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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 SEPTEMBER 30, 2003
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
ISLAND PACIFIC, INC.
--------------------
(Formerly, 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)
19800 MACARTHUR BOULEVARD, 12TH FLOOR, IRVINE, CALIFORNIA 92612
- --------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(949) 476-2212
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(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 - 47,472,554 shares as of November 10, 2003.
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TABLE OF CONTENTS
PAGE
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PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003
and March 31, 2003 ............................................3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended September 30, 2003 and 2002........4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2003 and 2002 ......................5
Notes to Condensed Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........29
Item 4. Controls and Procedures..............................................29
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings....................................................30
Item 2. Changes in Securities and Use of Proceeds............................31
Item 4. Submission of Matters to a Vote of Security Holders..................31
Item 6. Exhibits and Reports on Form 8-K.....................................31
SIGNATURES....................................................................33
CERTIFICATIONS................................................................34
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, MARCH 31,
2003 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,052 $ 1,319
Accounts receivable, net of allowance for doubtful accounts of $203 and $372,
respectively 8,514 3,974
Income tax refund receivable 846 --
Other receivables, including $0 and $3 from related parties, respectively 87 97
Inventories 84 91
Current portion of non-compete agreements 917 917
Net assets from discontinued operations -- 309
Prepaid expenses and other current assets 618 225
--------- ---------
Total current assets 12,118 6,932
Note receivable 171 --
Property and equipment, net 370 380
Purchased and capitalized software, net 15,846 14,804
Goodwill, net 14,795 14,795
Non-compete agreements, net 209 668
Other assets 29 58
--------- ---------
Total assets $ 43,538 $ 37,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due to stockholders $ -- $ 1,320
Convertible note 500 500
Current portion of long-term debts -- 149
Accounts payable 483 2,941
Accrued expenses 2,896 4,517
Deferred revenue 1,686 1,561
Income tax payable 398 --
--------- ---------
Total current liabilities 5,963 10,988
Convertible debentures, net of debt discount of $0 and $625, respectively -- 2,726
Other long-term liabilities 68 81
--------- ---------
Total liabilities 6,031 13,795
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred, 7.2% cumulative 141,100 shares authorized and
outstanding with a stated value of $100 per share, dividends in arrears of
$1,439 and $1,269, respectively 14,100 14,100
Committed common stock - 2,500,000 shares 1,383 1,383
Common stock, $.0001 par value; 100,000,000 shares authorized; 43,987,176 and
42,199,632 shares issued; and 43,987,176 and 31,499,632 shares outstanding 4 4
Additional paid in capital 61,526 57,751
Accumulated deficit (39,506) (40,490)
Treasury stock, at cost; shares - 10,700,000 -- (8,906)
--------- ---------
Total stockholders' equity 37,507 23,842
--------- ---------
Total liabilities and stockholders' equity $ 43,538 $ 37,637
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 6,679 $ 3,798 $ 12,145 $ 8,690
Cost of sales 1,074 1,608 2,728 3,662
--------- --------- --------- ---------
Gross profit 5,605 2,190 9,417 5,028
Expenses:
Application development 546 1,344 683 2,244
Depreciation and amortization 898 1,048 1,766 2,082
Selling, general and administrative 3,001 1,891 5,797 3,827
--------- --------- --------- ---------
Total expenses 4,445 4,283 8,246 8,153
--------- --------- --------- ---------
Income (loss) from operations 1,160 (2,093) 1,171 (3,125)
Other income (expense):
Interest income (17) -- 9 1
Other income (expense) (167) 3 (178) 2
Interest expense (210) (277) (521) (685)
--------- --------- --------- ---------
Total other expenses (394) (274) (690) (682)
--------- --------- --------- ---------
Income (loss) before provision for income taxes 766 (2,367) 481 (3,807)
Provision for income taxes (benefits) 67 1 (503) 1
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle 699 (2,368) 984 (3,808)
Cumulative effect of changing accounting principle -
goodwill valuation under SFAS 142 -- -- -- (627)
--------- --------- --------- ---------
Income (loss) from continuing operations 699 (2,368) 984 (4,435)
Income from discontinued operations of the SVI Training
Products Inc, subsidiary, net of applicable income
taxes -- 109 -- 159
--------- --------- --------- ---------
Net income (loss) 699 (2,259) 984 (4,276)
Cumulative preferred dividends 282 263 554 517
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 417 $ (2,522) $ 430 $ (4,793)
========= ========= ========= =========
Basic earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.02 $ (0.08) $ 0.03 $ (0.13)
Cumulative effect of a change in accounting principle -
goodwill Valuation under SFAS 142 -- -- -- (0.02)
--------- --------- --------- ---------
Income (loss) from continuing operations 0.02 (0.08) 0.03 (0.15)
Income from discontinued operations -- -- -- --
Cumulative preferred dividends 0.01 0.01 0.02 0.02
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 0.01 $ (0.09) $ 0.01 $ (0.17)
========= ========= ========= =========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.01 $ (0.08) $ 0.02 $ (0.13)
Cumulative effect of a change in accounting principle -
goodwill valuation under SFAS 142 -- -- -- (0.02)
--------- --------- --------- ---------
Income (loss) from continuing operations 0.01 (0.08) 0.02 (0.15)
Income from discontinued operations -- -- -- --
Cumulative preferred dividends -- 0.01 0.01 0.02
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 0.01 $ (0.09) $ 0.01 $ (0.17)
========= ========= ========= =========
Weighted-average common shares outstanding:
Basic 34,417 28,855 33,264 28,685
Diluted 63,990 28,855 61,718 28,685
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ 984 $(4,276)
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization 1,766 2,082
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- 627
Gain on disposal of furniture and equipment 169 --
Amortization of debt discount and conversion option 267 171
Stock-based compensation 126 8
Common stock issued for services rendered 25 64
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (4,530) 417
Income tax refund receivable (846) --
Inventories 7 7
Prepaid expenses and other assets (363) (34)
Accounts payable and accrued expenses (3,880) 348
Income tax payable 398 (106)
Accrued interest on stockholders' loans, convertible notes and term loan 187 465
Deferred revenue 125 (1,696)
-------- --------
Net cash used for operating activities (5,565) (1,923)
-------- --------
Cash flows from investing activities:
Payment received from note receivable 9 --
Purchases of furniture and equipment (264) (26)
Capitalized software development costs (2,243) (255)
-------- --------
Net cash used for investing activities (2,498) (281)
-------- --------
Cash flows from financing activities:
Sale of common stock, net of offering costs 7,232 --
Decrease in amount due to stockholders, net -- (287)
Proceeds from committed stock 700 1,383
Payments on term loan and debentures (135) (125)
Proceeds from short-term loan from related party -- 120
Payments on short-term loan from related party -- (70)
-------- --------
Net cash provided by financing activities 7,797 1,021
-------- --------
Effect of exchange rate changes on cash (1) (2)
-------- --------
Net decrease in cash and cash equivalents (267) (1,185)
Cash and cash equivalents, beginning of period 1,319 1,309
-------- --------
Cash and cash equivalents, end of period $ 1,052 $ 124
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 134 $ 246
Supplemental schedule of non-cash investing and financing activities:
Issued 4,103,161 shares of common stock upon conversion of the 9% debentures $ 4,200 --
Issued 2,287,653 shares of common stock upon conversion of the note due to
stockholders $ 1,374 --
Issued 500,000 shares of common stock as payment for dividend on preferred
stock $ 421 --
Retired 1,070,000 shares of treasury stock $(8,905) --
Issued 100,000 shares of common stock for services in connection with an
equity financing in December 2000 -- $ 45
Issued 140,000 shares of common stock to pay for penalty for late
effectiveness of the registration statement -- $ 60
Received 262,500 shares of common stock related to early termination
of a service contract -- $ (210)
Issued 84,849 and 568,380 shares of common stock as payments for bonuses
and services rendered in prior periods $ 83 $ 237
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ISLAND PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2003 and for all
the periods presented have been made.
Certain amounts in the prior periods have been reclassified to conform to the
presentation for the three and six months ended September 30, 2003. The
financial information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes thereto
in our Form 10-K/A for the year ended March 31, 2003.
The results of operations for the three and six months ended September 30, 2003
and 2002 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our wholly-owned subsidiary, SVI Training
Products, Inc. ("Training Products"), to its former president, for the sale
price of $180,000 plus earn-out payments equal to 20% of the total gross
revenues of Training Products in each of its next two fiscal years, to the
extent the revenues in each of those years exceed certain target. We received a
promissory note for the amount of $180,000 and the earn-out payments, if any,
will be made in quarterly installments following each fiscal year, bearing an
annual interest rate of 5%. The note has a balance of $171,000 at September 30,
2003.
The sale of the Training Products subsidiary resulted in a loss of $129,000, net
of estimated income taxes, which was accrued for at March 31, 2003. Accordingly,
the operating results of the Training Products subsidiary for the three and six
months ended September 30, 2002 were restated as discontinued operations.
NOTE 3 - INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost or
market, on a first-in, first-out basis.
NOTE 4 - CONVERTIBLE DEBTS
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
During the quarter ended June 30, 2001, we entered into subscription agreements
with a limited number of accredited investors related to existing stockholders
for gross proceeds of $1.3 million. Each unit consisted of a convertible
promissory note to purchase 250 shares of our common stock for each $1,000
borrowed by us. The holders of the notes had the option to convert the unpaid
principal and interest to common stock at any time at a conversion price of
$0.60 per share. The notes matured on September 30, 2003 and earned interest at
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest, to be paid at maturity. We did not have a right to prepay
the notes. In September 2003, these investors converted all outstanding balances
of principal and accrued interest totaling $1.4 million into 2,287,653 shares of
our common stock.
We also issued to these investors warrants to purchase an aggregate of 1,600,000
shares at $0.60 per share, expiring July 19, 2007. The warrants are not callable
by us. No warrants have currently been exercised.
We filed a registration statement for the resale of all shares held by or
obtainable by these and other investors. The registration statement was declared
effective on July 18, 2003.
CONVERTIBLE NOTE DUE TO UNION BANK OF CALIFORNIA
Pursuant to the Discounted Loan Payoff Agreement dated March 31, 2003, we issued
to Union Bank of California a $500,000 unsecured, non-interest bearing
convertible note payable in either cash or shares of common stock, at our
option. If we elect to pay the principal amount or any portion thereof in shares
of common stock, the shares will be computed on a price per share of 80% of the
average share closing price of our common stock for the ten trading day period
immediately preceding the payoff date. The maturity date is March 31, 2004. As
of September 30, 2003, the bank had assigned the note to an unrelated party.
6
CONVERTIBLE DEBENTURES
In March 2003, we entered into a Securities Purchase Agreement for the sale of
convertible debentures to a group of investors (the "March '03 Debenture
Investors"). The debentures were convertible into shares of our common stock at
a conversion price of $1.02 per share, for the total proceeds of $3.5 million.
The debentures would have matured in May 2005 and bore an interest rate of 9%
per annum. Interest was payable on a quarterly basis commencing on June 1, 2003,
in cash or shares of common stock, at our option. If certain conditions were
met, we had the right, but not the obligation, to redeem the debentures at 110%
of their face value, plus accrued interest. Commencing in February 2004, we
would have been obligated to redeem $219,000 per month of the debentures. In
August 2003, the daily volume weighted average price of our common stock on the
American Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive
trading days; therefore, we exercised our option to cause the investors to
convert their debentures into common stock. As a result, the investors converted
all of their debentures into an aggregate of 3,419,304 shares of our common
stock in the quarter ended September 30, 2003.
We filed a registration statement covering 130% of the common stock issuable
upon the conversion of the debentures and warrants. The registration statement
was declared effective on July 18, 2003.
Additional debentures, aggregating up to $2 million, will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of September
30, 2003.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. It was recognized
in the statement of operations during the period from the issuance of the debt
to the time at which the debt first became convertible. We recognized this
interest expense of $715,000 in March 2003.
The March '03 Debenture Investors also received warrants to purchase up to, in
the aggregate, 1,572,858 shares of common stock with an exercise price equal to
$1.02 per share. The warrants expire five years from the date of issuance. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants was $625,000 and was being
amortized as interest expense over the life of the convertible debentures. For
the six months ended September 30, 2003, we recorded an interest expense of
$144,000. At the date of the conversion of the debentures to equity, $481,000 of
the expense remained unamortized and has been debited to additional paid in
capital. The value of the detachable warrants of $481,000 has been recorded as
an offering cost at September 30, 2003. As such, there is no effect on our
statement of operations.
In April 2003, we entered into a Securities Purchase Agreement with an investor
(the "April '03 Debenture Investor") for the sale of a 9% debenture, convertible
to shares of our common stock at a conversion price of $1.02, for the gross
proceeds of $400,000. Interest was due on a quarterly basis commencing on June
1, 2003, payable in cash or shares of common stock at our option. Commencing on
February 1, 2004, we would have been obligated to redeem $20,000 per month of
the debenture. The debenture would have matured in October 2005. In August 2003,
the daily volume weighted average price of our common stock on the American
Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive trading days;
therefore, we exercised the option to cause this investor to convert its
debenture into common stock. As a result, the April '03 Debenture Investor
converted its debenture into 390,777 shares of our common stock in the quarter
ended September 30, 2003.
The April '03 Debenture Investor was also granted registration rights under a
registration rights agreement, and certain other rights similar to those granted
to the March '03 Debenture Investors.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. We recognized this
interest expense of $69,000 in the quarter ended June 30, 2003.
The debenture issued to the April '03 Debenture investor was accompanied by a
five-year warrant to purchase 156,311 shares of our common stock with an
exercise price of $1.02 per share. We allocated the proceeds received from debt
or convertible debt with detachable warrants using the relative fair value of
the individual elements at the time of issuance. The amount allocated to the
warrants was determined to be $63,000 and was being amortized as interest
expense over the life of the convertible debentures. We recorded an interest
7
expense of $11,000 in the six months ended September 30, 2003. At the date of
the conversion of the debentures to equity, $52,000 of the expense remained
unamortized and has been debited to additional paid in capital. The value of the
detachable warrants of $52,000 has been recorded as an offering cost at
September 30, 2003. As such, there is no effect on our statement of operations.
In May 2003, we entered into an agreement with a group of investors (the "May
'03 Debenture Investors") for the sale of 9% debentures, convertible into shares
of our common stock at a conversion price of $1.02 for the gross proceeds of
$300,000. Interest was due on a quarterly basis commencing on June 1, 2003,
payable in cash or shares of common stock at our option. Commencing on February
1, 2004, we would have been obligated to redeem $19,000 per month of the
debentures. In August 2003, the daily volume weighted average price of our
common stock on the American Stock Exchange exceeded $1.02 by more than 200% for
15 consecutive trading days; therefore, we exercised the option to cause the
investors to convert their debentures into common stock. As a result, the May
'03 Debenture Investors converted their debentures into an aggregate of 293,083
shares of our common stock in the quarter ended September 30, 2003.
The debentures would have been matured in May 2005. The May '03 Debenture
Investors were also granted registration rights under a registration rights
agreement, and certain other rights similar to those granted to the March '03
Debenture Investors.
Additional debentures aggregating up to $300,000 will be sold to the May '03
Debenture Investors in a second closing, if within one year after the date of
first sale of debentures there occurs a period of 15 consecutive trading days
during which the daily volume weighted average closing price of our common stock
is maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of the date of
this report.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures was recorded as interest expense. We recognized this
interest expense of $38,000 in the quarter ended June 30, 2003.
These debentures were accompanied by five-year warrants to purchase an aggregate
of 101,112 shares of common stock with an exercise price of $1.02 per share. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants is $39,000 and was being
amortized as interest expense over the life of the convertible debentures. We
recorded an interest expense of $5,000 in the six months ended September 30,
2003. At the date of the conversion of the debentures to equity, $34,000 of the
expense remained unamortized and has been debited to additional paid in capital.
The value of the detachable warrants of $34,000 has been recorded as an offering
cost at September 30, 2003. As such, there is no effect on our statement of
operations.
In June 2003, we entered into an agreement with various institutional investors
("Common Stock Institutional Investors") for the sale of 5,275,000 shares of
common stock at a per share price of $1.50 for an aggregate purchase price of
$7.9 million. In connection with this financing, we paid Roth Capital Partners,
LLC, as placement agent, cash compensation of 8% of the proceeds and issued a
five-year warrant to purchase 527,500 shares of common stock at an exercise
price of $1.65 per share. We also issued five-year warrants to purchase 375,000
shares of common stock at an exercise price of $1.65 to the March '04 Debenture
Investors and May '04 Debenture Investors in order to obtain their requisite
consents and waivers of rights they possessed to participate in the financing.
We filed a registration statement covering the shares sold and warrants issued
in connection with this transaction. The registration statement was declared
effective September 26, 2003.
NOTE 5 - INCOME TAX BENEFITS
Income tax benefits for the six months ended September 30, 2003 include $846,000
income tax refund receivable; offset in part by income tax payable relating to
prior periods of $271,000. The net amount of $570,000 has been recorded as
income under provision for income taxes in the consolidated statement of
operations in the six months ended September 30, 2003. The income tax refund
resulted from carrying back net operating losses in the last three years to
prior periods.
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could indicate
8
that their value has diminished or been impaired. Other intangible assets will
continue to be amortized over their estimated useful lives. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.
Effective April 1, 2002, we adopted SFAS 142 and ceased amortization of goodwill
recorded in business combinations prior to June 30, 2001. We evaluate the
remaining useful lives of these intangibles on an annual basis to determine
whether events or circumstances warrant a revision to the remaining period of
amortization.
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $627,000 as a
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002.
NOTE 7 - PREFERRED STOCK
The Series A Preferred has a stated value of $100 per share and is redeemed at
our option any time prior to the maturity date of December 31, 2006 for 107% of
the stated value and accrued and unpaid dividends. The preferred shares are
entitled to cumulative dividends of 7.2% per annum, payable semi-annually, and
have accumulative dividends of $1.4 million and $10.21 and $777,000 of $5.46 per
share, at September 30, 2003 and 2002, respectively. The holders may convert
each share of Series A Preferred at any time into the number of shares of our
common stock determined by dividing the stated value plus all accrued and unpaid
dividends, by a conversion price initially equal to $0.80. The conversion price
will increase at an annual rate of 3.5% calculated on a semi-annual basis. The
conversion price as of September 30, 2003 is $0.84. The Series A Preferred is
entitled upon liquidation to an amount equal to its stated value plus accrued
and unpaid dividends in preference to any distributions to common stockholders.
The Series A Preferred has no voting rights prior to conversion into common
stock, except with respect to proposed impairments of the Series A Preferred
rights and preferences, or as provided by law. We have the right of first
refusal to purchase all but not less than all of any shares of Series A
Preferred or shares of common stock received on conversion which the holder may
propose to sell to a third party, upon the same price and terms as the proposed
sale to a third party.
NOTE 8 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common shares ("diluted EPS") reflect the
potential dilutive effect, determined by the treasury method, of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. Earnings per share for the three and six months ended
September 30, 2003 and 2002 is calculated as follows (in thousands):
Three months ended September 30, Six months ended September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) available to
common stockholders $ 417 $ (2,522) $ 430 $ (4,793)
========= ========= ========= =========
Basic weighted average shares 34,417 28,855 33,264 28,685
Dilutive common stock equivalent 29,573 -- 28,454 --
--------- --------- --------- ---------
Diluted weighted average shares 63,990 28,855 61,718 28,685
========= ========= ========= =========
Basic earnings (loss) per share $ 0.01 $ (0.09) $ 0.01 $ (0.17)
Diluted earnings (loss) per share $ 0.01 $ (0.09) $ 0.01 $ (0.17)
The following potential common shares have been excluded from the computation of
diluted net loss per share for the three and six months ended September 30,
2002, because the effect would have been anti-dilutive:
Outstanding options under our stock option plans 5,181,082
Outstanding options granted outside our stock option plans 5,074,312
Warrants issued in conjunction with private placements 4,232,000
Warrants issued for services rendered 804,002
Convertible notes due to stockholders 2,083,333
Convertible note due to a major customer 2,500,000
Series A Convertible Preferred Stock 18,576,750
------------
Total 38,451,479
============
9
NOTE 9 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a leading provider of software solutions and services to the retail
industry. We provide high value innovative solutions that help retailers
understand, create, manage and fulfill consumer demand. Our solutions and
services have been developed specifically to meet the needs of the retail
industry. Our solutions help retailers improve the efficiency and effectiveness
of their operations and build stronger, longer lasting relationships with their
customers. We currently operate in the United States and the United Kingdom. The
geographic distribution of our net sales and long-lived assets are as follows
(in thousands):
Three months ended September 30, Six months ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales:
United States $ 6,188 $ 3,225 $11,114 $ 7,652
United Kingdom 491 573 1,031 1,038
-------- -------- -------- --------
Total net sales $ 6,679 $ 3,798 $12,145 $ 8,690
======== ======== ======== ========
September 30,
2003 2002
------------- -------------
Identifiable assets from continuing operations:
United States $ 42,921 $ 35,584
United Kingdom 617 420
------------- -------------
Total identifiable assets $ 43,538 $ 36,004
============= =============
For the three months ended September 30, 2003 and 2002, net sales to major
customers are as follows (in thousands):
Three months ended September 30, Six months ended September 30,
2003 2002 2003 2002
------------ ------------- ------------- -------------
QQQ Systems Ltd. 58% -- 32% --
Toys `R' Us 3% 27% 13% 35%
The account receivable balances from Toys `R' Us at September 30, 2003 and 2002
represent 25% and 9% of total accounts receivable. The account receivable
balance from QQQ Systems Ltd. at September 30, 2003 represents 46% of total
accounts receivable.
We organize our business into two segments as follows:
o RETAIL MANAGEMENT SOLUTIONS - offer suite of applications,
which builds on our long history in retail software design and
development. We provide our customers with an extremely
reliable, widely deployed, comprehensive and fully integrated
retail management solutions. Retail Management Solutions
include merchandise management that optimizes workflow and
provides the highest level of data integrity. This module
supports all operational areas of the supply chain including
planning, open-to-buy purchase order management, forecasting,
warehouse and store receiving distribution, transfers, price
management, performance analysis and physical inventory. In
addition, Retail Management Solutions include a comprehensive
set of tools for analysis and planning, replenishment and
forecasting, event and promotion management, warehouse,
ticketing, financials and sales audit. Through collaborations
with strategic partners, Retail Management Solutions offer
tools for loss prevention, communication with stores and
vendors, integration needs, purchase and allocation decisions,
analysis of weather impact, control and management of business
processes, consumer research, tracking consumer shopping
patterns, forecasting and replenishment, and analyzing store
people productivity.
o STORE SOLUTIONS - offer suite of applications builds on our
long history of providing multi-platform, client server
in-store solutions. We market this set of applications under
the name "OnePointe," and "OnePointe International" which is a
full business to consumer software infrastructure encompassing
a range of integrated store solutions. "OnePointe" is a
complete application providing all point-of-sale ("POS") and
in-store processor (server) functions for traditional "brick
and mortar" retail operations.
10
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):
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales:
Retail Management Solutions $ 6,306 $ 3,528 $ 11,370 $ 7,972
Store Solutions 373 270 775 718
--------- --------- --------- ---------
$ 6,679 $ 3,798 $ 12,145 8,690
========= ========= ========= =========
Operating income (loss):
Retail Management Solutions $ 3,223 $ (249) $ 4,819 $ 535
Store Solutions (192) (181) (192) (341)
Other (see below) (1,871) (1,663) (3,456) (3,319)
--------- --------- --------- ---------
Total operating income (loss) $ 1,160 $ (2,093) $ 1,171 $ (3,125)
========= ========= ========= =========
Depreciation:
Retail Management Solutions $ 35 $ 50 $ 65 $ 100
Store Solutions 7 13 16 26
Other (see below) 8 23 25 47
--------- --------- --------- ---------
Total depreciation $ 50 $ 86 $ 106 $ 173
========= ========= ========= =========
Other operating loss:
Amortization of intangible assets $ (848) $ (962) $ (1,660) $ (1,909)
Depreciation (50) (86) (106) (173)
Administrative costs and other non-allocated
expenses (973) (615) (1,690) (1,237)
--------- --------- --------- ---------
Total other operating loss $ (1,871) $ (1,663) $ (3,456) $ (3,319)
========= ========= ========= =========
Identifiable assets:
Retail Management Solutions $ 37,228 $ 30,634 $ 37,228 $ 30,634
Store Solutions 4,410 4,756 4,410 4,756
--------- --------- --------- ---------
Total identifiable assets $ 41,638 $ 35,390 $ 41,638 $ 35,390
========= ========= ========= =========
Operating income (loss) in Retail Management Solutions and Store Solutions
includes direct expenses for software licenses, maintenance services,
programming and consulting services, sales and marketing expenses, product
development expenses, and direct general and administrative expenses. The
"Other" caption includes depreciation, amortization of intangible assets,
non-allocated costs and other expenses that are not directly identified with a
particular business unit and which management does not consider in evaluating
the operating income of the business unit.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 further clarifies accounting for derivative
instruments. We believe the adoption of this statement will have no material
impact on our consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. We do not believe the
adoption of SFAS 150 will have a material impact on our consolidated financial
statements.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In June 2003, we entered into a development and marketing license agreement with
a software and services company affiliated with one of our officers. Under this
agreement, we obtain an exclusive right to sell and distribute this company's
software. In return, we committed to fund $1.2 million toward development of
this product. We also agreed to pay a royalty of 30% of the software license
sales up until we have recuperated all the development funding, at which point
the royalty will increase to 50% thereafter. As of September 30, 2003, we've
funded $275,000 toward development.
11
In September 2003, we entered into an agreement in principle to acquire Page
Digital, Inc. for $7 million. This purchase has not yet been finalized as of the
date of this report.
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. This dispute was heard before an arbitrator during the week ended
October 3, 2003, and a decision from the arbitrator should be forthcoming.
We decided in the third quarter of fiscal 2002 to sell certain assets of our
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have reserved $187,000 as our potential exposure.
The receiver has also claimed that we are obligated to it for inter-company
balances of $636,000, but we do not believe any amounts are owed to the
receiver, who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against us with the Department
of Fair Employment and Housing, alleging harassment and sexual orientation
discrimination. We have responded appropriately to both the wage claim and the
discrimination allegations, which we believe lack merit based on present
information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claimed damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertained to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. The parties settled this matter in September 2003 and the terms of the
settlement are covered by a confidentiality agreement.
In mid-2002, we were the subject of an adverse judgment entered against us in
favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. A hearing on Sabica's and Island Pacific's motion to
quash occurred on May 22, 2003 which was subsequently denied.
12
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
NOTE 12 - RELATED-PARTY TRANSACTIONS
We retain our former CEO and Chairman of the Board to provide consulting
services starting August 2003. For the quarter and six months ended September
30, 2003, the expense for this service was $74,000.
We retained an entity owned by an immediate family member of our CEO and
Chairman to provide recruiting services. For the six months ended September 30,
2003, the expense for this service was $108,000.
In June 2003, we entered into a development and marketing license agreement with
a software and services company affiliated with one of our officers. Under this
agreement, we obtain an exclusive right to sell and distribute this company's
software. In return, we committed to fund $1.2 million toward development of
this product. We also agreed to pay a royalty of 30% of the software license
sales up until we have recuperated all the development funding, at which point
the royalty will increase to 50% thereafter. As of September 30, 2003, we've
funded $275,000 toward development.
NOTE 13 - SUBSEQUENT EVENTS
In October 2003, Donald Radcliffe resigned as a member of our Board Directors.
On November 7, 2003, we entered into an agreement with various institutional
investors ("November 2003 Institutional Investors") for the sale of 3,180,645
shares of common stock at a price of $1.55 per share for an aggregate purchase
price of $4.9 million. We also granted the November 2003 Institutional Investors
registration rights under a registration rights agreement in which we agree to
file a registration statement with the Securities and Exchange Commission for
the resale of all shares sold these investors. If the registration statement is
not filed by December 7, 2003, we will be obligated to pay on December 7, 2003,
and each monthly anniversary until the registration statement is filed, an
amount in cash, as liquidated damages, equal to 2.0% of the purchase price paid
by the November 2003 Institutional Investors.
In connection with this financing, we paid Roth Capital Partners, LLC ("Roth
Capital"), as placement agent, a compensation of $179,000 in cash and 115,226
shares of our common stock and issued a five-year warrant to purchase 282,065
shares of our common stock at an exercise price of $1.71 per share. Roth Capital
was granted the registration rights similar to those granted to the November
2003 Institutional Investors.
13
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934 AND THE COMPANY INTENDS THAT CERTAIN MATTER DISCUSSED IN THIS REPORT ARE
"FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY FOR THE SAFE HARBOR FROM
LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED BY THE CONTEXT OF
THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE COMPANY ("IPI", "WE" OR "US")
"BELIEVES", "ANTICIPATES", "EXPECTS", "FORECASTS", "ESTIMATES" OR OTHER WORDS
SIMILAR MEANING AND CONTEXT. SIMILARLY, STATEMENTS THAT DESCRIBE FUTURE PLANS,
OBJECTIVES, OUTLOOKS, TARGETS, MODELS, OR GOALS ARE ALSO DEEMED FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
FORECASTED OR ANTICIPATED AS OF THE DATE OF THIS REPORT. CERTAIN OF SUCH RISKS
AND UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY TO SUCH STATEMENTS AND
ELSEWHERE IN THIS REPORT INCLUDING ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." STOCKHOLDERS, POTENTIAL
INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE FACTORS IN EVALUATING
THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
SUCH FORWARD-LOOKING STATEMENTS OR CONSTRUE SUCH STATEMENTS TO BE A
REPRESENTATION BY US THAT OUR OBJECTIVES OR PLANS WILL BE ACHIEVED. THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE MADE ONLY AS OF THE DATE
OF THIS REPORT, AND WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
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/A FOR THE YEAR ENDED MARCH 31, 2003, AND THE
DISCLOSURES UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K/A, AS WELL AS
OTHER REPORTS AND FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We are a provider of software solutions and services to the retail industry. We
provide innovative solutions that help retailers understand, create, manage and
fulfill consumer demand. Our solutions and services have been developed
specifically to meet the needs of the retail industry. Our solutions help
retailers improve the efficiency and effectiveness of their operations and build
stronger, longer lasting relationships with their customers. We market our
software solutions through direct and indirect sales channels primarily to
retailers who sell to their customers through traditional retail stores,
catalogs and/or Internet-enabled storefronts. To date, we have licensed our
solutions to more than 200 retailers across a variety of retail sectors. Our
operations are conducted principally in the United States and the United
Kingdom.
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.
RECENT DEVELOPMENTS
In the third quarter of fiscal 2004, the 9% convertible debenture holders
converted all of outstanding balances totaling $4.2 million into 4,103,141
shares of our common stock.
In September 2003, ICM Asset Management's investors converted all outstanding
balances totaling $1.4 million of the convertible notes into 2,287,653 shares of
our common stock.
14
In October 2003, we announced our intentions to acquire Page Digital, Inc. for
$7 million. This acquisition has not yet been finalized as of the date of this
report.
In October 2003, Donald Radcliffe resigned as a member of our Board Directors.
In November 2003, we entered into an agreement with various institutional
investors for the sale of 3,180,645 shares of common stock at a price of $1.55
per share for an aggregate purchase price of $4.9 million. See "Liquidity and
Capital Resources -- Financing Transactions" below.
DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our wholly-owned subsidiary, SVI Training
Products, Inc. ("Training Products") to its former president for the sale price
of $180,000 plus earn-out payments equal to 20% of the total gross revenues of
Training Products in each of its next two fiscal years, to the extent the
revenues in each of those years exceed certain targets. We received a promissory
note for the amount of $180,000 and the earn-out payments, if any, will be made
in quarterly installments following each fiscal year, bearing an annual interest
rate of 5%. The sale of the Training Products subsidiary resulted in a loss of
$129,000, net of estimated income taxes, which was accrued for at March 31,
2003. The operating results of Training Products for the prior periods are
restated as discontinued operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements:
o REVENUE RECOGNITION. Our revenue recognition policy is
significant because our revenue is a key component of our
results of operations. In addition, our revenue recognition
determines the timing of certain expenses such as commissions
and royalties. We follow specific and detailed guidelines in
measuring revenue; however, certain judgments affect the
application of our revenue policy.
We license software under non-cancelable agreements and
provide related services, including consulting and customer
support. We recognize revenue in accordance with Statement of
Position 97-2 (SOP 97-2), Software Revenue Recognition, as
amended and interpreted by Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with
respect to certain transactions, as well as Technical Practice
Aids issued from time to time by the American Institute of
Certified Public Accountants.
Software license revenue is generally recognized when a
license agreement has been signed, the software product has
been delivered, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and
collection is considered probable. If a software license
contains an undelivered element, the fair value of the
undelivered element is deferred and the revenue recognized
once the element is delivered. In addition, if a software
license contains customer acceptance criteria or a
cancellation right, the software revenue is recognized upon
the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right. 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,
15
customer configurations, and training are billed on both an
hourly basis and under fixed price contracts. Consulting
services revenue billed on an hourly basis is recognized as
the work is performed. On fixed price contracts, consulting
services revenue is recognized using the percentage of
completion method of accounting by relating hours incurred to
date to total estimated hours at completion. We have from time
to time provided software and consulting services under fixed
price contracts that require the achievement of certain
milestones. The revenue under such arrangements is recognized
as the milestones are achieved.
Customer support services include post contract support and
the rights to unspecified upgrades and enhancements.
Maintenance revenues from ongoing customer support services
are billed on a monthly basis and recorded as revenue in the
applicable month, or on an annual basis with the revenue being
deferred and recognized ratably over the maintenance period.
If an arrangement includes multiple elements, the fees are
allocated to the various elements based upon vendor-specific
objective evidence of fair value.
o ACCOUNTS RECEIVABLE. We typically extend credit to our
customers. Software licenses are generally due in installments
within twelve months from the date of delivery. Billings for
customer support and consulting services performed on a time
and material basis are due upon receipt. From time to time
software and consulting services are provided under fixed
price contracts where the revenue and the payment of related
receivable balances are due upon the achievement of certain
milestones. Management estimates the probability of collection
of the receivable balances and provides an allowance for
doubtful accounts based upon an evaluation of our customers
ability to pay and general economic conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL.
For fiscal 2003, we have adopted SFAS No. 142 resulting in a
change in the way we value long-term intangible assets and
goodwill. We completed the initial transitional analysis of
goodwill impairment as of April 1, 2002 and recorded an
impairment of $0.6 million as a cumulative effect of a change
in accounting principle in the first quarter of fiscal 2003.
We no longer amortize goodwill, but instead test goodwill for
impairment on an annual basis or more frequently if certain
events occur. Goodwill is to be measured for impairment by
reporting units, which currently consist of our operating
segments. At each impairment test for a business unit, we are
required to compare the carrying value of the business unit to
the fair value of the business unit. If the fair value exceeds
the carrying value, goodwill will not be considered impaired.
If the fair value is less than the carrying value, we will
perform a second test comparing the implied fair value of
reporting unit goodwill with the carrying amount of that
goodwill. The difference if any between the carrying amount of
that goodwill and the implied fair value will be recognized as
an impairment loss, and the carrying amount of the associated
goodwill will be reduced to its implied fair value. These
tests require us to make estimates and assumptions concerning
prices for similar assets and liabilities, if available, or
estimates and assumptions for other appropriate valuation
techniques.
For our intangible assets with finite lives, including our
capitalized software and non-compete agreements, we assess
impairment at least annually or whenever events and
circumstances suggest the carrying value of an asset may not
be recoverable based on the net future cash flows expected to
be generated from the asset on an undiscounted basis. When we
determine that the carrying value of intangibles with finite
lives may not be recoverable, we measure any impairment based
on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the
risk inherent in our current business model.
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 9). As
discussed in the notes to the interim financial statements, the implementation
of some of these new pronouncements is not expected to have a material effect on
our financial position or results of operations.
16
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
NET SALES
Net sales increased by $2.9 million, or 76%, to $6.7 million in the three months
ended September 30, 2003 from $3.8 million in the three months ended September
30, 2002 primarily due to an increase in license sales.
COST OF SALES/GROSS PROFIT
Cost of sales decreased by $0.5 million, or 31%, to $1.1 million in the quarter
ended September 30, 2003 from $1.6 million in the quarter ended September 30,
2002. Gross profit as a percentage of net sales increased to 84% in the quarter
ended September 30, 2003 from 58% in the prior comparative period. The decrease
in cost of sales and the increase in gross profit as a percentage of net sales
were due to the increase in high-margin application technology license revenues
coupled with the decrease in low-margin software modification and professional
services sales. During the quarter ended September 30, 2003 and 2002, license
revenues represented 61% and 13% of net sales, respectively, and modifications
and services revenues represented 13% and 43% of net sales, respectively.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $0.8 million, or 62%, to $0.5
million in the quarter ended September 30, 2003 from $1.3 million in the quarter
ended September 30, 2002. The decrease is primarily due to capitalizing $0.9
million development costs for new products. We've made significant investments
in our new products in the current year. We anticipate these new products will
be launched during the second half of the fiscal 2004. In the prior comparative
period, research and development efforts was spent on enhancing existing
products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.1 million, or 10%, to $0.9 million
in the quarter ended September 30, 2003 from $1.0 million in the quarter ended
September 30, 2002. The decrease is mainly due to a decrease in amortization of
purchased and capitalized software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $1.1 million, or 58%,
to $3.0 million in the three months ended September 30, 2003 from $1.9 million
in the three months ended September 30, 2002. Much of the current quarter was
spent building the infrastructure and developing our sales organization.
OPERATING INCOME
Operating income from continuing operations, which included depreciation and
amortization expense, was $1.2 million for the quarter ended September 30, 2003,
compared to a loss from continuing operations of $2.1 million for the quarter
ended September 30, 2002. Earnings from continuing operations before interest,
provision for income taxes, depreciation, amortization and change in accounting
principle was $2.1 million for the quarter ended September 30, 2003 compared to
a loss of $1.0 million for the quarter ended September 30, 2002.
INTEREST EXPENSE
Interest expense decreased by $0.1 million, or 33%, to $0.2 million in the
quarter ended September 30, 2003 from $0.3 million in the quarter ended
September 30, 2002. The decrease is due to $4.3 million decrease in average
balance of interest-bearing debts.
PROVISION FOR INCOME TAXES
Provision for income taxes for the quarters ended September 30, 2003 and 2002
are $67,000 and $1,000, respectively.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to the
quarter ended September 30, 2003 and 2002 were $0.3 million.
SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2002
NET SALES
Net sales increased by $3.4 million, or 39%, to $12.1 million in the six months
ended September 30, 2003 from $8.7 million in the six months ended September 30,
2002 primarily due to an increase in license sales.
17
COST OF SALES/GROSS PROFIT
Cost of sales decreased by $1.0 million, or 27%, to $2.7 million in the six
months ended September 30, 2003 from $3.7 million in the six months ended
September 30, 2002. Gross profit as a percentage of net sales increased to 78%
in the six ended September 30, 2003 from 58% in the prior comparative period.
The decrease in cost of sales and the increase in gross profit as a percentage
of net sales were due to the increase in high-margin license revenues coupled
with the decrease in low margin software modification and professional services.
During the six months ended September 30, 2003 and 2002, application technology
license revenues represented 44% and 14% of net sales, respectively, and
modification and professional services revenues represented 25% and 48% of net
sales, respectively.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $1.5 million, or 68%, to $0.7
million in the six months ended September 30, 2003 from $2.2 million in the six
months ended September 30, 2002. The decrease is primarily due to capitalizing
$1.8 million development costs for new products. We've made significant
investments in our new products in the first six months of the current quarter.
We anticipate these new products will be launched during the second half of the
fiscal 2004. In the prior comparative period, research and development efforts
was spent on enhancing existing products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.3 million, or 14%, to $1.8 million
in the six months ended September 30, 2003 from $2.1 million in the six months
ended September 30, 2002. The decrease is mainly due to a decrease in
amortization of purchased and capitalized software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $2.0 million, or 53%,
to $5.8 million in the six months ended September 30, 2003 from $3.8 million in
the six months ended September 30, 2002. The first six months of fiscal 2003
included a $0.6 million reversal of excess amount accrued in prior periods for a
litigation settlement. Additional, much of the first six months of fiscal 2004
was spent building the infrastructure and developing our sales organization.
OPERATING INCOME
Operating income from continuing operations, which included depreciation and
amortization expense, was $1.2 million for the six months ended September 30,
2003, compared to a loss from continuing operations of $3.1 million for the
comparable period in prior year. Earnings from continuing operations before
interest, provision for income taxes, depreciation, amortization and change in
accounting principle was $2.9 million for the six months ended September 30,
2003 compared to a loss of $1.0 million for the six months ended September 30,
2002.
INTEREST EXPENSE
Interest expense decreased by $0.2 million, or 29%, to $0.5 million in the six
months ended September 30, 2003 from $0.7 million in the six months ended
September 30, 2002. The decrease is due to $4.5 million decrease in average
balance of interest-bearing debts.
PROVISION FOR INCOME TAXES
Provision for income taxes represents $0.6 million income tax refund and $0.1
million provision for state income taxes in the six months ended September 30,
2003. No provision was made at in the six months ended September 30, 2002 due to
the availability of tax losses. The income tax refund of $0.6 million at
September 30, 2003 results from amending prior years' income tax returns to
carry back net operating losses incurred in the past 2 years.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $0.6 million as the
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002. We also evaluated the remaining useful lives of our intangibles in the
quarter ended June 30, 2002 and no adjustments have been made to the useful
lives of our intangible assets. There have been no such charges in the quarter
ended June 30, 2003.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to the six
months ended September 30, 2003 and 2002 were $0.6 million and $0.5 million,
respectivley.
18
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the six months ended September 30, 2003, we financed our operations using
cash on hand, internally generated cash, proceeds from the sale of common stock
and proceeds from sale of convertible debentures. At September 30, 2003 and
March 31, 2003, we had cash of $1.1 million and $1.3 million, respectively.
Operating activities used cash of $5.6 million in the six months ended September
30, 2003 and $1.9 million in the six months ended September 30, 2002. Cash used
for operating activities in the six months ended September 30, 2003 resulted
from $4.5 million increase in accounts receivable and other receivables and $3.9
million decrease in accounts payable and accrued expenses; offset in part by
$1.0 million net income and $1.8 million of non-cash depreciation and
amortization.
Investing activities used cash of $2.5 million in the six months ended September
30, 2003 and $0.3 million in the six months ended September 30, 2002. Cash used
for investing activities in the current quarter was primarily for capitalization
of $2.2 million software development costs.
Financing activities provided cash of $7.8 million and $1.0 million in the six
months ended September 30, 2003 and 2002, respectively. The 2004 financing
activities included net proceeds of $7.2 million from the sale of common stock
and $0.7 million from the issuance of convertible debentures.
Accounts receivable increased to $8.5 million at September 30, 2003 from $4.0
million at March 31, 2003. The increase is primarily due to $3.9 million in
current receivable from new sales.
We believe that our cash and cash equivalent and funds generated from operations
will provide adequate liquidity to meet our normal operating requirements for at
least the next twelve months.
FINANCING TRANSACTIONS
In June 2003, we entered into an agreement with various institutional investors
("June 2003 Institutional Investors") for the sale to these investors of
5,275,000 shares of common stock at a per share price of $1.50 for an aggregate
purchase price of $7.9 million. Pursuant to a registration rights agreement, we
filed a separate registration statement respecting their shares which was
declared effective on September 26, 2003 by the SEC.
In connection with this financing, we paid Roth Capital Partners, LLC, as
placement agent, cash compensation of 8% of the proceeds and issued a warrant to
purchase 527,500 shares of common stock at an exercise price of $1.65 per share.
We also issued warrants to purchase 375,000 shares of common stock at an
exercise price of $1.65 to certain holders of our 9% convertible debentures in
order to obtain their requisite consents and waivers of rights they possessed to
participate in the financing.
On November 7, 2003, we entered into an agreement with various institutional
investors ("November 2003 Institutional Investors") for the sale of 3,180,645
shares of common stock at a price of $1.55 per share for an aggregate purchase
price of $4.9 million. We also granted the November 2003 Institutional Investors
registration rights under a registration rights agreement in which we agree to
file a registration statement with the Securities and Exchange Commission for
the resale of all shares sold these investors. If the registration statement is
not filed by December 7, 2003, we will be obligated to pay on December 7, 2003,
and each monthly anniversary until the registration statement is filed, an
amount in cash, as liquidated damages, equal to 2.0% of the purchase price paid
by the November 2003 Institutional Investors.
In connection with this financing, we paid Roth Capital Partners, LLC ("Roth
Capital"), as placement agent, a compensation of $179,000 in cash and 115,226
shares of our common stock and issued a five-year warrant to purchase 282,065
shares of our common stock at an exercise price of $1.71 per share. Roth Capital
was granted the registration rights similar to those granted to the November
2003 Institutional Investors.
INDEBTEDNESS
UNION BANK
Pursuant to the Discounted Loan Payoff Agreement dated March 31, 2003, we issued
to Union Bank of California a $500,000 unsecured, non-interest bearing
convertible note payable in either cash or shares of common stock, at our
option. If we elect to pay the principal amount or any portion thereof in shares
of common stock, the shares will be computed on a price per share of 80% of the
average share closing price of our common stock for the ten trading day period
immediately preceding payoff date. The maturity date is March 31, 2004. As of
September 30, 2003, the bank had assigned the right of this note to Roth Capital
Partners, LLC.
19
NATIONAL AUSTRALIA BANK LIMITED
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.
ICM ASSET MANAGEMENT, INC.
During the quarter ended June 30, 2001, we entered into Subscription Agreements
with a limited number of accredited investors related to existing stockholders
for gross proceeds of $1.3 million. Each unit consisted of a convertible
promissory note to purchase 250 shares of our common stock for each $1,000
borrowed by us. The holders of the notes had the option to convert the unpaid
principal and interest to common stock at any time at a conversion price of
$0.60 per share. The notes matured on September 30, 2003 and earned interest at
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest, to be paid at maturity. We did not have a right to prepay
the notes. In September 2003, the investors converted the outstanding balance of
principal and accrued interest totaling $1.4 million into 2,287,653 shares of
our common stock.
We also issued to these accredited investors warrants to purchase an aggregate
of 1,600,000 shares at $0.60 per share, expiring July 19, 2007. The warrants are
not callable by us. No warrants have been exercised as of October 31, 2003.
We filed a registration statement for the resale of all shares held by or
obtainable by these and other investors. The registration statement was declared
effective by the SEC on July 18, 2003.
TOYS "R" US
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million for the
purchase of a non-recourse convertible note and a warrant to purchase 2,500,000
common shares. The purchase price was received in installments through September
27, 2002. The note is non-interest bearing, and the face amount was either
convertible into shares of our stock valued at $0.553 per share or payable in
cash at our option, at the end of the term. In November 2002, the Board decided
that this note will be converted solely for equity and will not be repaid in
cash. The note is due May 29, 2009, or if earlier than that date, three years
after the completion of the development project contemplated in the development
agreement between us and Toys entered into at the same time. We do not have the
right to prepay the convertible note before the due date. The face amount of the
note is 16% of the $1.3 million purchase price as of May 29, 2002, and increases
by 4% of the $1.3 million purchase price on the last day of each succeeding
month, until February 28, 2004, when the face amount is the full $1.3 million
purchase price. The face amount will cease to increase if Toys terminates its
development agreement with us for a reason other than our breach. The face
amount will be zero if we terminate the development agreement due to an uncured
breach by Toys of the development agreement. We have received all of the $1.3
million proceeds.
The warrant entitles Toys to purchase up to 2,500,000 of our common shares at
$0.553 per share. The warrant was 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 October 31, 2003, 2.1 million shares of the warrant are
exercisable. No warrants have currently been exercised.
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. As a result,
under the rules of the SEC, Toys will not be considered the beneficial owner of
20
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.
OMICRON/MIDSUMMER/ISLANDIA
On March 31, 2003, we entered into a securities purchase agreement with
Midsummer Investment, Ltd. ("Midsummer"), Omicron Master Trust ("Omicron"), and
Islandia, L.P. ("Islandia") for the sale to these investors of debentures,
convertible into shares of our common stock at a conversion price equal to
$1.0236 per share, for an aggregate amount of $3.5 million. The investors also
received a five-year warrant to purchase up to, in the aggregate, 1,572,858
shares of common stock with an exercise price equal to $1.0236 per share. The
debentures would have been matured in May 2005 and bore an interest rate of 9%
per annum. Interest was payable on a quarterly basis commencing on June 1, 2003,
in cash or shares of common stock, at our option. If certain conditions were
met, we had the right, but not the obligation, to redeem the debentures at 110%
of their face value, plus accrued interest. Commencing in February 2004, we
would have been obligated to redeem $219,000 per month of the debentures.
Furthermore, if the daily volume weighted average price of our common stock on
the American Stock Exchange exceeds $1.0236 by more than 200% for 15 consecutive
trading days, we will have the option to cause the investors to convert their
debentures into common stock. In July 2003, Omicron converted $500,000 of their
debenture into 488,472 shares of our common stock. In August 2003, the daily
volume weighted average price of our common stock on the American Stock Exchange
exceeded $1.02 by more than 200% for 15 consecutive trading days; therefore, we
exercised the option to cause the investors to convert their debentures into
common stock. As a result, the investors converted the remaining balance of
their debentures into an aggregate of 2,930,832 shares of our common stock as of
September 30, 2003.
Pursuant to the registration rights agreement, we filed a registration statement
covering 130% of the common stock issuable upon the conversion of the debentures
and the warrants. The registration statement was declared effective July 18,
2003.
Additional debentures, aggregating up to $2 million, will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
Neither the investors nor we have executed the second closing as of October 31,
2003.
MBSJ INVESTORS, LLC
On April 1, 2003, we entered into a securities purchase agreement with MBSJ
Investors, LLC ("MBSJ") for the sale to MBSJ of a 9% debenture, convertible to
shares of our common stock at a conversion price of $1.0236, for $400,000. This
debenture was accompanied by a five-year warrant to purchase 156,311 shares of
common stock with an exercise price of $1.0236 per share. Interest was due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we would have been obligated to redeem $20,000
per month of the debenture. The debenture would have matured in October 2005.
This debenture was accompanied by a five-year warrant to purchase 156,311 shares
of our common stock with an exercise price of $1.0236 per share. MBSJ was also
granted registration rights under a registration rights agreement, and certain
other rights similar to those granted to Midsummer, Omicron and Islandia. In
August 2003, the daily volume weighted average price of our common stock on the
American Stock Exchange exceeded $1.02 by more than 200% for 15 consecutive
trading days; therefore, we exercised the option to cause the investor to
convert its debenture into common stock. As a result, the investor converted its
debenture into 390,777 shares of our common stock as of September 2003.
CRESTVIEW
On May 6, 2003, we entered into an agreement with Crestview Capital Fund I,
L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund, Inc.
(collectively, the "Crestview Investors") for the sale to the Crestview
Investors of 9% debentures, convertible into shares of our common stock at a
conversion price of $1.0236 for $300,000. These debentures were accompanied by
five-year warrants to purchase an aggregate of 101,112 shares of common stock
with an exercise price of $1.0236 per share. Interest was due on a quarterly
basis, payable in cash or shares of common stock at our option. Commencing on
February 1, 2004, we would have been obligated to redeem $19,000 per month of
the debentures. The debentures would have matured in May 2005. These debentures
were accompanied by five-year warrants to purchase an aggregate of 101,112
21
shares of common stock with an exercise price of $1.0236 per share. The
Crestview Investors were also granted registration rights under a registration
rights agreement, and certain other rights similar to those granted to
Midsummer, Omnicron and Islandia. In August 2003, the daily volume weighted
average price of our common stock on the American Stock Exchange exceeded $1.02
by more than 200% for 15 consecutive trading days; therefore, we exercised the
option to cause the investor to convert its debenture into common stock. As a
result, the investors converted their debentures into 293,082 shares of our
common stock as of September 30, 2003.
Additional debentures aggregating up to $300,000 will be sold to these investors
in a second closing, if within one year after the date of first sale of
debentures there occurs a period of 15 consecutive trading days during which the
daily volume weighted average closing price of our common stock is maintained at
a price at or above $1.75 per share, subject to certain conditions. The shares
of common stock underlying these debentures and warrants were not included in
the registration statement declared effective in July 2003. Neither the
investors nor we have executed the second closing as of October 31, 2003.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including purchase
commitments at September 30, 2003, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
For the fiscal years ending March 31,
-------------------------------------
Contractual Cash Obligations 2004 2005 2006 2007 Thereafter
- ---------------------------- ---- ---- ---- ---- ----------
(in thousands)
Operating leases $ 445 $ 867 $ 360 $ 107 $ 13
Purchases 667 394
Payables aged over 90 days 398
------- ------- ------- ------- -------
Total contractual cash obligations $1,510 $1,261 $ 360 $ 107 $ 13
======= ======= ======= ======= =======
For the fiscal years ending March 31,
-------------------------------------
Other Commercial Commitments 2004 2005 2006 2007 Thereafter
- ---------------------------- ---- ---- ---- ---- ----------
(in thousands)
Guarantees $ 187
---------
Total commercial commitments $ 187
=========
BUSINESS RISKS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN OUR FORM 10-K/A FOR THE YEAR ENDED MARCH 31, 2003 AND
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003. 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 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS IN THIS FORM 10-Q.
OUR SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS MAKES IT DIFFICULT
FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of sales cycles in our business makes it difficult to evaluate the
effectiveness of our sales strategies. Our sales cycles historically has ranged
from three to twelve months, which has caused significant fluctuations in
revenues from period to period. Due to our difficulties in completing new
application software sales in recent periods and our refocused sales strategy,
it is difficult to predict revenues and properly budget expenses.
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
22
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; and
o market acceptance of new applications and related services.
In particular, we usually deliver our software applications when contracts are
signed, so order backlog at the beginning of any quarter may represent only a
portion of that quarter's expected revenues. As a result, application license
revenues in any quarter are substantially dependent on orders booked and
delivered in that quarter, and this makes it difficult for us to accurately
predict revenues. We have experienced, and we expect to continue to experience,
quarters or periods where individual application license or services orders are
significantly larger than our typical application license or service orders.
Because of the nature of our offerings, we may get one or more large orders in
one quarter from a customer and then no orders the next quarter.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD, WHICH COULD AFFECT QUARTERLY
RESULTS AND OUR STOCK PRICE.
If we incur additional expenses in a quarter in which we do not experience
increased revenue, our results of operations would be adversely affected and we
may incur losses for that quarter. Factors that could cause our expenses to
fluctuate from period to period include:
o the extent of marketing and sales efforts necessary to promote
and sell our applications and services;
o the timing and extent of our development efforts; and
o the timing of personnel hiring.
IT IS DIFFICULT TO EVALUATE OUR PERFORMANCE BASED ON PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
The many factors, which can cause revenues and expenses to vary, make meaningful
period to period comparisons of our results difficult. We do not believe period
to period comparisons of our financial performance are necessarily meaningful,
and you cannot rely on them as an indication of our future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from October
through December of each year as a result of retailers' focus on the holiday
retail-shopping season. This can negatively affect revenues in our third fiscal
quarter and in other quarters, depending on our sales cycles.
WE MAY NEED TO RAISE CAPITAL TO GROW OUR BUSINESS. OBTAINING THIS CAPITAL COULD
IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise 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.
23
Our future capital requirements depend on many factors including our application
development, sales and marketing activities. We do not know whether additional
financing will be available when needed, or available on terms acceptable to us.
If we cannot raise needed funds for the above purposes on acceptable terms, we
may be forced to curtail some or all of the above activities and we may not be
able to grow our business or respond to competitive pressures or unanticipated
developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities or convertible debt securities, our stockholders may experience
substantial dilution and the new securities may have greater rights, preferences
or privileges than our existing common stock.
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other intangible
assets represent approximately 73% of our total assets as of September 30, 2003.
We may have to impair or write-off these assets, which will cause a charge to
earnings and could cause our stock price to decline. Any such impairment will
also reduce our assets, as well as the ratio of our assets to our liabilities.
These balance sheet effects could make it more difficult for us to obtain
capital, and could make the terms of capital we do obtain more unfavorable to
our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our applications
and services and our expenses, and foreign currency losses will negatively
affect profitability or increase losses. Approximately 8% and 12% of our net
sales were in the United Kingdom, in the six months ended September 30, 2003 and
2002, respectively. Many of our expenses related to foreign sales, such as
corporate level administrative overhead and development, are denominated in U.S.
dollars. When accounts receivable and accounts payable arising from
international sales and services are converted to U.S. dollars, the resulting
gain or loss contributes to fluctuations in our operating results. We do not
hedge against foreign currency exchange rate risks.
WE HAVE CUSTOMERS REPRESENTING SIGNIFICANT AMOUNTS OF OUR BUSINESS.
QQQ Systems Ltd. ("QQQ") accounted for 32% and 0% and Toys "R" Us, Inc. ("Toys")
accounted for 13% and 35% of our net sales for the six months ended September
30, 2003 and 2002, respectively. The software license sale to QQQ was a one-time
transaction. While we have a development agreement with Toys, this customer has
the right to terminate the agreement without cause with limited advance notice.
A reduction, delay or cancellation of orders from Toys would significantly
reduce our revenues and force us to substantially curtail operations. We cannot
provide any assurances that Toys or any of our current customers will continue
at current or historical levels or that we will be able to obtain orders from
new customers.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on Harvey Braun, our Chief Executive Officer and
Chairman of the Board, and Steven Beck, our President and Chief Operating
Officer. We do not have any written employment agreements with Mr. Braun or Mr.
Beck. We also believe our future success will depend largely upon our ability to
attract and retain highly-skilled software programmers, managers, and sales and
marketing personnel. Competition for personnel is intense, particularly in
international markets. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. We compete
against numerous companies, including larger, more established companies, for
our personnel. We may not be successful in attracting or retaining skilled
sales, technical and managerial personnel. The loss of key employees or our
inability to attract and retain other qualified employees could negatively
affect our financial performance and cause our stock price to decline.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES
HAVE BEEN AND MAY CONTINUE TO BE SLOW.
Our future growth is critically dependent on increased sales to the retail
industry. We derive the substantial majority of our revenues from the licensing
of software applications and the performance of related professional and
consulting services to the retail industry. Demand for our applications and
services could decline in the event of consolidation, instability or more
downturns in the retail industry. This decline would likely cause reduced sales
and could impair our ability to collect accounts receivable. The result would be
reduced earnings and weakened financial condition, each or both of which would
likely cause our stock price to decline.
24
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 weak economic conditions that could negatively impact the
industry and our customers' ability to pay for our products and services. Such
consolidation and weak 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.
Weak economic conditions and the September 11, 2001 terrorist attack have
adversely impacted sales of our software applications, and we believe mid-tier
specialty retailers may be reluctant during the current economic slowdown to
make the substantial infrastructure investment that generally accompanies the
implementation of our software applications. The war in Iraq and the anticipated
burden of rebuilding that country's infrastructure has also led to some
uncertainty in the economic climate, which may adversely impact our business.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS.
We have in the past and may in the future be impacted by customer bankruptcies.
During weak economic conditions, such as those currently being experienced in
many geographic regions around the world, there is an increased risk that
certain of our customers will file bankruptcy. When our customers file
bankruptcy, we may be required to forego collection of pre-petition amounts
owed, and to repay amounts remitted to us during the 90-day preference period
preceding the filing. Accounts receivable balances related to pre-petition
amounts may in certain of these instances be large due to extended payment terms
for software license fees, and significant billings for consulting and
implementation services on large projects. The bankruptcy laws, as well as the
specific circumstances of each bankruptcy, may severely limit our ability to
collect pre-petition amounts, and may force us to disgorge payments made during
the 90-day preference period. We also face risk from international customers
which file for bankruptcy protection in foreign jurisdictions, in that the
application of foreign bankruptcy laws may be less certain or harder to predict.
Although we believe that we have sufficient reserves to cover anticipated
customer bankruptcies, there can be no assurance that such reserves will be
adequate, and if they are not adequate, our business, operating results and
financial condition would be adversely affected.
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We conduct business in an industry characterized by intense competition. Most of
our competitors are very large companies with an international presence. We must
also compete with smaller companies which have been able to develop strong local
or regional customer bases. Many of our competitors and potential competitors
are more established, benefit from greater name recognition and have
significantly greater resources than us. Our competitors may also have lower
cost structures and better access to the capital markets than us. As a result,
our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Our competitors may:
o introduce new technologies that render our existing or future
products obsolete, unmarketable or less competitive;
o make strategic acquisitions or establish cooperative
relationships among themselves or with other solution
providers, which would increase the ability of their products
to address the needs of our customers; and
o establish or strengthen cooperative relationships with our
current or future strategic partners, which would limit our
ability to compete through these channels.
We could be forced to reduce prices and suffer reduced margins and market share
due to increased competition from providers of offerings similar to, or
competitive with, our applications, or from service providers that provide
services similar to our services. Competition could also render our technology
obsolete.
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.
25
The success of application enhancements and new applications depends on a
variety of factors, including technology selection and specification, timely and
efficient completion of design, and effective sales and marketing efforts. In
developing new applications and services, we may:
o fail to respond to technological changes in a timely or
cost-effective manner;
o encounter applications, capabilities or technologies developed
by others that render our applications and services obsolete
or non-competitive or that shorten the life cycles of our
existing applications and services;
o experience difficulties that could delay or prevent the
successful development, introduction and marketing of these
new applications and services; or
o fail to achieve market acceptance of our applications and
services.
The life cycles of our applications are difficult to estimate, particularly in
the emerging electronic commerce market. As a result, new applications and
enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our success and competitive position is dependent in part upon our ability to
develop and maintain the proprietary aspects of our intellectual property. Our
intellectual property includes our trademarks, trade secrets, copyrights and
other proprietary information. Our efforts to protect our intellectual property
may not be successful. Effective copyright and trade secret protection may be
unavailable or limited in some foreign countries. We hold no patents.
Consequently, others may develop, market and sell applications substantially
equivalent to ours or utilize technologies similar to those used by us, so long
as they do not directly copy our applications or otherwise infringe our
intellectual property rights.
We may find it necessary to bring claims or litigation against third parties for
infringement of our proprietary rights or to protect our trade secrets. These
actions would likely be costly and divert management resources. These actions
could also result in counterclaims challenging the validity of our proprietary
rights or alleging infringement on our part. The ultimate outcome of any
litigation will be difficult to predict.
OUR APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to and defending claims related to our intellectual property rights,
even ones without merit, can be time consuming and expensive and can divert
management's attention from other business matters. In addition, these actions
could cause application delivery delays or require us to enter into royalty or
license agreements. Royalty or license agreements, if required, may not be
available on terms acceptable to us, if they are available at all. Any or all of
these outcomes could have a material adverse effect on our business, operating
results and financial condition.
DEVELOPMENT AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources necessary
to develop and market our offerings to their target markets, our business
strategy substantially depends on our strategic relationships. While some of
these relationships are governed by contracts, most are non-exclusive and all
may be terminated on short notice by either party. If these relationships
terminate or fail to deliver the intended benefits, our development and
marketing efforts will be impaired and our revenues may decline. We may not be
able to enter into new strategic relationships, which could put us at a
disadvantage to those of our competitors, which do successfully exploit
strategic relationships.
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.
26
Substantially all of our primary computer and telecommunications systems are
located in two geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business interruption
insurance may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product liability or
other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our applications are highly complex and sophisticated and they may occasionally
contain design defects or software errors that could be difficult to detect and
correct. In addition, implementation of our applications may involve
customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
We are not currently aware of any defects in our applications that might give
rise to future lawsuits. However, errors or integration problems may be
discovered in the future. Such defects, errors or difficulties could result in
loss of sales, delays in or elimination of market acceptance, damage to our
brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing costs. In
addition, third-party products, upon which our applications are dependent, may
contain defects which could reduce or undermine entirely the performance of our
applications.
Our customers typically use our applications to perform mission-critical
functions. As a result, the defects and problems discussed above could result in
significant financial or other damage to our customers. Although our sales
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims, we do not know if these
limitations of liability are enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
applications or the performance of our services. Our product liability insurance
may not cover all claims brought against us.
SOFTLINE LIMITED HAS THE RIGHT TO ACQUIRE A CONTROLLING PERCENTAGE OF OUR COMMON
STOCK, SO WE MAY BE EFFECTIVELY CONTROLLED BY SOFTLINE, AND OUR OTHER
STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING.
Softline Limited beneficially owns approximately 49% 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.
27
OUR BUSINESS MAY BE DISADVANTAGED OR HARMED IF SOFTLINE'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have and will continue to arise between Softline and us in
a number of areas relating to our past and ongoing relationships. Conflicts may
not be resolved in a manner that is favorable to us, and such conflicts may
result in harmful consequences to our business or prospects.
SOFTLINE'S INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY
TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Softline's potential voting control could discourage others from initiating any
potential merger, takeover or other change of control transaction that may
otherwise be beneficial to our business or our stockholders. As a result,
Softline's control could reduce the price that investors may be willing to pay
in the future for shares of our stock, or could prevent any party from
attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to continue to be,
volatile. When we or our competitors announce new customer orders or services,
change pricing policies, experience quarterly fluctuations in operating results,
announce strategic relationships or acquisitions, change earnings estimates,
experience government regulatory actions or suffer from generally adverse
economic conditions, our stock price could be affected. Some of the volatility
in our stock price may be unrelated to our performance. Recently, companies
similar to ours have experienced extreme price fluctuations, often for reasons
unrelated to their performance.
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common stock. We
anticipate that we will use our earnings and cash flow for repayment of
indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. 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
American Stock Exchange could in the future determine that our stock does not
merit continued listing. If our stock were delisted from the American Stock
Exchange, the ability of our stockholders to sell our common stock could become
limited, and we would lose the advantage of some state and federal securities
regulations imposing lower regulatory burdens on exchange-traded issuers.
DELAWARE LAW AND SOME PROVISIONS OF OUR CHARTER AND BYLAWS MAY ADVERSELY AFFECT
THE PRICE OF YOUR STOCK.
Special meetings of our stockholders may be called only by the Chairman of the
Board, the Chief Executive Officer or the Board of Directors. Stockholders have
no right to call a meeting. Stockholders must also comply with advance notice
provisions in our bylaws in order to nominate directors or propose matters for
stockholder action. These provisions of our charter documents, as well as
certain provisions of Delaware law, could delay or make more difficult certain
types of transactions involving a change in control of the Company or our
management. Delaware law also contains provisions that could delay or make more
difficult change in control transactions. As a result, the price of our common
stock may be adversely affected.
28
SHARES ISSUED UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND CONVERTIBLE
NOTES COULD DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our employees and
certain other persons at various prices, some of which are or may in the future
have exercise prices at below the market price of our stock. As of October 31,
2003, we have outstanding options and warrants for 16,865,219 shares. Of these
options and warrants, 1,048,005 have exercise prices above the recent market
price of $2.06 per share (as of October 31, 2003), and 15,817,214 have exercise
prices at below that recent market price. If exercised, these options and
warrants will cause immediate and possibly substantial dilution to our
stockholders.
Our existing stock option plan currently has approximately 2,108,005 shares
available for issuance as of October 31, 2003. Future options issued under the
plan may have further dilutive effects.
We issued to Toys "R" Us, Inc. our major customer, a note convertible into
2,500,000 shares of common stock. This note has a conversion price of $0.553.
This note will have a dilutive effect on stockholders if converted.
We issued to Union Bank of California, N.A. an unsecured note that is
convertible into shares of common stock at a price per share of eighty percent
(80%) of the average share closing price of our common stock for the ten trading
day period immediately preceding the payoff date. This note will have a dilutive
effect on stockholders if converted.
Sales of shares pursuant to exercisable options, warrants, convertible notes,
and convertible debentures could lead to subsequent sales of the shares in the
public market, and could depress the market price of our stock by creating an
excess in supply of shares for sale. Issuance of these shares and sale of these
shares in the public market could also impair our ability to raise capital by
selling equity securities.
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
We do not have debt or borrowings with variable rate term.
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 7% and 15% of our
total net sales were denominated in currencies other than the U.S. dollar for
the three months ended September 30, 2003 and 2002, respectively. Approximately
8% and 12% of our total net sales were denominated in currencies other than the
U.S. dollar for the six months ended September 30, 2003.
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 4. - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation of
our disclosure controls and procedures, as such term is defined under Rule
13a-14 (c) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of a date (the "Evaluation Date") within 90 days of the
filing date of this Quarterly Report on Form 10-Q, our principal executive
officer and finanical and accounting officer have concluded that our disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal
controls, as such term is defined under Section 13 (b) of the Exchange Act, or
to our knowledge, in other factors that could significantly affect these
controls subsequent to the Evaluation Date.
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PART II. - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. This dispute was heard before an arbitrator during the week ended
October 3, 2004 and a decision from the arbitrator should be forthcoming.
Due to the declining performance of our Australian subsidiary, we decided in the
third quarter of fiscal 2002 to sell certain assets of our Australian subsidiary
to the former management of such subsidiary, and then cease Australian
operations. Such sale was, however, subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to an entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have reserved $187,000 as our potential exposure. The
receiver has also claimed that we are obligated to it for inter-company balances
of $636,000, but we do not believe any amounts are owed to the receiver, who has
not as of the date of this report acknowledged the monthly corporate overhead
recovery fees and other amounts charged by us to the Australian subsidiary
offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against us with the Department
of Fair Employment and Housing, alleging harassment and sexual orientation
discrimination. We have responded appropriately to both the wage claim and the
discrimination allegations, which we believe lack merit based on present
information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claimed damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertained to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. The parties settled this matter in September 2003 and the terms of the
settlement are covered by a confidentiality agreement.
In mid-2002, we were the subject of an adverse judgment entered against us in
favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. A hearing on Sabica's and Island Pacific's motion to
quash occurred on May 22, 2003 which was subsequently denied.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
30
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2003, we issued 75,000 shares of common
stock to an employee in lieu of cash payments for commissions earned in prior
periods, valued at $75,000.
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.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 9, 2003, we held a special meeting of stockholders. All 32,577,343
shares were represented at the meeting in person or by proxy. The following
matters were considered and approved:
o Ratification of the sale and issuance of up to $6.5 million of
9% convertible debentures and accompanying warrants to
purchase shares of common stock to certain investors. The
measure passed with 21,475,900 votes for, 482,980 votes
against, 11,835 abstained and 10,606,628 broker non-votes.
o Change of our name from "SVI Solutions, Inc." to "Island
Pacific, Inc." The measure passed with 32,508,306 votes for,
56,072 votes against, 12,965 abstained and no broker
non-votes.
o Amendment and restatement of our Restated Certificate of
Incorporation to reflect the removal of Article XII, which
restricts the shareholders' ability to take actions by written
consent. The measure passed with 21,763,166 votes for, 82,572
votes against, 124,977 abstained and 10,606,628 broker
non-votes.
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.
2.2 Securities Purchase Agreement dated March 31, 2003 by and among the
Company, Midsummer Investment, Ltd., Omicron Master Trust, and
Islandia, L.P., incorporated by reference to exhibit 2.1 to the
Company's Form 8-K filed April 15, 2003
2.3 Securities Purchase Agreement dated April 1, 2003 by and among the
Company and MBSJ Investors, LLC, incorporated by reference to exhibit
2.2 to the Company's Form 8-K filed on April 15, 2003.
2.4 Agreement dated May 6, 2003 by and among the Company, Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital
Offshore Fund, Inc., incorporated by reference to exhibit 2.12 to
Company's Form S-1 filed May 12, 2003.
2.5 Securities Purchase Agreement dated June 27, 2003 by and among the
Company and the purchasers named therein, incorporated by reference to
exhibit 2.1 to the Company's Form 8-K filed on July 2, 2003.
2.6 Securities Purchase Agreement dated November 7, 2003 by and among the
Company and the purchasers named therein, incorporated by reference to
exhibit 2.1 to the Company's Form 8-K filed on November 12, 2003.
3.1 Amended and Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's 8-K filed on July 15, 2003.
3.2 Certificate of Designation, incorporated by reference to exhibit 4.1 of
the Company's Form 8-K filed May 16, 2002.
4.1 Registration Rights Agreement dated as of March 31, 2003 by and among
the Company, Midsummer Investment, Ltd., Omicron Master Trust, and
Islandia, L.P., incorporated by reference to exhibit 4.1 to the
Company's Form 8-K filed April 15, 2003.
4.2 Registration Rights Agreement dated as of April 1, 2003 between the
Company and MBSJ Investors LLC., incorporated by reference to exhibit
4.2 to the Company's Form 8-K filed April 15, 2003.
4.3 Registration Rights Agreement dated June 27, 2003 by and among the
Company and the parties named therein, incorporated by reference to
exhibit 4.1 to the Company's Form 8-K filed on July 2, 2003.
4.4 Registration Rights Agreement dated November 7, 2003 by and among the
Company and the parties named therein, incorporated by reference to
exhibit 4.1 to the Company's Form 8-K filed on November 12, 2003.
31
10.1 Discounted Loan Payoff Agreement dated March 31, 2003 by and amount
Union Bank of California, N.A., SVI Solutions, Inc., SVI Retail, Inc.,
Sabica Ventures, Inc. and SVI Training Products, Inc., incorporated by
reference to exhibit 10.3 to the Company's Form 8-K filed on April 15,
2003.
10.2 Unsecured Promissory Note dated March 31, 2003 in favor of Union Bank
of California, N.A., incorporated by reference to exhibit 10.47 to the
Company's Form S-1 filed on May 12, 2003.
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 First Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated December 5, 2002.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 Second Amendment to Amendment Agreement between the Company,Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated March 14, 2003, incorporated by
reference to exhibit 10.29 to the Company's Form S-1 filed on May 12,
2003.
10.6 Third Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated March 28, 2003, incorporated by
reference to exhibit 10.30 to the Company's Form S-1 filed on May 12,
2003.
10.7 Fourth Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated April 3, 2003, incorporated by
reference to exhibit 10.31 to the Company's Form S-1 filed on May 12,
2003.
10.8 Fifth Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated June 27, 2003 , incorporated by
reference to exhibit 10.32 to the Company's Form S-3 filed on July 31,
2003.
10.9 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.
10.10 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.
10.11 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.
10.12 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 Certification from Principal Executive Officer.
99.2 Certification from Principal Financial and Accounting Officer
(b) REPORTS ON FORM 8-K
On July 2, 2003, we filed a Form 8-K disclosing as Item 5 the sale of 5,275,000
shares of our common stock to a group of institutional investors.
On July 15, 2003, we filed a Form 8-K disclosing as Item 5 the name change to
Island Pacific, Inc.
On August 1, 2003, we filed a Form 8-K disclosing as Item 5 the appointment of
Harvey Braun, our Chief Executive Officer, to the position of Chairman of the
Board and Ran Furman to the position of Chief Financial Officer.
On August 13, 2003, we filed a Form 8-K disclosing as Item 9 our first quarter
financial results for the quarter ended June 30, 2003.
32
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.
Island Pacific, Inc.
Registrant
/S/ Ran Furman
-------------------------------------------
Date: November 12, 2003 Ran Furman
Chief Financial Officer
(Principal Financial and Accounting Officer)
Signing on behalf of the registrant
33
FORM 10-Q CERTIFICATIONS
I, Harvey Braun, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Island
Pacific, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2003
/s/ Harvey Braun
-----------------------------------------
Harvey Braun
Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
34
FORM 10-Q CERTIFICATIONS
I, Ran Furman, certify that:
5. I have reviewed this quarterly report on Form 10-Q of Island
Pacific, Inc.;
6. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
7. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
8. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
9. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
10. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2003
/s/ Ran Furman
-------------------------------------------
Ran Furman
Chief Financial Officer
(Principal Financial and Accounting Officer)
35