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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2002
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[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission file number 0-23049
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SVI SOLUTIONS, INC.
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(Exact Name of Registrant as specified in its charter)
DELAWARE 33-0896617
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5607 PALMER WAY, CARLSBAD, CA 92008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (877) 784-7978
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.0001 par value American Stock Exchange
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Securities registered under Section 12(g) of the Act
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates* as of June 28, 2002 was approximately $6.4 million, based on the
closing sale price on the American Stock Exchange on that date.
The number of shares outstanding of the registrant's Common Stock was 28,716,941
on June 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement for the annual meeting to
be held in 2002, to be filed with the Securities Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the registrant's
fiscal year, are incorporated by reference under Part III of this Form 10-K.
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* Excludes the Common Stock beneficially held by executive officers, directors
and stockholders whose beneficial ownership exceeds 10% of the Common Stock
outstanding at June 28, 2002.
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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO
FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE OF THE REGISTRANT, SVI SOLUTIONS,
INC. ("WE" OR "US"). 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 DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS ARE
DESCRIBED IN THE SECTION ENTITLED "BUSINESS RISKS" IN ITEM 7 IN THIS REPORT, AND
OTHER RISKS IDENTIFIED FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, PRESS RELEASES AND OTHER COMMUNICATIONS.
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.
ITEM 1. DESCRIPTION OF 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;
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 also develop and distribute retail system training products and general
computer courseware and computer skills testing products through our SVI
Training Products, Inc. subsidiary.
Our executive offices are located at 5607 Palmer Way, Carlsbad, California
92008, telephone number (877) 784-7978.
RECENT DEVELOPMENTS
In October 2001, 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 appointed during the
fourth quarter of fiscal 2001 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 M. 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, and Jackie Tran, our
Controller, as acting Chief Financial Officer. 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.
As of April 1, 2002, we have refocused the company into three strategic
business units each lead by experienced managers. The units are Island Pacific,
SVI Store Solutions, Inc. and SVI Training Products, Inc.
In May 2002, Steven Cohen, Softline's Chief Operating Officer, and Gerald
Rubenstein, a director of Softline, resigned from our board of directors. Ivan
Epstein, Softline's Chief Executive Officer, continues to serve on our board,
and in June 2002, Rob Wilkie, Softline's Chief Financial Officer, was appointed
to our board of directors. For a further discussion of the terms of transactions
with Softline during the 2002 fiscal year, see "Management's Discussion and
Analysis of Financial Condition and Results of Operation" under the heading
"Financing Transactions -- Softline."
Due to the declining performance of our Australian subsidiary, the
subsidiary ceased operations in February 2002. For further details, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" under the heading "Liquidity and Capital Resources -- Contractual
Obligations -- National Australia Bank" below.
In May 2002, we entered into a new two-year software development and
services agreement with our largest customer, Toys "R" Us, Inc. Toys also 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. For a further details, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Liquidity and Capital Resources -- Financing
Transactions -- Toys "R" Us" below.
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. We amended these
notes to extend the maturity date and other provisions, and we replaced warrants
issued to these investors in July 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
"Financing Transactions -- ICM Asset Management, Inc." below.
We negotiated an extension of our senior bank lending facility to August
31, 2003. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the heading "Liquidity and Capital Resources -
Contractual Obligations -- Union Bank" below.
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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. 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.
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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.
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. Our training
products subsidiary has also focused development and marketing efforts
on producing training products for our retail customer base.
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 client,
especially those opportunities which are undeserved by our larger
competitors.
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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 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
We have three operating business units: Island Pacific, SVI Store Solutions
and SVI Training Products, Inc.
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 upgrade and error
correction services to our customer base using our applications.
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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.
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.
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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 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.
[Island Pacific Applications Suite Graphic 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.
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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.
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.
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APPLICATION TRAINING. We train the customer's internal training staff and
we offer training for the customer's end users. Through our SVI Training
Products subsidiary, we also offer certain software-training modules for our
solutions.
IMPLEMENTATION SERVICES. Our technical experts provide implementation
consulting and programming services. Implementation services include:
o interface and conversion o design, modification and
between systems; customization; o programming; and
o testing; o problem resolution; o system management.
o upgrade planning, testing
o software installation; 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.
9
SVI TRAINING PRODUCTS, INC.
Our training products subsidiary develops and distributes PC courseware and
skills assessment products. The courseware is designed for use in instructor-led
and self-study training environments. We sell courseware either as individual
manuals and instructor guides, or on a limited site license basis. We have
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. We provide the site-licensed courseware on the Internet through our
website, or on CD-ROM, allowing customization of the instructor-led course
materials.
We use a network of specialized consultants to develop courseware products.
We hire consultants on a project basis. This allows for the fast, simultaneous
development of multiple courses and gives us access to diverse skills without
fixed overhead commitments.
We market training products through a direct sales force. We also advertise
and sell the training product range through the Internet, direct mail and trade
shows. SVI Training Products 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.
Our training subsidiary is also a reseller of multimedia and hardcopy
self-study materials for desktop and technical computer software applications.
In addition, we resell on-line training products.
We also market 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. We market this package to personnel agencies,
universities, schools, training companies and corporations.
Our training subsidiary 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. We also provide 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.
As of March 31, 2002, 39% 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.
10
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 calendar
year 2002 and to be generally available at the beginning of calendar
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 5" 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:
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.
11
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 products subsidiary competes with a large number of companies
offering similar products. The market for courseware and skills assessment
products is characterized by low barriers to entry. Many existing and potential
competitors have greater financial, technical, production and/or marketing
resources than we have. 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.
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
12
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.
EMPLOYEES
At March 31,2002, we had a total of 175 employees, 160 of which were based
in the United States and 15 of which were based in the United Kingdom. Of the
total, 16% were engaged in sales and marketing, 39% were engaged in application
technology development projects, 27% were engaged in professional services, and
18% were in general and administrative. We believe our relations with our
employees are good. We have never has a work stoppage and none of our employees
are subject to a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
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.
ITEM 3. LEGAL PROCEEDINGS
In April of 2002 our former CEO, Thomas A. 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, we 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
us to enter into with his affiliates and related parties without proper board
approval. We expect one or more cross-claims from Mr. Dorosewicz in that action.
We do not believe we have any obligation to pay the severance benefits alleged
by Mr. Dorosewicz to be due, and we intend to vigorously pursue our causes of
action against Mr. Dorosewicz. We cannot at this time predict what will be the
outcome of these matters, as discovery has not yet commenced in either action.
Due to the declining performance of our Australian subsidiary, we decided
in the third quarter of fiscal 2002 to sell certain assets of our Australian
subsidiary to the former management of such subsidiary, and then cease
Australian operations. Such sale was however subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to the entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as the maximum amount of our
potential exposure. The receiver has also claimed that we are obligated to it
for inter-company balances of $636,000, but we do not believe any amounts are
owed to the receiver, who has not as of the date of this report acknowledged the
monthly corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
13
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 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
We have never declared any dividends. Our agreement with Union Bank
prohibits us from paying dividends while the term loan from Union Bank is
outstanding. We are also required to pay dividends on our Series A Convertible
Preferred Stock in preference and priority to dividends on our common stock. 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 any cash dividends in the foreseeable future. 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.
As of June 28, 2002 there were 28,716,941 shares of our common stock
outstanding, which were held by approximately 128 stockholders of record.
During the quarter ended March 31, 2002, we issued the following securities
without registration under the Securities Act of 1933
o 45,133 shares of common stock to outside service providers for payment
of services rendered in previous periods, valued at $36,000.
o In conjunction with the Softline transactions described below under
"Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Financing Transactions -- Softline," we issued
to Softline an aggregate of 141,000 shares of newly-designated Series
A Convertible Preferred Stock at a deemed purchase price of $100 per
share in exchange for 10,700,000 SVI common shares held by Softline
and the discharge of a $12.3 million note payable to Softline. We also
transferred to Softline our note received in connection with the sale
of IBIS Systems Ltd.
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 Regulation D
thereunder, and an appropriate legend was placed on the shares.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of, each of our last six fiscal years (including the six months ended March 31,
1998) are derived from our consolidated financial statements. The consolidated
financial statements as of March 31, 2002, 2001, and 2000 and the independent
auditors' report thereon, are included elsewhere in this report.
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
Expenses:
Application development 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 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
--------- --------- --------- --------- --------- ---------
Income (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
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. 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 DIFFER MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS ARE DESCRIBED UNDER THE HEADING "BUSINESS RISKS"
BELOW, AND MAY BE IDENTIFIED FROM TIME TO TIME IN OUR FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, PRESS RELEASES AND OTHER COMMUNICATIONS.
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.
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.
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. We amortized capitalized
software and goodwill from both of these acquisitions using ten year lives
through March 31, 2002. See "Significant Accounting Policies" below.
Effective April 1, 2002, we restructured our operations into three
strategic business units lead by experienced managers. The business units are
Island Pacific, SVI Store Solutions and SVI Training Products, Inc. Our
operations are conducted principally in the United States and the United
Kingdom. Prior to February 2002, we also conducted business in Australia.
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 our sales mix in
the US and the UK to shift to lower margin services.
16
We evaluate local operations primarily based on total revenues and earnings
before interest expense, provision for income taxes, depreciation and
amortization and impairment charges as shown below.
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%
Selling, general and administration expenses 13,144 48% 18,037 65% 14,817 56%
Other income (expense) (45) 0% 694 3% 858 3%
--------- --------- ---------- --------- ---------- ---------
Income (loss) before interest expense,
provision for income taxes, depreciation
and amortization and impairment (319) (1)% (4,151) (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 Ltd. (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)
========= ========= =========
We also manage long-lived assets by geographic region. The geographic
distribution of our revenues and long-lived assets for the fiscal years ended
March 31, 2002, 2001, and 2000 is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
(in thousands)
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 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.
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.
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
17
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 M.
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, and Jackie Tran, our Controller,
as acting Chief Financial Officer. 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. 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 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 these notes to extend the maturity
date and other provisions, and we replaced the warrants issued to
these investors. See "Financing Transactions -- ICM Asset Management,
Inc." below.
o We relocated our principal executive offices to smaller and less
expensive premises in Carlsbad, California.
o We negotiated an extension of our senior bank lending facility to
August 31, 2003. See "Liquidity and Capital Resources -- Contractual
Obligations -- Union Bank" below.
o We completed an integrated series of transaction 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"
below.
o Our Australian subsidiary ceased operations in February 2002. See
"Discontinued Operations" 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
also 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.
For a further details, see "Financing Transactions -- Toys "R" Us"
below.
For a further discussion of our plans to address our net losses and negative
working capital, see Note 1 to our Financial Statements included with this
report.
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 February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to the entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as the maximum amount of our
potential exposure. The receiver has also claimed that we are obligated to it
for inter-company balances of $636,000, but we do not believe any amounts are
owed to the receiver, who has not as of the date of this report acknowledged the
monthly corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due. For further
details, see "Liquidity and Capital Resources -- Contractual Obligations --
National Australia Bank" below.
18
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.
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
19
percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. We have from
time to time provided software and consulting services under fixed
price contracts that require the achievement of certain milestones. The
revenue under such arrangements is recognized as the milestones are
achieved.
Customer support services include post contract support and the rights
to unspecified upgrades and enhancements. Maintenance revenues from
ongoing customer support services are billed on a monthly basis and
recorded as revenue in the applicable month, or on an annual basis with
the revenue being deferred and recognized ratably over the maintenance
period. If an arrangement includes multiple elements, the fees are
allocated to the various elements based upon vendor-specific objective
evidence of fair value.
o ACCOUNTS RECEIVABLE. We typically extend credit to our customers.
Software licenses are generally due in installments within twelve
months from the date of delivery. Billings for customer support and
consulting services performed on a time and material basis are due upon
receipt. From time to time software and consulting services are
provided under fixed price contracts where the revenue and the payment
of related receivable balances are due upon the achievement of certain
milestones. Management estimates the probability of collection of the
receivable balances and provides an allowance for doubtful accounts
based upon an evaluation of our customers ability to pay and general
economic conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We 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.
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. We may call the warrant
for $0.001 per share if our common stock trades above $2.00 per share for twenty
consecutive trading days and the warrant shares are registered with the SEC for
resale or otherwise salable by AMRO without restriction. AMRO will have thirty
days after the call to exercise the warrant, after which time the warrant will
expire.
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.
20
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 into 1,470,590 option 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. 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. The notes were
originally due August 30, 2001, and required interest at the rate of 12% per
annum to be paid until maturity, with the interest rate increasing to 17% after
maturity. Any portion of the unpaid amount of principal and interest was
convertible at any time by the investors into common shares valued at $1.35 per
share. We also agreed to issue to the investors three-year warrants to purchase
250 common shares for each $1,000 in notes purchased, at an exercise price of
$1.50 per share.
In July 2002, we agreed to amend the terms of the notes and warrants issued
to the investors related to ICM. The investors agreed to replace the existing
notes with new notes having a maturity date of September 30, 2003. The interest
rate on the new notes was reduced to 8% per annum, increasing to 13% in the
event of a default in payment of principal or interest. [We are required to pay
accrued interest on the new notes calculated from July 19, 2002, in quarterly
installments beginning September 30, 2002.] The investors agreed to reduce
accrued interest and late charges on the original notes up to $85,000, and to
accept the reduced amount in shares of our common stock valued at the average
closing price of our shares on the American Stock Exchange for the 10 trading
days prior to July 19, 2002. The new notes are convertible at the option of the
holders into shares of our common stock valued at $0.60 per share. We do not
have a right to prepay the notes.
We also agreed that the warrants previously issued to the investors to
purchase an aggregate of 2,996,634 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 1,580,244 shares
at $0.60 per share, expiring July 19, 2007. We anticipate that warrants for an
additional 36,451 shares will be exchanged for warrants for 19,756 shares on
substantially identical terms. The replacement warrants are not callable by us.
We also agreed to file a registration statement for the resale of all
shares held by or obtainable by these investors. In the event such registration
statement is not declared effective by the SEC within 120 days after July 17,
2002, we will be obligated to issue five-year penalty warrants for the purchase
of 5% of the total number of registrable securities at an exercise price of
$0.60 per share. We will be obligated to issue additional penalty warrants for
each 30 day period after such date in which the registration statement is not
effective. No further penalty warrants will accrue from our original
registration obligation.
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 Ltd.
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 the 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 at any time into the number of common shares
determined by dividing the stock stated value plus all accrued and unpaid
dividends, by a conversion price initially equal to $0.80. The conversion price
21
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 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 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
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 common
shares. 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 our stock valued at $0.553 per share. The note is due May 29, 2009, or if
earlier than that date, three years after the completion of the development
project contemplated in the development agreement between us and Toys entered
into at the same time. We do not have the right to prepay the convertible note
before the due date, but upon the due date, we may at our option pay the
principal amount in cash rather than shares to the extent Toys did not earlier
convert the note to shares. 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.
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.
22
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:
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%
Expenses:
Application development 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 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 Ltd. 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.
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.
23
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 as most development expenditures were client funded compared to
$5.3 million for the fiscal year ended March 31, 2001, a decrease of 21%. The
decrease 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" above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses 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 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 likely however record impairment charges 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.
24
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.
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. In
addition to those factors,