AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2003
REGISTRATION NO. [___________]
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SVI SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0896617
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization Number)
7379
----
(Primary Standard Industrial
Classification Code Number)
------------------------------
5607 PALMER WAY,
CARLSBAD, CALIFORNIA 92008
(877) 784-7978
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------
BARRY M. SCHECHTER
CHAIRMAN OF THE BOARD
SVI SOLUTIONS, INC.
5607 PALMER WAY,
CARLSBAD, CALIFORNIA 92008
(877) 784-7978
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
---------------------
Copies to:
Harry J. Proctor, Esq.
Solomon Ward Seidenwurm & Smith, LLP
401 B Street, Suite 1200
San Diego, CA 92101
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after this registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
------------------------- -------------------- -------------------- -------------------- ---------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE
------------------------- -------------------- -------------------- -------------------- ---------------------
Common Stock, $.0001
par value 38,700,053 N/A N/A $3,525
------------------------- -------------------- -------------------- -------------------- ---------------------
(1) The registrant is hereby registering a number of shares of common
stock equal to (a) 7,151,795 shares of common stock held by or
issuable to Koyah Leverage Partners, L.P., Koyah Partners, L.P., Raven
Partners, L.P., Brian Cathcart and Nigel M. Davey, all of whom have
registration rights, plus (b) 7,713,480 shares of common stock
issuable upon the conversion of convertible debentures and warrants
held by Midsummer Investment, Ltd., Omicron Master Trust, Islandia,
L.P., MBSJ Investors LLC, Crestview Capital Fund I, L.P., Crestview
Fund II, L.P. and Crestview Capital Offshore Fund, Inc., all of whom
have registration rights, and 945,000 shares of common stock issuable
as payment for interest accrued on the debentures, plus (c) 18,255,073
shares of common stock issuable upon the conversion of Series A
Preferred Stock held by Softline, Ltd., which was granted "piggy-back"
registration rights, plus (d) 4,000,000 shares issuable upon the
exercise of stock options held by Steven Beck and Harvey Braun, plus
(e) 634,705 shares held by or issuable to other stockholders who have
been extended the opportunity to participate in this offering as a
selling shareholder. This number of shares is subject to adjustment to
prevent dilution resulting from stock splits, stock dividends or
similar events. Therefore, pursuant to Rule 416, this Registration
Statement also registers such indeterminate number of shares as may be
issuable in connection with stock splits, stock dividends or similar
transactions.
(2) It is not known how many of such shares of Common Stock will be
purchased under this Registration Statement or at what price such
shares will be purchased.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) promulgated under the
Securities Act of 1933, as amended (the "Securities Act") based upon
the average of the high and low prices of our common stock on May 5,
2003 as reported on the American Stock Exchange, which was $0.99 per
share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
PROSPECTUS
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
PURSUANT TO THIS PROSPECTUS UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SVI SOLUTIONS, INC.
38,700,053 SHARES
COMMON STOCK
We are registering 38,700,053 shares of our common stock for resale by
the selling stockholders identified in this prospectus on pages 18 and 19. The
selling stockholders may sell the shares of common stock described in this
prospectus in public or private transactions, on or off the American Stock
Exchange, at prevailing market prices, or at privately negotiated prices. The
selling stockholders may sell shares directly to purchasers or through brokers
or dealers. Brokers or dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders. We will not
receive any of the proceeds from the sale of the shares by the selling
stockholders. The selling stockholders will receive all of the proceeds from the
sale of the shares and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the shares. We will pay the
expenses of registration of the sale of the shares.
Our common stock is listed on the American Stock Exchange under the
symbol "SVI." The closing sale price of our common stock as reported on the
American Stock Exchange on May 5, 2003 was $1.02 per share. See "Price Range of
Common Stock."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 5.
NEITHER THE SECURITIES EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is May 9, 2003, subject to completion
TABLE OF CONTENTS
-----------------
PAGE
----
PROSPECTUS SUMMARY.........................................................1
THE OFFERING...............................................................2
SUMMARY CONSOLIDATED FINANCING DATA........................................3
RISK FACTORS...............................................................5
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................15
FORWARD LOOKING STATEMENTS.................................................15
SELLING STOCKHOLDERS.......................................................17
PLAN OF DISTRIBUTION.......................................................21
USE OF PROCEEDS............................................................22
DIVIDEND POLICY............................................................22
PRICE RANGE OF COMMON STOCK................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................23
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................50
BUSINESS...................................................................50
MANAGEMENT.................................................................66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................76
DESCRIPTION OF CAPTIAL STOCK...............................................79
EXPERTS....................................................................82
WHERE YOU CAN FIND MORE INFORMATION........................................83
FINANCIAL STATEMENTS.......................................................F-1
PART II, INFORMATION NOT REQUIRED IN PROSPECTUS............................II-1
EXHIBIT INDEX..............................................................II-16
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE ON THE COVER PAGE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS,
"SVI", "WE", "US" AND "OUR" REFER TO SVI SOLUTIONS, INC., UNLESS THE CONTEXT
OTHERWISE REQUIRES.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS
BEFORE MAKING AN INVESTMENT DECISION.
We are an independent provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solutions. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
Our offerings consist of the following components:
The ISLAND PACIFIC MERCHANDISE MANAGEMENT suite of applications builds
on our long history in retail software design and development and provides our
customers with a comprehensive and fully integrated merchandise management
solution. Our complete enterprise-level offering of applications and services is
designed to assist our customers in maximizing their business potential. The
foundation of our application suite is the individual modules that comprise the
offering. The core modules are:
o MERCHANDISING;
o THE EYE/TM/, DATAMART, PLANNING AND REPORTING TOOL;
o TRENDS, FORECASTING AND DYNAMIC REPLENISHMENT TOOL;
o EVENTS;
o WAREHOUSE;
o TICKETING;
o FINANCIALS; AND
o SALES AUDIT.
The ISLAND PACIFIC DIRECT SOLUTION supports Web-based and traditional
mail order and catalog retailing. This application allows our customers to offer
multi-channel merchandise management within one integrated application tool set
to manage order entry, order processing, customer service, purchasing, inventory
planning and forecasting, fulfillment and shipping. The core modules are:
o CALL CENTER;
o CUSTOMER RELATIONSHIP MANAGEMENT (CRM);
o PLANNING AND FORECASTING; AND
o FULFILLMENT.
1
The SVI STORE SOLUTION suite of applications builds on our long history
of providing multi-platform, client server in-store solutions. We market this
set of applications under the name "OnePointe," which is a full business to
consumer software infrastructure encompassing a range of integrated store
solutions. OnePointe is a complete application providing all point-of-sale
("POS") and in-store processor (server) functions for traditional "brick and
mortar" retail operations.
Our PROFESSIONAL SERVICES provide our customers with retail business
consulting, project management, implementation, application training, technical
and documentation services. This offering ensures that our customers' technology
selection and implementation projects are planned and implemented timely and
effectively. We also provide development services to customize our applications
to meet specific requirements of our customers and ongoing support and
maintenance services.
We market our applications and services through an experienced and
professional direct sales force in the United States and the United Kingdom. We
believe our knowledge of the complete needs of multi-channel retailers enables
us to help our customers identify the optimal systems for their particular
businesses. The customer relationships we develop build recurring support,
maintenance and professional service revenues and position us to continuously
recommend changes and upgrades to existing systems.
We also develop and distribute retail system training products and
general computer courseware and computer skills testing products through our SVI
Training Products, Inc. subsidiary. We have agreed to sell this subsidiary and
are currently in the process of finalizing this sale transaction.
Our executive offices are located at 5607 Palmer Way, Carlsbad,
California 92008, telephone number (877) 784-7978.
THE OFFERING
------------------------------- ---------------------------------
Common stock to be offered
by the selling stockholders 38,700,053 shares (1)
------------------------------- ---------------------------------
Common stock outstanding
as of March 31, 2003 31,499,632 shares
------------------------------- ---------------------------------
Use of proceeds We will not receive any
proceeds from the sale of
shares of common stock
covered by this prospectus.
------------------------------- ---------------------------------
American Stock Exchange symbol SVI
------------------------------- ---------------------------------
(1) Includes 7,151,795 shares held by or issuable to Koyah Leverage Partners,
L.P., Koyah Partners, L.P., Raven Partners, L.P., Brian Cathcart and Nigel
M. Davey, plus (b) 7,713,480 shares of common stock issuable upon the
conversion of convertible debentures and warrants held by Midsummer
Investment, Ltd., Omicron Master Trust, Islandia, L.P., MBSJ Investors LLC,
Crestview Capital Fund I, L.P., Crestview Fund II, L.P. and Crestview
Capital Offshore Fund, Inc, all of whom have registration rights, and
945,000 shares of common stock issuable as payment for interest accrued on
the debentures, plus (c) 18,255,073 shares of common stock issuable upon
the conversion of Series A Preferred Stock held by Softline, Ltd., which
was granted "piggy-back" registration rights, plus (d) 4,000,000 shares of
common stock issuable upon the exercise of stock options held by Steven
Beck and Harvey Braun, plus (e) 634,705 shares held by or issuable to other
stock holders who are being provided the opportunity to register shares.
2
SUMMARY CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
The following financial information should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and unaudited
financial information included elsewhere in this prospectus.
SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE 9 MONTHS ENDED DECEMBER
31, 2002 AND 2001:
NINE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
------------- ------------
(unaudited)
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 16,918 $ 21,446
Cost of sales 5,997 9,247
------------- ------------
Gross profit 10,921 12,199
Expenses
Product development 2,894 2,932
Depreciation and amortization 3,122 4,991
Selling, general and administrative expenses 7,365 10,388
------------- ------------
Total expenses 13,381 18,311
------------- ------------
Loss from operations (2,460) (6,112)
Other income (expense):
Interest income 1 8
Other income (expense) 8 (35)
Interest expense (894) (2,795)
Gain on foreign currency transaction 23 --
------------- ------------
Total other expense (862) (2,822)
------------- ------------
Loss before provision for income taxes (3,322) (8,934)
Provision for income tax benefits (57) (2)
------------- ------------
Loss before cumulative effect of a
change in accounting principle (3,265) (8,932)
Cumulative effect of changing accounting
principle - goodwill valuation under SFAS 142 (627) --
------------- ------------
Loss from continuing operations (3,892) (8,932)
Loss from discontinued operations (1,140)
------------- ------------
Net loss $ (3,892) $ (10,072)
============= ============
Basic and diluted loss per share:
Loss before cumulative effect
of change in accounting principle (0.11) (0.23)
Cumulative effect of change in
accounting principle (0.02) --
------------- ------------
Loss from continuing operations $ (0.13) (0.23)
Loss from discontinued operations -- (0.03)
------------- ------------
Net loss (0.13) (0.26)
============= ============
Weighted average common shares 29,257 38,092
BALANCE SHEET DATA:
Working Capital $ (11,109) $ (13,371)
Total assets $ 38,419 $ 52,712
Long-term obligations $ 99 $ 12,379
Stockholders' equity $ 20,497 $ 19,003
3
SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE LAST 5 FISCAL YEARS(1):
SIX MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------------
2002 2001 2000 1999 1998 1997
----------- ------------ ------------- ------------ ------------ -------------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 27,109 $ 27,713 $ 26,652 $ 5,010 $ 414 $ 800
Cost of sales 10,036 9,188 6,421 1,401 37 66
----------- ------------ ------------- ------------ ------------ -------------
Gross profit 17,073 18,525 20,231 3,609 377 734
Application development
expenses 4,203 5,333 4,877 --- --- ---
Depreciation and
amortization 6,723 8,616 7,250 1,672 1,611 1,018
Selling, general and
administrative expenses 13,144 18,037 14,817 4,265 418 1,312
Impairment of intangible
assets --- 6,519 --- --- --- ---
Impairment of note
receivable received in
connection with the sale
of IBIS Systems Limited --- 7,647 --- --- --- ---
----------- ------------ ------------- ------------ ------------ -------------
Total expenses 24,070 46,152 26,944 5,937 2,029 2,330
----------- ------------ ------------- ------------ ------------ -------------
Loss from operations (6,997) (27,627) (6,713) (2,328) (1,652) (1,596)
Other income (expense):
Interest income 10 628 1,074 520 274 33
Other income (expense) (46) 63 (206) 828 49 627
Interest expense (3,018) (3,043) (1,493) (1) (35) (102)
Gain on disposals of
Softline Limited shares --- --- --- --- 4,388 3,974
Gain (loss) on foreign
currency transaction (9) 2 (10) (58) (14) (120)
----------- ------------ ------------- ------------ ------------ -------------
Total other income
(expense) (3,063) (2,350) (635) 1,289 4,662 4,412
----------- ------------ ------------- ------------ ------------ -------------
Income (loss) before
provision (benefit for
income taxes (10,060) (29,977) (7,348) (1,039) 3,010 2,816
Provision (benefit) for
income taxes 39 (4,778) (2,414) 30 887 190
----------- ------------ ------------- ------------ ------------ -------------
Income (loss) from
continuing operations (10,099) (25,199) (4,934) (1,069) 2,123 2,626
Income (loss) from
discontinued operations (4,559) (3,746) 880 6,654 3,696 2,222
----------- ------------ ------------- ------------ ------------ -------------
Net income (loss) $ (14,658) $ (28,945) $ (4,054) $ 5,585 $ 5,819 $ 4,848
=========== ============ ============= ============ ============ =============
Basic earnings (loss) per
share:
Income (loss) from
continuing operations $ (0.28) $ (0.72) $ (0.15) $ (0.04) $ 0.08 $ 0.19
Income (loss) from
discontinued operations (0.13) (0.11) 0.03 0.24 0.13 0.16
----------- ------------ ------------- ------------ ------------ -------------
Net income (loss) $ (0.41) $ (0.83) $ (0.12) $ 0.20 $ 0.21 $ 0.35
=========== ============ ============= ============ ============ =============
Diluted earnings (loss)
per share:
Income (loss) from
continuing operations $ (0.28) $ (0.72) $ (0.15) $ (0.03) $ 0.07 $ 0.17
Income (loss) from
discontinued operations (0.13) (0.11) 0.03 0.20 0.12 0.14
----------- ------------ ------------- ------------ ------------ -------------
Net income (loss) $ (0.41) $ (0.83) $ (0.12) $ 0.17 $ 0.19 $ 0.31
=========== ============ ============= ============ ============ =============
Weighted average common shares:
Basic 35,698 34,761 32,459 28,600 27,768 13,971
Diluted 35,698 34,761 32,459 33,071 31,046 15,618
BALANCE SHEET DATA:
Working capital $ (5,337) $ (2,782) $ 2,628 $ 26,387 $ 9,763 $ 596
Total assets $ 40,005 $ 56,453 $ 94,083 $ 52,374 $ 46,481 $ 19,230
Long-term obligations $ 8,013 $ 18,554 $ 21,586 $ 2,043 $ 771 $ 545
Stockholders' equity $ 21,952 $ 26,993 $ 53,497 $ 45,270 $ 37,075 $ 10,885
(1) Except for the year ended March 31, 2002, certain reclassifications are
reflected in the above data since the filing of such annual reports on forms
10KSB and 10K. Such reclassifications did not result in changes in net income
(loss), net income (loss) per share or stockholders' equity.
4
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE
RISKS DESCRIBED BELOW BEFORE MAKING A DECISION TO BUY OUR COMMON STOCK. IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS COULD BE HARMED. IN THAT
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL
OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION IN
THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES.
EXCEPT FOR HISTORICAL INFORMATION, THE INFORMATION IN THIS PROSPECTUS CONTAINS
"FORWARD-LOOKING" STATEMENTS ABOUT OUR EXPECTED FUTURE BUSINESS AND PERFORMANCE.
OUR ACTUAL OPERATING RESULTS AND FINANCIAL PERFORMANCE MAY PROVE TO BE VERY
DIFFERENT FROM WHAT WE MIGHT HAVE PREDICTED AS OF THE DATE OF THIS PROSPECTUS.
THE RISKS DESCRIBED BELOW ADDRESS SOME OF THE FACTORS THAT MAY AFFECT OUR FUTURE
OPERATING RESULTS AND FINANCIAL PERFORMANCE.
BUSINESS RISKS
WE INCURRED LOSSES FOR THE FIRST NINE MONTHS OF THE FISCAL YEAR 2003 AND IN
FISCAL YEARS 2002, 2001 AND 2000.
We incurred losses of $3.9 million in the first nine months ended
December 31, 2002, compared to losses of $10.1 million for the first nine months
ended December 31, 2001. We incurred losses of $14.7 million, $28.9 million and
$4.1 million in the fiscal years ended March 31, 2002, 2001 and 2000,
respectively. The losses in the past two years have generally been due to
difficulties completing sales for new application software licenses, the
resulting change in sales mix toward lower margin services, and debt service
expenses. We will need to generate additional revenue to achieve profitability
in future periods. Failure to achieve profitability, or maintain profitability
if achieved, may have a material adverse effect on our business and stock price.
WE HAVE NEGATIVE WORKING CAPITAL, AND WE HAVE EXTENDED PAYMENT TERMS WITH A
NUMBER OF OUR SUPPLIERS.
At December 31, 2002 and December 31, 2001, we had negative working
capital of $11.1 million and $13.4 million, respectively. At March 31, 2002 and
March 31, 2001, we had negative working capital of $5.3 million and $2.8
million, respectively. We have had difficulty meeting operating expenses,
including interest payments on debt, lease payments and supplier obligations. We
have at times deferred payroll for our executives offices, and borrowed from
related parties to meet payroll obligations. We have extended payment terms with
our trade creditors wherever possible.
As a result of extended payment arrangements with suppliers, we may be
unable to secure products and services necessary to continue operations at
current levels from these suppliers. In that event, we will have to obtain these
products and services from other parties, which could result in adverse
consequences to our business, operations and financial condition.
OUR NET SALES HAVE DECLINED. WE EXPERIENCED A SUBSTANTIAL DECREASE IN
APPLICATION SOFTWARE LICENSE SALES. OUR GROWTH AND PROFITABILITY IS DEPENDENT ON
THE SALE OF HIGHER MARGIN LICENSES.
Our net sales decreased by 21% in the first nine months ended December
31, 2002, compared to the first nine months ended December 31, 2001. Our net
sales decreased by 2% in the fiscal year ended March 31, 2002 compared to the
fiscal year ended March 31, 2001. Net sales for the fiscal year ended March 31,
2001 decreased 4% compared to the fiscal year ended March 31, 2000. We
experienced a substantial decrease in application license software sales, which
typically carry a much higher margin than other revenue sources. We must improve
new application license sales to become profitable. We have taken steps to
refocus our sales strategy on core historic competencies, but our typically long
sales cycles make it difficult to evaluate whether and when sales will improve.
We cannot be sure that the decline in sales has not been due to factors which
might continue to negatively affect sales.
5
OUR FINANCIAL CONDITION MAY INTERFERE WITH OUR ABILITY TO SELL NEW APPLICATION
SOFTWARE LICENSES.
Future sales growth may depend on our ability to improve our financial
condition. Our current financial condition has made it more difficult for us to
complete sales of new application software licenses. Because our applications
typically require lengthy implementation and extended servicing arrangements,
potential customers require assurance that these services will be available for
the expected life of the application. These potential customers may defer buying
decisions until our financial condition improves, or may choose the products of
our competitors whose financial condition is or is perceived to be stronger.
Customer deferrals or lost sales will adversely affect our business, financial
conditions and results of operations.
OUR SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS MAKES IT DIFFICULT
FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of sales cycles in our business makes it difficult to
evaluate the effectiveness of our sales strategies. Our sales cycles
historically has ranged from three to twelve months, which has caused
significant fluctuations in revenues from period to period. Due to our
difficulties in completing new application software sales in recent periods and
our refocused sales strategy, it is difficult to predict revenues and properly
budget expenses.
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND THEY MAY
CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the
past and may fluctuate in the future as a result of several factors, many of
which are outside of our control. If revenue declines in a quarter, our
operating results will be adversely affected because many of our expenses are
relatively fixed. In particular, sales and marketing, application development
and general and administrative expenses do not change significantly with
variations in revenue in a quarter. It is likely that in some future quarter our
net sales or operating results will be below the expectations of public market
analysts or investors. If that happens, our stock price will likely decline.
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAKES IT DIFFICULT TO PREDICT
FUTURE RESULTS.
Factors outside our control that could cause our revenue to fluctuate
significantly from period to period include:
o THE SIZE AND TIMING OF INDIVIDUAL ORDERS, PARTICULARLY WITH
RESPECT TO OUR LARGER CUSTOMERS;
o GENERAL HEALTH OF THE RETAIL INDUSTRY AND THE OVERALL ECONOMY;
o TECHNOLOGICAL CHANGES IN PLATFORMS SUPPORTING OUR SOFTWARE
PRODUCTS; AND
o MARKET ACCEPTANCE OF NEW APPLICATIONS AND RELATED SERVICES.
In particular, we usually deliver our software applications when
contracts are signed, so order backlog at the beginning of any quarter may
represent only a portion of that quarter's expected revenues. As a result,
application license revenues in any quarter are substantially dependent on
orders booked and delivered in that quarter, and this makes it difficult for us
to accurately predict revenues. We have experienced, and we expect to continue
to experience, quarters or periods where individual application license or
services orders are significantly
6
larger than our typical application license or service orders. Because of the
nature of our offerings, we may get one or more large orders in one quarter
from a customer and then no orders the next quarter.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD, WHICH COULD AFFECT QUARTERLY
RESULTS AND OUR STOCK PRICE.
If we incur additional expenses in a quarter in which we do not
experience increased revenue, our results of operations would be adversely
affected and we may incur losses for that quarter. Factors that could cause our
expenses to fluctuate from period to period include:
o THE EXTENT OF MARKETING AND SALES EFFORTS NECESSARY TO PROMOTE
AND SELL OUR APPLICATIONS AND SERVICES;
o THE TIMING AND EXTENT OF OUR DEVELOPMENT EFFORTS; AND
o THE TIMING OF PERSONNEL HIRING.
IT IS DIFFICULT TO EVALUATE OUR PERFORMANCE BASED ON PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
The many factors which can cause revenues and expenses to vary make
meaningful period to period comparisons of our results difficult. We do not
believe period to period comparisons of our financial performance are
necessarily meaningful, and you cannot rely on them as an indication of our
future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from
October through December of each year as a result of retailers' focus on the
holiday retail-shopping season. This can negatively affect revenues in our third
fiscal quarter and in other quarters, depending on our sales cycles.
OUR DEBT COULD ADVERSELY AFFECT US.
As of April 1, 2003, our debt is as follows:
o $3.5 MILLION IN CONVERTIBLE DEBENTURES ISSUED ON MARCH 31, 2003
TO MIDSUMMER INVESTMENT, LTD., OMICRON MASTER TRUST, AND
ISLANDIA, L.P. DUE IN FULL IN MAY 2005, WITH MONTHLY
REDEMPTIONS TO COMMENCE IN FEBRUARY 2004.
o $400,000 IN CONVERTIBLE DEBENTURES ISSUED ON APRIL 1, 2003 TO
MBSJ INVESTORS LLC DUE IN FULL IN OCTOBER 2005, WITH MONTHLY
REDEMPTIONS TO COMMENCE IN FEBRUARY 2004.
o $300,000 IN CONVERTIBLE DEBENTURES ISSUED ON MAY 7, 2003 TO
CRESTVIEW CAPITAL FUND I, L.P., CRESTVIEW CAPITAL
FUND II, L.P., AND CRESTVIEW CAPITAL OFFSHORE FUND, INC.,
WITH MONTHLY REDEMPTIONS TO COMMENCE IN FEBRUARY 2004.
o $1.25 MILLION IN CONVERTIBLE NOTES REISSUED IN JULY 2002 TO
ENTITIES RELATED TO ICM ASSET MANAGEMENT, INC. DUE SEPTEMBER
30, 2003.
o $500,000 IN A CONVERTIBLE NOTE ISSUED TO UNION BANK OF CALIFORNIA
NA ON MARCH 31, 2003, DUE MARCH 31, 2004.
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.
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o WE MAY NOT HAVE SUFFICIENT FUNDS TO PAY PRINCIPAL AND/OR INTEREST
PAYMENT WHEN THEY BECOME DUE, WHICH COULD LEAD TO A DEFAULT.
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 HAVE RELIED ON CAPITAL CONTRIBUTED BY RELATED PARTIES, AND SUCH CAPITAL MAY
NOT BE AVAILABLE IN THE FUTURE.
Our cash from operations has not been sufficient to meet our
operational needs, and we have relied on capital from related parties. A company
affiliated with Donald S. Radcliffe, one of our directors, made short-term loans
to us in fiscal 2002 and in fiscal 2003 to meet payroll when cash on hand was
not sufficient. Softline loaned us $10 million to make a required principal
payment on our Union Bank term loan in July 2000. A subsidiary of Softline
loaned us an additional $600,000 in November 2000 to meet working capital needs.
This loan was repaid in February 2001, in part with $400,000 we borrowed from
Barry M. Schechter, our Chairman. We borrowed an additional $164,000 from Mr.
Schechter in March 2001 for operational needs related to our Australian
subsidiary, which was repaid in July 2001.
We may not be able to obtain capital from related parties in the
future. Neither Softline, Mr. Schechter, Mr. Radcliffe nor any other officers,
directors, stockholders or related parties are under any obligation to continue
to provide cash to meet our future liquidity needs.
WE MAY NEED TO RAISE CAPITAL TO REPAY DEBT AND GROW OUR BUSINESS. OBTAINING THIS
CAPITAL COULD IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise capital to discharge our aged payables and grow
our business. We will also likely need to raise capital to pay our $1.25 million
convertible note obligations to the entities related to ICM Asset Management,
Inc. due in full in September 2003, our $3.5 million convertible debenture
obligations due in full in May 2005,with monthly redemptions commencing in
February 2004, our $400,000 convertible debenture obligations due in full in
October 2005, with monthly redemptions commencing in February 2004, and our
$500,000 convertible note obligation due in full in March 2004. We may also need
to raise further capital to:
o SUPPORT UNANTICIPATED CAPITAL REQUIREMENTS;
o TAKE ADVANTAGE OF ACQUISITION OR EXPANSION OPPORTUNITIES;
o CONTINUE OUR CURRENT DEVELOPMENT EFFORTS;
o DEVELOP NEW APPLICATIONS OR SERVICES; OR
o ADDRESS WORKING CAPITAL NEEDS.
Our future capital requirements depend on many factors including our
application development, sales and marketing activities. We do not know whether
additional financing will be available when needed, or available on terms
acceptable to us. If we cannot raise needed funds for the above purposes on
acceptable terms, we may be forced to curtail some or all of the above
activities and we may not be able to grow our business or respond to competitive
pressures or unanticipated developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities 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.
8
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other
intangible assets represent approximately 84% of our total assets as of December
31, 2002 and represent more than our stockholders' equity. We may have to impair
or write-off these assets, which will cause a charge to earnings and could cause
our stock price to decline.
Any such impairments will also reduce our assets, as well as the ratio
of our assets to our liabilities. These balance sheet effects could make it more
difficult for us to obtain capital, and could make the terms of capital we do
obtain more unfavorable to our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our
applications and services and our expenses, and foreign currency losses will
negatively affect profitability or increase losses. Approximately 12% of our net
sales were in the United Kingdom in the nine-month period ending December 31,
2002. Approximately 17%, 22% and 37% of our net sales were outside North
America, principally in Australia and the United Kingdom, in the fiscal years
ended March 31, 2002, 2001 and 2000, respectively. Many of our expenses related
to foreign sales, such as corporate level administrative overhead and
development, are denominated in U.S. dollars. When accounts receivable and
accounts payable arising from international sales and services are converted to
U.S. dollars, the resulting gain or loss contributes to fluctuations in our
operating results. We do not hedge against foreign currency exchange rate risks.
WE HAVE A SINGLE CUSTOMER REPRESENTING A SIGNIFICANT AMOUNT OF OUR BUSINESS.
Toys "R" Us, Inc. ("Toys") accounted for 31% and 47% of our net sales
for the nine months ended December 31, 2002 and 2001, respectively. Toys
accounted for 42%, 29% and 15% of our net sales for the fiscal years ended March
31, 2002, 2001 and 2000, respectively. While we have a development agreement
with this customer, Toys has the right to terminate the agreement without cause
with limited advance notice. A reduction, delay or cancellation of orders from
Toys would significantly reduce our revenues and force us to substantially
curtail operations. We cannot provide any assurances that Toys or any of our
current customers will continue at current or historical levels or that we will
be able to obtain orders from new customers.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on Barry M. Schechter, our Chairman, Harvey
Braun, our Chief Executive Officer, and Steven Beck, our President and Chief
Operating Officer. Mr. Schechter has an employment agreement with us, which
expires September 30, 2003 and may be terminated on 14 days notice. We do not
have any written employment agreements with Mr. Braun or Mr. Beck. We also
believe our future success will depend largely upon our ability to attract and
retain highly-skilled software programmers, managers, and sales and marketing
personnel. Competition for personnel is intense, particularly in international
markets. The software industry is characterized by a high level of employee
mobility and aggressive recruiting of skilled personnel. We compete against
numerous companies, including larger, more established companies, for our
personnel. We may not be successful in attracting or retaining skilled sales,
technical and managerial personnel. The loss of key employees or our inability
to attract and retain other qualified employees could negatively affect our
financial performance and cause our stock price to decline.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES
HAVE BEEN AND MAY CONTINUE TO BE SLOW.
Our future growth is critically dependent on increased sales to the
retail industry. We derive the substantial majority of our revenues from the
licensing of software applications and the performance of related professional
and consulting services to the retail industry. Demand for our applications and
services could decline in the event of consolidation, instability or more
downturns in the retail industry. This decline would likely cause reduced sales
and could impair our ability to collect accounts receivable. The result would be
reduced earnings and weakened financial condition, each or both of which would
likely cause our stock price to decline.
9
The success of our customers is directly linked to economic conditions
in the retail industry, which in turn are subject to intense competitive
pressures and are affected by overall economic conditions. In addition, the
retail industry may be consolidating, and it is uncertain how consolidation will
affect the industry. The retail industry as a whole is currently experiencing
increased competition and weakening economic conditions that could negatively
impact the industry and our customers' ability to pay for our products and
services. Such consolidation and weakening economic conditions have in the past,
and may in the future, negatively impact our revenues, reduce the demand for our
products and may negatively impact our business, operating results and financial
condition. Weakening economic conditions and the September 11, 2001 terrorist
attack have adversely impacted sales of our software applications, and we
believe mid-tier specialty retailers may be reluctant during the current
economic slowdown to make the substantial infrastructure investment that
generally accompanies the implementation of our software applications. Also, the
current war in Iraq and the anticipated burden of rebuilding that country's
infrastructure has led to some uncertainty in the economic climate, which may
adversely impact our business.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS.
We have in the past and may in the future be impacted by customer
bankruptcies. During weak economic conditions, such as those currently being
experienced in many geographic regions around the world, there is an increased
risk that certain of our customers will file bankruptcy. When our customers file
bankruptcy, we may be required to forego collection of pre-petition amounts
owed, and to repay amounts remitted to us during the 90-day preference period
preceding the filing. Accounts receivable balances related to pre-petition
amounts may in certain of these instances be large due to extended payment terms
for software license fees, and significant billings for consulting and
implementation services on large projects. The bankruptcy laws, as well as the
specific circumstances of each bankruptcy, may severely limit our ability to
collect pre-petition amounts, and may force us to disgorge payments made during
the 90-day preference period. We also face risk from international customers
which file for bankruptcy protection in foreign jurisdictions, in that the
application of foreign bankruptcy laws may be less certain or harder to predict.
Although we believe that we have sufficient reserves to cover anticipated
customer bankruptcies, there can be no assurance that such reserves will be
adequate, and if they are not adequate, our business, operating results and
financial condition would be adversely affected.
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We conduct business in an industry characterized by intense
competition. Most of our competitors are very large companies with an
international presence. We must also compete with smaller companies which have
been able to develop strong local or regional customer bases. Many of our
competitors and potential competitors are more established, benefit from greater
name recognition and have significantly greater resources than us. Our
competitors may also have lower cost structures and better access to the capital
markets than us. As a result, our competitors may be able to respond more
quickly than we can to new or emerging technologies and changes in customer
requirements. Our competitors may:
o INTRODUCE NEW TECHNOLOGIES THAT RENDER OUR EXISTING OR FUTURE
PRODUCTS OBSOLETE, UNMARKETABLE OR LESS COMPETITIVE;
o MAKE STRATEGIC ACQUISITIONS OR ESTABLISH COOPERATIVE RELATIONSHIPS
AMONG THEMSELVES OR WITH OTHER SOLUTION PROVIDERS, WHICH WOULD
INCREASE THE ABILITY OF THEIR PRODUCTS TO ADDRESS THE NEEDS OF OUR
CUSTOMERS; AND
o ESTABLISH OR STRENGTHEN COOPERATIVE RELATIONSHIPS WITH OUR CURRENT
OR FUTURE STRATEGIC PARTNERS, WHICH WOULD LIMIT OUR ABILITY TO
COMPETE THROUGH THESE CHANNELS.
10
We could be forced to reduce prices and suffer reduced margins and
market share due to increased competition from providers of offerings similar
to, or competitive with, our applications, or from service providers that
provide services similar to our services. Competition could also render our
technology obsolete. For a further discussion of competitive factors in our
industry, see "Business" under the heading "Competition."
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological
change, evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
The success of application enhancements and new applications depends on
a variety of factors, including technology selection and specification, timely
and efficient completion of design, and effective sales and marketing efforts.
In developing new applications and services, we may:
o FAIL TO RESPOND TO TECHNOLOGICAL CHANGES IN A TIMELY OR
COST-EFFECTIVE MANNER;
o ENCOUNTER APPLICATIONS, CAPABILITIES OR TECHNOLOGIES DEVELOPED BY
OTHERS THAT RENDER OUR APPLICATIONS AND SERVICES OBSOLETE OR
NON-COMPETITIVE OR THAT SHORTEN THE LIFE CYCLES OF OUR EXISTING
APPLICATIONS AND SERVICES;
o EXPERIENCE DIFFICULTIES THAT COULD DELAY OR PREVENT THE SUCCESSFUL
DEVELOPMENT, INTRODUCTION AND MARKETING OF THESE NEW APPLICATIONS
AND SERVICES; OR
o FAIL TO ACHIEVE MARKET ACCEPTANCE OF OUR APPLICATIONS AND
SERVICES.
The life cycles of our applications are difficult to estimate,
particularly in the emerging electronic commerce market. As a result, new
applications and enhancements, even if successful, may become obsolete before we
recoup our investment.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our success and competitive position is dependent in part upon our
ability to develop and maintain the proprietary aspects of our intellectual
property. Our intellectual property includes our trademarks, trade secrets,
copyrights and other proprietary information. Our efforts to protect our
intellectual property may not be successful. Effective copyright and trade
secret protection may be unavailable or limited in some foreign countries. We
hold no patents. Consequently, others may develop, market and sell applications
substantially equivalent to ours or utilize technologies similar to those used
by us, so long as they do not directly copy our applications or otherwise
infringe our intellectual property rights.
We may find it necessary to bring claims or litigation against third
parties for infringement of our proprietary rights or to protect our trade
secrets. These actions would likely be costly and divert management resources.
These actions could also result in counterclaims challenging the validity of our
proprietary rights or alleging infringement on our part. The ultimate outcome of
any litigation will be difficult to predict.
OUR APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial
11
resources to defend or prosecute our rights in connection with any such
litigation. Responding to and defending claims related to our intellectual
property rights, even ones without merit, can be time consuming and expensive
and can divert management's attention from other business matters. In addition,
these actions could cause application delivery delays or require us to enter
into royalty or license agreements. Royalty or license agreements, if required,
may not be available on terms acceptable to us, if they are available at all.
Any or all of these outcomes could have a material adverse effect on our
business, operating results and financial condition.
DEVELOPMENT AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources
necessary to develop and market our offerings to their target markets, our
business strategy substantially depends on our strategic relationships. While
some of these relationships are governed by contracts, most are non-exclusive
and all may be terminated on short notice by either party. If these
relationships terminate or fail to deliver the intended benefits, our
development and marketing efforts will be impaired and our revenues may decline.
We may not be able to enter into new strategic relationships, which could put us
at a disadvantage to those of our competitors which do successfully exploit
strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
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.
12
Our customers typically use our applications to perform
mission-critical functions. As a result, the defects and problems discussed
above could result in significant financial or other damage to our customers.
Although our sales agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, we do not
know if these limitations of liability are enforceable or would otherwise
protect us from liability for damages to a customer resulting from a defect in
one of our applications or the performance of our services. Our product
liability insurance may not cover all claims brought against us.
SOFTLINE LIMITED HAS THE RIGHT TO ACQUIRE A CONTROLLING PERCENTAGE OF OUR COMMON
STOCK, SO WE MAY BE EFFECTIVELY CONTROLLED BY SOFTLINE, AND OUR OTHER
STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING.
Softline Limited beneficially owns 54.7% of our outstanding common
stock, including shares Softline has the right to acquire upon conversion of its
Series A Convertible Preferred Stock. Ivan M. Epstein, Softline's Chief
Executive Officer, and Robert P. Wilkie, Softline's Chief Financial Officer,
serve on our board of directors. If Softline converts its Series A Preferred
Stock, it may have effective control over all matters affecting us, including:
o THE ELECTION OF ALL OF OUR DIRECTORS;
o THE ALLOCATION OF BUSINESS OPPORTUNITIES THAT MAY BE SUITABLE FOR
SOFTLINE AND US;
o ANY DETERMINATIONS WITH RESPECT TO MERGERS OR OTHER BUSINESS
COMBINATIONS INVOLVING US;
o THE ACQUISITION OR DISPOSITION OF ASSETS OR BUSINESSES BY US;
o DEBT AND EQUITY FINANCING, INCLUDING FUTURE ISSUANCE OF OUR
COMMON STOCK OR OTHER SECURITIES;
o AMENDMENTS TO OUR CHARTER DOCUMENTS;
o THE PAYMENT OF DIVIDENDS ON OUR COMMON STOCK; AND
o DETERMINATIONS WITH RESPECT TO OUR TAX RETURNS.
OUR BUSINESS MAY BE DISADVANTAGED OR HARMED IF SOFTLINE'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have and will continue to arise between Softline
and us in a number of areas relating to our past and ongoing relationships.
Conflicts may not be resolved in a manner that is favorable to us, and such
conflicts may result in harmful consequences to our business or prospects.
SOFTLINE'S INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY
TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Softline's potential voting control could discourage others from
initiating any potential merger, takeover or other change of control transaction
that may otherwise be beneficial to our business or our stockholders. As a
result, Softline's control could reduce the price that investors may be willing
to pay in the future for shares of our stock, or could prevent any party from
attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to
continue to be, volatile. When we or our competitors announce new customer
orders or services, change pricing policies, experience quarterly fluctuations
in operating results, announce strategic relationships or acquisitions, change
earnings estimates, experience government regulatory actions or suffer from
generally adverse economic conditions, our stock price could be affected. Some
of the volatility in our stock price may be unrelated to our performance.
Recently, companies similar to ours have experienced extreme price fluctuations,
often for reasons unrelated to their performance. For further information on our
stock price trends, see "Price Range of Common Stock."
13
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common
stock. We anticipate that we will use our earnings and cash flow for repayment
of indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Softline is entitled
to dividends on its Series A Convertible Preferred Stock in preference and
priority to common stockholders. Future equity financing(s) may further restrict
our ability to pay dividends.
THE TERMS OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock in
one or more series. We issued 141,000 shares of Series A Convertible Preferred
Stock to Softline in May 2002. Our board of directors may determine the terms of
subsequent series of preferred stock without further action by our stockholders.
If we issue additional preferred stock, it could affect your rights or reduce
the value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. We are actively seeking capital, and some of the
arrangements we are considering may involve the issuance of preferred stock.
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The
Exchange has published certain guidelines it uses in determining whether a
security warrants continued listing. These guidelines include financial, market
capitalization and other criteria, and as a result of our financial condition or
other factors, the American Stock Exchange could in the future determine that
our stock does not merit continued listing. If our stock were delisted from the
American Stock Exchange, the ability of our stockholders to sell our common
stock could become limited, and we would lose the advantage of some state and
federal securities regulations imposing lower regulatory burdens on
exchange-traded issuers.
DELAWARE LAW AND SOME PROVISIONS OF OUR CHARTER AND BYLAWS MAY ADVERSELY AFFECT
THE PRICE OF YOUR STOCK.
Special meetings of our stockholders may be called only by the Chairman
of the Board, the Chief Executive Officer or the Board of Directors.
Stockholders have no right to call a meeting and may not act by written consent.
Stockholders must also comply with advance notice provisions in our bylaws in
order to nominate directors or propose matters for stockholder action. These
provisions of our charter documents, as well as certain provisions of Delaware
law, could delay or make more difficult certain types of transactions involving
a change in control of the Company or our management. Delaware law also contains
provisions that could delay or make more difficult change in control
transactions. As a result, the price of our common stock may be adversely
affected.
SHARES ISSUED UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND CONVERTIBLE
NOTES COULD DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our
employees and certain other persons at various prices, some of which are or may
in the future have exercise prices at below the market price of our stock. We
currently have outstanding options and warrants for 16,130,089 shares. Of these
options and warrants, 4,739,337 have exercise prices above the recent market
price of $1.02 per share (as of May 5, 2003), and 11,390,752 have exercise
prices at below that recent market price. If exercised, these options and
warrants will cause immediate and possibly substantial dilution to our
stockholders.
Our existing stock option plan currently has approximately 2,366,405
shares available for issuance as of May 5, 2003. Future options issued under the
plan may have further dilutive effects.
14
We issued to Toys "R" Us, our major customer, a note convertible into
2,500,000 shares of common stock. This note has a conversion price of $0.553.
This note will have a dilutive effect on stockholders if converted.
We issued to entities related to ICM Asset Management notes that are
convertible into 2,083,333 shares of common stock. These notes have a conversion
price of $0.60 per share, which is currently below the recent market price of
$0.95. These notes will have a dilutive effect on stockholders if converted.
We also recently issued to a group of investors debentures that are
convertible into 4,103,165 shares of common stock. These debentures have a
conversion price of $1.0236, which is above the recent market price of $0.95.
These debentures will have a dilutive effect on stockholders of converted.
We issued to Union Bank of California, N.A. an unsecured note that is
convertible into shares of common stock at a price per share of eighty percent
(80%) of the average share closing price of our common stock for the ten trading
day period immediately preceding the maturity date of the note. This note will
have a dilutive effect on stockholders if converted.
Sales of shares pursuant to exercisable options, warrants, convertible
notes, and convertible debentures could lead to subsequent sales of the shares
in the public market, and could depress the market price of our stock by
creating an excess in supply of shares for sale. Issuance of these shares and
sale of these shares in the public market could also impair our ability to raise
capital by selling equity securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our
consolidated financial position, results of operations or cash flows. We are
exposed to market risks, which include changes in interest rates and changes in
foreign currency exchange rate as measured against the U.S. dollar.
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe
and until February 2002, Australia. Sales are typically denominated in the local
foreign currency, which creates exposures to changes in exchange rates. These
changes in the foreign currency exchange rates as measured against the U.S.
dollar may positively or negatively affect our sales, gross margins and retained
earnings. We attempt to minimize currency exposure risk through decentralized
sales, development, marketing and support operations, in which substantially all
costs are local-currency based. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the value of the foreign currency. We do not hedge against foreign currency
risk. Approximately 12% and 18% of our total net sales were denominated in
currencies other than the U.S. dollar for the nine-month period ending December
31, 2002 and 2001, respectively. Approximately 17%, 22%, and 37% of our total
net sales were denominated in currencies other than the U.S. dollar for the
periods ended March 31, 2002, 2001 and 2000, respectively.
EQUITY PRICE RISK
We have no direct equity investments.
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS THE
WORDS MAY, WILL, SHOULD, EXPECT, PLAN, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT,
POTENTIAL OR CONTINUE, OR THE NEGATIVES OF SUCH WORDS OR OTHER COMPARABLE
TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO
15
DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO THE ITEMS DISCUSSED UNDER "RISK FACTORS" AND OTHER SECTIONS OF THIS
PROSPECTUS.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO OBLIGATION TO
UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE FILING OF THIS REPORT TO
CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
16
SELLING STOCKHOLDERS
We are registering 38,700,053 shares of our common stock for resale by
the selling stockholders named below. The term "selling stockholders" includes
each stockholder named below and such stockholder's transferees, pledgees,
donees or other successors. See "Registration Rights" and below for a more
complete description of our agreements with selling stockholders in connection
with their registration rights.
BACKGROUND
In this registration statement, 7,151,795 shares of common stock held
by or issuable to Koyah Leverage Partners, L.P., Koyah Partners, L.P., Raven
Partners, L.P., Brian Cathcart and Nigel M. Davey are being registered herein
pursuant to an investors rights agreement. We previously issued or sold shares
of common stock, as well as warrants and convertible notes, to these investors,
who are or were related to ICM Asset Management. Pursuant to an investors'
rights agreement, we also agreed to file a registration statement for the resale
of all shares held by or issuable to these investors. See "Managements'
Discussion and Analysis of Financial Condition and Results of Operations -
Financing Transactions, ICM Asset Management." Accordingly, we are registering
for these investors 3,468,462 shares of common stock, 1,600,000 shares of common
stock issuable upon the exercise of their warrants, and 2,083,333 shares of
common stock issuable upon the conversion of their convertible notes.
In May 2002, we entered into a securities purchase agreement with
Softline Limited where we issued and sold 141,000 shares of newly designated
Series A Convertible Preferred Stock. The Series A Preferred Stock is
convertible into that number of shares of our common stock as determined in
accordance with this formula:
Number of shares of common stock = $100 + amount of all dividends
accrued since 1/01/02 x (# of shares of preferred stock)/ conversion price
(the conversion price is initially $0.80, but increases at the annual
rate of 3.5%; dividends accrue on $100 at the rate of 7.2% per year)
Pursuant to a registration rights agreement, we granted "piggy back"
registration rights covering the resale of the shares of our common stock
issuable upon conversion of the Series A Preferred Stock. The number of shares
being registered by Softline is 18,255,073, which is the number of shares of
common stock issuable upon conversion of the Series A Preferred Stock as of
January 1, 2003. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations - Financing Transactions, Softline."
In March 2003, we granted registration rights to Midsummer Investment,
Ltd., Omicron Master Trust, and Islandia, L.P. with respect to debentures that
are convertible into an aggregate of 3,419,304 shares of common stock and
warrants to purchase an aggregate 1,572,858 shares of common stock pursuant to a
registration rights agreement. Under that agreement, we are required to file a
registration statement covering 130% of the shares issuable upon the conversion
of the debentures and warrants. We are also registering an aggregate of 819,000
shares issuable as payment for interest accrued on the debentures. The total
number of shares to be registered equals 7,308,811. Additional debentures and
warrants may be issued to these investors if certain conditions are met. The
shares underlying these additional debentures and additional warrants are not
included for registration under this prospectus. See "Managements' Discussion
and Analysis of Financial Condition and Results of Operations - Financing
Transactions, Midsummer/Omicron/Islandia."
In connection with the debentures sold in March 2003, Softline entered
into a "lock up" agreement with the purchasers of those debentures under which
Softline is limited or restricted in the number of shares Softline may sell
during any period of time debentures are still outstanding with respect to
Midsummer and/or Omicron.
On April 1, 2003, we granted registration rights to MBSJ Investors LLC
with respect to debenture that is convertible into an aggregate of 390,778
shares of common stock and warrants to purchase an aggregate of 156,311 shares
of common stock pursuant to a registration rights agreement. Under that
agreement, we are required to file a registration rights agreement covering 130%
of the shares issuable upon the conversion of the debentures and warrants. We
are also registering an aggregate of 72,000 shares issuable as payment for
interest accrued on the debentures. See "Managements' Discussion and Analysis of
Financial Condition and Results of Operations - Financing Transactions, MBSJ."
17
On May 6, 2003, we granted registration rights to Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. with respect to debentures that are convertible into an aggregate of
293,083 shares of common stock and warrants to purchase an aggregate of 101,112
shares of common stock pursuant to a registration rights agreement. Under that
agreement, we are required to file a registration statement covering 130% of the
shares issuable upon the conversion of the debentures and warrants. We are also
registering an aggregate of 54,000 shares issuable as payment for interest
accrued on the debentures. Additional debentures and warrants may be issued to
these investors if certain conditions are met. The shares underlying these
additional debentures and additional warrants are not included for registration
under this prospectus. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations - Financing Transactions, Crestview."
In September 2002, we granted each of Steven Beck and Harvey Braun a
non-qualified option to purchase up to 2,000,000 shares of common stock at an
exercise price of $0.28 per share. We granted registration rights covering the
shares issuable upon the exercise of the options.
In addition, 634,705 shares of common stock, including shares that
are issuable upon the exercise or conversion of options and warrants, are being
registered for other individuals or entities who are being extended this
opportunity to register their shares.
The following table, which reflects stockholdings as of April 1, 2003,
is based in part upon information provided by the selling stockholders and sets
forth (i) the names of the selling stockholders; (ii) the number of shares of
our common stock that the selling stockholders owned prior to the offering for
resale of any of the shares or our common stock being registered hereby; (iii)
the maximum number of shares of our common stock that may be offered for resale
for the accounts of the selling stockholders pursuant to this prospectus; and
(iv) the percentage of shares of common stock to be held by the selling
stockholders after the offering of the resale shares (assuming all of the resale
shares are sold by the selling stockholders).
--------------------------------------- ------------------------- -------------------------- -------------------------
NUMBER OF SHARES OF SVI NUMBER OF SHARES OF SVI PERCENTAGE OF COMMON
COMMON STOCK COMMON STOCK TO BE STOCK OUTSTANDING AFTER
SELLING STOCKHOLDERS BENEFICIALLY OWNED (1) RESOLD IN THE OFFERING THE OFFERING (2)
--------------------------------------- ------------------------- -------------------------- -------------------------
Gary Seehoff 39,705 39,705 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Rachel Clicksman 24,000 24,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Gary Nash 1,000 1,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Steven Beck (3) 2,000,000 2,000,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Harvey Braun (3) 2,000,000 2,000,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Norman Smith 180,000 180,000 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Barry M. Schechter (4) 4,093,391 20,000 6.1%
--------------------------------------- ------------------------- -------------------------- -------------------------
Softline Limited (5) 27,250,800 18,255,073 13.5%
--------------------------------------- ------------------------- -------------------------- -------------------------
Brian Cathart (6) 44,155 44,155 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Nigel M. Davey (7) 27,013 15,013 <1%
--------------------------------------- ------------------------- -------------------------- -------------------------
Koyah Leverage Partners, L.P. (8) 5,537,062 5,537,062 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Koyah Partners, L.P. (9) 1,281,683 1,281,683 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Raven Partners, L.P. (10) 273,882 273,882 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Donald Radcliffe (11) 1,115,900 370,000 1.2%
--------------------------------------- ------------------------- -------------------------- -------------------------
18
--------------------------------------- ------------------------- -------------------------- -------------------------
NUMBER OF SHARES OF SVI NUMBER OF SHARES OF SVI PERCENTAGE OF COMMON
COMMON STOCK COMMON STOCK TO BE STOCK OUTSTANDING AFTER
SELLING STOCKHOLDERS BENEFICIALLY OWNED(1) RESOLD IN THE OFFERING THE OFFERING(2)
--------------------------------------- ------------------------- -------------------------- -------------------------
Midsummer Investment, Ltd. (12) 1,996,865 2,923,525 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Omicron Master Trust (13) 2,139,498 3,132,347 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Islandia, L.P. (14) 855,799 1,252,939 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
MBSJ Investors LLC (15) 547,089 783,216 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Crestview Capital Fund I., L.P. (16) 131,398 188,817 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Crestview Capital Fund, II, L.P. (17) 229,947 330,431 0%
--------------------------------------- ------------------------- -------------------------- -------------------------
Crestview Capital Offshore Fund, Inc. 32,850 47,205 0%
(18)
--------------------------------------- ------------------------- -------------------------- -------------------------
(1) The number of shares does not include an indeterminate number of
additional shares that may be registered and issued in accordance with Rule 416
under the Securities Act to prevent dilution of the common stock resulting from
stock splits, stock dividends or other events.
(2) Percentage of shares of common stock outstanding after the offering (a)
is based upon 31,499,632 shares of our common stock outstanding as of March 31,
2003, plus 34,911,846 shares of our common stock issuable upon the conversion or
exercise of the Series A Preferred Stock, options, warrants, convertible notes
and for the payment of interest on the debentures, which shares are being
registered in this prospectus, and (b) assumes that the selling stockholders
sell all shares of our common stock that are registered pursuant to this
prospectus.
(3) Represents shares issuable upon exercise of options granted outside of
our incentive stock option plans.
(4) Claudav Holdings Ltd. B.V. ("Claudav"), the Ivanhoe Irrevocable Trust
("Ivanhoe") and Barry M. Schechter may be deemed a group pursuant to Rule 13d-5
promulgated under the Exchange Act. Claudav holds 462,300 shares, for which it
shares voting power with Mr. Schechter pursuant to a proxy. Claudav is managed
by Erwin Wachter, Trustee. Mr. Wachter has beneficial ownership of the shares
held by Claudav. Ivanhoe holds 2,008,237 shares for which it shares voting and
investment power with Mr. Schechter pursuant to Mr. Schechter's position as a
trustee. Includes 2,000 shares held by Mr. Schechter's minor children and
1,516,854 shares issuable upon exercise of options held by Mr. Schechter. We are
also registering 20,000 shares of common stock issuable upon the exercise of Mr.
Schechter's options.
(5) Includes 8,923,915 shares of common stock and 71,812 shares issuable upon
exercise of options held by Softline Limited, which shares we are not
registering with this offering. Also includes 18,255,073 shares issuable upon
conversion of the Series A Preferred Stock, which we are registering with this
offering. Ivan Epstein and Robert Wilkie are the chief executive officer and
chief financial officer, respectively, of Softline Limited and have shared
voting and dispositive power over the shares held by Softline Limited, but
disclaim beneficial ownership of the shares of our common stock owned by
Softline Limited.
(6) Includes 14,743 shares issuable upon exercise of a warrant held by Mr.
Cathart.
(7) Includes 5,013 shares issuable upon exercise of a warrant held by Mr.
Davey.
19
(8) Includes 1,257,925 shares issuable upon exercise of warrants and
1,562,500 shares issuable upon conversion of a convertible promissory note held
by Koyah Leverage Partners, L.P. Koyah Ventures, LLC is the general partner of
Koyah Leverage Partners, L.P. and as a result has shared voting and dispositive
power over shares held by Koyah Leverage Partners, L.P. ICM Asset Management,
Inc. is the investment advisor to Koyah Leverage Partners, L.P. and as a result
has shared voting and dispositive power over shares held by Koyah Leverage
Partners, L.P. James M. Simmons is the managing member of Koyah Ventures, LLC
and the chief investment officer and controlling shareholder of ICM Asset
Management, Inc. and as a result has shared voting and dispositive power over
shares held by Koyah Leverage Partners, L.P. James M. Simmons disclaims
beneficial ownership of the shares of our common stock owned by Koyah Leverage
Partners, L.P.
(9) Includes 309,784 shares issuable upon exercise of warrants and 312,500
shares issuable upon conversion of a convertible promissory note held by Koyah
Partners, L.P. Koyah Ventures, LLC is the general partner of Koyah Partners,
L.P. and as a result has shared voting and dispositive power over shares held by
Koyah Partners, L.P. ICM Asset Management, Inc. is the investment advisor to
Koyah Partners, L.P. and as a result has shared voting and dispositive power
over shares held by Koyah Partners, L.P. James M. Simmons is the managing member
of Koyah Ventures, LLC and the chief investment officer and controlling
shareholder of ICM Asset Management, Inc. and as a result has shared voting and
dispositive power over shares held by Koyah Partners, L.P. James M. Simmons
disclaims beneficial ownership of the shares of our common stock owned by Koyah
Partners, L.P.
(10) Includes 12,535 shares issuable upon exercise of warrants and 208,333
shares issuable upon conversion of a convertible promissory note held by Raven
Partners, L.P. Koyah Ventures, LLC and Raven Ventures, LLC are the general
partners of Raven Partners, L.P. and as a result have shared voting and
dispositive power over shares held by Raven Partners, L.P. ICM Asset Management,
Inc. is the investment advisor to Raven Partners, L.P. and as a result has
shared voting and dispositive power over shares held by Raven Partners, L.P.
James M. Simmons is the managing member of Koyah Ventures, LLC and Raven
Ventures, LLC and the chief investment officer and controlling shareholder of
ICM Asset Management, Inc. and as a result has shared voting and dispositive
power over shares held by Raven Partners, L.P. James M. Simmons disclaims
beneficial ownership of the shares of our common stock owned by Raven Partners,
L.P.
(11) Includes 610,000 shares issuable upon exercise of options, of which we
are registering 295,000 shares with this offering. Also includes 17,600 shares
held by an entity for which Mr. Radcliffe has sole voting and investment power.
Also includes an aggregate of 82,100 shares held by three entities for which Mr.
Radcliffe has shared voting and investment power. Excludes 124,500 shares held
by Mr. Radcliffe's spouse, for which Mr. Radcliffe disclaims beneficial
ownership. We are registering 75,000 shares held by Mr. Radcliffe with this
offering.
(12) Includes 1,367,722 shares issuable upon conversion of debentures and
629,143 shares issuable upon exercise of warrants. We are registering a number
of shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Midsummer Investment, Ltd. as of March 31, 2003
in accordance with the requirements of a registration rights agreement. We are
also registering 327,600 shares issuable for interest accrued on the debentures.
(13) Includes 1,465,416 shares issuable upon conversion of debentures and
674,082 shares issuable upon exercise of warrants. We are registering a number
of shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Omicron Master Trust as of March 31, 2003 in
accordance with the requirements of a registration rights agreement. We are also
registering 351,000 shares issuable for interest accrued on the debentures.
(14) Includes 586,166 shares issuable upon conversion of debentures and
269,633 shares issuable upon exercise of warrants. We are registering a number
of shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Islandia, L.P. as of March 31, 2003 in
accordance with the requirements of a registration rights agreement. We are also
registering 140,400 shares issuable for interest accrued on the debentures.
(15) Includes 390,778 shares issuable upon conversion of debentures and
156,311 shares issuable upon exercise of warrants. We are registering a number
of shares equal to 130% of the number of shares issuable upon conversion
20
of the debentures and warrants held be MBSJ Investors, LLC as of April 1,
2003 pursuant to a registration rights agreement. We are also registering 72,000
shares issuable for interest accrued on the debentures.
(16) Includes 97,694 shares issuable upon conversion of debentures and
33,704 shares issuable upon conversion of warrants. We are registering a number
of shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Crestview Capital Fund I, L.P. as of May 6, 2003
pursuant to a registration rights agreement. We are also registering 18,000
shares issuable for interest accrued on the debentures.
(17) Includes 170,965 shares issuable upon conversion of debentures and
58,982 shares issuable upon exercise of warrants. We are registering a number of
shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Crestview Capital Fund II, L.P. as of May 6,
2003 pursuant to a registration rights agreement. We are also registering 31,500
shares issuable for interest accrued on the debentures.
(18) Includes 24,424 shares issuable upon conversion of debentures and
8,426 shares issuable upon exercise of warrants. We are registering a number of
shares equal to 130% of the number of shares issuable upon conversion of the
debentures and warrants held by Crestview Capital Offshore Fund, Inc. as of May
6, 2003 pursuant to a registration rights agreement. We are also registering
4,500 shares issuable for interest accrued on the debentures.
PLAN OF DISTRIBUTION
The shares of common stock offered for resale through this prospectus
may be sold from time to time by the selling stockholders in one or more
transactions at fixed prices, at market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The selling
stockholders may offer their shares of common stock in one or more of the
following transactions:
o ON ANY NATIONAL SECURITIES EXCHANGE OR QUOTATION SERVICE AT WHICH
THE COMMON STOCK MAY BE LISTED OR QUOTED AT THE TIME OF SALE,
INCLUDING THE AMERICAN STOCK EXCHANGE;
o IN THE OVER-THE-COUNTER MARKET;
o IN PRIVATE TRANSACTIONS;
o THROUGH OPTIONS;
o BY PLEDGE TO SECURE DEBTS AND OTHER OBLIGATIONS;
o ORDINARY BROKERAGE TRANSACTIONS AND TRANSACTIONS IN WHICH THE
BROKER-DEALER SOLICITS PURCHASES;
o BLOCK TRADES IN WHICH THE BROKER-DEALER WILL ATTEMPT TO SELL THE
SHARES AS AGENT BUT MAY POSITION AND RESELL A PORTION OF THE BLOCK
AS PRINCIPAL TO FACILITATE THE TRANSACTION;
o PURCHASES BY A BROKER-DEALER AS PRINCIPAL AND RESALE BY THE
BROKER-DEALER FOR ITS ACCOUNT;
o AN EXCHANGE DISTRIBUTION IN ACCORDANCE WITH THE RULES OF THE
APPLICABLE EXCHANGE;
o SETTLEMENT OF SHORT SALES;
o THE SALE OF A SPECIFIED NUMBER OF SHARES AT A STIPULATED PRICE
PER SHARE BY AGREEMENT BETWEEN BROKER-DEALERS AND THE SELLING
SHAREHOLDERS; OR
o A COMBINATION OF ANY OF THE ABOVE METHODS.
If required, we will distribute a supplement to this prospectus to
describe material changes in the terms of the offering.
21
The shares of common stock described in this prospectus may be sold
from time to time directly by the selling stockholders. Alternatively, the
selling stockholders may from time to time offer shares of common stock to or
through underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933 (the "Securities Act"). Any profits on the resale
of shares of common stock and any compensation received by any underwriter,
broker/dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares and, if they default in the
performance of any of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provisions of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders may also transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
Any shares covered by this prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares we are registering. The selling stockholders may transfer, devise or gift
such shares by other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common
stock must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the shares may not be offered or
sold unless they have been registered or qualified for sale or an exemption is
available and the selling stockholder complies with the exemption.
Under the Securities Exchange Act of 1934 (the "Exchange Act'), any
person engaged in a distribution of the common stock may not simultaneously
engage in market-making activities with respect to the common stock for nine
business days prior to the start of the distribution. In addition, each selling
stockholder and any other person participating in a distribution will be subject
to the Exchange Act which may limit the timing of purchases and sales of common
stock by the selling stockholders or any such other person. These factors may
affect the marketability of the common stock and the ability of brokers or
dealers to engage in market-making activities.
We will pay all expenses of this registration. These expenses include
the Securities Exchange Commission's (the "SEC's") filing fees, fees under state
securities or "blue sky" laws, and accounting and legal fees. We estimate that
our expenses in connection with this registration will be approximately $74,000.
All expenses for the issuance of any supplement to this prospectus will be paid
by us. The selling stockholders may pay selling commissions or brokerage fees
with respect to the sale of the resale shares by them. Some of the selling
stockholders will be indemnified by us against certain civil liabilities under
securities laws or will be entitled to contribution in connection therewith. We
will be indemnified by some of the selling stockholders against certain
liabilities under securities laws or will be entitled to contribution in
connection therewith.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale by the selling
stockholders of any of the shares of common stock covered by this prospectus.
All proceeds from the resale of the shares of our common stock described in this
prospectus will be for the accounts of the selling stockholders.
DIVIDEND POLICY
We have never declared any dividends. We currently intend to retain any
future earnings to discharge indebtedness and finance the growth and development
of the business. We therefore we do not anticipate paying
22
any cash dividends in the foreseeable future. Furthermore, our Certificate
of Designation restricts us from declaring dividends on our common stock until
we first declare and pay all accrued and unpaid dividends to the holders of
Series A Preferred Stock. Any future determination to pay cash dividends when we
are permitted to do so will be at the discretion of the board of directors and
will be dependent upon the future financial condition, results of operations,
capital requirements, general business conditions and other factors that the
board of directors may deem relevant.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the American Stock Exchange under the
symbol "SVI" and has traded on that exchange since July 8, 1998. The following
table indicates the high and low sales prices for our shares for each quarterly
period for each of our two most recent fiscal years.
YEAR ENDED MARCH 31, 2003 HIGH LOW
First Quarter $ 0.660 $ 0.300
Second Quarter $ 1.300 $ 0.210
Third Quarter $ 1.250 $ 0.400
Fourth Quarter $ 1.170 $ 0.550
YEAR ENDED MARCH 31, 2002 HIGH LOW
First Quarter $ 1.600 $ 0.650
Second Quarter $ 1.040 $ 0.690
Third Quarter $ 1.010 $ 0.670
Fourth Quarter $ 0.920 $ 0.580
YEAR ENDED MARCH 31, 2001 HIGH LOW
First Quarter $ 10.250 $ 5.125
Second Quarter $ 7.063 $ 4.760
Third Quarter $ 5.000 $ 0.950
Fourth Quarter $ 2.700 $ 0.910
As of March 31, 2003 there were 31,499,632 shares of our common stock
outstanding, which were held by approximately 140 stockholders of record.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an independent provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solution. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
We developed our retail application software technology and services
business through acquisitions. The largest and most important of these
acquisitions were:
o APPLIED RETAIL SOLUTIONS, INC. (ARS) IN JULY 1998 FOR AGGREGATE
CONSIDERATION OF $7.9 MILLION IN CASH AND STOCK PAID TO THE
FORMER STOCKHOLDERS; AND
o ISLAND PACIFIC SYSTEMS CORPORATION IN APRIL 1999 FOR $35 MILLION
CASH.
Island Pacific is one of the leading providers of retail enterprise
applications. ARS was one of the leading providers of store applications, and
the technology we acquired and have subsequently enhanced now forms the core
of our SVI Store Solutions.
23
We accounted for both the Island Pacific and ARS acquisitions using
purchase accounting, which has resulted in the addition of significant goodwill
and capitalized software assets on our balance sheet. See "Significant
Accounting Policies."
Effective April 1, 2002, we reorganized our operations into three
strategic business units with separate management teams and reporting
infrastructures. Each unit is evaluated primarily based on total revenues and
operating income. Identifiable assets are also managed by business units. The
units are as follows:
o Island Pacific - PROVIDES RETAIL ENTERPRISE SOLUTIONS AND
ASSOCIATED PROFESSIONAL SERVICES FOR MULTI-CHANNEL RETAILERS IN
THE SPECIALTY, MASS MERCHANDISING AND DEPARTMENT STORE MARKETS.
o SVI Store Solutions - OFFERS RETAILERS MULTI-PLATFORM, CLIENT
SERVER IN-STORE SOLUTIONS PROVIDING ALL POINT-OF-SALE AND IN-STORE
PROCESSOR FUNCTIONS.
o SVI Training Products, Inc. - DEVELOPS AND DISTRIBUTES PC
COURSEWARE AND SKILLS ASSESSMENT PRODUCTS FOR BOTH DESKTOP AND
RETAIL APPLICATIONS.
Our operations are conducted principally in the United States and the
United Kingdom. Prior to February 2002, we also conducted business in Australia.
We have also agreed to sell our shares in SVI Training Products, Inc. to Arthur
Klitofsky, President of SVI Training Products, Inc. We are in the process of
finalizing this sale transaction.
We currently derive the majority of our revenues from the sale of
application software licenses and the provision of related professional and
support services. Application software license fees are dependent upon the sales
volume of our customers, the number of users of the application(s), and/or the
number of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds additional users
and/or adds additional locations, we charge additional license fees. We
typically charge for support, maintenance and software updates on an annual
basis pursuant to renewable maintenance contracts. We typically charge for
professional services including consulting, implementation and project
management services on an hourly basis. Our sales cycles for new license sales
historically ranged from three to twelve months, but new license sales were
limited during the past two fiscal years and sales cycles are now difficult to
estimate. Our long sales cycles have in the past caused our revenues to
fluctuate significantly from period to period. The reduction of new license
sales caused the revenues of our Australian subsidiary to decrease substantially
prior to discontinuation of operations in February 2002, and caused our sales
mix in the US and the UK to shift to lower margin services.
We evaluate local operations primarily based on total revenues and
earnings before interest expense, provision for income taxes, depreciation and
amortization and impairment charges. Our evaluation for the nine-month period
ending December 31, 2002 and for the fiscal years ended March 31, 2002, 2001 and
2000 are shown below.
24
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
--------------------------- ---------------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
------------- ------------ ----------------------------
(unaudited and in thousands)
------------- ------------ ----------------------------
STATEMENT OF OPERATIONS DATA:
Net Sales $ 16,918 100 % $ 21,446 100 %
Cost of sales 5,997 35 % 9,247 43 %
------------ ------------ -------------- -------------
Gross profit 10,921 65 % 12,199 57 %
Product development expense 2,894 17 % 2,932 14 %
Selling, general and administration
expenses 7,365 44 % 10,388 48 %
Other income (expense) 32 0 % (27) 0 %
------------ ------------ -------------- -------------
Income (loss) before interest expenses,
provision for income taxes,
depreciation and amortization and
impairment 694 4 % (1,148) (5)%
Depreciation and amortization (3,122) (18)% (4,991) (23)%
Cumulative effect of change in accounting
principle (627) (4)% -- --
Interest expense (894) (5)% (2,795) (13)%
Provision for income tax benefits (57) 0 % (2) 0 %
------------ ------------ -------------- -------------
Loss from continuing operations (3,892) (23)% (8,932) (41)%
Loss from discontinued
operations, net of taxes -- (1,140)
------------ --------------
Net loss $ (3,892) $ (10,072)
============ ==============
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
YEAR ENDED MARCH 31,
2002 2001 2000
--------------------------- ---------------------------- --------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
------------- ------------- ------------- ------------- ------------- ------------
(in thousands)
------------- ------------- ------------- ------------- ------------- ------------
Net sales $ 27,109 100 % $ 27,713 100 % $ 26,652 100 %
Cost of sales 10,036 37 % 9,188 33 % 6,421 24 %
------------- ------------- ------------- ------------- ------------- -------------
Gross profit 17,073 63 % 18,525 67 % 20,231 76 %
Application development expense 4,203 16 % 5,333 19 % 4,877 18 %
Selling, general and administration
expenses 13,144 48 % 18,037 65 % 14,817 56 %
Other income (expense) (45) 0 % 693 3 % 858 3 %
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before interest expenses,
provision for income taxes,
depreciation and amortization and
impairment (319) (1)% (4,152) (14)% 1,395 5 %
Depreciation and amortization (6,723) (25)% (8,616) (31)% (7,250) (27)%
Impairment of intangible assets (6,519) (24)%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited --- --- (7,647) (28)% --- ---
Interest expense (3,018) (11)% (3,043) (11)% (1,493) (6)%
Provision (benefit) for income taxes 39 0 % (4,778) 17 % (2,414) 9 %
------------- ------------- ------------- ------------- ------------- -------------
Loss from continuing operations (10,099) (37)% (25,199) (91)% (4,934) (19)%
Income (loss) from discontinued
operations, net of taxes (4,559) (3,746) 880
------------- ------------- -------------
Net loss $ (14,658) $ (28,945) $ (4,054)
============= ============= =============
25
We also manage long-lived assets by geographic region. The geographic
distribution of our revenues and long-lived assets for the nine months ended
December 31, 2002 and 2001, and for the fiscal years ended March 31, 2002, 2001
and 2000, is as follows (in thousands):
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
---------------- ------------------
(unaudited)
Net Sales:
United States $ 14,885 $ 19,278
Australia (discontinued operations) -- 2,110
United Kingdom 2,033 2,168
---------------- ------------------
Total net sales $ 16,918 $ 23,556
================ ==================
Long-lived assets:
United States $ 32,594 $ 44,506
Australia (discontinued operations) -- 1,138
United Kingdom 28 26
---------------- ------------------
Total long-lived assets $ 32,622 $ 45,670
================ ==================
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ------------------- ------------------
Net Sales:
United States $ 24,559 $ 25,457 $ 22,820
Australia (discontinued operations) 2,363 4,959 8,372
South Africa (discontinued operations) -- -- 1,090
United Kingdom 2,550 2,256 3,832
--------------- ------------------- ------------------
Total net sales $ 29,472 $ 32,672 $ 36,114
=============== =================== ==================
Long-lived assets:
United States $ 35,280 $ 48,270 $ 60,909
Australia (discontinued operations) -- 1,370 11,471
United Kingdom 22 59 75
--------------- ------------------- ------------------
Total long-lived assets $ 35,302 $ 49,699 $ 72,455
=============== =================== ==================
Up to March 31, 2002, we classified our operations into two lines of
business: retail solutions and training products. As revenues, results of
operations and assets related to our training products subsidiary were below the
threshold established for segment reporting, we consider our business for the
fiscal year ended March 31, 2002 to have consisted of one reportable operating
segment. Effective April 1, 2002, we operate under three strategic business
units. Each of these units will be measured separately against their individual
business plans.
Results of operations for fiscal 2002 and the first nine months of
fiscal year 2003 reflect continued weakness in new license sales of our
application software suites. As a result of our net losses, we experienced
significant strains on our cash resources throughout the 2002 fiscal year and
the first nine months of fiscal year 2003.
We have taken a number of affirmative steps to address our operating
situation and liquidity problems, and to position us for improved results of
operations.
26
o IN OCTOBER 2002, WE APPOINTED STEVEN BECK, A RETAIL INDUSTRY
EXPERT, TO THE POSITION OF PRESIDENT OF ISLAND PACIFIC. MR.
BECK'S VISION FOR ISLAND PACIFIC IS TO BECOME THE DOMINANT
PROVIDER OF "THOUGHTWARE" TO THE RETAIL INDUSTRY. MR. BECK'S
GOALS ARE TO DEVELOP HIGH QUALITY, HIGH VALUE PRODUCTS AND
SERVICES TO THE RETAIL INDUSTRY; USING BREAKTHROUGH TECHNOLOGIES
AND PROCESSES, AND TO PROVIDE THESE PRODUCTS AND THEIR ASSOCIATED
SERVICES IN PARTNERSHIP WITH MAJOR CONSULTING ORGANIZATIONS AND
OTHER BEST OF BREED SOLUTION PROVIDERS. THESE PRODUCTS AND
SERVICES WILL BE OFFERED TO SMALL AND MID-SIZE RETAILERS. OUR GOAL
IS TO EXPAND ALTERNATIVES TO RETAILERS, MATCHING INNOVATIVE
SOLUTIONS TO EMERGING INDUSTRY COMPLEXITIES SO RETAILERS WILL
REALIZE ONGOING SUCCESSES. WE WILL MAKE AVAILABLE TO RETAILERS AT
WHAT WE BELIEVE TO BE AFFORDABLE PRICES A "DASHBOARD" OF DECISION
MAKERS, AND EXPERIENCED MINDS, YIELDING A RANGE OF VELOCITY
MANAGEMENT ALTERNATIVES FOR REVIEW AND ACTIONS THAT SPAN
MERCHANDISING AND MARKETING ACTIVITIES FROM CONCEPTION TO
CONSUMPTION. WE SUBSEQUENTLY APPOINTED MR. BECK AS SVI'S
PRESIDENT AND CHIEF OPERATING OFFICER AND AS A DIRECTOR.
o IN JANUARY 2003, WE APPOINTED HARVEY BRAUN, A WELL-KNOWN AND
HIGHLY-RESPECTED RETAIL INDUSTRY VETERAN, TO THE POSITION OF CHIEF
EXECUTIVE OFFICER OF ISLAND PACIFIC. TOGETHER WITH MR. BECK, WE
ANTICIPATE MR. BRAUN WILL LEAD ISLAND PACIFIC THROUGH THE NEXT
EVOLUTION OF PRODUCT AND SERVICE OFFERINGS TO MEET THE
EVER-CHANGING NEEDS OF RETAILERS WORLDWIDE. WE SUBSEQUENTLY
APPOINTED MR. BRAUN AS SVI'S CHIEF EXECUTIVE OFFICER AND AS A
DIRECTOR.
o WE ARE INCREASING OUR PRODUCT OFFERINGS THROUGH STRATEGIC
RELATIONSHIPS WITH PLANALYTICS, KMG SOLUTIONS, VISIONCOMPASS INC.,
RAYMARK, INC., WAZAGUA LLC, ANT USA, INC. AND IT RESOURCES INC.
o UNDER A PARTNERSHIP AGREEMENT WITH PLANALYTICS INC., ISLAND
PACIFIC WILL MARKET IMPACT LR, AN INTERNET-BASED APPLICATION THAT
MEASURES THE SPECIFIC EFFECTS OF FUTURE WEATHER ON CONSUMER DEMAND
BY PRODUCT, LOCATION AND TIME. USING IMPACT LR, OUR CUSTOMERS CAN
PLAN THE TIMING OF IN-SEASON MARKDOWNS, AS WELL AS THE
SEASON-TO-SEASON FLOW OF MERCHANDISE INTO THEIR STORES WITH
MAXIMUM EFFECTIVENESS.
o UNDER A MARKETING LICENSE AGREEMENT WITH KMG SOLUTIONS, ISLAND
PACIFIC WILL INTEGRATE, MARKET AND SUPPORT TRAXION/TM/ PROCESS
MANAGEMENT SOLUTIONS. TRAXION'S BUSINESS PROCESS MANAGEMENT
SOLUTION CONSISTS OF THREE MODULES. TRAXION PROCESSENGINE/TM/ IS
THE REAL-TIME PROCESS MANAGEMENT PLATFORM THAT RETAILERS USE TO
ACTIVELY MANAGE AND SUPPORT THEIR ORGANIZATIONS' UNIQUE BUSINESS
PROCESSES. TRAXION PROCESSMODELER/TM/, INCLUDES SIMULATION
FUNCTIONS SUCH AS SAME-TIME COMPARISON OF PROCESS VARIATIONS AND
THE USE OF ACTUAL COST DATA TO PRODUCE PROCESS-BASED FINANCIAL
ESTIMATES. TRAXION ORGANIZATIONMODELER/TM/ SIMPLIFIES THE CREATION
OF SOPHISTICATED MODELS INCLUDING INTER-COMPANY WORKGROUPS,
PAYROLL INFORMATION, AND ROLES.
o ISLAND PACIFIC WILL MARKET VISIONCOMPASS/TM/ COLLABORATIVE
ENTERPRISE MANAGEMENT SOFTWARE, WHICH UNIQUELY COMBINES THE BEST
OF PERFORMANCE MANAGEMENT, BUSINESS INTELLIGENCE, RESOURCE
PLANNING, AND COLLABORATION CAPABILITIES INTO ONE STRAIGHTFORWARD,
WEB-BASED APPLICATION. THE SYSTEM ENABLES DECISION MAKERS AND
TEAMS TO DEVELOP SPECIFIC BUSINESS GOALS, WORK ON THEM TOGETHER,
AND MEASURE THEIR COLLECTIVE RESULTS OBJECTIVELY. THE HIGHLY
FLEXIBLE SYSTEM IS EASILY CUSTOMIZABLE TO FIT EACH ORGANIZATION'S
UNIQUE NEEDS AND LEADS DIRECTLY TO IMPROVED QUALITY AND VISIBILITY
OF KEY INDICATORS THROUGHOUT THE ENTERPRISE.
o UNDER AN OEM AGREEMENT WITH RAYMARK, INC., ISLAND PACIFIC WILL
INTEGRATE, MARKET AND SUPPORT XPERT STORE POINT-OF-SALE ("POS")
SOFTWARE SOLUTION UNDER THE ISLAND PACIFIC BRAND. RAYMARK'S
FULL-FEATURED POS SOLUTION STREAMLINES THE CHECKOUT PROCESS IN
ORDER TO INCREASE SALES ASSOCIATE EFFICIENCY AND AUGMENT CUSTOMER
SATISFACTION. THE SOFTWARE SUPPORTS MULTI-CHANNEL, MULTI-LANGUAGE,
MULTI-CURRENCY AND MULTI-TAXATION REQUIREMENTS.
o UNDER A AGREEMENT WITH WAZAGUA LLC, ISLAND PACIFIC WILL
EXCLUSIVELY OFFER TO RETAILERS WORLDWIDE WAZAGUA'S PRODUCTS AND
SERVICES INCLUDING WEB-BASED LOSS PREVENTION CASE MANAGEMENT
PACKAGE, ASP DATA HOSTING AND POS EXCEPTION REPORTING. WAZAGUA/TM/
ASP HOSTED SUITE OF MODULES AUTOMATES DATA MANAGEMENT FOR THE LOSS
PREVENTION, OPERATIONS, HUMAN RESOURCES, SAFETY & RISK
27
MANAGEMENT COMMUNITY. THESE ASP-HOSTED PRODUCTIVITY TOOLS ALLOW
RETAILERS TO CAPTURE THE POWER OF THE INTERNET. RETAILERS CAN
CREATE EFFICIENCIES, MANAGE AND SHARE INFORMATION, MAKE BETTER
USE OF THEIR STAFF, ELIMINATE REDUNDANT DATA ENTRY - AND WORK FROM
VIRTUALLY ANY POINT IN THE WORLD.
o UNDER TERMS OF A RESELLER AGREEMENT, ISLAND PACIFIC WILL MARKET,
SELL, INSTALL, INTERFACE TO, AND SUPPORT ANT USA'S PRODUCTS
INCLUDING BUYER'S TOOLBOX(TM), A LEADING SUITE OF MERCHANDISE AND
ASSORTMENT PLANNING SOFTWARE THAT HAS BEEN SUCCESSFULLY
IMPLEMENTED BY OVER 140 RETAILERS WORLDWIDE. THE SOFTWARE WILL
EXTEND ISLAND PACIFIC'S ASSORTMENT AND PLANNING CAPABILITIES BY
PROVIDING A SOLID PLANNING METHODOLOGY ACCESSED THROUGH AN
EASY-TO-USE INTERFACE, IN A COST-EFFECTIVE OFFERING.
o A MARKETING LICENSE AGREEMENT WITH IT RESOURCES INC. ALLOWS ISLAND
PACIFIC TO MARKET, SELL, INSTALL, SUPPORT AND INTEGRATE IT
RESOURCES' BUYER'S WORKMATE(R) SUITE, AN INNOVATIVE DECISION
SUPPORT SOFTWARE PLATFORM DEVELOPED FOR MERCHANDISING
ORGANIZATIONS. THE SOFTWARE WILL BRING MOBILITY AND OTHER
TIMESAVING BENEFITS TO THE BUYING PROCESS.
o IN THE THIRD QUARTER OF 2002, WE COMPLETED AN ANALYSIS OF OUR
OPERATIONS AND CONCLUDED THAT IT WAS NECESSARY TO RESTRUCTURE
THE COMPOSITION OF OUR MANAGEMENT AND PERSONNEL. WE WERE CONCERNED
THAT THE NEW MANAGEMENT TEAM HAD NOT BEEN ABLE TO CLOSE A NUMBER
OF NEW BUSINESS OPPORTUNITIES OR TO RAISE CAPITAL. WE WERE ALSO
CONCERNED WITH GENERAL ECONOMIC CONDITIONS, ESPECIALLY AFTER THE
TERRORIST ATTACKS OF SEPTEMBER 11, 2001, AND THE RESULTING ONGOING
HOSTILITIES IN THE WORLD. OUR CEO, THOMAS A. DOROSEWICZ, AND OUR
CFO, KEVIN C. O'NEILL, ELECTED TO LEAVE TO PURSUE OTHER INTERESTS,
AND BOTH RESIGNED FROM OUR BOARD OF DIRECTORS. WE APPOINTED BARRY
M. SCHECHTER, OUR CHAIRMAN, AS CHIEF EXECUTIVE OFFICER. MR.
SCHECHTER STEPPED DOWN AS OUR CEO IN APRIL 2002, BUT CONTINUES TO
SERVE AS OUR CHAIRMAN. WE ALSO REDUCED OUR STAFF BY A TOTAL OF
20%, AND RESTRUCTURED AND REFOCUSED OUR SALES FORCE TOWARD
OPPORTUNITIES AVAILABLE IN THE CURRENT ECONOMIC CLIMATE.
THIS REORGANIZATION RESULTED IN COSTS SAVINGS OF APPROXIMATELY
$3 MILLION PER YEAR.
o IN THE FOURTH QUARTER OF 2001, WE APPOINTED EXPERIENCED MANAGERS
TO MANAGE OUR ISLAND PACIFIC AND SVI STORE SOLUTIONS OPERATIONS.
THESE MANAGERS REPORT DIRECTLY TO THE CEO. WE ALSO APPOINTED AN
EXPERIENCED VICE PRESIDENT OF SALES TO THE TEAM.
o WE DEVELOPED MEASURABLE BUDGETS FOR EACH DIVISIONAL OPERATION SO
AS TO MEASURE PERFORMANCE DIRECTLY AND MAINTAIN CONTROL OVER
EXPENDITURES.
o WE RESTRUCTURED OUR APPLICATION DEVELOPMENT EFFORTS IN CONCERT
WITH OUR NEW MARKETING AND TECHNOLOGY MANAGEMENT TEAM TO WORK MORE
CLOSELY WITH CUSTOMERS FOR IMPROVEMENTS TO OUR OFFERINGS. WE
EXPECT THE RESULT WILL BE APPLICATION TECHNOLOGY THAT MORE CLOSELY
MEETS THE NEEDS OF OUR CUSTOMERS. ADDITIONALLY, MORE OF THE COSTS
OF DEVELOPMENT MAY BE OFFSET AGAINST CUSTOMER SPECIFIC REVENUES.
o IN JULY 2001, WE RELOCATED OUR PRINCIPAL EXECUTIVE OFFICES TO
SMALLER AND LESS EXPENSIVE PREMISES IN CARLSBAD, CALIFORNIA.
o IN JULY 2002, WE NEGOTIATED AN EXTENSION OF OUR SENIOR BANK
LENDING FACILITY TO AUGUST 31, 2003, AND THEN WE SUBSEQUENTLY
SATISFIED THIS DEBT IN FULL UNDER THE DISCOUNTED LOAN PAYOFF
AGREEMENT DATED MARCH 31, 2003. SEE "LIQUIDITY AND CAPITAL
RESOURCES -- CONTRACTUAL OBLIGATIONS -- UNION BANK."
o IN MAY 2002, WE COMPLETED AN INTEGRATED SERIES OF TRANSACTIONS
WITH SOFTLINE TO REPAY OUR SUBORDINATED NOTE TO SOFTLINE, TO
TRANSFER TO SOFTLINE OUR NOTE RECEIVED IN CONNECTION WITH THE SALE
OF IBIS SYSTEMS LIMITED, AND TO ISSUE NEW SERIES A CONVERTIBLE
PREFERRED SECURITIES IN EXCHANGE FOR 10,700,000 SVI COMMON SHARES.
SEE "FINANCING TRANSACTIONS -- SOFTLINE."
o OUR AUSTRALIAN SUBSIDIARY CEASED OPERATIONS IN FEBRUARY 2002.
SEE "DISCONTINUED OPERATIONS."
o IN FISCAL 2001, WE ISSUED A TOTAL OF $1.25 MILLION IN CONVERTIBLE
NOTES TO A LIMITED NUMBER OF ACCREDITED INVESTORS RELATED TO ICM
ASSET MANAGEMENT, INC. OF SPOKANE, WASHINGTON, A SIGNIFICANT
BENEFICIAL
28
OWNER OF OUR COMMON STOCK. IN JULY 2002, WE AMENDED THESE
CONVERTIBLE NOTES TO EXTEND THE MATURITY DATE TO SEPTEMBER
30, 2003 AND WE REPLACED THE WARRANTS ISSUED TO THESE INVESTORS.
SEE "FINANCING TRANSACTIONS -- ICM ASSET MANAGEMENT, INC." BELOW.
o IN MAY 2002, WE ENTERED INTO A NEW TWO-YEAR SOFTWARE DEVELOPMENT
AND SERVICES AGREEMENT WITH OUR LARGEST CUSTOMER, TOYS "R' US,
INC. ("TOYS"). TOYS ALSO AGREED TO INVEST $1.3 MILLION FOR THE
PURCHASE OF A NON-RECOURSE CONVERTIBLE NOTE AND A WARRANT TO
PURCHASE UP TO 2,500,000 COMMON SHARES. SEE "FINANCING
TRANSACTIONS -- TOYS "R" US' BELOW.
o IN MARCH 2003, WE ISSUED A TOTAL OF $3.5 MILLION IN 9% CONVERTIBLE
DEBENTURES TO MIDSUMMER INVESTMENT, LTD., OMICRON MASTER TRUST AND
ISLANDIA, L.P. ALONG WITH THESE DEBENTURES, WARRANTS TO PURCHASE
AN AGGREGATE OF 1,572,858 SHARES OF COMMON STOCK WERE ISSUED TO
THESE INVESTORS. SEE "FINANCING TRANSACTIONS -
MIDSUMMER/OMICRON/ISLANDIA" BELOW. WE USED MOST OF THE PROCEEDS
FROM THIS ISSUANCE TO REPAY OUR DEBT TO UNION BANK.
o ON APRIL 1, 2003, WE ISSUED A TOTAL OF $400,000 IN 9% CONVERTIBLE
DEBENTURES TO MSBJ INVESTORS LLC. ALONG WITH THESE DEBENTURES,
WARRANTS TO PURCHASE AN AGGREGATE OF 156,311 SHARES OF COMMON
STOCK WERE ISSUED TO THIS INVESTORS. SEE "FINANCING TRANSACTIONS -
MSBJ" BELOW.
o IN MARCH 2003, OUR BOARD OF DIRECTORS APPOINTED HARVEY BRAUN AS
OUR CHIEF EXECUTIVE OFFICER, AND STEVEN BECK AS OUR PRESIDENT AND
CHIEF OPERATIONS OFFICER. BARRY SCHECHTER, OUR FORMER CEO, REMAINS
AS OUR CHAIRMAN. THESE APPOINTMENTS WERE MADE EFFECTIVE APRIL 1,
2003. ARTHUR KLITOFSKY RESIGNED AS A DIRECTOR ON THAT DATE AS
WELL.
o ON MAY 6, 2003, WE ISSUED A TOTAL OF $300,000 IN 9% CONVERTIBLE
DEBENTURES TO CRESTVIEW CAPITAL FUND I, L.P., CRESTVIEW CAPITAL
FUND II, L.P. AND CRESTVIEW CAPITAL OFFSHORE FUND, INC. ALONG WITH
THESE DEBENTURES, WARRANTS TO PURCHASE AN AGGREGATE OF 101,112
SHARES OF COMMON STOCK WERE ISSUED TO THESE INVESTORS. SEE
"FINANCING TRANSACTIONS - CRESTVIEW" BELOW.
DISCONTINUED OPERATIONS
Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in April 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to the entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as our potential exposure. The
receiver has also claimed that we are obligated for inter-company balances of
$636,000. We do not believe any amounts are owed to the receiver, who has not as
of the date of this report acknowledged the monthly corporate overhead recovery
fees and other amounts charged by us to the Australian subsidiary offsetting the
amount claimed to be due. For further details, see "Liquidity and Capital
Resources -- Contractual Obligations -- National Australia Bank."
The disposal of our Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown on our
financial statements as discontinued operations with the prior period results
restated.
We also have agreed to sell our shares in SVI Training Products, Inc.,
one of our wholly owned subsidiaries to Arthur Klitofsky. We are in the process
of finalizing the terms of the written agreements pertaining to this sale. This
business unit accounted for less than 7% of our total revenues in the nine month
period ending December 31, 2002.
29
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o Revenue recognition. Our revenue recognition policy is significant
because our revenue is a key component of our results of
operations. In addition, our revenue recognition determines the
timing of certain expenses such as commissions and royalties. We
follow specific and detailed guidelines in measuring revenue;
however, certain judgments affect the application of our revenue
policy.
We license software under non-cancelable agreements and provide
related services, including consulting and customer support. We
recognize revenue in accordance with Statement of Position 97-2
(SOP 97-2), Software Revenue Recognition, as amended and
interpreted by Statement of Position 98-9, Modification of SOP
97-2, Software Revenue Recognition, with respect to certain
transactions, as well as Technical Practice Aids issued from time
to time by the American Institute of Certified Public Accountants.
We adopted Staff Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements, during the first quarter of
2000. SAB 101 provides further interpretive guidance for public
companies on the recognition, presentation, and disclosure of
revenue in financial statements. The adoption of SAB 101 did not
have a material impact on our licensing or revenue recognition
practices.
Software license revenue is generally recognized when a license
agreement has been signed, the software product has been
delivered, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and collection is
considered probable. If a software license contains an undelivered
element, the fair value of the undelivered element is deferred and
the revenue recognized once the element is delivered. In addition,
if a software license contains customer acceptance criteria or a
cancellation right, the software revenue is recognized upon the
earlier of customer acceptance or the expiration of the acceptance
period or cancellation right. Typically, payments for our software
licenses are due in installments within twelve months from the
date of delivery. Where software license agreements call for
payment terms of twelve months or more from the date of delivery,
revenue is recognized as payments become due and all other
conditions for revenue recognition have been satisfied. Deferred
revenue consists primarily of deferred license, prepaid services
revenue and maintenance support revenue.
Consulting services are separately priced, are generally available
from a number of suppliers, and are not essential to the
functionality of our software products. Consulting services, which
include project management, system planning, design and
implementation, customer configurations, and training are billed
on both an hourly basis and under fixed price contracts.
Consulting services revenue billed on an hourly basis is
recognized as the work is performed. On fixed price contracts,
consulting services revenue is recognized using the percentage of
completion method of accounting by relating hours incurred to date
to total estimated hours at completion. We have from time to time
provided software and consulting services under fixed price
contracts that require the achievement of certain milestones. The
revenue under such arrangements is recognized as the milestones
are achieved.
30
Customer support services include post-contract support and the
rights to unspecified upgrades and enhancements. Maintenance
revenues from ongoing customer support services are billed on a
monthly basis and recorded as revenue in the applicable month, or
on an annual basis with the revenue being deferred and recognized
ratably over the maintenance period. If an arrangement includes
multiple elements, the fees are allocated to the various elements
based upon vendor-specific objective evidence of fair value.
o Accounts Receivable. We typically extend credit to our customers.
Software licenses are generally due in installments within twelve
months from the date of delivery. Billings for customer support
and consulting services performed on a time and material basis are
due upon receipt. From time to time software and consulting
services are provided under fixed price contracts where the
revenue and the payment of related receivable balances are due
upon the achievement of certain milestones. Management estimates
the probability of collection of the receivable balances and
provides an allowance for doubtful accounts based upon an
evaluation of our customers ability to pay and general economic
conditions.
o Valuation of long-lived and intangible assets and goodwill. We
assess the impairment of identifiable intangibles, long-lived
assets and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. When we determine that the carrying value of
intangibles, long-lived assets and related goodwill may not be
recoverable we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model. Net intangible assets, long-lived assets,
and goodwill amounted to $35.5 million as of March 31, 2002.
In our 2003 fiscal year, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets
became effective and as a result, we will cease to amortize
approximately $14.8 million of goodwill. We had recorded
approximately $2.2 million of amortization during fiscal 2002 and
would have recorded approximately $2.2 million of amortization
during fiscal 2003.
We review for impairment at least annually or on an interim basis
if an event occurs or circumstances change that would indicate
that the value of intangible assets has diminished or been
impaired. Other intangible assets will continue to be amortized
over their estimate useful lives. We evaluate the remaining useful
lives of these intangibles on an annual basis to determine whether
events or circumstances warrant a revision to the remaining period
of amortization.
FINANCING TRANSACTIONS
AMRO INTERNATIONAL, S.A.
On October 24, 2000, the SEC declared effective a registration
statement registering up to 700,000 shares of our common stock for resale by
AMRO International, S.A. AMRO purchased 344,948 shares in March 2000 for
approximately $2.9 million, and under the terms of the purchase agreement, was
entitled to receive additional shares of our common stock if the average of the
closing price of our stock for the five days preceding the effective date of the
registration statement was less than $10.34. Pursuant to the repricing formula,
we issued to AMRO 375,043 additional shares of common stock. We became obligated
to pay to AMRO liquidated damages for late effectiveness of the registration
statement in the amount of $286,000. AMRO agreed in March 2001 to accept 286,000
shares of common stock in satisfaction of the liquidated damages, and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, we issued AMRO a two-year warrant to purchase up
to 107,000 shares of common stock at $1.50 per share, which has since expired.
We agreed to register all of the shares sold in March 2001, and those
that we may sell under the warrant, with the SEC. We became obligated to pay to
AMRO as liquidated damages the amount of $60,000. In April 2002, AMRO agreed to
accept 140,000 shares of common stock in satisfaction of the liquidated damages
31
ICM ASSET MANAGEMENT, INC.
In December 2000, we entered into an agreement to sell up to 2,941,176
common shares to a limited number of accredited investors related to ICM Asset
Management, Inc. for cash at $0.85 per share. We sold 1,764,706 of such shares
in December 2000, for gross proceeds of $1.5 million, and an additional 588,235
shares in January 2001, for additional gross proceeds of $0.5 million. Two of
the investors exercised a right to purchase an additional 588,235 shares in
February 2001 for additional gross proceeds of $0.5 million.
We also agreed to issue to each investor a warrant to purchase one
common share at $1.50 for each two common shares purchased in the private
placement (aggregate warrants exercisable for 1,470,590 shares). We had the
right to call 50% of the warrants, subject to certain conditions, if our common
shares traded at a price above $2.00 per share for thirty consecutive days. We
had the right to call the remaining 50% of the warrants, subject to certain
conditions, if our common shares traded at a price above $3.00 per share for
thirty consecutive days.
We agreed to register all of the shares sold under the purchase
agreement or upon exercise of the warrants with the SEC. Our agreement with the
investors provided that if a registration statement was not effective on or
before April 21, 2001, we would be obligated to issue two-year warrants to each
investor, entitling the investor to purchase additional shares of our common
stock at $0.85 per share. We filed a registration statement in January 2001 to
register these shares, but it did not become effective. As of June 28, 2002, we
had issued the investors warrants to purchase 1,249,997 common shares under this
agreement.
In May and June 2001, we issued a total of $1.25 million in convertible
notes to a limited number of accredited investors related to ICM Asset
Management, Inc. The notes were originally due August 30, 2001, and required
interest at the rate of 12% per annum to be paid until maturity, with the
interest rate increasing to 17% in the event of a default in payment of
principal or interest. Any portion of the unpaid amount of principal and
interest was convertible at any time by the investors into common shares valued
at $1.35 per share. We also agreed to issue to the investors three-year warrants
to purchase 250 common shares for each $1,000 in notes purchased, at an exercise
price of $1.50 per share.
In July 2002, we agreed to amend the terms of the notes and warrants
issued to the investors related to ICM Asset Management, Inc. The investors
agreed to replace the existing notes with new notes having a maturity date of
September 30, 2003. The interest rate on the new notes was reduced to 8% per
annum, increasing to 13% in the event of a default in payment of principal or
interest. We are required to pay accrued interest on the new notes calculated
from July 19, 2002, in quarterly installments beginning September 30, 2002. The
investors agreed to reduce accrued interest and late charges on the original
notes by up to $16,000, and to accept the reduced amount in 527,286 shares of
our common stock valued at $0.41 per share which was the average closing price
of our shares on the American Stock Exchange for the 10 trading days prior to
July 19, 2002. The new notes are convertible at the option of the holders into
shares of our common stock valued at $0.60 per share. We do not have a right to
prepay the notes. In December 2002, the investors agreed to extend the payments
of accrued interest to September 30, 2003.
We also agreed that the warrants previously issued to the investors to
purchase an aggregate of 3,033,085 shares at exercise prices ranging from $0.85
to $1.50, and expiring on various dates between December 2002 and June 2004,
would be replaced by new warrants to purchase an aggregate of 1,600,000 shares
at $0.60 per share, expiring July 19, 2007. The replacement warrants are not
callable by us.
We also agreed to file a registration statement for the resale of all
shares held by or issuable to these investors. In the event such registration
statement is not declared effective by the SEC by June 30, 2003, we will be
obligated to issue five-year warrants for the purchase of 5% of the total number
of registrable securities at an exercise price of $0.60 per share. For the first
30 day period after June 30, 2003 in which the registration statement is not
effective, we will be obligated to issue additional warrants for the purchase of
5% of the total number of registrable securities at an exercise price of $0.60
per share. For each 30 day period thereafter in which the registration statement
is not effective, we will be obligated to issue additional warrants for the
purchase of 2.5% of the total number of registrable securities at an exercise
price of $0.60 per share.
32
SOFTLINE
In May 2002, we entered into an integrated series of transactions with
Softline by which:
1. We transferred to Softline the note received in connection with the
sale of IBIS Systems Limited.
2. We issued to Softline 141,000 shares of newly-designated Series A
Convertible Preferred Stock.
3. Softline released us from approximately $12.3 million in
indebtedness due to Softline under a promissory note.
4. Softline surrendered 10,700,000 shares of our common shares
held by Softline.
The Series A Preferred Stock has a stated value of $100 per share and
is redeemable at our option any time prior to the maturity date of December 31,
2006 for 107% of the stated value and accrued and unpaid dividends. The shares
are entitled to cumulative dividends of 7.2% per annum, payable semi-annually
when, as and if declared by the board of directors. Softline may convert each
share of Series A Preferred Stock at any time into the number of common shares
determined by dividing the stated value plus all accrued and unpaid dividends,
by a conversion price initially equal to $0.80. The conversion price increases
at an annual rate of 3.5% calculated on a semi-annual basis. The Series A
Preferred Stock is entitled upon liquidation to an amount equal to its stated
value plus accrued and unpaid dividends in preference to any distributions to
our common stockholders. The Series A Preferred Stock has no voting rights prior
to conversion into common stock, except with respect to proposed impairments of
the Series A Preferred rights and preferences, or as provided by law. We have
the right of first refusal to purchase all but not less than all of any shares
of Series A Preferred Stock or common shares received on conversion which
Softline may propose to sell to a third party, upon the same price and terms as
the proposed sale to a third party. We also granted Softline certain
registration rights for the common shares into which the Series A Preferred
Stock is convertible, including the right to demand registration on Form S-3 if
such form is available to us and Softline proposes to sell at least $5 million
of registrable common shares, and the right to include shares obtainable upon
conversion of the Series A Preferred Stock in other registration statements we
propose to file.
These transactions were recorded for accounting purposes on January 1,
2002, the date when Softline took effective control of the IBIS note and we
ceased accruing interest on the Softline note. We did not recognize any gain or
loss in connection with the disposition of the IBIS note or the other components
of the transactions.
TOYS "R" US, INC.
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million
for the purchase of a non-recourse convertible note and a warrant to purchase
2,500,000 common shares. The purchase price was received in installments through
September 27, 2002. The note is non-interest bearing, and the face amount was
either convertible into shares of our stock valued at $0.553 per share or
payable in cash at our option, at the end of the term. In November 2002, the
Board decided that this note will be converted solely for equity and will not be
repaid in cash. The note is due May 29, 2009, or if earlier than that date,
three years after the completion of the development project contemplated in the
development agreement between us and Toys entered into at the same time. We do
not have the right to prepay the convertible note before the due date. The face
amount of the note is 16% of the $1.3 million purchase price as of May 29, 2002,
and increases by 4% of the $1.3 million purchase price on the last day of each
succeeding month, until February 28, 2004, when the face amount is the full $1.3
million purchase price. The face amount will cease to increase if Toys
terminates its development agreement with us for a reason other than our breach.
The face amount will be zero if we terminate the development agreement due to an
uncured breach by Toys of the development agreement.
The warrant entitles Toys to purchase up to 2,500,000 of our common
shares at $0.553 per share. The warrant is initially vested as to 400,000 shares
as of May 29, 2002, and vests at the rate of 100,000 shares per month until
February 28, 2004. The warrant will cease to vest if Toys terminates its
development agreement with us for a reason other than our breach. The warrant
will become entirely non-exercisable if we terminate the development agreement
due to an uncured breach by Toys of the development agreement. Toys may elect a
"cashless exercise" where a portion of the warrant is surrendered to pay the
exercise price. As of March 31, 2003, 1.4 million shares of the warrant are
exercisable.
33
The note conversion price and the warrant exercise price are each
subject to a 10% reduction in the event of an uncured breach by us of certain
covenants to Toys. These covenants do not include financial covenants.
Conversion of the note and exercise of the warrant each require 75 days advance
notice to us. As a result, under the rules of the SEC, Toys will not be
considered the beneficial owner of the common shares into which the note is
convertible and the warrant is exercisable until 15 days after it has given
notice of conversion or exercise, and then only to the extent of such noticed
conversion or exercise. We also granted Toys certain registration rights for the
common shares into which the note is convertible and the warrant is exercisable,
including the right to demand registration on Form S-3 if such form is available
to us, and the right to include shares into which the note is convertible and
the warrant is exercisable in other registration statements we propose to file.
MIDSUMMER/OMICRON/ISLANDIA
On March 31, 2003, we entered into a Securities Purchase Agreement
with Midsummer Investment, Ltd. ("Midsummer"), Omicron Master Trust ("Omicron"),
and Islandia, L.P. ("Islandia") for the sale to these investors of 9%
debentures, convertible into shares of SVI common stock at a conversion price
equal to $1.0236 per share, for an aggregate amount of $3,500,000. The investors
also each received a warrant to purchase up to, in the aggregate, 1,572,858
shares of common stock with an exercise price equal to $1.0236 per share.
The debentures bear an interest rate of 9% per annum, and they provide
for interest only payments on a quarterly basis, payable, at our option, in cash
or shares of common stock. The debentures mature in May 2005. If certain
conditions are met, we have the right, but not the obligation, to redeem the
debentures at 110% of their face value, plus accrued interest. Commencing on
February 1, 2004, we must redeem $218,750 per month of the debenture.
Furthermore, if the daily volume weighed average price of our common stock on
the American Stock Exchange exceeds $1.0236 by more than 200% for 15 consecutive
trading days, we will have the option to cause the investors to convert their
debentures into common stock.
The warrants issued to the investors are for a 5-year term, with an
exercise price equal to $1.0236 per share.
The investors were granted the right of first refusal to participate
in our future offerings of common stock or equivalent securities so long as any
one of them owns at least 5% of the debentures purchased by them. Monthly
redemptions shall be in cash, or, provided certain conditions are met, such as
an effective registration statement, in shares of common stock. If we elect to
pay in shares of common stock, the conversion price shall be the lessor of
$1.0236 and 90% of the average of the daily volume weighted average price of the
common stock for the 20 trading days immediately prior to the redemption date.
The investors were also given registration rights under a Registration Rights
Agreement requiring us to file by April 30, 2003 a registration statement
respecting 130% of the common stock issuable upon the conversion of the
debentures and the warrants, and to use best efforts to have the registration
statement declared effective at the earliest date. If the registration statement
is not filed within these timeframes or declared effective by June 29, 2003
following the closing date of the debentures sold in the first phase, or within
120 days in the event of a review by the Securities and Exchange Commission, we
will be obligated to pay liquidated damages to the investors equal to 2% of the
sum of the amount of debentures subscribed to by the investors and the value of
the warrants for each month until the registration statement becomes effective.
Additional debentures aggregating up to $2,000,000 will be sold to
these investors in a second closing if within one year after the date of first
sale of debentures there occurs a period of 15 consecutive trading days during
which the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
are not included for registration in this prospectus.
MBSJ INVESTORS, LLC
On April 1, 2003, we entered into a Securities Purchase Agreement with
MBSJ Investors, LLC ("MBSJ") for the sale to MBSJ of a 9% debenture, convertible
to shares of our common stock at a conversion price of $1.0236, for $400,000.
This debenture was accompanied by a five-year warrant to purchase 156,311 shares
of common stock with an exercise price of $1.0236 per share. Interest is due on
a quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $20,000 per month of the
34
debenture. The debenture matures in October 2005. MBSJ was also granted
registration rights under a Registration Rights Agreement, and certain other
rights similar to those granted to Midsummer, Omicron and Islandia.
CRESTVIEW
On May 6, 2003, we entered into an agreement with Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. (collectively, the "Crestview Investors") for the sale to the
Crestview Investors of 9% debentures, convertible into shares of our common
stock at a conversion price of $1.0236, for $300,000. These debentures were
accompanied by five-year warrants to purchase an aggregate of 101,112 shares of
common stock with an exercise price of $1.0236 per share. Interest is due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $18,750 per month of the
debentures. The debentures mature in October 2005. The Crestview Investors were
also granted registration rights under a registration rights agreement, and
certain other rights similar to those granted to Midsummer, Omnicron and
Islandia.
35
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
interim nine-month periods ending December 31, 2002 and 2001 (in thousands):
NINE MONTHS ENDED DECEMBER 31,
------------------------------------------------
2002 2001
---------------------- ------------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
---------- ----------- ---------- -----------
(unaudited) (unaudited)
Net sales $ 16,918 100% $ 21,446 100%
Cost of sales 5,997 35% 9,247 43%
---------- ----------- ---------- -----------
Gross profit 10,921 65% 12,199 57%
Product development expense 2,894 17% 2,932 14%
Depreciation and amortization 3,122 18% 4,991 23%
Selling, general and administration expenses 7,365 44% 10,388 48%
---------- ----------- ---------- -----------
Total expenses 13,381 79% 18,311 85%
---------- ----------- ---------- -----------
Loss from operations (2,460) (14)% (6,112) (28)%
Other income (expense)
Interest income 1 0% 8 0%
Other income (expense) 8 0% (35) 0%
Interest expense (894) (5)% (2,795) (13)%
Gain (loss) on foreign currency translation 23 0% 0%
---------- ----------- ---------- -----------
Total other expense (862) (5)% (2,822) (13)%
---------- ----------- ---------- -----------
Loss before provision (benefit) for income taxes (3,322) (19)% (8,934) (41)%
Provision for income tax benefits (57) 0% (2) 0%
---------- ----------- ---------- -----------
Loss before cumulative effect of a change in
accounting principle (3,265) (19)% (8,932) (41)%
Cumulative Effect of Change of Accounting
Principle - Goodwill under SFAS 142 (627) (4%) (0) ---
---------- ----------- ---------- -----------
Loss from continuing operations (3,892) (23)% (8,932) (41)%
Loss from discontinued Australian operations, net --- (1,140)
---------- ----------- ---------- -----------
Net loss $ (3,892) $ (10,072)
========== ==========
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO NINE MONTH PERIOD ENDED
DECEMBER 31, 2001 (unaudited)
NET SALES
Net sales decreased by $4.5 million, or 21%, to $16.9 million in the
nine months ended December 31, 2002 from $21.4 million in the nine months ended
December 31, 2001. The decrease is due to $3.0 million decrease in modification
service revenue and $2.4 million decrease in professional service revenues. The
decrease is offset by $1.1 million increase in software license revenue. In May
2002, we entered into a new development agreement services through February
2004. We expect that the overall level of services to be performed for Toys "R"
Us, Inc. in fiscal 2003 will be substantially less than fiscal 2002.
COST OF SALES/GROSS PROFIT
Cost of sales decreased by $3.2 million, or 35%, to $6.0 million in the
nine months ended December 31, 2002 from $9.2 million in the nine months ended
December 31, 2001. Gross profit as a percentage of net sales increased to 65% in
the nine months ended December 31, 2002 from 57% in the prior comparative
period. The decrease in cost of sales and the increase in gross profit as a
percentage of net sales were due to increases in software license and
maintenance sales as percentage of sales of 48% and 32%, respectively, in the
nine months ended December 31, 2002 compared to the nine months ended December
31, 2001.
36
PRODUCT DEVELOPMENT EXPENSE
Product development expense was $2.9 million in each of the nine months
ended December 31, 2002 and 2001. We focus on the on-going enhancement of our
existing products and research for new value-added products. The new version 2.0
of our Retail Enterprise Solutions will be released in the fourth quarter of the
current fiscal year.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $1.9 million, or 3.8%, to
$3.1 million in the nine months ended December 31, 2002 from $5.0 million in the
nine months ended December 31, 2001, as a result of our ceasing to amortize
goodwill upon adoption of SFAS No. 142.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $3.0 million,
or 29%, to $7.4 million in the nine months ended December 31, 2002 from $10.4
million in the nine months ended December 31, 2001. The decrease was primarily
related to the 20% reduction of non-essential personnel in the third quarter of
fiscal 2002 and improved management of expenditures.
OPERATING LOSS
Operating loss from continuing operations, which included depreciation
and amortization expense, was $2.5 million for the nine months ended December
31, 2002, compared to a loss from operations of $6.1 million for the nine months
ended December 31, 2001.
INTEREST EXPENSE
Interest expense decreased by $1.9 million, or 68%, to $0.9 million in
the nine months ended December 31, 2002 from $2.8 million in the nine months
ended December 31, 2001. Interest expense in the 2001 period included $1.2
million interest expense on the note due Softline Limited. Our obligations
related to this note were released by Softline effective January 1, 2002 in
connection with the integrated series of recapitalization transactions with
Softline. The balance of the difference was a $0.7 million decrease in
amortization of debt discount.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Pursuant to SFAS 142, we completed the transitional analysis of
goodwill impairment as of April 1, 2002 and recorded an impairment of $0.6
million as the cumulative effect of a change in accounting principle in the
quarter ended June 30, 2002. We also evaluated the remaining useful lives of our
intangibles in the quarter ended June 30, 2002 and no adjustments have been made
to the useful lives of our intangible assets.
37
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
fiscal years ended March 31, 2002, March 31, 2001 and March 31, 2000:
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------
2002 2001 2000
----------------------- ------------------------ ------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
----------- ----------- ----------- ----------- ----------- -----------
Net sales $ 27,109 100% $ 27,713 100% $ 26,652 100%
Cost of sales 10,036 37% 9,188 33% 6,421 24%
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 17,073 63% 18,525 67% 20,231 76%
Application development expense 4,203 16% 5,333 19% 4,877 18%
Depreciation and amortization 6,723 25% 8,616 31% 7,250 27%
Selling, general and administration expenses 13,144 48% 18,037 65% 14,817 56%
Impairment of intangible assets -- -- 6,519 24% -- --
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited -- -- 7,647 (28)% -- --
----------- ----------- ----------- ----------- ----------- -----------
Total expenses 24,070 89% 46,152 167% 26,944 101%
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations (6,997) (26)% (27,627) (100)% (6,713) (25)%
Other income (expense)
Interest income 10 0% 628 2% 1,074 4%
Other income (expense) (46) 0% 63 0% (206) (1)%
Interest expense (3,018) (11)% (3,043) (11)% (1,493) (6)%
Gain (loss) on foreign currency
translation (9) 0% 2 0% (10) 0%
----------- ----------- ----------- ----------- ----------- -----------
Total other expense (3,063) (11)% (2,350) (8)% (635) (2)%
----------- ----------- ----------- ----------- ----------- -----------
Loss before provision (benefit) for income
taxes (10,060) (37)% (29,977) (108)% (7,348) (28)%
Provision (benefit) for income taxes 39 0% (4,778) 17% (2,414) 9%
----------- ----------- ----------- ----------- ----------- -----------
Loss from continuing operations (10,099) (37)% (25,199) (91)% (4,934) (19)%
Income (loss) from discontinued operations,
net of taxes (4,559) (3,746) 880
----------- ----------- ----------- -----------
Net loss $ (14,658) $ (28,945) $ (4,054)
=========== =========== ===========
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH
31, 2001
NET SALES
Net sales decreased slightly by $0.6 million, or 2%, to $27.1 million
in the fiscal year ended March 31, 2002 from $27.7 million in the fiscal year
ended March 31, 2001. Fiscal year 2001 revenues included recognition of $2.0
million in revenue from a one-time sale of technology rights which was signed in
fiscal 2000.
Fiscal 2002 was a challenging year in which to close new application
license sales. We believe our difficulties initially arose from insufficient
staffing of our sales force. Although we significantly increased the staffing of
our sales force in the first quarter of fiscal 2002, the economic slowdown and
the terrorist attacks of September 11, 2001, and the ongoing hostilities in the
world increased the challenges faced by our sales force. In addition, our
financial condition may have interfered with our ability to sell new application
software licenses, as implementation of our applications generally requires
extensive future services and support, and some potential customers have
expressed concern about our financial ability to provide these ongoing services.
We believe strongly that we provide and will continue to provide excellent
support to our customers, as demonstrated by the continuing upgrade purchases by
our top-tier established customer base. Significant sales growth may, however,
depend in part on our ability to improve our financial condition.
38
In October 2001, we took aggressive steps designed to improve sales of
new application software licenses, and to streamline our operations around
services to our existing customers. These steps included a restructuring of our
operations and repositioning of the sales force to better focus on the
historical markets of our retail enterprise solution and our retail store
solution. This strategy has permitted us to reduce overhead expenses, while
allowing us to target those markets most likely to result in sales in the
current economic climate. Our newly focused sales force has also begun to
aggressively market individual modules within our suites. These modules have
been improved through modification services performed for existing customers,
and may now be marketed as separate applications to new customers. These modules
are suited to those potential customers looking for incremental upgrades to
their systems at a substantially lower cost, and with a substantially reduced
implementation commitment, than an upgrade to our full suite would require. We
intend to add additional sales personnel at such time as the economic climate
and market for our products permits.
In July 2001, we entered into an agreement to expand our current
professional services activities with Toys "R" Us significantly through
September 2003. In May 2002, we entered into a new development agreement with
Toys for the provision of development services through February 2004. We expect
the overall dollar amount of professional services we perform for Toys in 2003
to be comparable to fiscal 2002, and to continue to be a significant source of
professional services revenues in fiscal 2004. Toys accounted for 42% of our net
sales in fiscal 2002 compared to 29% of net sales in fiscal 2001.
COST OF SALES/GROSS PROFIT
Cost of sales increased $0.8 million, or 9%, to $10.0 million in the
fiscal year ended March 31, 2002 from $9.2 million in the fiscal year ended
March 31, 2001. Gross profit as a percentage of net sales decreased to 63% in
fiscal 2002 from 67% in fiscal 2001. The decrease in gross profit margin was due
to a further shift in the sales mix from high margin application licenses to
lower margin software modification and professional services. During fiscal
2002, application technology license revenues represented 17% of net sales and
related services represented 76% of net sales, compared to 25% and 69% of net
sales, respectively, of net sales during fiscal 2001.
Cost of sales for fiscal 2002 and 2001 included $3.6 million and $3.4
million, respectively, in costs associated with the development or modification
of modules for Toys "R" Us, including the use of higher cost outsource
development services (subcontractors) for certain components of the overall
project. These costs are neither capitalized nor included in application
technology development expenses, but we consider them to be part of our overall
application technology development program.
APPLICATION DEVELOPMENT EXPENSE
Application development expense for the fiscal year ended March 31,
2002 was $4.2 million compared to $5.3 million for the fiscal year ended March
31, 2001, a decrease of 21%. The decrease primarily reflects a shift toward
customer-funded development expenses. For a further discussion of our
application technology development program, see "Description of Business" under
the heading "Application Technology Development."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first year ended
March 31, 2002 decreased by $4.9 million, or 27%, to $13.1 million compared to
$18.0 million in the fiscal year ended March 31, 2001. The decrease was due to
the following:
o PERSONNEL REDUCTION IMPLEMENTED IN THE FOURTH QUARTER OF 2001 AND
THIRD QUARTER OF 2002 AND CONTROL OF EXPENDITURES.
o A $0.9 MILLION RESERVE FOR BAD DEBTS IN FISCAL 2001.
During the third quarter of 2002, we completed an analysis of our
operations and concluded that it was necessary to restructure the composition of
our management and personnel. We anticipated that the restructuring would result
in an approximately $3.0 million annual reduction in our expense levels compared
to expenses prior to
39
implementation of the plan. To the extent resources are
available, we expect to slowly increase our expense levels in fiscal 2003 from
the reduced level after the reductions in the third quarter of fiscal 2002.
Additional planned expenditures are for the building of our sales force and for
additions to our Professional Services group for US and UK retail operations as
new licenses and services are sold.
EARNINGS (LOSS) FROM CONTINUING OPERATIONS AND BEFORE INTEREST
EXPENSE, INCOME TAXES, DEPRECIATION, AMORTIZATION AND IMPAIRMENTS
The loss from continuing operations and before interest expense, income
taxes, depreciation, amortization, and impairments of intangible assets and
notes receivable was $0.3 million for the year ended March 31, 2002 as compared
to a comparable loss from continuing operations of $4.2 million in the year
ended March 31, 2001, representing an improvement of $3.9 million. The gross
profit for the year decreased by $1.5 million and other income by $3.9 million,
but was offset by improvements primarily from reduced application development
expenses in the amount of $1.1 million, and reduced selling, general and
administrative expenses of $4.9 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $1.9 million, or 22%, to
$6.7 million in the fiscal year ended March 31, 2002 from $8.6 million in the
fiscal year ended March 31, 2001. The decrease reflected the reduction in the
base amounts of goodwill and capitalized software assets resulting from the
recognition of impairments of those assets in the fourth quarter of fiscal 2001.
As a result of the implementation of SFAS No. 142, we will not amortize goodwill
in fiscal 2003. We will however record in the first quarter of fiscal 2003 a
$0.6 million impairment charge based upon the transitional analysis of goodwill
impairment required by SFAS 142, and we may record impairment charges based upon
the impairment testing procedures required by SFAS 144.
INTEREST INCOME AND EXPENSE
Interest expense was $3.0 million in the fiscal years ended March 31,
2002 and 2001.
Interest income decreased $0.6 million to $0.1 million in fiscal 2002,
compared to $0.7 million in fiscal 2001 due to cessation of the accrual of
interest income on the note receivable received in connection with the sale of
IBIS after the second quarter of fiscal 2001.
DISCONTINUED OPERATIONS
Loss from discontinued operations in fiscal 2002 was $4.6 million,
which included $1.4 million of net loss from Australian operations and $3.2
million of loss on disposal. Loss from discontinued operations in fiscal 2001
was $3.7 million. Net sales from Australian operations decreased from $5.0
million in fiscal 2001 to $2.4 million in fiscal 2002, due primarily to its
disposal during the fiscal year 2002.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
NET SALES
Net sales increased by $1.0 million, or 4%, to $27.7 million in the
fiscal year ended March 31, 2001 from $26.7 million in the fiscal year ended
March 31, 2000. Fiscal year 2001 revenues included recognition of $2.0 million
in revenue from a one-time sale of technology rights which was signed in fiscal
2000. Excluding that transaction, overall net rates decreased principally due to
a $1.6 million reduction in revenue from our United Kingdom retail operations
reflecting a substantial decrease in new application license sales. The
substantial decrease in new application license sales was due in part to our
inability to close several larger application license transactions in our sales
pipeline.
40
COST OF SALES/GROSS PROFIT
Cost of sales increased $2.8 million, or 43%, to $9.2 million in the
fiscal year ended March 31, 2001 from $6.4 million in the fiscal year ended
March 31, 2000. Gross profit as a percentage of net sales decreased to 67% in
fiscal 2001 from 76% in fiscal 2000. The decrease in gross profit margin was due
to a shift in the sales mix from high margin application licenses to lower
margin software modification and professional services. During fiscal 2001,
application technology license revenues represented 23% of net sales and related
services represented 77% of net sales, compared to 30% and 70% of net sales,
respectively, of net sales during fiscal 2000.
Cost of sales for fiscal 2001 included $4.9 million in costs associated
with the development or modification of modules for Toys "R" Us, including the
use of higher cost outsource development services (subcontractors) for certain
components of the overall project. These costs are neither capitalized nor
included in application technology development expenses, but we consider them to
be part of our overall application technology development program.
APPLICATION DEVELOPMENT EXPENSE
Application development expense for the fiscal year ended March 31,
2001 was $5.3 million compared to $4.9 million for the fiscal year ended March
31, 2000, an increase of 8%. During fiscal 2001, we continued our application
technology development program begun in fiscal 2000 to improve and integrate our
application software. For a further discussion of our application technology
development program, see "Description of Business" under the heading
"Application Technology Development."
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $1.3 million, or 18%, to
$8.6 million in the fiscal year ended March 31, 2001 from $7.3 million in the
fiscal year ended March 31, 2000. The increase was due to the amortization of
software purchased in connection with the acquisition of MarketPlace Systems
Corporation in March 2000, and to amortization of capitalized software that was
made available for sale in fiscal 2001.
IMPAIRMENT OF ASSETS
Our March 31, 2001 balance sheet includes a $7.0 million note
receivable. This note was secured by 1,536,000 shares or approximately 11% of
the outstanding common stock of Integrity Software, Inc. We do not believe the
obligor under the note has significant assets other than the Integrity shares
securing the note. The obligor is an entity affiliated with Integrity, and its
ability to sell the Integrity shares to repay the note is limited by law and by
market conditions. During the fiscal year ended March 31, 2001, we determined
that the value of this note receivable was impaired, and we wrote off a total of
$7.6 million as a valuation allowance. We obtained an independent valuation of
the Integrity shares securing the note at March 31, 2001, which supported the
value shown on our March 31, 2001 balance sheet. This note and the shares
securing it were transferred to Softline effective January 1, 2002. See
"Financing Transactions -- Softline."
We also recorded in the fourth quarter of fiscal 2001 an impairment of
$6.5 million in capitalized software and goodwill associated with Australian
operations. In determining the amount of impairment, we compared the net book
value of the long-lived assets associated with the Australian subsidiary,
primarily consisting of recorded goodwill and software intangibles, to their
estimated fair values. Fair values were estimated based on anticipated future
cash flows of the Australian operations, discounted at a rate commensurate with
the risk involved.
INTEREST INCOME AND EXPENSE
Interest expense increased $1.5 million, or 100%, to $3.0 million in
the fiscal year ended March 31, 2001 from $1.5 million in the fiscal year ended
March 31, 2000. The increase was due to inclusion for the full 2001 fiscal year
of interest from indebtedness incurred in June 1999 to purchase Island Pacific,
and an increase in our average interest rate to 12% in fiscal 2001 compared to
9% in fiscal 2000. The increase also included $0.5 million in amortized loan
refinancing costs, including $0.2 million of amortized loan cost reimbursement
to Softline.
41
Interest income decreased $0.5 million to $0.6 million in fiscal 2001,
compared to $1.1 million in fiscal 2000 due to decreased cash and cash
equivalents.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS DURING THE NINE MONTH PERIOD ENDED DECEMBER 31, 2002
During the nine months ended December 31, 2002, we financed our
operations using cash on hand, internally generated cash, proceeds from the sale
of a convertible note to Toys "R" Us, Inc. and loans from an entity affiliated
with Donald S. Radcliffe, one of our directors. At December 31, 2002 and March
31, 2002, we had cash of $0.7 million and $1.3 million, respectively.
Operating activities used cash of $1.3 million and $0.7 million in the
nine months ended December 31, 2002 and 2001, respectively. Cash used for
operating activities in the nine months ended December 31, 2002 resulted from
$3.9 million of net losses and $2.7 million increase in accounts receivable;
offset in part by $3.1 million of depreciation and amortization, $0.6 million of
goodwill impairment, $1.0 million increase in accounts payable and accrued
expenses and $0.7 million increase in accrued interest on notes payable.
Investing activities used cash of $0.1 million and $0.2 million in the
nine months ended December 31, 2002 and 2001, respectively. Cash used for
investing activities in the current quarter was primarily for capitalization of
software development costs.
Financing activities provided cash of $0.8 million and $0.2 million in
the nine months ended December 31, 2002 and 2001, respectively. The 2002
financing activities included $1.4 million of proceeds from a convertible note
issued to Toys "R" Us, Inc.; offset in part by $0.3 million payments on a
stockholder loan and $0.3 million payments on term loan.
Accounts receivable increased to $4.7 million at December 31, 2002 from
$1.9 million at March 31, 2002. The increase was due to increase in sales and
invoicing semi-annual maintenance contracts in the quarter ended December 31,
2002.
Accounts payable increased to $2.2 million at December 31, 2002 from
$1.5 million at March 31, 2002.
Deferred revenue decreased to $2.9 million at December 31, 2002 from
$3.5 million at March 31, 2002. The decrease was primarily due to decreases in
prepare paid modification and services revenue of $1.5 million from our major
customer, Toys "R" Us, Inc., and $0.5 million from other customers; offset in
party by $1.4 million increase in prepaid support services revenue.
CASH FLOWS DURING FISCAL YEAR ENDED MARCH 31, 2002
During the fiscal year ended March 31, 2002, we financed our operations
using cash on hand, internally generated cash, cash from the issuance of
convertible notes and loans from an entity affiliated with Donald S. Radcliffe,
a director. During the fiscal year ended March 31, 2001, we financed our
operations using cash on hand, internally generated cash, cash from the sale of
common stock, proceeds from the exercise of options, lines of credit and loans
from each of Softline, a subsidiary of Softline and Barry M. Schechter, our
Chairman. During the fiscal year ended March 31, 2000, we financed our
operations through internally generated cash, proceeds from bank and other loans
(including a loan from a major stockholder), proceeds from the sale of common
stock and the exercise of options, and bank lines of credit. At March 31, 2002
and 2001, we had cash of $1.3 million.
Operating activities provided cash of $1.6 million in the fiscal year
ended March 31, 2002 and used cash of $2.4 million in the fiscal year ended
March 31, 2001 and $2.3 million in the fiscal year ended March 31, 2000. Cash
provided for operating activities in fiscal 2002 resulted primarily from $2.5
million decrease in accounts receivable and other receivables, $1.6 million
increase in deferred revenue, $7.1 million in non-cash depreciation and
amortization, $3.2 million of loss on disposal of Australian operations, $2.3
million increase in interest payable and $1.0 million in non-cash charges for
stock-based compensation and interest related to convertible notes due
42
stockholders; offset by $14.7 million of net losses and $1.9 million decrease in
accounts payable and accrued expenses. Cash used for operating activities in
fiscal 2001 resulted primarily from $28.9 million of net losses, a $4.4 million
decrease in net deferred tax liability and a $4.4 million decrease in deferred
revenue; offset by $16.5 million in non-cash impairments of assets, $9.5 million
in non-cash depreciation and amortization, a $5.1 million decrease in accounts
receivable, and a $4.4 million increase in accounts payable and accrued
expenses. Cash used for operating activities during fiscal year 2000 primarily
resulted from a $4.1 million net loss, a $4.6 million increase in accounts
receivable and other receivables, a $0.6 million decrease in accounts payable
and accrued expenses, a $0.8 million increase in interest receivable, a $2.6
million decrease in income tax payable, and a $2.6 million increase in deferred
income taxes liability; offset in part by $7.9 million of non-cash depreciation
and amortization expense and a $5.0 million increase in deferred revenue.
Accounts receivable decreased during fiscal year 2002 primarily due to
a write-off of $367,000 in receivables in connection with the discontinuation of
Australian operations in February 2002 and a significant improvement in
collection efforts. Accounts receivable decreased during fiscal year 2001
primarily due to payment during fiscal 2001 of $2.0 million from the one-time
sale of technology rights during fiscal 2000, the write-off during the fourth
quarter of fiscal 2001 of the $1.6 million outstanding balance remaining from
the one-time sale of technology rights and a decrease in trade receivables aged
over 30 days as a result of improvement in collection efforts. Accounts
receivable increased during fiscal year 2000 primarily due to the inclusion of
Island Pacific accounts receivable of $4.0 million at March 31, 2000 and the
$3.3 million total receivable associated with the non-recurring sale of
technology rights. Accounts receivable balances fluctuate significantly due to a
number of factors including acquisitions and dispositions, seasonality, shifts
in customer buying patterns, contractual payment terms, the underlying mix of
applications and services sold, and geographic concentration of revenues.
Investing activities used cash of $0.7 million, $3.0 million, and $36.5
million in the fiscal years ended March 31, 2002, 2001 and 2000. Investing
activities during fiscal 2002 included a $0.4 million increase in capitalized
software development costs and $0.3 million in furniture and equipment
purchases. Investing activities during fiscal year 2001 included a $2.5 million
increase in purchase of software and capitalized software development costs and
$0.5 million in furniture and equipment purchases. Investing activities during
fiscal year 2000 included a $33.8 million net cash payment for the acquisition
of Island Pacific, $1.8 million in software purchases and capitalized software
development costs and $0.8 million in capital expenditures.
Financing activities used cash of $0.8 million in the fiscal year ended
March 31, 2002 and provided cash of $1.9 million and $30.9 million in the fiscal
years ended March 31, 2001 and 2000. Financing activities during fiscal year
2002 included $1.2 million in note payments and $0.8 million decrease in amounts
due to stockholders; offset in part by $1.3 million in proceeds from issuance of
convertible notes. Financing activities during fiscal year 2001 included $3.8
million in proceeds from the sale of common stock, $9.9 million increase in
amounts due to stockholders and $1.6 million in proceeds from lines of credit,
offset by $13.2 million in note payments. Financing activities during fiscal
year 2000 included $18.5 million in proceeds from loans obtained to acquire
Island Pacific, $9.6 million in proceeds from the exercise of options and
private sale of common stock and $2.3 million in proceeds from lines of credit,
offset in part by $1.5 million in loan payments.
Changes in the currency exchange rates of our foreign operations had
the effect of decreasing cash by $0.1 million in the fiscal years ended March
31, 2002 and 2001 and $0.3 million in the fiscal year ended March 31, 2000.
43
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including
purchase commitments at March 31, 2002, and the effect such obligations are
expected to have on our liquidity and cash flow in future periods.
FOR THE FISCAL YEARS ENDING MARCH 31,
-------------------------------------
CONTRACTUAL CASH OBLIGATIONS 2003 2004 2005 2006 THEREAFTER
---------------------------- --------- -------- -------- -------- ----------
(in thousands)
Operating leases $ 752 $ 724 $ 704 $ 192 $ 7
Capital leases 73 18
Term loans (a) 3,303 500
Convertible debentures (a) 839 3,276 575
Convertible notes (a)
1,370
Demand loans due stockholders 618
Payables aged over 90 days 449
Other long-term obligations 200
--------- -------- -------- -------- ---------
Total contractual cash obligations $ 5,395 $ 4,872 $ 3,980 $ 767 $ 7
========= ======== ======== ======== =========
FOR THE FISCAL YEARS ENDING MARCH 31,
-------------------------------------
OTHER COMMERCIAL COMMITMENTS 2003 2004 2005 2006 THEREAFTER
---------------------------- --------- -------- -------- -------- ----------
(in thousands)
Guarantees for line of credit facility with
National Australia Bank Limited $ 187
--------- -------- -------- -------- ---------
Total commercial commitments $ 187
========= ======== ======== ======== =========
(a) Reflects certain transactions that occurred in March and April 2003.
UNION BANK
On June 29, 2001, we entered into an amended and restated loan
agreement with Union Bank with respect to the $7.4 million owing under the our
term loan. The maturity date under the restated agreement was May 1, 2002, but
we had a right to extend that date to November 1, 2002 if we satisfied certain
conditions, including our achieving certain earnings targets. We were required
to pay monthly interest at 5% over the bank reference rate, increased by an
additional 2% for late payments of principal and interest. We were required to
make an initial $210,000 principal payment in August 2001, and monthly principal
payments of $50,000 beginning October 1, 2001. Monthly principal payments were
to increase to $100,000 on May 1, 2002 upon an extension of the maturity date.
We had difficulty making both interest and principal payments during fiscal
2002, and the bank extended on several occasions the due dates for required
payments. We were required to use any proceeds in excess of $6 million we
received from private equity placements to reduce the principal under the loan.
We were also prohibited from making any payments on certain subordinated
obligations, including the convertible notes held by entities related to ICM
Asset Management, Inc. The entire amount owed to the bank was secured by
substantially all of our assets and those of our subsidiaries and 10,700,000
shares of our treasury stock. The restated agreement also contained limitations
on acquisitions, investments and other borrowings.
We agreed to pay the bank a loan restructuring fee of $200,000,
originally due May 1, 2002 (or if the maturity date was extended, $150,000 on
May 1, 2002 and $50,000 on November 1, 2002), but the fee would be waived if we
discharged the loan before May 1, 2002. We were also required to reimburse the
bank for certain other expenses incurred during the term of the loan.
On March 18, 2002, the loan agreement was amended to release certain
collateral from the pledge to Union Bank, and to instead pledge to the bank the
10,700,000 shares of our common stock surrender by Softline in the related
recapitalization transactions with Softline described under the heading
"Financing Transactions -- Softline."
44
The released collateral was our shares in our Australian subsidiary, and the
IBIS note and related shares of Integrity Software.
On May 21, 2002, the bank further amended the agreement to extend the
maturity date to May 1, 2003 and to revise other terms and conditions. We agreed
to pay to the bank $100,000 as a loan extension fee, payable in four monthly
installments of $25,000 each commencing on June 30, 2002. If we failed to pay
any installment when due, the loan extension fee was to increase to $200,000,
and the monthly payments were to increase accordingly. We also agreed to pay all
overdue interest and principal by June 30, 2002, and to pay monthly installments
of $24,000 commencing on June 30, 2002 and ending April 30, 2003 for the bank's
legal fees.
Effective July 15, 2002, the bank further amended the restated term
loan agreement, and waived the then existing defaults. Under this third
amendment to the restated agreement, the bank agreed to waive the application of
the additional 2% interest rate for late payments of principal and interest, and
to waive the additional $100,000 refinance fee required by the second amendment.
The bank also agreed to convert $361,000 in accrued and unpaid interest and fees
to term loan principal, and we executed a new term note in total principal
amount of $7.2 million. We were required to make a principal payment of $35,000
on October 15, 2002, principal payments of $50,000 on each of November 15, 2002
and December 15, 2002, and consecutive monthly principal payments of $100,000
each on the 15th day of each month thereafter through August 15, 2003. The
entire amount of principal and accrued interest was due August 31, 2003. The
bank also agreed to eliminate certain financial covenants and to ease others. We
were not in compliance with the revised financial covenants.
On January 2, 2003, we issued a warrant to an affiliate of the bank to
purchase up to 1.5 million shares of our common stock for $0.01 per share. The
warrant was exercisable for shares equal to 1% of our outstanding common stock
on January 2, 2003, and would have become exercisable for shares equal to an
additional 0.5% of the outstanding common stock on the first day each month
thereafter, until it was exercisable for the full 4.99% of the outstanding
common stock. To the extent we discharged in full our bank obligations before
any warrants became exercisable, those warrants would not have become
exercisable.
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement
with the bank. Under that agreement, we paid the bank $2,800,000 from the sale
of debentures to Midsummer, Omicron and Islandia. We also issued to the bank
1,000,000 shares of our common stock and a $500,000 one-year unsecured
non-interest bearing convertible note payable in either cash or stock, at our
option. The cash payment, shares and convertible note were accepted by the bank
in full satisfaction of our $7.1 million debt. The bank also cancelled the
warrant to purchase 1.5 million shares of our common stock and returned all
collateral held, including 10,700,000 shares of our common stock pledged as
security.
NATIONAL AUSTRALIA BANK LIMITED
Our Australian subsidiary maintained an AUS$1,000,000 (approximately
US$510,000) line of credit facility with National Australia Bank Limited. The
facility was secured by substantially all of the assets of our Australian
subsidiary, and we have guaranteed all amounts owing on the facility. In April
2001, we received a formal demand under our guarantee for the full AUS$971,000
(approximately US$495,000) then alleged by the bank to be due under the
facility. Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
Australian subsidiary's assets for $300,000 in May 2002 to the entity affiliated
with former management, and is actively pursuing the collection of receivables.
If the sale proceeds plus collections on receivables are insufficient to
discharge the indebtedness to National Australia Bank, we may be called upon to
pay the deficiency under our guarantee to the bank. We have accrued $187,000 as
the maximum amount of our potential exposure. The receiver has also claimed that
we are obligated to it for inter-company balances of $636,000, but we do not
believe any amounts are owed to the receiver, who has not as of the date of this
report acknowledged the monthly corporate overhead recovery fees and other
amounts charged by us to the Australian subsidiary offsetting the amount claimed
to be due.
45
OTHER INDEBTEDNESS, INCLUDING RELATED PARTIES
In connection with our acquisition of Island Pacific effective April
1999, we also borrowed $2.3 million with no stated maturity date from three
entities in June 1999. $1.5 million of this amount was borrowed from Claudav
Holdings Ltd. B.V., a significant stockholder. The balance due on these loans
were paid off in full at January 31, 2003. The loans bore interest at the prime
rate and were due upon demand.
In May and June 2001, we issued convertible notes to entities related
to ICM Asset Management, Inc., these notes were amended in July 2002. See
"Financing Transactions -- ICM Asset Management, Inc."
In May 2001, December 2001, May 2002 and September 2002, we borrowed
$50,000, $125,000, $70,000 and $50,000, respectively, from World Wide Business
Centres, a company affiliated with Donald S. Radcliffe, a director, to meet
payroll expenses. These amounts have been repaid in full together with interest
at the then-effective prime rate, as cash flows have been received.
In March 2003, we issued convertible debentures to Midsummer, Omicron,
and Islandia for $3.5 million. See "Financing Transactions -
Midsummer/Omicron/Islandia."
On April 1, 2003, we issued convertible debentures to MBSJ Investors,
LLC for $400,000. See "Financing Transactions - MBSJ."
CASH POSITION
As a result of our indebtedness and net losses for the past three
years, we have experienced significant strain on our cash resources. In order to
manage our cash resources, we reduced expenses and discontinued our Australian
operations. We have also extended payment terms with many of our trade creditors
wherever possible and have diligently focused our collection efforts on our
accounts receivable. We had a negative working capital of $5.3 million and $2.8
million at March 31, 2002 and 2001, respectively.
We were unable to make timely monthly rent payments for our Irvine and
Carlsbad facilities during the first quarter of fiscal 2003. We renegotiated
rent terms with the landlords of our Irvine and Carlsbad facilities in June
2002, and we are currently in compliance with the renegotiated terms.
As discussed above, we renegotiated our agreements with Union Bank on
several occasions after we were unable to make payments which would have
otherwise been required. Other than cash on hand, we have no unused sources of
liquid assets at March 31, 2003.
Management has been actively engaged in attempts to resolve our
liquidity problems. We recently issued $3.5 million in convertible debentures to
Midsummer, Omicron, and Islandia and used most of those proceeds to satisfy our
indebtedness to Union Bank, which would have been due in full in the second
quarter of fiscal 2004. If certain conditions are satisfied, we will issue an
additional $2,000,000 in convertible debentures to those investors by April
2004. We also recently issued $400,000 in convertible debentures to MBSJ
Investors, LLC. As a result, we believe we will have sufficient cash to remain
in compliance with our debt obligations, and meet our critical operating
obligations, for the next twelve months. We nonetheless continue to seek private
equity funding to discharge aged payables, pursue growth initiatives and repay
the bank indebtedness of $500,000. We have no binding commitments for funding at
this time. Financing may not be available on terms and conditions acceptable to
us, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a significant
impact on our financial statements.
46
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is
effective for fiscal years beginning after December 15, 2001. SFAS 142 prohibits
the amortization of goodwill and intangible assets with indefinite useful lives
but requires that these assets be reviewed for impairment at least annually or
on an interim basis if an event occurs or circumstances change that could
indicate that their value has diminished or been impaired. Other intangible
assets will continue to be amortized over their estimated useful lives. We
evaluate the remaining useful lives of these intangibles on an annual basis to
determine whether events or circumstances warrant a revision to the remaining
period of amortization. Pursuant to SFAS 142, amortization of goodwill and
assembled workforce intangible assets recorded in business combinations prior to
June 30, 2001 ceased effective March 31, 2002. Goodwill resulting from business
combinations completed after June 30, 2001, will not be amortized. We recorded
amortization expense of approximately $2.2 million on goodwill during the fiscal
year ended March 31, 2002. We currently estimate that application of the
non-amortization provisions of SFAS 142 will reduce amortization expense and
increase net income by approximately $2.2 million in fiscal 2003.
We tested goodwill for impairment during the 2003 fiscal year, and a
resulting impairment of $0.6 million will be recorded as a cumulative effect of
a change in accounting principle in the first quarter of fiscal 2003.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations."
This statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of long-lived assets, except for certain obligations
of lessees. The adoption of SFAS No. 143 did not have a significant impact on
our consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS 144 develops
one accounting model for long-lived assets that are to be disposed of by sale.
SFAS 144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value cost to sell. Additionally
SFAS 144 expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The accounting prescribed in SFAS 144 was applied in
connection with the disposal of our Australian subsidiary.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
updates, clarifies, and simplifies existing accounting pronouncements. This
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded.
SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends
SFAS No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in the same
manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
We do not expect adoption of SFAS No. 145 to have material impact, if any, on
our financial position or results of operations.
In November 2001, the FASB issued an Emerging Issues Task Force Issue
No. 01-14 ("EITC No. 01-14"), "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred". EITC No. 01-14
establishes that reimbursements received for out-of-pocket expenses should be
reported as revenue in the income statement. Currently, we classify reimbursed
out-of-pocket expenses as a reduction in cost of consulting services. We are
required to adopt the guidance of EITC No. 01-14 in the first quarter of fiscal
year 2003 and our consolidated statements of operations for prior periods will
be reclassified to conform to the new presentation. The adoption of Topic D-103
will result in an increase in reported net sales and cost of sales; however, it
will not affect net income or loss in any past or future periods.
47
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or
Disposal Activities". SFAS 146 replaces current accounting standards and
requires the recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. The provisions of the SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect adoption of SFAS No. 146 to have a significant effect on its results of
operations or financial condition.
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS 147"), "Acquisition of certain Financial Institutions".
SFAS 147 removes the requirement in SFAS 72 and Interpretation 9 thereto, to
recognize and amortize any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those transactions
be accounted for in accordance with SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". In addition, this
statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets, to include certain financial institution related intangibles.
We do not expect SFAS 147 to have a material impact on the Company's financial
statements.
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 SFAS 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 transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. We do not expect SFAS 148
to have a material impact on the Company's financial statements.
EMPLOYEES
At March 31, 2003, we had a total of 130 employees, 114 of which were
based in the United States and 16 of which were based in the United Kingdom. Of
the total, 12% were engaged in sales and marketing, 40% were engaged in
application technology development projects, 30% were engaged in professional
services, and 18% were in general and administrative. We believe our relations
with our employees overall are good. We have never had a work stoppage and none
of our employees are subject to a collective bargaining agreement.
FACILITIES
Our principal corporate headquarters consists of 13,003 square feet in
a building located at 5607 Palmer Way, Carlsbad, California. The lease for this
facility is currently being negotiated. The current monthly rent is $13,680. Our
primary operational office is in Irvine, California, where we occupy 26,521
square feet in a building located at 19800 MacArthur Blvd. This facility is
occupied under a lease that expires on June 30, 2005. The current monthly rent
is $55,620. We also occupy premises in the United Kingdom located at The Old
Building, Mill House Lane, Wendens Ambo, Essex, England. The lease for this
office building expires August 31, 2003. Annual rent is $43,646 (payable
quarterly) plus common area maintenance charges and real estate taxes.
LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand
with the California Labor Commissioner for $256,250 in severance benefits
allegedly due under a disputed employment agreement, plus attorney's fees and
costs. Mr. Dorosewicz's demand was later increased to $283,894. On June 18,
2002, we filed an action against Mr. Dorosewicz, Michelle Dorosewicz and an
entity affiliated with him in San Diego Superior Court, Case No. GIC790833,
alleging fraud and other causes of action relating to transactions Mr.
Dorosewicz caused us to enter into with his affiliates and related parties
without proper board approval. On July 31, 2002, Mr. Dorosewicz filed
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cross-complaints in that action alleging breach of statutory duty, breach of
contract, fraud and other causes of action related to his employment with the
Company and other transactions he entered into with the Company. These matters
are still pending and the parties have agreed to resolve all claims in binding
arbitrations.
Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of our
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have accrued $187,000 as our potential exposure.
The receiver has also claimed that we are obligated to it for inter-company
balances of $636,000, but we do not believe any amounts are owed to the
receiver, who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on
disability/worker's compensation leave, Debora Hintz, filed a claim with the
California Labor Commissioner seeking $41,000 in alleged unpaid commissions. In
or about December of 2002, Ms. Hintz filed a discrimination claim against the
Company with the Department of Fair Employment and Housing, alleging harassment
and sexual orientation discrimination. The Company has responded appropriately
to both the wage claim and the discrimination allegations, which the Company
believes lack merit based on present information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation
("Cord Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail,
Inc. as the successor to Island Pacific Systems Corporation, in the United
States District Court for the Southern District of Ohio, Eastern Division, Case
No. C2 02 859. The lawsuit claims damages in excess of $1.5 million, plus
punitive damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertain to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. At this time, we cannot predict the merits of this case because it is
in its preliminary state and discovery has not yet commence. However, SVI Retail
intends to defend vigorously the action and possibly file one or more
counter-claims.
In mid-2002, the Company is the subject of an adverse judgment entered
against it in favor of Randall's Family Golf Centers, ("Randall") in the
approximate sum of $61,000. The judgment was entered as a default judgment, and
is based on allegations that the Company received a preferential transfer of
funds within 90 days of the filing by Randall of a chapter 11 case in the United
States Bankruptcy Court for the Southern District of New York. We believe we
have viable defenses to the allegations if the default is set aside. We are
determining whether the matter can be settled without the necessity of
litigation to set aside the default, but we are unable to ascertain the likely
outcome of this matter at this time.
On December 16, 2002, Chapter 11 Debtors Natural Wonders, Inc. and
World of Science, Inc. (collectively "Debtors") filed an adversary proceeding
against our subsidiary SVI Retail, Inc. seeking to avoid and recover
preferential transfers. The Debtors sought recovery of approximately $84,000,
which it had previously paid to SVI Retail for goods and services rendered. On
March 12, 2003, the Debtors and SVI Retail settled the adversary proceeding for
$18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as
Shea Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
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Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. The hearing on Sabica and Island Pacific's motion to
quash is scheduled for May 22, 2003.
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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On November 30, 2001, Deloitte & Touche LLP notified us that they were
resigning as our independent certified public accountants. On December 5, 2001,
we engaged Singer Lewak Greenbaum & Goldstein LLP ("Singer Lewak") as our new
independent auditors. Singer Lewak previously audited our financial statements
for the fiscal years ended March 31, 1998 and September 30, 1997, 1996, 1995 and
1994. The decision to engage Singer Lewak was recommended by the Audit Committee
of the Board of Directors and approved by the Board of Directors.
Deloitte & Touche's reports on the financial statements for the fiscal
years ended March 31, 2001 and 2000 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except as noted in the following sentence.
Deloitte & Touche's audit report on the financial statements for the year ended
March 31, 2001, dated July 13, 2001, expressed an unqualified opinion and
included an explanatory paragraph relating to substantial doubt about our
ability to continue as a going concern. Further, in connection with its audits
of our financial statements for the past two fiscal years and the subsequent
interim period immediately preceding the date of resignation of Deloitte &
Touche, we had no disagreements with Deloitte & Touche on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche, would have caused them to make a reference to the subject
matter of the disagreements in connection with their reports on our consolidated
financial statements.
BUSINESS
INTRODUCTION
We are an independent provider of multi-channel application software
technology and associated services for the retail industry including enterprise,
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solution. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
Our offerings consist of the following components:
The ISLAND PACIFIC MERCHANDISE MANAGEMENT suite of applications builds
on our long history in retail software design and development and provides our
customers with a comprehensive and fully integrated merchandise management
solution. Our complete enterprise-level offering of applications and services is
designed to assist our customers in maximizing their business potential. The
foundation of our application suite is the individual modules that comprise the
offering. The core modules are:
o MERCHANDISING;
o THE EYE/TM/, DATAMART, PLANNING AND REPORTING TOOL;
o TRENDS, FORECASTING AND DYNAMIC REPLENISHMENT TOOL;
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o EVENTS;
o WAREHOUSE;
o TICKETING;
o FINANCIALS; AND
o SALES AUDIT.
The ISLAND PACIFIC DIRECT SOLUTION supports Web-based and traditional
mail order and catalog retailing. Direct allows our customers to offer
multi-channel merchandise management within one integrated application tool set
to manage order entry, order processing, customer service, purchasing, inventory
planning and forecasting, fulfillment and shipping. The core modules are:
o CALL CENTER;
o CUSTOMER RELATIONSHIP MANAGEMENT (CRM);
o PLANNING AND FORECASTING; AND
o FULFILLMENT.
The SVI STORE SOLUTION suite of applications builds on our long history
of providing multi-platform, client server in-store solutions. We market this
set of applications under the name "OnePointe," which is a full business to
consumer software infrastructure encompassing a range of integrated store
solutions. OnePointe is a complete application providing all point-of-sale
("POS") and in-store processor (server) functions for traditional "brick and
mortar" retail operations.
Our PROFESSIONAL SERVICES provide our customers with expert retail
business consulting, project management, implementation, application training,
technical and documentation services. This offering ensures that our customers'
technology selection and implementation projects are planned and implemented
timely and effectively. We also provide development services to customize our
applications to meet specific requirements of our customers and ongoing support
and maintenance services.
We market our applications and services through an experienced
professional direct sales force in the United States and the United Kingdom. We
believe our knowledge of the complete needs of multi-channel retailers enables
us to help our customers identify the optimal systems for their particular
businesses. The customer relationships we develop build recurring support,
maintenance and professional service revenues and position us to continuously
recommend changes and upgrades to existing systems.
We have developed and distributed retail system training products and
general computer courseware and computer skills testing products through our SVI
Training Products, Inc. subsidiary. We have agreed to sell SVI Training
Products, Inc. to Arthur Klitofsky. We are in the process of finalizing the
terms of the written agreements pertaining to this sale.
Our executive offices are located at 5607 Palmer Way, Carlsbad,
California 92008, telephone number (877) 784-7978.
RECENT DEVELOPMENTS
o IN OCTOBER 2002, WE APPOINTED STEVEN BECK, A RETAIL INDUSTRY
EXPERT, TO THE POSITION OF PRESIDENT OF ISLAND PACIFIC. MR. BECK'S
VISION FOR ISLAND PACIFIC IS TO BECOME THE DOMINANT PROVIDER OF
"THOUGHTWARE" TO THE RETAIL INDUSTRY. MR. BECK'S GOALS ARE TO
DEVELOP HIGH QUALITY, HIGH VALUE PRODUCTS AND SERVICES TO THE
RETAIL INDUSTRY; USING BREAKTHROUGH TECHNOLOGIES AND PROCESSES,
AND TO PROVIDE THESE PRODUCTS AND THEIR ASSOCIATED SERVICES IN
PARTNERSHIP WITH MAJOR CONSULTING ORGANIZATIONS AND OTHER BEST OF
BREED SOLUTION PROVIDERS. THESE PRODUCTS AND SERVICES WILL BE
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OFFERED TO SMALL AND MID-SIZE RETAILERS. OUR GOAL IS TO EXPAND
ALTERNATIVES TO RETAILERS, MATCHING INNOVATIVE SOLUTIONS TO
EMERGING INDUSTRY COMPLEXITIES SO RETAILERS WILL REALIZE ONGOING
SUCCESSES. WE WILL MAKE AVAILABLE TO RETAILERS AT WHAT WE BELIEVE
TO BE AFFORDABLE PRICES A "DASHBOARD" OF DECISION MAKERS, AND
EXPERIENCED MINDS IN THE INDUSTRY, YIELDING A RANGE OF VELOCITY
MANAGEMENT ALTERNATIVES FOR REVIEW AND ACTIONS THAT SPAN
MERCHANDISING AND MARKETING ACTIVITIES FROM CONCEPTION TO
CONSUMPTION. WE SUBSEQUENTLY APPOINTED MR. BECK AS SVI'S PRESIDENT
AND CHIEF OPERATING OFFICER AND AS A DIRECTOR.
o IN JANUARY 2003, WE APPOINTED HARVEY BRAUN, A WELL-KNOWN AND
HIGHLY-RESPECTED RETAIL INDUSTRY VETERAN, TO THE POSITION OF CHIEF
EXECUTIVE OFFICER OF ISLAND PACIFIC. TOGETHER WITH MR. BECK, WE
ANTICIPATE MR. BRAUN WILL LEAD ISLAND PACIFIC THROUGH THE NEXT
EVOLUTION OF PRODUCT AND SERVICE OFFERINGS TO MEET THE
EVER-CHANGING NEEDS OF RETAILERS WORLDWIDE. WE SUBSEQUENTLY
APPOINTED MR. BRAUN AS SVI'S CHIEF EXECUTIVE OFFICER AND AS A
DIRECTOR.
o WE ARE INCREASING OUR PRODUCT OFFERINGS THROUGH STRATEGIC
RELATIONSHIPS WITH PLANALYTICS, KMG SOLUTIONS, VISIONCOMPASS INC.,
RAYMARK, INC., WAZAGUA LLC, ANT USA, INC. AND IT RESOURCES INC.
o UNDER A PARTNERSHIP AGREEMENT WITH PLANALYTICS INC., ISLAND
PACIFIC WILL MARKET IMPACT LR, AN INTERNET-BASED APPLICATION THAT
MEASURES THE SPECIFIC EFFECTS OF FUTURE WEATHER ON CONSUMER DEMAND
BY PRODUCT, LOCATION AND TIME. USING IMPACT LR, OUR CUSTOMERS CAN
PLAN THE TIMING OF IN-SEASON MARKDOWNS, AS WELL AS THE
SEASON-TO-SEASON FLOW OF MERCHANDISE INTO THEIR STORES WITH
MAXIMUM EFFECTIVENESS.
o UNDER A MARKETING LICENSE AGREEMENT WITH KMG SOLUTIONS, ISLAND
PACIFIC WILL INTEGRATE, MARKET AND SUPPORT TRAXION/TM/ PROCESS
MANAGEMENT SOLUTIONS. TRAXION'S BUSINESS PROCESS MANAGEMENT
SOLUTION CONSISTS OF THREE MODULES. TRAXION PROCESSENGINE/TM/ IS
THE REAL-TIME PROCESS MANAGEMENT PLATFORM THAT RETAILERS USE TO
ACTIVELY MANAGE AND SUPPORT THEIR ORGANIZATIONS' UNIQUE BUSINESS
PROCESSES. TRAXION PROCESSMODELER/TM/, INCLUDES SIMULATION
FUNCTIONS SUCH AS SAME-TIME COMPARISON OF PROCESS VARIATIONS AND
THE USE OF ACTUAL COST DATA TO PRODUCE PROCESS-BASED FINANCIAL
ESTIMATES. TRAXION ORGANIZATIONMODELER/TM/ SIMPLIFIES THE CREATION
OF SOPHISTICATED MODELS INCLUDING INTER-COMPANY WORKGROUPS,
PAYROLL INFORMATION, AND ROLES.
o ISLAND PACIFIC WILL MARKET VISIONCOMPASS/TM/ COLLABORATIVE
ENTERPRISE MANAGEMENT SOFTWARE, WHICH UNIQUELY COMBINES THE BEST
OF PERFORMANCE MANAGEMENT, BUSINESS INTELLIGENCE, RESOURCE
PLANNING, AND COLLABORATION CAPABILITIES INTO ONE STRAIGHTFORWARD,
WEB-BASED APPLICATION. THE SYSTEM ENABLES DECISION MAKERS AND
TEAMS TO DEVELOP SPECIFIC BUSINESS GOALS, WORK ON THEM TOGETHER,
AND MEASURE THEIR COLLECTIVE RESULTS OBJECTIVELY. THE HIGHLY
FLEXIBLE SYSTEM IS EASILY CUSTOMIZABLE TO FIT EACH ORGANIZATION'S
UNIQUE NEEDS AND LEADS DIRECTLY TO IMPROVED QUALITY AND VISIBILITY
OF KEY INDICATORS THROUGHOUT THE ENTERPRISE.
o UNDER AN OEM AGREEMENT WITH RAYMARK, INC., ISLAND PACIFIC WILL
INTEGRATE, MARKET AND SUPPORT XPERT STORE POINT-OF-SALE ("POS")
SOFTWARE SOLUTION UNDER THE ISLAND PACIFIC BRAND. RAYMARK'S
FULL-FEATURED POS SOLUTION STREAMLINES THE CHECKOUT PROCESS IN
ORDER TO INCREASE SALES ASSOCIATE EFFICIENCY AND AUGMENT CUSTOMER
SATISFACTION. THE SOFTWARE SUPPORTS MULTI-CHANNEL, MULTI-LANGUAGE,
MULTI-CURRENCY AND MULTI-TAXATION REQUIREMENTS.
o UNDER A AGREEMENT WITH WAZAGUA LLC, ISLAND PACIFIC WILL
EXCLUSIVELY OFFER TO RETAILERS WORLDWIDE WAZAGUA'S PRODUCTS AND
SERVICES INCLUDING WEB-BASED LOSS PREVENTION CASE MANAGEMENT
PACKAGE, ASP DATA HOSTING AND POS EXCEPTION REPORTING. WAZAGUA/TM/
ASP HOSTED SUITE OF MODULES AUTOMATES DATA MANAGEMENT FOR THE LOSS
PREVENTION, OPERATIONS, HUMAN RESOURCES, SAFETY & RISK MANAGEMENT
COMMUNITY. THESE ASP-HOSTED PRODUCTIVITY TOOLS ALLOW RETAILERS TO
CAPTURE THE POWER OF THE INTERNET. RETAILERS CAN CREATE
EFFICIENCIES, MANAGE AND SHARE INFORMATION, MAKE BETTER USE OF
THEIR STAFF, ELIMINATE REDUNDANT DATA ENTRY - AND WORK FROM
VIRTUALLY ANY POINT IN THE WORLD.
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o UNDER TERMS OF A RESELLER AGREEMENT, ISLAND PACIFIC WILL MARKET,
SELL, INSTALL, INTERFACE TO, AND SUPPORT ANT USA'S PRODUCTS
INCLUDING BUYER'S TOOLBOX/TM/, A LEADING SUITE OF MERCHANDISE AND
ASSORTMENT PLANNING SOFTWARE THAT HAS BEEN SUCCESSFULLY
IMPLEMENTED BY OVER 140 RETAILERS WORLDWIDE. THE SOFTWARE WILL
EXTEND ISLAND PACIFIC'S ASSORTMENT AND PLANNING CAPABILITIES BY
PROVIDING A SOLID PLANNING METHODOLOGY ACCESSED THROUGH AN
EASY-TO-USE INTERFACE, IN A COST-EFFECTIVE OFFERING.
o A MARKETING LICENSE AGREEMENT WITH IT RESOURCES INC. ALLOWS ISLAND
PACIFIC TO MARKET, SELL, INSTALL, SUPPORT AND INTEGRATE IT
RESOURCES' BUYER'S WORKMATE(R) SUITE, AN INNOVATIVE DECISION
SUPPORT SOFTWARE PLATFORM DEVELOPED FOR MERCHANDISING
ORGANIZATIONS. THE SOFTWARE WILL BRING MOBILITY AND OTHER
TIMESAVING BENEFITS TO THE BUYING PROCESS.
o IN THE THIRD QUARTER OF 2002, WE COMPLETED AN ANALYSIS OF OUR
OPERATIONS AND CONCLUDED THAT IT WAS NECESSARY TO RESTRUCTURE
THE COMPOSITION OF OUR MANAGEMENT AND PERSONNEL. WE WERE
CONCERNED THAT THE THEN EXISTING MANAGEMENT TEAM HAD NOT BEEN
ABLE TO CLOSE A NUMBER OF NEW BUSINESS OPPORTUNITIES OR TO RAISE
CAPITAL. WE WERE ALSO CONCERNED WITH GENERAL ECONOMIC CONDITIONS,
ESPECIALLY AFTER THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001, AND
THE RESULTING ONGOING HOSTILITIES IN THE WORLD. OUR CEO, THOMAS A.
DOROSEWICZ, AND OUR CFO, KEVIN C. O'NEILL, ELECTED TO LEAVE TO
PURSUE OTHER INTERESTS, AND BOTH RESIGNED FROM OUR BOARD OF
DIRECTORS. WE APPOINTED BARRY M. SCHECHTER, OUR CHAIRMAN, AS
CHIEF EXECUTIVE OFFICER. MR.SCHECHTER STEPPED DOWN AS OUR CEO IN
APRIL 2002, BUT CONTINUES TO SERVE AS OUR CHAIRMAN. WE ALSO
REDUCED OUR STAFF BY A TOTAL OF 20%, AND RESTRUCTURED AND
REFOCUSED OUR SALES FORCE TOWARD OPPORTUNITIES AVAILABLE IN THE
CURRENT ECONOMIC CLIMATE. THIS REORGANIZATION RESULTED IN COSTS
SAVINGS OF APPROXIMATELY $3 MILLION PER YEAR.
o IN THE FOURTH QUARTER OF 2001, WE APPOINTED EXPERIENCED MANAGERS
TO MANAGE OUR ISLAND PACIFIC AND SVI STORE SOLUTIONS OPERATIONS.
THESE MANAGERS REPORT DIRECTLY TO THE CEO. WE ALSO APPOINTED AN
EXPERIENCED VICE PRESIDENT OF SALES TO THE TEAM.
o WE DEVELOPED MEASURABLE BUDGETS FOR EACH DIVISIONAL OPERATION SO
AS TO MEASURE PERFORMANCE DIRECTLY AND MAINTAIN CONTROL OVER
EXPENDITURES.
o WE RESTRUCTURED OUR APPLICATION DEVELOPMENT EFFORTS IN CONCERT
WITH OUR NEW MARKETING AND TECHNOLOGY MANAGEMENT TEAM TO WORK MORE
CLOSELY WITH CUSTOMERS FOR IMPROVEMENTS TO OUR OFFERINGS. WE
EXPECT THE RESULT WILL BE APPLICATION TECHNOLOGY THAT MORE CLOSELY
MEETS THE NEEDS OF OUR CUSTOMERS. ADDITIONALLY, MORE OF THE COSTS
OF DEVELOPMENT MAY BE OFFSET AGAINST CUSTOMER SPECIFIC REVENUES.
o WE RELOCATED OUR PRINCIPAL EXECUTIVE OFFICES TO SMALLER AND LESS
EXPENSIVE PREMISES IN CARLSBAD, CALIFORNIA.
o IN JULY 2002, WE NEGOTIATED AN EXTENSION OF OUR SENIOR BANK
LENDING FACILITY TO AUGUST 31, 2003, AND THEN WE SUBSEQUENTLY
SATISFIED THIS DEBT UNDER THE DISCOUNTED LOAN PAYOFF AGREEMENT
DATED MARCH 31, 2003. SEE "LIQUIDITY AND CAPITAL RESOURCES --
CONTRACTUAL OBLIGATIONS -- UNION BANK."
o WE COMPLETED A SERIES OF TRANSACTIONS WITH SOFTLINE TO REPAY OUR
SUBORDINATED NOTE TO SOFTLINE, TO TRANSFER TO SOFTLINE OUR NOTE
RECEIVED IN CONNECTION WITH THE SALE OF IBIS SYSTEMS LIMITED, AND
TO ISSUE NEW SERIES A CONVERTIBLE PREFERRED SECURITIES IN EXCHANGE
FOR 10,700,000 SVI COMMON SHARES. SEE "FINANCING TRANSACTIONS --
SOFTLINE."
o OUR AUSTRALIAN SUBSIDIARY CEASED OPERATIONS IN FEBRUARY 2002. SEE
"DISCONTINUED OPERATIONS."
o IN FISCAL 2001, WE ISSUED A TOTAL OF $1.25 MILLION IN CONVERTIBLE
NOTES TO A LIMITED NUMBER OF ACCREDITED INVESTORS RELATED TO ICM
ASSET MANAGEMENT, INC. OF SPOKANE, WASHINGTON, A SIGNIFICANT
BENEFICIAL OWNER OF OUR COMMON STOCK. IN JULY 2002, WE AMENDED THE
CONVERTIBLE NOTES TO EXTEND THE MATURITY DATE TO SEPTEMBER 30,
2003 AND WE REPLACED THE WARRANTS ISSUED TO THESE INVESTORS. SEE
"FINANCING TRANSACTIONS -- ICM ASSET MANAGEMENT, INC."
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o IN MAY 2002, WE ENTERED INTO A NEW TWO-YEAR SOFTWARE DEVELOPMENT
AND SERVICES AGREEMENT WITH OUR LARGEST CUSTOMER, TOYS "R' US,
INC. ("TOYS"). TOYS ALSO AGREED TO INVEST $1.3 MILLION FOR THE
PURCHASE OF A NON-RECOURSE CONVERTIBLE NOTE AND A WARRANT TO
PURCHASE UP TO 2,500,000 COMMON SHARES. SEE "FINANCING
TRANSACTIONS -- TOYS "R" US."
o IN MARCH 2003, WE ISSUED A TOTAL OF $3.5 MILLION IN 9% CONVERTIBLE
DEBENTURES TO MIDSUMMER INVESTMENT, LTD., OMICRON MASTER TRUST AND
ISLANDIA, L.P. ALONG WITH THESE DEBENTURES, WARRANTS TO PURCHASE
AN AGGREGATE OF 1,572,858 SHARES OF COMMON STOCK WERE ISSUED TO
THESE INVESTORS. SEE "FINANCING TRANSACTIONS -
MIDSUMMER/OMICRON/ISLANDIA BELOW.
o ON APRIL 1, 2003, WE ISSUED $400,000 IN 9% CONVERTIBLE DEBENTURES
TO MBSJ INVESTORS, LLC. ALONG WITH THESE DEBENTURES, WARRANTS TO
PURCHASE 156,311 SHARES OF COMMON STOCK WERE ISSUED TO THIS
INVESTOR. SEE "FINANCING TRANSACTIONS - MBSJ."
o WE HAVE AGREED TO SELL OUR SHARES OF SVI TRAINING PRODUCTS,
INC. TO ARTHUR KLITOFSKY. THIS TRANSACTION HAS NOT YET BEEN
FINALIZED.
o IN MARCH 2003, THE BOARD ADOPTED A RESOLUTION TO CHANGE OUR
NAME TO "ISLAND PACIFIC, INC.", SUBJECT TO APPROVAL BY OUR
SHAREHOLDERS.
o IN MARCH 2003, OUR BOARD OF DIRECTORS APPOINTED HARVEY BRAUN AS
OUR CHIEF EXECUTIVE OFFICER, AND STEVEN BECK AS OUR PRESIDENT AND
CHIEF OPERATIONS OFFICER. BARRY SCHECHTER, OUR FORMER CEO, REMAINS
AS OUR CHAIRMAN. THESE APPOINTMENTS WERE MADE EFFECTIVE APRIL 1,
2003. ARTHUR KLITOFSKY RESIGNED AS A DIRECTOR ON THAT DATE AS
WELL.
o ON MAY 6, 2003, WE ISSUED $300,000 IN 9% CONVERTIBLE DEBENTURES TO
CRESTVIEW CAPITAL FUND I, L.P., CRESTVIEW CAPITAL FUND II, L.P.
AND CRESTVIEW CAPITAL OFFSHORE FUND, INC. ALONG WITH THESE
DEBENTURES, WARRANTS TO PURCHASE 101,112 SHARES OF COMMON STOCK
WERE ISSUED TO THESE INVESTORS. SEE "FINANCING TRANSACTIONS -
CRESTVIEW."
INDUSTRY OVERVIEW - RETAIL APPLICATION SOFTWARE
The rapid development of the retail application software market has
increasingly allowed the retail industry to track, analyze and implement its
information on a virtually real-time basis. Modern applications and technology
capture sales information as a sale occurs and quickly provide that information
to the enterprise's retail management system. This information is available
daily both to local management and to the retailer's headquarters functions for
purposes of inventory tracking and sales analysis. These systems have become
increasingly important for multi-channel retail enterprises that need to
disseminate sales information throughout the enterprise to better manage
inventory, costs, pricing and manufacturing requirements. Multi-channel
retailers also require sophisticated, integrated point-of-sale retail management
systems that can reliably and efficiently capture and manage large numbers of
individual transactions generated from diversified points of sale.
Retail software applications were initially custom-designed to satisfy
business needs of individual retailers. These initial applications were
proprietary, with software and support services developed either internally or
provided by a single supplier. Due to the custom nature of the applications,
little opportunity existed for suppliers to leverage their niche success into
market-wide success. In addition, custom solutions, whether internally developed
by the retailer or offered by external suppliers, often did not provide a
long-term return on investment (ROI). However, standard, scalable, extensible
applications that are provided by suppliers such as us, offer both near- and
long-term ROI, as these solutions are continuously developed and evolve over
time. Outside suppliers such as us, with our single version philosophy and
built-in upgrade path to the future, provide the retailer with a solution that
continues to provide a consistent return on its application investment.
The retail application-specific software industry has developed from
proprietary, customized, single- platform systems to open architecture systems
in which a variety of hardware and software products from different
manufacturers can be combined to obtain the mix of features desired by the
individual retail enterprise.
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Correspondingly, application software suppliers can leverage their investment
in design, development and expertise across standard platforms and multiple
customers. When scalable technology is included in the offering, the result is a
growing market for retail applications that includes smaller as well as larger
retailers.
The retail industry we serve is currently experiencing significant
structural changes. These changes are driven by a variety of factors including
evolving consumer preferences, technological advances, globalization and more
intense competition. The rapid growth of the Internet as a means of commerce is
affecting the retail industry. The Internet is a business-to-consumer (B2C)
sales channel and a means of creating and managing customer relationships. The
Internet is also transforming business-to-business (B2B) supply chain
communications and management. These changes have forced traditional "brick and
mortar" retailers to re-evaluate their business models and to also develop
e-commerce strategies in order to maximize their competitive position. We
believe the industry changes and trends include:
o MULTI-CHANNEL RETAILING. RETAILERS OF ALL TYPES ARE CHANGING THEIR
BUSINESS MODELS TO SERVICE THEIR CUSTOMERS USING MULTIPLE CHANNELS
OF DISTRIBUTION, INCLUDING TRADITIONAL BRICK AND MORTAR STORES,
THE WEB, CATALOG, AND MAIL ORDER METHODS. IN ADDITION,
MANUFACTURERS CAN NOW DIRECTLY MARKET THEIR MERCHANDISE MORE
EFFICIENTLY AND COMPETE WITH THE RETAILERS WHO WERE FORMERLY THEIR
PARTNERS.
o PRESSURE ON PROFIT MARGINS. THE WIDE AVAILABILITY AND
ACCESSIBILITY OF COMPETITIVE PRICE QUOTES ON THE INTERNET AND
INTENSE COMPETITION FROM OTHER RETAILERS PLACES PRICE PRESSURE ON
BOTH ONLINE RETAILERS AND BRICK AND MORTAR RETAILERS, FORCING
LOWER PROFIT MARGINS. THIS PRESSURE ON MARGINS HAS FORCED
RETAILERS TO FOCUS ON MAXIMIZING THE COST STRUCTURE AND PROFIT
OPPORTUNITY ACROSS THEIR ENTIRE ENTERPRISE, FROM THE SUPPLY CHAIN
PROCESS, THROUGH THE ENTERPRISE AND AT THE STORE LEVEL.
o CENTRALIZED FULFILLMENT. THE EMERGENCE OF ONLINE RETAILING HAS
CREATED SIGNIFICANTLY HIGHER DEMAND FOR CENTRALIZED ON-DEMAND,
ORDER FULFILLMENT SOLUTIONS.
o PRODUCT LEVEL INFORMATION. BECAUSE OF ADDITIONAL RETAIL CHANNELS
LIKE E-COMMERCE SITES, THE ABILITY TO HAVE A SINGLE VIEW OF A
PRODUCT ACROSS ALL RETAIL CHANNELS IS CRITICAL FOR THE ACCURACY OF
INVENTORY MANAGEMENT AND MAXIMIZING PROFIT OPPORTUNITIES.
o NEED FOR TECHNOLOGY. TRADITIONAL RETAILERS HAVE HISTORICALLY BEEN
RELATIVELY SLOW TO INTRODUCE NEW TECHNOLOGIES. RETAILERS ARE NOW
MOVING AT A FASTER PACE TO UTILIZE TECHNOLOGY TO COMPETE
EFFECTIVELY.
o WIRELESS APPLICATIONS. THERE IS A GROWING DEMAND FOR IN-STORE
WIRELESS COMMUNICATIONS BASED APPLICATIONS, UTILIZING VARIOUS
HANDHELD AND POS DEVICES.
All of these changes are leading to new approaches to retail systems
architecture. These approaches include movement away from traditional
distributed models and toward more centralized control environments with limited
capability in-store devices also known as "thin clients." The thin clients
include point-of-sale devices, kiosks and wireless in-store devices.
We believe these changes have accelerated the trend away from
internally developed and supported retail application software. The increasingly
competitive and technologically evolving environment has made it very difficult
for companies that use internal, proprietary or prior generation
supplier-provided software to keep up with the rapidly improving products that
are available from external suppliers. At the same time, these changes have put
pressure on outside suppliers such as us to continuously enhance our existing
applications and develop new applications under new technologies on a more rapid
timetable. We further believe that as retailers move forward with the selection
and implementation of applications such as ours, they will increasingly require
expert consulting, system integration, and other technical professional and
support services. Further, we see that retailers are increasingly looking to
experts, not generalists, to provide these services.
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MISSION AND STRATEGY
Our mission is to become the leading global provider of retail
application technology and related services using our single version philosophy
which offers our customers a built-in upgrade path to the future. To fulfill our
mission, our strategy is to provide our current and new customers the tools,
infrastructure and expert services necessary for them to compete effectively in
the global, multi-channel marketplace. Key elements of our strategy include:
o LEVERAGING OUR RETAIL EXPERIENCE AND PRESENCE IN SELLING TO
NEW AND EXISTING CUSTOMERS. OVER 200 RETAILERS IN THE US,
CANADA, EUROPE, SOUTH AMERICA AND AUSTRALIA USE SOME OR ALL
OF OUR SOLUTIONS. OUR MANAGEMENT, MARKETING, SALES,
DEVELOPMENT, QUALITY ASSURANCE, PROFESSIONAL SERVICES AND
SUPPORT TEAMS HAVE AN IN-DEPTH UNDERSTANDING OF THE RETAIL
INDUSTRY THROUGH HAVING DELIVERED WIDELY ACCEPTED PRODUCTS AND
SERVICES FOR MORE THAN 25 YEARS. WE BELIEVE OUR SINGLE VERSION
PHILOSOPHY, THE SOPHISTICATION AND STABILITY OF OUR APPLICATIONS,
AND OUR EXPERIENCE AND PRESENCE IN THE RETAIL INDUSTRY GIVE US A
SIGNIFICANT COMPETITIVE ADVANTAGE IN MARKETING NEW AND ENHANCED
APPLICATIONS AND SERVICES TO THE INDUSTRY. OUR REFOCUSED
MARKETING STRATEGY INVOLVES AN EMPHASIS ON OUR CORE COMPETENCIES,
THE HIGH DEGREE OF CUSTOMER SATISFACTION AND LOYALTY OF OUR
EXISTING CUSTOMERS AND OUR BUILT-IN UPGRADE PATH TO THE FUTURE.
o EXPANDING AND ENHANCING OUR APPLICATIONS. WE ARE ENGAGED IN AN
AGGRESSIVE APPLICATION TECHNOLOGY DEVELOPMENT EFFORT TO EXPAND AND
ENHANCE OUR APPLICATIONS FOR USE BOTH DOMESTICALLY IN THE US AND
INTERNATIONALLY. WE ARE ALSO CONTINUING OUR STRATEGY OF OFFERING
NEW SOLUTIONS THAT ARE COMPLEMENTARY TO OUR APPLICATIONS,
PRIMARILY THROUGH STRATEGIC ALLIANCES. OUR APPLICATION TECHNOLOGY
ENHANCEMENT PROGRAM IS DESIGNED TO ANTICIPATE TRENDS IN THE RETAIL
INDUSTRY THROUGH CONSTANT CONSULTATION WITH OUR CUSTOMERS,
STRATEGIC ALLIANCE PARTNERS AND RESEARCH ANALYSTS. OUR GOAL IS TO
INTRODUCE TIMELY NEW APPLICATIONS AND ENHANCEMENTS TO OUR EXISTING
APPLICATIONS THAT WILL ALLOW US TO BETTER COMPETE FOR NEW
CUSTOMERS AND CONTINUED TO BE ATTRACTIVE TO OUR EXISTING
CUSTOMERS.
o INCREASING FOCUS ON THE SMALLER RETAILER. WE RECENTLY INTRODUCED A
NEW STANDARD MERCHANDISING MANAGEMENT AND STORE SOLUTION
APPLICATION SET BASED ON OUR LARGE TIER RETAILER EXPERIENCE AND
APPLICATION BASE. WE CAN SUPPLY THIS APPLICATION WITH LITTLE OR NO
MODIFICATION TO SMALLER TIER 2, TIER 3 AND TIER 4 RETAILERS AT A
COMPETITIVE PRICE POINT. THE APPLICATION SET OFFERS THESE
RETAILERS A FAST IMPLEMENTATION SCHEDULE AND SHORT ROI. WE INTEND
TO MARKET MORE AGGRESSIVELY TO TIER 3 AND TIER 4 RETAILERS AS PART
OF OUR STRATEGY TO LOCATE AND EXPLOIT MARKET OPPORTUNITIES
AVAILABLE TO US IN THE CURRENT ECONOMIC CLIMATE, ESPECIALLY THOSE
OPPORTUNITIES WHICH ARE UNDERSERVED BY OUR LARGER COMPETITORS.
o EMPHASIZING MULTI-CHANNEL SOLUTIONS. AN IMPORTANT PART OF OUR
APPLICATION TECHNOLOGY ENHANCEMENT PROGRAM IS THE INTEGRATION OF
WEB-BASED, CATALOG AND MAIL ORDER SOLUTIONS WITH OUR HISTORIC
SUITE OF APPLICATIONS FOCUSED ON THE TRADITIONAL BRICK AND MORTAR
RETAIL BUSINESS.
o GROWING PROFESSIONAL SERVICES. AN INCREASINGLY IMPORTANT PART OF
OUR SOLUTIONS ARE THE EXPERT SERVICES WE PROVIDE INCLUDING RETAIL
BUSINESS CONSULTING, PROJECT MANAGEMENT, IMPLEMENTATION,
INTEGRATION, TRAINING AND DOCUMENTATION SERVICES.WE INTEND TO
CONTINUE TO GROW AND MARKET OUR PROFESSIONAL SERVICES TO SUPPORT
CLOSE RELATIONSHIPS WITH OUR CUSTOMERS AND TO ASSIST THEM IN
SUCCESSFUL IMPLEMENTATION OF BOTH OUR APPLICATION TECHNOLOGY AND
THAT OF OUR STRATEGIC PARTNERS. WE EXPECT, AS A RESULT, TO RECEIVE
RECURRING REVENUES FROM OUR PROFESSIONAL SERVICE AGREEMENTS, AND
APPLICATION CUSTOMIZATION SERVICES. WE BELIEVE THAT AN EXPANSION
OF THIS REVENUE BASE CAN CREATE A MORE STABLE REVENUE AND CASH
FLOW BASE, REDUCING OUR RELIANCE ON APPLICATION SOFTWARE LICENSE
SALES, WHICH TEND TO FLUCTUATE OVER TIME BASED ON ECONOMIC AND
OTHER CONDITIONS.
o GROWING RECURRING REVENUES. USING OUR SINGLE VERSION PHILOSOPHY
AND BY OFFERING OUR EXISTING AND NEW CUSTOMERS A BUILT-IN UPGRADE
PATH TO THE FUTURE, WE ARE ABLE AND EXPECT TO GROW OUR RECURRING
REVENUE FROM OUR MAINTENANCE AND SUPPORT AGREEMENTS. WE BELIEVE
THAT AN EXPANSION OF THIS REVENUE
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BASE CAN CREATE A MORE STABLE REVENUE AND CASH FLOW BASE, REDUCING
OUR RELIANCE ON APPLICATION SOFTWARE LICENSE SALES, WHICH TEND TO
FLUCTUATE OVER TIME BASED ON ECONOMIC AND OTHER CONDITIONS.
o INCREASING INTERNATIONAL SALES. WE INTEND TO INCREASE OUR
INTERNATIONAL SALES EFFORTS, FOCUSING ON THE EUROPEAN MARKET. OUR
DEVELOPMENT EFFORTS WITH TOYS "R" US, INC. HAVE ADDED SIGNIFICANT
FUNCTIONALITY TO OUR ISLAND PACIFIC MERCHANDISE MANAGEMENT SUITE,
MAKING US EVEN MORE COMPETITIVE INTERNATIONALLY.
APPLICATION TECHNOLOGY AND SERVICES
Through March 31, 2003, we operated three operating business units:
Island Pacific, SVI Store Solutions and SVI Training Products, Inc. We have
agreed to sell our shares in SVI Training Products, Inc. to Arthur Klitofsky. We
are in the process of finalizing the terms of the written agreements pertaining
to this sale.
ISLAND PACIFIC
OVERVIEW
Island Pacific is a leading provider of application software solutions
and professional services for multi-channel retailers in the specialty, mass
merchandising and department store markets. Our applications and services
provide retailers with a robust enterprise business solution.
Our Island Pacific applications and services include the following
major offerings:
o ISLAND PACIFIC MERCHANDISE MANAGEMENT SUITE OF APPLICATIONS,
INCLUDING MERCHANDISING, THE EYE/TM/ DATAMART TOOL SET, TRENDS
FORECASTING AND DYNAMIC REPLENISHMENT TOOLS, EVENTS, WAREHOUSE,
TICKETING, FINANCIALS, AND SALES AUDIT.
o ISLAND PACIFIC DIRECT, INCLUDING SUPPORT FOR WEB-BASED, MAIL-ORDER
AND TRADITIONAL CATALOG RETAILING, WHICH CAN BE INTEGRATED WITH
OUR MERCHANDISE MANAGEMENT SUITE OR IMPLEMENTED INDEPENDENTLY.
o ISLAND PACIFIC PROFESSIONAL SERVICES, INCLUDING RETAIL BUSINESS
CONSULTING, PROJECT MANAGEMENT, IMPLEMENTATION, APPLICATION
TRAINING, AND TECHNICAL AND DOCUMENTATION SERVICES.
o ISLAND PACIFIC DEVELOPMENT, MAINTENANCE AND SUPPORT SERVICES,
INCLUDING CUSTOM APPLICATION DEVELOPMENT TO TAILOR OUR SOFTWARE TO
MEET THE SPECIFIC NEEDS OF OUR CUSTOMERS, AND MAINTENANCE AND
SUPPORT SERVICES WHEREBY WE OFFER HELP DESK, PRODUCT RELEASE
UPGRADES AND ERROR CORRECTION SERVICES TO OUR CUSTOMER BASE USING
OUR APPLICATIONS.
Our application technology and services provide the following benefits
to our customers:
MULTI-CHANNEL RETAILING. Our solutions integrate the various
storefronts of retailers, from point-of-sale devices to Web-based storefronts to
mail order catalogs.
INTEGRATION. Our solutions are fully integrated applications that
address the complete information and management requirements of the retail
enterprise. In addition, our applications are designed for ease of
implementation and operation. This means that our customers can quickly install,
train and become operational with our products, thus minimizing the cost and
time required to achieve true return on their investment. All of our
applications are open systems, allowing integration with many third-party
applications used by our customers.
SERVICES. We are able to provide expert, retail-savvy professional
services to plan and implement our application solutions with our customers. We
also customize our solutions to the unique needs of particular retailers. In
addition, our standard applications contain a number of tools and features that
allow our customers to tailor their systems continuously to their changing
needs.
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MARKETS AND CUSTOMERS
Island Pacific software is installed in over 200 retailers worldwide.
Our applications are used by the full spectrum of retailers including specialty
goods sellers, mass merchants and department stores. Most of our U.S. customers
are in the Tier 1 to Tier 3 retail market sectors.
A sample of some of our active customers are listed below:
Nike Limited Brands American Eagle Outfitters Disney
Phillips-Van Heusen Signet(UK) Shoefayre(UK) Pacific Sunwear
Toys "R" Us Timberland Vodaphone(UK) Academy Sports
MARKETING AND SALES
We sell our applications and services primarily through a direct sales
force that operates in the United States and the United Kingdom. Sales efforts
involve comprehensive consultations with current and potential customers prior
to completion of the sales process. Our Sales Executives, Retail Application
Consultants (who operate as part of the sales force) and Marketing and
Technology Management associates use their collective knowledge of the needs of
multi-channel retailers to help our customers identify the optimal solutions for
their individual businesses.
We maintain a comprehensive web site describing our applications,
services and company. We regularly engage in cooperative marketing programs with
our strategic alliance partners. We annually host a Users Conference in which
hundreds of our customers attend to network and to share experiences and ideas
regarding their business practices and implementation of our, and our partners'
technology. This Users Conference also provides us with the opportunity to meet
with many of our customers on a concentrated basis to provide training and
insight into new developments and to gather valuable market requirements
information.
We are aggressively focusing on our Product Marketing and Product
Management functions to better understand the needs of our markets in advance of
required implementation, and to translate those needs into new applications,
enhancements to existing applications and related services. These functions are
also responsible for managing the process of market need identification through
product or service launch and deployment. It is the goal of these functions to
position Island Pacific optimally with customers and prospects in our target
market.
We have established a Product Direction Council, comprised of leading
executives from our customers. The purpose of this Council is to help guide us
in the future development of our applications and services, to maximize our
opportunity to meet overall retail market trends and needs for a broad sector of
the industry, and to do so well in advance of our competitors.
DESCRIPTION OF APPLICATIONS AND SERVICES
We have carefully assembled our Island Pacific Applications such that
the modules work together as a single solution. Our customers can mix and match
the modules to create a solution tailored to their businesses. We also offer
comprehensive professional services, custom development, maintenance and support
services.
ISLAND PACIFIC ENTERPRISE SOLUTION
Island Pacific's Enterprise Solution application suite provides a
methodology for retail chains that integrates the flow of data from the planning
phase, through budgeting, to purchasing, allocation and distribution. The
application then takes retail sales data for evaluation and feedback to the
sales audit and planning phase. This suite of applications operates on the IBM
iSeries computing platform, which is widely installed and extremely
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popular in the retail industry. The diagram below provides a graphic
representation of the Island Pacific applications suite, including the
integration of the optional Direct and Store Solutions applications.
[GRAPHIC APPEARS HERE]
MERCHANDISING. The Merchandising module is the core of the Island
Pacific Enterprise Solution application suite. This extensive module includes
management planning and real time open to buy, forecasting, purchase order
management, merchandise receiving, allocation, transfers, basic stock
replenishment, physical inventory, price management and merchandise stock
ledger. Merchandising has multiple language and currency capabilities for
international operations.
Merchandising is offered as a single version application. Most
modifications we perform on the application are incorporated into future
releases of the base. This methodology reduces implementation risks for our
customers, shortens the implementation cycle and reduces software bugs. It also
reduces training requirements. Moreover, customers who continue to use our
services for maintenance of the application are able to take advantage of
improvements requested by other retailers. Finally, it gives us the ability to
present a very stable application and support it with smaller focused
infrastructure.
THE EYE/TM/ (DATAMART). The Eye complements the Merchandising
application by offering user-definable datamarts and information retrieval. The
Eye uses innovative storage techniques that provide quick access to data and
graphical drag-and-drop movement of elements and data. The Eye can also be used
for data generated by applications outside the Island Pacific Enterprise
Solution suite.
FINANCIALS. Financials includes accounts payable with automatic invoice
matching, general ledger and fixed assets functions.
WAREHOUSE. Warehouse is a user-definable locator application for
controlling the physical flow of merchandise. Warehouse employs a number of
special features designed for retailers. Warehouse also includes support for
radio frequency (RF) technology to allow for access to the application from the
warehouse floor using a range of wireless devices.
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EVENTS. The Events module plans and analyzes the performance of events
and promotions. The module is linked to The Eye datamart application to provide
sophisticated and customizable implementation of an event or promotion and
analysis and reports of its success.
Island Pacific Enterprise Solution Suite also includes sales audit,
forecast and dynamic replenishment and merchandise ticketing modules.
ISLAND PACIFIC DIRECT SOLUTION
Our Direct application suite provides fully integrated tools including
order entry, order processing, customer service, purchasing, inventory planning
and forecasting, warehouse management, fulfillment and shipping, as well as
marketing and circulation management to support Internet, catalog and mail-order
retailing. We support these tools using our single version development
philosophy, offering constant evolution and improvement to features and
functions. Used in combination with our Island Pacific Merchandise Management
suite of applications, Island Pacific Direct provides a system to fully
integrate the fulfillment functions of multiple distribution channels, including
local outlets, e-commerce and catalog and mail order.
PROFESSIONAL SERVICES
We offer a variety of consulting implementation and upgrade services to
our customers. We perform services on an as needed basis and as part of project
plans. We typically render services at the customer's site to provide the best
overall understanding of the customer's environment and business.
RETAIL BUSINESS CONSULTING. We employ a staff of highly qualified,
experienced retailers who provide a variety of business consulting services. Our
consulting staff members have an average of over ten years experience in the
retail industry as buyers, merchandise planners, store managers, IT managers,
and retail business owners. They combine their retail experience with their
knowledge of the SVI application solutions to offer advice on how best to
integrate our solutions into the latest retail practices for a cost-effective,
smooth implementation of change within an organization.
Our RETAIL CONSULTANTS assist with:
o REQUIREMENTS DEFINITIONS; o BUSINESS PROCESS REVIEW;
o WORK PROCESS RE-ENGINEERING; o UNDERSTANDING OF BUSINESS BENEFITS; AND
o ORGANIZATIONAL CHANGE MANAGEMENT; o JOB DEFINITION AND STAFFING REQUIREMENTS.
PROJECT MANAGEMENT. Our experienced project management teams assist with:
o WORK PRODUCT DEFINITION; o COORDINATION WITH SUPPLIERS;
o BUSINESS AND TECHNICAL COORDINATION; o PROJECT ASSESSMENT DOCUMENTATION;
o APPLICATION TESTING AND CONFERENCE ROOM PILOTS; o SYSTEM INTEGRATION; AND
o OVERALL IMPLEMENTATION PLANNING; o PROJECT TIMELINES.
APPLICATION TRAINING. We train the customer's internal training staff
and we offer training for the customer's end users.
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IMPLEMENTATION SERVICES. Our technical experts provide implementation
consulting and programming services. Implementation services include:
o INTERFACE AND o DESIGN, MODIFICATION AND o PROGRAMMING; AND
CONVERSION BETWEEN CUSTOMIZATION;
SYSTEMS;
o TESTING; o PROBLEM RESOLUTION; o SYSTEM MANAGEMENT.
o SOFTWARE INSTALLATION; o UPGRADE PLANNING, TESTING
AND IMPLEMENTATION;
DOCUMENTATION SERVICES. We provide customized documentation for all
elements of our solutions.
SVI STORE SOLUTIONS
SVI Store Solutions offers retailers a complete application providing
point-of-sale and in-store processor (server) functions through its OnePointe
application. OnePointe is a full business-to-consumer (B2C) integrated, in-store
application, encompassing a range of integrated store solutions. It can also
incorporate a third-party provided retail customer relationship management
system and a complete performance measurement system with loss prevention
features. The major benefits of OnePointe to a retailer are as follows:
o ONEPOINTE IS POS HARDWARE PLATFORM INDEPENDENT, FUNCTIONING ON
IBM, NCR, FUJITSU, WINCORP OR PC-CD PLATFORMS.
o THICK OR THIN CLIENT VERSIONS OF THE PRODUCT ARE AVAILABLE,
ALLOWING RETAILERS TO HAVE SOFTWARE CONTINUITY AS HARDWARE
PLATFORMS EVOLVE.
o ONEPOINTE'S FUNCTIONALITY REFLECTS OVER 15 YEARS OF CUSTOMIZED
DEVELOPMENT FOR A WIDE VARIETY OF LARGE AND MEDIUM RETAILERS.
o ONEPOINTE OFFERS MULTI-CHANNEL APPLICATIONS AND HARDWARE. KIOSK
AND WEB APPLICATIONS ALLOW RETAILERS TO ACCESS THEIR CUSTOMERS VIA
SEVERAL CHANNELS.
o ONEPOINTE USES INTERNET PROTOCOL DATA TRANSFER FOR PEER TO PEER
COMMUNICATIONS.
o ONEPOINTE INCLUDES ADVANCED DEVELOPMENT TOOLSET, INCLUDING TAG, A
CUSTOMER USEABLE DEVELOPMENT ENVIRONMENT.
o ONEPOINTE IS OFFERED ON A VARIETY OF HARDWARE CONFIGURATIONS, AND
IS ABLE TO RUN ON MANY DIFFERENT OPERATING SYSTEM PLATFORMS. THE
APPLICATION EMPLOYS A GRAPHICAL USER INTERFACE, OPTIONAL TOUCH
SCREEN INPUT AND WIRELESS COMMUNICATION SUPPORT. THE APPLICATION
ALSO PROVIDES AN ON-DEMAND REFERENCE SOURCE FOR EMPLOYEES,
INCLUDING STORE POLICIES, AN ON-SCREEN CALCULATOR, INSTRUCTIONS
FOR FORMS USAGE, PACKAGE PRICING, FREQUENT SHOPPER INFORMATION,
GIFT CARDS, TRAINING MODE, AUDITING FEATURES AND E-MAIL. THE
APPLICATION IS FULLY CUSTOMIZABLE, EITHER BY THE CUSTOMER USING
INCLUDED TOOLS, OR BY OUR TECHNICAL TEAM AS PART OF OUR
IMPLEMENTATION AND SUPPORT SERVICES.
o ONEPOINTE PROVIDES A RELIABLE, HIGH-PERFORMANCE MANAGEMENT
PLATFORM TO ADMINISTER STORE APPLICATIONS. THE ARCHITECTURE IS
DESIGNED TO MAINTAIN DATA INTEGRITY WHILE ALLOWING FULL
INTEGRATION WITH OUR ISLAND PACIFIC SUITE OR THIRD-PARTY
ENTERPRISE SOFTWARE PRODUCTS USED BY THE INDIVIDUAL CUSTOMER.
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SVI TRAINING PRODUCTS, INC.
We have agreed to sell our shares in SVI Training Products, Inc.
("SVITP") to Arthur Klitofsky. We are in the process of finalizing the
agreements pertaining to this sale. SVITP accounted for approximately 7% of our
total revenues for the 9-month period ending December 31, 2002.
This company develops and distributes PC courseware and skills
assessment products. The courseware is designed for use in instructor-led and
self-study training environments. It sells courseware either as individual
manuals and instructor guides, or on a limited site license basis. It has
developed more than 210 training courses for desktop and retail applications.
Site licensing allows a customer to print an unlimited number of course
manuals for a fixed annual fee, and renewals provide us with a recurring annual
revenue stream. In excess of 80% of the annual training site licenses are
renewed. SVITIP provides the site-licensed courseware on the Internet through
its website, or on CD-ROM, allowing customization of the instructor-led course
materials.
SVITP uses a network of specialized consultants to develop courseware
products. It hires consultants on a project basis. This allows for the fast,
simultaneous development of multiple courses and gives SVITP access to diverse
skills without fixed overhead commitments.
SVITP markets training products through a direct sales force. It also
advertises and sells the training product range through the Internet, direct
mail and trade shows. SVITP uses both in-house and independent representatives,
and has representation in California, Texas, Indiana, Florida, New Jersey,
Ireland, the United Kingdom and South Africa. Customers include Fortune 1000
corporations, K-12 school districts, universities, military facilities,
government agencies and training schools.
SVITP is also a reseller of multimedia and hardcopy self-study
materials for desktop and technical computer software applications. In addition,
it resells on-line training products.
SVITP also markets the "compAssess On-Line" skills testing
administration system and test center. compAssess On-Line is a multi-faceted
software product that consists of three main applications. It includes a
comprehensive administration system for registering students, assigning tests
and monitoring results, a built-in collection of more than 1,500 performance
based software test questions, and a facility to develop multiple-choice,
true/false, hotspot and simulated questions on any subject regardless of the
discipline. The compAssess built-in questions enable employers to evaluate the
computer skills of their employees and provides assistance in selecting the
appropriate course modules for trainees. SVITP market this package to personnel
agencies, universities, schools, training companies and corporations.
SVITP also provides courseware for our Store Solutions Group. The
courseware is designed to provide in store training to all levels of store
personnel from management to POS data entry clerks. SVITP also provides custom
courseware development services to support additional retail applications.
APPLICATION TECHNOLOGY DEVELOPMENT
We believe it is imperative to our long-term success that we maintain
aggressive application technology development programs to improve our existing
applications and to develop new applications. We believe that the core
functionality that already exists in our technology will continue to serve many
of the important retailing functions, but that additional functionality and
flexibility will be required in the constantly challenging, competitive
environment.
Our future performance will depend in large part on our ability to
enhance our current application technology and develop new applications. In
order to achieve market acceptance, these new applications must anticipate and
respond to the latest trends in business-to-consumer and business-to-business
commerce. Our applications must also offer clearly perceived advantages over the
offerings of our competitors.
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As of January 31, 2003, 43% of our employees were engaged in
application technology development. Most of these employees are located in our
southern California offices. Company-sponsored application technology
development expenses were $4.1 million, $6.6 million and $6.7 million,
respectively, for the fiscal years 2002, 2001 and 2000. Customer-sponsored
application technology development expenses were $5.5 million, $5.5 million and
$1.5 million, respectively, for the fiscal years 2002, 2001 and 2000.
Our current application development projects include:
o INFOCUS 2.0 OF OUR ISLAND PACIFIC MERCHANDISE MANAGEMENT
APPLICATION SUITE. THIS RELEASE WILL OFFER SIGNIFICANT
ENHANCEMENTS TO OUR CURRENT RELEASE 1.5, WHICH CONTINUES TO BE
DEPLOYED BY THE MAJORITY OF OUR CUSTOMERS. INFOCUS 2.0 IS EXPECTED
TO BE RELEASED LATE IN FISCAL YEAR 2003.
o DEVELOPMENT OF THE ISLAND PACIFIC APPLICATION ARCHITECTURE USING
THE JAVA PROGRAMMING LANGUAGE. SEVERAL OF OUR JAVA-BASED
APPLICATIONS WILL BE ABLE TO OPERATE ON VIRTUALLY ANY HARDWARE
PLATFORM, AND WILL ALLOW FOR GREATER CENTRALIZATION OF THE CONTROL
SYSTEM ENVIRONMENT. WE ARE CONTINUING TO REDEVELOP OTHER PORTIONS
AND MODULES OF THE SOLUTION IN JAVA AS NEW FEATURES AND
ENHANCEMENTS ARE INTRODUCED.
o INVISION 1.5. INVISION 1.5 IS OUR AFFORDABLE AND SCALEABLE, YET
COMPLETE MERCHANDISE MANAGEMENT SYSTEM DESIGNED TO MEET THE NEEDS
OF THE REGIONAL RETAILING ENTREPRENEUR. THROUGH THE LAUNCH OF
INVISION 1.5, ISLAND PACIFIC WILL PENETRATE THE TIER 3 AND 4
RETAIL SECTORS, A MARKET THAT HAS BEEN TYPICALLY IGNORED BY THE
COMPETITION DUE TO THE SIZE OF THE BUSINESSES.
o THE CONTINUED IMPROVEMENT OF OUR SINGLE VERSION STORE SOLUTION
APPLICATION, ONEPOINTE. WE INTRODUCED THIS OFFERING IN THE FOURTH
QUARTER OF FISCAL 2000, AND WE ARE CONTINUING TO ENHANCE ITS
FEATURES AND FUNCTIONS.
COMPETITION
The markets for our application technology and services are highly
competitive, subject to rapid change and sensitive to new product introductions
or enhancements and marketing efforts by industry participants. We expect
competition to increase in the future as open systems architecture becomes more
common and as more companies compete in the emerging electronic commerce market.
The largest of our competitors offering end-to-end retail solutions is
JDA Software Group, Inc. Other suppliers offer one or more of the components of
our solution. In addition, new competitors may enter our markets and offer
merchandise management systems that target the retail industry. For enterprise
solutions, our competitors include Retek Inc., SAP AG, nsb Retail Systems PLC,
Essentus, Inc., GERS, Inc., Marketmax, Inc., Micro Strategies Incorporated and
NONSTOP Solutions. For SVI Store Solutions, our competitors include Datavantage,
Inc., CRS Business Computers, nsb Retail Systems PLC, Triversity, ICL, NCR and
IBM. Our Direct applications compete with Smith Gardner & Associates, Inc., and
CommercialWare, Inc. Our professional services offerings compete with the
professional service groups of our competitors, major consulting firms
associated or formerly associated with the "Big 4" accounting firms, as well as
locally based service providers in many of the territories in which we do
business. Our strategic partners, including IBM, NCR and Fujitsu, represent
potential competitors as well.
We believe the principal competitive factors in the retail solutions
industry are price, application features, performance, retail application
expertise, availability of expert professional services, quality, reliability,
reputation, timely introduction of new offerings, effective distribution
networks, customer service, and quality of end-user interface.
We believe we currently compete favorably with respect to these
factors. In particular, we believe that our competitive advantages include:
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o PROVEN, SINGLE VERSION TECHNOLOGY, REDUCING IMPLEMENTATION COSTS
AND RISKS AND PROVIDING CONTINUED FORWARD MIGRATION FOR OUR
CUSTOMERS.
o EXTENSIVE RETAIL APPLICATION EXPERIENCE FOR ALL ELEMENTS OF THE
CUSTOMER'S BUSINESS, INCLUDING PROFESSIONAL SERVICES, DEVELOPMENT,
CUSTOMER SUPPORT, SALES AND MARKETING/TECHNOLOGY MANAGEMENT.
o ABILITY TO PROVIDE EXPERT PROFESSIONAL SERVICES.
o LARGE AND LOYAL CUSTOMER BASE.
o HARDWARE PLATFORM INDEPENDENT STORE SOLUTION (POS) APPLICATION.
o BREADTH OF OUR APPLICATION TECHNOLOGY SUITE INCLUDING ITS
MULTI-CHANNEL RETAILING CAPABILITIES.
o OUR CORPORATE CULTURE FOCUSING ON THE CUSTOMER.
Many of our current and potential competitors are more established,
benefit from greater name recognition, have greater financial, technical,
production and/or marketing resources, and have larger distribution networks,
any or all of which advantages could give them a competitive advantage over us.
Moreover, our current financial condition has placed us at a competitive
disadvantage to many of our larger competitors, as we are required to provide
assurance to customers that we have the financial ability to support the
products we sell. We believe strongly that we provide and will continue to
provide excellent support to our customers, as demonstrated by the continuing
upgrade purchases by our top-tier established customer base.
Our training subsidiary competes on the basis of its existing breadth
of products, timely introduction of new products and value pricing. We believe
that these factors give us an advantage over many of our competitors. We further
believe that larger competitors will find it difficult to compete with us on the
basis of price due to their higher development costs and larger overhead
structures.
PROPRIETARY RIGHTS
Our success and ability to compete depend in part on our ability to
develop and maintain the proprietary aspects of our technologies. We rely on a
combination of copyright, trade secret and trademark laws, and nondisclosure and
other contractual provisions, to protect our various proprietary applications
and technologies. We seek to protect our source code, documentation and other
written materials under copyright and trade secret laws. We license our software
under license agreements that impose restrictions on the ability of the customer
to use and copy the software. These safeguards may not prevent competitors from
imitating our applications and services or from independently developing
competing applications and services, especially in foreign countries where legal
protections of intellectual property may not be as strong or consistent as in
the United States.
We hold no patents. Consequently, others may develop, market and sell
applications substantially equivalent to our applications, or utilize
technologies similar to those used by us, so long as they do not directly copy
our applications or otherwise infringe our intellectual property rights.
We integrate widely-available platform technology from third parties
for certain of our applications. These third-party licenses generally require us
to pay royalties and fulfill confidentiality obligations. Any termination of, or
significant disruption in, our ability to license these products could cause
delays in the releases of our software until equivalent technology can be
obtained and integrated into our applications. These delays, if they occur,
could have a material adverse effect on our business, operating results and
financial condition.
64
Intellectual property rights are often the subject of large-scale
litigation in the software and Internet industries. We may find it necessary to
bring claims or litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. These actions would likely
be costly and divert management resources. These actions could also result in
counterclaims challenging the validity of our proprietary rights or alleging
infringement on our part. We cannot guarantee the success of any litigation we
might bring to protect our proprietary rights.
Although we believe that our application technology does not infringe
on any third-party's patents or proprietary rights, we cannot be certain that we
will not become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to, defending or bringing claims related to our intellectual property
rights may require our management to redirect our human and monetary resources
to address these claims. In addition, these actions could cause delivery delays
or require us to enter into royalty or license agreements. Royalty or license
agreements, if required, may not be available on terms acceptable to us, if they
are available at all. Any or all of these outcomes could have a material adverse
effect on our business, operating results and financial condition.
65
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
NAME AGE POSITION
Barry M. Schechter 49 Chairman of the Board
Harvey Braun 63 Chief Executive Officer and Director
President and Chief Operating
Steven Beck 62 Officer and Director
Arthur S. Klitofsky 48 Vice President, President, SVI
Training Products, Inc.
Donald S. Radcliffe (2) 57 Director
Ivan M. Epstein 42 Director
Michael Silverman (1) (2) 58 Director
Ian Bonner (1) (2) 47 Director
Robert P. Wilkie 33 Director
Randy Pagnotta 46 Vice President of Island Pacific,
Domestic Sales
Cheryl Valencia 39 Vice President of Island Pacific,
Management Services
Kavindra Malik 42 Vice President of Island Pacific,
Product Management
Ronald Koren 48 Vice President of Island Pacific,
Marketing Communications
Mike Dotson 36 Managing Director of Island
Pacific's European Operations
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Barry M. Schechter has been the Chairman of the Board of the Company
since February 1994. He served as our Chief Executive Officer from October 2001
to March 2003 and also held such position from February 1994 to January
2001. He also has been Chief Executive Officer of our predecessor and
wholly-owned subsidiary, Sabica Ventures, Inc., from its inception in February
1990. Mr. Schechter is a director of Integrity Software, Inc. Mr. Schechter is a
Chartered Accountant (South Africa).
Harvey Braun became our Chief Executive Officer in April 2003, and he
served as CEO of Island Pacific, from January 2003 to February 2003. Prior to
joining the Company, he was a Senior Partner in Deloitte & Touche's Consulting
Consumer Business Program. He worked for Deloitte & Touche for over 20 years,
and has acted as a consultant to many of the top retailers in the country,
including Ahold, ConAgra, Inc., Federated, Heilig-Meyers, Home Depot, IBM,
Kmart, Marmaxx, RJR Nabisco, Sears, The Gap, and The Limited. Mr. Braun holds an
engineering degree from Renuselaer Polytechnical Institute and a Masters of
Administration from Carnegie Mellon.
66
Steven Beck became our President, Chief Operating Officer and a
director in April 2003. He had been President and Chief Operating Officer of
Island Pacific since September, 2002. Since January 2002, he has served as an
independent consultant to various retailers. From March 1998 until January 2002,
he was co-founder and Chief Operating Officer of Planalytics, the foremost
provider of past and future weather analytics to industry, the inventor of
ARTHUR (a trademark of JDA), the most widely installed Merchandise Planning
System for retailers, an officer of The Limited, and President of Dennison TRG.
Mr. Beck received a B.A. from Adelphi University.
Arthur Klitofsky has been our Vice President and a director of the
Company from February 1994 until March 2003. He has been President of the
Company's SVI Training Products, Inc. subsidiary since 1991. From 1985 to 1991,
he was Managing Director of Punch Line Columbia Training Ltd., which became the
largest computer education company in South Africa. Mr. Klitofsky has a Bachelor
of Science Degree in Electrical Engineering from the University of
Witwatersrand, Johannesburg, South Africa and a Bachelor in Accounting Science
Degree from the University of South Africa.
Donald S. Radcliffe became a director of the Company in May 1998. He
has been President of Radcliffe & Associates since 1990. Radcliffe & Associates
provides financial consulting services to public companies, and currently
provides us financial advisory and public relations services. Since 1984 he has
also been Executive Vice President and Chief Operating and Financial Officer of
World-Wide Business Centres, which is a privately held operator of shared office
space facilities. Mr. Radcliffe is a director of Integrity Software, Inc. Mr.
Radcliffe received a B.S. from Lehigh University and an M.B.A. from Dartmouth
College. He is a certified public accountant and a member of the Audit
Committee.
Ivan M. Epstein became a director of the Company in May 1998. He is the
Chief Executive Officer and Chairman of Softline Limited ("Softline"), which he
co-founded in 1988. Softline is listed in the Information Technology sector of
the Johannesburg Stock Exchange (JSE:SFT) and is one of the leading accounting
software vendors in the world. Softline is deemed the beneficial owner of 55.8%
of our outstanding common stock.
Michael Silverman became a director in January 2001. Mr.Silverman
founded Advanced Remote Communications Solutions, Inc. (formerly known as
Boatracs, Inc.) in 1990 and serves on its board of directors. He previously
served as its Chairman until May 2002, and as Chief Executive Officer and
President until October 1997, and from November 1999 to May 2002. Mr. Silverman
is a Chartered Accountant (South Africa) and has an M.B.A. from Stanford
University. Mr. Silverman is a member of the Audit and Compensation Committees.
Ian Bonner became a director in May 1998. He is President and Chief
Executive Officer of Terraspring, Inc., a software and Internet infrastructure
company. From 1993 until April 2001, he held various positions with IBM
Corporation, including Vice President of Partner Marketing and Programs for the
IBM/Lotus/Tivoli Software Group. His responsibilities included the development
and implementation of marketing campaigns and programs designed to serve the
business partners of IBM, Lotus and Tivoli, including major accounts,
independent software vendors and global systems integrators. He also oversaw the
IBM BESTeam and the Lotus Business Partner programs which are designed to
provide enhanced opportunities, including education, marketing and training
support, to qualified providers of IBM's and Lotus's portfolio of network
solutions. Mr. Bonner received a Bachelor of Commerce from the University of the
Witwatersrand in 1976 and a graduate degree in Marketing Management and Market
Research and Advertising from the University of South Africa in 1978. Mr. Bonner
is a member of the Audit and Compensation Committees.
Robert P. Wilkie became a director in June 2002. He is the Group
Financial Director and director of Softline, which he joined in 1997 as
controller. Mr. Wilkie is responsible for operational fiscal discipline, group
treasury and financial reporting across Softline. Mr. Wilkie received a Bachelor
of Commerce from the University of Cape Town in 1989 and Bachelor of Accounting
from the University of Witwatersrand in 1992. Mr. Wilkie is a Chartered
Accountant (South Africa).
Randy Pagnotta became Vice President of Island Pacific in December
2001. Mr. Pagnotta is in charge of Island Pacific's domestic sales organization.
Prior to joining Island Pacific, Mr. Pagnotta served as Executive Vice President
for 5R Online Solutions, Inc. in Montreal Canada from 2000 to 2001. From 1999 to
2000, he was an account executive for JDA Software Group. From 1995 to 1999, he
was senior retail industry consultant for Siemens Nixdorf Information Systems.
Mr. Pagnotta received a degree in Business General Study Program from University
of Maryland in 1977.
67
Cheryl Valencia became Vice President of Management Services of the
Island Pacific business unit in October 2002. Prior to joining Island Pacific in
September 2002, Ms. Valencia was Director of Product Management and Professional
Services for eConnections since February 2002. From November 2001 to April 2002,
Ms. Valencia was contracted as Director of Product Management and Professional
Services for Hitech Systems, Inc. From September 2000 to September 2001, she
served as Product Manager for iStarSystems. From June 1994 to October 2000, she
held various positions including Product Manager and Global Education Director
with System Software Associates. Ms. Valencia has a B.S. in Business
Administration from Southeast Missouri State University.
Kavindra Malik became Vice President of Island Pacific in January
2003. Mr. Malik is responsible for the product vision and roadmap for Island
Pacific unit. Prior to joining Island Pacific, Mr. Malik served as Vice
President of Product Management for Spotlight Solutions from 2002. From 1997 to
2002, Mr. Malik was the Director of Retail and Consumer Goods Solutions
Management for i2 Technologies. Mr. Malik received a Ph. D. in Decision Sciences
from the University of Pennsylvania in 1988.
Ronald Koren became Vice President of Island Pacific in December 2002.
Mr.Koren is responsible for marketing communications for Island Pacific. Prior
to joining Island Pacific, Mr. Koren was briefly in charge of Retail Solutions
Marketing at Fujitsu. From April 2000 to May 2002, Mr. Koren was Director of
Marketing for Raymark in Canada. His responsibilities included web development,
direct and web-based mail campaigns as well as launching a branding strategy for
newly developed hand-held products for point-of-sale and inventory. From
November 1994 to May 2000, Mr. Koren was Director of Sales Support for Wincor
Nixdorf. Mr.Koren received a B.A.in Communications from San Francisco State
University.
Mike Dotson became Managing Director of Island Pacific's United
Kingdom Operations since April 2001. Prior to such appointment, Mr. Dotson held
various positions with Island Pacific's United Kingdom office since January
1998. Mr. Dotson received a B.A. in Political Science and Economy from
University California of Irvine in May 1988.
There are no family relationships among the directors. There are no
arrangements or understandings between any director and any other person
pursuant to which that director was or is to be elected.
BOARD COMMITTEES
We have established a compensation committee and an audit committee.
The Board of Directors formed a Compensation Committee in April 1998.
The Compensation Committee's primary function is to establish the compensation
policies and recommend to the Board the compensation arrangements for senior
management and directors. The Compensation Committee also recommends the
adoption of compensation plans in which officers and directors are eligible to
participate and the granting of stock options or other benefits to executive
officers. The Compensation Committee is composed entirely of independent
directors (as "independence" is defined in Section 121(A) of the listing
standards of the American Stock Exchange). Current members of the Compensation
Committee are Ian Bonner and Michael Silverman. The Compensation Committee met
three times during the fiscal year ended March 31, 2003.
The Board of Directors also formed an Audit Committee in April 1998.
The purpose of the Audit Committee is to assist the Board in fulfilling its
responsibilities for our financial reporting. The Audit Committee recommends the
engagement and discharge of independent auditors, reviews with independent
auditors the audit plan and the results of the audit, reviews the independence
of the independent auditors, reviews internal accounting procedures and
discharges such other duties as may from time to time be assigned to it by the
Board of Directors. Current members of the Audit Committee are Ian Bonner,
Donald S. Radcliffe and Michael Silverman. The Audit Committee met four times
during the fiscal year ended March 31, 2003.
68
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ian Bonner and Michael Silverman served as the members of the
Compensation Committee during the fiscal year ended March 31, 2003. No member of
our Compensation Committee during the last completed fiscal year has ever been
an officer of the Company or any of its subsidiaries. During the last completed
fiscal year, no executive officer of the Company served as a member of a
compensation committee or board of directors of any entity that had one or more
of its executive officers serving as a member of our Compensation Committee.
COMPENSATION OF DIRECTORS
During fiscal 2003, we issued the following options to purchase shares
of our common stock to our directors: (a) 5,000 options with exercise prices of
$0.35 per share to each of Barry Schechter, Arthur Klitofsky, Ian Bonner,
Michael Silverman and Ivan Epstein, vesting immediately; (b) 20,000 options with
exercises prices of $0.28 to each of Arthur Klitofsky, Donald Radcliffe, Ian
Bonner, Michael Silverman, Ivan Epstein, and Robert Wilke, vesting 1/3 on the
first anniversary date of the grant and 2/3 in 24 equal monthly installments;
(c) 100,000 options with exercise prices of $0.44 to Donald Radcliffe, vesting
1/3 on the first anniversary date of the grant and 2/3 in 24 equal monthly
installments; (d) 5,000 options with exercise prices of $0.85 to each of Donald
Radcliffe, Ian Bonner, Michael Silverman, Ivan Epstein, and Robert Wilke,
vesting immediately; (e) 25,000 options with exercises prices of $0.85 to Donald
Radcliffe, vesting immediately; (f) 50,000 options with exercise prices of $0.85
to each of Michael Silverman and Ian Bonner, vesting immediately.
On January 30, 2002, the Board adopted a plan to issue to each director
who attends a Board meeting an option under the 1998 Incentive Stock Plan to
purchase 5,000 shares at an exercise price equal to the fair market value on the
date of the meeting.
69
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth summary information concerning the
compensation for the last three fiscal years received by each person who served
as Chief Executive Officer during the last completed fiscal year, the four other
most highly compensated persons serving as executive officers at the end of the
last completed fiscal year who earned more than $100,000 in salary and bonus in
the last completed fiscal year, and two other persons who were executive
officers during the last completed fiscal year and earned more than $100,000 in
salary and bonus, but who were not executive officers at the end of the last
completed fiscal year. These individuals are referred to as the "named executive
officers."
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------ ------------
SECURITIES ALL OTHER
NAME AND OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS ($)
------------------ ---- --------- -------- --------------- ------------ ------------
Barry M. Schechter 2003 369,314 -- -- 505,000 --
(Chairman of the 2002 337,486 -- -- 505,000 4,263
Board) 2001 312,492 -- -- 321,429 4,995
Harvey Braun 2003 162,764 -- -- 2,000,000 --
(Chief Executive
Officer)
Steven Beck 2003 379,431 -- -- 2,000,000 --
(President and Chief
Operating Officer)
Arthur S. Klitofsky 2002 201,755 -- -- 65,000 --
(Vice President and 2002 168,000 14,700 -- 5,000 3,807
Pres. of SVI Training) 2001 152,400 -- -- 90,000 4,572
Randy Pagnotta 2003 242,703 -- -- -- --
(Vice President of
of Island Pacific)
Mike Dotson 2003 160,000 -- -- -- --
(Vice President of
of Island Pacific)
___________
We also provide certain compensatory benefits and other non-cash
compensation to the named executive officers. Except as set forth above, our
incremental cost of all such benefits and other compensation paid in the years
indicated to each such person was less than 10% of his or her reported
compensation and also less than $50,000.
70
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth the information concerning individual
grants of stock options during the last fiscal year to the named executive
officers.
OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Individual Grants Appreciation for Option
----------------------------------------------------------------------------------- Term ($)
Exercise or -----------------------
Date of Options Base Price Expiration
Name Grant Granted(#) %of Total ($/Sh.) Date 5% 10%
------- -------- ------------ --------- ------------ ---------- ------- --------
Barry M.Schechter 06/24/02 5,000(2) 0.09% 0.35 06/24/12 1,101 2,789
09/03/02 500,000(1) 8.63% 0.28 09/03/12 88,045 223,124
Arthur S.Klitofsky 06/24/02 5,000(1) 0.09% 0.35 06/24/12 1,101 2,789
09/03/02 60,000(2) 1.04% 0.28 09/03/12 10,566 26,775
Harvey Braun 09/03/02 2,000,000(3) 34.52% 0.28 09/03/05 88,270 185,360
Steven Beck 09/03/02 2,000,000(3) 34.52% 0.28 09/03/05 88,270 185,360
(1) Options vest on the date of grant and subject to continuing service.
(2) Options vest as to one-third of the shares on the first anniversary of
the grant and the remaining two-thirds of the shares in 24 equal
monthly installments after the first vesting date, subject to
continuing service.
(3) Options granted outside of the plan and vest on the date of grant.
The potential realizable value is calculated based on the term of the
option at its time of grant and the number of shares underlying the grant at
fiscal year end. It is calculated based on assumed annualized rates of total
price appreciation from the market price at the date of grant of 5% and 10%
(compounded annually) over the full term of the grant with appreciation
determined as of the expiration date. The 5% and 10% assumed rates of
appreciation are mandated by SEC rules and do not represent our estimate or
projections of future common stock prices. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not be
achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth the information concerning the fiscal
year end value of unexercised options held by the named executive officers. None
of the named executive officers exercised options during the last fiscal year.
71
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY END (#) OPTIONS AT FY END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
-------------------- ------------------------- ---------------------------------
Barry M. Schechter 1,315,926/200,928 525,193/3,807
Arthur S. Klitofsky 162,549/122,151 3,867/46,783
Harvey Braun 2,000,000/0 1,540,000/0
Steven Beck 2,000,000/0 1,540,000/0
Randy Pagnotta 41,375/58,625 14,068/19,933
Mike Dotson 21,471/18,529 4,226/4,774
(1) Based upon the market price of $1.05 per share, determined on the basis
of the closing sale price per share of our common stock on the American
Stock Exchange on the last trading day of the 2003 fiscal year, less
the option exercise price payable per share.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Barry M. Schechter
effective October 1, 2000. This agreement will continue until September 3 2003
unless earlier terminated for cause. Under the agreement Mr. Schechter has the
right to annual compensation of $325,000 for the first year of the agreement,
$350,000 for the second year of the agreement and $375,000 for the third year of
the agreement. In addition, Mr. Schechter is entitled to receive on each
anniversary of the date of the agreement, an option to purchase the number of
shares of common stock determined by dividing 150% of his base compensation for
the prior year by the closing price of our common stock on the anniversary date.
The agreement states that options will be fully vested when issued and
exercisable for ten years after the date of the grant. The Compensation
Committee is currently discussing restructuring Mr. Schechter's employment
agreement to base option grants on performance criteria. However, no such
agreement has yet been reached, and the current agreement remains in effect.
We entered into an employment agreement with Thomas A. Dorosewicz
effective January 10, 2001. Under the agreement, Mr. Dorosewicz was paid base
annual compensation of $250,000. For fiscal year 2001, he was entitled to earn a
guaranteed bonus of $18,750 and an additional $18,750 performance bonus. Mr.
Dorosewicz earned the full $37,500 bonus for fiscal 2001, and he agreed to
accept payment in shares of common stock. We agreed to pay the withholding taxes
which were due upon this stock grant and that Mr. Dorosewicz would be entitled
to a cash bonus upon achievement of performance targets in fiscal 2002. We also
agreed to issue Mr. Dorosewicz 250,000 options priced at fair market value on
his start date, vesting over five years, and an additional 300,000 special stock
options priced at 85% of fair market value, vesting 100,000 immediately, 100,000
after six months and 100,000 after 24 months. Furthermore, we agreed to issue
additional options to Mr. Dorosewicz during fiscal 2002 based on various
performance criteria and to pay Mr. Dorosewicz certain relocation expenses. If
we terminated the agreement, the agreement provided that Mr. Dorosewicz would be
entitled to severance equal to six months' base salary plus bonus. In addition,
if we terminated the agreement after one year, the agreement provided that Mr.
Dorosewicz would be entitled to additional severance of one month's base salary
for each year of service completed, up to a maximum of six additional months.
Effective October 21, 2001, Mr. Dorosewicz resigned from his position. As a
result of his resignation, we did not pay severance to Mr. Dorosewicz. Mr.
Dorosewicz filed a demand with the California Labor Commissioner for $256,250 in
alleged unpaid severance benefits. His demand was later increase to $283,893.43.
On June 18, 2002, we filed a lawsuit against Mr. Dorosewicz and an entity
affiliated with in the San Diego Superior Court alleging fraud and other causes
of action. Mr. Dorosewicz filed cross-complaints alleging various causes of
action. These matters are still pending and the parties have agreed to resolve
all claims in arbitration. Mr. Dorosewicz received no bonuses or additional
stock options for fiscal 2002.
72
LONG TERM INCENTIVE PLANS
We do not have any long-term incentive plans, as those terms are
defined in SEC regulations. During the fiscal years ended March 31, 2002 and
2003, we did not adjust or amend the exercise price of stock options awarded to
the named executive officers. We have no defined benefit or actuarial plans
covering any named executive officer.
STOCK INCENTIVE PLANS
We have two stock incentive plans. Our Incentive Stock Option Plan
("1989 Plan") terminated in October 1999. It provided for issuance of incentive
stock options to purchase up to 1,500,000 shares of common stock to employees.
580,735 of such shares remain subject to option as of April 11, 2003. The 1989
Plan was administered by the Board of Directors, which established the terms and
conditions of each option grant.
The 1998 Incentive Stock Plan ("1998 Plan") authorizes the issuance of
shares of common stock through incentive stock options, non-statutory options,
stock bonuses, stock appreciation rights and stock purchase agreements. The 1998
Plan was amended in August 2000 to increase the number of shares reserved from
3,500,000 to 4,000,000. The August 2000 amendments authorized a further
automatic annual increase in reserved shares to take place on the first trading
day of each fiscal year. The amount of the automatic annual increase is 2% of
the total number of shares of common stock outstanding on the last trading day
of the immediately prior fiscal year. The automatic annual increase cannot
however be more than 600,000 shares, and the Board may in its discretion provide
for a lesser increase. The 1998 Plan was further amended in August 2002 to
increase the number of shares reserved from 4,600,000 to 5,600,000. The August
2000 amendments also implemented a limit on stock awards to any one person in
excess of 500,000 shares in any calendar year, which limit was increased to
1,000,000 shares in August 2002. Our stockholders approved the August 2000
amendments at our annual meeting held November 16, 2000 and the August 2002
amendments at our annual meeting held September 19, 2002. On April 1, 2002 and
April 1, 2003, the automatic increase of 565,872 and 600,000 shares,
respectively, was effected, so that the total number of shares reserved under
the 1998 Plan is currently 6,765,872. The exercise price of options is
determined by the Board of Directors, but the exercise price may not be less
than 100% of the fair market value on the date of the grant, in the case of
incentive stock options, or 85% of the fair market value on the date of the
grant, in the case of non-statutory stock options.
73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership of shares of our common stock as
of March 31, 2003 (except as otherwise stated below) (i) by all persons known by
us to beneficially own more than 5% of such stock and (ii) by each director,
each of the named executive officers, and all directors and executive officers
as a group. Except as otherwise specified, the address for each person is 5607
Palmer Way, Carlsbad, California 92007. As of March 31, 2003, there were
31,499,632 shares of common stock outstanding. Each of the named persons has
sole voting and investment power with respect to the shares shown (subject to
community property laws), except as stated below.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
-------------------- -------------------- ----------------
Softline Limited 27,240,800 (2) 54.7%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
Claudav Holdings Ltd. B.V. 3,892,742 (3) 11.9%
9 Rue Charles Humbert
1205 Geneva
Switzerland
The Ivanhoe Irrevocable Trust 3,892,742 (3) 11.9%
Barry M. Schechter 3,892,742 (3) 11.9%
ICM Asset Management, Inc. 7,103,028 (4) 20.2%
601 W. Main Ave., Suite 600
Spokane, WA 99201
Midsummer Investment 1,996,865 (9) 6.0%
c/o Midsummer Capital, LLC
485 Madison Avenue, 23/rd/ Floor
New York, NY 10022
Omnicron Master Trust 2,139,498 (10) 6.4%
c/o Omnicron Capital, LP
810 Seventh Avenue, 39/th/ Floor
New York, NY 10019
Arthur S. Klitofsky 425,728 (5) 1.3%
Steven Beck 2,000,000 (6) 6.0%
Harvey Braun 2,000,000 (6) 6.0%
Randy Pagnotta 46,958 (6) < 1%
Cheryl Valencia 1,000 < 1%
Kavindra Malik 50,000 < 1%
Ronald Koren 400 < 1%
Mike Dotson 23,535 (6) < 1%
Donald S. Radcliffe 905,091 (7) 2.8%
575 Madison Avenue
New York, NY 10022
74
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- -------------------- ----------------
Michael Silverman 143,291 (8) <1%
10675 Sorrento Valley Road, Suite 200
San Diego, CA 92121
Ian Bonner 116,291 (6) <1%
5527 Inverrary Court
Dallas, Texas 75287
Ivan M. Epstein 117,208 (6) <1%
2 Victoria
Eastgate Extension 13
Sandton 2148
South Africa
Robert P. Wilkie 5,000 (6) <1%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
All directors and executive officers as 9,727,244 (11) 25.7%
a group (14 persons)
(1) This table is based on information supplied by officers, directors and
principal stockholders. The inclusion in this table of such shares does
not constitute an admission that the named stockholder is a direct or
indirect beneficial owner of, or receives the economic benefit of, such
shares.
(2) Includes 61,812 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003 and 18,255,073 shares obtainable upon
conversion of Series A Convertible Preferred Stock. The nine directors
of the Softline Limited board are Ivan M. Epstein, Steven Cohen, Carlos
Soares dos Santos, Eric Ellerine, Mac Maharaj, Robert Wilkie, Gerald
Rubenstein, John Copelyn and Marcel Golding. Mr. Epstein serves as
Chief Executive Officer, Mr. Cohen serves as Chief Operating Officer,
and Mr. Wilkie serves as Group Financial Director of Softline. Each of
the foregoing persons disclaims beneficial ownership of the shares and
options held by Softline.
(3) Claudav Holdings Ltd. B.V., the Ivanhoe Irrevocable Trust and Barry M.
Schechter may be deemed a group pursuant to Rule 13d-5 promulgated
under the Exchange Act. Claudav holds 462,300 shares, for which it
shares voting power with Mr. Schechter pursuant to a proxy. Claudav is
managed by Erwin Wachter, Trustee. Mr. Wachter therefore has beneficial
ownership of the shares held by Claudav. Ivanhoe holds 2,008,237 shares
for which it shares voting and investment power with Mr. Schechter
pursuant to Mr. Schechter's position as a trustee. Includes 2,000
shares held by Mr. Schechter's minor children and 1,420,205 shares
issuable upon exercise of options of Mr. Schechter exercisable within
60 days of March 31, 2003. Excludes 10,000 shares held by Mr.
Schechter's spouse, for which Mr. Schechter disclaims beneficial
ownership.
(4) Includes 2,716,637 shares held by Koyah Leverage Partners, L.P., 53,014
shares held by Raven Partners, L.P. and 659,399 shares held by Koyah
Partners, L.P. Also includes 1,257,925 shares issuable upon exercise of
outstanding warrants and 1,562,500 shares issuable upon conversion of a
convertible note held by Koyah Leverage Partners, L.P., 309,784 shares
issuable upon exercise of outstanding warrants and 312,500 shares
issuable upon conversion of a convertible note held by Koyah Partners,
L.P., and 12,535 shares issuable upon exercise of outstanding warrants
and 208,334 shares issuable upon conversion of a convertible note held
by Raven Partners, L.P. Koyah Ventures, LLC is the general partner of
Koyah
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Leverage Partners, L.P., Koyah Partners, L.P. and Raven Partners,
L.P., and as a result has shared voting and investment power over
shares held by all three entities. Raven Ventures, LLC is an additional
general partner of Raven Partners, L.P. and as a result has shared
voting and investment power over shares held by Raven Partners, L.P.
ICM Asset Management, Inc. is the investment advisor to Koyah Leverage
Partners, L.P., Koyah Partners, L.P. and Raven Partners, L.P., and as a
result has shared voting and investment power over shares held by all
three entities. Also includes 10,400 shares held by other clients of
ICM Asset Management, Inc. ICM Asset Management, Inc. has discretionary
authority over shares held by these other clients and as a result has
shared voting and investment power over these shares. James M. Simmons
is the managing member of Koyah Ventures, LLC and Raven Ventures, LLC
and the chief investment officer and controlling stockholder of ICM
Asset Management, Inc. and as a result has shared voting and investment
power over shares held by Koyah Leverage Partners, L.P., Koyah
Partners, L.P., Raven Partners, L.P., ICM Asset Management, Inc. and
the other clients of ICM Asset Management, Inc. Each of these entities
or persons disclaims beneficial ownership in these securities except to
the extent of such entity's or person's pecuniary interest in these
securities and disclaims membership in a group with any other entity or
person within the meaning of Rule 13d-5(b)(1) under the Exchange Act.
(5) Includes 162,828 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003.
(6) Consists of outstanding options exercisable within 60 days of March 31
, 2003.
(7) Includes 430,000 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003. Also includes 17,600 shares held by
an entity for which Mr. Radcliffe has sole voting and investment power.
Also includes an aggregate of 82,100 shares held by three entities for
which Mr. Radcliffe has shared voting and investment power. Excludes
124,500 shares held by Mr. Radcliffe's spouse, for which Mr. Radcliffe
disclaims beneficial ownership.
(8) Includes 143,291 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003.
(9) Includes 629,143 shares pursuant to outstanding warrants and 1,367,722
shares obtainable upon conversion of convertible debenture. Midsummer's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(10)Includes 674,082 shares pursuant to outstanding warrants and 1,465,416
shares obtainable upon conversion of convertible debenture. Omicron's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(11)Includes 6,321,607 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions since April 1, 2001 to
which we have been a party, in which the amount involved exceeds $60,000 and in
which any director, executive officer or holder of more than 5% of our common
stock had or will have a direct or indirect interest, other than compensation
arrangements with our directors and named executive officers described above
under "Executive Compensation." Certain of these transactions will continue in
effect and may result in conflicts of interest between the Company and such
individuals. Although these persons may owe fiduciary duties to our
stockholders, there is a risk that such conflicts of interest may not be
resolved in our favor.
We borrowed $10 million from Softline Limited ("Softline") in July 2000
in order to pay the same amount to Union Bank as a mandatory reduction of
principal owing to Union Bank. In July 2001, we amended and restated the
Softline note. The restated note was in the original principal amount of $11.4
million and accrued interest at 14% per annum. All unpaid principal and interest
was due May 1, 2003, unless our term loan from Union Bank of California, N.A.
was not extended to November 1, 2002, in which case the note would have been due
and payable on November 1, 2002. The restated note was subordinate to our bank
indebtedness, and we were not required or permitted to make any payments of
principal or interest under the restated note so long as the bank indebtedness
was outstanding.
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In May 2002, we entered into a series of transactions with Softline by
which:
o We transferred to Softline the note received in connection with
the sale of IBIS Systems Limited.
o We issued to Softline 141,000 shares of newly-designated Series A
Preferred Stock.
o Softline released us from approximately $12.3 million then due
under the promissory note to Softline.
o Softline surrendered 10,700,000 shares of our common stock held by
Softline.
In December 2000, we entered into an agreement to sell up to 2,941,176
common shares to a limited number of accredited investors related to ICM Asset
Management, Inc. ("ICM") for cash at $0.85 per share. We sold 1,764,706 of such
shares in December 2000, for gross proceeds of $1.5 million, and an additional
588,235 shares in January 2001, for additional gross proceeds of $0.5 million.
Two of the investors exercised a right to purchase an additional 588,235 shares
in February 2001 for additional gross proceeds of $0.5 million. We also agreed
to issue to each investor a warrant to purchase one common share at $1.50 for
each two common shares purchased in the private placement (aggregate warrants
exercisable for 1,470,590 shares). We had the right to call 50% of the warrants,
subject to certain conditions, if our common stock traded at a price above $2.00
per share for thirty consecutive days. We also had the right to call the
remaining 50% of the warrants, subject to certain conditions, if our common
stock traded at a price above $3.00 per share for thirty consecutive days. We
also agreed to register all of the shares sold under the purchase agreement or
upon exercise of the warrants with the SEC. The agreement with the investors
provided that if a registration statement was not effective on or before April
21, 2001, we would be obligated to issue two-year warrants to each investor,
entitling the investor to purchase additional shares of our common stock at
$0.85 per share. We filed a registration statement in January 2001 to register
these shares, but it did not become effective. As of June 28, 2002, we had
issued the investors warrants to purchase 1,249,997 shares of common stock under
this agreement. At the time of these investments, none of the investors were
affiliated with us, but ICM and related persons became greater than 5%
beneficial owners of our common stock as a result of such transactions.
In May and June 2001, we issued a total of $1.25 million in convertible
notes to a limited number of accredited investors related to ICM. The notes were
originally due August 30, 2001, and required interest at the rate of 12% per
annum to be paid until maturity, with the interest rate increasing to 17% in the
event of a default in payment of principal or interest. Any portion of the
unpaid amount of principal and interest was convertible at any time by the
investors into shares of common stock valued at $1.35 per share. We also agreed
to issue to the investors three-year warrants to purchase 250 common shares for
each $1,000 in notes purchased, at an exercise price of $1.50 per share.
In July 2002, the terms of the notes and warrants issued to the
investors related to ICM were amended. The investors agreed to replace the
existing notes with new notes having a maturity date of September 30, 2003. The
interest rate on the new notes was reduced to 8% per annum, increasing to 13% in
the event of a default in payment of principal or interest. We are required to
pay accrued interest on the new notes calculated from July 19, 2002, in
quarterly installments beginning September 30, 2002. In December 2002, the
investors agreed to extend the accrued interest payments on the new notes to
September 30, 2003. The investors agreed to reduce accrued interest and late
charges on the original notes by $16,000, and to accept the reduced amount in
527,286 shares of our common stock valued at $0.41 per share, which was the
average closing price of our shares on the American Stock Exchange for the ten
trading days prior to July 19, 2002. The new notes are convertible at the option
of the holders into shares of common stock valued at $0.60 per share. We do not
have a right to prepay the notes.
We also agreed that the warrants previously issued to the investors to
purchase an aggregate of 3,033,085 shares at exercise prices ranging from $0.85
to $1.50, and expiring on various dates between December 2002 and June 2004,
would be replaced by new warrants to purchase an aggregate of 1,600,000 shares
at $0.60 per share, expiring July 19, 2007. The replacement warrants are not
callable by us.
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We also agreed to file a registration statement for the resale of all
shares held by or issuable to these investors. In the event such registration
statement is not declared effective by the SEC by June 30, 2003, we will be
obligated to issue five-year warrants for the purchase of 5% of the total number
of registrable securities at an exercise price of $0.60 per share. For the first
30 day period after June 30, 2003 in which the registration statement is not
effective, we will be obligated to issue additional warrants for the purchase of
5% of the total number of registrable securities at an exercise price of $0.60
per share. For each 30 day period thereafter in which the registration statement
is not effective, we will be obligated to issue additional warrants for the
purchase of 2.5% of the total number of registrable securities at an exercise
price of $0.60 per share.
In May 2001, December 2001, May 2002 and September 2002, we borrowed
$50,000, $125,000, $70,000 and $50,000 from World-Wide Business Centres, a
company affiliated with Donald S. Radcliffe, to meet payroll expenses. These
amounts were repaid together with interest at the then-effective prime rate,
promptly as revenues were received, and have been paid in full as of the date of
this proxy statement.
We began occupying its current principal executive offices in July
2001. At that time, the premises were owned by an affiliate of then Chief
Executive Officer, Thomas A. Dorosewicz. Monthly rent for these premises was set
at $13,783. In April 2002, the premises were sold to an entity unrelated to Mr.
Dorosewicz. As of the date of this proxy statement, we are negotiating the terms
of a written lease with the new owner.
During fiscal 2002, we paid a total of $532,770 in interest and
principal to Claudav Holdings Ltd. B.V., which is deemed the beneficial owner of
11.9% of our outstanding common stock as of March 31, 2003. The original loan
was in the amount of $1.5 million, bore interest at the prime rate, and was used
to pay a portion of the purchase price for Island Pacific in 1999. The loan was
due on demand, and was paid in full as of July 31, 2002.
In March 2003, we entered into a Securities Purchase Agreement dated
March 31, 2003 with Midsummer Omicron, and Islandia, L.P. for the sale to these
investors of 9% debentures, convertible into shares of SVI common stock, for an
aggregate amount of up to $5,500,000, to be sold in two separate closings. The
debentures purchased are accompanied by a number of warrants to purchase shares
of SVI common stock equal to 40% of (a) the dollar amount of debentures
purchased by the Investors, (b) divided by the daily volume weighted average
price of our common stock on the American Stock Exchange for the ten consecutive
days immediately prior to the closing date the debentures were sold. At the
first closing, the closing price was $0.8901. The closing price for the second
closing will be determined at that time.
The first closing for the sale of debentures aggregating $3,500,000
occurred on March 31, 2003. Additional debentures aggregating up to $2,000,000
will be sold to these investors in a second closing if within one year after the
date of first sale of debentures there occurs a period of 15 consecutive trading
days during which the daily volume weighted average closing price of our common
stock is maintained at a price at or above $1.75 per share, subject to certain
conditions. The debentures bear an interest rate of 9% per annum, and they
provide for interest only payments on a quarterly basis, payable, at our option,
in cash or shares of common stock. The debentures sold in the first closing for
$3,500,000 mature 26 months after that closing, and the additional debentures
that may be sold for up to $2,000,000 in the second closing mature 30 months
after the first closing date. The debentures are convertible into shares of our
common stock at a conversion price equal to 115% of the daily volume weighed
average price of the common stock on the American Stock Exchange on the date the
debentures were sold. The debentures sold at the first closing have a conversion
price of $1.0236. If certain conditions are met, we have the option to redeem
the debentures at 110% of their face value, plus accrued interest. We must
redeem the debentures at the initial monthly amount of $218,750, commencing on
February 1, 2004. If the second closing occurs, this redemption amount will be
increased to $300,000, commencing on the later of February 1, 2004 or the fifth
month following the second closing. Furthermore, if the daily volume weighed
average price of our common stock on the American Stock Exchange exceeds its
closing price on the closing date (which was $0.8901 at the first closing) by
more than 200% for 15 consecutive trading days, we will have the option to
convert the debentures into common stock at the conversion price then in effect.
At the first closing, Midsummer was issued 629,143 warrants, Omicron
was issued 674,082 warrants, and Islandia was issued 269,633 warrants. These
warrants, as well as the warrants to be issued in the second closing, are for a
5-year term, with an exercise price equal to 115% of the daily volume weighed
average price of our common stock on the American Stock Exchange on the date the
accompanying debentures were sold. The warrants issued in the first closing have
an exercise price of $1.0236.
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The investors were granted the right of first refusal to participate in
our future offerings of common stock or equivalent securities so long as any one
of them owns at least 5% of the debentures purchased on the first closing. The
investors were also given registration rights under a Registration Rights
Agreement requiring us to file a registration statement respecting 130% of the
common stock issuable upon the conversion of the debentures and the warrants
within 30 days after the first closing, and to use best efforts to have the
registration statement declared effective at the earliest date. If the
registration statement is not filed within these timeframes or declared
effective within 90 days following the closing date of the debentures sold in
the first phase, or within 120 days in the event of a review by the Securities
and Exchange Commission, we will be obligated to pay liquidated damages to the
investors equal to 2% of the sum of the amount of debentures subscribed to by
the investors and the value of the warrants for each month until the
registration statement becomes effective.
On April 1, 2003, we entered into a Securities Purchase Agreement with
MBSJ Investors, LLC for the sale to MBSJ of a 9% debenture, convertible to
shares of our common stock at a conversion price of $1.0236, for $400,000. This
debenture was accompanied by five-year warrants to purchase 156,311 shares of
common stock with an exercise price of $1.0236 per share. Interests are due on a
quarterly basis, payable in cash or shares of common stock at or option.
Commencing on February 1, 2004, we must redeem $20,000 per month of the
debenture. The debenture matures in October 2005. MBSJ was also granted
registration rights under a Registration Rights Agreement, and certain other
rights similar to those granted to Midsummer, Omicron and Islandia.
On May 6, 2003, we entered into an agreement with Crestview Capital
Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. (collectively, the "Crestview Investors") for the sale to the
Crestview Investors of 9% debentures, convertible into shares of our common
stock at a conversion price of $1.0236, for $300,000. These debentures were
accompanied by five-year warrants to purchase an aggregate of 101,112 shares of
common stock with an exercise price of $1.0236 per share. Interest is due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $18,750 per month of the
debentures. The debentures mature in October 2005. The Crestview Investors were
also granted registration rights under a registration rights agreement, and
certain other rights similar to those granted to Midsummer, Omnicron and
Islandia. Additional debentures aggregating up to $300,000 will be sold to the
Crestview Investors in a second closing if within one year after the date of
first sale of debentures there occurs a period of 15 consecutive trading days
during which the daily volume weighted average closing price of our common stock
is maintained at a price at or above $1.75 per share, subject to certain
conditions.
We retain Radcliffe & Associates, an entity affiliated with Donald S.
Radcliffe, to perform financial advisory services. During the fiscal years ended
March 31, 2003 and 2002, we incurred $36,000 and $42,000, respectively, in fees
and costs to Radcliffe & Associates. We incurred an additional $19,000 in fees
to Mr. Radcliffe for accounting services during the fiscal year ended March 31,
2002. In June 2002, we issued Mr. Radcliffe 75,000 shares of common stock to
repay $25,000 in obligations pursuant to these arrangements.
We have agreed to sell SVI Training Products, Inc., one of our wholly
owned subsidiaries, to Arthur Klitofsky. We are in the process of finalizing the
written agreements pertaining to this sale.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of (1) 100,000,000 authorized
shares of common stock, $0.001 par value, and (2) 5,000,000 shares of preferred
stock of which 141,000 are designated Series A Preferred Stock. As of March 31,
2003, there were 31,499,632 shares of common stock outstanding and 141,000
shares of Series A Preferred Stock outstanding. The following description of our
capital stock is a summary and is qualified by the provisions of our certificate
of incorporation, as amended and our bylaws, as amended, copies of which have
been filed as exhibits to the registration statement.
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COMMON STOCK
Holders of our common stock are entitled to one vote for each share on
all matters submitted to a shareholder vote. Holders of our common stock have no
conversion, preemptive or subscription rights and there are no redemption
provisions applicable to our common stock. The rights of the holders of common
stock are subject to the rights of holders of preferred stock. All outstanding
shares of common stock are, and the shares underlying all options and warrants
will be, duly authorized, validly issued, fully paid and non-assessable.
SERIES A PREFERRED STOCK
The Series A Preferred Stock has an original issue price of $100 per
share and is redeemable at our option any time prior to the maturity date of
December 31, 2006 for 107% of the original issue price and accrued and unpaid
dividends. The shares are entitled to cumulative dividends of 7.2% per annum,
payable semi-annually when, as and if declared by the board of directors.
Softline may convert each share of Series A Preferred Stock at any time into the
number of common shares determined by dividing the stated value plus all accrued
and unpaid dividends, by a conversion price initially equal to $0.80. The
conversion price increases at an annual rate of 3.5% calculated on a semi-annual
basis. The Series A Preferred Stock is entitled upon liquidation to an amount
equal to its original issue price plus accrued and unpaid dividends in
preference to any distributions to our common stockholders. The Series A
Preferred Stock has no voting rights prior to conversion into common stock,
except with respect to proposed impairments of the Series A Preferred rights and
preferences, or as provided by law. We have the right of first refusal to
purchase all but not less than all of any shares of Series A Preferred Stock or
common shares received on conversion which Softline may propose to sell to a
third party, upon the same price and terms as the proposed sale to a third
party. We also granted Softline certain registration rights for the common
shares into which the Series A Preferred Stock is convertible, including the
right to demand registration on Form S-3 if such form is available to us and
Softline proposes to sell at least $5 million of registrable common shares, and
the right to include shares obtainable upon conversion of the Series A Preferred
Stock in other registration statements we propose to file.
WARRANTS
Warrants to purchase 1,600,000 shares of common stock that are being
registered in this statement expire on July 19, 2007 and have an exercise price
of $0.60 per share. Warrants to purchase 1,830,833 shares of common stock that
are being registered in this statement expire on March 31, 2008 and have an
exercise price of $1.0236 per share. The exercise prices are subject to
adjustment to reflect stock dividends, splits, reverse splits, and other similar
events.
OPTIONS
Non-statutory options to purchase 4,000,000 shares of common stock
that are being registered in this statement have a 3-year term, expiring on
September 3, 2005. These options have an exercise price of $0.28 per share. The
exercise price is subject to adjustment to reflect stock dividends, splits,
reverse splits, and other similar events. The other options (consisting of
statutory and non-statutory) from which 315,000 shares of common stock are
issuable and being registered in this statement have varying expiration dates,
ranging from June 3, 2007 to November 3, 2007. The exercise prices range from
$2.00 per share to $4.50 per share. The exercise prices are subject to
adjustment to reflect stock dividends, splits, reverse splits, and other similar
events.
CONVERTIBLE DEBENTURES
The outstanding debentures bear an interest rate of 9% per annum, and
they provide for interest only payments on a quarterly basis, payable, at our
option, in cash or shares of common stock. $3,500,000 of the debentures mature
May 2005, and $400,000 of the debentures mature in October 2005. If certain
conditions are met, we have the right, but not the obligation, to redeem the
debentures at 110% of their face value, plus accrued interest. Commencing on
February 1, 2004, we must redeem the debentures at the rate of $238,750 per
month in the aggregate. Furthermore, if the daily volume weighed average price
of our common stock on the American Stock Exchange exceeds $1.0236 by more than
200% for 15 consecutive trading days, we will have the option to cause the
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investors to convert their debentures into common stock. The conversion prices
are subject to adjustment to reflect stock dividends, splits, reverse splits,
and other similar events.
CONVERTIBLE NOTES
The convertible notes are convertible into an aggregate of 2,083,333
shares of common stock at a conversion price of $0.60 per share prior to the
payment thereof. These notes are due in full on September 30, 2003. The
conversion prices are subject to adjustment to reflect stock dividends, splits,
reverse splits, and other similar events.
REGISTRATION RIGHTS
GENERAL
We have granted certain registration rights with respect to 38,065,348
of our securities, of which we are registering all of these shares on this
registration statement. The holders of the remaining 634,705 shares we are
registering in the offering were not granted contractual registration rights. We
will pay for all expenses incurred in connection with these registrations, other
than underwriting discounts and commissions. The following is only a summary of
the terms and conditions of the agreements involving parties which have
registration rights. Copies of the actual agreements have been filed as exhibits
to this registration statement.
GRANTED TO ICM ASSET MANAGEMENT AND RELATED PARTIES
We granted ICM and related entities and other individuals demand ,
"piggyback" and incidental registration rights with respect to 3,468,462 shares
of common stock, 1,600,000 shares of common stock underlying warrants and
2,083,333 shares of common stock underlying notes held by them. We are
registering all of these shares held by them.
GRANTED TO SOFTLINE LIMITED
We granted Softline demand, "piggyback" and incidental registration
rights with respect to 18,255,073 shares of common stock underlying the Series A
Preferred Stock held by them. We are registering these shares held by them.
EXTENDED TO MR. NORMAN SMITH
We extended to Mr. Smith the opportunity to participate as a selling
shareholder with respect to 180,000 shares of common stock held by him. We are
registering all of these shares held by Mr. Smith.
EXTENDED TO MR. GARY SEEHOFF
We extended to Mr. Seehoff the opportunity to participate as a
selling shareholder with respect to 39,705 shares of common stock held by him.
We are registering all of these shares held by Mr. Seehoff.
EXTENDED TO MS. RACHEL GLICKSMAN
We extended to Ms. Glicksman the opportunity to participate as a
selling shareholder with respect to 24,000 shares of common stock held by her.
We are registering all of these shares held by Ms.Glicksman.
EXTENDED TO MR. GARY NASH
We extended to Mr. Nash the opportunity to participate as a selling
shareholder with respect to 1,000 shares of common stock held by him. We are
registering all of these shares held by Mr. Nash.
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EXTENDED TO MR. DONALD RADCLIFFE
We extended to Mr. Radcliffe the opportunity to participate as a
selling shareholder with respect to 75,000 shares of common stock and 295,000
shares of common stock underlying stock options held by him. We are registering
these shares held by Mr. Radcliffe.
EXTENDED TO MR. BARRY SCHECHTER
We extended to Mr. Schechter the opportunity to participate as a
selling shareholder with respect to 20,000 shares of common stock underlying
non-qualified stock options held by him. We are registering these shares held by
Mr. Schechter.
GRANTED TO MR. STEVEN BECK
We granted to Mr. Beck "piggyback" rights with respect to 2,000,000
shares of common stock underlying non-qualified stock options held by him.
We are registering all of these shares held by Mr. Beck.
GRANTED TO MR. HARVEY BRAUN
We granted to Mr. Braun "piggyback" rights with respect to 2,000,000
shares of common stock underlying non-qualified stock options held by him. We
are registering all of these shares held by Mr. Braun.
GRANTED TO MIDSUMMER/OMICRON/ISLANDIA
We granted to Midsummer Investment, Ltd., Omicron Master Trust, and
Islandia, L.P. registration rights with respect an aggregate of 6,489,810 shares
of common stock underlying convertible dentures and warrants held or to be held
by them and representing 130% of the actual number of shares of common stock
issuable upon the conversion of the debentures and warrants currently held by
them. We are registering all of these shares, as well as 819,000 shares of
common stock issuable as payment for interest accrued on the debentures.
GRANTED TO MBSJ INVESTORS, LLC
We granted to MBSJ Investors, LLC registration rights with respect an
aggregate of 711,216 shares of common stock underlying convertible dentures and
warrants held or to be held by it and representing 130% of the actual number of
shares of common stock issuable upon the conversion of the debentures and
warrants currently held by it. We are registering all of these shares, as well
as 72,000 shares of common stock issuable as payment for interest accrued on the
debentures.
GRANTED TO CRESTVIEW INVESTORS
We granted to Crestview Capital Fund I, L.P., Crestview Capital Fund
II, L.P. and Crestview Capital Offshore Fund, Inc. registration rights with
respect an aggregate of 512,453 shares of common stock underlying convertible
dentures and warrants held or to be held by them and representing 130% of the
actual number of shares issuable upon the conversion of the debentures and
warrants currently held by them. We are registering all of these shares, as well
as 54,000 shares of common stock issuable as payment for interest accrued on the
debentures.
EXPERTS
The consolidated financial statements of SVI Solutions, Inc. for the
year ended March 31, 2002 appearing in this Prospectus and Registration
Statement have been audited by Singer Lewak Greenbaum Goldstein LLP, independent
accountants and auditors as set forth in their report thereof appearing
elsewhere herein and are included in reliance upon such report and given upon
their authority of such firm as experts in accounting and auditing.
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The consolidated financial statements of SVI Solutions, Inc. as of
March 31, 2001 and for the years ended March 31, 2001 and 2000 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to the Company's ability
to continue as a going concern), and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 under the Act with
the SEC with respect to the shares offered hereby. This prospectus filed as part
of the registration statement does not contain all of the information contained
in the registration statement and exhibits thereto and reference is hereby made
to such omitted information. Statements made in this registration statement are
summaries of the terms of such referenced contracts, agreements or documents and
are not necessarily complete. Reference is made to each such exhibit for a more
complete description of the matters involved and such statements shall be deemed
qualified in their entirety by such reference.
You can read the registration statement and our future SEC filings,
over the Internet at the SEC's web site at HTTP://WWW.SEC.GOV. You may also read
and copy any document we file with the SEC at its public reference facility at
450 Fifth Street, N.W., Washington, DC 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.
83
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
SVI Solutions, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of SVI Solutions,
Inc. and subsidiaries as of March 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SVI Solutions, Inc.
and subsidiaries as of March 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 30, 2002 (except for paragraph 2,3
and 6 of Note 8 of to which the date is
May 8, 2003)
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SVI Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of SVI Solutions,
Inc. and subsidiaries (collectively, the "Company") (a majority owned subsidiary
of Softline Limited) as of March 31, 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period then ended (prior to the inclusion of the transitional
disclosures in Note 8 required upon the Company's adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets").
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2001,
and the results of its operations and its cash flows for each of the two years
in the period then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and
negative working capital raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
July 13, 2001
F-2
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, MARCH 31,
2002 2002 2001
-------------- ------------ ------------
(unaudited)
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 659 $ 1,309 $ 1,208
Accounts receivable, net of allowance for doubtful
accounts of $449, $446 and $790, respectively 4,685 1,946 3,394
Income tax refund receivable -- -- 380
Other receivables, including $7, $31 and $61 from
related parties, respectively 213 255 253
Inventories 111 126 138
Current portion - non-compete agreements 917 917 1,017
Net assets from discontinued operations -- -- 1,441
Prepaid expenses and other current assets 129 150 293
------------ ------------ ------------
Total current assets 6,714 4,703 8,124
Note receivable, net -- -- 7,000
Property and equipment, net 426 641 976
Purchased and capitalized software, net 15,529 17,612 20,074
Goodwill, net 14,795 15,422 17,642
Non-compete agreements, net 897 1,585 2,597
Other assets 58 42 40
------------ ------------ ------------
Total assets $ 38,419 $ 40,005 $ 56,453
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible and demand loans due to stockholders $ 1,295 $ 618 $ 1,333
Current portion of term loans 7,233 435 --
Accounts payable 2,154 1,497 2,868
Accrued expenses 4,216 3,864 4,911
Deferred revenue 2,925 3,528 1,794
Income tax payable -- 98 --
----------- ------------ ------------
Total current liabilities 17,823 10,040 10,906
Term loans refinanced in July 2002 and May 2001 -- 6,472 7,325
Convertible notes due to stockholders -- 1,421 --
Subordinated term loan due to stockholder -- -- 11,037
Other long-term liabilities 99 120 192
----------- ------------ ------------
Total liabilities 17,922 18,053 29,460
----------- ------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000
shares authorized; Series A Convertible Preferred
stock, 7.2% cumulative convertible 141,100 shares
authorized and outstanding with a stated value of
$100 per share, dividends in arrears of $1,015,
$254 and $0 respectively 14,100 14,100 --
Committed common stock, 2,500,000 shares 1,383 -- --
Common stock, $.0001 par value; 100,000,000 shares
authorized; 41,541,632, 38,993,609 and 37,836,669 shares
issued and 30,841,632, 28,293,609 and 37,836,669 shares
outstanding 4 4 4
Additional paid-in capital 55,855 54,685 57,108
Retained (deficit) earnings (41,664) (37,772) (23,114)
Treasury stock, at cost; shares - 10,700,000 in 2002
and 444,641 in 2001 (8,906) (8,580) (4,306)
Shares receivable (275) (485) --
Accumulated other comprehensive loss -- -- (2,699)
----------- ------------ ------------
Total stockholders' equity 20,497 21,952 26,993
----------- ------------ ------------
Total liabilities and stockholders' equity $ 38,419 $ 40,005 $ 56,453
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED MARCH 31,
------------------------------ -----------------------------------
2002 2001 2002 2001 2000
--------- --------- --------- --------- ---------
(unaudited) (unaudited)
(in thousands, except per share data)
Net sales $ 16,918 $ 21,446 $ 27,109 $ 27,713 $ 26,652
Cost of sales 5,997 9,247 10,036 9,188 6,421
--------- --------- --------- --------- ---------
Gross profit 10,921 12,199 17,073 18,525 20,231
--------- --------- --------- --------- ---------
Expenses:
Application development 2,894 2,932 4,203 5,333 4,877
Depreciation and amortization 3,122 4,991 6,723 8,616 7,250
Selling, general and administrative 7,365 10,388 13,144 18,037 14,817
Impairment of capitalized software and goodwill -- -- -- 6,519 --
Impairment of note receivable received in
connection with the sale of IBIS Systems Limited -- -- -- 7,647 --
--------- --------- --------- --------- ---------
Total expenses 13,381 18,311 24,070 46,152 26,944
--------- --------- --------- --------- ---------
Loss from operations (2,460) (6,112) (6,997) (27,627) (6,713)
Other income (expense):
Interest income 1 8 10 628 1,074
Other income (expense) 8 (35) (46) 63 (206)
Interest expense (894) (2,795) (3,018) (3,043) (1,493)
Gain (loss) on foreign currency transaction 23 -- (9) 2 (10)
--------- --------- --------- --------- ---------
Total other expense (862) (2,822) (3,063) (2,350) (635)
--------- --------- --------- --------- ---------
Loss before provision (benefit) for income taxes (3,322) (8,934) (10,060) (29,977) (7,348)
Provision (benefit) for income taxes (57) (2) 39 (4,778) (2,414)
--------- --------- --------- --------- ---------
Loss before cumulative effect of a change in accounting
principle (3,265) (8,932) (10,099) (25,199) (4,934)
Cumulative effect of changing accounting principle -
Goodwill valuation under SFAS 142 (627) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (3,892) (8,932) (10,099) (25,199) (4,934)
Income (loss) from discontinued Australian operations,
net of estimated income taxes expense (benefit)
of $332, $0, ($833) and $2 -- (1,140) (4,559) (3,746) 880
--------- --------- --------- --------- ---------
Net loss $ (3,892) $(10,072) $(14,658) $(28,945) $ (4,054)
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per share:
Loss before cumulative effect of a change in
accounting principle $ (0.11) $ (0.23) $ (0.28) $ (0.72) $ (0.15)
Cumulative effect of a change in accounting principle-
Goodwill valuation under SFAS 142 (0.02) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (0.13) (0.23) (0.28) (0.72) (0.15)
Income (loss) from discontinued operations -- (0.03) (0.13) (0.11) 0.03
--------- --------- --------- --------- ---------
Net loss $ (0.13) $ (0.26) $ (0.41) $ (0.83) $ (0.12)
========= ========= ========= ========= =========
Basic and diluted weighted average common shares outstanding 29,257 38,092 35,698 34,761 32,459
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share amounts)
Balance, March 31, 1999 -- $ 3 $ 39,436 $ (951) $ (2,142) $ 9,885 -- $ (961) $ 45,270
Issuance of common stock
in connection with the
purchase of technology
rights and subsidiaries -- -- 3,654 -- -- -- -- -- 3,654
Exercise of stock options -- -- 6,992 -- -- -- -- -- 6,992
Income tax benefit on
stock options exercised -- -- 424 -- -- -- -- -- 424
Compensation expense for
stock options granted -- -- 55 -- -- -- -- -- 55
Repurchase of common stock -- -- -- (1,213) -- -- -- -- (1,213)
Shares receivable from
stockholder in connection
with the sale of
IBIS Systems Limited -- -- -- (2,142) 2,142 -- -- -- --
Issuance of common stock
for services -- -- 20 -- -- -- -- -- 20
Private placement of common
stock -- -- 2,873 -- -- -- -- -- 2,873
Comprehensive loss:
Net loss -- -- -- -- -- (4,054) $ (4,054) -- (4,054)
Other comprehensive loss:
Translation adjustment -- -- -- -- -- -- (524) (524) (524)
----------
Comprehensive loss -- -- -- -- -- -- $ (4,578) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2000 -- $ 3 $ 53,454 $ (4,306) $ -- $ 5,831 -- $ (1,485) $ 53,497
Exercise of stock options -- -- 792 -- -- -- -- -- 792
Income tax benefit on stock
options exercised -- -- 84 -- -- -- -- -- 84
Compensation expense for
stock options -- -- 28 -- -- -- -- -- 28
Issuance of common stock
warrants for services -- -- 6 -- -- -- -- -- 6
Issuance of common stock
(net of financing costs
of $40,035) -- 1 2,460 -- -- -- -- -- 2,461
Issuance of common stock
(net of $286,000 late
registration fees) -- -- 214 -- -- -- -- -- 214
Issuance of common stock
for services -- -- 70 -- -- -- -- -- 70
Comprehensive loss:
Net loss -- -- -- -- -- (28,945) $ (28,945) -- (28,945)
Other comprehensive loss:
Translation adjustment -- -- -- -- -- -- (1,214) (1,214) (1,214)
----------
Comprehensive loss -- -- -- -- -- -- $ (30,159) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2001 -- $ 4 $ 57,108 $ (4,306) $ -- $ (23,114) -- $ (2,699) $ 26,993
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share amounts)
Balance, March 31, 2001 -- $ 4 $ 57,108 $ (4,306) $ -- $ (23,114) -- $ (2,699) $ 26,993
Issuance of common stock
for services and
severance payments -- -- 441 -- -- -- -- -- 441
Common stock to be returned -- -- 485 -- (485) -- -- -- --
Compensation expense for
warrants granted -- -- 579 -- -- -- -- -- 579
Interest charges on
convertible notes due to
stockholders -- -- 438 -- -- -- -- -- 438
Warrants issued for late
effectiveness of the
registration for common
stock sold in a private
placement in fiscal 2001 -- -- 711 -- -- -- -- -- 711
Offering costs -- -- (711) -- -- -- -- -- (711)
Liquidated damages for late
effectiveness of the
registration statement -- -- (60) -- -- -- -- -- (60)
Issuance of Series A
Preferred stock in
exchange for common
stock, sale of IBIS note
receivable and settlement
of Softline note payable 14,100 -- -- (8,580) -- -- -- -- 5,520
Retired treasury stock -- -- (4,306) 4,306 -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- (14,658) $ (14,658) -- (14,658)
Disposal of Australian
operations -- -- -- -- -- -- 2,699 -- 2,699
----------
Comprehensive loss -- -- -- -- -- -- $ (11,959) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2002 14,100 4 54,685 (8,580) (485) (37,772) -- -- 21,952
Issuance of common stock
for services -- -- 753 -- -- -- -- -- 753
Common stock returned -- -- (210) -- 210 -- -- -- --
Compensation expense for
options granted -- -- 8 -- -- -- -- -- 8
Issuance of common stock
to payoff a note payable -- -- 388 -- -- -- -- -- 388
Debt discount on a
a convertible note -- -- 171 -- -- -- -- -- 171
Common stock issued for late
effectiveness of the
registration for common
stock sold in a private
placement in fiscal 2001 -- -- 60 -- -- -- -- -- 60
Convertible note payble
In common stock -- -- -- -- -- -- -- -- 1,383
Additional cost -- -- -- (326) -- -- -- -- (326)
Comprehensive loss:
Net loss -- -- -- -- -- (3,892) $ (3,892) -- (3,892)
----------
Comprehensive loss -- -- -- -- -- -- $ (3,892) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, December 31,
2002 (unaudited) $ 14,100 $ 4 $ 55,855 $ (8,906) $ (275) $ (41,664) -- $ -- $ 20,497
========== ========== ========== ========== ========== ========== ========== ==========
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED MARCH 31,
------------------------------ -----------------------------------
2002 2001 2002 2001 2000
--------- --------- --------- --------- ---------
(unaudited) (unaudited)
(in thousands, except share amounts)
Cash flows from operating activities:
Net loss $ (3,892) $(10,072) $(14,658) $(28,945) $ (4,054)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization 3,122 5,289 7,069 9,540 7,942
Cumulative effect of a change in accounting principle
- goodwill valuation under SFAS 142 627 -- -- -- --
Impairment of note receivable -- -- -- 7,647 --
Impairment of intangible assets associated with
discontinued operations -- -- -- 8,886 --
Loss on disposal of Australian operations -- -- 3,171 -- --
(Gain)/Loss on foreign currency transactions (23) 14 41 (9) 12
Compensation expense for stock options and warrants 8 487 579 112 55
Interest charges on convertible notes 171 517 438 -- --
Common stock issued for services rendered and severance
payments 390 -- 245 -- --
Deferred income tax provision -- (135) (149) (4,396) (2,614)
Loss on sale of furniture and equipment -- 53 64 3 177
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable and other receivables (2,697) (64) 2,548 5,126 (4,586)
Accrued interest on note receivable -- -- -- (555) (840)
Inventories 15 56 61 (8) (34)
Prepaid expenses and other current assets 5 216 60 157 (197)
Accounts payable and accrued expenses 1,014 (1,955) (1,892) 3,506 (576)
Accrued interest on stockholders' loans, convertible
notes and term loan 664 2,071 2,295 944 --
Deferred revenue (603) 2,792 1,642 (4,438) 5,023
Income taxes payable (98) 57 98 -- (2,576)
--------- --------- --------- --------- ---------
Net cash provided by (used for) operating
activities (1,297) (674) 1,612 (2,430) (2,268)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- -- -- -- (33,898)
Purchase of furniture and equipment (39) (240) (301) (534) (849)
Proceeds from sale of furniture and equipment -- 7 13 -- 83
Purchase of software and capitalized software development costs (93) -- (409) (2,471) (1,831)
--------- --------- --------- --------- ---------
Net cash used for investing activities (132) (233) (697) (3,005) (36,495)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 16 -- 3,754 9,615
Increase (decrease) in amounts due to stockholders, net (287) (475) (844) 9,855 1,982
Proceeds from committed stock and lines of credit 1,383 1,260 -- 1,555 2,281
Proceeds from convertible notes due to stockholders -- -- 1,260 -- --
Proceeds from term loans -- -- -- -- 18,500
Payments on term loans (336) (559) (1,243) (13,231) (1,458)
Proceeds from short-term loan from related party 120 -- -- -- --
Payments on short-term loan from related party (120) -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used for) financing
activities 760 242 (827) 1,933 30,920
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash 19 15 (46) (69) (325)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (650) (650) 42 (3,571) (8,168)
Cash and cash equivalents, beginning of year 1,309 1,267 1,267 4,838 13,006
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year $ 659 $ 617 $ 1,309 $ 1,267 $ 4,838
========= ========= ========= ========= =========
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED MARCH 31,
------------------------------ ------------------------------------
2002 2001 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
(in thousands, except share amounts)
Supplemental disclosure of non-cash information:
Interest paid $ 408 $ 788 $ 1,194 $ 1,990 $ 1,417
Income taxes paid -- -- -- $ 665 $ 2,163
Supplemental disclosure of non-cash investing and
financing activities:
Issued 38,380 shares of common stock for services to be
provided -- -- $ 31 -- --
644,715 shares of common stock to be returned for services
canceled after shares were issued, of which 262,500
shares were received $ (210) -- $ 485 -- --
Issued 1,010,000 shares of common stock to repay in full
a stockholder's loan $ 388 -- -- -- --
Issued 100,000 shares of common stock for services in
Connection with an equity financing in December 2000 $ 45 -- -- -- --
Issuance of 141,000 shares of Series A Preferred Stock and
transfer of note receivable received from the sale of IBIS
Systems Limited in exchange for 10,700,000 shares
of common stock and settlement of Softline note payable -- -- $ 5,520 -- --
Issued 46,774 shares of common stock in connection
with the acquisition of Triple-S -- -- -- -- $ 213
Issued 1,223,580, 1,193,837, 68,208 and 54,845 shares of
common stock for bonuses, interest and services
rendered in prior periods $ 657 $ 955 $ 165 $ 70 --
Issued 140,000 shares of common stock for penalty for
late effectiveness of the registration statement $ 60 -- -- -- --
Issued 500,000 shares of common stock for $214,000 in cash
and $286,000 in accrued costs related to penalty for
late effectiveness of the registration statement -- -- -- $ 286 --
Issued 5,000 warrants in connection with an equity financing -- -- -- $ 8 --
Received 178,500 treasury shares as settlement for a
receivable -- -- -- -- $ (2,142)
Issued 220,000 shares of common stock in connection
with prior acquisitions -- -- -- -- $ 2,402
Received 78,241 shares from Softline for Triple-S -- -- -- -- $ (665)
Issued 93,023 shares of common stock in connection
with acquisition of MarketPlace Systems Corporation -- -- -- -- $ 1,000
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SVI SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS CONDITIONS - SVI Solutions, Inc. (the "Company") is a holding
company which, through its subsidiaries, is an independent provider of
multi-channel application software technology and associated services
for the retail industry. The Company also develops and distributes PC
courseware and skills assessment products for both desktop and retail
applications.
MANAGEMENT'S PLAN TO CONTINUE AS A GOING CONCERN - The accompanying
consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. As shown in the
accompanying consolidated financial statements, the Company has
incurred net losses from operations of $14.7 million, $28.9 million and
$4.1 million for the years ended March 31, 2002, 2001 and 2000,
respectively, and $3.8 million (unaudited) and $10.1 million
(unaudited) for the nine months ended December 31, 2002 and 2001,
respectively.
The loss for the nine months ended December 31, 2002 included $0.6
million (unaudited) loss from cumulative effect of changing accounting
principle and non-cash charges of $3.1 million (unaudited) in
depreciation and amortization. The loss for the nine months ended
December 31, 2001 included $1.1 million (unaudited) loss from the
discontinued Australian operations and non-cash charges of $5.0 million
(unaudited) in depreciation and amortization. With net sales decreased
by 21% (unaudited), costs of sales and selling, general and
administrative expenses decreased by 35% (unaudited) and 29%
(unaudited), respectively, as compared to the nine month period ended
December 31, 2001.
The loss for the year ended March 31, 2002 included a $4.6 million
loss from the discontinued Australian operations and non-cash charges
of $6.7 million in depreciation and amortization. While net sales
decreased slightly by 2%, the selling, general and administrative
expense decreased by 25%.
The loss for the year ended March 31, 2001 included a non-cash
impairment of charges totaling $14.2 million for goodwill and
capitalized software write-downs related to its discontinued Australian
subsidiary and its note receivable in connection with a prior sale of a
foreign subsidiary. In addition, the Company recorded a $3.7 million
loss from the discontinued Australian operations, non-cash charges of
$8.6 million in depreciation and amortization, which related primarily
to its intangible assets, and $900,000 for severance and related
personnel reductions in the fourth quarter of the year ended March 31,
2001. Overall, the Company's general and administrative expense
increased 22% during fiscal 2001.
In addition, the Company's balance sheet reflects negative working
capital of $5.3 million and $2.8 million as of March 31, 2002 and 2001,
respectively, and $11.1 million (unaudited) at December 31, 2002. At
March 31, 2002, the Company has a substantial amount of debt, including
$6.9 million due to Union Bank of California and $2.0 million due to
stockholders. At December 31, 2002, the Company's debt includes $7.2
million (unaudited) due to Union Bank of California and $1.3 million
(unaudited) due to stockholders. The Company experienced significant
strains on its cash resources during the years ended March 31, 2002 and
2001 and the nine months ended December 31, 2002 and 2001 and had
difficulty meeting its current obligations, including principal and
interest payments on indebtedness and lease payments due on its two
facilities in the US.
The Company experienced a reduction in sales of its high margin
application software licenses in its U.S. and U.K. operations. The
Company believes its difficulties initially arose from insufficient
staffing of its sales force. Although the Company significantly
increased the staffing of the sales force in the first quarter of
fiscal 2002, the economic slowdown and the terrorist attacks of
September 11, 2001, and the ongoing hostilities in the world, increased
the challenges faced by the sales force. In addition, the Company's
financial condition may have interfered with its ability to sell new
application software licenses. The Company was dependent on one
customer for 42% of its net sales in fiscal 2002 and 31% (unaudited) of
its net sales in the nine months ended December 31, 2002. The Company
needs to generate additional sales and revenue and to control
expenditures to return to profitability and to achieve positive cash
flow.
F-9
In October 2001, the Company completed an analysis of its operations
and concluded that it was necessary to restructure the composition of
management and personnel. The CEO, CFO and general manager of the
Company's retail operations elected to leave to pursue other interests.
The Company appointed the Chairman as the Chief Executive Officer. The
Company reduced its staff by a total of 20%, and restructured and
refocused the sales force toward opportunities available in the current
economic climate.
As of April 1, 2002, the Company has refocused the company into three
strategic business units lead by experienced managers. The units are
Island Pacific, SVI Store Solutions and SVI Training Products, Inc.
The management team developed and presented to the Board of Directors
in June 2002, an operating plan for the current fiscal year that, if
achieved, will return the Company to positive cash flow from
operations. This improvement is based on a restructuring of the
Company's debt with Union Bank of California ("Union Bank"), on an
aggressive sales campaign for its applications and related services and
on rigorous management of its costs and expenses.
In May and July 2002, the Company extended its term loan facility with
Union Bank (see Note 10). In March 2003, the Company satisfied this
debt in full.
In May 2002, the Company also entered into an agreement with its major
customer, Toys "R" Us ("Toys"), to issue a $1.3 million non-interest
bearing convertible note, a warrant to purchase up to 2.5 million
shares of the Company's common stock at the exercise price of $0.553
per share and to provide development and professional services to Toys
through February 2004. In July 2002, the Company extended its notes
payable to certain stockholders which were in default (see Note 11).
In the third and fourth quarter of fiscal 2003, the Company appointed a
new Chief Executive Officer and Chief Operating Officer. The Company
increases its product offerings through strategic partnerships with
other solution providers and major consulting organizations.
In March, April and May of 2003, the Company issued a total of $4.2
million in 9% convertible debentures to unrelated investors to settle
its term loan and provide working capital.
Management is now actively seeking additional financing to provide
needed working capital for operations. Management believes additional
financings, if completed, would provide the cash required for
operations during the current fiscal year, thus enabling the Company
the opportunity to increase sales of its applications and services.
However, there can be no assurance that the Company will be successful
in obtaining new financing, increasing sales or producing incremental
profits and cash flow.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION - The
consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, SVI Retail, Inc. and SVI Training
Products, Inc., based in US and SVI Retail (Pty) Limited based in
Australia. Effective February 2002, the Australian subsidiary ceased
operation (see Note 3). All material intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed financial statements for the nine
months ended December 31, 2002 and 2001 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
December 31, 2002 and 2001.
RECLASSIFICATIONS - Certain amounts in the fiscal years ended March 31,
2001 and 2000 have been reclassified to conform to the presentation for
the fiscal year ended March 31, 2002. Certain amounts in the nine
months ended December 31, 2001 have been reclassified to conform to the
presentation for the nine months ended December 31, 2002. Such
reclassifications did not have any effect on losses reported in prior
periods.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those
estimates.
F-10
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
highly liquid investments with original maturities of not more than
three months.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of short-term
financial instruments, including cash and cash equivalents, trade
accounts receivable, other receivables, prepaid expenses, other assets,
accounts payable, accrued expenses, lines of credit and demands due to
stockholders approximate their carrying amounts in the financial
statements due to the short maturity of and/or the variable nature of
interest rates associated with such instruments.
The fair value of the long-term note receivable is discussed in Note 5.
The amounts shown for term loans and convertible notes due to
stockholders approximate fair value because current interest rates
offered to the Company for debt of similar maturity are substantially
the same or the difference is immaterial.
INVENTORIES - Inventories consist of finished goods and are stated at
the lower of cost or market, on a first-in, first-out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally ranging from 4 to 10
years.
Leasehold improvements are amortized using the straight-line method,
over the shorter of the life of the improvement or lease term.
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized.
GOODWILL - Goodwill, the excess of cost over the fair value of net
assets acquired. Beginning April 1, 2002, the Company adopted Statement
of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") and ceased amortization of goodwill
recorded in business combinations prior to June 30, 2001 (see Note 8).
The Company reviews goodwill for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could
indicate that its value has diminished or been impaired. Goodwill was
amortized on a straight-line basis through March 31, 2002 over useful
lives not exceeding 10 years. As described in Note 8 to the
consolidated financial statements, effective April 1, 1999, the Company
revised its estimate of the useful live of goodwill from 20 years to 10
years.
PURCHASED AND CAPITALIZED SOFTWARE COSTS - Pursuant to the provisions
of Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," the Company capitalizes internally developed software and
software purchased from third parties if the related software product
under development has reached technological feasibility or if there are
alternative future uses for the purchased software. These costs are
amortized on a product-by-product basis typically over three to ten
years using the greater of the ratio that current gross revenue for a
product bears to the total of current and anticipated future gross
revenue for that product or the straight-line method over the remaining
estimated economic life of the product. At each balance sheet date, the
Company evaluates on a product-by-product basis the unamortized
capitalized cost of computer software compared to the net realizable
value of that product. The amount by which the unamortized capitalized
costs of a computer software product exceed its net realizable value is
written off (see Note 7).
NON-COMPETE AGREEMENTS - Non-compete agreements represent agreements to
retain key employees of acquired subsidiaries for a certain period of
time and prohibit those employees from competing with the Company
within a stated period of time after terminating employment with the
Company. The amounts incurred are capitalized and amortized over the
life of the agreements, generally ranging from two to six years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
such assets or intangibles may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets (see
Notes 4, 7, 8 and 9). Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
F-11
REVENUE RECOGNITION - The Company recognizes revenues in accordance
with the provisions of the American Institute of Certified Public
Accountants Statement of Position 97-2, "Software Revenue Recognition."
The Company licenses its software products under nonexclusive,
nontransferable license agreements. For software arrangements that
require significant production, modification or customization, the
entire arrangement is accounted for in conformity with Accounting
Research Bulletin No. 45, "Long-term Construction-Type Contracts",
using the relevant guidance Statement of Position 81-1, "Accounting for
Performance of Construction-Type Contracts and Certain Production-Type
Contracts". For those arrangements that do not require significant
production, modification or customization, revenue is recognized when a
license agreement has been signed, delivery of the software product has
occurred, the related fee is fixed or determinable and collectibility
is probable. The Company also licenses non-software training products
under nonexclusive, nontransferable licenses. Revenue related to such
license agreements is recognized ratably over the license agreement, or
at such time that no further obligation to the customer exists.
Professional services are billed on an hourly basis and revenue is
recognized as the work is performed.
In December 1999, SEC Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" was issued. SAB 101
provides the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues, including
software revenue recognition. There was no impact on the financial
statements as a result of the adoption of SAB 101. Therefore, no
adjustment was recorded.
REIMBURSABLE OUT-OF-POCKET EXPENSES - The Company adopted Financial
Accounting Standards Board Emerging Issues Task Force Issue No.
01-14("EITF 01-14"), "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred". EITF
01-14 establishes that reimbursements received for out-of-pocket
expenses should be reported in both net sales and cost of sales in the
consolidated statement of operations. Through March 31, 2002, the
Company classified reimbursed out-of-pocket expenses as a reduction in
cost of consulting services. The adoption of EITF 01-14 increased
reported net sales and cost of sales; however, it did not affect the
net income or loss in any past or future periods. Reimbursed expenses
of $537,000 (unaudited) have been classified in both net sales and cost
of sales for the nine months ended December 31, 2002, and we have
reclassified reimbursed expenses of $968,000 (unaudited), $1.1 million,
$1.9 million and $400,000 to net sales and cost of sales in the
consolidated statements of operations for the nine months ended
December 31, 2001 and the years ended March 31, 2002, 2001 and 2000,
respectively.
NET INCOME (LOSS) PER SHARE - As required by Statement of Financial
Accounting Standards No. 128, "Earnings per Share," the Company has
presented basic and diluted earnings per share amounts. Basic earnings
per share is calculated based on the weighted-average number of shares
outstanding during the year, while diluted earnings per share also
gives effect to all potential dilutive common shares outstanding during
the year such as stock options, warrants and contingently issuable
shares.
INCOME TAXES - The Company utilizes Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
F-12
TRANSLATION OF FOREIGN CURRENCY - The financial position and results of
operations of the Company's foreign subsidiaries are measured using
local currency as the functional currency. Revenues and expenses of
such subsidiaries have been translated into U.S. dollars at average
exchange rates prevailing during the period. Assets and liabilities
have been translated at the rates of exchange at the balance sheet
date. Transaction gains and losses are deferred as a separate component
of stockholders' equity, unless there is a sale or complete liquidation
of the underlying foreign investments. Aggregate foreign currency
transaction gains and losses are included in determining net earnings.
ADVERTISING AND PROMOTIONAL EXPENSES - Advertising and promotional
expenses are charged to expense as incurred and amounted to $38,000,
$198,000 and $497,000 for the years ended March 31, 2002, 2001 and
2000, respectively.
COMPREHENSIVE INCOME - The Company utilizes Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities and are included as a component
of stockholders' equity.
STOCK-BASED COMPENSATION - As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for costs of stock based
compensation in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly, discloses the pro forma effect on net income (loss) and
related per share amounts using the fair-value method defined in SFAS
No. 123.
In April 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB No. 25," which is effective July 1, 2000 except
for certain conclusions which cover specific events after either
December 15, 1998 or January 12, 2000. FIN No. 44 clarifies the
application of APB No. 25 related to modifications of stock options,
changes in grantee status, and options issued on a business
combination, among other things. The adoption of FIN No. 44 did not
have a significant impact on the consolidated financial position or
results of operations.
CONCENTRATIONS - The Company maintains cash balances and short-term
investments at several financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. As of March 31, 2002 and December 31, 2002, the uninsured
portion of these balances held at financial institutions aggregated to
approximately $973,000 and $148,000 (unaudited), respectively. The
Company has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk on cash and cash
equivalents.
For the fiscal years ended March 31, 2002, 2001 and 2000, net sales to
one customer accounted for 42%, 29% and 15%, respectively, of total
consolidated net sales. For the nine months ended December 31, 2002 and
2001, net sales to one customer accounted for 31% (unaudited) and 47%
(unaudited), respectively, of total consolidated net sales. As of March
31, 2002 and 2001, the Company's trade receivables from this customer
accounted for 40% and 26%, respectively, of total consolidated
receivables. As of December 31, 2002 and 2001, the Company's trade
receivables from this customer accounted for 15% (unaudited) and 21%
(unaudited), respectively. As of March 31, 2002, deferred revenues from
this customer accounted for 48% of total consolidated deferred revenue.
As of December 31, 2001, deferred revenues from this customer accounted
for 21% (unaudited) of total consolidated deferred revenue.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a
significant impact on the Company's financial statements.
F-13
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets,"
which is effective for fiscal years beginning after December 15, 2001.
SFAS 142 prohibits the amortization of goodwill and intangible assets
with indefinite useful lives but requires that these assets be reviewed
for impairment at least annually or on an interim basis if an event
occurs or circumstances change that could indicate that their value has
diminished or been impaired. Other intangible assets will continue to
be amortized over their estimated useful lives. The Company evaluates
the remaining useful lives of these intangibles on an annual basis to
determine whether events or circumstances warrant a revision to the
remaining period of amortization. Pursuant to SFAS 142, amortization of
goodwill and assembled workforce intangible assets recorded in business
combinations prior to June 30, 2001 ceased effective March 31, 2002.
Goodwill resulting from business combinations completed after June 30,
2001 will not be amortized. The Company recorded amortization expense
of approximately $2.2 million on goodwill during the fiscal year ended
March 31, 2002. The Company currently estimates that application of the
non-amortization provisions of SFAS 142 will reduce amortization
expense and increase net income by approximately $2.2 million in fiscal
2003.
In the first quarter of 2003, the Company completed the transitional
analysis of goodwill impairment required by the adoption of SFAS 142 in
fiscal 2003, and recorded in the first quarter of fiscal 2003 an
impairment of $627,000 as a cumulative effect of a change in accounting
principles.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of
long-lived assets, except for certain obligations of lessees. The
adoption of SFAS No. 143 did not have a material impact on the
Company's consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends APB Opinion
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by
sale. SFAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value cost to
sell. Additionally SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that
(1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The accounting prescribed in SFAS 144 was applied in
connection with the disposal of the Australian operations.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies, and simplifies existing
accounting pronouncements. This statement rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in APB No. 30
will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary.
SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sale-lease
transactions. This statement also makes technical corrections to
existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice. The
Company does not expect adoption of SFAS No. 145 to have material
impact, if any, on its financial position or results or operations.
F-14
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 replaces current accounting
literature and requires the recognition of costs associated with exit
or disposal activities when they are incurred rather than at the date
of commitment to an exit or disposal plan. The provisions of the SFAS
146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company does not expect adoption of SFAS
No. 146 to have a significant effect on its results of operations or
financial condition.
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS 147"), "Acquisition of certain Financial
Institutions". SFAS 147 removes the requirement in SFAS 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset. This statement requires that those transactions be accounted for
in accordance with SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". In addition, this
statement amends SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets, to include certain financial institution
related intangibles. This statement is not likely to have any impact on
the Company's financial statements.
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
transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. SFAS
148 is not expected to have a material impact on the Company's
financial statements.
2. ACQUISITIONS
MARKETPLACE SYSTEM CORPORATION - Effective March 16, 2000, Island
Pacific acquired certain assets and liabilities of Marketplace System
Corporation ("Marketplace"), a privately-held software development and
consulting firm headquartered in Austin, Texas. The purchase price for
the acquisition was $750,000 in cash and 93,023 shares of the Company's
common stock with the fair value of $1 million at the date of
acquisition. The acquisition has been accounted for as a purchase.
The fair value of assets acquired and liabilities assumed were as
follows (in thousands):
Assets acquired, including goodwill $ 1,621
Liabilities assumed -
Common stock issued (1,000)
Liability for purchase consideration (500)
--------------
Net cash paid for acquisition $ 121
==============
3. DISCONTINUED OPERATIONS
The Company's Australian subsidiary maintained an AUS$1,000,000
(approximately US$510,000) line of credit facility with National
Australia Bank Limited. The facility was secured by substantially all
of the assets of the Australian subsidiary, and the Company has
guaranteed all amounts owing on the facility. The facility became due
in February of each year, but had renewed annually. In April 2001, the
Company received a formal demand under the guarantee for the full
AUS$971,000 (approximately US$495,000) then alleged by the bank to be
due under the facility. Due to the declining performance of the
Australian subsidiary, management decided in the third quarter of
fiscal 2002 to sell certain assets of the Australian subsidiary to the
former management of such subsidiary, and then cease Australian
operations. Such sale was however subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002.
The bank caused a receiver to be appointed in February 2002 to sell
F-15
substantially all of the assets of the Australian subsidiary and pursue
collections on any outstanding receivables. The receiver proceeded to
sell substantially all of the assets for $300,000 in May 2002 to the
entity affiliated with former management, and is actively pursuing the
collection of receivables. If the sale proceeds plus collections on
receivables are insufficient to discharge the indebtedness to National
Australia Bank, the Company may be called upon to pay the deficiency
under its guarantee to the bank. The Company has accrued $187,000 as
the maximum amount of our potential exposure. The receiver has also
claimed that the Company is obligated to it for inter-company balances
of $636,000, but the Company does not believe any amounts are owed to
the receiver, who has not as of the date of this report acknowledged
the monthly corporate overhead recovery fees and other amounts charged
by us to the Australian subsidiary offsetting the amount claimed to be
due.
The disposal of the Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown
as discontinued operations with the prior period results restated. The
operating results reflected in loss from discontinued operations are
summarized as follows (in thousands):
Year ended March 31,
2002 2001 2000
---- ---- ----
Net sales $ 2,363 $ 4,959 $ 9,462
Income (loss) before taxes $ (1,056) $ (4,580) $ 882
Provision (benefit) for income taxes 332 (833) 2
Net income (loss) $ (1,388) $ (3,746) $ 880
Net income (loss) per share of common stock $ (0.04) $ (0.11) $ 0.03
Net assets from discontinued operations at March 31, 2001 consisted of
the following (in thousands):
Net assets available for sale $ 1,595
Current assets 1,102
Line of credit (485)
Current liabilities (771)
---------
$ 1,441
=========
4. ASSET IMPAIRMENT CHARGES
In the fiscal year ended March 31, 2001, the Company evaluated the
recoverability of the long-lived assets in accordance with the
evaluation of its long-lived assets as described in Note 1. In
determining the amount of impairment, the Company compared the net book
value of the long-lived assets associated with the Australian
operations, primarily consisting of recorded goodwill and software
intangibles, to their estimated fair values. Fair values were estimated
based on anticipated future cash flows of the Company's operations
consistent with the assets' remaining useful lives. The anticipated
future cash flows were then discounted at 13%, which approximates the
Company's interest rate on its amended and restated loan agreement in
fiscal year ended March 31, 2001. Accordingly, the Company recorded
impairment of goodwill of $2.3 million and capitalized software of $6.6
million in the fiscal year ended March 31, 2001.
The Company also recorded an impairment charge to its note receivable
in the fiscal year ended March 31, 2001 (See Note 5.).
Subsequent to March 31, 2002, the Company completed the transitional
analysis of intangible asset impairment required by the adoption of
Statement of Financial Accounting Standards No. 142 as of April 1,
2002, and the Company recorded in the first quarter of fiscal 2003
impairment of $627,000 to goodwill as a cumulative effect of a change
in accounting principles.
F-16
5. NOTE RECEIVABLE
In connection with the sale of its United Kingdom subsidiary, IBIS
Systems Limited ("IBIS") to Kielduff Investments Limited ("Kielduff")
in the fourth quarter of fiscal 1999, the Company recorded a note
receivable (the "Note") of $13.6 million. The Note bore interest at 2%
over the base prime rate for United States dollar deposits quoted by
the Hong Kong Shanghai British Columbia Bank plc, and principal and
interest were originally due October 1, 1999. In September 1999, the
Note was extended to February 15, 2000 to allow Kielduff sufficient
time to complete a combination of several companies under a common
name, Integrity Software, Inc. ("Integrity"), and register this newly
formed entity for trading on a United States exchange. The Note was
further extended to November 15, 2000 to accommodate the registration
and underwriting process related to Integrity. In September 2000, the
Company discontinued accruing interest on the Note. The Note was
secured by approximately 11% of the outstanding shares of Integrity.
The Company also had the right to convert all sums due from Kielduff
into shares of Integrity at its option. The Company did not exercise
its option to convert any amount of the Note into shares of Integrity.
Kielduff did not pay the Note on the November 15, 2000 due date. Given
the Company's lack of ability to enforce collection on the due date,
the Company classified the Note as long term. The Company engaged
Business Valuation Services, Inc. ("BVS") to perform an analysis of the
fair value of the Note's underlying collateral at each quarter during
fiscal year 2001. After consideration of the BVS reports and other
relevant data, the Company concluded that the fair value of the
collateral underlying the Note was impaired. Thus, during the fiscal
year ended March 31, 2001, the Company recorded an impairment of $7.6
million. The carrying value of the Note at March 31, 2001 was $7.0
million.
Effective January 1, 2002, the Company transferred the Note to Softline
Limited ("Softline"), a major stockholder, in connection with an
integrated series of transactions with Softline (see Notes 10 and 13).
The transactions with Softline were as follows:
1. The Company transferred to Softline the note received
in connection with the sale of IBIS.
2. The Company issued to Softline 141,000 shares of
newly-designated Series A Convertible Preferred Stock
("Series A Preferred").
3. In consideration of the above, Softline released the
Company from its obligations related to the note and
financing costs payable due to Softline. Softline
also surrendered 10,700,000 shares of the Company's
common stock held by Softline.
No gain or loss was recognized in connection with the disposition of
the Note or the other components of the transactions.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following (in thousands):
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited) (unaudited)
Computer equipment and purchased software $ 2,342 $ 2,411 $ 2,299 $ 2,451
Furniture and fixtures 475 484 473 492
Leasehold improvements 407 399 400 338
--------- --------- --------- ---------
3,224 3,294 3,172 3,281
Less accumulated depreciation and amortization 2,798 2,437 2,531 2,305
--------- --------- --------- ---------
Total $ 426 $ 857 $ 641 $ 976
========= ========= ========= =========
F-17
Depreciation and amortization expense from continuing operations for
the fiscal years ended March 31, 2002, 2001 and 2000 was $520,000,
$698,000 and $414,000, respectively. Depreciation and amortization from
continuing operations for the nine months ended December 31, 2002 and
2001 was $258,000 (unaudited) and $288,000 (unaudited), respectively.
Depreciation and amortization expense from discontinued operations for
the fiscal years ended March 31, 2002, 2001 and 2000 was $46,000,
$173,000 and $241,000, respectively. Depreciation and amortization
expense from discontinued operations for the nine months ended December
31, 2001 was $48,000 (unaudited).
7. CAPITALIZED SOFTWARE
Capitalized software consisted of the
following (in thousands):
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED MARCH 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Software $ 28,221 $ 27,720 $ 28,128 $ 27,873
Less accumulated amortization 12,692 9,799 10,516 7,799
---------- ---------- ---------- ----------
Total $ 15,529 $ 17,921 $ 17,612 $ 20,074
========== ========== ========== ==========
Amortization expense from continuing operations for the fiscal years
ended March 31, 2002, 2001 and 2000 was $2.9 million, $3.4 million and
$2.8 million, respectively. Amortization expense from continuing
operations for the nine months ended December 31, 2002 and 2001 was
$2.2 million (unaudited). Amortization expense from discontinued
operations for the fiscal years ended March 31, 2002, 2001 and 2001 was
$300,000, $751,000 and $451,000, respectively. Amortization expense
from discontinued operations for the nine months ended December 31,
2001 was $253,000 (unaudited). The Company recorded an impairment of
$6.6 million to the capitalized software associated with its
discontinued Australian subsidiary in fiscal 2001 (see Note 4).
8. GOODWILL
Effective April 1, 1999, in evaluating the economic benefit and useful
lives of goodwill obtained in connection with the Company's acquisition
of Divergent Technologies Pty. Ltd., Chapman Computers Pty. Ltd.,
Applied Retail Solutions, Inc. and Island Pacific Systems Corporation,
management determined that the period of amortization should be revised
from twenty years to ten years. Accordingly, the unamortized cost of
such assets at April 1, 1999 have been allocated to the reduced number
of remaining periods in the revised useful life.
The Company adopted SFAS 142 effective April 1, 2002 and ceased
amortization of goodwill it recorded in business combinations prior to
June 30, 2001. SFAS 142 prohibits the amortization of goodwill and
certain other intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually
or on an interim basis if an event occurs or circumstances change that
could indicate that their value has diminished or been impaired. Other
intangible assets continue to be amortized over their useful lives.
Pursuant to SFAS 142, the Company completed the transitional analysis
of goodwill impairment as of April 1, 2002 and recorded an impairment
of $627,000 as a cumulative effect of a change in accounting principle
in the quarter ended June 30, 2002. The Company also evaluated the
remaining useful lives of its intangible assets in the quarter June 30,
2002 and no adjustments have been made to the useful of its intangible
assets. The Company is currently performing the annual test for
impairment as of March 31, 2003.
F-18
Goodwill consisted of the following (in thousands):
Nine Months Ended December 31, Year Ended March 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Cost $ 21,288 $ 21,914 $ 21,915 $ 21,914
Less accumulated amortization 6,493 5,933 6,493 4,272
---------- ---------- ---------- ----------
Total $ 14,795 $ 15,981 $ 15,422 $ 17,642
========== ========== ========== ==========
The amortization expense for twelve months ended March 31, 2002, 2001
and 2000 was $2.2 million, $2.6 million, and $2.4 million,
respectively. The amortization expense for the nine months ended
December 31, 2001 was $1.7 million (unaudited). The Company recorded an
impairment to the goodwill associated with its discontinued Australian
subsidiary of approximately $2.3 million at March 31, 2001 (see Note
4).
The following table reconciles net loss and loss per share as reported
for the nine months ended December 31, 2001 and the years ended March
31, 2002, 2001 and 2000 to net loss and loss per share as adjusted to
exclude amortization expense, net of taxes, related to goodwill that
are no longer being amortized.
Nine Months Ended
December 31, Year Ended March 31,
2002 2001 2002 2001 2000
--------- --------- --------- --------- ---------
(unaudited) (unaudited)
(in thousands)
Reported net loss $ (3,892) $(10,072) $(14,658) $(28,945) $ (4,054)
Add back: Goodwill amortization -- 1,661 2,220 2,618 2,440
--------- --------- --------- --------- ---------
Adjusted net loss $ (3,892) $ (8,411) $(12,438) $(26,327) $ (1,614)
========= ========= ========= ========= =========
Basic and diluted loss per share:
Reported net loss $ (0.13) $ (0.26) $ (0.41) $ (0.83) $ (0.12)
Goodwill amortization -- 0.04 0.06 0.08 0.08
--------- --------- --------- --------- ---------
Adjusted net loss $ (0.13) $ (0.22) $ (0.35) $ (0.76) $ (0.05)
========= ========= ========= ========= =========
Basic and diluted shares used
to compute 29,257 38,092 35,698 34,761 32,459
9. NON-COMPETE AGREEMENTS
Non-compete agreements are as follows (in
thousands):
Nine Months Ended December 31, Year Ended March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited) (unaudited)
Cost $ 6,986 $ 6,986 $ 6,986 $ 6,986
Less accumulated amortization 5,172 4,255 4,484 3,372
--------- --------- --------- ---------
Total $ 1,814 $ 2,731 $ 2,502 $ 3,614
Current portion 917 917 917 1,017
--------- --------- --------- ---------
Long-term portion $ 897 $ 1,814 $ 1,585 $ 2,597
========= ========= ========= =========
F-19
The amortization expense for the twelve months ended March 31, 2002,
2001 and 2000 was $1.1 million , $1.6 million and $1.5 million,
respectively. The amortization expense for the nine months ended
December 31, 2002 and 2001 was $688,000 (unaudited) and $883,000
(unaudited), respectively.
10. TERM LOANS
TERM LOANS DUE TO BANK
The Company's term loans consist of the
following (in thousands):
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Term loans payable to bank $ 7,233 $ 7,421 $ 6,907 $ 7,325
Less term loans payable to bank classified
as long-term as discussed below -- -- 6,472 7,325
---------- ---------- ---------- ----------
Current portion of term loans $ 7,233 $ 7,421 $ 435 $ -
========== ========== ========== ==========
In June 1999, the Company obtained two term loans from Union Bank of
California, N.A. (the "Bank") in the aggregate amount of $18.5 million
as partial funding for the acquisition of Island Pacific Systems
Corporation. During the first quarter of fiscal 2001, the Company
agreed to consolidate the approximately $14.75 million balance of the
two loans into a single term loan, and to extend the maturity date of
the renegotiated loan to August 1, 2000. The Company also agreed to
reduce the outstanding principal amount by $10 million. During the
second quarter of fiscal 2001, Softline loaned the Company $10 million
for the purpose of making this $10 million principal reduction. The
Company then refinanced the $4.75 million balance due on the term loan.
Under the terms of this arrangement, the Company was required beginning
August 1, 2000 to pay interest on the outstanding balance at the rate
of 5% over the Bank's prime rate, increasing to 6.25% over the Bank's
prime rate after December 31, 2000. The Company was also required to
pay $200,000 per month toward reduction of principal, and to pay as
further reduction of principal one half of amounts received from a
$1.75 million contract receivable, any amounts received from sale of
shares of Integrity Software, Inc. which secure a related note
receivable (see Note 4), and any amounts received from the issuance of
debt or equity securities other than stock option exercises. The
Company's $3 million revolving line of credit with the Bank also became
subject to the terms of this agreement. The entire amount of
indebtedness was due April 1, 2001.
During the third quarter of fiscal 2001, the Bank agreed to waive the
required $200,000 monthly principal payments and to allow the Company
to pay a reduced monthly interest rate of 2% over prime, with the
balance of the contractual interest accruing and payable upon maturity.
The Bank also agreed to permit the Company to apply up to $2.5 million
in private placement proceeds (see Note 12) and the full $100,000 paid
on the contract receivable during the third quarter of the fiscal year
toward working capital instead of reduction of principal. The Company
also agreed to terminate the revolving line of credit arrangement,
which as of December 31, 2000, was fully drawn, and to a restriction on
payments toward subordinated loan obligations until the Bank
obligations are discharged. The restriction did not apply to the
repayment of amounts due to a subsidiary of Softline (see Note 17).
The entire amount owed to the Bank is secured by the Company's assets,
10,700,000 shares of the Company's common stock and stock of its U.S.
retail and training products subsidiaries. The loan is subject to
certain financial covenants and contains limitations on acquisitions,
investments and other borrowings.
F-20
Effective June 28, 2001, the term loan was amended and restated. Under
the restated term loan agreement, the Bank extended the maturity date
to May 1, 2002. The restated agreement also provided for the Company,
at its option, to receive a further extension of six months (i.e.,
until November 1, 2002), subject to certain conditions. Interest on the
term loan accrues and is payable monthly at a rate per annum equal to
the Bank's reference rate plus five percentage points. The restated
agreement includes affirmative covenants regarding the Company
maintaining and obtaining certain financial ratios. The Company was
required to make monthly principal payments of $50,000 starting October
1, 2001.
On March 18, 2001, the loan agreement was amended to release certain
collateral from the pledge to the Bank, and to instead pledge to the
Bank 10,700,000 shares of the Company's common stock surrendered by
Softline in the related recapitalization transactions with Softline
described in Notes 5, 10 and 13. The release collateral consisted of
shares of capital stock of our Australian subsidiary, and the IBIS note
and related shares of Integrity Software.
On May 21, 2002, the Bank further amended the loan agreement to extend
the maturity date to May 1, 2003 and to revise other terms and
conditions. We agreed to pay to the Bank $100,000 as a loan extension
fee, payable in four monthly installments of $25,000 each commencing on
June 30, 2002. If we fail to pay any installment when due, the loan
extension fee increases to $200,000, and the monthly payments increase
accordingly. We also agreed to pay all overdue interest and principal
by June 30, 2002, and to pay monthly installments of $24,000 commencing
on June 30, 2002 and ending April 30, 2003 for the Bank's legal fees.
The Company was not able to make the payments required in June 2002.
The Company was also out of compliance with certain financial covenants
as of June 28, 2002. Effective July 15, 2002, the Bank further amended
the restated term loan agreement, and waived the then existing
defaults. Under this third amendment to the restated agreement, the
Bank agreed to waive the application of the additional 2% interest rate
for late payments of principal and interest, and to waive the
additional $100,000 refinance fee required by the second amendment. The
Bank also agreed to convert $361,000 in accrued and unpaid interest
and fees to term loan principal, and the Company executed a new term
note in total principal amount of $7.2 million. The Company is required
to make a principal payment of $35,000 on October 15, 2002, principal
payments of $50,000 on each of November 15, 2002 and December 15, 2002,
and consecutive monthly principal payments of $100,000 each on the 15th
day of each month thereafter through August 15, 2003. The entire amount
of principal and accrued interest is due August 31, 2003. The Bank also
agreed to eliminate certain financial covenants and to ease others, and
the Company is in compliance with the revised covenants.
On January 2, 2003, the Company issued a warrant to an affiliate of the
bank to purchase up to 1.5 million shares of the Company's common stock
for $0.01 per share. The warrant was exercisable for shares equal to 1%
of the Company's outstanding common stock on January 2, 2003, and would
become exercisable for shares equal to an additional 0.5% of the
outstanding common stock on the first day each month thereafter, until
it was exercisable for the full 4.99% of the outstanding common stock.
The warrant would not become exercisable to the extent that the Company
had discharged in full its bank indebtedness prior to a various vesting
date. As all of the shares became exercisable, it would result in a
finance charge of $909,000.
In March 2003, the Company entered into a Discounted Loan Payoff
Agreement with the bank. Under this agreement, the Company paid the
bank $2.8 million from the sale of debentures to certain investors. The
Company also issued to the bank 1 million shares of its common stock
and a $500,000 one-year unsecured, non-interest bearing convertible
note payable in either cash or stock, at the Company's option. The cash
payment, shares and convertible note were accepted by the bank in full
satisfaction of the company's debt to the bank. The bank also canceled
the warrant to purchase 1.5 million shares of the Company's common
stock and returned all collateral held, including 10.7 million shares
of the Company's common stock pledged as security. In March 2003, the
Board decided that the $500,000 convertible note will be converted
solely for equity and will not be repaid in cash.
F-21
SUBORDINATED TERM LOAN DUE TO STOCKHOLDER
During the second quarter of fiscal 2001, Softline loaned the Company
$10 million for the purpose of making a $10 million principal reduction
on the Bank term loan. This loan was unsecured and was subordinated to
the term loan. The loan bore interest at 14% per annum, payable
monthly, and had a stated due date of August 1, 2001. The Company did
not pay monthly interest and had accrued $1.0 million interest as of
March 31, 2001. There were no financial covenants or restrictions
related to the Softline loan. Effective June 30, 2001, the terms of the
loan with Softline were amended. Included in the amendment was an
extension of the maturity date to November 1, 2002.
The Company agreed to reimburse Softline for costs associated with this
loan in the amount of $326,000, which was fully accrued for as of March
31, 2001. These costs were to be amortized over the initial 13 month
life of the loan.
Effective January 1, 2002, the Company entered into an integrated
series of transactions with Softline where Softline agreed to release
the Company's obligations relating to this loan, including the $326,000
refinancing costs. As a result, the Company recorded a reduction of
refinancing cost equal to the $224,000 previously amortized. For
further discussion of the transactions with Softline, see Notes 5 and
13.
During the fiscal year ended March 31, 2001, the Company borrowed $0.6
million from a subsidiary of Softline on a short-term basis (see Note
16).
Interest expense included interestdue to Softline and its subsidiary
for the fiscal years ended March 31, 2002, 2001 and 2000 of $1.3
million, $1.0 million and $0, respectively, and for the nine months
ended December 31, 2002 and 2001 of $0 (unaudited) and $1.3 million
(unaudited), respectively. Interest expense for the fiscal years ended
March 31, 2002, 2001 and 2000 also included interest due to other
stockholders in the amount of $56,000, $130,000 and $31,000,
respectively, and for the nine months ended December 31, 2002 and 2001
of $23,000 (unaudited) and $48,000 (unaudited), respectively.
11. CONVERTIBLE NOTES
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
In May and June 2001, the Company entered into Subscription Agreements
with a limited number of accredited investors related to existing
stockholders for gross proceeds of $1.3 million. Each unit consisted of
a convertible promissory note and warrants to purchase 250 shares of
the Company's common stock for each $1,000 borrowed by the Company. The
holders of the notes had the option to convert the unpaid principal and
interest at any time at a conversion price of $1.35. The notes matured
on August 30, 2001 and earned interest at 12% per annum to be paid at
maturity. The notes were not paid or converted at March 31, 2002.
The interest rate increased to 17% per annum on August 30, 2001 as a
result of the non-payment on the maturity date. As of March 31, 2002,
the balance of these convertible notes is $1.4 million, including
$171,000 in accrued interest.
In accordance with generally accepted accounting principles, the
difference between the conversion price of $1.35 and the Company's
stock price on the date of issuance of the notes is considered to be
interest expense. It is recognized in the statement of operations
during the period from the issuance of the debt to the time at which
the debt first becomes convertible. The Company recognized interest
expense of $191,000 in the accompanying statement of operations for the
fiscal year ended March 31, 2002.
Each warrant entitled the holder to purchase one share of the Company's
common stock at an exercise price of $1.50. The warrants were to expire
three years from the date of issuance. The Company allocates the
proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at
the time of issuance. The amount allocated to the warrants was
determined to be $247,000 and is included in interest expense in the
accompanying statement of operations for the year ended March 31, 2002.
Interest expense for the fiscal year ended March 31, 2002 was $609,000.
F-22
In July 2002, the Company agreed to amend the terms of the notes and
warrants issued to these investors. The investors agreed to replace the
existing notes with new notes having a maturity date of September 30,
2003. The interest rate on the new notes was reduced to 8% per annum,
increasing to 13% in the event of a default in payment of principal or
interest. The Company is required to pay accrued interest on the new
notes calculated from July 19, 2002, in quarterly installments
beginning September 30, 2002. The investors agreed to reduce accrued
interest and late charges on the original notes by up to $16,000, and
to accept the reduced amount in 527,286 shares of the Company's common
stock valued at $0.41 per share which was the average closing price of
the shares on the American Stock Exchange for the 10 trading days prior
to July 19, 2002. The new notes are convertible at the option of the
holders into shares of the Company's common stock valued at $0.60 per
share. The Company does not have the right to prepay the notes. In
December 2002, the investors agreed to extend the payments of accrued
interest to September 30, 2003.
The Company also agreed that the warrants previously issued to the
investors to purchase an aggregate of 3,033,085 shares of common stock
at exercise prices ranging from $0.85 to $1.50, and expiring on various
dates between December 2002 and June 2004, would be replaced by new
warrants to purchase an aggregate of 1,600,000 shares at $0.60 per
share, expiring July 19, 2007.
The Company also agreed to file a registration statement with the
Securities and Exchange Commission for the resale of all shares held by
or obtainable by these investors. In the event such registration
statement is not declared effective by the SEC by June 30, 2003, the
Company will be obligated to issue five-year penalty warrants for the
purchase of 5% of the total number of registrable securities at an
exercise price of $0.60 per share. For the first and second 30 day
periods after June 30, 2003 in which the registration statement is not
effective, the Company will be obligated to issue additional warrants
for the purchase of 5% of the total number of registrable securities at
an exercise price of $0.60 per share. For each 30 day period thereafter
in which the registration statement is not effective, the Company will
be obligated to issue additional warrants for the purchase of 2.5% of
total number of registrable securities at an exercise price of $0.60
per share. No further penalty warrants will accrue from the original
registration obligation to these investors (see Note 13).
12. COMMITTED COMMON STOCK
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million
for the purchase of a non-recourse convertible note and a warrant to
purchase 2,500,000 shares of common stock. In connection with this
transaction, Toys signed a two-year software development and services
agreement (the "Development Agreement") that expires in February 2004.
The purchase price is payable in installments through September 27,
2002. The note is non-interest bearing, and the face amount is payable
in shares of common stock valued at $0.553 per share. The note is due
May 29, 2009, or if earlier than that date, three years after the
completion of the development project contemplated in the Development
Agreement. The Company does not have the right to prepay the
convertible note before the due date, but upon the due date, the
Company may at its option pay the principal amount in cash rather than
shares of common stock to the extent Toys did not earlier convert the
note to shares of common stock. The face amount of the note is 16% of
the $1.3 million purchase price as of May 29, 2002, and increases by 4%
of the $1.3 million purchase price on the last day of each succeeding
month, until February 28, 2004, when the face amount is the full $1.3
million purchase price. The face amount will cease to increase if Toys
terminates the Development Agreement for a reason other than the
Company's breach. The face amount will be zero if the Company
terminates the Development Agreement due to an uncured breach by Toys
of the Development Agreement. As of December 31, 2002, the Company had
received proceeds of $1.3 million.
The warrant entitles Toys to purchase up to 2,500,000 of shares of our
common stock at $0.553 per share. The warrant is initially vested as to
400,000 shares as of May 29, 2002, and vests at the rate of 100,000
shares per month until February 28, 2004. The warrant will cease to
vest if Toys terminates the Development Agreement for a reason other
than the Company's breach. The warrant will become entirely
non-exercisable if the Company terminates the Development Agreement due
to an uncured breach by Toys of the Development Agreement. Toys may
elect a "cashless exercise" where a portion of the warrant is
surrendered to pay the exercise price. As of December 31, 2002, 1.1
million shares of the warrant are exercisable/
F-23
The note conversion price and the warrant exercise price are each
subject to a 10% reduction in the event of an uncured breach by the
Company of certain covenants to Toys. These covenants do not include
financial covenants. Conversion of the note and exercise of the warrant
each require 75 days advance notice. The Company also granted Toys
certain registration rights for the shares of common stock into which
the note is convertible and the warrant is exercisable.
In November 2002, the Board decided that this note will be converted
solely for equity and will not be repaid in cash. The note has
therefore been classified as equity at December 31, 2002.
In accordance with generally accepted accounting principles, the
difference between the conversion price of the note of $0.553 and the
Company's stock price on the date of issuance of the notes was
considered to be interest expense. For the nine months ended December
31, 2002, the Company has recorded a charge of $151,000 (unaudited)
representing a proportion of the total debt discount.
The Company has also allocated the proceeds received from debt or
convertible debt with detachable warrants using the relative fair value
of the individual elements at the time of issuance. For the nine months
ended December 31, 2002, the Company recognized $20,000 (unaudited) as
interest expense. The remaining value of the detachable warrants of
$574,000 (unaudited) has been recorded as an offering cost and as such,
there is no effect on the Company's statement of operations.
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases office space and various
automobiles under non-cancelable operating leases that expire at
various dates through the year 2006. Certain leases contain renewal
options. Future annual minimum lease payments for non-cancelable
operating leases at March 31, 2002 are summarized as follows (in
thousands):
YEAR ENDING MARCH 31:
2003 $ 753
2004 724
2005 704
2006 192
2007 7
--------------
$ 2,380
==============
Rent expense was $1.2 million, $1.5 million and $1.3 million for the
fiscal years ended March 31, 2002, 2001 and 2000, respectively. Rent
expense for the nine months ended December 31, 2002 and 2001 was
$663,000 (unaudited) and $812,000 (unaudited), respectively.
EMPLOYEE BENEFIT PLAN - Effective January 1, 1999, the Company adopted
a defined contribution plan under Section 401(k) of the Internal
Revenue Code covering all eligible employees employed in the United
States ("401(k) Plan"). Eligible participants may contribute up to
$10,000 or 20% of their total compensation, whichever is lower. The
Company matched 50% of the employee's contributions, up to 3% of the
employee's total compensation, and may make discretionary contributions
to the plan. Participants will be immediately vested in their personal
contributions and over a six year graded schedule for amounts
contributed by the Company. Effective, July 1, 2000, the Company
amended the 401(k) Plan to for the following items: (a) Company
matching contribution equal to 50% of the employee's contributions, up
to 6% of the employee's total compensation and (b) eligible
participants may defer up to $10,500 or 18% of their total
compensation, whichever is lower. Effective January 1, 2002, the
Company ceased matching contributions. The Company made matching
contributions to the 401(k) Plan of approximately $125,000, $359,000
and $192,000 in the fiscal years ended March 31, 2002, 2001 and 2000,
respectively.
F-24
LITIGATION -In April of 2002, the Company's former CEO, Thomas
Dorosewicz, filed a demand with the California Labor Commissioner for
$256,250 in severance benefits allegedly due under a disputed
employment agreement, plus attorney's fees and costs. On June 18, 2002,
the Company filed an action against Mr. Dorosewicz and an entity
affiliated with him in San Diego Superior Court, Case No. GIC790833,
alleging fraud and other causes of action relating to transactions Mr.
Dorosewicz caused the Company to enter into with his affiliates and
related parties without proper board approval. The Company expects one
or more cross-claims from Mr. Dorosewicz in that action. The Company
does not believe it has any obligation to pay the severance benefits
alleged by Mr. Dorosewicz to be due, and it intends to vigorously
pursue its causes of action against Mr. Dorosewicz. On July 31, 2002,
Mr. Dorosewicz filed cross-complaints in that action alleging breach of
statutory duty, breach of contract, fraud and other causes of action
related to his employment with the Company and other transactions he
entered into with the Company. These matters are still pending and the
parties have agreed to resolve all claims in binding arbitrations.
Due to the declining performance of our Australian subsidiary, we
decided in the third quarter of fiscal 2002 to sell certain assets of
our Australian subsidiary to the former management of such subsidiary,
and then cease Australian operations. Such sale was, however, subject
to the approval of National Australia Bank, the subsidiary's secured
lender. The bank did not approve the sale and the subsidiary ceased
operations in February 2002. The bank caused a receiver to be appointed
in February 2002 to sell substantially all of the assets of the
Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former
management, and is actively pursuing the collection of receivables. If
the sale proceeds plus collections on receivables are insufficient to
discharge the indebtedness to National Australia Bank, we may be called
upon to pay the deficiency under our guarantee to the bank. We have
accrued $187,000 as our potential exposure. The receiver has also
claimed that we are obligated to it for inter-company balances of
$636,000, but we do not believe any amounts are owed to the receiver,
who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on
disability/worker's compensation leave, Debora Hintz, filed a claim
with the California Labor Commissioner seeking $41,000 in alleged
unpaid commissions. In or about December of 2002, Ms. Hintz filed a
discrimination claim against the Company with the Department of Fair
Employment and Housing, alleging harassment and sexual orientation
discrimination. The Company has responded appropriately to both the
wage claim and the discrimination allegations, which the Company
believes lack merit based on present information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation
("Cord Camera"), filed a lawsuit against one of our subsidiaries, SVI
Retail, Inc. as the successor to Island Pacific Systems Corporation, in
the United States District Court for the Southern District of Ohio,
Eastern Division, Case No. C2 02 859. The lawsuit claims damages in
excess of $1.5 million, plus punitive damages of $250,000, against SVI
Retail for alleged fraud, negligent misrepresentation, breach of
express warranties and breach of contract. These claims pertain to the
following agreements between Cord Camera and Island Pacific: (i) a
License Agreement, dated December 1999, as amended, for the use of
certain software products, (ii) a Services Agreement for consulting,
training and product support for the software products and (iii) a POS
Software Support Agreement for the maintenance and support services for
a certain software product. At this time, we cannot predict the merits
of this case because it is in its preliminary state and discovery has
not yet commence. However, SVI Retail intends to defend vigorously the
action and possibly file one or more counter-claims.
In mid-2002, the Company is the subject of an adverse judgment entered
against it in favor of Randall's Family Golf Centers, ("Randall") in
the approximate sum of $61,000. The judgment was entered as a default
judgment, and is based on allegations that the Company received a
preferential transfer of funds within 90 days of the filing by Randall
of a chapter 11 case in the United States Bankruptcy Court for the
Southern District of New York. We believe we have viable defenses to
the allegations if the default is set aside. We are determining whether
the matter can be settled without the necessity of litigation to set
aside the default, but we are unable to ascertain the likely outcome of
this matter at this time.
F-25
On December 16, 2002, Chapter 11 Debtors Natural Wonders, Inc. and
World of Science, Inc. (collectively "Debtors") filed an adversary
proceeding against our subsidiary SVI Retail, Inc. seeking to avoid and
recover preferential transfers. The Debtors sought recovery of
approximately $84,000, which it had previously paid to SVI Retail for
goods and services rendered. On March 12, 2003, the Debtors and SVI
Retail settled the adversary proceeding for $18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as
Shea Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island
Pacific, an operating division of SVI Solutions, Inc. ("Island
Pacific") with a cross-complaint for indemnity on behalf of an entity
identified in the summons as Pacific Cabinets. Sabica and Island
Pacific filed a notice of motion and motion to quash service of summons
on the grounds that neither Sabica nor Island Pacific has ever done
business as Pacific Cabinets and has no other known relation to the
construction project that is the subject of the cross-complaint and
underlying complaint. The hearing on Sabica and Island Pacific's motion
to quash is scheduled for May 22, 2003.
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.
14. PREFERRED STOCK, COMMON STOCK, TREASURY STOCK, STOCK OPTIONS AND
WARRANTS
PRIVATE PLACEMENTS - In March 2000, the Company received $2.9 million
from the sale of common stock to an investor. The Company agreed to
register the shares with the Securities and Exchange Commission
("SEC"). The shares carried a "repricing right" which entitled the
investor to receive additional shares upon the occurrence of certain
events. In October 2000, the Company issued 375,043 shares in
satisfaction of the repricing right.
In October 2000, the SEC declared effective the registration statement.
The Company became obligated to pay to the investor liquidated damages
for late effectiveness of the registration statement in the amount of
$286,000. The investor agreed in March 2001 to accept 286,000 shares of
common stock in satisfaction of the liquidated damages and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, the Company issued the investor a
two-year warrant to purchase up to 107,000 shares of common stock at
$1.50 per share. The Company may call the warrants for $0.001 per share
upon the occurrence of certain events. The investor will have thirty
days after the call to exercise the warrant, after which time the
warrant will expire.
The Company agreed to register all of the shares sold in March 2001,
and those that it may sell under the warrant, with the SEC. The Company
became obligated to pay to the investor liquidated damages in the
amount of $60,000. Subsequent to March 31, 2002, the investor agreed to
accept 140,000 shares of common stock in satisfaction of the liquidated
damages.
In December 2000, the Company received $1.5 million from the sale of
common stock and warrants to a limited number of accredited investors.
As part of the same transaction, the investors purchased in January
2001 an additional $0.5 million of common stock and warrants, and two
of the investors purchased in February 2001 an additional $0.5 million
of common stock and warrants on the same terms and conditions. The
Company issued a total of 2,941,176 shares of common stock and
1,470,590 warrants to purchase common stock at an exercise price of
$1.50 as a result of the aforementioned transaction. The Company agreed
to register the common shares purchased and the common shares issuable
upon the exercise of warrants with the Securities and Exchange
Commission. The Company filed a registration statement in January 2001
to register these shares, but it did not become effective. As of March
31, 2002, the Company has not registered these shares and has issued
1,029,410 penalty warrants with a strike price of $0.85 per share, with
F-26
fair value of $711,000, as required under an agreement with the
investors. The Company was obligated to issue to each investor a
warrant for an additional 2.5% of the number of shares purchased by
that investor in the private placement for each continuing 30-day
period during which a registration statement is not effective.
Subsequent to March 31, 2002, the Company and the investors agreed to
revise the terms of the foregoing warrants, and to cease accruing
penalty warrants (see Note 11).
PREFERRED STOCK - The Series A Preferred has a stated value of $100 per
share and is redeemed at the option of the Company any time prior to
the maturity date of December 31, 2006 for 107% of the stated value and
accrued and unpaid dividends. The shares are entitled to cumulative
dividends of 7.2% per annum, payable semi-annually. At March 31, 2002,
dividends in arrears amount to $254,000 or $1.80 per share. The holders
may convert each share of Series A Preferred at any time into the
number of shares of the Company's common stock determined by dividing
the stated value plus all accrued and unpaid dividends, by a conversion
price initially equal to $0.80. The conversion price will increase at
an annual rate of 3.5% calculated on a semi-annual basis. The Series A
Preferred is entitled upon liquidation to an amount equal to its stated
value plus accrued and unpaid dividends in preference to any
distributions to common stockholders. The Series A Preferred has no
voting rights prior to conversion into common stock, except with
respect to proposed impairments of the Series A Preferred rights and
preferences, or as provided by law. The Company has the right of first
refusal to purchase all but not less than all of any shares of Series A
Preferred or shares of common stock received on conversion which the
holder may propose to sell to a third party, upon the same price and
terms as the proposed sale to a third party.
COMMON STOCK - During fiscal year ended March 31, 2002, the Company
issued the following:
o An aggregate of 573,845 shares of common stock for services
rendered and severance payments totaling $490,000.
o 38,380 shares of common stock for investor relations services.
The $31,000 value of these shares was recorded subsequent to
year end when the services were performed.
o 644,715 shares of common stock totaling $485,000 which are to
be returned as a result of early termination of investor
relations service contracts. The value of these shares is
recorded as a share receivable component of stockholders'
equity.
During the nine months ended December 31, 2002 (unaudited), the Company
issued the following:
o an aggregate of 283,332 shares of common stock to consultants
for services rendered in the quarter ended June 30, 2002 and
prior periods.
o 140,000 shares of common stock in satisfaction of the
liquidated damages relating to late registration of the shares
sold to AMRO International, S.A. in March 2001.
o In conjunction with the recapitalization transactions with
Softline Limited, the Company issued in May 2002 an aggregate
of 141,000 shares of newly-designated Series A Preferred Stock
at a deemed purchase price of $100 per share in exchange for
10,700,000 its common shares held by Softline and the
discharge of a $12.3 million note payable to Softline. The
Company also transferred to Softline its note received in
connection with the sale of IBIS Systems Limited. The
transactions had an effective date of January 1, 2002 (see
Note 5).
F-27
The Series A Preferred Stock has a stated value of $100 per share and
is redeemable at our option any time prior to the maturity date of
December 31, 2006 for 107% of the stated value and accrued and unpaid
dividends. The shares are entitled to cumulative dividends of 7.2% per
annum, payable semi-annually when, as and if declared by the board of
directors in priority and preference to dividends declared on the
Company's common shares. Softline may convert each share of Series A
Preferred Stock at any time into the number of common shares determined
by dividing the stated value plus all accrued and unpaid dividends, by
a conversion price initially equal to $0.80. The conversion price
increases at an annual rate of 3.5% calculated on a semi-annual basis.
The Series A Preferred Stock is entitled upon liquidation to an amount
equal to its stated value plus accrued and unpaid dividends in
preference to any distributions to the Company's common stockholders.
The Series A Preferred Stock has no voting rights prior to conversion
into common stock, except with respect to proposed impairments of the
Series A Preferred rights and preferences, or as provided by law. The
Company has the right of first refusal to purchase all but not less
than all of any shares of Series A Preferred Stock or common shares
received on conversion which Softline may propose to sell to a third
party, upon the same price and terms as the proposed sale to a third
party. The Company also granted Softline certain registration rights
for the common shares into which the Series A Preferred Stock is
convertible, including the right to demand registration on Form S-3 if
such form is available to the Company and Softline proposes to sell at
least $5 million of registrable common shares, and the right to include
shares obtainable upon conversion of the Series A Preferred Stock in
other registration statements the Company proposes to file.
o an aggregate of 527,286 shares of common stock to stockholders
as payment of accrued interest on the convertible notes due to
stockholders.
o 5,000 shares of common stock for consulting fee incurred in
the quarter ended September 30, 2002.
o an aggregate of 595,200 shares of common stock to Softline
Limited, our majority stockholder, as payments for $390,000
past due loan refinancing fees and payables.
o 1,010,000 shares of common stock to a stockholder as repayment
of a loan with the outstanding balance of $388,000. This loan
was acquired in connection with the acquisition of Island
Pacific.
o 100,000 shares of common stock to an employee as bonus payment
of $25,000 earned in the fiscal year 2003.
o 60,000 shares of common stock to its attorney as payment for
$30,000 legal services provided in prior periods.
o 50,000 shares of common stock as payment for $8,000 consulting
fee incurred in quarter ended December 31, 2002.
TREASURY STOCK - In November 1998, the Board of Directors authorized
the Company to purchase up to 1,000,000 shares of the Company's common
stock. As of March 31, 2001 and 2000, the Company had repurchased
444,641 shares of its common stock at a cost of $4.3 million. The
purchased shares were canceled as of March 31, 2002.
The Company received 10,700,000 shares of the Company's common stock
valued at $8.6 million from Softline in connection with the
transactions between the Company and Softline described in Notes 5, 10
and 13. These shares are pledged to the Bank as collateral for the term
loans (see Note 10).
STOCK OPTION PLAN - The Company adopted an incentive stock option plan
during fiscal year 1990 (the "1989 Plan"). Options under this plan may
be granted to employees and officers of the Company. There were
initially 1,000,000 shares of common stock reserved for issuance under
this plan. Effective April 1, 1998, the board of directors approved an
amendment to the 1989 Plan increasing the number of shares of common
stock authorized under the 1989 Plan to 1,500,000. The exercise price
of the options is determined by the board of directors, but the
exercise price may not be less than the fair market value of the common
stock on the date of grant. Options vest immediately and expire between
three to ten years from the date of grant. The 1989 Plan terminated in
October 1999.
F-28
On October 5, 1998, the board of directors and stockholders approved a
new plan entitled the 1998 Incentive Stock Plan (the "1998 Plan"). The
1998 Plan authorizes 3,500,000 shares to be issued pursuant to
incentive stock options, non-statutory options, stock bonuses, stock
appreciation rights or stock purchases agreements. The options may be
granted at a price not less than the fair market value of the common
stock at the date of grant. The options generally become exercisable
over periods ranging from zero to five years, commencing at the date of
grant, and expire in one to ten years from the date of grant. The 1998
Plan terminates in October 2008. On August 18, 2000, the Board approved
certain amendments to the 1998 Plan. On November 16, 2000, certain of
the amendments were approved by the shareholders. These amendments: (a)
increased number of shares authorized in the Plan from 3,500,000 to
4,000,000, (b) authorized an "automatic" annual increase in the number
of shares reserved for issuance by an amount equal to the lesser of 2%
of total number of shares outstanding on the last day of the fiscal
year, 600,000 shares, or an amount approved by the Board of Directors,
and (c) to limit the number of stock awards of any one participant
under the 1998 Plan to 500,000 shares in any calendar year.
The following summarizes the Company's stock option transactions under
the stock option plans:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
----------- -----------
Options outstanding, April 1, 1999 1,369,285 $ 4.05
Exercised (190,075) $ 3.63
Granted 730,150 $ 7.87
Expired/canceled (119,100) $ 7.28
-----------
Options outstanding, March 31, 2000 1,790,260 $ 5.44
Exercised (131,300) $ 6.24
Granted 2,891,929 $ 1.35
Expired/canceled (589,855) $ 4.88
-----------
Options outstanding, March 31, 2001 3,961,034 $ 2.55
Granted 2,117,300 $ 0.89
Expired/canceled (1,592,445) $ 1.84
-----------
Options outstanding March 31, 2002 4,485,889 $ 2.05
===========
Exercisable, March 31, 2000 1,169,160 $ 4.37
===========
Exercisable, March 31, 2001 922,885 $ 4.01
===========
Exercisable, March 31, 2002 2,030,673 $ 2.63
===========
In addition to options issued pursuant to the stock option plans
described above, the Company issued additional options outside the
plans to employees, consultants, and third parties. The following
summarizes the Company's other stock option transactions:
F-29
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
----------- -----------
Options outstanding, April 1, 1999 5,388,700 $ 1.95
Exercised (3,247,188) $ 1.92
Granted 15,000 $ 9.50
-----------
Options outstanding, March 31, 2000 2,156,512 $ 2.02
Exercised (289,700) $ 1.82
Granted 300,000 $ 0.95
Expired/Canceled (800,000) $ 1.25
-----------
Options outstanding, March 31, 2001 1,366,812 $ 2.28
Expired/Canceled (320,000) $ 1.08
-----------
Options outstanding, March 31, 2002 1,046,812 $ 2.61
===========
Exercisable, March 31, 2000 2,156,512 $ 2.02
===========
Exercisable, March 31, 2001 1,166,812 $ 2.51
===========
Exercisable, March 31, 2002 1,046,812 $ 2.61
===========
During the fiscal years ended March 31, 2001 and 2000, the Company
recognized compensation expense of $28,000 and $55,000, respectively,
for stock options granted to non-employees for services provided to the
Company.
The following table summarizes information as of March 31, 2002
concerning currently outstanding and exercisable options:
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range Of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ------------ ------------- ----------- ------------ --------
(years)
$0.50 - 1.75 4,020,664 8.28 $ 1.15 1,720,728 $ 1.13
$1.76 - 4.00 631,812 5.32 $ 2.45 631,812 $ 2.45
$4.01 - 7.00 464,575 4.06 $ 5.36 444,575 $ 5.32
$7.01 - 11.75 415,650 4.25 $ 7.83 280,370 $ 7.87
-------------------------------------------------- ------------------------------
5,532,701 7.28 $ 2.16 3,077,485 $ 2.62
================================================== ==============================
F-30
The Company has adopted the disclosure-only provision of SFAS No. 123.
The following pro forma information presents net income and basic and
diluted earnings per share as if compensation expense had been
recognized for stock options granted in the fiscal years ended March
31, 2002, 2001 and 2000, as determined under the fair value method
prescribed by SFAS No. 123 (in thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
------------ ------------ ------------
Net loss:
As reported $ (14,658) $ (28,945) $ (4,054)
Pro forma $ (15,963) $ (29,408) $ (5,305)
Basic and diluted loss per share:
As reported $ (0.41) $ (0.83) $ (0.12)
Pro forma $ (0.45) $ (0.85) $ (0.16)
Weighted average assumptions:
Dividend yield None None None
Volatility 77% 140% 49%
Risk free interest rate 3.9% 5.8% 5.8%
Expected life of options 4 years 10 years 1-4 years
For options granted during the year ended March 31, 2002 where the
exercise price was greater than the stock price at the date of grant,
the weighted-average fair value of such options was $0.46, and the
weighted-average exercise price of such options was $0.89. For options
granted during the year ended March 31, 2002 where the exercise price
was equal to the stock price at the date of grant, the weighted average
fair value of such options was $0.53, and the weighted-average exercise
price of such options was $0.89. No options granted during the year
ended March 31, 2002 where the exercise price was less than the stock
price at the date of grant.
WARRANTS - At March 31, 2002 and 2001, the Company had outstanding
warrants to purchase 4,040,168 and 1,614,925 shares of common stock,
respectively, at exercise prices ranging from $0.79 to $7.00 per share.
The lives of the warrants range from two to five years from the grant
date. During the fiscal year ended March 31, 2002, the Company
recognized compensation expense of $579,000 for warrants granted to
non-employees for services provided to the Company. Subsequent to March
31, 2002, the Company agreed to replace warrants to purchase an
aggregate of 3,033,085 shares of common stock at exercise prices
ranging from $0.85 to $1.50, and expiring on various dates between
December 2002 and June 2004, with new warrants to purchase an aggregate
of 1,600,000 shares of common stock at $0.60 per share, expiring July
17, 2007 (see Note 11).
15. INCOME TAXES
The provision (benefit) for income taxes consisted of the following
components (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
Current:
Federal $ 39 $ (1,261) $ 681
State - 45 103
Foreign - 1,048
--------------- ---------------- ---------------
Total 39 (1,216) 1,832
--------------- ---------------- ---------------
Deferred:
Federal - (3,523) (3,325)
State - (774) 261
Foreign - (99) (1,180)
--------------- ---------------- ---------------
Total 39 (4,396) (4,244)
--------------- ---------------- ---------------
Provision (benefit) for income taxes $ 39 $ (5,612) $ (2,412)
=============== ================ ===============
F-31
Significant components of the Company's deferred tax assets and
liabilities at March 31, 2002 and 2001 are as follows (in
thousands):
MARCH 31,
--------------------------------
2002 2001
-------------- --------------
Current deferred tax assets/(liabilities):
State taxes $ - $ 1
Accrued expenses 1,107 728
Related party interest 852 511
Prepaid services 284 -
Warrants for services 344 -
Allowance for bad debts 191 99
-------------- --------------
Net current deferred tax assets 2,778 1,339
-------------- --------------
Non-current deferred tax assets/(liabilities):
Research and expenditure credits - 1,656
Net operating loss 11,040 3,994
Fixed assets - 117
Other credits - 123
Deferred rent 82 82
Accrued expenses 84 3,567
-------------- --------------
Total non-current deferred tax assets 11,206 9,539
Intangible assets (9,908) (5,678)
Accumulated capitalized research and development costs (749) (749)
Other (17) (227)
-------------- --------------
Total non-current deferred tax liability (10,674) (6,654)
-------------- --------------
Net non-current deferred tax asset/(liability) 3,310 2,885
-------------- --------------
Valuation allowance (3,310) (2,885)
-------------- --------------
Net deferred tax liability $ - $ -
============== ==============
The difference between the actual provision (benefit) and the amount
computed at the statutory United States federal income tax rate of 34%
for the fiscal years ended March 31, 2002, 2001 and 2000 is
attributable to the following:
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
Provision (benefit) computed at statutory rate (34.0)% (34.0)% (34.0)%
Nondeductible goodwill 5.1 4.8 12.8
Change in valuation allowance 20.4 9.1
Foreign income taxed at different rates 9.7 5.0 (4.7)
Tax credits (2.9)
State income tax, net of federal tax benefit (0.7) (1.4) (4.3)
Other 2.4 0.3 (7.1)
--------------- ---------------- ----------------
Total provision (benefit) for income taxes (-)% (16.2)% (37.3)%
=============== ================ ================
F-32
At March 31, 2002, the Company had Federal and California tax net
operating loss carryforwards of approximately $29.4 million and $15.2
million, respectively. The Federal and California tax net operating
loss carryforwards will begin expiring after 2008 and 2002,
respectively.
The Company also has Federal and California research and development
tax credit carryforwards of approximately $960,000 and $696,000,
respectively. The Federal credits will begin expiring after 2008. The
California credits may be carried forward indefinitely.
16. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the fiscal years ended March 31, 2002,
2001 and 2000, are as follows (in thousands, except share amounts and
per share data):
FISCAL YEAR ENDED MARCH 31, 2002
---------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and diluted EPS:
Loss available to common stockholders $ (14,658) 35,697,999 $ (0.41)
=========== =========== ===========
FISCAL YEAR ENDED MARCH 31, 2001
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and diluted EPS:
Loss available to common stockholders $ (28,945) 34,761,386 $ (0.83)
=========== =========== ===========
FISCAL YEAR ENDED MARCH 31, 2000
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and Diluted EPS:
Loss available to common stockholders $ (4,054) 32,458,902 $ (0.12)
=========== =========== ===========
The following potential common shares have been excluded from the
computation of diluted net loss per share for the periods presented
because the effect would have been anti-dilutive:
For the years ended March 31,
2002 2001 2000
---- ---- ----
Options outstanding under the Company's
stock option plans 4,485,889 3,961,034 1,790,260
Options granted outside the Company's
stock option plans 1,046,812 1,366,812 2,156,212
Warrants issued in conjunction with private placements 2,944,499 1,602,590 25,000
Warrants issued for services rendered 1,095,669 12,336
Convertible notes due to stockholders 1,037,037
Series A Convertible Preferred Stock 17,625,000
F-33
17. RELATED PARTIES
Included in other receivables at December 31, 2002 and March 31, 2002
and 2001 are amounts due from officers and employees of the Company in
the amount of $7,000 (unaudited), $31,000 and $65,000, respectively.
The office space for the Company's Sydney office was leased from a
former officer of the Company. During the year ended March 31, 2000,
the Company paid $163,000 in rent to this related party. The former
officer was terminated in fiscal year ended March 31, 2001.
The Company began occupying its current principal executive offices in
July 2001. At that time, the premises were owned by an affiliate of the
Company's then Chief Executive Officer. Monthly rent for these premises
was set at $13,783. In April, 2002, the premises were sold to an entity
unrelated to the former Chief Executive Officer. As of the date of this
report, the Company is negotiating the terms of a written lease with
the new owner.
In November 2000, the Company borrowed $600,000 from a wholly-owned
subsidiary of Softline to help meet operating expenses. This loan
called for interest at 10% per annum, and was discharged in full in
February 2001. Interest expense under this loan was $3,000 for the year
ended March 31, 2001. In order to discharge the remaining balance of
that loan while meeting other critical operational expenses, the
Company borrowed $400,000 from Barry M. Schechter, the Company's
Chairman. The Company borrowed an additional $164,000 from Mr.
Schechter in March 2001, which funds were needed to meet operational
requirements of our Australian subsidiary. The advances from Mr.
Schechter bore interest at prime rate and were due on demand, subject
to a limit on demand rights of $50,000 per payment. Interest expense
under the loans from Mr. Schechter was $0 and $7,000 for the fiscal
year ended March 31, 2002 and 2001, respectively. The loans were paid
in full in June 2001.
Included in demand loans due to stockholders totaling $618,000 and $1.3
million as of March 31, 2002 and 2001, respectively, was $122,000 and
$552,000, respectively, owed to a stockholder who together with Barry
M. Schechter and an irrevocable trust forms a beneficial ownership
group. The original loan amounts totaling $2.3 million ($1.5 million of
which was from the stockholder included in the group described above)
were borrowed in June 1999 to fund the acquisition of Island Pacific
Systems Corporation on April 1, 1999. Interest was calculated monthly
at the current prime rate with no stated maturity date. Interest
expense under these loans for the years ended March 31, 2002, 2001 and
2000 was $26,000, $74,000 and $80,000, respectively. Interest expense
under these loans for the nine months ended December 31, 2002 and 2001
was $23,000 (unaudited) and $48,000 (unaudited), respectively. These
loans were repaid in full at December 31, 2002.
The Company retains an entity affiliated with a director of the board
to provide financial advisory services. During the years ended March
31, 2002, 2001 and 2000, the expenses for these services were $42,000,
$112,000 and $36,000, respectively. During the nine months ended
December 31, 2002 and 2001, the expenses for these services were
$33,000 (unaudited) and $27,000 (unaudited), respectively. The Company
also incurred $19,000 and $25,000 in expenses to the same director for
accounting services during the fiscal years ended March 31, 2002 and
2001, respectively and $0 (unaudited) and $29,000 (unaudited) during
the nine months ended December 31, 2002 and 2001, respectively. The
Company borrowed $50,000, $125,000, $70,000 and $50,000 from another
entity affiliated with this director in May 2001, December 2001, May
2002 and September 2002, respectively, to meet payroll expenses. These
amounts were repaid together with interest at the then-effective prime
rate, promptly as revenues were received, and are paid in full as of
the date of this report.
Effective October 1, 1999, the Company sold its Triple-S Computers
(Pty) Limited subsidiary ("Triple-S") to Softline. Triple-S developed
and installed retail point of sale systems throughout Southern Africa.
Softline transferred 78,241 shares of the Company's common stock valued
at the October 1, 1999 closing price of $8.50 per share as
consideration for the acquisition. The transfer of Triple-S was
recorded at the Company's historical book basis and was not material to
the operations of the Company.
F-34
18. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company classifies its operations into two lines of business,
retail solutions and training products. As revenues, reported
profit/(loss) and assets related to the Company's training products
subsidiary are below the threshold established for segment reporting,
the Company considers its business to consist of one reportable
operating segment.
The Company currently operates in the United States and the United
Kingdom. In February 2002, the Australian subsidiary ceased operations
after National Australian Bank, the subsidiary's secured lender, placed
it in receivership (see Note 3). In the fiscal year ended March 31,
2000, the Company also had limited operations in South Africa. The
following is a summary of local operations by geographic area (in
thousands):
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, MARCH 31, MARCH 31,
2002 2001 2002 2001 2000
--------- --------- --------- --------- ---------
(unaudited) (unaudited)
Net sales:
United States $ 14,885 $ 19,278 $ 24,559 $ 25,457 $ 22,820
Australia (discontinued
operations) -- 2,110 2,363 4,959 8,372
South Africa (discontinued
operations) -- -- -- -- 1,090
United Kingdom 2,033 2,168 2,550 2,256 3,832
--------- --------- --------- --------- ---------
Total net sales $ 16,918 $ 23,556 $ 29,472 $ 32,672 $ 36,114
========= ========= ========= ========= =========
Long-lived assets:
United States $ 32,594 $ 44,506 $ 35,280 $ 48,270 $ 60,909
Australia (discontinued
operations) -- 1,138 -- 1,370 11,471
United Kingdom 28 26 22 59 75
--------- --------- --------- --------- ---------
Total long-lived assets $ 32,622 $ 45,670 $ 35,302 $ 49,699 $ 72,455
========= ========= ========= ========= =========
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31, 2002 JUNE 30 SEPT 30 DEC 31 MAR 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 7,851 $ 8,419 $ 6,317 $ 6,885 $ 29,472
GROSS PROFIT 4,376 5,195 3,795 4,918 18,284
NET LOSS (3,514) (3,588) (2,970) (4,586) (14,658)
DILUTED LOSS PER SHARE $ (0.09) $ (0.09) $ (0.08) $ (0.16) $ (0.41)
MARCH 31, 2001 JUNE 30 SEPT 30 DEC 31 MAR 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 11,000 $ 7,993 $ 7,737 $ 5,942 $ 32,672
GROSS PROFIT 8,314 4,004 3,861 4,824 21,003
NET INCOME (LOSS) 546 (4,741) (5,997) (18,753) (28,945)
DILUTED (LOSS) PER SHARE $ 0.02 $ (0.14) $ (0.17) $ (0.54) $ (0.83)
The summation of quarterly net income (loss) per share may not equate
to the year-end calculation as quarterly calculations are performed on
a discrete basis.
F-35
20. SUBSEQUENT EVENTS (UNAUDITED)
In April 2003, the Company appointed Messrs. Harvey Brown and Steven
Beck to the positions of Chief Executive Officer and Chief Operating
Officer, respectively. Mr. Barry M. Schechter remains as Chairman of
the Board.
In March 2003, the Company entered into a Securities Purchase Agreement
with a group of investors for the sale of convertible debentures,
convertible into shares of its common stock at a conversion price of
$1.0236 per share, for the total proceeds of $3.5 million to a group of
investors. The debentures mature in May 2005, bear an interest rate of
9% per annum, and provide for interest only payments on a quarterly
basis, payable, at our option, in cash or shares of common stock.
Along with these debentures, the Company also issued warrants to
purchase an aggregate of 1,572,858 shares of common stock to these
investors. The warrants issued to the investors are for a 5-year term,
with an exercise price equal to $1.0236 per share.
In April 2003, the Company entered into a Securities Purchase Agreement
with an unrelated investor for the sale of a 9% debenture, convertible
to shares of its common stock at a conversion price of $1.0236, for the
proceeds of $400,000.
This debenture matures in October 2005 and was accompanied by a
five-year warrant to purchase 156,311 shares of common stock with an
exercise price of $1.0236 per share. Interest is due on a quarterly
basis, payable in cash or shares of common stock at the Company's
option.
In May 6, 2003, the Company entered into an agreement with another
unrelated group of investors for the sale of 9% debentures, convertible
into shares of the Company's common stock at a conversion price of
$1.0236, for the gross proceeds of $300,000. These debentures mature in
October 2005 and are accompanied by five-year warrants to purchase an
aggregate of 101,112 shares of common stock with an exercise price of
$1.0236 per share. Interest is due on a quarterly basis, payable in
cash or shares of the Company's common stock at its option.
F-36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the securities
being registered are set forth in the following table (all amounts except the
registration fee are estimated):
SEC Registration Fee........................ $ 3,525
Legal fees and expenses..................... $ 60,000
Accounting fees and expenses................ $ 10,000
Printing & Engraving........................ $ 0
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. Our Restated Certificate of Incorporation contains provisions permitted
by Section 102(b)(7) of the DGCL.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such director, officer, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal actions or
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify directors and/or officers in an action or
suit by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the director
or officer is adjudged to be liable to the corporation. Where a director or
officer is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such director or officer actually and reasonably incurred.
Our Restated Certificate of Incorporation provides indemnification of
our directors and officers to the fullest extent permitted by the DGCL. Our
Restated Bylaws provides for indemnification by the Company of its directors,
officers and certain non-officer employees under certain circumstances against
expenses, including attorney's fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with any threatened,
pending or completed action, suit or proceeding, in which such person was or is
a party or is threatened to be made a party by reason of the fact that such
person is or was an employee or agent of the Company.
We have obtained liability insurance for each of our directors and
officers for certain losses arising from claims or charges made against them
while acting in their capacities as our directors or officers.
The above discussion of our Restated Certificate of Incorporation and
Restated Bylaws and Sections 102(b)(7) and 145 of the DGCL is not intended to be
exhaustive and is qualified in its entirety by such Restated Certificate of
Incorporation, Restated Bylaws and statutes.
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At present, there is no pending litigation or proceeding involving our
directors or officers as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following unregistered securities within the last
three years.
1. In May 2002, we issued 141,000 shares of our Series A Convertible
Preferred Stock to Softline Limited. The issuance of the Series A
Convertible Preferred Stock was part of a series of transactions
with Softline to (a) repay our subordinated note to Softline and
(b) to transfer to Softline our note received in connection with
the sale of IBIS Systems Limited, in exchange for 10,700,000 of
our common shares. The foregoing securities were offered and sold
without registration under the Securities Act to a sophisticated
investor who had access to all information which would have been
in a registration statement, in reliance upon the exemption
provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
2. In May 2002, Toys "R" Us agreed to invest $1.3 million for the
purchase of a non-recourse convertible note and a warrant to
purchase 2,500,000 of our common shares. The note is non-interest
bearing, and the face amount is payable in shares of our common
stock valued at $0.553 per share. The foregoing securities were
offered and sold without registration under the Securities Act to
a sophisticated investor who had access to all information which
would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
3. During the last three years, we granted 6,742,229 options to
purchase shares of our common stock to employees and consultants
pursuant to our 1998 Incentive Stock Plan, in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
4. During the last three years, we issued an aggregate of 166,408
shares of our common stock to employees, at per share prices
ranging from $0.25 to $1.25, in lieu of cash payments for bonuses
totaling $100,000, in reliance upon the exemption provided by
Section 4(2) under the Securities Act.
5. During the last three years, we granted 174,845 shares to Norman
Smith, at per share prices ranging from $0.50 to $1.61, as payment
for past due legal fees totaling $130,000. The foregoing
securities were offered and sold without registration under the
Securities Act to sophisticated investors who had access to all
information which would have been in a registration statement, in
reliance upon the exemption provided by Section 4(2) under the
Securities Act and/or Regulation D thereunder.
6. In March 2000, we sold 337,448 shares of common stock to AMRO
International, S.A. ("AMRO") for gross proceeds of $3 million and
issued 7,500 shares of common stock to AMRO in lieu of $85,000
commission payment. We agreed to register the shares with the
Securities and Exchange Commission ("SEC") by June 30, 2000. The
shares carried a "repricing right" which entitled the investor to
receive additional shares upon the occurrence of certain events.In
October 2000, we issued additional 375,043 shares of common stock
to AMRO in satisfaction of the repricing right. The registration
statement was declared effective in October 2000. We became
obligated to pay to AMRO liquidated damages for late effectiveness
of the registration statement in the amount of $286,000. In March
2001, we issued 286,000 shares of common stock in satisfaction of
the liquidated damages and sold additional 214,000 shares of
common stock for gross proceeds of $214,000 to AMRO. In connection
with this sale of shares, we granted AMRO a two-year warrant to
purchase 107,000 shares of common stock at $1.50 per share We may
call warrants for $0.001 per share upon the occurrence of certain
events. AMRO will have thirty days after the call to exercise the
warrant, after which time the warrant will expire.We agreed to
II-2
register all of the shares sold in March 2001, and those that it
may sell under the warrant, with the SEC. We became obligated to
pay to AMRO liquidated damages in the amount of $60,000. In April
2002, we issued 140,000 shares of common stock in satisfaction of
the liquidated damages. The foregoing securities were offered and
sold without registration under the Securities Act to
sophisticated investors who had access to all information which
would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
7. In December 2000, we entered into an agreement to sell up to
2,941,176 common shares to a limited number of accredited
investors related to ICM Asset Management, Inc. ("ICM") for cash
at $0.85 per share. We sold 1,764,706 of such shares in December
2000, for gross proceeds of $1.5 million, and an additional
588,235 shares in January 2001, for additional gross proceeds of
$0.5 million. Two of the investors exercised a right to purchase
an additional 588,235 shares in February 2001 for additional gross
proceeds of $0.5 million. The foregoing securities were offered
and sold without registration under the Securities Act to an
accredited investors who had access to all information which would
have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
8. We also agreed to issue to each investor related to ICM a warrant
to purchase one common share at $1.50 for each two common shares
purchased in the private placement (aggregate warrants exercisable
for 1,470,590 shares). We had the right to call 50% of the
warrants, subject to certain conditions, if our common shares
traded at a price above $2.00 per share for thirty consecutive
days. We had the right to call the remaining 50% of the warrants,
subject to certain conditions, if our common shares traded at a
price above $3.00 per share for thirty consecutive days. We agreed
to register all of the shares sold under the purchase agreement or
the warrants with the SEC. Our agreement with the investors
provided that if a registration statement was not effective on or
before April 21, 2001, we would be obligated to issue two-year
warrants to each investor, entitling the investor to purchase
additional shares of our common stock at $0.85 per share. We filed
a registration statement in January 2001 to register these shares,
but it did not become effective. We had issued the investors
warrants to purchase 1,249,997 common shares under this agreement.
In July 2002, these warrants were cancelled and replaced by new
warrants pursuant to the amended agreements. See Item 11. The
foregoing securities were offered and sold without registration
under the Securities Act to an accredited investors who had access
to all information which would have been in a registration
statement, in reliance upon the exemption provided by Section 4(2)
under the Securities Act and/or Regulation D thereunder.
9. In May and June 2001, we issued a total of $1.25 million in
convertible notes to a limited number of accredited investors
related to ICM. The notes were originally due August 30, 2001, and
required interest at the rate of 12% per annum to be paid until
maturity, with the interest rate increasing to 17% in the event of
a default in payment of principal or interest. Any portion of the
unpaid amount of principal and interest was convertible at any
time by the investors into common shares valued at $1.35 per
share. We also agreed to issue to the investors three-year
warrants to purchase 250 common shares for each $1,000 in notes
purchased, at an exercise price of $1.50 per share. The foregoing
securities were offered and sold without registration under the
Securities Act to an accredited investors who had access to all
information which would have been in a registration statement, in
reliance upon the exemption provided by Section 4(2) under the
Securities Act and/or Regulation D thereunder.
10. In July 2002, we agreed to amend the terms of the notes and
warrants issued to the investors related to ICM. The investors
agreed to replace the existing notes with new notes having a
maturity date of September 30, 2003. The interest rate on the new
notes was reduced to 8% per annum, increasing to 13% in the event
of a default in payment of principal or interest. We are required
to pay accrued interest on the new notes calculated from July 19,
2002, in quarterly installments beginning September 30, 2002. In
December 2002, the investors agreed to extend the accrued interest
payments on the new notes to September 2003. The investors reduced
accrued interest and late charges on the original notes by
$16,000, and accepted payment of the reduced amount with 527,286
shares of our common stock valued at $0.41 per share, which was
II-3
the average closing price of our shares on the American Stock
Exchange for the 10 trading days prior to July 19, 2002. In July
2002, we issued 358,863 common shares to the investors as payment
for $147,493 in accrued interest. In August 2002, we issued
168,423 common shares to the investors as payment for $69,222 in
accrued interest. The new notes are convertible at the option of
the holders into shares of our common stock valued at $0.60 per
share. We do not have a right to prepay the notes. The foregoing
securities were offered and sold without registration under the
Securities Act to accredited investors who had access to all
information which would have been in a registration statement, in
reliance upon the exemption provided by Section 4(2) under the
Securities Act and/or Regulation D thereunder.
11. We also agreed that the warrants previously issued to the
investors related to ICM to purchase an aggregate of 3,033,085
shares at exercise prices ranging from $0.85 to $1.50, and
expiring on various dates between December 2002 and June 2004,
would be replaced by new warrants to purchase an aggregate of
1,600,000 shares at $0.60 per share, expiring July 19, 2007. The
replacement warrants are not callable by us.
12. We also agreed to file a registration statement for the resale of
all shares held by or obtainable by the investors related to ICM.
In the event such registration statement is not declared effective
by the SEC by June 30, 2003, we will be obligated to issue
five-year warrants for the purchase of 5% of the total number of
registrable securities at an exercise price of $0.60 per share.
For the first 30 day period after June 30, 2003 in which the
registration statement is not effective, we will be obligated to
issue additional warrants for the purchase of 5% of the total
number of registrable securities at an exercise price of $0.60 per
share. For each 30 day period thereafter in which the registration
statement is not effective, we will be obligated to issue
additional warrants for the purchase of 2.5% of the total number
of registrable securities at an exercise price of $0.60 per share.
No further warrants will accrue from our original registration
obligation.
13. In January 2000, we issued 5,000 shares of common stock to Tara
Trust, an unrelated party, upon exercise of non-qualified option
at an exercise price of $5.00 per share. This option was granted
outside of the option plans in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
14. During the period January 2000 through June 2000, we issued
300,000 shares of common stock to Gala Trust, an unrelated party,
upon exercise of non-qualified option at an exercise price of
$1.75 per share. This option was granted outside of the option
plan in reliance upon the exemption provided by Section 4(2) under
the Securities Act.
15. In March 2000, we issued 93,023 shares to Jay Fisher, a former
stockholder of MarketPlace Systems Corporation, valued at $1
million, as partial consideration for the acquisition of the
assets of that company. The foregoing securities were offered and
sold without registration under the Securities Act to an
accredited investor who had access to all information which would
have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
16. In March 2000, we issued 46,774 shares of common stock, valued at
$213,000, to Softline Limited ("Softline"), our majority
stockholder, as reimbursement for a portion of the purchase price
for Triple-S Computers pursuant to our agreement with Softline
dated May 27, 1998. We also issued 56,718 shares of common stock
to Softline upon exercise of non-qualified option for an exercise
price of $113,000. This option was granted outside of the
incentive stock option plans. In October 2002, we issued to
Softline 500,000 shares of common stock, valued at $325,000, for
payment of past due refinancing fees related to a note payable to
Softline and 95,200 shares of common stock, valued at $64,000, for
payment of past due services provided in prior periods by
Softline's subsidiary. The foregoing securities were offered and
sold without registration under the Securities Act to an
accredited investor who had access to all information which would
have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
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17. In March 2000, we issued an aggregate of 10,000 shares of common
stock to Donald Radcliffe, a Board director, upon exercise of
non-qualified options at exercise prices of $0.30 and $2.00 per
share for an aggregate exercise price of $11,500. In June 2002, we
issued 75,000 shares of common stock to Mr. Radcliffe for payment
of services provided in previous periods, valued at $24,750. The
foregoing securities were offered and sold without registration
under the Securities Act to an accredited investor who had access
to all information which would have been in a registration
statement, in reliance upon the exemption provided by Section 4(2)
under the Securities Act and/or Regulation D thereunder.
18. In May 2000, we issued 5,000 shares of common stock to Gerald
Bagg, an unrelated party, upon exercise of non-qualified option at
an exercise price of $0.75 per share. This option was granted
outside of the incentive stock option plans in reliance upon the
exemption provided by Section 4(2) under the Securities Act
19. In July 2000, we issued 3,700 shares of common stock to Clive
Klugman, a former employee, upon exercise of non-qualified option
at an exercise price of $2.75 per share. This option was granted
outside of the incentive stock option plans in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
20. In September 2000, we issued 11,308, 22,918, 11,000 and 12,500
shares of common stock to Mr. A. Speck, Mr. R. Rosenblatt, Madison
Leasing and Mr. J. Bloom, respectively, unrelated parties, upon
exercise of non-qualified options at an exercise price of $2.00
per share. These options were granted outside of the incentive
stock option plans in reliance upon the exemption provided by
Section 4(2) under the Securities Act.
21. In October 2002, we issued 1,010,000 shares of common stock,
valued at $389,000, to Stonehage S.A. as full settlement of a note
payable acquired in connection with the acquisition of our
business unit, Island Pacific. The foregoing securities were
offered and sold without registration under the Securities Act to
an accredited investor who had access to all information which
would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/
or Regulation D thereunder.
22. In May 2001 and July 2001, we issued 5,000 and 17,157 shares of
common stock to Stephenson & Stephenson LLP for payments of past
due invoices for recruiting fees, valued at $8,000 and $17,000,
respectively, in reliance upon the exemption provided by Section
4(2) under the Securities Act.
23. In August 2001 and September 2001, we issued 5,000 shares of
common stock each to Job Dr. for payments of past due invoices for
recruiting fees, valued at $4,000 and $3,000, respectively, in
reliance upon the exemption provided by Section 4(2) under the
Securities Act.
24. In October 2001, we issued 10,000 shares of common stock to Donner
Corp. International for payment of past due invoices for investor
relation services, valued at $10,000 in reliance upon the
exemption provided by Section 4(2) under the Securities Act.
25. In October 2001, we issued 100,000 shares of common stock to
Western Financial Communications, Inc. ("Western Financial") for
payment of consulting services provided, valued at $72,000. We
also granted Western Financial a two-year warrant to purchase
100,000 shares of common stock at an exercise price of $1.00 in
reliance upon the exemption provided by Section 4(2) under the
Securities Act.
26. In October 2001, we issued 31,575 shares of common stock to
Research Works, Inc. for payment of past due invoices for
recruiting fees, valued at $24,000 in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
II-5
27. In December 2001, we issued 187,500 shares of common stock to KBK
Ventures, Inc. for payment of public relation services provided,
valued at $150,000. We also granted KBK Ventures, Inc. a
three-year warrant to purchase up to 208,333 shares of common
stock at an exercise price of $1.00 in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
28. In December 2001, we issued 30,000 shares of common stock to Roger
Howland for payment of past due invoices for recruiting fees,
valued at $28,000 in reliance upon the exemption provided by
Section 4(2) under the Securities Act.
29. In January 2002, we issued 40,000 shares of common stock to
Displayworks for payment of past due invoices for tradeshow
exhibit services, valued at $36,000 in reliance upon the exemption
provided by Section 4(2) under the Securities Act.
30. In January 2002, we issued 11,800 shares of common stock to Retail
Search Group for payment of past due invoices for recruiting fees,
valued at $10,000 in reliance upon the exemption provided by
Section 4(2) under the Securities Act.
31. In April 2002, we issued 33,332 shares of common stock to Richard
Singer for payment of consulting fees provided, valued at $19,000
in reliance upon the exemption provided by Section 4(2) under the
Securities Act.
32. In April 2002, we issued 100,000 shares of common stock, valued at
$45,000, to Aura (Pvt) Limited for investment relations services
in reliance upon the exemption provided by Section 4(2) under the
Securities Act.
33. In June 2002, we issued 15,000 shares of common stock to Robert
Pomerantz for payment for legal services provided, valued at
$7,000 in reliance upon the exemption provided by Section 4(2)
under the Securities Act.
34. In September 2002, we issued 5,000 shares of common stock to RCG
Capital Markets Group, Inc. for payment of consulting services
provided, valued at $3,000 in reliance upon the exemption provided
by Section 4(2) under the Securities Act.
35. In October 2002, we issued 50,000 shares of common stock to Tribe
Communications, Inc. for payment of public relation services
provided, valued at $8,000 in reliance upon the exemption provided
by Section 4(2) under the Securities Act.
36. In January 2003 and April 2003, we issued 25,000 and 48,000,
respectively, shares of common stock to CEOcast, Inc. for payment
of investor relation services provided, valued at $8,000 and
$25,000, respectively, in reliance upon the exemption provided by
Section 4(2) under the Securities Act. CEOcast, Inc. assigned
rights to 70,080 shares to Rachel Glicksman and 2,920 shares to
Gary Nash.
37. In September 2002, we granted Steven Beck, President of Island
Pacific, and Harvey Braun, CEO of Island Pacific, each a
non-qualified option to purchase up to 2 million shares of common
stock at an exercise price of $0.28 per share. The option vests
immediately and expires in September 2005. The option was granted
outside of the incentive stock option plans. The foregoing
securities were offered and sold without registration under the
Securities Act to an accredited investor who had access to all
information which would have been in a registration statement, in
reliance upon the exemption provided by Section 4(2) under the
Securities Act and/or Regulation D thereunder.
II-6
38. In March 2003, we issued 1,000,000 shares of common stock to Union
Bank of California as part of a settlement for a term loan
acquired in June 1999. The foregoing securities were offered and
sold without registration under the Securities Act to an
accredited investor who had access to all information which would
have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
39. In March 2003, we issued an aggregate of $3.5 million in
debentures convertible into shares of common stock and warrants to
purchase an aggregate of 1,572,858 shares of common stock to
Midsummer Investment, Ltd., Omicron Master Trust, and Islandia,
L.P. The debentures are have a conversion price of $1.0236, and
the warrants have an exercise price of $1.0236. These debentures
and warrants were offered and sold without registration under the
Securities Act to accredited investors who had access to all
information which would have been in a registration statement, in
reliance upon the exemption provided by Section 4(2) under the
Securities Act and/or Regulation D thereunder.
40. In March 2003, we issued an unsecured note that is convertible
into shares of common stock at a price per share of eighty percent
(80%) of the average share closing price of Borrower's common
stock for the ten trading day period immediately preceding the
maturity date of the note, in reliance upon the exemption provided
by Section 4(2) under the Securities Act and/or Regulation D
thereunder.
41. On April 1, 2003, we issued an aggregate of $400,000 in debentures
convertible into and warrants to purchase an aggregate of 547,089
shares of common stock to MBSJ Investors LLC. The debentures are
have a conversion price of $1.0236, and the warrants have an
exercise price of $1.0236. These debentures and warrants were
offered and sold without registration under the Securities Act to
an accredited investor who had access to all information which
would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and/or
Regulation D thereunder.
42. On May 6, 2003, we issued an aggregate of $300,000 in debentures
convertible into and warrants to purchase an aggregate of 394,195
shares of common stock to Crestview Capital Fund I, L.P.,
Crestview Capital Fund II, L.P. and Crestview Capital Offshore
Fund, Inc. The debentures are have a conversion price of $1.0236,
and the warrants have an exercise price of $1.0236. These
debentures and warrants were offered and sold without registration
under the Securities Act to an accredited investor who had access
to all information which would have been in a registration
statement, in reliance upon the exemption provided by Section 4(2)
under the Securities Act and/or Regulation D thereunder.
ITEM 16. EXHIBITS.
EXHIBIT DESCRIPTION
------- -----------
2.1 Agreement of Merger and Plan of Reorganization dated as of
July 1, 1998 among the Company and its wholly-owned
subsidiary; Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc.,incorporated
by reference to exhibit 2.1 to the Company's 8-K filed on
September 16, 1998.
2.2 First Amendment to the Agreement and Plan of Reorganization
dated January 28, 1999 among the Company and its wholly-
owned subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's Form 10-QSB for
the quarter ended December 31, 1998.
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2.3 Second Amendment to the Agreement and Plan of Reorganization
dated May 24, 1999 among the Company and its wholly-owned
subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.12 to the Company's 10-KSB for the
fiscal year ended March 31, 1999.
2.4 Stock Purchase Agreement dated June 1, 1999 among the
Company, Island Pacific Systems Corporation, and the
shareholders of Island Pacific Systems Corporation,
incorporated by reference to exhibit 2.1 to the Company's
Form 8-K filed on June 18, 1999.
2.5 Asset Purchase Agreement dated March 16, 2000 among the
Company, MarketPlace Systems Corporation and Jay Fisher,
incorporated by reference to exhibit 2.15 to the Company's
10-K for the fiscal year ended March 31, 2000.
2.6 Agreement and Plan of Merger of SVI Solutions, Inc. and SVI
Holdings, Inc. dated February 20, 2001, incorporated by
reference to exhibit 2.8 to the Company's 10-K for the
fiscal year ended March 31, 2001.
2.7 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.
2.8 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 filed July
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.
2.9 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 filed July16,
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.
2.10 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.
2.11 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.
2.12 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. (attached
herewith).
3.1 Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's 10-K for the
fiscal year ended March 31, 2001.
3.2 Certificate of Designation, incorporated by reference to
exhibit 4.1 of the Company's 8-K filed May 16, 2002.
II-8
3.3 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's 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.
5.1 Opinion of Solomon Ward Seidenwurm & Smith, LLP (to be
included in a pre-effective amendment).
10.1 Incentive Stock Option Plan, as amended April 1, 1998,
incorporated by reference to exhibit 10.1 to the Company's
10-QSB for the quarter ended September 30, 1998.
10.2 1998 Incentive Stock Plan, as amended, incorporated by
reference to exhibit 10.4 to the Company's 10-K for the
fiscal year ended March 31, 2001.
10.3 Employment Agreement of Barry M. Schechter dated effective
October 1, 2000, incorporated by reference to exhibit 10.2
to the Company's 10-K for the fiscal year ended March 31,
2001.
10.4 Term Loan Agreement dated June 3, 1999 between the Company
and Union Bank of California, N.A., incorporated by
reference to exhibit 10.1 to the Company's 8-K filed on June
18, 1999.
10.5 Amendment No. 1 to Term Loan Agreement between the Company
and Union Bank of California, N.A., dated May 31, 2000,
incorporated by reference to exhibit 10.24 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.6 Revolving Note between the Company and Union Bank of
California, N.A., dated May 31, 2000, incorporated by
reference to exhibit 10.25 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.7 Amendment No. 2 to Term Loan Agreement between the Company
and Union Bank of California, N.A., dated July 13, 2000,
incorporated by reference to exhibit 10.26 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.8 Term Loan Note of the Company in favor of Union Bank of
California, N.A. dated July 13, 2000, incorporated by
reference to exhibit 10.27 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.9 Common Stock Purchase Agreement dated December 22, 2000
between the Company, Koyah Leverage Partners, L.P., Koyah
Partners, L.P., Nigel Davey, and Brian Cathcart,
incorporated by reference as exhibit 10.2 to the Company's
8-K filed on January 8, 2001.
10.10 Amendment No. 3 to Term Loan Agreement, incorporated by
reference to exhibit 10.6 to the Company's 10-Q filed
February 14, 2001.
10.11 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 10-K for the
fiscal year ended March 31, 2001.
II-9
10.12 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 10-K for the
fiscal year ended March 31, 2001.
10.13 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 10-K for the fiscal year ended March 31, 2001.
10.14 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, each incorporated by reference to exhibit 10.4 to
the Company's 10-K filed on July 16, 2002.
10.15 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 10-K filed on July 16, 2002.
10.16 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 10-K filed on July 16, 2002.
10.17 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.
10.18 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.
10.19 Common Stock Purchase Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.28 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.20 Registration Rights Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.29 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.21 Letter Agreement between the Company and AMRO International,
S.A.dated March 1, 2000, incorporated by reference to
exhibit 10.23 to the Company's 10-K for the fiscal year
ended March 31, 2001.
10.22 Common Stock Option Agreement dated May 24, 1999 between the
Company and Softline Limited, incorporated by reference to
exhibit 10.30 to the Company's 10-K for the fiscal year
ended March 31, 2000.
10.23 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
10-K for the fiscal year ended March 31, 2001.
II-10
10.24 Investor Rights Agreement between the Company and Softline
Limited dated as of January 1, 2002, incorporated by
reference to exhibit 4.2 to the Company's 8-K filed May 16,
2002.
10.25 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P. dated July
19, 2002 (included herewith).
10.26 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P., dated
December 22, 2000, incorporated by reference to exhibit 10.3
to the Company's 8-K filed January 8, 2001.
10.27 Amendment Agreement between the Company, Koyah Leverage
Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated July 15, 2002, incorporated
by reference to exhibit 10.11 to the Company's 10-K filed on
July 16, 2002.
10.28 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.
10.29 Second Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 14, 2003 (included herewith).
10.30 Third Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 28, 2003 (included herewith).
10.31 Fourth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated April 3, 2003 (included herewith).
10.32 Convertible Promissory Note and Grant of Security Interest
between SVI Holdings, Inc. and Koyah Leverage Partners L.P.,
dated December 14, 2000, incorporated by reference to
exhibit 10.1 to the Company's 8-K filed January 8, 2001.
10.33 Form of Warrant To Purchase Common Stock, incorporated by
reference to exhibit 10.4 to the Company's 8-K filed
January 8, 2001.
10.34 Form of Convertible Promissory Note for entities related to
ICM Asset Management, Inc., incorporated by reference to
exhibit 10.31 to the Company's 10-K for the fiscal year
ended March 31, 2001.
10.35 Loan Note in Favor of Datafaction, as amended, incorporated
by reference to exhibit 10.5 to the Company's 10-Q filed
February 14, 2001.
10.36 Promissory Note in favor of Barry Schechter, dated February
13, 2001, incorporated by reference to exhibit 10.33 to the
Company's 10-K for the fiscal year ended March 31, 2001.
II-11
10.37 Umbrella Agreement with Toys `R Us, incorporated by
reference to exhibit 10.34 to the Company's 10-K for the
fiscal year ended March 31, 2001. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.
10.38 License Agreement for Software Products with Toys `R Us,
incorporated by reference to exhibit 10.35 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.39 Modification Agreement with Toys `R Us, as amended,
incorporated by reference to exhibit 10.36 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.40 Services Agreement with Toys `R Us, incorporated by
reference to exhibit 10.37 of the Company's 10-K for the
fiscal year ended March 31, 2001. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.
10.41 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by reference
to exhibit 10.2 to the Company's 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 under the
Securities Exchange Act of 1934.
10.42 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 10-K filed on July 16, 2002.
10.43 Convertible Note in favor of Toys "R" Us, Inc. dated May 29,
2002, incorporated by reference to exhibit 10.15 to the
Company's 10-K filed on July 16, 2002.
10.44 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's
10-K filed on July 16, 2002.
10.45 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 10-K filed on July 16, 2002.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of
1934.
10.46 Discounted Loan Payoff Agreement dated March 31, 2003 by and
among Union Bank of California, N.A., the Company, 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 April 15, 2003.
10.47 Unsecured Promissory Note dated March 31, 2003 in favor of
Union Bank of California (included herewith).
10.48 Summary of loan transactions between the Company and World
Wide Business Centres, incorporated by reference to exhibit
10.12 to the Company's 10-K filed on July 16, 2002.
II-12
21.1 List of Subsidiaries (included herewith).
23.2 Consent of Deloitte & Touche LLP, independent auditors
(included herewith)
23.3 Consent of Singer Lewak Greenbaum & Goldstein LLP,
independent auditors (included herewith)
23.4 Consent of Solomon Ward Seidenwurm & Smith, LLP. Reference
is made to Exhibit 5.1.
24.5 Power of Attorney. Reference is made to the signature page
hereof.
ITEM 17. UNDERTAKINGS
We hereby undertake:
(1) To file, during any period in which offers or sales are being
made pursuant to this registration statement, a post-effective
amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)
(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this registration statement (or
the most recent post-effective amendment thereof) which, individually
or in aggregate, represent a fundamental change in the information
set forth in this registration statement. Notwithstanding the
foregoing, any increase of decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in this
registration statement as effective; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in this
registration statement or any material change to such information in
this registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
We hereby undertake that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions referenced above or otherwise, we
have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
II-13
or controlling person in connection with the securities being registered
hereunder, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed by the
final adjudication of such issue.
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Carlsbad,
State of California, on May 9, 2003.
SVI SOLUTIONS, INC., A DELAWARE CORPORATION
By: /s/ Barry M. Schechter
-------------------------------------
Barry M. Schechter, Chairman and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITY DATE
/s/ Barry M. Schechter Chairman of the Board 5/9/03
----------------------------
Barry M. Schechter
/s/ Harvey Braun Chief Executive Officer and 5/9/03
---------------------------- Director
Harvey Braun
/s/ Steven Beck President and Director 5/9/03
----------------------------
Steven Beck
/s/ Donald S. Radcliffe Director 5/9/03
----------------------------
Donald S. Radcliffe
/s/ Ivan M. Epstein Director 5/9/03
----------------------------
Ivan M. Epstein
/s/ Ian Bonner Director 5/9/03
----------------------------
Ian Bonner
/s/ Michael Silverman Director 5/9/03
----------------------------
Michael Silverman
/s/ Robert P. Wilkie Director 5/9/03
----------------------------
Robert P. Wilkie
II-15
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
2.1 Agreement of Merger and Plan of Reorganization dated as of
July 1, 1998 among the Company and its wholly-owned
subsidiary; Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's 8-K filed on
September 16, 1998.
2.2 First Amendment to the Agreement and Plan of Reorganization
dated January 28, 1999 among the Company and its wholly-
owned subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's Form 10-QSB for
the quarter ended December 31, 1998.
2.3 Second Amendment to the Agreement and Plan of Reorganization
dated May 24, 1999 among the Company and its wholly-owned
subsidiary, Applied Retail Solutions, Inc., and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.12 to the Company's 10-KSB for the
fiscal year ended March 31, 1999.
2.4 Stock Purchase Agreement dated June 1, 1999 among the
Company, Island Pacific Systems Corporation, and the
shareholders of Island Pacific Systems Corporation,
incorporated by reference to exhibit 2.1 to the Company's
Form 8-K filed on June 18, 1999.
2.5 Asset Purchase Agreement dated March 16, 2000 among the
Company, MarketPlace Systems Corporation and Jay Fisher,
incorporated by reference to exhibit 2.15 to the Company's
10-K for the fiscal year ended March 31, 2000.
2.6 Agreement and Plan of Merger of SVI Solutions, Inc. and SVI
Holdings, Inc. dated February 20, 2001, incorporated by
reference to exhibit 2.8 to the Company's 10-K for the
fiscal year ended March 31, 2001.
2.7 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.
2.8 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 filed July
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.
2.9 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 filed July
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.
II-16
2.10 Securities Purchase 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 2.1 to the Company's Form 8-K filed on April 15,
2003.
2.11 Securities Purchase Agreement dated as of March 31, 2003
between 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.
2.12 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. (attached
herewith).
3.1 Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's 10-K for the
fiscal year ended March 31, 2001.
3.2 Certificate of Designation, incorporated by reference to
exhibit 4.1 of the Company's 8-K filed May 16, 2002.
3.3 Restated Bylaws, incorporated by reference to exhibit 3.2 to
the Company's 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.
5.1 Opinion of Solomon Ward Seidenwurm & Smith, LLP (to be
included with pre-effective amendment).
10.1 Incentive Stock Option Plan, as amended April 1, 1998,
incorporated by reference to exhibit 10.1 to the Company's
10-QSB for the quarter ended September 30, 1998.
10.2 1998 Incentive Stock Plan, as amended, incorporated by
reference to exhibit 10.4 to the Company's 10-K for the
fiscal year ended March 31, 2001.
10.3 Employment Agreement of Barry M. Schechter dated effective
October 1, 2000, incorporated by reference to exhibit 10.2
to the Company's 10-K for the fiscal year ended March 31,
2001.
10.4 Term Loan Agreement dated June 3, 1999 between the Company
and Union Bank of California, N.A., incorporated by
reference to exhibit 10.1 to the Company's 8-K filed on June
18, 1999.
10.5 Amendment No. 1 to Term Loan Agreement between the Company
and Union Bank of California, N.A., dated May 31, 2000,
incorporated by reference to exhibit 10.24 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.6 Revolving Note between the Company and Union Bank of
California, N.A., dated May 31, 2000, incorporated by
reference to exhibit 10.25 to the Company's 10-K for the
fiscal year ended March 31, 2000.
II-17
10.7 Amendment No. 2 to Term Loan Agreement between the Company
and Union Bank of California, N.A., dated July 13, 2000,
incorporated by reference to exhibit 10.26 to the Company's
10-K for the fiscal year ended March 31, 2000.
10.8 Term Loan Note of the Company in favor of Union Bank of
California, N.A. dated July 13, 2000, incorporated by
reference to exhibit 10.27 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.9 Common Stock Purchase Agreement dated December 22, 2000
between the Company, Koyah Leverage Partners, L.P., Koyah
Partners, L.P., Nigel Davey, and Brian Cathcart,
incorporated by reference to exhibit 10.2 to the Company's
8-K filed on January 8, 2001.
10.10 Amendment No. 3 to Term Loan Agreement, incorporated by
reference to exhibit 10.6 to the Company's 10-Q filed
February 14, 2001.
10.11 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 10-K for the
fiscal year ended March 31, 2001.
10.12 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 10-K for the
fiscal year ended March 31, 2001.
10.13 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 10-K for the fiscal year ended March 31, 2001.
10.14 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, each incorporated by reference to exhibit 10.4 to
the Company's 10-K filed on July 16, 2002.
10.15 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 10-K filed on July 16, 2002.
10.16 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 10-K filed on July 16, 2002.
10.17 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.
10.18 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.
10.19 Common Stock Purchase Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.28 to the Company's 10-K for the
fiscal year ended March 31, 2000.
II-18
10.20 Registration Rights Agreement between the Company and AMRO
International, S.A. dated March 13, 2000, incorporated by
reference to exhibit 10.29 to the Company's 10-K for the
fiscal year ended March 31, 2000.
10.21 Letter Agreement between the Company and AMRO International,
S.A. dated March 1, 2000, incorporated by reference to
exhibit 10.23 to the Company's 10-K for the fiscal year
ended March 31, 2001.
10.22 Common Stock Option Agreement dated May 24, 1999 between the
Company and Softline Limited, incorporated by reference to
exhibit 10.30 to the Company's 10-K for the fiscal year
ended March 31, 2000.
10.23 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
10-K for the fiscal year ended March 31, 2001.
10.24 Investor Rights Agreement between the Company and Softline
Limited dated as of January 1, 2002, incorporated by
reference to exhibit 4.2 to the Company's 8-K filed May 16,
2002.
10.25 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P. dated July
19, 2002 (included herewith).
10.26 Investors' Rights Agreement among SVI Holdings, Inc., Koyah
Leverage Partners, L.P. and Koyah Partners, L.P., dated
December 22, 2000, incorporated by reference to exhibit 10.3
to the Company's 8-K filed January 8, 2001.
10.27 Amendment Agreement between the Company, Koyah Leverage
Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel
Davey, and Brian Cathcart dated July 15, 2002, incorporated
by reference to exhibit 10.11 to the Company's 10-K filed on
July 16, 2002.
10.28 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.
10.29 Second Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 14, 2003 (included herewith).
10.30 Third Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated March 28, 2003 (included herewith).
10.31 Fourth Amendment to Amendment Agreement between the Company,
Koyah Leverage Partners, Koyah Partners, L.P., and Raven
Partners, L.P. dated April 3, 2003 (included herewith).
10.32 Convertible Promissory Note and Grant of Security Interest
between SVI Holdings, Inc. and Koyah Leverage Partners L.P.,
dated December 14, 2000, incorporated by reference to
exhibit 10.1 to the Company's 8-K filed January 8, 2001.
10.33 Form of Warrant To Purchase Common Stock, incorporated by
reference to exhibit 10.4 to the Company's 8-K filed January
8, 2001.
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10.34 Form of Convertible Promissory Note for entities affiliated
with ICM Asset Management, Inc., incorporated by reference
to exhibit 10.31 to the Company's 10-K for the fiscal year
ended March 31, 2001.
10.35 Loan Note in Favor of Datafaction, as amended, incorporated
by reference to exhibit 10.5 to the Company's 10-Q filed
February 14, 2001.
10.36 Promissory Note in favor of Barry Schechter, dated February
13, 2001, incorporated by reference to exhibit 10.33 to the
Company's 10-K for the fiscal year ended March 31, 2001.
10.37 Umbrella Agreement with Toys 'R Us, incorporated by
reference to exhibit 10.34 to the Company's 10-K for the
fiscal year ended March 31, 2001. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.
10.38 License Agreement for Software Products with Toys 'R Us,
incorporated by reference to exhibit 10.35 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.39 Modification Agreement with Toys 'R Us, as amended,
incorporated by reference to exhibit 10.36 of the Company's
10-K for the fiscal year ended March 31, 2002. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.40 Services Agreement with Toys 'R Us, incorporated by
reference to exhibit 10.37 of the Company's 10-K for the
fiscal year ended March 31, 2001. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.
10.41 Professional Services Agreement between SVI Retail, Inc. and
Toys "R" Us dated July 10, 2001, incorporated by reference
to exhibit 10.2 to the Company's 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 under the
Securities Exchange Act of 1934.
10.42 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 10-K filed on July 16, 2002.
10.43 Convertible Note in favor of Toys "R" Us, Inc. dated May 29,
2002, incorporated by reference to exhibit 10.15 to the
Company's 10-K filed on July 16, 2002.
10.44 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's
10-K filed on July 16, 2002.
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10.45 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 10-K filed on July 16, 2002.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 of the Securities Exchange Act of
1934.
10.46 Discounted Loan Payoff Agreement dated March 31, 2003 by and
among Union Bank of California, N.A., the Company, SVI
Retail, Inc., Sabica Ventures, Inc. and SVI Training
Products, Inc. (included herewith)
10.47 Unsecured Promissory Note dated March 31, 2003 in favor of
Union Bank of California (included herewith).
10.48 Summary of loan transactions between the Company and World
Wide Business Centres, incorporated by reference to exhibit
10.12 to the Company's 10-K filed on July 16, 2002.
21.1 List of Subsidiaries (included herewith).
23.1 Consent of Deloitte & Touche LLP, independent auditors
(included herewith)
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP,
independent auditors (included herewith)
23.3 Consent of Solomon Ward Seidenwurm & Smith, LLP. Reference
is made to Exhibit 5.1.
24.1 Power of Attorney. Reference is made to the signature page
hereof.
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