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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 JUNE 30, 2004 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
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ISLAND PACIFIC, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 - 54,809,255 shares as of July 31, 2004.
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TABLE OF CONTENTS
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004
and March 31, 2004.............................................3
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2004 and 2003............................4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2004 and 2003............................5
Notes to Condensed Consolidated Financial Statements ................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........39
Item 4. Controls and Procedures..............................................40
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings....................................................40
Item 2. Changes in Securities and Use of Proceeds............................40
Item 3. Defaults Upon Senior Securities......................................40
Item 4. Submission of Matters to a Vote of Security Holders..................40
Item 5. Other Information....................................................40
Item 6. Exhibits and Reports on Form 8-K.....................................41
SIGNATURES....................................................................46
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, MARCH 31,
2004 2004
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,289 $ 2,108
Accounts receivable, net of allowance for doubtful accounts of
$1,044 and $409, respectively 6,615 4,572
Other receivables, including $14 and $37 from related parties,
respectively 83 143
Inventories 40 46
Current portion of non-compete agreements 471 668
Current portion of note receivable 36 36
Prepaid expenses and other current assets 673 472
--------- ---------
Total current assets 9,207 8,045
Note receivable 117 126
Property and equipment, net 1,226 821
Goodwill, net 30,654 20,469
Other intangibles, net 25,270 22,099
Other assets, including $170 from related party 211 202
--------- ---------
Total assets $ 66,685 $ 51,762
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable to related parties $ 451 $ --
Current portion of notes payable 2,470
Current portion of convertible debentures 1,189 146
Current portion of capital leases 176 169
Line of credit 182 --
Accounts payable 2,007 1,255
Accrued expenses 3,709 3,016
Deferred revenue 6,327 2,657
Income tax payable 127 --
--------- ---------
Total current liabilities 16,638 7,243
Notes payable to related parties, less current maturities 2,134 --
Notes payable, less current maturities 352 --
Convertible debentures, net of debt discount of $623 and $706,
respectively, less current maturities 1,210 2,160
Capital lease obligations, less current maturities 52 89
Deferred revenue 906 --
Deferred rent 89 70
--------- ---------
Total liabilities 21,381 9,562
--------- ---------
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
issued and outstanding with a stated value of $100 per share,
dividends in arrears of $2,286 and $2,002, respectively 14,100 14,100
Series B Convertible Preferred , cumulative dividend of $0.136 per
share per annum commencing on January 1, 2005, 2,517,233 shares
issued and outstanding with a stated value of $3 per share 5,709 --
Common Stock, $.0001 par value; 100,000,000 shares authorized;
53,974,532 and 52,427,799 shares issued and outstanding, respectively 5 5
Additional paid in capital 74,001 72,813
Accumulated deficit (48,511) (44,718)
--------- ---------
Total stockholders' equity 45,304 42,200
--------- ---------
Total liabilities and stockholders' equity $ 66,685 $ 51,762
========= =========
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
June 30,
2004 2003
--------- ---------
Net sales $ 5,283 $ 5,466
Cost of sales 1,833 1,654
--------- ---------
Gross profit 3,450 3,812
Expenses:
Application development 1,247 137
Depreciation and amortization 1,306 868
Selling, general and administrative 4,517 2,796
--------- ---------
Total expenses 7,070 3,801
--------- ---------
Income (loss) from operations (3,620) 11
Other income (expense):
Interest income -- 26
Other income (expense) 97 (11)
Interest expense (270) (311)
--------- ---------
Total other expense (173) (296)
--------- ---------
Loss before provision for income taxes (3,793) (285)
Provision for income tax benefits -- 570
--------- ---------
Net income (loss) (3,793) 285
Cumulative preferred dividends (286) (272)
--------- ---------
Net income (loss) available to common stockholders $ (4,079) $ 13
========= =========
Basic earnings (loss) per share:
Net loss $ (0.07) $ 0.01
Cumulative preferred dividends (0.01) (0.01)
--------- ---------
Net income (loss) available to common stockholders $ (0.08) $ --
========= =========
Diluted earnings (loss) per share:
Net income (loss) $ (0.07) $ --
Cumulative preferred dividends (0.01) --
--------- ---------
Net income (loss) available to common stockholders $ (0.08) $ --
========= =========
Weighted-average common shares outstanding:
Basic 52,938 31,615
Diluted 52,938 64,743
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)
THREE MONTHS ENDED
JUNE 30,
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $(3,793) $ 285
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization 1,306 868
Amortization of debt discount and conversion option 83 189
Provision for allowance for doubtful accounts, net of recoveries 48 81
Stock-based compensation 18 --
Common stock issued for services rendered and settlement cost -- 25
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (470) (2,797)
Income tax refund receivable -- (845)
Inventories 7 5
Prepaid expenses and other assets (62) (74)
Accounts payable and accrued expenses (182) (866)
Income tax payable -- 271
Accrued interest on stockholders' loans, convertible notes and term loan 85 57
Deferred revenue 1,887 1,483
-------- --------
Net cash used for operating activities (1,073) (1,318)
-------- --------
Cash flows from investing activities:
Payment from note receivable 9 --
Proceeds from acquisition of Retail Technologies International, Inc., net 672 --
Purchases of furniture and equipment (30) (11)
Capitalized software development costs (260) (900)
-------- --------
Net cash provided by (used for) investing activities 391 (911)
-------- --------
Cash flows from financing activities:
Sale of common stock, net of offering costs -- 7,264
Decrease in amount due to stockholders, net (220) --
Proceeds from convertible debts -- 700
Payments on capital leases (40) --
Payments on convertible debentures (59) --
Proceeds from line of credit 182 --
-------- --------
Net cash provided by (used for) financing activities (137) 7,964
-------- --------
Effect of exchange rate changes on cash -- (1)
-------- --------
Net increase (decrease) in cash and cash equivalents (819) 5,734
Cash and cash equivalents, beginning of period 2,108 1,319
-------- --------
Cash and cash equivalents, end of period $ 1,289 $ 7,053
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 76 $ 61
Income taxes paid
Supplemental schedule of non-cash investing and financing activities:
Issued 2,517,233 shares of Series B Convertible Preferred Stock in
connection with the acquisition of Retail Technologies International, Inc. 5,709 --
Issued 1,546,733 shares of common stock in connection with the acquisition
of Retail Technologies International, Inc. 1,169 --
Issued promissory notes in connection with the acquisition of Retail
Technologies International, Inc. 3,622 --
-------- --------
Issued 9,849 shares of common stock as payments for
bonuses and services rendered in prior periods $ -- $ 8
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 June 30, 2004 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 months ended June 30, 2004. 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 for
the year ended March 31, 2004.
The results of operations for the three months ended June 30, 2004 and 2003 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2 - ACQUISITIONS
PAGE DIGITAL INCORPORATED
Effective January 30, 2004, we acquired all of the issued and outstanding shares
of Page Digital Incorporated ("Page Digital"), a Colorado-based developer of
multi-channel commerce software, through a merger with our newly-formed
wholly-owned subsidiary. The purchase price for the acquisition was $7.0
million, consisting of $2.0 million in cash and 2.5 million shares of our common
stock valued at $2.00 per share. Upon the consummation of this transaction, we
entered into two-year employment agreements for executive officer positions with
two of the principals of Page Digital and a two-year non-compete agreement with
one of the two principals of Page Digital.
The following unaudited pro forma consolidated results of continuing operations
for the three months ended June 30, 2003 assume the acquisition of Page Digital
occurred as of April 1, 2003. The pro forma results are not necessarily
indicative of the actual results that would have occurred had the acquisitions
been completed as of the beginning of the period presented, nor are they
necessarily indicative of future consolidated results.
Quarter ended
June 30, 2003
-------------
(unaudited)
(in thousands, except
per share data)
Net sales $ 6,832
Net income $ 323
Net income available to common stockholders $ 51
Basic and diluted income per share of common stock $ 0.01
Basic and diluted income per share available to common stockholders $ --
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
Pursuant to an agreement dated June 1, 2004, we acquired Retail Technologies
International, Inc. ("RTI") from Michael Tomczak, Jeffrey Boone and Intuit Inc.
("Intuit") in a merger transaction. On March 12, 2004, we, RTI, IPI Merger Sub,
Inc., ("Merger Sub") and Michael Tomczak and Jeffrey Boone (the "Shareholders")
entered the initial Agreement of Merger and Plan of Reorganization (the "March
12, 2004 Merger Agreement") which provided we would acquire RTI in a merger
transaction in which RTI would merge with and into Merger Sub. The merger
consideration contemplated by the March 12, 2004 Merger Agreement was a
combination of cash and shares of our common stock. The March 12, 2004 Merger
Agreement was amended by the Amended and Restated Agreement of Merger and Plan
of Reorganization, dated June 1, 2004, by and between us, RTI, Merger Sub, IPI
Merger Sub II, Inc. ("Merger Sub II") and the Shareholders (the "Amended Merger
Agreement").
6
Pursuant to the Amended Merger Agreement, the Merger (as defined below) was
completed with the following terms: (i) we assumed RTI's obligations under those
certain promissory notes issued by RTI on December 20, 2002 with an aggregate
principal balance of $2.3 million; (ii) the total consideration paid at the
closing of the Merger was $10.0 million paid in shares of our common stock and
newly designated Series B convertible preferred stock ("Series B Preferred") and
promissory notes; (iii) the Shareholders and Intuit are entitled to price
protection payable if and to the extent that the average trading price of our
common stock is less than $0.76 at the time the shares of our common stock
issued in the Merger and issuable upon conversion of the Series B Preferred are
registered pursuant to the registration rights agreement dated June 1, 2004
between us, the Shareholders and Intuit (the "Registration Rights Agreement");
and (iv) the merger consisted of two steps (the "Merger"), first, Merger Sub
merged with and into RTI, Merger Sub's separate corporate existence ceased and
RTI continued as the surviving corporation (the "Reverse Merger"), immediately
thereafter, RTI merged with and into Merger Sub II, RTI's separate corporate
existence ceased and Merger Sub II continued as the surviving corporation (the
"Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares of Series
B Preferred and a promissory note payable monthly over two years in the
principal amount of $1,295,000 bearing interest at 6.5% per annum. As a result
of the Merger, Intuit, the holder of all of the outstanding shares of RTI's
Series A Preferred stock, received 1,546,733 shares of our common stock and a
promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under the
Registration Rights Agreement, we agreed to register the common stock issuable
upon conversion of the Series B Preferred issued to the Shareholders within 30
days of the automatic conversion of the Series B Preferred into common stock.
The automatic conversion will occur upon us filing an amendment to our
certificate of incorporation with the Delaware Secretary of State increasing the
authorized number of shares of our common stock ("Certificate of Amendment")
after securing shareholder approval for the Certificate of Amendment. Under the
Registration Rights Agreement, Intuit is entitled to demand registration or to
have its shares included on any registration statement filed prior the
registration statement covering the Shareholders' shares, subject to certain
conditions and limitations, or if not previously registered to have its shares
included on the registration statement registering the Shareholders' shares. The
Shareholders and Intuit are entitled to price protection payments of up to a
maximum of $0.23 per share payable by promissory note, if and to the extent that
the average closing price of our common stock for the 10 days immediately
preceding the date the registration statement covering their shares is declared
effective by the Securities and Exchange Commission, is less than the 10 day
average closing price as of June 1, 2004, which was $0.76
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well as certain
officers and directors signed voting agreements that provide they will not
dispose of or transfer their shares of our capital stock and that they will vote
their shares of our capital stock in favor of the Certificate of Amendment and
the Amended Merger Agreement and transactions contemplated therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former President and
Chief Executive Officer, was appointed our President, Chief Operating Officer
and director and Jeffrey Boone, RTI's former Chief Technology Officer, was
appointed our Chief Technology Officer. We entered into two-year employment
agreements and non-competition agreements with Mr. Tomczak and Mr. Boone.
We entered into an employment agreement with Michael Tomczak on June 1, 2004.
The term of the agreement is two years. Under the agreement, Mr. Tomczak is
entitled to $360,000 in annual compensation. He also received an option to
purchase 1,772,354 shares of our common stock. Mr. Tomczak's right to purchase
886,178 of the shares subject to the option shall vest at the first anniversary
date of this agreement, thereafter, the remaining option shall vest at the rate
of 73,848 shares per month during the second year of this agreement. If Mr.
Tomczak's employment with us is terminated without cause during the term of the
agreement, he will receive severance in the amount of the lesser of $360,000 or
the balance of compensation payable over the remaining term of the agreement,
but in no event should the amount be less than $180,000. We also entered into
non-competition agreement with Mr. Tomczak, pursuant to which Mr. Tomczak agreed
not to engage in any business or activity that in any way competes with us for a
period of two years after the termination of his employment with us.
7
We entered into an employment agreement with Jeffrey Boone on June 1, 2004. The
term of the agreement is two years. Under the agreement, Mr. Boone is entitled
to $240,000 in annual compensation. He also received an option to purchase
1,572,354 shares of our common stock. Mr. Boone's right to purchase 786,179 of
the shares subject to the option shall vest at the first anniversary date of
this agreement, thereafter, the remaining option shall vest at the rate of
65,514 shares per month during the second year of this agreement. If Mr. Boone's
employment with us is terminated without cause during the term of the agreement,
he will receive severance in the amount of the lesser of $240,000 or the balance
of his compensation payable over the remaining term of the agreement, but in no
event should the amount be less than $120,000. We also entered into
non-competition agreement with Mr. Boone, pursuant to which Mr. Boone agreed not
to engage in any business or activity that in any way competes with us for a
period of two years after the termination of his employment with us.
The acquisition has been accounted for as a purchase. The results of the
operations of RTI have been included in the consolidated financial statements
since the date of the acquisition. The excess of purchase price over the fair
values of net assets acquired was approximately $10.2 million and has been
recorded as goodwill. The fair value of assets acquired and liabilities assumed
were as follows (in thousands):
Accounts receivable $ 1,348
Inventory
Property and equipment 496
Other assets 4,931
Liabilities assumed (6,460)
---------
Net assets 315
Excess of cost over fair value of net assets acquired 10,185
---------
Total purchase price $ 10,500
=========
The following unaudited pro forma consolidated results for the three months
ended June 30, 2004 and 2003 assume the acquisitions of RTI occurred as of April
1, 2004 and 2003, respectively, and Page Digital occurred as of April 1, 2003.
The pro forma results are not necessarily indicative of the actual results that
would have occurred had the acquisitions been completed as of the beginning of
the period presented, nor are they necessarily indicative of future consolidated
results.
Quarters Ended
June 30,
2004 2003
-------- --------
(unaudited)
(in thousands, except per share data)
Net sales $ 6,676 $ 8,974
Net income (loss) $(4,725) $ 365
Net income (loss) available to common stockholders $(5,011) $ 93
Basic and diluted income (loss) per share of common stock $ (0.09) $ 0.01
Basic and diluted income (loss) per share available to common
stockholders $ (0.09) $ --
NOTE 3 - NOTE RECEIVABLE
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%. We agreed to postpone the payments due January 2004
and April 2004 until April 2008. The note has a balance of $153,000 and $162,000
at June 30, 2004 and March 31, 2004, respectively, of which $36,000 is current.
8
NOTE 4 - INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost or
market, on a first-in, first-out basis.
NOTE 5 - GOODWILL AND OTHER INTANGIBLES
At June 30, 2004 and March 31, 2004, goodwill and other intangibles consist of
the following (in thousands):
JUNE 30, 2004 MARCH 31, 2004
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Net amount amortization Net
--------------------------------------- ---------------------------------------
Goodwill $ 37,147 $ (6,493) $ 30,654 $ 26,962 $ (6,493) $ 20,469
--------------------------------------- ---------------------------------------
Other intangibles:
Amortized intangible
assets
Software technology 35,874 (14,164) 21,710 34,257 (13,317) 20,940
Non-compete agreements 7,015 (6,543) 471 6,986 (6,318) 668
Customer relationships 2,564 (89) 2,475 904 (30) 874
Unamortized intangible
Trademark 1,085 -- 1,085 285 -- 285
--------------------------------------- ---------------------------------------
46,537 (20,796) 25,741 42,432 (19,665) 22,767
Less: current portion of
non- compete agreements 471 -- 471 668 -- 668
--------------------------------------- ---------------------------------------
Long-term portion of other
intangibles 46,066 (20,796) 25,270 41,764 (19,665) 22,099
--------------------------------------- ---------------------------------------
Long-term portion of
goodwill and other
intangibles $ 83,213 $(27,289) $ 55,924 $ 68,726 $(26,158) $ 42,568
======================================= =======================================
During the quarter ended June 30, 2004, we recorded approximately $10.2 million
goodwill, $1.4 million software, $1.7 million customer relationships, $800,000
trademark and $29,000 non-compete agreement in connection with the acquisition
of RTI. Software and customer relationships are amortized on a straight-line
basis over their useful lives, seven and ten years, respectively. The goodwill
and the trademark have indefinite useful lives and are not subject to
amortization. The non-compete agreement will be amortized its remaining useful
life of seven months.
We found no indication of impairment of the goodwill during the quarter ended
June 30, 2004. Accordingly, absent of future indications of impairment, the next
annual impairment test will be performed in fourth quarter of fiscal 2005.
We also evaluated the remaining useful lives of our intangible assets in the
quarter ended June 30, 2003 and during the fourth quarter 2004. No adjustments
have been made to the useful lives of our intangible assets.
Amortization expense from continuing operations for quarters ended June 30, 2004
and 2003 was $1.2 million and $812,000, respectively. We expect amortization
expense for the next five years to be as follows (in thousands):
Year Ending March 31:
2006 $ 4,981
2007 $ 4,340
2008 $ 4,162
2009 $ 4,138
2010 $ 3,211
9
NOTE 6 - DEBTS
NOTES PAYABLE TO RELATED PARTIES
In connection with the RTI acquisition, we issued promissory notes to RTI's two
principal officers totaling $2,585,000 , payable in installments totaling
$20,000 per month for the period of June 1, 2004 through May 1, 2005 and
increasing to $200,000 per month from June 1, 2005 through June 1, 2006, at 6.5%
interest per annum. The notes have a balance of $2,585,000 as of June 30, 2004,
of which $451,000 is current. There were no notes payable due to related parties
at March 31, 2004.
NOTES PAYABLE
In connection with the acquisition of RTI, we issued a promissory note to Intuit
and assumed RTI's obligations under certain promissory notes originally issued
by RTI. Notes payable consisted of the following (in thousands):
June 30, March 31,
2004 2004
------ ------
Notes payable, secured by common stock of our new subsidiary, IP Retail
Technologies International, Inc. ("IP RTI"), payable in monthly
installments totaling $197,000 including interest at 6.5%
per annum beginning June 1, 2004 through May 31, 2005 $2,289 $ --
Note payable, to Intuit, secured by IP RTI's common stock, payable in
monthly installments of $4,000 for the period from June 1, 2004 through
December 1, 2004 and $30,000 from January 1, 2005 through
June 1, 2006, including interest at 6.5% per annum 533 --
------ ------
Total 2,822 --
Less: accrued interest 3 --
------ ------
$2,819 $ --
====== ======
Total notes payable (including accrued interest) $2,822 $ --
------ ------
Less: current maturities 2,470 --
------ ------
Long-term portion of notes payable $ 352 $ --
====== ======
CONVERTIBLE DEBENTURES
In March 2004, we entered into a Securities Purchase Agreement for the sale of
convertible debentures (the "March '04 Debentures") to two investors (the
"Purchasers") for the total gross proceeds of $3.0 million. The debentures
mature in May 2006, bear an interest rate of 9% per annum and provide for
interest only payments on a quarterly basis, payable, at our option, in cash or
shares of our common stock. The debentures are convertible into shares of our
common stock at a conversion price of $1.32 per share, subject to adjustment if
we offer or sell any securities for an effective per share price that is less
than 87% of the then current conversion price, negatively restate any of our
financial statement or make any public disclosure that negatively revises or
supplements any prior disclosure regarding a material transaction consummated
prior to March 15, 2004 or trigger other customary anti-dilution protections. If
certain conditions are met, we have the option to redeem the March '04
Debentures at 110% of their face value, plus accrued but unpaid interest.
We must redeem the debentures at the initial monthly amount of $233,333
commencing on February 1, 2005. If the daily volume weighted average price of
our common stock on the American Stock Exchange exceeds $1.15 by more than 200%
for 15 consecutive trading days, we have the option to cause the Purchasers to
convert the then outstanding principal amount of March '04 debentures into our
common stock at the conversion price then in effect.
We also issued the Purchasers two warrants as follows: (1) Series A Warrants to
purchase up to an aggregate of 1,043,479 shares of our common stock at an
exercise price of $1.15 per share with a five-year term, exercisable at anytime
after September 16, 2004, subject to adjustment if we offer or sell any
securities for an effective per share price that is less than the then current
exercise price, negatively restate any of our financial statements or make any
public disclosure that negatively revises or supplements any prior disclosure
regarding a material transaction consummated prior to March 15, 2004 or trigger
other customary anti-dilution protections and (2) Series B Warrants to purchase
up to 8,500,000 shares of our common stock with an exercise price of $5 per
share, these warrants are immediately exercisable and expire on the earlier of
the six-month anniversary of the effective date of the registration statement
10
that is required to be filed or 18 months from March 15, 2004, subject to
adjustment upon the issuance or sale of securities in a public offering for an
effective per share price that is less than the then-current exercise price and
upon the trigger of other customary anti-dilution protections.
For a period of one hundred eighty (180) days following the date the
registration statement is declared effective ("Effective Date"), each Purchaser
has the right, in its sole discretion, to elect to purchase such Purchaser's pro
rata portion of additional Debentures and Series A Warrants for an aggregate
purchase price of up to $2,000,000 in a second closing (the "Second Closing").
The terms of the Second Closing shall be identical to the terms set forth in the
Purchase Agreement and related documents, except that, the conversion price for
the additional debentures and the exercise price for the additional warrants
shall be equal to 115% of the average of the daily volume weighted average price
of our common stock on the American Stock Exchange for the ten (10) days
preceding the Second Closing ("Second Closing Price"). The Series A Warrant
coverage for the Second Closing shall be 40% of each Purchaser's subscription
amount divided by the Second Closing Price.
For a period of one hundred eighty (180) days following the Effective Date, if
the daily volume weighted average price of our common stock for twenty (20)
consecutive trading days exceeds $2.00, subject to adjustment, we may, on one
occasion, in our sole determination, require the Purchasers to purchase each
such Purchaser's pro rata portion of additional debentures and Series A Warrants
for an aggregate purchase price of up to $2,000,000. Any such additional
investment shall be under the terms set forth in the Purchase Agreement and
related documents, except that, the conversion price for the additional
Debentures and the exercise price for the additional warrants shall be equal to
the then current conversion price and warrant exercise price for the 9%
Debentures and warrants purchased on March 15, 2004.
For a period of six (6) months from the Effective Date, the Purchasers have a
right of first refusal to participate in certain future financings by us
involving the sale of our common stock or equivalent securities. The Purchasers
were also granted registration rights under a Registration Rights Agreement
dated March 15, 2004, pursuant to which we were required to file a registration
statement respecting the common stock issuable upon the conversion of the
debentures and exercise of the warrants within thirty (30) days after March 15,
2004, and to use best efforts to have the registration statement declared
effective at the earliest date. If a registration statement was not filed within
such thirty (30) day period or declared effective within such ninety (90) day
period (or within one hundred twenty (120) days in the event of a full review by
the SEC), we became obligated to pay liquidated damages to the Purchasers equal
to 2% per month of each such Purchasers' subscription amount under the Purchase
Agreement plus the value of any warrants issued pursuant to the Purchase
Agreement then held by such Purchaser. The registration statement has not been
filed as of the date of this report, June 30, 2004; therefore, liquidated
damages in the amounts of $81,000 and $120,000 have been recorded in the
quarters ended June 30, 2004 and March 31, 2004, respectively. Included in
accrued expenses at June 30, 2004 and March 31, 2004 is $201,000 and $120,000,
respectively, related to accrued liquidated damages.
In accordance with generally accepted accounting principles, we will compute the
difference between the conversion price of $1.32 and our stock price of the date
of issuance of the debentures and record the relative portion as an interest
expense in the second quarter of fiscal 2005.
We will also allocate the proceeds received from convertible debt with
detachable warrants using the relative fair market value of the individual
elements at the time of issuance and amortize the change over the life of the
note.
The balance of convertible debentures is $2,399,000 and $2,306,000 at June 30,
2004 and March 31, 2004, of which $1,189,000 and $146,000, respectively, are
current.
Subsequent to June 30, 2004, we sold and issued a secured convertible term note
to an unrelated investor for $7.0 million (the "Laurus Transaction")(see Note
15). Part of the proceeds from this debt financing were used to pay off $1.8
million due to one of the two investors. We issued 600,000 shares of our common
stock to the remaining investor in order to pay $112,000 in liquidated damages
and secure such investor's consent to the Laurus Transaction. We also amended
the remaining investor's debenture in exchange for the remaining investors
consent for the Laurus Transaction. Pursuant to Amendment No. 1 to the 9%
Debenture Due May 15, 2006 Issued to Midsummer Investments, Ltd. And Waiver, the
terms of the remaining debenture were amended as follows:
o Prepayment penalty is eliminated,
o Conversion price is reduced to $0.56 per share,
o Interest payments are due on a monthly basis, and
11
o The commencement of monthly redemption payments was
accelerated to September 1, 2004 and the payments due were
revised such that payments of $50,000 are due monthly from
September 1, 2004 and the monthly payments increase to $62,500
starting February 1, 2005. Monthly redemption payments are
payable in cash or registered shares at a 90% of the
average of the 20 days volume weighted average price
In addition, the exercise price of the Series A Warrants held by both investors
was reduced to $0.56 per share.
NOTE 7 - CAPITAL LEASES
In connection with the acquisition of Page Digital, we assumed capital lease
obligations on certain office equipment and fixtures leases expiring from
November 2004 through November 2006. The capital leases bear interest at rates
between 7% and 11% per annum and monthly lease payments range between
approximately $1,000 to $8,000.
In connection with the acquisition of RTI, we assumed a capital lease obligation
for certain office equipment, expiring in February 2006. The capital lease bears
interest at a rate of approximately 11% per annum and monthly lease payments of
approximately $600.
The balance of capital leases is $228,000 and $258,000 at June 30, 2004 and
March 31, 2004, respectively, of which the current portion is $176,000 and
$169,000, respectively.
NOTE 8 - LINE OF CREDIT
In connection with the acquisition of RTI, we assumed obligation under a line of
credit with a balance of $182,000 at June 30, 2004. Subsequent to June 30, 2004,
the line of credit was paid off in full.
NOTE 9 - PREFERRED STOCK
The Series A Convertible 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 cumulative dividends of $2.3
million, or $16.22 per share, and $2.0 million, or $14.19 per share, at June 30,
2004 and March 31, 2004, 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 increases
at an annual rate of 3.5% calculated on a semi-annual basis. The conversion
price as of July 1, 2004 is $0.86. The Series A Preferred is entitled upon
liquidation to an amount equal to its stated value plus accrued and unpaid
dividends in preference to any distributions to common stockholders. The Series
A Preferred has no voting rights prior to conversion into common stock, except
with respect to proposed impairments of the Series A Preferred rights and
preferences, or as provided by law. We have the right of first refusal to
purchase all but not less than all of any shares of Series A Preferred or shares
of common stock received on conversion which the holder may propose to sell to a
third party, upon the same price and terms as the proposed sale to a third
party.
On November 14, 2003, the Sage Group plc (the "Sage Group") acquired
substantially all the assets of Softline, including Softline's 141,000 shares of
our Series A Preferred, 8,923,915 shares of our common stock and options to
purchase 71,812 shares of our common stock. On September 17, 2003, 500,000
shares of common stock constituting accrued dividends on our Series A Preferred
were issued to various financial institutions.
The Series B Convertible Preferred Stock (the "Series B Preferred") has no
stated value and is entitled to cumulative dividends at the rate of $0.136 per
share per annum, payable annually commencing on January 1, 2005. Upon our filing
of an amendment to our Certificate of Incorporation ("Certificate") increasing
the number of shares of common stock, we are authorized to issue, to a
sufficient number of shares to permit full conversion of all Series B Preferred,
each share of Series B Preferred will automatically convert into the number of
shares of our common stock determined by dividing the conversion value of $3 per
share by the conversion price of $1 per share. The Series B Preferred is
entitled upon liquidation to $2.27 per share plus unpaid dividends in preference
to any distributions to common stockholders. Each holder of Series B Preferred
is entitled to the number of votes equal to the number of shares of common stock
into which such shares of Series B Preferred are convertible. No dividends have
been declared as of June 30, 2004.
12
NOTE 10 - EQUITY TRANSACTIONS
During the quarter ended June 30, 2004, we have the following equity
transactions:
o Issued 1,546,733 shares of common stock, with a fair value of
$1,169,000, to Intuit in connection with the acquisition of
RTI.
o Issued an aggregate of 2,517,233 shares of Series B
Convertible Preferred Stock, with a fair value of $5,709,000
to Michael Tomczak, our director, COO and President, and
Jeffrey Boone, our CTO, in connection with acquisition of RTI.
o Granted options to purchase 1,572,364 and 1,772,364 shares of
common stock at an exercise price of $0.77per share to Messrs.
Boone and Tomczak, respectively, in accordance with their
employment agreements.
o Issued warrants to purchase an aggregate of 20,000 shares of
common stock at exercise prices of $0.75 and $1.05 per share
to a consulting firm for investor relation services rendered
for a fair value of $3,000.
o In connection with the acquisition of RTI, we assumed RTI's
incentive stock option plan and converted all outstanding
options at June 1, 2004 into our options at a conversion rate
of 1.5562. As a result, RTI's option holders have options to
purchase an aggregate of 1,366,911 shares of our common stock
at an exercise price of $0.02.
o Granted options to purchase an aggregate of 67,500 shares of
common stock at exercise prices ranging from $0.62 to $1.17 to
employees hired during the quarter ended June 30, 2004.
o Granted options to purchase an aggregate of 20,000 shares of
common stock at an exercise price of $0.96 to certain outside
directors of the board as directors' fees during June 30,
2004.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure." This Statement amends SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The following table presents pro forma disclosures required by SFAS 123 and SFAS
148 of net income (loss) and basic and diluted earnings (loss) per share as if
stock-based employee compensation had been recognized during the quarter ended
June 30, 2004 and 2003. The compensation expense for these periods has been
determined under the fair value method using the Black-Scholes pricing model,
and assumes graded vesting.
Three Months Ended
June 30, June 30,
2004 2003
-------- --------
(in thousands, except per share amounts)
(unaudited)
Net income (loss) as reported $(3,793) $ 285
Less: stock-based compensation expense,
net of related tax effects (502) (540)
-------- --------
Pro forma net loss $(4,295) $ (255)
======== ========
Basic earnings (loss) per share - as reported $ (0.07) $ 0.01
Diluted earnings (loss) per share - as reported $ (0.07) $ --
Basic earnings (loss) per share - pro forma $ (0.08) $ --
Diluted earnings (loss) per share - pro forma $ (0.08) $ --
NOTE 11 - 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 months ended June 30,
2004 and 2003 is calculated as follows (in thousands):
13
Three Months ended
June 30,
2004 2003
--------- ---------
Net income (loss) available to common
stockholders $ (4,079) $ 13
========= =========
Basic weighted average shares 52,938 31,615
Dilutive common stock equivalent -- 33,128
--------- ---------
Diluted weighted average shares 52,938 64,743
========= =========
Basic and diluted earnings (loss) per
share available to common
Stockholders $ (0.08) $ --
========= =========
The following potential common shares have been excluded from the computation of
diluted net loss per share for the three months ended June 30, 2004, because the
effect would have been anti-dilutive:
Three Months Ended
June 30,
2004
------------------
Outstanding options under our stock option plans 6,074,662
Outstanding options granted outside our stock option plans 8,314,774
Warrants issued in conjunction with private placements
and Financing 13,348,760
Warrants issued for services rendered 1,231,898
Series A Convertible Preferred Stock 19,115,405
Series B Convertible Preferred Stock 7,551,699
Convertible debentures 2,272,727
------------------
Total 57,909,925
==================
NOTE 12 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a leading provider of software solutions and services to the retail
industry. Our solutions and services have been developed specifically to meet
the needs of the retail industry. We provide high value innovative solutions
that help retailers understand, create, manage and fulfill consumer demand. Our
solutions help retailers improve the efficiency and effectiveness of their
operations and build stronger, longer lasting relationships with their
customers. We acquired Page Digital, which offers multi-channel retail
solutions, on January 31, 2004 and RTI, which offers point-of-sale and inventory
management solutions, on June 1, 2004.
We currently operate in the Americas and Europe. On June 1, 2004, we began to
operate in Asia. The geographic distribution of our net sales and long-lived
assets are as follows (in thousands):
Three Months ended
June 30,
2004 2003
------ ------
Net sales:
Americas $4,232 $4,925
Europe 1,012 541
Asia 39 --
------ ------
Total net sales $5,283 $5,466
====== ======
14
June 30, March 31,
2004 2004
---- ----
Long-lived assets:
Americas $57,809 $44,229
Europe 25 30
------- -------
Total long-lived assets $57,832 $44,259
======= =======
In the three months ended June 30, 2004, net sales to one major customer
represents 12% of total net sales and accounts receivable balance at June 30,
2004 from this customer represents 8% of total accounts receivable. In the three
months ended June 30, 2003, net sales to another major customer represents 24%
of total net sales and its accounts receivable balance represents 13% of total
accounts receivable.
We structure our operations into three business units that have separate
reporting infrastructures. Each unit is evaluated primarily based on total net
sales and operation income excluding depreciation and amortization. Identifiable
assets are also managed by business units. Our three business units are as
follows:
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") - offers
suite of applications, which builds on our long history in
retail software design and development. We provide our
customers with an extremely reliable, widely deployed,
comprehensive and fully integrated retail management
solutions. Retail Management includes merchandise management
that optimizes workflow and provides the highest level of data
integrity. This module supports all operational areas of the
supply chain including planning, open-to-buy purchase order
management, forecasting, warehouse and store receiving
distribution, transfers, price management, performance
analysis and physical inventory. In addition, Retail
Management includes a comprehensive set of tools for analysis
and planning, replenishment and forecasting, event and
promotion management, warehouse, ticketing, financials and
sales audit. Through collaborations with strategic partners,
Retail Management offers tools for loss prevention,
communication with stores and vendors, integration needs,
purchase and allocation decisions, analysis of weather impact,
control and management of business processes, consumer
research, tracking consumer shopping patterns, forecasting and
replenishment, and analyzing store people productivity.
o STORE SOLUTIONS - offers suites of applications built on our
long history of providing multi-platform, client server
in-store solutions. We market these sets of applications under
the name "OnePointe,"(TM) and "Retail Pro"(R). With more than
15 years of development, OnePointe(TM) is a solution with a
high degree of fit and value out of the box. Additionally, the
software was designed for easy customization, enabling our
development team to quickly develop solutions to meet
retailers' specific point-of-sale ("POS") and in-store
processor (server) requirements. Retail Pro(R) is a leading
point-of-sale and inventory management software used by
specialty retailers worldwide.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL RETAIL") - Page
Digital designs its application to specifically address direct
commerce business processes, which primarily relate to
interactions with the end-user. Having developed its software
out of necessity to manage its own former direct commerce
operation, Page Digital has been extremely attentive to
functionality, usability and scalability. Its software
components include applications for customer relations
management, order management, call centers, fulfillment, data
mining and financial management. Specific activities like
partial ship orders, payments with multiple tenders, back
order notification, returns processing and continuum
marketing, represent just a few of the more than 1,000
parameterized direct commerce activities that have been built
into its "Synaro"(R)applications. Page Digital makes these
components and its interfacing technology available to
customers, systems integrators and independent software
developers who may modify them to meet their specific needs.
This growing base of inherited functionality continues to
improve the market relevance of its products.
15
A summary of the net sales and operating income (loss), excluding depreciation
and amortization, and identifiable assets attributable to each of these business
units are as follows (in thousands):
Three Months Ended
June 30,
2004 2003
--------- ---------
Net sales:
Retail Management $ 2,965 $ 5,064
Store Solutions 1,163 402
Multi-channel retail 1,155 --
--------- ---------
Total net sales $ 5,283 $ 5,466
========= =========
Operating income (loss):
Retail Management $ (864) $ 1,596
Store Solutions (358) --
Multi-channel retail (514)
Other (see below) (1,884) (1,585)
--------- ---------
Total operating income (loss) $ (3,620) $ 11
========= =========
Other operating loss:
Amortization of intangible assets $ (1,229) $ (812)
Depreciation (122) (56)
Administrative costs and other non-allocated
Expenses (533) (717)
--------- ---------
Total other operating loss $ (1,884) $ (1,585)
========= =========
Identifiable assets:
Retail Management $ 36,823 $ 34,151
Store Solutions 19,795 4,132
Multi-channel retail 9,691 --
--------- ---------
Total identifiable assets $ 66,309 $ 38,283
========= =========
Operating income (loss) in Retail Management, Store Solutions and Multi-channel
Retail includes direct expenses for software licenses, maintenance services,
programming and consulting services, sales and marketing expenses, product
development expenses, and direct general, administrative and depreciation
expenses. The "Other" caption includes depreciation, amortization of intangible
assets, non-allocated costs and other expenses that are not directly identified
with a particular business unit and which we do not consider in evaluating the
operating income of the business unit.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
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 the former
management, and actively pursued the collection of receivables. If the sale
proceeds plus collections on receivables had been insufficient to discharge the
indebtedness to National Australia Bank, we might have been called upon to pay
the deficiency under our guarantee to the bank. At March 31, 2004 we accrued
$187,000 as the maximum amount of our potential exposure. In June 2004, we
settled this obligation by paying $69,000 to the bank. As a result, the $118,000
accrual in excess of settlement amount was written off to the consolidated
statement of operations as other income in the quarter ended June 30, 2004.
16
On May 15, 2002, an employee who was out on disability/worker's compensation
leave, Debora Hintz, filed a claim with the California Labor Commissioner
seeking $41,000 in alleged unpaid commissions. On or about December of 2002, Ms.
Hintz filed a discrimination claim against us with the Department of Fair
Employment and Housing, alleging harassment and sexual orientation
discrimination. We had responded appropriately to both the wage claim and the
discrimination allegations, which we believed lack merit based on present
information. On December 1, 2003, the Department of Fair Housing and Employment
closed the case on the basis of no probable cause to prove violation of statue,
and gave notice of right to sue. In January 2004, we terminated Ms. Hintz's
employment with us and, as a result, her medical insurance was terminated. On
February 12, 2004, Ms. Hintz filed a petition for violation of Labor Code
Section 132(a) before the Workers' Compensation Appeals Board of the State of
California.
On November 22, 2002, we and Sabica Ventures, Inc. ("Sabica", our wholly-owned
subsidiary), were sued in a matter entitled Stemley vs. Shea Homes, Inc. et.
al., in San Diego Superior Court Case No. GIC 787680, as Pacific Cabinets. The
case dealt with alleged construction defects. Pacific Cabinets was dismissed
from the litigation for a waiver of fees and costs. At this time, neither we nor
Pacific Cabinets are parties to this action. Because no significant discovery
was done, it is not possible at this time to provide an evaluation of potential
exposure, though it appears highly unlikely that Pacific Cabinets or we would be
brought back into this suit.
On April 2, 2004, we filed a federal court action in the Southern District of
California against 5R Online, Inc., John Frabasile, Randy Pagnotta, our former
officers, and Terry Buckley for fraud, breach of fiduciary duty, breach of
contract, and unfair business practice arising from their evaluation of,
recommendation for, and ultimately engagement in a development arrangement
between IPI and 5R. Pursuant to the development agreement entered into in June
2003 and upon reliance of the representations of the individual defendants that
product development was progressing, we paid and expensed $640,000 in
development payments in the fiscal year ended March 31, 2004 but received no
product. The amount in controversy is the $640,000 development payments as well
as a claim for punitive damages. Defendants Pagnotta and Buckley have
counterclaimed against defendant Frabasile, who has moved to dismiss in light of
a parallel action pending in Canada. Frabasile's and 5R Online, Inc.'s response
to IPI's complaint was due on August 9, 2004. Settlement negotiations are
currently underway.
RTI was named as a cross-defendant in an action by General Electric Capital
Corporation as plaintiff ("GE Capital"), against San Francisco City Stores LLC,
dated May 10, 2004. The cross-complaint filed on behalf of San Francisco City
Stores names GE Capital, Big Hairy Dog Information Systems, and RTI as
cross-defendants, claiming breach of warranty and unfair competition (against
RTI), and makes various other claims against GE Capital and Big Hairy Dog
Information Systems. The claim is for approximately $83,000. However, we believe
the claims made against RTI are without merit and we intend to vigorously defend
them.
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 14 - RELATED-PARTY TRANSACTIONS
Included in other receivables at June 30, 2004 and March 31, 2004 are amounts
due from our officers and employees in the amount of $14,000 and $37,000,
respectively.
In connection with the Page Digital acquisition, we assumed a three-party lease
agreement for our Colorado offices between CAH Investments, LLC ("CAH"), wholly
owned by the spouse of our executive officer, Larry Page, and Southfield
Crestone, LLC, whereby Page Digital agreed to lease offices for ten years
expiring on December 31, 2013. CAH and Southfield Crestone LLC are equal owners
of the leased property. Rent expense related to this lease is $200,000 for the
three months ended June 30, 2004. Security deposit of $170,000 relating to this
lease is included in other long-term assets at June 30, 2004 and March 31, 2004.
We retain our former CEO and Chairman of the Board, Barry Schechter, to provide
consulting services starting August 2003. For the quarters ended June 30, 2004
and 2003, the expense for this service was $111,000 and $0, respectively.
We retained an entity owned by an immediate family member of our former CEO and
Chairman, Harvey Braun, to provide recruiting and marketing services. For the
quarters ended June 30, 2004 and 2003, the expense for this service was $0 and
$10,000, respectively.
In May 2004, Mr. Braun resigned from his position as Chief Executive Officer. We
are currently negotiating a separation agreement as of July 31, 2004. We
reserved an estimated severance payment of $163,000 in the three months ended
June 30, 2004 and included this in accrued expenses at June 30, 2004.
17
NOTE 15 - SUBSEQUENT EVENTS
Pursuant to a Securities Purchase Agreement dated July 12, 2004, we sold and
issued to an investor a secured convertible term note ("Note") for a gross
proceed of $7.0 million. In addition, we issued to the investor a warrant to
purchase up to 3,750,000 shares of our common stock at a price of $0.71 per
share ("Warrant"). The investor is aware that we have exceeded our authorized
share capital limit of 100,000,000 shares and that we intend to increase our
authorized share capital limit to 250,000,000. We submitted a proposal to amend
our Certificate of Incorporation to increase our authorized shares of common
stock to 250,000,000 to our stockholders at our annual meeting on August 11,
2004. We did not receive sufficient votes to authorize the increase at that time
and adjourned the meeting until August 27, 2004 to provide us additional time to
secure sufficient votes to effect the increase. Our obligations under the Note
are secured by all of our assets. All our wholly owned subsidiaries guaranteed
our obligations under the Note. We also pledged all of our interests in the
outstanding stock of our subsidiaries as security for our obligations under the
Note.
The Note matures on September 1, 2004 (Maturity Date"); provided however, the
maturity of the Note will be automatically extended to July 12, 2007 upon the
stockholders approving an amendment to our Certificate increasing the authorized
common stock to 250 million shares and us filing an amendment to our Certificate
to effect the increase with the Secretary of State of Delaware by August 31,
2004. We are required to make monthly payments in the amount of $212,000 plus
any unpaid interest commencing on August 1, 2004. In July 2004, the investor
agreed to defer the August 1, 2004 payment until Maturity Date.
The Note accrues interest at a rate per annum (the "Interest Rate") equal to the
"prime rate" (4.25% as of July 31, 2004) published in The Wall Street Journal
from time to time, plus two percent. Interest under the Note is payable monthly
in arrears commencing on August 1, 2004. The Interest Rate is calculated on the
last day of each month (the "Determination Date") and is subject to adjustment
as follows: (1) if the shares issuable upon conversion of the Note or exercise
of the Warrant have been registered with the U.S. Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the "Securities
Act") and the market price of our common stock for the five trading days
immediately preceding the Determination Date exceeds the then applicable
conversion price for the Note by at least 25%, then the Interest Rate for the
succeeding calendar month shall be reduced by 2% for each incremental 25%
increase over the then applicable conversion price or (2) if all of the
conditions set forth in subparagraph (1) have been satisfied, except that the
shares issuable upon conversion of the Note or exercise of Warrant have not been
registered, then the Interest Rate for the succeeding calendar month shall be
reduced by 1% for each incremental 25% increase over the then applicable
conversion price. The initial conversion price under the Note is $0.56 per
share, subject to adjustment upon our issuance of securities at a price per
share below the fixed conversion price, a stock split or combination,
declaration of a dividend on our common stock or reclassification of our common
stock. We have the option to redeem the Note by paying the investor 125% of the
principal amount due under the Note together with all accrued and unpaid
interest.
The Warrant is immediately exercisable and has a seven year term. We have the
right to require exercise of the Warrant in whole or in part if: (1) all of our
obligations under the Note have been irrevocably paid in full, (2) the common
stock underlying the Warrant has been registered on a registration statement
declared effective by the SEC, and such registration statement remains
effective, and (3) the average closing price of our common stock for the ten
(10) trading days immediately prior to the proposed date of the mandatory
exercise of the Warrant is greater than three hundred percent (300%) of the then
applicable exercise price.
We are obligated to file a registration statement on Form S-3 (or if Form S-3 is
not available another appropriate form) (the "Registration Statement")
registering the shares of our common stock issuable upon conversion of the Note
or exercise of the Warrant (the "Underlying Shares") pursuant to the
Registration Rights Agreement between us and the investor (the "Registration
Rights Agreement"). We are required to file the Registration Statement by
September 10, 2004 (the "Filing Date") and have the Registration Statement
declared effective by the SEC no later than 90 days after it is filed (the
"Effectiveness Date"). If the Registration Statement is not filed by the Filing
Date, declared effective by the Effectiveness Date, ceases to be effective for
18
more than 30 days in any calendar year or 10 consecutive calendar days or if our
common stock is not listed or traded or is suspended from trading for three
consecutive trading days, we are required to pay the investor liquidated damages
equal to 2% of original principal balance on the Note for each 30 day period
(with partial periods prorated) that such event continues. We are obligated to
keep the Registration Statement effective until the earlier of when (1) all of
the Underlying Shares have been sold or (2) such time as all of the Underlying
Shares can be sold without registration or volume restrictions under Rule 144(k)
of the Securities Act (the "Effectiveness Period"). If there is not an effective
Registration Statement covering the Underlying Shares at any time during the
Effectiveness Period and we propose to file a registration statement for our own
account or the account of others, we will be obligated to include the Underlying
Shares on that registration statement.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $0.56 and our stock price on the date of
issuance of the Note 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 $281,000 in July 2004.
We allocated the proceeds received from the Note with a detachable warrant using
the relative fair market value of the individual elements at the time of
issuance. The amount allocated to the warrant was $531,000 and is being
amortized as interest expense over the life of the Note.
Effective July 1, 2004, Robert P. Wilkie and Ivan M. Epstein resigned from our
board of directors. Messrs. Wilke and Epstein were both independent directors
and we are currently looking for two independent individuals to fill the
vacancies resulting from their resignations.
Effective as of July 14, 2004, Steven Beck resigned from our board of directors
and Donald Radcliffe, who previously served as our director from May 1998 to
October 2003, was appointed to replace Mr. Beck. Effective July 29, 2004, Mr.
Beck resigned from his position as executive officer. We agreed to pay Mr. Beck
$325,000 with $109,000 payable on July 29, 2004 and the balance payable in four
monthly installments of $54,000 commencing on August 15, 2004.
19
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 MATTERS 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 FOR THE YEAR ENDED MARCH 31, 2004, AND THE DISCLOSURES
UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K, AS WELL AS OTHER REPORTS AND
FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We are a provider of software solutions and services to the retail industry. We
provide solutions that help retailers understand, create, manage and fulfill
consumer demand. We derive the majority of our revenues from the sale of
application software licenses and the provision of related professional and
support services. Application software license fees are dependent upon the sales
volume of our customers, the number of users of the application(s), and/or the
number of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds additional users
and/or adds additional locations, we charge additional license fees. We
typically charge for support, maintenance and software updates on an annual
basis pursuant to renewable maintenance contracts. We typically charge for
professional services including consulting, implementation and project
management services on an hourly basis.
In recent periods, we have sustained a relatively flat period in terms of
revenues and have suffered operating and net losses, largely attributable to
general economic and competitive conditions. In this regard, we have taken a
number of steps designed to improve our operations, including:
o Acquired two complementary companies with substantial revenues
and earnings potential;
o Revamped our management team by adding a new President and COO
and CTO, as well as a new CFO;
o Improved our IBM-based core products through continuing
internal research and development;
o Obtained the rights to distribute complementary products,
including a new easy-to-install and easy-to-use,
open-architecture software system for very small retailers,
which we are currently offering;
o Established partnerships with several value added resellers to
provide a variety of options and product extensions;
o Improved our distribution capabilities by adding new third
party channels, such as IBM and IBM's resellers, and
professional service firms, such as CGI and LakeWest.
We believe that these actions will position us to achieve revenue growth and
profitability.
20
RECENT DEVELOPMENTS
o In June 2004, we completed the acquisition of RTI. See
"Acquisition of RTI" below.
o Upon completion of RTI's acquisition, Michael Tomczak, RTI's
CEO and President, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's Chief
Technology Officer, was appointed our CTO. Mr. Tomczak
replaced Steve Beck, who was serving as our president and Mr.
Page, who was serving as our COO. Mr. Boone replaced Mr. Page
as our CTO. Mr. Beck served as our President from April 2003
to June 2004 and our COO from April 2003 to February 2004. Mr.
Page served as our CTO from January 2004 to June 2004 and as
our COO from February 2004 to June 2004.
o Harvey Braun resigned from the board of directors and the
position of CEO in May 2004.
o Mr. Beck resigned from the board of directors and the position
of executive officer in July 2004. Donald Radcliffe, who
previously served as our director from May 1998 to October
2003, was appointed to replace Mr. Beck.
o In July, we sold and issued a secured convertible note for a
gross proceed of $7.0 million. See "Indebtedness - Laurus"
below.
ACQUISITION OF RTI
Pursuant to an agreement dated June 1, 2004, we acquired RTI from Michael
Tomczak, Jeffrey Boone and Intuit in a merger transaction. On March 12, 2004,
we, RTI, Merger Sub and the Shareholders entered the March 12, 2004 Merger
Agreement which provided we would acquire RTI in a merger transaction in which
RTI would merge with and into Merger Sub. The merger consideration contemplated
by the March 12, 2004 Merger Agreement was a combination of cash and shares of
our common stock. The March 12, 2004 Merger Agreement was amended by the Amended
Merger Agreement dated June 1, 2004.
Pursuant to the Amended Merger Agreement, the Merger was completed with the
following terms: (i) we assumed RTI's obligations under those certain promissory
notes issued by RTI on December 20, 2002 with an aggregate principal balance of
$2.3 million; (ii) the total consideration paid at the closing of the Merger was
$10.0 million paid in shares of our common stock and newly designated Series B
Preferred and promissory notes; (iii) the Shareholders and Intuit are entitled
to price protection payable if and to the extent that the average trading price
of our common stock is less than $0.76 at the time the shares of our common
stock issued in the Merger and issuable upon conversion of the Series B
Preferred are registered pursuant to the Registration Rights Agreement dated
June 1, 2004 between us, the Shareholders and Intuit; and (iv) the merger
consisted of two steps (the "Merger"), first, Merger Sub merged with and into
RTI, Merger Sub's separate corporate existence ceased and RTI continued as the
surviving corporation (the "Reverse Merger"), immediately thereafter, RTI merged
with and into Merger Sub II, RTI's separate corporate existence ceased and
Merger Sub II continued as the surviving corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares of Series
B Preferred and a promissory note payable monthly over two years in the
principal amount of $1,295,000 bearing interest at 6.5% per annum. As a result
of the Merger, Intuit, the holder of all of the outstanding shares of RTI's
Series A Preferred stock, received 1,546,733 shares of our common stock and a
promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under the
Registration Rights Agreement, we agreed to register the common stock issuable
upon conversion of the Series B Preferred issued to the Shareholders within 30
days of the automatic conversion of the Series B Preferred into common stock.
The automatic conversion will occur upon us filing the Certificate of Amendment
with the Delaware Secretary of State increasing the authorized number of shares
of our common stock after securing shareholder approval for the Certificate of
Amendment. Under the Registration Rights Agreement, Intuit is entitled to demand
registration or to have its shares included on any registration statement filed
prior the registration statement covering the Shareholders' shares, subject to
certain conditions and limitations, or if not previously registered to have its
shares included on the registration statement registering the Shareholders'
shares. The Shareholders and Intuit are entitled to price protection payments of
up to a maximum of $0.23 per share payable by promissory note, if and to the
extent that the average closing price of our common stock for the 10 days
immediately preceding the date the registration statement covering their shares
is declared effective by the Securities and Exchange Commission, is less than
the 10 day average closing price as of June 1, 2004, which was $0.76.
21
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well as certain
officers and directors signed voting agreements that provide they will not
dispose of or transfer their shares of our capital stock and that they will vote
their shares of our capital stock in favor of the Certificate of Amendment and
the Amended Merger Agreement and transactions contemplated therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former President and
Chief Executive Officer, was appointed our President, Chief Operating Officer
and director and Jeffrey Boone, RTI's former Chief Technology Officer, was
appointed our Chief Technology Officer. We entered into two-year employment
agreements and non-competition agreements with Mr. Tomczak and Mr. Boone.
The combination of Island Pacific and RTI, will enable us to offer a fully
integrated solution to mid-tier retailers that will be unique in the
marketplace. As a result of this transaction, smaller retailers will now be able
to cost-effectively acquire a solution that provides both front and back-end
support. The combination instantly expands our products, services offerings and
distribution channels.
RECENT ACCOUNTING PRONOUNCEMENTS
None.
QUARTER ENDED JUNE 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2003
NET SALES
Net sales decreased by $0.2 million, or 4%, to $5.3 million in the quarter ended
June 30, 2004 from $5.5 million in the quarter ended June 30, 2003. The decrease
is due to a $1.3 million decrease in modification and services sales on the Toys
"R" Us, Inc. ("Toys") contract, which was completed in the fiscal year ended
March 31, 2004, a $0.4 million decrease in software license revenue and $0.6
million decrease in services revenue; offset in part by $1.2 million in revenues
from Page Digital, $0.7 million in revenues from RTI and $0.2 increase in
hardware sales.
COST OF SALES/GROSS PROFIT
Cost of sales increased by $0.1 million, or 6%, to $1.8 million in the quarter
ended June 30, 2004 from $1.7 million in the quarter ended June 30, 2003. Gross
profit as a percentage of net sales decreased to 65% in the quarter ended June
30, 2004 from 70% in the prior comparative period. The increase in cost of sales
and the decrease in gross profit as a percentage of net sales were due to
increase in hardware and support services revenues which have lower margins and
decrease in software license revenues, which has higher margins.
APPLICATION DEVELOPMENT EXPENSE
Application development expense increased by $1.1 million, or 1100%, to $1.2
million in the quarter ended June 30, 2004 from $0.1 million in the quarter
ended June 30, 2003. The increase is primarily due to $0.6 million decrease in
capitalization of development costs for new products and our continuing efforts
in enhancing and improving our existing products. We've made significant
investments in our new products in fiscal 2004 and the first quarter of fiscal
2005. Most of these new products were completed in the quarter ended June 30,
2004.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $0.5 million, or 56%, to $1.4 million
in the quarter ended June 30, 2004 from $0.9 million in the quarter ended June
30, 2003. The increase is due to additions of fixed assets and intangible assets
from acquisitions of Page Digital in the fourth quarter of fiscal 2004 and RTI
in the first quarter of fiscal 2005.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $1.7 million, or 61%,
to $4.5 million in the quarter ended June 30, 2004 from $2.8 million in the
quarter ended June 30, 2003. The increase is mainly due to the additions of
selling, general and administrative expenses of $0.5 million from the
acquisition of Page Digital and $0.6 million from the acquisition of RTI. In
addition, the increase is due to increasing our efforts and spending in
marketing and sales activities and professional fees related to the acquisition
of RTI and financing activities.
INCOME (LOSS) FROM OPERATIONS
Loss from operations which included depreciation and amortization expense, was
$3.6 million for the quarter ended June 30, 2004, compared to an income from
operations of $0.01 million for the quarter ended June 30, 2003.
INTEREST EXPENSE
Interest expense was $0.3 million in the quarters ended June 30, 2004 and 2003.
PROVISION FOR INCOME TAXES
No provision was made at June 30, 2004 due to the availability of tax losses.
Provision for income taxes for the quarter ended June 30, 2003 produced an
income of $0.6 million. The income tax refund of $0.6 million at June 30, 2003
resulted from the amendment of prior years' income tax returns to carry back net
operating losses incurred in the prior years.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding preferred stock attributable to the
quarter ended June 30, 2004 and 2003 were $0.3 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the quarter ended June 30, 2004, we financed our operations, using cash
on hand and, internally generated cash. At June 30, 2004 and March 31, 2004, we
had cash of $1.3 million and $2.1 million, respectively.
Operating activities used cash of $1.1 million in the quarter ended June 30,
2004 and $1.3 million in the quarter ended June 30, 2003. Cash used for
operating activities in the quarter ended June 30, 2004 resulted from $3.8
million net loss, $0.5 million increase in accounts receivable and other
receivables and $0.2 million decrease in accounts payable and accrued expenses;
offset in part by $1.9 million increase in deferred revenue and $1.4 million of
non-cash depreciation and amortization.
Investing activities provided cash of $0.4 million in the quarter ended June 30,
2004 and used cash of $0.9 million in the quarter ended June 30, 2003. Cash
provided by investing activities in the current quarter was primarily from $0.6
million cash from acquisition of RTI; offset in part by capitalization of $0.3
million software development costs.
Financing activities used cash of $0.2 million in the quarter ended June 30,
2004 and provided cash of $8.0 million in the quarter ended June 30, 2003. Cash
used for financing activities in the quarter ended June 30, 2004 was primarily
$0.2 million payments on notes payable to related parties.
Accounts receivable increased to $6.6 million at June 30, 2004 from $4.6 million
at March 31, 2004. The increase is primarily due to increase in current
receivables for semi-annual maintenance contracts billed in the quarter ended
June 30, 2004 and $1.3 million in receivables from RTI in the current quarter.
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.
23
INDEBTEDNESS
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. The sale was subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to an entity affiliated with former management, and
actively pursued the collection of receivables. If the sale proceeds plus
collections on receivables were insufficient to discharge the indebtedness to
National Australia Bank, we might be called upon to pay the deficiency under our
guarantee to the bank. We accrued $187,000 as the maximum amount of our
potential exposure as of March 31, 2004. In June 2004, we settled this
obligation by paying $69,000 to the bank. As a result, the $118,000 accrual in
excess of settlement amount was written off to the consolidated statement of
operations as other income in the quarter ended June 30, 2004.
OMICRON/MIDSUMMER
In March 2004, we entered into a Securities Purchase Agreement for the sale of
9% convertible debentures (the "March '04 Debentures") to Omicron Master Trust
("Omicron") for gross proceeds of $1.75 million ("Omicron Debenture") and
Midsummer Investments, Ltd. ("Midsummer") for gross proceeds of $1.25 million
("Midsummer Debenture"). With proceeds from the sale of a secured convertible
term note to Laurus Master Fund, Ltd. ("Laurus") in July 2004 for $7.0 million,
the Omicron Debenture with the principal balance of $1.75 million was paid off
in full together with $0.1 million in accrued interest, liquidated damages and
prepayment penalty. We also amended the Midsummer Debenture pursuant to
Amendment No. 1 to the 9% Convertible Debenture, Due May 15, 2006 Issued to
Midsummer and Waiver dated July 30, 2004 as partial consideration for Midsummer
consenting to the transaction with Laurus and issued 600,000 shares of common
stock to Midsummer as payment for $112,000 in liquidated damages and as partial
consideration for for Midsummer consenting to the transaction with Laurus and
issued 600,000 shares of common stock to Midsummer as payment for $112,000 in
liquidated damages and as partial consideration for its consent to the Laurus
Transaction.
The amended Midsummer Debenture matures in May 2006 and bears an interest rate
of 9% per annum. Interest only payments, payable, at our option, in cash or
shares of common stock, are payable on a monthly basis. The amended Midsummer
Debenture is convertible into shares of our common stock at a conversion price
of $0.56 per share, subject to adjustment if we offer or sell any securities for
an effective per share price that is less than 87% of the then current
conversion price, negatively restate any of our financial statement or make any
public disclosure that negatively revises or supplements any prior disclosure
regarding a material transaction consummated prior to March 15, 2004 or trigger
other customary anti-dilution protections. If certain conditions are met, we
have the option to redeem the amended Midsummer Debenture at 100% of its face
value, plus accrued but unpaid interest.
We must redeem the amended Midsummer Debenture at the initial monthly amount of
$50,000 commencing on September 1, 2004 which increases to $62,500 as of
February 1, 2005. If the daily volume weighted average price of our common stock
on the American Stock Exchange exceeds the then current conversion price by more
than 200% for 15 consecutive trading days, we have the option to cause Midsummer
to convert the then outstanding principal amount of amended Midsummer Debenture
into our common stock at the conversion price then in effect.
We also issued Omicron and Midsummer (the "Purchasers") two warrants as follows:
(1) Series A Warrants to purchase up to an aggregate of 1,043,479 shares of our
common stock at an exercise price of $1.15 per share, which was reduced to $0.56
per share as a result of the transaction with Laurus, with a five-year term,
exercisable at anytime after September 16, 2004, subject to adjustment if the we
offer or sell any securities for an effective per share price that is less than
the then current exercise price, negatively restate any of our financial
statements or make any public disclosure that negatively revises or supplements
any prior disclosure regarding a material transaction consummated prior to March
15, 2004 or trigger other customary anti-dilution protections and (2) Series B
Warrants to purchase up to 8,500,000 shares of our common stock with an exercise
price of $5 per share, these warrants are immediately exercisable and expire on
the earlier of the six-month anniversary of the effective date of the
registration statement that is required to be filed or 18 months from March 15,
2004, subject to adjustment upon the issuance or sale of securities in a public
offering for an effective per share price that is less than the then-current
exercise price and upon the trigger of other customary anti-dilution
protections.
For a period of one hundred eighty (180) days following the date the
registration statement is declared effective ("Effective Date"), each Purchaser
has the right, in its sole discretion, to elect to purchase such Purchaser's pro
rata portion of additional Debentures and Series A Warrants for an aggregate
purchase price of up to $2,000,000 in a second closing (the "Second Closing").
The terms of the Second Closing shall be identical to the terms set forth in the
24
Purchase Agreement and related documents, except that, the conversion price for
the additional debentures and the exercise price for the additional warrants
shall be equal to 115% of the average of the daily volume weighted average price
of our common stock on the American Stock Exchange for the ten (10) days
preceding the Second Closing ("Second Closing Price"). The Series A Warrant
coverage for the Second Closing shall be 40% of each Purchaser's subscription
amount divided by the Second Closing Price.
For a period of one hundred eighty (180) days following the Effective Date, if
the daily volume weighted average price of our common stock for twenty (20)
consecutive trading days exceeds $2.00, subject to adjustment, we may, on one
occasion, in our sole determination, require the Purchasers to purchase each
such Purchaser's pro rata portion of additional debentures and Series A Warrants
for an aggregate purchase price of up to $2,000,000. Any such additional
investment shall be under the terms set forth in the Purchase Agreement and
related documents, except that, the conversion price for the additional
Debentures and the exercise price for the additional warrants shall be equal to
the then current conversion price and warrant exercise price for the 9%
Debentures and warrants purchased on March 15, 2004.
For a period of six (6) months from the Effective Date, the Purchasers have a
right of first refusal to participate in certain future financings by us
involving the sale of our common stock or equivalent securities. The Purchasers
were also granted registration rights under a Registration Rights Agreement
dated March 15, 2004, pursuant to which we were required to file a registration
statement respecting the common stock issuable upon the conversion of the
debentures and exercise of the warrants within thirty (30) days after March 15,
2004, and to use best efforts to have the registration statement declared
effective at the earliest date. If a registration statement was not filed within
such thirty (30) day period or declared effective within such ninety (90) day
period (or within one hundred twenty (120) days in the event of a full review by
the SEC), we became obligated to pay liquidated damages to the Purchasers equal
to 2% per month of each such Purchasers' subscription amount under the Purchase
Agreement plus the value of any warrants issued pursuant to the Purchase
Agreement then held by such Purchaser. The registration statement has not been
filed as of July 31, 2004; therefore, liquidated damages in the amount of
$201,000 in liquidated damages have been recorded and included in accrued
expenses at June 30, 2004.
In accordance with generally accepted accounting principles, the difference
between the original conversion price of $1.32 and our stock price of the date
of issuance of the debentures was recorded as interest expense. It was
recognized in the statement of operations during the period from the issuance of
the debt to the time at which the debt first became convertible. We recognized
this interest expense of $265,000 in the fiscal year ended March 31, 2004.
We allocated the proceeds received from convertible debt with detachable
warrants using the relative fair market value of the individual elements at the
time of issuance. The amount allocated to the warrants was $720,000 and is being
amortized as interest expense over the life of the convertible debentures. We
recorded an interest expense of $83,000 and $0 in the quarter ended June 30,
2004 and 2003, respectively.
The outstanding balance of Midsummer Debenture, including accrued interest, is
$1.3 million at July 31, 2004.
INTUIT
In connection with the RTI acquisition in June 2004, we issued a promissory note
to Intuit for $0.5 million ("Intuit Note"). The Intuit Note is due on June 1,
2006 and payable in monthly installments of $4,000 from June 1, 2004 through
December 1, 2004, increasing to $30,000 from January 1, 2005. The Intuit Note
earns interest at a rate of 6.5% per annum. The balance of Intuit Note including
accrued interest is $0.5 million at July 31, 2004.
RTI NOTEHOLDERS
In connection with the RTI acquisition in June 2004, we assumed RTI's
obligations on notes payable totaling $1.8 million and issued additional $0.5
25
million to the holders of these notes. These notes are secured by common stock
of our subsidiary IP Retail Technology International, Inc. (formerly known as
IPI Merger Sub II, Inc.; "IP RTI"). The notes are due on May 31, 2005 and
payable in monthly installments in aggregate of $197,000 commencing May 31,
2004. These notes earn interest at a rate of 6.5% per annum. The balance of
these notes, including accrued interest, is $1.9 million at July 31, 2004.
TOMCZAK/BOONE
In connection with the RTI acquisition in June 2004, we issued promissory notes
to RTI's two principals, Michael Tomczak and Jeffrey Boone, totaling $2.6
million ("Officers Notes"). The Officers Notes are due on June 1, 2006 and
payable in monthly installments in aggregate of $20,000 from June 1, 2004
through May 1, 2005, increasing to $200,000 from June 1, 2005. The Officers
Notes earn interest at a rate of 6.5% per annum. The balance of the Officers
Notes is $2.6 million at July 31, 2004.
LAURUS
Pursuant to a Securities Purchase Agreement dated July 12, 2004, we sold and
issued to an investor a secured convertible term note ("Note") for gross
proceeds of $7.0 million. In addition, we issued to the investor a warrant to
purchase up to 3,750,000 shares of our common stock at a price of $0.71 per
share ("Warrant"). The investor is aware that we have exceeded our authorized
share capital limit of 100,000,000 shares and that we intend to increase our
authorized share capital limit to 250,000,000. We submitted a proposal to amend
our Certificate of Incorporation to increase our authorized shares of common
stock to 250,000,000 to our stockholders at our annual meeting on August 11,
2004. We did not receive sufficient votes to approve the amendment to the
Certificate of Incorporation at that time and have adjourned the meeting until
August 27, 2004 to provide us time to secure additional votes sufficient to
effect such amendment. Our obligations under the Note are secured by all of our
assets. All our wholly owned subsidiaries guarantied our obligations under the
Note. We also pledged all of our interests in the outstanding stock of our
subsidiaries as security for our obligations under the Note.
The Note matures on September 1, 2004 ("Maturity Date"); provided however, the
maturity of the Note will be automatically extended to July 12, 2007 upon the
stockholders approving an amendment to our Certificate increasing our authorized
common stock to 250 million shares and us filing an amendment to our Certificate
to effect the increase with the Secretary of State of Delaware by August 31,
2004. We are required to make monthly payments of $212,000 commencing August 1,
2004. In July 2004, the investor agreed to defer the August 1, 2004 payment
until Maturity Date.
The Note accrues interest at a rate per annum (the "Interest Rate") equal to the
"prime rate" published in The Wall Street Journal from time to time, plus two
percent. Interest under the Note is payable monthly in arrears commencing on
August 1, 2004. The Interest Rate is calculated on the last day of each month
(the "Determination Date") and is subject to adjustment as follows: (1) if the
shares issuable upon conversion of the Note or exercise of the Warrant have been
registered with the U.S. Securities and Exchange Commission ("SEC") under the
Securities Act of 1933, as amended (the "Securities Act") and the market price
of our common stock for the five trading days immediately preceding the
Determination Date exceeds the then applicable conversion price for the Note by
at least 25%, then the Interest Rate for the succeeding calendar month shall be
reduced by 2% for each incremental 25% increase over the then applicable
conversion price or (2) if all of the conditions set forth in subparagraph (1)
have been satisfied, except that the shares issuable upon conversion of the Note
or exercise of Warrant have not been registered, then the Interest Rate for the
succeeding calendar month shall be reduced by 1% for each incremental 25%
increase over the then applicable conversion price. The initial conversion price
under the Note is $0.56 per share, subject to adjustment upon our issuance of
securities at a price below the fixed conversion price, a stock split or
combination, declaration of a dividend on our common stock or reclassification
of our common stock. We have the option to redeem the Note by paying the
investor 125% of the principal amount due under the Note together with all
accrued and unpaid interest.
The Warrant is immediately exercisable and has a seven year term. We have the
right to require exercise of the Warrant in whole or in part if: (1) all of our
obligations under the Note have been irrevocably paid in full, (2) the common
stock underlying the Warrant has been registered on a registration statement
declared effective by the SEC, and such registration statement remains
effective, and (3) the average closing price of our common stock for the ten
(10) trading days immediately prior to the proposed date of the mandatory
exercise of the Warrant is greater than three hundred percent (300%) of the then
applicable exercise price.
We are obligated to file a registration statement on Form S-3 (or if Form S-3 is
not available another appropriate form) (the "Registration Statement")
registering the shares of our common stock issuable upon conversion of the Note
or exercise of the Warrant (the "Underlying Shares") pursuant to the
Registration Rights Agreement between us and the investor (the "Registration
Rights Agreement"). We are required to file the Registration Statement by
September 10, 2004 (the "Filing Date") and have the Registration Statement
declared effective by the SEC no later than 90 days after it is filed (the
"Effectiveness Date"). If the Registration Statement is not filed by the Filing
26
Date, declared effective by the Effectiveness Date, ceases to be effective for
more than 30 days in any calendar year or 10 consecutive calendar days or if our
common stock is not listed or traded or is suspended from trading for three
consecutive trading days, we are required to pay the investor liquidated damages
equal to 2% of original principal balance on the Note for each 30 day period
(with partial periods prorated) that such event continues. We are obligated to
keep the Registration Statement effective until the earlier of when (1) all of
the Underlying Shares have been sold or (2) such time as all of the Underlying
Shares can be sold without registration or volume restrictions under Rule 144(k)
of the Securities Act (the "Effectiveness Period"). If there is not an effective
Registration Statement covering the Underlying Shares at any time during the
Effectiveness Period and we propose to file a registration statement for our own
account or the account of others, we will be obligated to include the Underlying
Shares on that registration statement.
In accordance with generally accepted accounting principles, we will compute the
difference between the conversion price of $0.56 and our stock price on the date
of issuance of the Note and record the relative portion as an interest expense
in the second quarter of fiscal 2005.
We will also allocate the proceeds received from the Note with detachable
warrant using the relative fair market value of the individual elements at the
time of issuance and amortize the change over the life of the note.
The balance of the Note, including accrued interest, is $7.0 million at July 31,
2004.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including purchase
commitments at June 30, 2004, and the effect such obligations are expected to
have on our liquidity and cash flow in future periods.
Payment due by period
---------------------
Less than 1
Contractual Cash Obligations Total year 1-3 years 3-5 years Thereafter
- ---------------------------- ----- ---- --------- --------- ----------
(in thousands)
Long-term debt obligations $16,562 $ 8,155 $ 8,407 $ -- $ --
Capital lease obligations 228 179 49 -- --
Operating leases 10,629 2,050 2,222 1,896 4,461
Purchase obligations 946 927 19 -- --
------- ------- ------- ------- -------
Total contractual cash obligations $28,365 $11,311 $10,697 $ 1,896 $ 4,461
======= ======= ======= ======= =======
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:
27
o REVENUE RECOGNITION. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations.
In addition, our revenue recognition determines the timing of certain
expenses such as commissions and royalties. We follow specific and
detailed guidelines in measuring revenue; however, certain judgments
affect the application of our revenue policy.
We license software under non-cancelable agreements and provide
related services, including consulting and customer support. We
recognize revenue in accordance with Statement of Position 97-2 (SOP
97-2), Software Revenue Recognition, as amended and interpreted by
Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with respect to certain transactions, as well as Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition", updated by
SAB's 103 and 104, "Update of Codification of Staff Accounting
Bulletins", and Technical Practice Aids issued from time to time by
the American Institute of Certified Public Accountants.
Software license revenue is generally recognized when a license
agreement has been signed, the software product has been delivered
("delivered" constitutes F.O.B. shipping terms when a third party
carrier is used), there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and collection is
considered probable. If a software license contains an undelivered
element, the fair value of the undelivered element is deferred and the
revenue recognized once the element is delivered. In addition, if a
software license contains customer acceptance criteria or a
cancellation right, the software revenue is recognized upon the
earlier of customer acceptance or the expiration of the acceptance
period or cancellation right. Typically, payments for our software
licenses are due in installments within twelve months from the date of
delivery. Where software license agreements call for payment terms of
twelve months or more from the date of delivery, revenue is recognized
as payments become due and all other conditions for revenue
recognition have been satisfied. Deferred revenue consists primarily
of deferred license, prepaid services revenue and maintenance support
revenue.
Consulting services are separately priced, are generally available
from a number of suppliers, and are not essential to the functionality
of our software products. Consulting services, which include project
management, system planning, design and implementation, customer
configurations, and training are billed on both an hourly basis and
under fixed price contracts. Consulting services revenue billed on an
hourly basis is recognized as the work is performed. On fixed price
contracts, consulting services revenue is recognized using the
percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. We have from
time to time provided software and consulting services under fixed
price contracts that require the achievement of certain milestones.
The revenue under such arrangements is recognized as the milestones
are achieved.
Customer support services include post contract support and the rights
to unspecified upgrades and enhancements. Maintenance revenues from
ongoing customer support services are billed on a monthly basis and
recorded as revenue in the applicable month, or on an annual basis
with the revenue being deferred and recognized ratably over the
maintenance period. If an arrangement includes multiple elements, the
fees are allocated to the various elements based upon vendor-specific
objective evidence of fair value.
o ACCOUNTS RECEIVABLE. We typically extend credit to our customers.
Software licenses are generally due in installments within twelve
months from the date of delivery. Billings for customer support and
consulting services performed on a time and material basis are due
upon receipt. From time to time software and consulting services are
provided under fixed price contracts where the revenue and the payment
of related receivable balances are due upon the achievement of certain
milestones. Management estimates the probability of collection of the
receivable balances and provides an allowance for doubtful accounts
based upon an evaluation of our customers' ability to pay and general
economic conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We do not
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.
28
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.
o APPLICATION DEVELOPMENT. The costs to develop new software products
and enhancements to existing software products are expensed as
incurred until technological feasibility has been established.
Technological Feasibility has occurred when all planning, designing,
coding and testing have been completed according to design
specifications. Once technological feasibility is established, any
additional costs would be capitalized, in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed".
o STOCK-BASED COMPENSATION. We do not record compensation expense for
options granted to our employees as all options granted under our
stock option plans have an exercise price equal to the market value of
the underlying common stock on the date of grant. In addition, we do
not record compensation expense for shares issued under our employee
stock purchase plan. As permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", we account for
costs of stock based compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and accordingly, discloses the pro forma effect
on net income (loss) and related per share amounts using the
fair-value method defined in SFAS No. 123, updated by SFAS No. 148.
BUSINESS RISKS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN OUR FORM 10-K FOR THE YEAR ENDED MARCH 31, 2004 AND
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004. 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.
WE INCURRED LOSSES FOR FISCAL YEARS 2004, 2003 AND 2002.
We incurred losses of $4.2 million, $2.7 million and $14.7 million in the fiscal
years ended March 31, 2004, 2003, and 2002 respectively. The losses in the past
three years have generally been due to difficulties completing sales for new
application software licenses, the resulting change in sales mix toward lower
margin services, and debt service expenses. We will need to generate additional
revenue to achieve profitability in future periods. If we are unable to achieve
profitability, or maintain profitability if achieved, our business and stock
price may be adversely effected and we may be unable to continue operations at
current levels, if at all.
WE HAD NEGATIVE WORKING CAPITAL IN PRIOR FISCAL YEAR, AND WE HAVE EXTENDED
PAYMENT TERMS WITH A NUMBER OF OUR SUPPLIERS.
At March 31, 2003, we had negative working capital of $4.1 million. We have had
difficulty meeting operating expenses, including interest payments on debt,
lease payments and supplier obligations. We have at times deferred payroll for
our executive officers, and borrowed from related parties to meet payroll
obligations. We have extended payment terms with our trade creditors wherever
possible.
As a result of extended payment arrangements with suppliers, we may be unable to
secure products and services necessary to continue operations at current levels
from these suppliers. In that event, we will have to obtain these products and
services from other parties, which could result in adverse consequences to our
business, operations and financial condition, and we may be unable to obtain
these products from other parties on terms acceptable to us, if at all.
OUR NET SALES HAVE DECLINED IN RECENT FISCAL YEARS. WE EXPERIENCED A SUBSTANTIAL
DECREASE IN APPLICATION SOFTWARE LICENSE SALES. OUR GROWTH AND PROFITABILITY IS
DEPENDENT ON THE SALE OF HIGHER MARGIN LICENSES.
Our net sales decreased by 2% in the fiscal year ended March 31, 2004, compared
to the fiscal year ended March 31, 2003. Our net sales decreased by 16% in the
fiscal year ended March 31, 2003 compared to the fiscal year ended March 31,
29
2002. We experienced a substantial decrease in application license software
sales in fiscal year 2003 and 2002, which typically carry a much higher margin
than other revenue sources. We must improve new application license sales to
become profitable. We have taken steps to refocus our sales strategy on core
historic competencies, but our typically long sales cycles make it difficult to
evaluate whether and when sales will improve. We cannot be sure that the decline
in sales has not been due to factors which might continue to negatively affect
sales.
OUR FINANCIAL CONDITION MAY INTERFERE WITH OUR ABILITY TO SELL NEW APPLICATION
SOFTWARE LICENSES.
Future sales growth may depend on our ability to improve our financial
condition. Our past financial condition has made it difficult for us to complete
sales of new application software licenses. Because our applications typically
require lengthy implementation and extended servicing arrangements, potential
customers require assurance that these services will be available for the
expected life of the application. These potential customers may defer buying
decisions until our financial condition improves, or may choose the products of
our competitors whose financial conditions are, or are perceived to be,
stronger. Customer deferrals or lost sales will adversely affect our business,
financial conditions and results of operations.
OUR SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS MAKES IT DIFFICULT
FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of sales cycles in our business makes it difficult to evaluate the
effectiveness of our sales strategies. Our sales cycles historically have ranged
from three to twelve months, which has caused significant fluctuations in
revenues from period to period. Due to our difficulties in completing new
application software sales in recent periods and our refocused sales strategy,
it is difficult to predict revenues and properly budget expenses.
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
OUR OPERATING RESULTS AND REVENUE HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND
THEY MAY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Our quarterly operating results have fluctuated significantly in the past and
may fluctuate in the future as a result of several factors, which are outside of
our control including: the size and timing of orders, the general health of the
retail industry, the length of our sales cycles and technological changes. If
revenue declines in a quarter, our operating results will be adversely affected
because many of our expenses are relatively fixed. In particular, sales and
marketing, application development and general and administrative expenses do
not change significantly with variations in revenue in a quarter. It is likely
that in some future quarter our net sales or operating results will be below the
expectations of public market analysts or investors. If that happens, our stock
price will likely decline.
Further, due to these fluctuations, we do not believe period to period
comparisons of our financial performance are necessarily meaningful nor should
they be relied on as an indication of our future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from October
through December of each year as a result of retailers' focus on the holiday
retail-shopping season. This can negatively affect revenues in our third fiscal
quarter and in other quarters, depending on our sales cycles.
OUR DEBT COULD ADVERSELY AFFECT US.
As of July 31, 2004, our debt, including any accrued interest, is as follows:
o $1.3 million in convertible debenture issued in March 2004 to
Midsummer Investment, Ltd. due in full in May 2006, with
monthly redemptions to commence in September 2004.
30
o $0.5 million in promissory note issued in June 2004 to Intuit
Inc. due in full on June 1, 2006, payable in monthly
installments.
o $1.9 million in promissory notes issued in June 2004 to RTI's
noteholders due on May 1, 2005, payable in monthly
installments.
o $2.6 million in promissory notes issued in June 2004 to
Michael Tomczak and Jeffrey Boone due on June 1, 2006, payable
in monthly installments.
o $7.0 million in a secured convertible term note issued to
Laurus Master Fund, Ltd. in July 2004, matures on September 1,
2004, subject to automatic extension if we increase our
authorized shares after such action is approved by our
stockholders'.
The substantial amount of our indebtedness impacts us in a number of ways:
o We have to dedicate a portion of cash flow from operations to
principal and interest payments on the debt, which reduces
funds available for other purposes.
o We may not have sufficient funds to pay principal and/or
interest when they become due resulting in a default, which
could lead to our debt holders exercising rights under their
respective debt instruments, including, without limitation,
declaring debt immediately due and payable or taking
possession or control of the assets that secure the respective
debt instruments.
These are just some factors pertaining to our debt that generally place us at a
disadvantage to our less leveraged competitors. Any or all of these factors
could cause our stock price to decline.
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 pay our debts outstanding at July 31, 2004 as set forth above;
o support unanticipated capital requirements;
o take advantage of acquisition or expansion opportunities;
o continue our current development efforts;
o develop new applications or services; or
o address working capital needs.
Our future capital requirements depend on many factors including our application
development, sales and marketing activities. We do not know whether additional
financing will be available when needed, or available on terms acceptable to us.
If we cannot raise needed funds for the above purposes on acceptable terms, we
may be forced to curtail some or all of the above activities and we may not be
able to grow our business or respond to competitive pressures or unanticipated
developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities or convertible debt securities, our stockholders may experience
substantial dilution and the new securities may have greater rights, preferences
or privileges than our existing common stock.
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other intangible
assets represent approximately 86% of our total assets as of June 30, 2004. We
may have to impair or write-off these assets, which will cause a charge to
earnings and could cause our stock price to decline. Any such impairment will
31
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 80%, 19 % and 1% of our
net sales were in the Americas, Europe and Asia, respectively, in the three
months ended June 30, 2004. Approximately 90%, 10% and 0% of our net sales were
in the Americas, Europe and Asia, respectively, in the three months ended June
30, 2003. Many of our expenses related to foreign sales, such as corporate level
administrative overhead and development, are denominated in U.S. dollars. When
accounts receivable and accounts payable arising from international sales and
services are converted to U.S. dollars, the resulting gain or loss contributes
to fluctuations in our operating results. We do not hedge against foreign
currency exchange rate risks.
HISTORICALLY WE HAVE BEEN DEPENDENT ON A SMALL NUMBER OF CUSTOMERS FOR A
SIGNIFICANT AMOUNT OF OUR BUSINESS.
One customer accounted for 12% of our consolidated net sales in the quarter
ended June 30, 2004. Another customer accounted for 24% in the quarter ended
June 30, 2003.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on our Chief Operating Officer, Michael Tomczak, and
our Chief Technology, Jeffrey Boone. We are also heavily dependent on our former
Chairman, Barry Schechter, who remains a consultant to us. 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. The retail industry as a whole is
currently experiencing increased competition and weakening economic conditions
that could negatively impact the industry and our customers' ability to pay for
our products and services. In addition, the retail industry may be
consolidating, and it is uncertain how consolidation will affect the industry.
Such consolidation and weakening economic conditions have in the past, and may
in the future, negatively impact our revenues, reduce the demand for our
products and may negatively impact our business, operating results and financial
condition. Specifically, uncertain economic conditions and the specter of
terrorist activities have adversely impacted sales of our software applications,
and we believe mid-tier specialty retailers may be reluctant during the current
economic climate to make the substantial infrastructure investment that
generally accompanies the implementation of our software applications, which may
adversely impact our business.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS.
We have in the past and may in the future be impacted by customer bankruptcies.
During weak economic conditions, such as those currently being experienced in
many geographic regions around the world, there is an increased risk that
certain of our customers will file bankruptcy. When our customers file
bankruptcy, we may be required to forego collection of pre-petition amounts
owed, and to repay amounts remitted to us during the 90-day preference period
preceding the filing. Accounts receivable balances related to pre-petition
amounts may in certain of these instances be large due to extended payment terms
for software license fees, and significant billings for consulting and
implementation services on large projects. The bankruptcy laws, as well as the
specific circumstances of each bankruptcy, may severely limit our ability to
collect pre-petition amounts, and may force us to disgorge payments made during
the 90-day preference period. We also face risk from international customers who
file for bankruptcy protection in foreign jurisdictions, in that the application
of foreign bankruptcy laws may be less certain or harder to predict. Although we
believe that we have sufficient reserves to cover anticipated customer
bankruptcies, there can be no assurance that such reserves will be adequate, and
if they are not adequate, our business, operating results and financial
condition would be adversely affected.
32
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We conduct business in an industry characterized by intense competition. Most of
our competitors are very large companies with an international presence. We must
also compete with smaller companies which have been able to develop strong local
or regional customer bases. Many of our competitors and potential competitors
are more established, benefit from greater name recognition and have
significantly greater resources than us. Our competitors may also have lower
cost structures and better access to the capital markets than us. As a result,
our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Our competitors may:
o introduce new technologies that render our existing or future
products obsolete, unmarketable or less competitive;
o make strategic acquisitions or establish cooperative
relationships among themselves or with other solution
providers, which would increase the ability of their products
to address the needs of our customers; and
o establish or strengthen cooperative relationships with our
current or future strategic partners, which would limit our
ability to compete through these channels.
We could be forced to reduce prices and suffer reduced margins and market share
due to increased competition from providers of offerings similar to, or
competitive with, our applications, or from service providers that provide
services similar to our services. Competition could also render our technology
obsolete.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological change,
evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
The success of application enhancements and new applications depends on a
variety of factors, including technology selection and specification, timely and
efficient completion of design, and effective sales and marketing efforts. In
developing new applications and services, we may:
o Fail to respond to technological changes in a timely or
cost-effective manner;
o Encounter applications, capabilities or technologies developed
by others that render our applications and services obsolete
or non-competitive or that shorten the life cycles of our
existing applications and services;
o Experience difficulties that could delay or prevent the
successful development, introduction and marketing of these
new applications and services; or
o Fail to achieve market acceptance of our applications and
services.
The life cycles of our applications are difficult to estimate, particularly in
the emerging electronic commerce market. As a result, new applications and
enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR 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
33
may not be successful. Effective copyright and trade secret protection may be
unavailable or limited in some foreign countries. We hold no patents.
Consequently, others may develop, market and sell applications substantially
equivalent to ours or utilize technologies similar to those used by us, so long
as they do not directly copy our applications or otherwise infringe our
intellectual property rights.
We may find it necessary to bring claims or initiate litigation against third
parties for infringement of our proprietary rights or to protect our trade
secrets. These actions would likely be costly and divert management resources.
These actions could also result in counterclaims challenging the validity of our
proprietary rights or alleging infringement on our part. The ultimate outcome of
any litigation will be difficult to predict.
OUR APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may become subject to litigation involving patents or proprietary rights of
third parties. 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 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, who do successfully exploit strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Substantially all of our primary computer and telecommunications systems are
located in two geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business interruption
insurance may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product liability or
other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our applications are highly complex and sophisticated and they may occasionally
contain design defects or software errors that could be difficult to detect and
correct. In addition, implementation of our applications may involve
customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
34
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.
THE SAGE GROUP HAS THE RIGHT TO ACQUIRE A SIGNIFICANT PERCENTAGE OF OUR COMMON
STOCK, WHICH IF ACQUIRED BY THE SAGE GROUP, MAY ENABLE THE SAGE GROUP TO
EXERCISE EFFECTIVE CONTROL OF US.
The Sage Group beneficially owns approximately 38.2% of our outstanding common
stock, including shares the Sage Group has the right to acquire upon conversion
of its Series A Convertible Preferred Stock and exercise of its outstanding
options. Although the Series A Convertible Preferred Stock is non-voting as to
most matters and is redeemable by us, if the Sage Group converts its Series A
Convertible Preferred Stock to common stock, it may have effective control over
all matters affecting us, including:
o The election of all of our directors;
o The allocation of business opportunities that may be suitable
for the Sage Group and us;
o Any determinations with respect to mergers or other business
combinations involving us;
o The acquisition or disposition of assets or businesses by us;
o Debt and equity financing, including future issuance of our
common stock or other securities;
o Amendments to our charter documents;
o The payment of dividends on our common stock; and
o Determinations with respect to our tax returns.
THE SAGE GROUP'S POTENTIAL INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR
ANOTHER COMPANY TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
The Sage Group beneficially owns a significant percentage of our common stock.
In addition, two of the current members of our board of directors are employed
by a subsidiary of the Sage Group. The Sage Group's potential effective voting
control could discourage others from initiating any potential merger, takeover
or other change of control transaction that may otherwise be beneficial to our
business or our stockholders. As a result, the Sage Group's potential effective
control could reduce the price that investors may be willing to pay in the
future for shares of our stock, or could prevent any party from attempting to
acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to continue to be,
volatile. When we or our competitors announce new customer orders or services,
change pricing policies, experience quarterly fluctuations in operating results,
announce strategic relationships or acquisitions, change earnings estimates,
experience government regulatory actions or suffer from generally adverse
economic conditions, our stock price could be affected. Some of the volatility
in our stock price may be unrelated to our performance. Recently, companies
similar to ours have experienced extreme price fluctuations, often for reasons
unrelated to their performance.
35
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK NOR DO WE INTEND TO PAY
DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common stock. We
anticipate that we will use our earnings and cash flow for repayment of
indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Holders of our Series
A and Series B Convertible Preferred Stock are entitled to dividends in
preference and priority to common stockholders. Future equity financing(s) may
further restrict our ability to pay dividends.
THE TERMS OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock in one or
more series. We issued 141,000 shares of Series A Convertible Preferred Stock in
May 2002 and 2,517,232 shares of Series B Convertible Preferred Stock in June
2004. Our board of directors may determine the terms of subsequent series of
preferred stock without further action by our stockholders. If we issue
additional preferred stock, it could affect your rights or reduce the value of
your common stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with or sell our
assets to a third party. These terms may include voting rights, preferences as
to dividends and liquidation, conversion and redemption rights, and sinking fund
provisions. We are actively seeking capital, and some of the arrangements we are
considering may involve the issuance of preferred stock.
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The Exchange has
published certain guidelines it uses in determining whether a security warrants
continued listing. Pursuant to these guidelines the Exchange will consider
suspending trading in a listed security or delisting a security when, in the
opinion of the Exchange: (i) the financial condition and/or operating results of
the issuer appear to be unsatisfactory; (ii) the aggregate market value of the
security has become so reduced as to make further dealings on the Exchange
inadvisable; (iii) the issuer has sold or otherwise disposed of its principal
operating assets, or has ceased to be an operating company; (iv) the issuer has
failed to comply with its listing agreements with the Exchange; or (v) any other
event shall occur or any condition shall exist which makes further dealings on
the Exchange unwarranted. As a result of our financial condition or other
factors, the American Stock Exchange could in the future determine that our
stock does not merit continued listing. If our stock were delisted from the
American Stock Exchange, the ability of our stockholders to sell our common
stock could become limited, and we would lose the advantage of some state and
federal securities regulations imposing lower regulatory burdens on
exchange-traded issuers.
SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND
CONVERTIBLE NOTES OR UNDER ANTI-DILUTION PROVISIONS IN CERTAIN AGREEMENTS COULD
DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our employees and
certain other persons at various prices, some of which are or may in the future
have exercise prices at below the market price of our stock. We currently have
outstanding options and warrants for 32,271,203 shares. Of these options and
warrants, as of July 31, 2004, 26,864,459 have exercise prices above the recent
market price of $0.52 per share, and 5,406,744 have exercise prices at or below
that recent market price. If exercised, these options and warrants will cause
immediate and possibly substantial dilution to our stockholders.
Our existing stock option plan currently has approximately 973,485 shares
available for issuance as of July 31, 2004. Future options issued under the plan
may have further dilutive effects.
Sales of shares issued pursuant to exercisable options, warrants, convertible
notes or anti-dilution provisions could lead to subsequent sales of the shares
in the public market, and could depress the market price of our stock by
creating an excess in supply of shares for sale. Issuance of these shares and
sale of these shares in the public market could also impair our ability to raise
capital by selling equity securities.
ALL OF OUR AUTHORIZED COMMON STOCK IS ISSUED AND OUTSTANDING OR IS RESERVED FOR
ISSUANCE PURSUANT TO EXERCISE OF OUTSTANDING OPTIONS OR WARRANTS OR CONVERSION
OF DEBENTURES OR PREFERRED STOCK. OUR INABILITY TO ISSUE ADDITIONAL SHARES OF
COMMON STOCK IN THE FUTURE MAY LIMIT OUR ABILITY TO RAISE CAPITAL, ENTER
STRATEGIC TRANSACTIONS AND SATISFY CONTRACTUAL OBLIGATIONS.
36
Our authorized capital stock under our Amended and Restated Certificate of
Incorporation is 100,000,000 shares of common stock, 54,809,255 of which were
issued and outstanding as of July 31, 2004 and 5,000,000 shares of preferred
stock consisting of 141,000 shares of Series A Preferred Stock, all of which
were issued and outstanding as of July 31, 2004, and 2,517,232 Series B
Preferred Stock, all of which were issued and outstanding as of July 31, 2004.
In addition, we have 47,237,225 shares of common stock reserved for issuance
upon exercise of options or warrants or conversion of debentures or preferred
stock. As a result, we have 102,046,480 shares of common stock outstanding or
reserved for issuance, which exceeds our authorized shares of common stock by
2,046,480 shares. In addition, the Company has contractual obligations to issue
additional shares of common stock to holders of its Series A Preferred Stock and
Series B Preferred Stock and to maintain sufficient shares of common stock
available for future issuances on exercise of options, warrants and conversion
of convertible securities to certain members of management and certain investors
pursuant to employment compensation arrangements and securities purchase
agreements, which are not currently reserved. We submitted a proposal to amend
our Certificate of Incorporation to increase the number of shares of common
stock we are authorized to issue from 100,000,000 to 250,000,000 to our
stockholders at our annual meeting on August 11, 2004. We did not receive
sufficient votes to approve the amendment to the Certificate of Incorporation at
that time and have adjourned the meeting until August 27, 2004 to provide us
time to secure additional votes sufficient to effect such amendment. However,
there can be no assurances that such a proposal will be approved by the
requisite vote of the stockholders. If we are unable to increase our authorized
common stock our ability to obtain additional capital through sales of our
common stock, to engage in acquisitions or other strategic transactions and to
satisfy contractual commitments will be severely limited.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS WITH PAGE DIGITAL OR
RTI OR REALIZE ALL OF THE ANTICIPATED BENEFITS OF THESE ACQUISITIONS.
On January 30, 2004, we acquired Page Digital and on June 1, 2004, we acquired
Retail Technologies, Inc. (see "Recent Transactions" below). These acquisitions
involve integrating two companies that previously operated independently into
Island Pacific. These integrations will be complex, costly and time-consuming
processes. The difficulties of combining these companies' operations include,
among other things:
o Coordinating geographically disparate organizations, systems
and facilities;
o Strain on management resources due to integration demands;
o Integrating personnel with diverse business backgrounds;
o Consolidating corporate and administrative functions;
o Coordinating product development;
o Coordinating sales and marketing functions;
o Retaining key employees; and
o Preserving relationships with key customers.
BUSINESS RISKS FACED BY PAGE DIGITAL COULD DISADVANTAGE OUR BUSINESS.
Page Digital is a developer of multi-channel commerce software and faces several
business risks that could disadvantage our business. These risks include many of
the risks that we face, described above, as well as:
o LONG AND VARIABLE SALES CYCLES MAKE IT DIFFICULT TO PREDICT
OPERATING RESULTS - Historically, the period between initial
contact with a prospective customer and the licensing of Page
Digital's products has ranged from one to twelve months. Page
Digital's average sales cycle is currently three months. The
licensing of Page Digital's products is often an enterprise
wide decision by customers that involves a significant
commitment of resources by Page Digital and its prospective
customer. Customers generally consider a wide range of issues
before committing to purchase Page Digital's products,
including product benefits, cost and time of implementation,
ability to operate with existing and future computer systems,
ability to accommodate increased transaction volume and
product reliability. As a part of the sales process, Page
Digital spends a significant amount of resources informing
prospective customers about the use and benefits of Page
Digital products, which may not result in a sale, therefore
37
increasing operating expenses. As a result of this sales
cycle, Page Digital's revenues are unpredictable and could
vary significantly from quarter to quarter causing our
operating results to vary significantly from quarter to
quarter.
o DEFECTS IN PRODUCTS COULD DIMINISH DEMAND FOR PRODUCTS AND
RESULT IN LOSS OF REVENUES - From time to time errors or
defects may be found in Page Digital's existing, new or
enhanced products, resulting in delays in shipping, loss of
revenues or injury to Page Digital's reputation. Page
Digital's customers use its products for business critical
applications. Any defects, errors or other performance
problems could result in damage to Page Digital's customers'
businesses. These customers could seek significant
compensation from Page Digital for any losses. Further, errors
or defects in Page Digital's products may be caused by defects
in third-party software incorporated into Page Digital
products. If so, Page Digital may not be able to fix these
defects without the assistance of the software providers.
o FAILURE TO FORMALIZE AND MAINTAIN RELATIONSHIPS WITH SYSTEMS
INTEGRATORS COULD REDUCE REVENUES AND HARM PAGE DIGITAL'S
ABILITY TO IMPLEMENT PRODUCTS - A significant portion of Page
Digital's sales are influenced by the recommendations of
systems integrators, consulting firms and other third parties
who assist with the implementation and maintenance of Page
Digital's products. These third parties are under no
obligation to recommend or support Page Digital's products.
Failing to maintain strong relationships with these third
parties could result in a shift by these third parties toward
favoring competing products, which could negatively affect
Page Digital's software license and service revenues.
o PAGE DIGITAL'S PRODUCT MARKETS ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE, SO PAGE DIGITAL'S SUCCESS DEPENDS
HEAVILY ON ITS ABILITY TO DEVELOP AND INTRODUCE NEW
APPLICATIONS AND RELATED SERVICES - The retail software
industry is characterized by rapid technological change,
evolving standards and wide fluctuations in supply and demand.
Page Digital must cost-effectively develop and introduce new
applications and related services that keep pace with
technological developments to compete. If Page Digital fails
to gain market acceptance for its existing or new offerings or
if Page Digital fails to introduce progressive new offerings
in a timely or cost-effective manner, our financial
performance may suffer.
o FAILURE TO PROTECT PROPRIETARY RIGHTS OR INTELLECTUAL
PROPERTY, OR INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST
PAGE DIGITAL COULD RESULT IN PAGE DIGITAL LOSING VALUABLE
ASSETS OR BECOMING SUBJECT TO COSTLY AND TIME-CONSUMING
LITIGATION - Page Digital's success and ability to compete
depend on its proprietary rights and intellectual property.
Page Digital relies on trademark, trade secret and copyright
laws to protect its proprietary rights and intellectual
property. Page Digital also has one issued patent. Despite
Page Digital's efforts to protect intellectual property, a
third party could obtain access to Page Digital's software
source code or other proprietary information without
authorization, or could independently duplicate Page Digital's
software. Page Digital may need to litigate to enforce
intellectual property rights. If Page Digital is unable to
protect its intellectual property it may lose a valuable
asset. Further, third parties could claim Page Digital has
infringed their intellectual property rights. Any claims,
regardless of merit, could be costly and time-consuming to
defend.
o COMPETITION IN THE SOFTWARE MARKET IS INTENSE AND COULD REDUCE
PAGE DIGITAL'S SALES OR PREVENT THEM FROM ACHIEVING
PROFITABILITY - The market for Page Digital's products is
intensely competitive and subject to rapid technological
change. Competition is likely to result in price reductions,
reduced gross margins and loss of Page Digital's market share,
any one of which could reduce future revenues or earnings.
Further, most of Page Digital's competitors are large
companies with greater resources, broader customer
relationships, greater name recognition and an international
presence. As a result, Page Digital's competitors may be able
to better respond to new and emerging technologies and
customer demands.
BUSINESS RISKS FACED BY RTI COULD DISADVANTAGE OUR BUSINESS.
RTI is a provider of retail management store solutions to small through mid-tier
retailers via an international network of retailers and faces several business
risks that could disadvantage our business. These risks include many of the
risks that we face, described above, as well as:
38
o RTI FACES INTENSE COMPETITION IN THE RETAIL POINT OF SALE
INDUSTRY - RTI operates in an extremely competitive industry,
which is subject to rapid technological and market changes. We
anticipate that the competition will increase as more
companies focus on providing technology solutions to small and
mid-tier retailers. Many of our current and potential
competitors, such as Microsoft, have more resources to devote
to product development, marketing and distribution. While RTI
believes that it has competitive strengths in its market,
there can be no assurance that RTI will continue to compete
successfully against larger more established competitors.
o RTI IS DEPENDENT ON THEIR VALUE-ADDED RESELLERS (VARS) - RTI
does not have a direct sales force and relies on VARs to
distribute and sell its products. RTI currently has
approximately 67 VARs - 27 in North America, 7 in South
America, 11 in Asia, 19 in Europe and the Middle East, 1 in
Africa, and 1 each in Australia and New Zealand. Combined,
RTI's four largest VARs account for approximately 35% of its
revenues, although no one is over 15%. RTI's VARs are
independently owned businesses and there can be no assurance
that one or more will not go out of business or cease to sell
RTI products. Until a replacement VAR could be recruited, and
trained, or until an existing VAR could expand into the
vacated territory, such a loss could result in a disruption in
RTI's revenue and profitability. Furthermore, there can be no
assurance that an adequate replacement could be located.
o A PROLONGED SLOWDOWN IN THE GLOBAL ECONOMY COULD ADVERSELY
IMPACT RTI'S REVENUES - A slowdown in the global economy might
lead to decreased capital spending, fewer new retail business
start ups, and slower new store expansion at existing retail
businesses. Such conditions, even on a regional basis could
severely impact one or more of RTI's VARs and result to a
disruption in RTI's revenues, and profitability.
o RTI'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, SO RTI'S SUCCESS DEPENDS HEAVILY ON ITS ABILITY TO
DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED SERVICES -
We believe RTI's ability to succeed in its market is partially
dependent on its ability to identify new product opportunities
and rapidly, cost-effectively bring them to market. However,
there is no guarantee that they will be able to gain market
acceptance for any new products. In addition, there is no
guarantee that one of RTI competitors will not be able to
bring competing applications to market faster or market them
more effectively. Failure to successfully develop new
products, bring them to market and gain market acceptance
could result in decreased market share and ultimately have a
material adverse affect on RTI.
o RTI DOES NOT HOLD ANY PATENTS OR COPYRIGHTS, ANY TERMINATION
OF OR ADVERSE CHANGE TO RTI'S LICENSE RIGHTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS BUSINESS - RTI has a license to
develop, modify, market, sell, and support its core technology
from a third party. Any termination of, or disruption in this
license could have a material adverse affect on RTI's
business. Further, we believe that most of the technology used
in the design and development of RTI's core products is widely
available to others. Consequently, there can be no assurance
that others will not develop, and market applications that are
similar to RTI's, or utilize technologies that are equivalent
to RTI's. Likewise, while RTI believes that its products do
not infringe on any third party's intellectual property, there
can be no assurance that they will not become involved in
litigation involving intellectual property rights. If such
litigation did occur, it could have a material adverse affect
on RTI's business.
ITEM 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 foreign currency exchange rate as
measured against the U.S. dollar.
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
39
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 18% and 10% of our
total net sales were denominated in currencies other than the U.S. dollar for
the three months ended June 30, 2004 and 2003, respectively.
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal
financial and accounting officer, have conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that were in effect at the end of the period
covered by this report. Based on their evaluation, our principal executive
officer and principal financial and accounting officer have concluded that our
disclosure controls and procedures that were in effect on March 31, 2004 were
effective to ensure that all material information relating to us that is
required to be included in the reports that we file with the SEC is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. There have been no changes in internal controls over
financial reporting that were identified during the evaluation that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as discussed in the footnotes to our interim financial statements (see
Note 12), we are not involved in any material legal proceedings, other than
ordinary routine litigation proceedings incidental to our business, none of
which are expected to have a material adverse effect on our financial position
or results of operations. However, litigation is subject to inherent
uncertainties, and an adverse result in existing or other matters may arise from
time to time which may harm our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2004, we issued:
o 1,546,733 shares of common stock to Intuit, Inc. in connection
with the acquisition of RTI.
o an aggregate of 2,517,233 shares of Series B Convertible
Preferred Stock to Michael Tomczak, our COO and President, and
Jeffrey Boone, our CTO, in connection with acquisition of RTI.
o Options to purchase 1,572,364 and 1,772,364 shares of common
stock at an exercise price of $0.77per share to Messrs. Boone
and Tomczak, respectively, in accordance with their employment
agreements.
o Warrants to purchase an aggregate of 20,000 shares of common
stock at exercise prices of $0.75 and $1.05 per share to a
consulting firm for investor relation services rendered.
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 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Description
- ------- -----------
2.1 Purchase and Exchange Agreement dated as of January 1, 2002
between the Company and Softline Limited, incorporated by
reference to exhibit 2.1 to the Company's 8-K filed May 16,
2002. Exhibits and schedules have been omitted pursuant to
Item 601(b)(2) of Regulation S-K, but a copy will be furnished
supplementally to the Securities and Exchange Commission upon
request.
2.2 Deed of Appointment dated February 20, 2002 between the bank
and the receivers of SVI Retail (Pty) Limited, incorporated by
reference to exhibit 2.2 to the Company's 10-K for fiscal year
ended March 31, 2002.
2.3 Business Sale Agreement dated May 3, 2002 among the receivers
and managers of the assets of SVI Retail (Pty) Limited and QQQ
Systems PTY Limited, incorporated by reference to exhibit 2.3
to the Company's 10-K for fiscal year ended March 31, 2002.
2.4 Securities Purchase Agreement dated March 31, 2003 by and
among the Company, Midsummer Investment, Ltd., Omicron Master
Trust, and Islandia, L.P., incorporated by reference to
exhibit 2.1 to the Company's Form 8-K filed April 15, 2003.
2.5 Securities Purchase Agreement dated April 1, 2003 by and among
the Company and MBSJ Investors, LLC, incorporated by reference
to exhibit 2.2 to the Company's Form 8-K filed on April 15,
2003.
2.6 Agreement dated May 6, 2003 by and among the Company,
Crestview Capital Fund I, L.P., Crestview Capital Fund II,
L.P. and Crestview Capital Offshore Fund, Inc., incorporated
by reference to exhibit 2.12 to the Company's Form S-1 filed
on May 12, 2003.
2.7 Stock Purchase Agreement effective April 1, 2003 between SVI
Solutions, Inc. and Arthur Klitofsky, incorporated by
reference to exhibit 4.1 to the Company's Form 8-K filed on
May 21, 2003.
2.8 Pledge Agreement effective April 1, 2003 between SVI
Solutions, Inc. and Arthur Klitofsky, incorporated by
reference to exhibit 4.2 to the Company's Form 8-K filed on
May 21, 2003.
2.9 Securities Purchase Agreement dated June 27, 2003 by and among
the Company and the purchasers named therein, incorporated by
reference to exhibit 2.1 to the Company's Form 8-K filed on
July 2, 2003.
2.10 Securities Purchase Agreement dated November 7, 2003 by and
among the Company and the purchasers named within,
incorporated by reference to exhibit 2.1 to the Company's Form
8-K filed on November 12, 2003.
2.11 Agreement of Merger and Plan of Reorganization dated November
20, 2003 by and among the Company, Page Digital Incorporated
and IPI Acquisition, Inc, incorporated by reference to exhibit
2.1 to the Company's Form 8-K filed on November 24, 2003.
2.12 Agreement of Merger and Plan of Reorganization dated March 12,
2004 by and among the Company, Retail Technologies
International, Inc. and IPI Merger Sub, Inc., incorporated by
reference to the Company's Form 8-K filed on March 17, 2004.
41
2.13 Amended and Restated Agreement of Merger and Plan of
Reorganization dated June 1, 2004 by and between Island
Pacific, Inc., Retail Technologies International, Inc., IPI
Merger Sub, Inc., IPI Merger Sub II, Inc., Michael Tomczak and
Jeffrey Boone, incorporated by reference to exhibit 2.1 to the
Company's Form 8-K filed on June 14, 2004.
2.14 Agreement of Merger dated June 1, 2004 between IPI Merger Sub
II, Inc. and Retail Technologies International, Inc.,
incorporated by reference to exhibit 2.2 to the Company's Form
8-K filed on June 14, 2004.
2.15 Securities Purchase Agreement dated March 15, 2004 by and
among the Company, Omicron Master Trust and Midsummer
Investments, Ltd, incorporated by reference to exhibit 4.1 to
the Company's Form 8-K filed on March 17, 2004.
3.1 Amended and Restated Certificate of Incorporation,
incorporated by reference to exhibit 3.1 to the Company's Form
10-K for the fiscal year ended March 31, 2001.
3.2 Certificate of Designation for Series A of Convertible
Preferred Stock, incorporated by reference to exhibit 4.1 of
the Company's Form 8-K filed May 16, 2002.
3.3 Certificate of Designation for Series B of Convertible
Preferred Stock, incorporated by reference to exhibit 3.1 to
the Company's Form 8-K filed on June 14, 2004.
3.4 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's Form 10-K for the fiscal year ended March 31,
2001.
4.1 Registration Rights Agreement dated as of March 31, 2003 by
and among the Company, Midsummer Investment, Ltd., Omicron
Master Trust and Islandia, L.P., incorporated by reference to
exhibit 4.1 to the Company's Form 8-K filed April 15, 2003.
4.2 Registration Rights Agreement dated as of April 1, 2003
between the Company and MBSJ Investors LLC, incorporated by
reference to exhibit 4.2 to the Company's Form 8-K filed April
15, 2003.
4.3 Registration Rights Agreement dated June 27, 2003 by and among
the Company and the parties named therein, incorporated by
reference to exhibit 4.1 to the Company's Form 8-K filed on
July 2, 2003.
4.4 Registration Rights Agreement dated November 7, 2003 by and
among the Company and the parties named therein, incorporated
by reference to exhibit 4.1 to the Company's Form 8-K filed on
November 12, 2003.
4.5 Settlement Agreement, Mutual Release and Covenant Not to Sue
by and among the Company and Cord Camera Centers, Inc. dated
September 30, 2003, incorporated by reference to exhibit 4.5
to the Company's Form S-1 filed on December 8, 2003.
4.6 Registration Rights Agreement dated March 15, 2004 by and
among the Company, Omicron Master Trust and Midsummer
Investments, Ltd., incorporated by reference to exhibit 4.2 to
the Company's Form 8-K filed on March 17, 2004.
4.7 Security Agreement as of June 1, 2004 between Island Pacific,
Inc., IPI Merger Sub II, Inc., Retail Technologies
International, Inc., and Nathaniel F. Jessup, an individual,
Kathleen M. Leacox, an individual, and Glenn Swenson, an
individual, the Lumsden Real Estate Defined Benefit Plan, Mace
and Shirley Lumsden as co-trustees of the Mace Lumsden and
S.K. Lumsden Trust of January 19, 1995, and Merry Youle, an
individual.
4.8 Registration Rights Agreement dated June 1, 2004 by and
between Island Pacific, Inc., Michael Tomczak, Jeffrey Boone
and Intuit, Inc., incorporated by reference to exhibit 4.1 to
the Company's Form 8-K filed on June 14, 2004.
4.9 Form of Voting Agreement, incorporated by reference to exhibit
4.2 to the Company's Form 8-K filed on June 14, 2004.
42
4.10 Securities Purchase Agreement dated July 12, 2004 between
Island Pacific, Inc. and Laurus Master Fund, Ltd.,
incorporated by reference to exhibit 4.1 to the Company's Form
8-K filed on July 21, 2004.
4.11 Secured Convertible Term Note issued by Island Pacific, Inc.
in favor of Laurus Master Fund. Ltd., incorporated by
reference to exhibit 4.2 to the Company's Form 8-K filed on
July 21, 2004.
4.12 Common Stock Purchase Warrant dated July 12, 2004 issued by
Island Pacific, Inc., incorporated by reference to exhibit 4.2
to the Company's Form 8-K filed on July 21, 2004.
4.13 Registration Rights Agreement dated July 12, 2004 between
Island Pacific, Inc., and Laurus Master Fund, Ltd.,
incorporated by reference to exhibit 4.4 of the Company's Form
8-k filed on July 21, 2004.
4.14 Amendment No. 1 to the 9% Convertible Debenture, Due May 15,
2006 Issued to Midsummer and Waiver dated July 30, 2004.
10.1 Letter Agreement between the Company and Union Bank of
California, N.A. dated April 24, 2001, incorporated by
reference to exhibit 10.18 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
10.2 Letter Agreement between the Company and Union Bank of
California, N.A. dated June 22, 2001, incorporated by
reference to exhibit 10.19 to the Company's Form 10-K for the
fiscal year ended March 31, 2001.
10.3 Amended and Restated Term Loan Agreement between the Company
and Union Bank of California, N.A. dated as of June 29, 2001,
incorporated by reference to exhibit 10.20 to the Company's
Form 10-K for the fiscal year ended March 31, 2001.
10.4 First Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of March 18, 2002, and First Amendment to Amended and
Restated Pledge Agreement between the Company, Sabica
Ventures, Inc., SVI Retail, Inc., SVI Training Products, Inc.,
and Union Bank of California, N.A. dated as of March 18, 2002,
incorporated by reference to exhibit 10.4 to the Company's
form 10-K for fiscal year ended March 31, 2002.
10.5 Second Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of May 21, 2001, incorporated by reference to exhibit 10.5
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.6 Third Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of July 15, 2002, incorporated by reference to exhibit 10.6
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.7 Fourth Amendment to Amended and Restated Term Loan Agreement
between the Company and Union Bank of California, N.A. dated
as of November 15, 2002, incorporated by reference to exhibit
10.3 to the Company's 10-Q filed on February 14, 2003.
10.8 Warrant in favor of UNIONBANCAL EQUITIES, Inc. dated January
2, 2003, incorporated by reference to exhibit 10.4 to the
Company's 10-Q filed on February 14, 2003.
10.9 Discounted Loan Payoff Agreement dated March 31, 2003 by and
among Union Bank of California, N.A., SVI, SVI Retail, Inc.,
Sabica Ventures, Inc. and SVI Training Products, Inc.,
incorporated by reference to exhibit 10.3 to the Company's
Form 8-k filed on April 15, 2003.
43
10.10 Unsecured Promissory Note dated March 31, 2003 in favor of
Union Bank of California, incorporated by reference to exhibit
10.47 to the Company's Form S-1 filed on May 12, 2003.
10.11 Amended and Restated Subordinated Promissory Note of the
Company in favor of Softline Limited dated June 30, 2001,
incorporated by reference to exhibit 10.26 to the Company's
Form 10-K for the fiscal year ended March 31, 2001.
10.12 Investor Rights Agreement between the Company and Softline
Limited dated as of January 1, 2002, incorporated by reference
to exhibit 4.2 of the Company's Form 8-K filed May 16, 2002.
10.13 Investors' Rights Agreement between the Company, Koyah
Leverage Partners, L.P. and Koyah Partners, L.P., incorporated
by reference to exhibit 10.3 to the Company's Form 8-K filed
January 8, 2001.
10.14 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P. dated July
19, 2002, incorporated by reference to exhibit 10.25 to the
Company's Form S-1 filed on May 12, 2003.
10.15 Form of Convertible Promissory Note, incorporated by reference
to exhibit 10.31 to the Company's Form 10-K for the fiscal
year ended March 31, 2001.
10.16 Amendment Agreement to between the Company, Koyah Leverage
Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated July 15, 2002, incorporated by
reference to exhibit 10.11 to the Company's 10-K for fiscal
year ended March 31, 2002.
10.17 First Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., Raven Partners,
L.P., Nigel Davey, and Brian Cathcart dated December 5, 2002,
incorporated by reference to exhibit 10.6 to the Company's
10-Q filed on February 14, 2003.
10.18 Second Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 14, 2003, incorporated by reference
to exhibit 10.29 to the Company's Form S-1 filed on May 12,
2003.
10.19 Third Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 28, 2003, incorporated by reference
to exhibit 10.30 to the Company's Form S-1 filed on May 12,
2003..
10.20 Fourth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated April 3, 2003, incorporated by reference
to exhibit 10.31 to the Company's Form S-1 filed on May 12,
2003.
10.21 Fifth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated June 27, 2003 (included herewith).
10.22 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by referenced to
exhibit 10.2 to the Company's Form 10-Q for the quarter ended
September 30, 2001. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.
10.23 Purchase Agreement between the Company and Toys "R" Us, Inc.
dated May 29, 2002, incorporated by reference to exhibit 10.14
to the Company's form 10-K for fiscal year ended March 31,
2002.
10.24 Convertible Note in favor of Toys "R" Us, Inc. dated May 29,
2002, incorporated by reference to exhibit 10.15 to the
Company's form 10-K for fiscal year ended March 31, 2002.
44
10.25 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's
form 10-K for fiscal year ended March 31, 2002.
10.26 Development Agreement between the Company and Toys "R" Us,
Inc. dated May 29, 2002, incorporated by reference to exhibit
10.17 to the Company's form 10-K for fiscal year ended March
31, 2002.
10.27 Summary of lease terms for Carlsbad facility, incorporated by
reference to exhibit 10.20 to the Company's form 10-K for
fiscal year ended March 31, 2002.
10.28 Termination Agreement between the Company and Toys "R" Us,
Inc. dated November 13, 2003 (included herewith).
10.29 Option Agreement between Softline Ltd. and Steven Beck, as
trustee of a certain management group of Island Pacific, Inc.
(included herewith).
10.30 Employment Agreement dated January 30, 2004 by and between
Island Pacific, Inc. and Larry Page (included herewith).
10.31 Employment Agreement dated January 30, 2004 by and between
Island Pacific, Inc. and David Joseph (included herewith).
10.32 Employment Agreement dated June 1, 2004 by and between Island
Pacific, Inc. and Michael Tomczak, incorporated by reference
to exhibit 10.1 to the Company's form 8-K filed on June 14,
2004.
10.33 Employment Agreement dated June 1, 2004 by and between Island
Pacific, Inc. and Jeffrey Boone, incorporated by reference to
exhibit 10.2 to the Company's form 8-K on June 14, 2004.
10.34 Option Agreement dated September 3, 2003 by and between SVI
Solutions, Inc. and Harvey Braun (included herewith).
10.35 Option Agreement dated September 3, 2003 by and between SVI
Solutions, Inc. and Steven Beck (included herewith).
10.36 Code of Ethics and Business Conduct (included herewith).
10.37 Summary of loan transactions between the Company and World
Wide Business Centres, incorporated by reference to exhibit
10.12 to the Company's form 10-K for fiscal year ended March
31, 2002.
10.38 Security Agreement dated June 1, 2004 by and among the
Company, IPI Merger Sub II, Inc., Retail Technologies
International, Inc., and Nathaniel F. Jessup, an individual,
Kathleen M. Leacox, an individual, and Glenn Swenson, an
individual, the Lumsden Real Estate Defined Benefit Plan, Mace
and Shirley Lumsden as co-trustees of the Mace Lumsden and
S.K. Lumsden Trust of January 19, 1995, and Merry Youle, an
individual (individually, a "Secured Party," and collectively,
the "Secured Parties").
10.39 Master Security Agreement between Island Pacific, Inc., Page
Digital Incorporated, IPI Merger Sub II, Inc., Sabica
Ventures, Inc. and Laurus Master Fund, Ltd. dated July 12,
2004, incorporated by reference to exhibit 10.1 to the
Company's Form 8-K filed on July 21, 2004.
10.40 Subsidiary Guaranty executed by Page Digital Incorporated, IPI
Merger Sub II, Inc. and Sabica Ventures, Inc., incorporated by
reference to exhibit 10.2 to the Company's Form 8-K filed on
July 21, 2004.
45
10.41 Stock Pledge Agreement dated July 12, 2004 between Island
Pacific, Inc. and Laurus Master Fund, Ltd., incorporated by
reference to exhibit 10.2 to the Company's Form 8-K filed on
July 21, 2004.
10.42 Separation Agreement and General Release of Claims between
Island Pacific, Inc. and Steven Beck dated July 29, 2004.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C.
32.1 Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On June 14, 2004, we filed a Form 8-K dated June 1, 2004 disclosing as Item 2 to
report the completion of the acquisition of Retail Technologies International,
Inc.
On July 21, 2004,,we filed a Form 8-K dated July 1, 2004 disclosing as Item 5
the sale of secured convertible term note for a gross proceed of $7.0 million.
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: August 12 , 2004 Ran Furman
Chief Financial Officer
(Principal Financial and Accounting Officer)
Signing on behalf of the registrant
46