect that the
overall level of services to be performed for Toys in fiscal 2003 will be
comparable to fiscal 2002.
The first quarter of fiscal 2003 remained a challenging period in which to close
new application license sales. We continue to feel the effects of the economic
slowdown in the United States and the United Kingdom, which has made many larger
customers reluctant to invest in new information technology initiatives. 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. We are currently focusing our efforts on selling our Invision 1.5
product, containing our core technology, to smaller high-growth retailers. We
believe that sales cycles for these types of retailers are likely to be shorter,
and that these retailers are less likely to be deferring technology investments
in the current economic climate. The focus on smaller retailers began during the
quarter ended June 30, 2002 and we expect to see results beginning in the
quarters ending September 30, 2002, December 31, 2002, and thereafter. We are
also continuing to market our larger applications to the larger retailers we
have historically served.
14
COST OF SALES/GROSS PROFIT
Cost of sales decreased by $1.5 million, or 42%, to $2.1 million in the quarter
ended June 30, 2002 from $3.6 million in the quarter ended June 30, 2001. Gross
profit as a percentage of net sales increased to 60% in the quarter ended June
30, 2002 from 52% in the prior comparative period. The decrease in cost of sales
and the increase in gross profit as a percentage of net sales were due to the
decrease in lower margin software modification and professional services for
Toys "R" Us. During the quarter ended June 30, 2002 and 2001, application
technology license revenues represented 13% and 4%, respectively, of net sales
and related services represented 78% and 90%, respectively, of net sales.
APPLICATION DEVELOPMENT EXPENSE
Application development expense increased by $0.4 million, or 80%, to $0.9
million in the quarter ended June 30, 2002 from $0.5 million in the quarter
ended June 30, 2001. Cost of sales for the quarter ended June 30, 2002 and 2001
included $0.5 million and $1.3 million, respectively, in costs associated with
the development or modification of modules for Toys "R" Us. These costs are
neither capitalized nor included in application technology development expense,
but we consider them to be part of our overall application technology
development program.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.6 million, or 38%, to $1.0 million
in the quarter ended June 30, 2002 from $1.6 million in the quarter ended June
30, 2001, as a result of our ceasing to amortize goodwill upon adoption of SFAS
No. 142.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $1.6 million, or 41%,
to $2.3 million in the three months ended June 30, 2002 from $3.9 million in the
three months ended June 30, 2001. The decrease was primarily related to the 20%
reduction of non-essential personnel in the third quarter of fiscal 2002 and
managing expenditures.
OPERATING LOSS
Operating loss from continuing operations, which included depreciation and
amortization expense, was $1.0 million for the quarter ended June 30, 2002,
compared to a loss from operations of $2.1 million for the quarter ended June
30, 2001. Earnings from continuing operations before interest, provision for
income taxes, depreciation, amortization and change in accounting principle was
$0.1 million for the quarter ended June 30, 2002 compared to a loss of $0.5
million for the quarter ended June 30, 2001.
INTEREST EXPENSE
Interest expense decreased by $0.7 million, or 64%, to $0.4 million in the
quarter ended June 30, 2002 from $1.1 million in the quarter ended June 30,
2001. Interest expense in the 2001 period included $0.4 million interest expense
on the note due Softline Limited. Our obligations related to this note were
released by Softline effective January 1, 2002 in connection with the integrated
series of recapitalization transactions with Softline. The balance of the
difference was a $0.3 million decrease in amortization of debt discount.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $0.6 million as the
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002. We also evaluated the remaining useful lives of our intangibles in the
quarter ended June 30, 2002 and no adjustments have been made to the useful
lives of our intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the quarter ended June 30, 2002, we financed our operations using cash on
hand, internally generated cash, proceeds from the sale of a convertible note to
Toys "R" Us and loans from an entity affiliated with Donald S. Radcliffe, one of
our directors. At June 30, 2002 and March 31, 2002, we had cash of $0.5 million
and $1.3 million, respectively.
Operating activities used cash of $1.4 million in the three months ended June
30, 2002 and $0.9 million in the three months ended June 30, 2001. Cash used for
operating activities in the three months ended June 30, 2002 resulted from $2.1
million of net losses, $1.0 million increase in accounts receivable and other
receivables and $0.4 million decrease in deferred revenue; offset in part by
$1.0 million of depreciation and amortization, $0.6 million of goodwill
impairment, $0.2 million of non-cash interest expense related to the convertible
note issued to Toys "R" Us and $0.2 million increase in accrued interest on
notes payable.
15
Investing activities used cash of $0.2 million in the three months ended June
30, 2002 and $0.1 million in the three months ended June 30, 2001. Cash used for
investing activities in the current quarter was primarily for capitalization of
software development costs.
Financing activities provided cash of $0.8 million and $1.0 million in the three
months ended June 30, 2002 and 2001, respectively. The 2002 financing activities
included $0.9 million of proceeds from a convertible note issued to Toys "R" Us;
offset in part by $0.1 million of payments on a stockholder loan.
Accounts receivable increased to $2.9 million at June 30, 2002 from $1.9 million
at March 31, 2002. The increase was due to $1.3 million in new maintenance
contract billings for the period of July 2002 through December 2002 (with a
balancing liability recorded for deferred revenue).
INDEBTEDNESS
UNION BANK
On May 21, 2002, we and Union Bank of California, N.A. entered into a second
amendment to our restated term loan agreement. The second amendment extended the
maturity date to May 1, 2003 and revised 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.
Effective July 15, 2002, the bank further amended the restated term loan
agreement. 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 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 and 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
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. At June 30, 2002, we have accrued $187,000 as the maximum amount of our
potential exposure. The receiver has also claimed that we are obligated to it
for inter-company balances of $636,000, but we do not believe any amounts are
owed to the receiver, who has not as of the date of this report acknowledged the
monthly corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
16
ICM ASSET MANAGEMENT, INC.
In May and June 2001, we issued a total of $1.25 million in convertible notes to
a limited number of accredited investors related to ICM Asset Management, Inc.
The notes were originally due August 30, 2001, and required interest at the rate
of 12% per annum to be paid until maturity, with the interest rate increasing to
17% 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 by $16,000 and accept
payment of the reduced amount with 527,286 shares of our common stock valued at
$0.41 per share, which was the average closing price of our shares on the
American Stock Exchange for the 10 trading days prior to July 19, 2002. 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 3,033,085 shares at exercise prices ranging from $0.85 to $1.50,
and expiring on various dates between December 2002 and June 2004, would be
replaced by new warrants to purchase an aggregate of 1,600,000 shares at $0.60
per share, expiring July 19, 2007. The replacement warrants are not callable by
us.
We also agreed to file a registration statement for the resale of all shares
held by or obtainable by these investors. In the event such registration
statement is not declared effective by the SEC within 150 days after July 19,
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.
TOYS "R" US
In May 2002, Toys "R" Us ("Toys"), our major customer, agreed to invest $1.3
million for the purchase of a non-recourse convertible note and a warrant to
purchase 2,500,000 common shares. The purchase price is payable in installments
through September 27, 2002. The note is non-interest bearing, and the face
amount is convertible into 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. 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. As of July 31, 2002, we had received proceeds of
$1.0 million from this note.
The warrant entitles Toys to purchase up to 2,500,000 of our common shares at
$0.553 per share. The warrant is initially vested as to 400,000 shares as of May
29, 2002, and vests at the rate of 100,000 shares per month until February 28,
2004. The warrant will cease to vest if Toys terminates its development
agreement with us for a reason other than our breach. The warrant will become
entirely non-exercisable if we terminate the development agreement due to an
uncured breach by Toys of the development agreement. Toys may elect a "cashless
exercise" where a portion of the warrant is surrendered to pay the exercise
price. As of July 31, 2002, 600,000 shares of the warrant are exercisable.
17
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.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including purchase
commitments at June 30, 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 Cash Obligations 2003 2004 2005 2006 Thereafter
- ---------------------------- ------ ------ ------ ------ ------
(in thousands)
Operating leases $ 627 $ 752 $ 704 $ 192 $ 7
Capital leases $ 73 $ 18
Term loans $ 833 $7,345
Convertible notes due stockholders $ 45 $1,325
Demand loans due stockholders $ 555
Payables aged over 90 days $1,333
------ ------ ------ ------ ------
Total contractual cash obligations $3,466 $9,440 $ 704 $ 192 $ 7
====== ====== ====== ====== ======
For the fiscal years ending March 31,
-------------------------------------
Other Commercial Commitments 2003 2004 2005 2006 Thereafter
- ---------------------------- ------ ------ ------ ------ ------
(in thousands)
Guarantees $ 187
------ ------ ------ ------ ------
Total commercial commitments $ 187
====== ====== ====== ====== ======
CASH POSITION AND NEED FOR CAPITAL
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 focused our collection efforts on our accounts receivable.
We had a negative working capital of $5.2 million and $5.3 million at June 30,
2002 and March 31, 2002, respectively.
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
A number of new pronouncements have been issued for future implementation as
discussed in the footnotes to our interim financial statements (see Note 8). As
discussed in the notes to the interim financial statements, the implementation
of some of these new pronouncements is expected to have a material effect on our
financial position or results of operations.
18
BUSINESS RISKS
Investors should carefully consider the following risk factors and all other
information contained in our Form 10-K (as amended) for the year ended March 31,
2002 and Form 10-Q for the quarter ended June 30, 2002. Investing in our common
stock involves a high degree of risk. In addition to those described below,
risks and uncertainties that are not presently known to us or that we currently
believe are immaterial may also impair our business operations. If any of the
following risks occur, our business could be harmed, the price of our common
stock could decline and our investors may lose all or part of their investment.
See the note regarding forward-looking statements included at the beginning of
Item II - Management's Discussion And Analysis of Financial Condition and
Results of Operations in this Form 10-Q.
WE HAVE INCURRED LOSSES FOR THE LAST THREE FISCAL YEARS AND IN THE CURRENT
QUARTER. WE MAY NOT ACHIEVE PROFITABILITY IN FUTURE PERIODS.
We incurred losses of $2.1 million in the quarter ended June 30, 2002 and $14.7
million, $28.9 million and $4.1 million in the fiscal years ended March 31,
2002, 2001 and 2000, respectively. 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 June 30, 2002 and March 31, 2002, we had negative working capital of $5.2
million and $5.3 million, respectively. We have had difficulty meeting operating
expenses, including interest payments on debt, lease payments, employee
commission payments and supplier obligations. We have at times deferred payroll
for our executive officers, and borrowed from related parties to meet payroll
obligations. We have extended payment terms with our trade creditors wherever
possible.
As a result of extended payment arrangements with suppliers, we may be unable to
secure products and services necessary to continue operations at current levels
from these suppliers. In that event, we will have to obtain these products and
services from other parties, which could result in adverse consequences to our
business, operations and financial condition.
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 29% in the quarter ended June 30, 2002 compared to
the quarter ended June 30, 2001. We experienced a substantial decrease in
application license software sales in the past two years, 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.
19
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND THEY MAY
CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the past and
may fluctuate in the future as a result of several factors, many of which are
outside of our control. If revenue declines in a quarter, our operating results
will be adversely affected because many of our expenses are relatively fixed. In
particular, sales and marketing, application development and general and
administrative expenses do not change significantly with variations in revenue
in a quarter. It is likely that in some future quarter our net sales or
operating results will be below the expectations of public market analysts or
investors. If that happens, our stock price will likely decline.
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAKES IT DIFFICULT TO PREDICT
FUTURE RESULTS.
Factors outside our control that could cause our revenue to fluctuate
significantly from period to period include:
o the size and timing of individual orders, particularly with respect to
our larger customers;
o general health of the retail industry and the overall economy;
o technological changes in platforms supporting our software products;
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.
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.
20
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 31,
2002:
o A $7.3 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.
o $0.5 million due to stockholders on demand.
o $1.3 million in convertible notes 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 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
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.
21
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 July 31,
2002, our total borrowings subject to variable interest rates was $7.8 million.
Based on this balance, a one percent increase in interest rates would cause a
change in interest expense of approximate $78,000 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 and CEO. 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.
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other intangible
assets represent 88% of our total assets as of June 30, 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.
22
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 9% and 13% of our net
sales were outside North America, principally in the United Kingdom, in the
quarter ended June 30, 2002 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 38% and 50% of our net sales for the quarters ended
June 30, 2002 and 2001, respectively. While we have a development agreement with
this customer, Toys has the right to terminate the agreement without cause with
limited advance notice. A reduction, delay or cancellation of orders from Toys
"R" Us would significantly reduce our revenues 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.
23
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 attacks 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.
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.
24
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY
We conduct business in an industry characterized by intense competition. Most of
our competitors are very large companies with an international presence. We must
also compete with smaller companies which have been able to develop strong local
or regional customer bases. Many of our competitors and potential competitors
are more established, benefit from greater name recognition and have
significantly greater resources than us. Our competitors may also have lower
cost structures and better access to the capital markets than us. As a result,
our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Our competitors may:
o introduce new technologies that render our existing or future products
obsolete, unmarketable or less competitive;
o make strategic acquisitions or establish cooperative relationships
among themselves or with other solution providers, which would increase
the ability of their products to address the needs of our customers;
and
o establish or strengthen cooperative relationships with our current or
future strategic partners, which would limit our ability to compete
through these channels.
We could be forced to reduce prices and suffer reduced margins and market share
due to increased competition from providers of offerings similar to, or
competitive with, our applications, or from service providers that provide
services similar to our services. Competition could also render our technology
obsolete.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological change,
evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
The success of application enhancements and new applications depends on a
variety of factors, including technology selection and specification, timely and
efficient completion of design, and effective sales and marketing efforts. In
developing new applications and services, we may:
o fail to respond to technological changes in a timely or cost-effective
manner;
o encounter applications, capabilities or technologies developed by
others that render our applications and services obsolete or
non-competitive or that shorten the life cycles of our existing
applications and services;
o experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new applications and
services; or
o fail to achieve market acceptance of our applications and services.
The life cycles of our applications are difficult to estimate, particularly in
the emerging electronic commerce market. As a result, new applications and
enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR PROPRIETY 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.
25
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 DEPEND ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources necessary
to develop and market our offerings to their target markets, our business
strategy substantially depends on our strategic relationships. While some of
these relationships are governed by contracts, most are non-exclusive and all
may be terminated on short notice by either party. If these relationships
terminate or fail to deliver the intended benefits, our development and
marketing efforts will be impaired and our revenues may decline.
We may not be able to enter into new strategic relationships, which could put us
at a disadvantage to those of our competitors which do successfully exploit
strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Substantially all of our primary computer and telecommunications systems are
located in two geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business interruption
insurance may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product liability or
other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our applications are highly complex and sophisticated and they may occasionally
contain design defects or software errors that could be difficult to detect and
correct. In addition, implementation of our applications may involve
customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
26
We are not currently aware of any defects in our applications that might give
rise to future lawsuits. However, errors or integration problems may be
discovered in the future. Such defects, errors or difficulties could result in
loss of sales, delays in or elimination of market acceptance, damage to our
brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing costs. In
addition, third-party products, upon which our applications are dependent, may
contain defects which could reduce or undermine entirely the performance of our
applications.
Our customers typically use our applications to perform mission-critical
functions. As a result, the defects and problems discussed above could result in
significant financial or other damage to our customers. Although our sales
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims, we do not know if these
limitations of liability are enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
applications or the performance of our services. Our product liability insurance
may not cover all claims brought against us.
SOFTLINE LIMITED HAS THE RIGHT TO ACQUIRE CONTROLLING PERCENTAGE OF OUR COMMON
STOCK, SO WE MAY BE EFFECTIVELY CONTROLLED BY SOFTLINE AND OUR OTHER
STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING.
Softline Limited beneficially owns 57.0% of our outstanding common stock,
including shares Softline has the right to acquire upon conversion of its Series
A Convertible Preferred Stock. Ivan M. Epstein, Softline's Chief Executive
Officer, and Robert P. Wilkie, Softline's Chief Financial Officer, serve on our
board of directors. If Softline converts its Series A Preferred Stock, it may
have effective control over all matters affecting us, including:
o the election of all of our directors;
o the allocation of business opportunities that may be suitable for
Softline and us;
o any determinations with respect to mergers or other business
combinations involving us;
o the acquisition or disposition of assets or businesses by us;
o debt and equity financing, including future issuance of our common
stock or other securities;
o amendments to our charter documents;
o the payment of dividends on our common stock; and
o determinations with respect to our tax returns.
OUR BUSINESS MAY BE DISADVANTAGED OR HARMED IF SOFTLINE'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have and will continue to arise between Softline and us in
a number of areas relating to our past and ongoing relationships. Conflicts may
not be resolved in a manner that is favorable to us, and such conflicts may
result in harmful consequences to our business or prospects.
SOFTLINE'S INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY
TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Softline's potential voting control could discourage others from initiating any
potential merger, takeover or other change of control transaction that may
otherwise be beneficial to our business or our stockholders. As a result,
Softline's control could reduce the price that investors may be willing to pay
in the future for shares of our stock, or could prevent any party from
attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE, 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.
27
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.
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
10,226,939 shares at prices above the recent market price of $0.40 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 1,492,607 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.
28
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risks, which include changes in interest rates, changes in foreign
currency exchange rate as measured against the U.S. dollar and changes in the
value of stock of a publicly traded company, which secures a promissory note we
hold.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates to our
revolving credit borrowings and variable rate term loans, which totaled $7.8
million at July 31, 2002. Based on this balance, a change in one percent in the
interest rate would cause a change in interest expense of approximately $78,000
or $0.01 per basic and diluted share, on an annual basis.
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. 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 9% and 16% of our
total net sales were denominated in currencies other than the U.S. dollar for
the quarters ended June 30, 2002 and 2001, respectively.
EQUITY PRICE RISK
We have no direct equity investments.
PART II. - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
In the Form 10K that we filed for the year ended March 31, 2002, we reported
that our former Chief Executive Officer, Thomas A. Dorosewicz, filed in April,
2002 a demand with the California Labor Commissioner for $256,250 in severance
benefits allegedly due under a disputed employment agreement, plus attorney's
fees and costs. Mr. Dorosewicz's demand was later increased to $283,893.53. On
June 18, 2002, we filed an action against Mr. Dorosewicz, Michelle Dorosewicz,
and an entity affiliated with him in the San Diego Superior Court, Case No.
GIC790833, alleging fraud and other causes of action relating to transactions
Mr. Dorosewicz caused us to enter into with his affiliates and related parties
without proper board approval. On July 31, 2002, Mr. Dorosewicz filed
cross-complaints in that action alleging breach of statutory duty, breach of
contract, fraud and other causes of action relating his employment with the
Company and other transactions he entered into with the Company. 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 in these matters is still in its preliminary
stage.
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.
Except as set forth above, we are not involved in any material pending legal
proceedings, other than ordinary routine litigation incidental to our business.
29
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2002, we issued:
o an aggregate of 283,332 shares of common stock to consultants for
services rendered in the quarter ended June 30, 2002 and prior periods.
o 140,000 shares of common stock in satisfaction of the liquidated
damages relating to late registration of the shares sold to AMRO
International, S.A. in March 2001.
o In conjunction with the recapitalization transactions with Softline
Limited, we issued in May 2002 an aggregate of 141,000 shares of
newly-designated Series A Preferred Stock at a deemed purchase price of
$100 per share in exchange for 10,700,000 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 Limited. The transactions had an effective
date of January 1, 2002.
The Series A Preferred Stock has a stated value of $100 per share and
is redeemable at our option any time prior to the maturity date of
December 31, 2006 for 107% of the stated value and accrued and unpaid
dividends. The shares are entitled to cumulative dividends of 7.2% per
annum, payable semi-annually when, as and if declared by the board of
directors in priority and preference to dividends declared on our
common shares. Softline may convert each share of Series A Preferred
Stock at any time into the number of common shares determined by
dividing the stated value plus all accrued and unpaid dividends, by a
conversion price initially equal to $0.80. The conversion price
increases at an annual rate of 3.5% calculated on a semi-annual basis.
The Series A Preferred Stock is entitled upon liquidation to an amount
equal to its stated value plus accrued and unpaid dividends in
preference to any distributions to our common stockholders. The Series
A Preferred Stock has no voting rights prior to conversion into common
stock, except with respect to proposed impairments of the Series A
Preferred rights and preferences, or as provided by law. We have the
right of first refusal to purchase all but not less than all of any
shares of Series A Preferred Stock or common shares received on
conversion which Softline may propose to sell to a third party, upon
the same price and terms as the proposed sale to a third party. We also
granted Softline certain registration rights for the common shares into
which the Series A Preferred Stock is convertible, including the right
to demand registration on Form S-3 if such form is available to us and
Softline proposes to sell at least $5 million of registrable common
shares, and the right to include shares obtainable upon conversion of
the Series A Preferred Stock in other registration statements we
propose to file.
The foregoing securities were offered and sold without registration under the
Securities Act of 1933 to sophisticated investors who had access to all
information which would have been in a registration statement, in reliance upon
the exemption provided by Section 4(2) under such Act and Regulation D
thereunder.
We also received 262,500 shares of common stock from a consultant as a result of
early termination of a contract.
ITEM 5. - OTHER INFORMATION
Our Annual Meeting of Stockholders has been scheduled for Thursday, September
19, 2002. The meeting will be held at 9 a.m. Pacific time at our headquarters in
Carlsbad, California. The address is 5607 Palmer Way, Carlsbad, California
92008. The record date for the meeting has been set at August 27, 2002. We
intend to mail formal notice of the meeting and proxy materials on or about
August 30, 2002.
Since we did not receive notice of a nomination for director or other business
to be brought before the meeting by a stockholder, on or before ten days after
we first announced the meeting date via a Form 8-K filed August 1, 2002, no such
nomination or matter will be presented for stockholder action at the meeting,
and any which are proposed will be disregarded.
30
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Business Sale Agreement dated May 3, 2002 among the receivers and
managers of the assets of SVI Retail (Pty) Limited and QQQ Systems
PTY Limited, incorporated by reference to exhibit 2.3 to the
Company's Form 10-K for the fiscal year ended March 31, 2002.
3.1 Certificate of Designation, incorporated by reference to exhibit
4.1 of the Company's Form 8-K filed May 16, 2002.
10.1 Second Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated as of
May 21, 2001, incorporated by reference to exhibit 10.5 to the
Company's Form 10-K for the fiscal year ended March 31, 2002.
10.2 Third Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated as of
July 15, 2002, incorporated by reference to exhibit 10.6 to the
Company's Form 10-K for the fiscal year ended March 31, 2002.
10.3 Amendment Agreement to between the Company, Koyah Leverage
Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel Davey,
and Brian Cathcart dated July 15, 2002, incorporated by reference
to exhibit 10.11 to the Company's Form 10-K for the fiscal year
ended March 31, 2002.
10.4 Summary of loan transactions between the Company and World Wide
Business Centres, incorporated by reference to exhibit 10.12 to
the Company's Form 10-K for the fiscal year ended March 31, 2002.
10.5 Purchase Agreement between the Company and Toys "R" Us, Inc. dated
May 29, 2002, incorporated by reference to exhibit 10.14 to the
Company's Form 10-K for the fiscal year ended March 31, 2002.
10.6 Convertible Note in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.15 to the Company's Form
10-K for the fiscal year ended March 31, 2002.
10.7 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's Form
10-K for the fiscal year ended March 31, 2002.
10.8 Development Agreement between the Company and Toys "R" Us, Inc.
dated May 29, 2002, incorporated by reference to exhibit 10.17 to
the Company's Form 10-K for the fiscal year ended March 31, 2002.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment pursuant
to Rule 24b-2 of the Securities Exchange Act of 1934.
99.1 Certifications.
(b) REPORTS ON FORM 8-K
On May 16, 2002, we filed a Form 8-K disclosing in Item 2 the completion of an
integrated series of transactions with Softline Limited.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SVI Holdings, Inc.
Registrant
/S/ Barry M. Schechter
---------------------------------
Date: August 14, 2002 Barry M. Schechter
Chief Executive Officer
Signing on behalf of the registrant
/S/ Jackie O. Tran
---------------------------------
Date: August 14, 2002 Jackie O. Tran
Controller
Signing as principal accounting officer.
31