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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
--------------
(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 - 62,894,387 shares as of October 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 September 30, 2004
and March 31, 2004..............................................................3
Condensed Consolidated Statements of Operations for the Three
Months and the Six Months Ended September 30, 2004 and 2003.....................4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 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.......................................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................45
Item 4. Controls and Procedures...............................................................45
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................45
Item 2. Changes in Securities and Use of Proceeds.............................................46
Item 3. Defaults Upon Senior Securities.......................................................46
Item 4. Submission of Matters to a Vote of Security Holders...................................46
Item 5. Other Information.....................................................................46
Item 6. Exhibits and Reports on Form 8-K......................................................47
SIGNATURES ....................................................................................53
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, MARCH 31,
2004 2004
-------------- --------------
(As Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 966 $ 2,108
Accounts receivable, net of allowance for doubtful accounts of $1,341
and $409, respectively 4,832 4,572
Other receivables, including $14 and $37 from related parties, respectively 115 143
Inventories 37 46
Current portion of non-compete agreements 310 668
Current portion of note receivable 36 36
Prepaid expenses and other current assets 701 682
-------------- --------------
Total current assets 6,997 8,255
Note receivable 117 126
Property and equipment, net 968 821
Goodwill, net 31,939 20,607
Other intangibles, net 20,627 18,297
Other assets 299 421
-------------- --------------
Total assets $ 60,947 $ 48,527
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable to related parties $ 982 $ --
Current portion of notes payable 1,798 --
Current portion of convertible debentures 2,294 146
Current portion of capital leases 169 169
Accounts payable 684 1,255
Accrued expenses 3,227 3,301
Deferred revenue 4,685 2,657
Income tax payable 127 --
-------------- --------------
Total current liabilities 13,966 7,528
Notes payable to related parties, less current maturities 1,565 --
Notes payable, less current maturities 266 --
Convertible debentures, net, less current maturities 4,159 1,900
Capital lease obligations, less current maturities 18 89
Deferred revenue 873 --
Long term liabilities 196 235
-------------- --------------
Total liabilities 21,043 9,752
-------------- --------------
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 $2,581 and $2,002, respectively 14,100 14,100
Common Stock, $.0001 par value; 100,000,000 shares authorized; 62,761,436
and 52,427,799 shares issued and outstanding, respectively 5 5
Additional paid in capital 84,296 74,088
Accumulated deficit (58,497) (49,418)
-------------- --------------
Total stockholders' equity 39,904 38,775
-------------- --------------
Total liabilities and stockholders' equity $ 60,947 $ 48,527
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- -------------- ----------- -------------
(As restated) (As restated)
Revenues:
Product $ 4,926 $ 1,825 $ 9,397 $ 5,011
Services 1,757 954 2,569 3,234
----------- -------------- ----------- -------------
Total revenues 6,683 2,779 11,966 8,245
----------- -------------- ----------- -------------
Cost of revenues:
Product 2,124 1,177 4,357 2,401
Services 956 476 1,434 1,489
----------- -------------- ----------- -------------
Total cost of revenues 3,080 1,653 5,791 3,890
----------- -------------- ----------- -------------
Gross profit 3,603 1,126 6,175 4,355
Expenses:
Application development 1,802 585 3,049 722
Depreciation and amortization 530 280 936 565
Restructuring 681 -- 681 --
Selling, general and administrative 3,988 3,001 8,299 5,797
----------- -------------- ----------- -------------
Total expenses 7,001 3,866 12,965 7,084
----------- -------------- ----------- -------------
Loss from operations (3,398) (2,740) (6,790) (2,729)
Other income (expense):
Interest income 4 (17) 4 9
Other income (expense) 5 (167) 102 (178)
Interest expense (2,088) (1,504) (2,389) (1,796)
----------- -------------- ----------- -------------
Total other expenses (2,079) (1,688) (2,283) (1,965)
----------- -------------- ----------- -------------
Loss before provision for income taxes (benefits) (5,477) (4,428) (9,073) (4,694)
Provision for income taxes (benefits) 6 67 6 (503)
----------- -------------- ----------- -------------
Net loss (5,483) (4,495) (9,079) (4,191)
Cumulative preferred dividends (294) (282) (580) (554)
----------- -------------- ----------- -------------
Net loss available to common stockholders $ (5,777) $ (4,777) $ (9,659) $ (4,745)
=========== ============== =========== =============
Basic and diluted loss per share:
Net loss $ (0.09) $ (0.13) $ (0.16) $ (0.13)
Cumulative preferred dividends (0.01) (0.01) (0.01) (0.01)
----------- -------------- ----------- -------------
Net loss available to common stockholders $ (0.10) $ (0.14) $ (0.17) $ (0.14)
=========== ============== =========== =============
Basic and diluted weighted-average common shares
outstanding 57,432 34,417 55,197 33,264
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------ -------------
(As restated)
Cash flows from operating activities:
Net loss $ (9,079) $ (4,191)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 2,687 1,766
Amortization of debt discount and conversion option 1,189 1,542
Gain on disposal of furniture and fixtures 169
Provision for allowance for doubtful accounts, net of recoveries 345 --
Stock-based compensation 29 126
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 979 (630)
Income tax refund receivable -- (846)
Inventories 9 7
Prepaid expenses and other assets 255 (363)
Accounts payable and accrued expenses (2,088) (3,880)
Income tax payable -- 398
Accrued interest on stockholders' loans, convertible notes and term loan 312 187
Deferred revenue 212 125
------------ -------------
Net cash used for operating activities (5,150) (5,565)
------------ -------------
Cash flows from investing activities:
Payment from note receivable 9 9
Proceeds from acquisition of Retail Technologies International, Inc., net 562 --
Purchases of furniture and equipment (55) (264)
Capitalized software development costs (357) (2,243)
------------ -------------
Net cash provided by (used for) investing activities 159 (2,498)
------------ -------------
Cash flows from financing activities:
Sale of common stock, net of offering costs 8 7,232
Decrease in amount due to stockholders, net (300) --
Proceeds from convertible debts 7,000 700
Payments on capital leases (82) --
Payments on term loans and convertible debentures (2,778) (135)
------------ -------------
Net cash provided by financing activities 3,848 7,797
------------ -------------
Effect of exchange rate changes on cash 1 (1)
------------ -------------
Net decrease in cash and cash equivalents (1,142) (267)
Cash and cash equivalents, beginning of period 2,108 1,319
------------ -------------
Cash and cash equivalents, end of period $ 966 $ 1,052
============ =============
Supplemental disclosure of cash flow information:
Interest paid $ 279 $ 134
Income taxes paid $ 6 --
Supplemental schedule of non-cash investing and financing activities:
Issued 7,551,696 shares of common stock upon conversion of 2,517,232 shares of
Series B Convertible Preferred Stock issued 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 600,000 shares of common stock as payment for liquidated damages $ 240 --
Issued 223,052 shares of common stock upon cashless exercise of an incentive
stock option $ 22 --
Issued 4,103,161 shares of common stock upon conversion of the 9% debentures -- $ 4,200
Issued 2,287,653 shares of common stock upon conversion of the note due to
stockholders -- $ 1,374
Issued 500,000 shares of common stock as payment for dividend on preferred stock -- $ 421
Retired 10,700,000 shares of treasury stock -- $ (8,906)
Issued 84,849 shares of common stock as payments for bonuses and services
rendered in prior periods -- $ 83
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ISLAND PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at September 30, 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 six months ended September 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/A for the year ended March 31, 2004.
The results of operations for the six months ended September 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 $7.1
million, consisting of $2.0 million in cash, 2.5 million shares of our common
stock valued at $2.00 per share and acquisition costs of $138,000. 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 and six months ended September 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.
Three Months Six Months
Ended Ended
September 30, September 30,
2003 2003
-------------- --------------
Revenues $ 4,307 $ 11,139
Net loss $ (4,734) $ (4,392)
Net loss available to common stockholders $ (5,016) $ (4,946)
Basic and diluted loss per share of common stock $ (0.14) $ (0.13)
Basic and diluted loss per share available to common stockholders $ (0.15) $ (0.15)
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 $11.6 million paid in shares of our common stock with
fair value of $1.2 million, newly designated Series B convertible preferred
stock ("Series B Preferred") with fair value of $5.7 million, promissory notes
totaling $3.6 million, assumption of incentive stock options with fair value of
$1.0 million and acquisition costs of $110,000; (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 occurred 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"). 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. We have not recorded
the liability relating to the price protection at the date of acquisition as the
contingency is based on future events and cannot yet be determined. We will
compute the total liability as soon as it can be determined and recorded as a
liability. The total cost of the price protection contingency will be deferred
and amortized over the shortest of the remaining useful lives of the assets
acquired in the acquisition in accordance with SFAS 141, "Business
Combinations".
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 $11.3 million and has been
recorded as goodwill. The fair value of assets acquired and liabilities assumed
were as follows (in thousands):
Cash $ 672
Accounts receivable 1,348
Prepaid expenses 148
Other receivables 212
Property and equipment 496
Non-compete agreement 29
Software technology 1,410
Customer relationship 1,660
Trademark 800
Capital lease obligation (11)
Accounts payable and accrued expenses (1,644)
Deferred revenue (2,689)
Income tax payable (127)
Notes due to stockholders (200)
Notes payable (1,789)
---------
Net assets 315
Excess of cost over fair value of net assets acquired 11,332
---------
Total purchase price $ 11,647
=========
The following unaudited pro forma consolidated results for the three and six
months ended September 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.
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues $ 6,683 $ 6,488 $ 13,359 $ 15,462
Net loss $ (5,483) $ (4,793) $ (10,011) $ (4,410)
Net loss available to common
stockholders $ (5,777) $ (5,075) $ (10,591) $ (4,964)
Basic and diluted loss per share of
common stock $ (0.10) $ (0.14) $ (0.18) $ (0.12)
Basic and diluted loss per share
available to common stockholders $ (0.10) $ (0.15) $ (0.19) $ (0.13)
8
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 September 30, 2004 and March 31, 2004, respectively, of which $36,000 is
current.
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 September 30, 2004 and March 31, 2004, goodwill and other intangibles consist
of the following (in thousands):
SEPTEMBER 30, 2004 MARCH 31, 2004
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Net amount amortization Net
-------- ------------- --------- --------- ------------- --------
Goodwill $ 38,431 $ (6,492) $ 31,939 $ 27,099 $ (6,492) $ 20,607
-------- ------------- --------- --------- ------------- --------
Other intangibles:
Amortized intangible assets
Software technology 32,071 (14,917) 17,154 30,357 (13,219) 17,138
Non-compete agreements 7,014 (6,704) 310 6,986 (6,318) 668
Customer relationships 2,564 (176) 2,388 904 (30) 874
Unamortized intangible:
Trademark 1,085 -- 1,085 285 -- 285
-------- ------------- --------- --------- ------------- --------
42,734 (21,797) 20,937 38,532 (19,567) 18,965
Less: current portion of non-
compete agreements 310 -- 310 668 -- 668
-------- ------------- --------- --------- ------------- --------
Long-term portion of other
Intangibles 42,424 (21,797) 20,627 37,864 (19,567) 18,297
-------- ------------- --------- --------- ------------- --------
Long-term portion of
goodwill and other
intangibles $ 80,855 $ (28,289) $ 52,566 $ 64,963 $ (26,059) $ 38,904
======== ============= ========= ========= ============= ========
During the six months ended September 30, 2004, we recorded approximately $11.3
million in goodwill, $1.4 million in software, $1.7 million in customer
relationships, $800,000 in trademarks and $29,000 in a non-compete agreement in
connection with the acquisition of RTI (see Note 2). In addition, we recorded
$97,000 and $357,000 million in capitalized software during the three and six
months ended September 30, 2004, respectively. 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 is being amortized its remaining useful life of seven months.
Transactions in goodwill during the six months ended September 30, 2004 and
fiscal year ended March 31, 2004 are as follows (in thousands):
September 30, March 31,
2004 2004
------------- -------------
Cost:
Beginning balance $ 27,099 $ 21,287
Goodwill from acquisition of RTI and Page
Digital, respectively 11,332 5,812
------------- -------------
Ending balance $ 38,431 $ 27,099
============= =============
Accumulated amortization $ 6,492 $ 6,492
============= =============
9
We found no indication of impairment of the goodwill during the six months ended
September 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, 2004 and during the fourth quarter 2004. No adjustments
have been made to the useful lives of our intangible assets.
Amortization expense for the three months ended September 30, 2004 and 2003 was
$1.2 million and $0.8 million, respectively. Amortization expense for six months
ended September 30, 2004 and 2003 was $2.3 million and $1.7 million. We expect
amortization expense for the next five fiscal years to be as follows (in
thousands):
March 31,
2005 $ 2,376
2006 $ 4,047
2007 $ 3,792
2008 $ 3,760
2009 $ 3,613
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 $2.6 million, 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 $2.5 million as of September 30,
2004, of which $982,000 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 totaling $1,789,000 under certain promissory notes
originally issued by RTI and additional notes totaling $500,000 to the existing
note holders of RTI. Notes payable consisted of the following (in thousands):
September 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 May 31, 2004 through May 31, 2005 $ 1,542 $ --
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 522 --
------------- ----------
Total notes payable $ 2,064 $ --
============= ==========
Total notes payable (including accrued interest) $ 2,064 $ --
Less: current maturities 1,798 --
------------- ----------
Long-term portion of notes payable $ 266 $ --
============= ==========
10
CONVERTIBLE DEBENTURES
Convertible debentures at September 30, 2004 and March 31, 2004 consist of the
following (in thousands):
September 30, March 31,
2004 2004
------------- ----------
Convertible note, secured by all of our assets, interest rate of
prime plus two percent per annum and matures in July 2007 $ 7,038 $ --
Convertible debentures, interest rate of 9% per annum and mature
in May 2006 1,209 3,012
------------- ----------
Total 8,247 3,012
Less: debt discount 1,794 966
------------- ----------
$ 6,453 $ 2,046
============= ==========
Total convertible debentures (including accrued interest), net of
debt discount $ 6,453 $ 2,046
Less: current maturities 2,294 146
------------- ----------
Long-term portion of convertible debentures $ 4,159 $ 1,900
============= ==========
Pursuant to a Securities Purchase Agreement dated July 12, 2004, we sold and
issued to Laurus Master Fund, Ltd. ("Laurus") a secured convertible term note
("Laurus Note") for gross proceeds of $7.0 million. In addition, we issued to
Laurus a warrant to purchase up to 3,750,000 shares of our common stock at a
price of $0.71 per share ("Laurus Warrant"). Our obligations under the Laurus
Note are secured by all of our assets. All our wholly owned subsidiaries
guaranteed our obligations under the Laurus Note. We also pledged all of our
interests in the outstanding stock of our subsidiaries as security for our
obligations under the Laurus Note.
The Laurus Note would have originally matured on September 1, 2004; however, the
maturity of the Laurus Note was automatically extended to July 12, 2007
("Maturity Date") upon the stockholders approving an amendment to our
Certificate of Amendment to increase our authorized share capital limit to 250
million shares and us filing an amendment to our Certificate of Amendment to
effect the increase with the Secretary of State of Delaware by August 31, 2004.
We would have been obligated to make monthly payments in the amount of $212,000
plus any unpaid interest commencing on August 1, 2004. In August 2004, Laurus
agreed to defer the August 1, 2004 payment until the Maturity Date.
In October 2004, Laurus agreed to amend the Laurus Note and defer the payments
due in September 2004 through February 2005 until the Maturity Date. Pursuant to
the amendment, we are required to make monthly payments in the amount of
$212,121 commencing on March 1, 2005 with a balloon payment of $1.1 million in
July 2007. We also issued Laurus a warrant to purchase 250,000 shares of our
common stock at a price of $0.41 per share ("October `04 Laurus Warrant").
The Laurus Note accrues interest at a rate per annum (the "Interest Rate") equal
to the "prime rate" (4.75% as of October 31, 2004) published in The Wall Street
Journal from time to time, plus two percent. Interest under the Laurus 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 Laurus Note or exercise of the Laurus 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 Laurus 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 Laurus 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 Laurus
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 Laurus Note by paying
Laurus 125% of the principal amount due under the Laurus Note together with all
accrued and unpaid interest. Pursuant to the Amendment No. 1 to the Laurus Note,
the conversion price for $2.0 million of the $7.0 million Laurus Note was
reduced to $0.37 per share.
11
The Laurus Warrant and October `04 Laurus Warrant (collectively "Laurus
Warrants") are immediately exercisable and have a seven year term. We have the
right to require exercise of the Laurus Warrants in whole or in part if: (1) all
of our obligations under the Laurus Note have been irrevocably paid in full, (2)
the common stock underlying the Laurus Warrants 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 Laurus Warrants is greater than three hundred
percent (300%) of the then applicable exercise price.
We were 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
Laurus Note or exercise of the Laurus Warrants (the "Underlying Shares")
pursuant to the Registration Rights Agreement between us and Laurus (the
"Registration Rights Agreement"). We filed the Registration Statement on
September 10, 2004 (the "Filing Date") and we are required to have the
Registration Statement declared effective by the SEC no later than 120 days
after it is filed (the "Effectiveness Date"). If the Registration Statement is
not 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 Laurus liquidated damages equal
to 2% of original principal balance on the Laurus 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 original conversion price of $0.56 and our stock price on the date
of issuance of the Laurus Note amounted to $281,000 and is being amortized over
the term of the Laurus Note. We amortized $20,000 in the three and six months
ended September 30, 2004.
We allocated the proceeds received from the Laurus 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 Laurus Note. We amortized
$37,000 in the three and six months ended September 30, 2004.
In connection with the amendment in October 2004, we will compute the difference
between the conversion price of $0.37 for the first $2.0 million of the Laurus
Note and our stock price on the date of issuance of the Laurus Note and will
amortize the difference over the remaining term of the Laurus Note.
In connection with the sale of $7.0 million Laurus Note, we had adjusted the
exercise price of outstanding warrants previously issued to certain investors to
$0.56 per share pursuant to the anti-dilution protection provision. Accordingly,
we recorded a charge of $254,000 as interest expense in the quarter ended
September 30, 2004.
In March 2004, we entered into a Securities Purchase Agreement for the sale of
convertible debentures (the "March '04 Debenture") to Omicron Master Trust
("Omicron") for gross proceeds of $1.75 million ("Omicron Debenture") and
Midsumer Investments, Ltd. ("Midsummer") for gross proceeds of $1.25 million
("Midsummer Debenture"). The debentures would have matured in May 2006, bore an
interest rate of 9% per annum and provided for interest only payments on a
quarterly basis, payable, at our option, in cash or shares of our common stock.
The debentures would have been convertible into shares of our common stock at a
conversion price of $1.32 per share, subject to adjustment if we offered or sold
any securities for an effective per share price that was less than 87% of the
then current conversion price, negatively restated any of our financial
statements or made any public disclosures that negatively revised or
supplemented any prior disclosure regarding a material transaction consummated
prior to March 15, 2004 or triggered other customary anti-dilution protections.
If certain conditions were met, we would have the option to redeem the March '04
Debentures at 110% of their face value, plus accrued but unpaid interest.
We would have been obligated to redeem the Omicron Debenture and Midsummer
Debenture at the initial monthly amounts of $136,110 and $97,223, respectively,
commencing on February 1, 2005. If the daily volume weighted average price of
our common stock on the American Stock Exchange exceeded $1.15 by more than 200%
for 15 consecutive trading days, we would 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.
12
With the proceeds from the sale of the Laurus Note in July 2004 for $7.0 million
as discussed above, we paid off in full the Omicron Debenture with a balance of
$1.75 million plus $0.2 million in accrued interest, liquidated damages and
prepayment penalty.
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 Omicron Debenture amounted to $155,000 and was being
amortized over the term of the debt. A total of $21,000 had been amortized
during the period from the date of issuance to the date the debt was repaid.
Upon repayment of the debt, the remaining balance of $134,000 was expensed.
On July 30, 2004, we also amended the Midsummer Debenture. Pursuant to the
amendment agreement, we issued 600,000 shares of common stock which we valued at
$240,000 to Midsummer as payment in liquidated damages and as consideration for
Midsummer consenting to the sale of the $7.0 million Laurus Note.
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 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. Triggering events have occurred
and we are currently in discussions with Midsummer concerning an adjustment of
the current conversion price.
We must redeem the amended Midsummer Debenture at the initial monthly amount of
$50,000 which commenced on September 1, 2004 and increases to $62,500 starting
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.
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 Midsummer Debenture amounted to $110,000 and was being
amortized over the term of the debt. Upon amending the debt, we computed the
difference between the amended conversion price of $0.56 and out stock price of
the date of issuance. We recorded an additional maximum charge of $785,000 and
will amortize it over the remaining term of the debt. We had amortized $115,000
and $128,000 in the three and six months ended September 30, 2004.
We also issued Omicron and Midsummer 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 $1.32 per share, which was adjusted to $0.56 in July
2004 as a result of the sale of $7.0 Laurus Note, with a five-year term,
exercisable at anytime after September 16, 2004, subject to adjustment if we
offer or sell any securities for an effective per share price that is less than
the then current exercise price, negatively restate any of our financial
statements or make any public disclosure that negatively revises or supplements
any prior disclosure regarding a material transaction consummated prior to March
15, 2004 or trigger other customary anti-dilution protections and (2) Series B
Warrants to purchase up to 8,500,000 shares of our common stock with an exercise
price of $5 per share, these warrants are immediately exercisable and expire on
the earlier of the six-month anniversary of the effective date of the
registration statement that is required to be filed or 18 months from March 15,
2004, subject to adjustment upon the issuance or sale of securities in a public
offering for an effective per share price that is less than the then-current
exercise price and upon the trigger of other customary anti-dilution
protections.
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.
13
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 was filed on
August 24, 2004, but it has not been declared effective as of November 15, 2004.
As a result, liquidated damages in the amounts of $81,000 and $120,000 have been
recorded in the six months ended September 30, 2004 and the fiscal year ended
March 31, 2004, respectively. Outstanding liquidated damages totaling $201,000
were paid in July 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 and amortize the change over the term of the debt. The amount
allocated to the warrants issued to Omicron was $420,000. A total of $57,000 had
been amortized during the period from the issuance to the date the note was
repaid. Upon repayment of the Omicron Debenture, the remaining balance of
$363,000 was expensed. As a result of adjusting the exercise price of Omicron's
warrant to $0.56, we also recorded a charge of $112,000 as interest expense in
the quarter ended September 30, 2004.
The amount allocated to the warrants issued to Midsummer was originally
$300,000. Upon amending the Midsummer Debenture, we recomputed the amount
allocated warrants and recorded an additional maximum charge of $54,000. The
additional charge is being amortized over the remaining term of the debt. We
amortized $42,000 and $76,000 in the three and six months ended September 30,
2004, respectively.
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 $187,000 and $258,000 at September 30, 2004 and
March 31, 2004, respectively, of which the current portion is $169,000.
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. The line of credit was paid
off in full in July 2004.
14
NOTE 9 - DEFERRED REVENUE
Deferred revenue at September 30, 2004 and March 31, 2004 consists of the
following (in thousands):
June 30, March 31,
2004 2004
-------- ---------
Prepaid support services $ 5,040 $ 2,528
Customer deposits 518 129
-------- ---------
Total 5,558 2,657
Long-term portion 873 --
-------- ---------
Current portion $ 4,685 $ 2,657
======== =========
NOTE 10 - 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 $2.6
million, or $18.31 per share, and $2.0 million, or $14.19 per share, at
September 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 $0.87. 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") had no
stated value and was 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 increasing the number of
shares of common stock in August 2004, all Series B Preferred was converted into
7,551,696 shares of common stock. No dividends had been declared.
NOTE 11 - EQUITY TRANSACTIONS
During the quarter ended September 30, 2004, we had the following equity
transactions:
o Issued 600,000 shares of common stock, with a fair value of $240,000,
to Midsummer as payment for liquidated damages and as
consideration for its consent to the sale of the Laurus Note,
o Issued an aggregate of 7,551,696 shares of common stock, with a fair
value of $5,709,000, to Michael Tomczak, our President and COO, and
Jeffrey Boone, our CTO, upon conversion of all of 2,517,232 shares of
Series B Preferred Stock,
o Granted Laurus a warrant to purchase up to 3,750,000 shares of our
common stock at an exercise price of $0.71 in connection with the sale
of the Laurus Note,
o Granted incentive stock options to employees to purchase an aggregate
of 3,340,000 shares of common stock at exercise prices ranging from
$0.38 to $0.48,
o Granted a consultant a warrant to purchase up to 220,000 shares of
common stock at an exercise price of $0.50 per share, with a fair value
of $37,000, for public relation services, and
o Granted options to purchase an aggregate of 102,500 shares of common
stock at an exercise price of $0.44 to outside directors of the Board
as directors' fees for the quarter ended September 30, 2004.
15
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 loss and basic and diluted loss per share as if stock-based employee
compensation had been recognized during the six months ended September 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.
Six Months Ended
September 30,
2004 2003
--------- ---------
(in thousands, except per
share amounts)
(unaudited)
Net loss as reported $ (9,079) $ (4,191)
Less: stock-based compensation expense,
net of related tax effects (1,005) (1,081)
--------- ---------
Pro forma net loss $(10,084) $ (5,272)
========= =========
Basic and diluted earnings (loss) per share
- as reported $ (0.16) $ (0.13)
Basic and diluted earnings (loss) per share
- pro forma $ (0.18) $ (0.16)
NOTE 12 - EARNINGS (LOSS) PER SHARE
Basic loss per common share are calculated by dividing net loss by the weighted
average number of common shares outstanding during the reporting period. Diluted
earnings per common shares ("diluted EPS") reflect the potential dilutive
effect, determined by the treasury method, of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Earnings per share for the three and six months ended September 30, 2004
and 2003 is calculated as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net loss available to common
stockholders $ (5,777) $ (4,777) $ (9,659) $ (4,745)
Basic and diluted weighted average
shares 57,432 34,417 55,197 33,264
Basic and diluted loss per share $ (0.10) $ (0.14) $ (0.17) $ (0.14)
16
The following potential common shares have been excluded from the computation of
diluted net loss per share for the six months ended September 30, 2004 and 2003,
because the effect would have been anti-dilutive:
Three Months Ended
September 30,
2004 2003
---------- ----------
Outstanding options under our stock option plans 8,609,547 4,866,240
Outstanding options granted outside our stock
option plans 8,182,274 5,054,312
Warrants issued in conjunction with private
placements and financing 17,098,760 6,330,281
Warrants issued for services rendered 1,451,898 748,169
Series A Convertible Preferred Stock 19,124,693 18,444,424
Convertible debt 14,642,857 2,723,214
---------- ----------
Total 69,110,029 38,166,640
========== ==========
NOTE 13 - RESTRUCTURING CHARGE
We recorded a $681,000 restructuring charge in the quarter ended September 30,
2004 for one-time termination benefits related to workforce reduction of nine
full-time employees including 3 executive officers, 2 in sales and 4 in
administrative functions in the Americas. The termination benefits include
severance payments and benefits. All workforce reductions associated with this
charge were made on or before September 30, 2004. A summary of the restructuring
charge included in accrued expenses at September 30, 2004 is as follows (in
thousands):
Initial reserve $ 681
Paid (320)
-------
Balance $ 361
=======
$156,000 of the remaining balance will be paid in the third quarter of
2005, $47,000 each in the fourth quarter of 2005 and the first through third
quarter of 2006 and $17,000 in the fourth quarter of 2006.
NOTE 14 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a 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.
17
We currently operate in the Americas and Europe. On June 1, 2004, we began to
operate in Asia. The geographic distribution of our revenues and long-lived
assets are as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
Revenues:
Americas $ 5,538 $ 2,288 $ 9,770 $ 7,214
Europe 993 491 2,006 1,031
Asia 152 -- 190 --
------- ------- ------- -------
Total revenues $ 6,683 $ 2,779 $11,966 $ 8,245
======= ======= ======= =======
September 30, March 31,
2004 2004
------------- ---------
Long-lived assets:
Americas $ 54,119 $ 40,783
Europe 24 30
------------- ---------
Total identifiable assets $ 54,143 $ 40,813
============= =========
In the three months ended September 30, 2004, revenues from three customers
represents 9%, 6% and 2%, respectively, of total revenues. In the six months
ended September 30, 2004, revenues from these three customers represents 6%, 4%
and 6% of total revenues, and accounts receivable balances at September 30, 2004
from these customers represent 3%, 0% and 10%, respectively, of total accounts
receivable. In the three and six months ended September 30, 2003, another
customer represents 7% and 18%, respectively, of total revenues and its account
receivable balance at September 30, 2003 represents 45% 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
revenues 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.
18
A summary of the revenues and operating income (loss) and identifiable assets
attributable to each of these business units are as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003
------------ --------- ---------- -----------
Revenues:
Retail Management Solutions $ 2,063 $ 2,406 $ 5,028 $ 7,470
Store Solutions 2,914 373 4,077 775
Multi-channel Retail 1,706 -- 2,861 --
------------ --------- ---------- -----------
Total revenues $ 6,683 $ 2,779 $ 11,966 $ 8,245
============ ========= ========== ===========
Operating income (loss):
Retail Management Solutions $ (1,375) $ (1,344) $ (2,066) $ (375)
Store Solutions (468) (415) (827) (639)
Multi-channel Retail (207) -- (721) --
Other (see below) (1,348) (981) (3,176) (1,715)
------------ --------- ---------- -----------
Total operating income (loss) $ (3,398) $ (2,740) $ (6,790) $ (2,729)
============ ========= ========== ===========
Other operating loss:
Depreciation $ (4) $ (8) $ (8) $ (25)
Administrative costs and other
non-allocated expenses (1,344) (973) (3,168) (1,690)
------------ --------- ---------- -----------
Total other operating loss $ (1,348) $ (981) $ (3,176) $ (1,715)
============ ========= ========== ===========
September 30, March 31,
2004 2004
------------- ------------
Identifiable assets:
Retail Management Solutions $ 29,872 $ 32,757
Store Solutions 20,448 3,790
Multi-channel Retail 9,729 10,093
------------- ------------
Total identifiable assets $ 60,049 $ 46,640
============= ============
Goodwill, net:
Retail Management Solutions $ 13,903 $ 13,903
Store Solutions 12,224 892
Multi-channel Retail Solutions 5,812 5,812
------------- ------------
Total goodwill, net $ 31,939 $ 20,607
============= ============
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 and administrative expenses. The
"Other" caption includes 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.
During the six months ended September 30, 2004, the Store Solutions business
unit acquired $11.3 million goodwill in connection with the acquisition of RTI.
There are no changes in goodwill of the Retail Management Solutions and
Multi-channel Retail Solutions business units.
19
In addition, during the three months and six month ended September 30, 2004, we
recorded restructuring charges in the amount of $82,000 in Store Solutions,
$10,000 in Retail Management, $5,000 in Multi-channel Retail and $584,000 in
corporate business units (see Note 13). There were no restructuring charges
recorded in the three and six months ended September 30, 2003.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Effective April 1, 2004, we entered into an agreement with a company ("Newco
PTY") 100% wholly-owned by QQQ. We previously purchased capitalized software
from QQQ, a company affiliated with the former management of our Australian
Subsidiary, which was sold in the third quarter of fiscal 2002. Under this
agreement, we granted Newco PTY a three year option to purchase our Store
Solutions subsidiary for the existing book value at the time of the option
exercise. After three years, the agreement automatically renews, but either
party may terminate this agreement with one month's written notice. Until the
option is exercised, the profit and losses of Newco shall be split as follows:
For profit, 50%/50% for the twelve months ended March 31, 2005, 60%/40%
(Newco PTY/Island Pacific) for the twelve months ended March 31, 2006 and
70%/30% (Newco PTY/Island Pacific) for the twelve months ended April 1, 2007.
Newco PTY may exercise its option at anytime with thirty day written notice.
Island Pacific shall bear all losses of Newco until September 30, 2004 and
then split any further losses 50/50 for the six months to March 31, 2005,
60/40 (Newco PTY/Island Pacific) for the twelve months ended March 31, 2005
and 70/30 (Newco PTY/Island Pacific) for the twelve months ended April 1,
2007. As of September 30, 2004, we have incurred Newco's total losses of
$56,000. As of September 30, 2004, the book value of the Store Solutions
subsidiary was approximately $2.2 million.
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.
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.
20
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.
Certain of our standard software license agreements contain a limited
infringement indemnity clause under which we agree to indemnify and hold
harmless our customers and business partners against certain liability and
damages arising from claims of various copyright or other intellectual property
infringement by our products. These terms constitute a form of guarantee that is
subject to the disclosure requirements, but not the initial recognition or
measurement provisions of Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of the Indebtedness of others." We
have never lost an infringement claim and our cost to defend such lawsuits have
been insignificant. Although it is possible that in the future third parties may
claim that our current or potential future software solutions infringe on their
intellectual property, we do not currently expect a significant impact on our
business, operating results or financial condition.
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 16 - RELATED-PARTY TRANSACTIONS
Included in other receivables at September 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 one of our former executive officers, 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
and $0 for the three months ended September 30, 2004 and 2003, respectively, and
$400,000 and $0 for the six months ended September 30, 2004 and 2003,
respectively. A security deposit of $170,000 relating to this lease is included
in other long-term assets at September 30, 2004 and March 31, 2004.
We retained our former CEO and Chairman of the Board, Barry Schechter, to
provide consulting services starting August 2003. For three months ended
September 30, 2004 and 2003, the expense for this service was $108,000 and $0,
respectively. For the six months ended September 30, 2004 and 2003, the expense
for this service was $219,000 and $108,000, respectively.
In fiscal 2004, we retained an entity owned by an immediate family member of our
former CEO and Chairman, Harvey Braun, to provide recruiting and marketing
services. For the three months ended September 30, 2004 and 2003, the expense
for this service was $0 and $98,000, respectively. For the six months ended
September 30, 2004 and 2003, the expense for this service was $0 and $108,000,
respectively.
In May 2004, Mr. Braun resigned from his position as Chief Executive Officer.
Subsequent to September 30, 2004, we entered into a severance and separation
agreement with Mr. Braun. Pursuant to this agreement, we agreed to pay Mr. Braun
a total of $192,000 with $96,000 payable on October 28, 2004 and the remaining
$96,000 payable on November 28, 2004. In addition, Mr. Braun agreed to forfeit
an option for 500,000 shares. We accrued a severance payment of $192,000 in the
six months ended September 30, 2004 and included in accrued expenses at
September 30, 2004. As of November 10, 2004, the outstanding balance is
$192,000.
Effective as of July 14, 2004, Steven Beck resigned from our board of directors
and effective July 29, 2004, Mr. Beck resigned from his position as executive
officer. On July 29, 2004, we entered into an agreement to pay Mr. Beck
$325,000, including $30,000 of vacation accrual balance, with $109,000 payable
on July 29, 2004 and the balance payable in four monthly installments of $54,000
commencing on August 15, 2004. We accrued a restructuring charge of $295,000 in
the three and six months ended September 30, 2004. As of November 10, 2004, the
outstanding balance is $54,000.
21
NOTE 17 - SUBSEQUENT EVENTS
On October 25, 2004, we determined that our financial statements for the fiscal
year ended March 31, 2004 and our quarterly financial statements for the second
and third quarters of the fiscal year ending March 31, 2003, the first, second
and third quarters of the fiscal year ending March 31, 2004 and the first
quarter of the fiscal year ending March 31, 2005 needed to be restated in
accordance with GAAP. In connection with the restatements, we filed an 8-k on
October 29, 2004.
We completed the restatements and made the following revised filings: 10-K/A for
the fiscal year ended March 31, 2004; and a 10-Q/A for fiscal quarters ended
September 30, 2002, December 31, 2002, June 30, 2003, September 30, 2003,
December 31, 2003 and June 30, 2004. We do not intend to file a revised 10K for
the year ended March 31, 2003 due to the immateriality of the impact of the
restatements in that filing.
We determined that prior presentation of the financial statements as discussed
above needed to be restated for the following items, where applicable:
1. Reversal of revenue recognized on a one-time sale of software
technology rights;
2. Presentation of net sales and cost of sales as product and services
revenues and corresponding costs of revenues;
3. Reversal of a purchase of software technology;
4. Accrual of a royalty liability pursuant to the purchase agreement of
software technology;
5. Capitalization and amortization of the beneficial conversion charges
related to the March '03 and March '04 convertible debentures;
6. Capitalization of legal fees related to the acquisition of Page
Digital Incorporated and Retail Technologies International, Inc.,
7. Reclassification of the unamortized cost of debt discount and
beneficial conversion charges from additional paid in capital to
interest expense, and
8. Inclusion of the value of options assumed in the acquisition of RTI as
a purchase price adjustment.
22
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/A FOR THE YEAR ENDED MARCH 31, 2004, AND THE
DISCLOSURES UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K/A, AS WELL AS
OTHER REPORTS AND FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We are a provider of software solutions and services to the retail industry. We
provide solutions that help retailers understand, create, manage and fulfill
consumer demand. We derive the majority of our revenues from three sources: the
initial sale of application software licenses, or license revenues, professional
services and support, and maintenance. 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. Professional services relate to implementation of our software,
training of customer personnel and modification or customization work. Support,
maintenance and software updates are a source of recurring revenues and are
generally based on a percentage of the software license revenues and are charged
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.
As the vast majority of our revenues are derived from the retail industry, we
are heavily dependent on the financial strength of retailers and their capital
budgets. Deterioration in the health of retailers, a reduction in their capital
budget or a decision to delay the purchase of new systems have a direct impact
on our business. Our sales cycles are long, generally three to twelve months,
and our ability to close a pipeline of potential transaction is very
unpredictable. As such, management believes that license revenue and growth in
license revenue are the best indicator of the Company's business as they signify
either new customers or an expansion of licenses of existing customers. While
there's generally a time lag between a sale of new license and when we provide
services and support, an increase in license revenue will generally lead to an
increase in services and support revenues in future quarters.
In recent periods, we have reported flat to decreased 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;
23
o Implemented cost containment measures;
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 collaborations 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.
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 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 as a director.
o Mr. Page resigned from the position of executive officer in September
2004.
o In July, we sold and issued a secured convertible note for a gross
proceed of $7.0 million. See "Indebtedness - Laurus" below.
o In November 2004, we completed the restatements and made the following
revised filings: 10-K/A for the fiscal year ended March 31, 2004 and
10-Q/A for the fiscal quarter ended September 30, 2002, December 31,
2002, June 30, 2003, September 30, 2003, December 31, 2003 and June 30,
2004.
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
$11.6 million paid in shares of our common stock with fair value of $1.2
million, newly designated Series B Preferred with fair value of $5.7 million,
promissory notes totaling $3.6 million, assumption of incentive stock options
with fair value of $1.0 million and acquisition costs of $110,000; (iii) the
Shareholders and Intuit are entitled to price protection payable if and to the
extent that the average trading price of our common stock is less than $0.76 at
the time the shares of our common stock issued in the Merger and issuable upon
conversion of the Series B Preferred are registered pursuant to the Registration
Rights Agreement dated June 1, 2004 between us, the Shareholders and Intuit; and
(iv) the Merger consisted of two steps, first, Merger Sub merged with and into
RTI, Merger Sub's separate corporate existence ceased and RTI continued as the
surviving corporation, 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.
24
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 occurred when we filed the Certificate of Amendment
with the Delaware Secretary of State increasing the authorized number of shares
of our common stock. 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. We have not recorded the liability relating to the price
protection at the date of acquisition as the contingency is based on future
events and cannot yet be determined. We will compute the total liability as soon
as it can be determined and recorded as a liability. The total cost of the price
protection contingency will be deferred and amortized over the shortest of the
remaining useful lives of the assets acquired in the acquisition in accordance
with SFAS 141, "Business Combinations.
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 SEPTEMBER 30, 2004 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2003
REVENUES
Product revenues increased $3.1 million, or 172%, to $4.9 million in the quarter
ended September 30, 2004 from $1.8 million in the quarter ended September 30,
2003, primarily due to the inclusion, in the quarter ended September 30, 2004,
of $2.4 million and $0.9 million of product revenues for RTI and Page Digital,
respectively. Excluding RTI and Page Digital product revenues, product revenues
decreased $0.2 million to $1.6 million, a 11% decrease, primarily due to a $0.2
million decrease in sale of partner products as we focused on selling our core
products. Services revenues increased by $0.8 million, or 84% to $1.8 million in
the quarter ended September 30, 2004 from $1.0 million in the quarter ended
September 30, 2003 primarily due to the inclusion of $0.8 million and $0.1
million of services revenue for Page Digital and RTI, respectively. Excluding
Page Digital and RTI services revenues, services revenues decreased $0.1 million
to $0.9 million, an 10% decrease. Toys accounted for $0 and $0.2 million of
services in the quarter ended September 30, 2004 and September 30, 2003,
respectively. Total revenues increased $3.9 million, or 139%, to $6.7 million in
the quarter ended September 30, 2004 from $2.8 million in the quarter ended
September 30, 2003, due primarily to the inclusion of $2.5 million and $1.7
million of RTI and Page Digital revenues recognized in the quarter ended
September 30, 2004. Excluding Page Digital and RTI, total revenues decreased
$0.3 million to $2.5 million, a 11% decrease, primarily due to the decrease in
sale of partner products and the inclusion, in the prior year quarter, or TRU
services revenue.
25
COST OF REVENUES/GROSS PROFIT
Cost of revenues increased by $1.4 million, or 82%, to $3.1 million in the
quarter ended September 30, 2004 from $1.7 million in the quarter ended
September 30, 2003. Cost of product revenues increased $0.9 million, or 75%, to
$2.1 million in the quarter ended September 30, 2004 from $1.2 million in the
quarter ended September 30, 2003. Amortization of capitalized software included
in cost of product revenues increased to $0.9 million in the quarter ended
September 30, 2004 from $0.6 million in the quarter ended September 30, 2003.
Cost of services revenue increased $0.5 million, or 100%, to $1.0 million in the
quarter ended September 30, 2004 from $0.5 million in the quarter ended
September 30, 2003. Total gross profit increased $2.5 million, or 227%, to $3.6
million in the quarter ended September 30, 2004 from $1.1 million in the quarter
ended September 30, 2003, primarily due to the inclusion of $2.1 million and
$0.6 million of total gross profit from RTI and Page Digital in the quarter
ended September 30, 2004. Excluding RTI and Page Digital, gross profit decreased
$0.2 million to $0.9 million, a 18% decrease. Total gross profit margin was 54%
and 39% for the quarter ended September 30, 2004 and September 30, 2003,
respectively. Excluding Page Digital and RTI, gross profit margin decreased to
36%. Gross profit margin on products was 57% and 33% for the quarters ended
September 30, 2004 and September 30, 2003, respectively. The increase is due to
the inclusion of Page Digital and RTI product revenues which carry higher profit
margins. Excluding Page Digital and RTI, gross profit margin on products
decreased to 22%, due primarily to a $0.2 million decrease in product revenues
and a $0.2 million increase in amortization of capitalized software. Gross
profit margin on services was 44% and 50% for the quarters ended September 30,
2004 and September 30, 2003, respectively. Excluding Page Digital and RTI, gross
profit margin increased to 62% as the percentage of modification revenues, which
carry higher margins than typical services, as a percentage of total services
revenue increased in the quarter ended September 30, 2004 from the quarter ended
September 30, 2003.
APPLICATION DEVELOPMENT EXPENSE
Application development expense increased by $1.2 million, or 200%, to $1.8
million in the quarter ended September 30, 2004 from $0.6 million in the quarter
ended September 30, 2003. The increase is primarily due to the inclusion of $0.4
million of application development expenses from Page Digital and RTI in the
quarter ended September 30, 2004 and larger capitalization in the six months
ended September 30, 2003.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $0.5 million in the quarter ended
September 30, 2004 from $0.3 million in the quarter ended September 30, 2003,
primarily due to the inclusion of Page Digital and RTI.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by $1.0 million,
or 33%, to $4.0 million in the quarter ended September 30, 2004 from $3.0
million in the quarter ended September 30, 2003, primarily due to the inclusion
of $2.3 million of SG&A expenses from Page Digital and RTI that are included in
the quarter ended September 30, 2004. Excluding Page Digital and RTI, SG&A
expenses decreased to $1.7 million, a 43% decrease, primarily due to reduction
in personnel and a focus on cost containment. SG&A expenses as a percent of
sales decreased to 57% in the quarter ended September 30, 2004 from 108% in the
quarter ended September 30, 2003. We anticipate that SG&A as a percentage of
sales will continue to decrease in the future as we anticipate revenues
increasing in the future at a faster rate than the growth in SG&A.
RESTRUCTURING EXPENSES
Restructuring expenses were $0.7 million and $0 in the three months ended
September 30, 2004 and September 30, 2003, respectively. During the quarter
ended September 30, 2004, we began a cost reduction program. This program was
not contemplated as part of the acquisition of Page Digital or RTI, but rather
was implemented in the quarter ended September 30, 2004 after we analyzed our
cost structure and determined that we needed to more properly align our
operating expense with our current revenue levels. The restructuring expenses
are a result of our cost containment measures across all business units and
relate to one-time termination costs consisting of severance payments and
benefits related to workforce reduction of nine full time employees. All
employees impacted by this restructuring were notified of the plan of
termination and the related benefits on or before September 30, 2004. As of
September 30, 2004, $0.3 million has been paid with the balance to be paid
through the fourth quarter of 2006.
OPERATING LOSS
Operating loss which included depreciation and amortization expense, was $3.4
million for the quarter ended September 30, 2004, compared to an operating loss
of $2.7 million for the quarter ended September 30, 2003, as the $2.5 million
increase in gross profit, due primarily to the increase in sales, was more than
offset by the $3.1 million increase in total expenses.
INTEREST EXPENSE
Interest expense increased by $0.1 million, or 7%, to $1.6 million in the
quarter ended September 30, 2004 from $1.5 million in the quarter ended
September 30, 2003. Interest expense in the quarter ended September 30, 2004 was
comprised primarily of $1.2 million financing costs and amortization of debt
discount on the Laurus Note, as well as $0.2 million interest expense on the
Laurus Note, the March '04 convertible debentures and notes due to the former
RTI note holders. Interest expense in the quarter ended September 30, 2003 was
comprised primarily of $1.4 million amortization of debt discount on the March
'04 convertible debentures.
26
PROVISION FOR INCOME TAXES
Provision for income taxes for the quarters ended September 30, 2004 and 2003
are $6,000 and $67,000, respectively.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding Series A Preferred attributable to the
quarter ended September 30, 2004 and September 30, 2003 were $0.3 million.
SIX MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2003
REVENUES
Product revenues increased $4.4 million, or 88%, to $9.4 million in the six
months ended September 30, 2004 from $5.0 million in the six months ended
September 30, 2003, primarily due to the inclusion, in the six months ended
September 30, 2004, of $3.0 million and $1.6 million of product revenues for RTI
and Page Digital, respectively. Excluding RTI and Page Digital product revenues,
product revenues decreased $0.2 million to $4.8 million, a 4% decrease. Services
revenues decreased by $0.6 million, or 19% to $2.6 million in the six months
ended September 30, 2004 from $3.2 million in the six months ended September 30,
2003 primarily due to a decrease to $1.5 million from Toys R Us., Inc. "(Toys"),
a $0.5 million decrease in services revenues, offset by the inclusion of $1.3mm
of Page Digital and RTI services revenues. Toys revenue in fiscal 2004 consisted
primarily of implementation services. Toys had been a major customer since
fiscal 2000 and terminated its contract in third quarter of fiscal 2004. As we
don't anticipate additional material Toys revenue in the near future, the loss
of Toys will have a significant impact on future revenues as we attempt to
replace those revenues with revenues generated from new customers. Total
revenues increased $3.8 million, or 46%, to $12.0 million in the six months
ended September 30, 2004 from $8.2 million in the six months ended September 30,
2003, due primarily to the inclusion of $3.2 million and $2.8 million of RTI and
Page Digital revenues recognized in the six months ended September 30, 2004,
offset by a decrease of $1.5 million for Toys. Excluding Page Digital and RTI,
total revenues decreased $2.2 million to $6.0 million, a 27% decrease.
COST OF REVENUES/GROSS PROFIT
Cost of revenues increased by $1.9 million, or 49%, to $5.8 million in the six
months ended September 30, 2004 from $3.9 million in the six months ended
September 30, 2003. Cost of product revenues increased $2.0 million, or 83%, to
$4.4 million in the six months ended September 30, 2004 from $2.4 million in the
six months ended September 30, 2003. Amortization of capitalized software
included in cost of product revenues increased to $1.8 million in the six months
ended September 30, 2004 from $1.2 million in the six months ended September 30,
2003. Cost of services revenue decreased $0.1 million, or 7%, to $1.4 million in
the six months ended September 30, 2004 from $1.5 million in the six months
ended September 30, 2003. Total gross profit increased $1.9 million, or 44%, to
$6.2 million in the six months ended September 30, 2004 from $4.3 million in the
six months ended September 30, 2003, primarily due to the inclusion of $2.6
million and $1.0 million of total gross profit from RTI and Page Digital in the
six months ended September 30, 2004. Excluding RTI and Page Digital, gross
profit decreased $1.8 million to $2.6 million, a 40% decrease. Total gross
profit margin remained at 52% for the six months ended September 30, 2004 and
September 30, 2003. Excluding Page Digital and RTI, gross profit margin
decreased to 44%. Gross profit margin on products was 53% and 52% for the six
months ended September 30, 2004 and September 30, 2003, respectively. The
increase is due to the inclusion of Page Digital and RTI product revenues which
carry higher profit margins. Excluding Page Digital and RTI, gross profit margin
on products decreased to 40%, due primarily to a $0.2 million decrease in
product revenues and a $0.3 million increase in amortization of capitalized
software. Gross profit margin on services was 46% and 53% for the six months
ended September 30, 2004 and September 30, 2003, respectively. Excluding Page
Digital and RTI, gross profit margin decreased to 44%, primarily due to lower
product revenues, which carry higher margins and the inclusion of an additional
$0.6 million of amortization of capitalized software costs.
APPLICATION DEVELOPMENT EXPENSE
Application development expense increased by $2.3 million, or 329%, to $3.0
million in the six months ended September 30, 2004 from $0.7 million in the six
months ended September 30, 2003. The increase is primarily related to the
capitalization of $2.2 million development for new products in the six months
ended September 30, 2003.
27
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $0.3 million, or 50%, to $0.9 million in
the six months ended September 30, 2004 from $0.6 million in the six months
ended September 30, 2003, primarily due to an increase of $0.5 million from Page
Digital and RTI for the six months ended September 30, 2004, offset by $0.1
million of decrease in amortization of a fully amortized asset.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by $2.5 million, or 43%, to $8.3 million in the six
months ended September 30, 2004 from $5.8 million in the six months ended
September 30, 2003, primarily due to the inclusion of $3.4 million of SG&A
expenses from Page Digital and RTI that are included in the six months ended
September 30, 2004. Excluding Page Digital and RTI, SG&A expenses decreased to
$4.9 million, a 16% decrease, primarily due to reduction in personnel and a
focus on cost containment. SG&A expenses as a percent of sales decreased to 69%
in the six months ended September 30, 2004 from 71% in the six months ended
September 30, 2003. We anticipate that SG&A as a percentage of sales will
continue to decrease in the future as we anticipate revenues increasing in the
future at a faster rate than the growth in SG&A.
RESTRUCTURING EXPENSES
Restructuring expenses were $0.7 million and $0 in the six months ended
September 30, 2004 and September 30, 2003, respectively. During the quarter
ended September 30, 2004, we began a cost reduction program. This program was
not contemplated as part of the acquisition of Page Digital or RTI, but rather
was implemented in the quarter ended September 30, 2004 after we analyzed our
cost structure and determined that we needed to more properly align our
operating expense with our current revenue levels. The restructuring expenses
are a result of our cost containment measures across all business units and
relate to one-time termination costs consisting of severance payments and
benefits related to workforce reduction of nine full time employees. All
employees impacted by this restructuring were notified of the plan of
termination and the related benefits on or before September 30, 2004. As of
September 30, 2004, $0.3 million has been paid with the balance to be paid
through the fourth quarter of 2006.
OPERATING LOSS
Operating loss, which included depreciation and amortization expense, was $6.8
million for the six months ended September 30, 2004, compared to an operating
loss of $2.7 million for the six months ended September 30, 2003, as the $1.9
million increase in gross profit, due primarily to the increase in sales, was
more than offset by the $5.9 million increase in total expenses.
INTEREST EXPENSE
Interest expense increased by $0.1 million, or 6%, to $1.9 million in the six
months ended September 30, 2004 from $1.8 million in the six months ended
September 30, 2003. Interest expense in the six months ended September 30, 2004
was comprised primarily of $1.6 million financing costs and amortization of debt
discount on the Laurus Note and the March '04 convertible debentures, as well as
$0.3 million interest expense on the Laurus Note, the March '04 convertible
debentures and notes due to the former RTI note holders. Interest expense in the
six months ended September 30, 2003 was comprised primarily of $1.6 million
amortization and $0.1 million of debt discount and interest expense,
respectively, on the March '04 convertible debentures.
PROVISION FOR INCOME TAXES
Provision for income tax was $6,000 for the six months ended September 30, 2004.
In the six months ended September 30, 2003, the provision for income taxes
represents $0.6 million income tax refund and $0.1 million provision for state
income taxes. The income tax refund of $0.6 million at September 30, 2003
results from amending prior years' income tax returns to carry back net
operating losses incurred in the past two years.
CUMULATIVE PREFERRED DIVIDENDS
Cumulative dividends on the outstanding Series A Preferred attributable to the
six months ended September 30, 2004 and September 30, 2003 were $0.6 million.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the six months ended September 30, 2004, we financed our operations using
cash on hand and proceeds from the sale of convertible debt. At September 30,
2004 and March 31, 2004, we had cash of $1.0 million and $2.1 million,
respectively.
28
Operating activities used cash of $5.2 million in the six months ended September
30, 2004 and $5.6 million in the six months ended September 30, 2003. Cash used
for operating activities in the six months ended September 30, 2004 resulted
from $8.6 million net loss and $1.8 million decrease in accounts payable and
accrued expenses which were offset in part by $2.7 million of non-cash
depreciation and amortization, $1.6 million increase in accounts and other
receivables and $0.7 million amortization of debt discount and conversion
option.
Investing activities provided cash of $0.2 million in the six months ended
September 30, 2004 and used cash of $2.5 million in the six months ended
September 30, 2003. Cash provided by investing activities in the six months
ended September 30, 2004 resulted primarily from $0.6 million proceeds from the
acquisition of RTI, offset by $0.4 million of capitalized software development
costs. Cash used by investing activities in the six months ended September 30,
2003 resulted primarily from $2.2 million of capitalized software development
costs and $0.3 million purchase of furniture and equipment.
Financing activities provided cash of $3.8 million and $7.8 million in the six
months ended September 30, 2004 and 2003, respectively. Cash provided by
financing activities in the six months ended September 30, 2004 resulted
primarily from the proceeds of a $7.0 million note payable, offset by $2.8
million payment on convertible debentures. Cash provided by financing activities
in the six months ended September 30, 2003 resulted primarily from net proceeds
of $7.2 million from the sale of common stock and $0.7 million from the issuance
of convertible debentures.
Accounts receivable increased to $4.8 million at September 30, 2004 from $4.6
million at March 31, 2004. The increase is primarily to the inclusion of RTI
accounts receivable at March 31, 2004, offset by decrease in unbilled accounts
receivable.
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. Our future capital requirements depend on many
factors, including our application development, sales and marketing activities.
In addition, we have incurred losses for the last three fiscal years and we had
a negative working capital at September 30, 2004. In the next twelve months, we
anticipate raising additional capital through public or private equity or debt
financings. In the long-term, we anticipate that cash from operations will be
sufficient to provide liquidity for our normal operating requirements. As such,
we do not know whether additional financing will be available when needed, or
available on terms acceptable to us. We may raise capital through public or
private equity or debt financings. If we are unable to raise the needed funds,
we may be forced to curtail some or all of our activities and we may not be able
to grow.
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 six months ended September 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 for gross
proceeds of $1.75 million ("Omicron Debenture") and Midsummer for gross proceeds
of $1.25 million ("Midsummer Debenture"). With proceeds from the sale of a
secured convertible term note to 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 which we valued at $240,000 to Midsummer as payment liquidated damages and
as consideration for Midsummer consenting to the sale of the $7.0 million note
to Laurus.
29
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. Triggering events have occurred and we
are currently in discussions with Midsummer concerning an adjustment of current
conversion price.
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
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 was not filed
as of July 31, 2004; therefore, liquidated damages in the amount of $201,000 in
liquidated damages have been recorded and paid in full in July 2004.
30
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 Omicron Debenture amounted to $155,000 and was being
amortized over the term of the debt. A total of $21,000 had been amortized
during the period from the date of issuance to the date the debt was repaid.
Upon repayment of the Omicron Debenture, the remaining balance of $134,000 was
expensed.
The difference between the original conversion price of $1.32 and our stock
price of the date of issuance of the Midsummer Debenture amounted to $110,000
and is being amortized over the term of the debt. A total of $28,000 had been
amortized during the period from the date of issuance through September 30,
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 and amortize the change over the term of the debt. The amount
allocated to the warrants issued to Omicron was $420,000. A total of $57,000 had
been amortized during the period from the issuance to the date the note was
repaid. Upon repayment of the Omicron Debenture, the remaining balance of
$363,000 was expensed. The amount allocated to the warrants issued to Midsummer
was $300,000. A total of $75,000 had been amortized during the period from the
date of issuance through September 30, 2004.
The outstanding balance of Midsummer Debenture, including accrued interest, is
$1.2 million at October 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 the Intuit Note
including accrued interest is $0.5 million at October 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
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 $1.4 million at October 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 $2.5 million at October 31, 2004.
LAURUS
Pursuant to a Securities Purchase Agreement dated July 12, 2004, we sold and
issued to Laurus a secured convertible term note ("Laurus Note") for gross
proceeds of $7.0 million. In addition, we issued to Laurus a warrant to purchase
up to 3,750,000 shares of our common stock at a price of $0.71 per share
("Laurus Warrant"). Our obligations under the Laurus Note are secured by all of
our assets. All our wholly owned subsidiaries guarantied our obligations under
the Laurus Note. We also pledged all of our interests in the outstanding stock
of our subsidiaries as security for our obligations under the Laurus Note.
The Laurus Note would have originally matured on September 1, 2004; however, the
maturity of the Laurus Note was automatically extended to July 12, 2007
("Maturity Date") upon the filing of an amendment to our Certificate of
Incorporation to effect the increase with the Secretary of State of Delaware on
August 31, 2004.
We would have been obligated to make monthly payments of $212,000 commencing
August 1, 2004. In August 2004, Laurus agreed to defer the August 1, 2004
payment until the Maturity Date.
In October 2004, Laurus agreed to amend the Laurus Note and defer the payments
due in September 2004 through February 2005 until the Maturity Date. Pursuant to
the amendment, we are required to make monthly payments in the amount of
$212,121 commencing on March 1, 2005 with a balloon payment of $1.1 million in
July 2007. We also issued Laurus a warrant to purchase 250,000 shares of our
common stock at a price of $0.41 per share ("October '04 Laurus Warrant").
31
The Laurus Note accrues interest at a rate per annum (the "Interest Rate") equal
to the "prime rate" (4.75% as of October 31, 2004) published in The Wall Street
Journal from time to time, plus two percent. Interest under the Laurus 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 Laurus Note or exercise of the Laurus 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 Laurus 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 Laurus Note or exercise
of Laurus 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 Laurus 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 Laurus
Note by paying Laurus 125% of the principal amount due under the Laurus Note
together with all accrued and unpaid interest. Pursuant to the Amendment No.1 to
the Laurus Note, the conversion price for $2.0 million of the $7.0 million
Laurus Note was reduced to $0.37 per share.
The Laurus Warrant and the October '04 Laurus Warrant (collectively "Laurus
Warrants") are immediately exercisable and has a seven year term. We have the
right to require exercise of the Laurus Warrants in whole or in part if: (1) all
of our obligations under the Laurus Note have been irrevocably paid in full, (2)
the common stock underlying the Laurus Warrants 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 Laurus Warrants is greater than three hundred
percent (300%) of the then applicable exercise price.
We were 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
Laurus Note or exercise of the Laurus Warrants (the "Underlying Shares")
pursuant to the Registration Rights Agreement between us and Laurus (the
"Registration Rights Agreement"). We filed the Registration Statement on
September 10, 2004 (the "Filing Date") and are required to have the Registration
Statement declared effective by the SEC no later than 120 days after it is filed
(the "Effectiveness Date"). If the Registration Statement is not 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 Laurus liquidated damages equal to 2% of
original principal balance on the Laurus 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 Laurus Note amounted to $281,000 and is being amortized over the
term of the debt. A total of $20,000 had been amortized during the period from
the date of issuance through September 30, 2004.
We also allocated the proceeds received from the Laurus Note with detachable
warrant using the relative fair market value of the individual elements at the
time of issuance. The amount allocated to the Laurus Warrant was $531,000 and is
being amortized over the term of the Laurus Note. A total of $36,000 had been
amortized during the period from the date of issuance through September 30,
2004.
In connection with the amendment in October 2004, we will compute the difference
between the conversion price of $0.37 for the first $2.0 million of the Laurus
Note and our stock price on the date of issuance of the Laurus Note and will
amortize the difference over the term of the Laurus Note. We will also allocate
the proceeds received from the Laurus Note using the relative fair market value
of the individual elements at the time of issuance and will amortize the change
over the term of the Laurus Note.
32
The balance of the Laurus 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 September 30, 2004, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
Payment due by period
---------------------
Contractual Cash Obligations Total Less than 1 1-3 years 3-5 years Thereafter
- ---------------------------- ----- ----------- --------- --------- ----------
year
----
(in thousands)
Long-term debt obligations $ 14,258 $ 5,942 $ 8,316 -- --
Capital lease obligations 195 177 18 -- --
Operating leases 10,056 1,877 2,104 $ 1,875 $ 4,200
Purchase obligations 1,265 1,265 -- -- --
--------- ----------- --------- --------- ---------
Total contractual cash obligations $ 25,774 $ 9,261 $ 10,438 $ 1,875 $ 4,200
========= =========== ========= ========= =========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements:
o REVENUE RECOGNITION. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of certain
expenses such as commissions and royalties. We follow specific and
detailed guidelines in measuring revenue; however, certain judgments
affect the application of our revenue policy.
We license software under non-cancelable agreements and provide related
services, including consulting, training, customization of software 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, including third party license revenues or
partner products, is generally recognized when a license agreement has
been signed, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. If a software
license contains an undelivered element, the fair value of the
undelivered element is deferred and the revenue recognized once the
element is delivered. We can establish vendor specific objective
evidence ("VSOE") for all elements and not just undeliverable elements.
The undeliverable elements are primarily training, consulting and
maintenance services. VSOE of fair value for training and consulting
services is based upon hourly rates charges when those services are
sold separately. VSOE of fair value for maintenance is the price the
customer will be required to pay when it is sold separately (that is
the renewal rate). In addition, if a software license contains
contingencies, such as specific customer acceptance criteria, right of
return or a cancellation right, the software revenue is recognized upon
the later 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 prepaid
maintenance, support revenues, prepaid services revenue and deferred
licenses.
33
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. Under most 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. In instances
where our fixed price contracts require the achievement of certain
milestones, the milestones are agreed with the customer and revenues
are recognized only when the milestones are delivered and accepted by
the customer.
Customization of software is billed on both an hourly basis and under
fixed price contracts. Customization services billed on an hourly
basis are recognized as the work is performed. Under most fixed price
contracts, customization services revenue is recognized using the
percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. In instances
where our fixed price contracts require the achievement of certain
milestones, the milestones are agreed with the customer and revenues
are recognized only when the milestones are delivered and accepted by
the customer.
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 is only
recognized and the payments are only due upon customer acceptance and
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.
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.
34
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/A FOR THE YEAR ENDED MARCH 31, 2004 AND
FORM 10-Q/A 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 $8.9 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 AT SEPTEMBER 30, 2004 AND IN THE PRIOR FISCAL
YEAR, AND WE HAVE EXTENDED PAYMENT TERMS WITH A NUMBER OF OUR SUPPLIERS.
At September 30, 2004 and March 31, 2004, we had negative working capital of
$7.8 million and $0.8 million, respectively. We have had difficulty meeting
operating expenses, including interest payments on debt, lease payments and
supplier obligations. We have at times deferred payroll for our 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 REVENUES 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 revenues decreased by 20% in the fiscal year ended March 31, 2004, compared
to the fiscal year ended March 31, 2003. Our revenues decreased by 16% in the
fiscal year ended March 31, 2003 compared to the fiscal year ended March 31,
2002. We experienced a substantial decrease in application license software
sales in fiscal year 2004 and 2003, 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.
35
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 revenues 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 October 31, 2004, our debt, including any accrued interest, is as follows:
o $1.2 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.
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 $1.4 million in promissory notes issued in June 2004 to RTI's
noteholders due on May 1, 2005, payable in monthly installments.
36
o $2.5 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 in
July 2004, matures on July 12, 2007.
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 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 and 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 87% of our total assets as of September 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
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 81%, 17 % and 2% of our
revenues were in the Americas, Europe and Asia, respectively, in the six months
ended September 30, 2004. Approximately 87%, 13% and 0% of our revenues were in
the Americas, Europe and Asia, respectively, in the six months ended September
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.
37
HISTORICALLY WE HAVE BEEN DEPENDENT ON A SMALL NUMBER OF CUSTOMERS FOR A
SIGNIFICANT AMOUNT OF OUR BUSINESS.
Gabriel Brothers, Inc. and Charming Shoppes of Delaware, Inc. accounted for 6%
each of our consolidated revenues in the six months ended September 30, 2004.
Toys accounted for 18% in the six months ended September 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 President, Chief Operating Officer and Director,
Michael Tomczak, and our Chief Technology Officer, 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.
38
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
may not be successful. Effective copyright and trade secret protection may be
unavailable or limited in some foreign countries. We hold only one patent.
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.
39
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.
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.
40
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 34.3 % of our outstanding common
stock, including shares the Sage Group has the right to acquire upon conversion
of its Series A Preferred and exercise of its outstanding options. Although the
Series A Preferred is non-voting as to most matters and is redeemable by us, if
the Sage Group converts its Series A Preferred 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.
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.
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 Preferred are entitled to dividends in preference and priority to common
stockholders. Future equity financing(s) may further restrict our ability to pay
dividends.
41
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 Preferred in May 2002. Our
board of directors may determine the terms of subsequent series of preferred
stock without further action by our stockholders. If we issue additional
preferred stock, it could affect your rights or reduce the value of your common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell our assets to
a third party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions. We are actively seeking capital, and some of the arrangements we are
considering may involve the issuance of preferred stock.
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The Exchange has
published certain guidelines it uses in determining whether a security warrants
continued listing. 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 34,858,451 shares. Of these options and
warrants, as of October 31, 2004, 29,955,484 have exercise prices above the
recent market price of $0.35 per share, and 4,902,967 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 6,619,500 shares
available for issuance as of October 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.
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
RTI.(see "Recent Transactions" below). These acquisitions involve integrating
two companies that previously operated independently. These integrations may 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;
42
o Coordinating sales and marketing functions;
o Retaining key employees; and
o Preserving relationships with key customers.
BUSINESS RISKS FACED BY PAGE DIGITAL COULD DISADVANTAGE OUR BUSINESS.
Page Digital is a developer of multi-channel commerce software and faces several
business risks that could disadvantage our business. These risks include many of
the risks that we face, described above, as well as:
o LONG AND VARIABLE SALES CYCLES MAKE IT DIFFICULT TO PREDICT OPERATING
RESULTS - Historically, the period between initial contact with a
prospective customer and the licensing of Page Digital's products has
ranged from one to twelve months. Page Digital's average sales cycle
is currently three months. The licensing of Page Digital's products
is often an enterprise wide decision by customers that involves a
significant commitment of resources by Page Digital and its
prospective customer. Customers generally consider a wide range of
issues before committing to purchase Page Digital's products,
including product benefits, cost and time of implementation, ability
to operate with existing and future computer systems, ability to
accommodate increased transaction volume and product reliability. As
a part of the sales process, Page Digital spends a significant amount
of resources informing prospective customers about the use and
benefits of Page Digital products, which may not result in a sale,
therefore increasing operating expenses. As a result of this sales
cycle, Page Digital's revenues are unpredictable and could vary
significantly from quarter to quarter causing our operating results
to vary significantly.
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.
43
o COMPETITION IN THE SOFTWARE MARKET IS INTENSE AND COULD REDUCE PAGE
DIGITAL'S SALES OR PREVENT THEM FROM ACHIEVING PROFITABILITY - The
market for Page Digital's products is intensely competitive and
subject to rapid technological change. Competition is likely to
result in price reductions, reduced gross margins and loss of Page
Digital's market share, any one of which could reduce future revenues
or earnings. Further, most of Page Digital's competitors are large
companies with greater resources, broader customer relationships,
greater name recognition and an international presence. As a result,
Page Digital's competitors may be able to better respond to new and
emerging technologies and customer demands.
BUSINESS RISKS FACED BY RTI COULD DISADVANTAGE OUR BUSINESS.
RTI is a provider of retail management store solutions to small through mid-tier
retailers via an international network of retailers and faces several business
risks that could disadvantage our business. These risks include many of the
risks that we face, described above, as well as:
o RTI FACES INTENSE COMPETITION IN THE RETAIL POINT OF SALE INDUSTRY -
RTI operates in an extremely competitive industry, which is subject
to rapid technological and market changes. We anticipate that the
competition will increase as more companies focus on providing
technology solutions to small and mid-tier retailers. Many of our
current and potential competitors, such as Microsoft, have more
resources to devote to product development, marketing and
distribution. While RTI 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.
44
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
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 19% and 18% of our
total revenues were denominated in currencies other than the U.S. dollar for the
three months ended September 30, 2004 and 2003, respectively. Approximately 19%
and 13% of our total revenues were denominated in currencies other than the U.S.
dollar for the six months ended September 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 15), 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.
45
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2004, we issued:
o In July 2004, 600,000 shares of common stock, with a fair value of
$240,000, to Midsummer as payment for liquidated damages and as
consideration for its consent to the sale of the Laurus Note,
o In August 2004, an aggregate of 7,551,696 shares of common stock, with
a fair value of $5,709,000, to Michael Tomczak, our President and COO,
and Jeffrey Boone, our CTO, upon conversion of all of 2,517,232 shares
of Series B Preferred Stock,
o In July 2004, a warrant to Laurus to purchase up to 3,750,000 shares of
our common stock at an exercise price of $0.71 in connection with the
sale of the Laurus Note, and
o In September 2004, a warrant to purchase up to 220,000 shares of common
stock, with a fair value of $37,000, at an exercise price of $0.50 per
share to a consultant for public relation services, and
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
Our 2004 Annual Meeting of Stockholders was held on August 11, 2004 at our
corporate headquarters at 19800 MacArthur Boulevard, Suite 1200, Irvine,
California 92612. Five proposals were voted on at the Annual Meeting and the
results of the voting are as follows:
1. To elect five directors to serve until the next Annual Meeting of
Stockholders and until their successors are elected and qualified. The
Director nominees received the following votes:
Nominees For Against Abstain
-------- --- ------- -------
Michael Silverman 24,339,577 871,567 117,531
Michael Tomczak 24,851,443 359,701 117,531
Donald Radcliffe 25,149,875 62,269 116,531
Lawrence Page 24,413,689 797,889 117,097
Ian Bonner 24,417,339 793,805 117,531
2. To amend and restate our Amended and Restated Certificate of
Incorporation to increase the authorized shares of common stock from
100,000,000 to 250,000,000. The measure passed with 53,556,200 votes
for, 3,200,128 votes against and 86,027 votes abstained.
3. To adopt the 2004 Equity Incentive Plan ("2004 Plan"). The measure
passed with 24,015,851 votes for, 1,224,767 votes against and 88,057
votes abstained.
4. To ratify the sale and issuance of a Secured Convertible Term Note and
accompanying warrant to purchase shares of common stock to Laurus for
$7,000,000. The measure passed with 24,649,944 votes for, 636,362 votes
against and 42,369 votes abstained.
5. To ratify the appointment of Singer Lewak Greenbaum & Goldstein LLP as
our independent public accountants for the fiscal year ended March 31,
2005. The measure passed with 25,227,197 votes for, 48,771 votes
against and 52,707 votes abstained.
ITEM 5. OTHER INFORMATION
Not applicable
46
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.
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.
47
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.
2.16 Amendment No. 1 to the 9% Convertible Debenture, Due May 16, 2006
Issued to Midsummer Investment, Ltd. and Waiver dated July 30, 2004
by and among the Company and Midsummer Investments, Ltd. (included
herewith).
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 be reference to exhibit 4.5 to the Company's Form
S-1 filed on December 8, 2003.
4.6 Registration Rights Agreement dated March 15, 2004 by and among the
Company, Omicron Master Trust and Midsummer Investments, Ltd.,
incorporated by reference to exhibit 4.2 to the Company's Form 8-K
filed on March 17, 2004.
4.7 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 (individually, a "Secured Party), and
collectively, the "Secured Parties"), incorporated by reference to
exhibit 4.7 to the Company's Form 10-Q filed on August 12, 2004.
48
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.
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.
4.15 Amended and Restated Secured Convertible Term Note dated October 29,
2004 issued by Island Pacific, Inc. in favor of Laurus Master Fund,
Ltd., incorporated by reference to exhibit 4.1 of the Company's Form
8-k filed on November 2, 2004.
4.16 Common Stock Purchase Warrant dated October 29, 2004 issued by Island
Pacific, Inc., incorporated by reference to exhibit 4.2 of the
Company's Form 8-k filed on November 2, 2004.
4.17 Amended and Restated Registration Rights Agreement dated October 29,
2004 between Island Pacific, Inc. and Laurus Master Fund, Ltd.,
incorporated by reference to exhibit 4.3 of the Company's Form 8-k
filed on November 2, 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.
49
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.
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.
50
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, incorporated by reference to exhibit 10.21 to
the Company's Form 10-K filed on June 29, 2004.
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.
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, incorporated by reference to exhibit 10.28 to the
Company's Form 10-K filed on June 29, 2004.
10.29 Option Agreement between Softline Ltd. and Steven Beck, as trustee of
a certain management group of Island Pacific, Inc., incorporated by
reference to exhibit 10.29 to the Company's Form 10-K filed on June
29, 2004.
10.30 Employment Agreement dated January 30, 2004 by and between Island
Pacific, Inc. and Larry Page, incorporated by reference to exhibit
10.30 to the Company's Form 10-K filed on June 29, 2004.
10.31 Employment Agreement dated January 30, 2004 by and between Island
Pacific, Inc. and David Joseph, incorporated by reference to exhibit
10.31 to the Company's Form 10-K filed on June 29, 2004.
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, incorporated by reference to
exhibit 10.34 to the Company's Form 10-K filed on June 29, 2004.
51
10.35 Option Agreement dated September 3, 2003 by and between SVI
Solutions, Inc. and Steven Beck, incorporated by reference to exhibit
10.35 to the Company's Form 10-K filed on June 29, 2004.
10.36 Retail Pro Software License Agreement by and between Retail
Technologies International, Inc. and Intuit Inc. dated December 6,
2002 (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 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.
10.39 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.
10.40 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.
10.41 Separation Agreement and General Release of Claims between Island
Pacific, Inc. and Steven Beck dated July 29, 2004, incorporated by
reference to exhibit 10.42 to the Company's Form 10-Q filed on August
12, 2004.
10.42 Severance and Release Agreement between Island Pacific, Inc. and
Harvey Braun dated October 28, 2004 (included herewith).
14.1 Code of Ethics and Business Conduct, incorporated by reference to
exhibit 10.36 to the Company's Form 10-K filed on June 29, 2004.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
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.
On August 5, we filed a Form 8-K/A dated June 1, 2004 disclosing as Item 7
financials statements and exhibits related to the acquisition of Retail
Technologies International, Inc.
On August 16, 2004, we filed a Form 8-K dated August 11, 2004 disclosing as Item
5 the adjournment of our Annual Stockholders' meeting until August 27, 2004 to
provide us additional time to secure sufficient votes to authorize the increase
to its authorized common stock from 100,000,000 to 250,000,000 shares.
On August 27, 2004, we filed a Form 8-K dated August 27, 2004 disclosing as Item
5 the conclusion of our Annual Meeting.
On October 7, 2004, we filed a Form 8-K dated September 30, 2004 disclosing as
Item 5.02 the departure of Larry Page as our Executive Vice President of Special
Projects.
52
On October 28, 2004, we filed a Form 8-K dated October 25, 2004 disclosing as
Item 4.02 the restatements of financial statements for the fiscal years ended
March 31, 2004 and March 31, 2003 and our quarterly financial statements for the
second and third quarters of the fiscal year ending March 31, 2003, the first,
second and third quarters of the fiscal year ending March 31, 2004 and the first
quarter of the fiscal year ending March 31, 2005.
On November 2, 2004, we filed a Form 8-K dated October 29, 2004 disclosing as
Item 3.03 the Amended and Restated Secured Convertible Term Note, an Amended
and Restated Registration Rights Agreement and Common Stock Purchase Warrant
Agreement with Laurus Master Fund, Ltd.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Island Pacific, Inc.
Registrant
/S/ Ran Furman
--------------------------
Date: November 15, 2004 Ran Furman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Signing on behalf of the registrant
53