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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, 2003
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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: None
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates as of September 30, 2002 was approximately $18.1
million, based on the closing sale price on the American Stock Exchange on
September 30, 2002. Excludes shares of common stock held by directors, officers
and each person who holds 10% or more of the registrant's common stock.
The number of shares outstanding of the registrant's Common Stock was 31,560,016
on May 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
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Portions of the Proxy Statement for the Items 10,11,12 and 13 of Part III
registrant's 2003 Annual Meeting of
Stockholders are incorporated by reference
into Part III of this Form 10-K
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TABLE OF CONTENTS
PART I
Item 1. Description of Business 2
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results 16
of Operations
Business Risks 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 44
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationship and Related Transactions 45
Item 14. Controls and Procedures 45
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
Signatures 49
Certifications 50
1
INTRODUCTORY NOTE
THE ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 AND THE COMPANY INTENDS THAT CERTAIN MATTER
DISCUSSED IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY
FOR THE SAFE HARBOR FROM LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE
IDENTIFIED BY THE CONTEXT OF THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE
COMPANY ("SVI", "WE" OR "US") "BELIEVES", "ANTICIPATES", "EXPECTS", "FORECASTS",
"ESTIMATES" OR OTHER WORDS SIMILAR MEANING AND CONTEXT. SIMILARLY, STATEMENTS
THAT DESCRIBE FUTURE PLANS, OBJECTIVES, OUTLOOKS, TARGETS, MODELS, OR GOALS ARE
ALSO DEEMED FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE FORECASTED OR ANTICIPATED AS OF THE DATE OF THIS
REPORT. CERTAIN OF SUCH RISKS AND UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY
TO SUCH STATEMENTS AND ELSEWHERE IN THIS REPORT, INCLUDING ITEM 7,
"MANANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." STAKEHOLDERS, POTENTIAL INVESTORS AND OTHER READERS ARE URGED TO
CONSIDER THESE FACTORS IN EVALUATING THE FORWARD-LOOKING STATEMENTS AND ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS OR
CONSTRUE SUCH STATEMENTS TO BE A REPRESENTATION BY US THAT OUR OBJECTIVES OR
PLANS WILL BE ACHIEVED. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT
ARE MADE ONLY AS OF THE DATE OF THIS REPORT, AND WE UNDERTAKE NO OBLIGATION TO
PUBLICLY UPDATE SUCH FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR
CIRCUMSTANCES.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
SVI Solutions, Inc. is a leading provider of software solutions and
services to the retail industry. We provide high value innovative solutions that
help retailers understand, create, manage and fulfill consumer demand. Up until
April 1, 2003, we also developed and distributed PC courseware and skills
assessment products for both desktop and retail applications.
Our solutions and services have been developed specifically to meet the
needs of the retail industry. Our solutions help retailers improve the
efficiency and effectiveness of their operations and build stronger, longer
lasting relationships with their customers.
We market our software solutions through direct and indirect sales channels
primarily to retailers who sell to their customers through traditional retail
stores, catalogs and/or Internet-enabled storefronts. To date, we have licensed
our solutions to more than 200 retailers across a variety of retail sectors.
SVI SOLUTIONS
Historically, retailers have relied upon custom-built systems, often
self-developed, to manage business processes and business information with both
trading partners and customers. These legacy systems are typically built on
1960's business models and 1970s technology. They are not Internet-enabled, and
do not permit collaboration among a retailer's customers, partners, suppliers
and other members of the supply/demand chain. Moreover, they reflect the
thinking of a seller's market.
Over the past few years, retailers have begun to purchase packaged
solutions designed specifically for the retail industry. Most of these systems
are very expensive to license, and very expensive, time-consuming and painful to
implement. They have been primarily positioned to the largest companies, who
have enormous amounts of managerial, technical and financial resources at their
disposal- organizations for which distraction and mistakes are affordable.
These solutions ignore the needs of the small to medium sized retailers,
who have many of the same needs and face many of the same challenges as do the
larger retailers, but lack the excess managerial, financial and technological
capacity of the larger retailers.
Our solutions serve the small to medium sized market.
All retailers today face the challenge of operating in a very competitive
environment, an environment that can be best described as over-stored and
over-homogenized, an environment in which power has shifted from the seller to
the buyer.
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As retailers expand their businesses to include the Internet, catalog,
kiosk and other distribution channels, the complexity of managing inventory and
meeting customer demands places tremendous pressure on their business processes
and their technology infrastructure.
To meet an ever more mobile and demanding consumer's expectations,
retailers need to deliver on the customer's terms. This means having the right
product, at the right time and in the right place across multi-channel touch
points. To do this, retailers need valuable consumer insights, intelligence on
external factors that shape consumer response such as how the weather, the
economy and changing consumer attitudes will affect future buying patterns. This
intelligence, augmented by powerful communications, comprehensive loss
prevention, strong forecasting, planning, assortment planning, allocation, event
planning, replenishment and merchandising functions are critical to profitably
achieve this goal. These represent the content of our offering.
Small to medium sized retailers need a cost-effective, easily installed,
affordable, comprehensive, integrated software infrastructure that spans
supplier to consumer and gives the retailer visibility, flexibility and control
of all business processes to meet all competitive challenges.
We believe a market opportunity exists to provide these retailers with a
software solution that is designed specifically for their needs. This solution
should be easy-to-use, leverage a retailer's existing investments in information
technology and be sufficiently flexible to meet the specific needs of a broad
range of retail sectors, such as fashion, hard-lines, mass merchandise or food
and drug.
We have developed and deployed software solutions that enable retailers to
manage the entire scope of their operations. These operations include
point-of-sale, customer relationship management, vendor relationship management,
merchandising, demand chain management, planning, and forecasting.
Key areas, which differentiate our software solutions, include:
o VALUE - Our integrated and modular architecture helps retailers
meet return on investment (ROI) objectives by allowing them to
implement the most critical and valuable applications first. This
modular architecture decreases migration path risk for the
replacement of legacy systems and increases the probability of an
on-time, on-budget implementation project.
o PROVEN - We are a leading provider of retail infrastructure
software and services. We understand the complex needs of
retailers and have designed our solutions specifically for the
retail industry. We provide certain software products and
services infrastructure for retailers with combined revenues of
over $200 billion annually.
o SCALABLE - Our solutions are engineered to provide scalability to
efficiently handle large volumes of transactions and users. Our
solutions work in environments that span from one to five
thousand stores.
o INNOVATIVE - Our partnerships and our solutions include some of
the most advanced technologies available to retailers.
RECENT DEVELOPMENTS
In January 2003, we appointed Harvey Braun, a well-known and
highly-respected retail industry veteran, to the position of Chief Executive
Officer of Island Pacific, one of our business units. In April 2003, our Board
of Directors appointed Mr. Braun to the position of Chief Executive Officer and
director of SVI. Barry Schechter remains as Chairman of the Board.
In October 2002, we appointed Steven Beck, a retail industry expert, to the
position of President of Island Pacific. In April 2003, our Board of Directors
appointed Mr. Beck to the position of President and Chief Operating Officer and
director of SVI. We anticipate Mr. Braun and Mr. Beck will lead us through the
next evolution of product and service offerings to meet the everchanging needs
of retailers worldwide. Mr. Beck's vision for SVI is to become the dominant
provider of "Thoughtware" to the retail industry. Mr. Beck's goals are to
develop high value products and services to the retail industry; using
breakthrough technologies and processes, and to provide these products and their
associated services in partnership with major consulting organizations and other
best of breed solution providers. These products and services will be offered to
small and mid-size retailers. Our goal is to expand alternatives to retailers,
3
matching innovative solutions to emerging industry complexities so retailers
will realize ongoing successes. We will make available to retailers at what we
believe to be affordable prices a "dashboard" of decision makers, and
experienced minds in the industry, yielding a range of velocity management
alternatives for review and actions that span merchandising and marketing
activities from conception to consumption.
We are strengthening our product offerings through strategic relationships
with Planalytics, KMG Solutions, VisionCompass Inc., Raymark, Inc., Wazagua LLC,
ANT USA, Inc. and IT Resources Inc.
Under a partnership agreement with Planalytics Inc. ("Planalytics"), Island
Pacific will market Impact LR, an internet-based application that measures the
specific effects of future weather on consumer demand by product, location and
time. Using Impact LR, our customers can plan the timing of in-season markdowns,
as well as the season-to-season flow of merchandise into their stores with
maximum effectiveness.
Under a marketing license agreement with KMG Solutions ("KMG"), Island
Pacific will integrate, market and support Traxion(TM) process management
solutions. Traxion's business process management solution consists of three
modules. Traxion ProcessEngine(TM) is the real-time process management platform
that retailers use to actively manage and support their organizations' unique
business processes. Traxion ProcessModeler(TM), includes simulation functions
such as same-time comparison of process variations and the use of actual cost
data to produce process-based financial estimates. Traxion
OrganizationModeler(TM) simplifies the creation of sophisticated models
including inter-company workgroups, payroll information, and roles.
Island Pacific will market VisionCompass(TM) collaborative enterprise
management software, which uniquely combines the best of performance management,
business intelligence, resource planning, and collaboration capabilities into
one straightforward, web-based application. The system enables decision makers
and teams to develop specific business goals, work on them together, and measure
their collective results objectively. The highly flexible system is easily
customizable to fit each organization's unique needs and leads directly to
improved quality and visibility of key indicators throughout the enterprise.
Under an OEM agreement with Raymark, Inc., Island Pacific will integrate,
market and support Xpert Store point-of-sale ("POS") software solution under the
Island Pacific brand. Raymark's full-featured POS solution streamlines the
checkout process in order to increase sales associate efficiency and augment
customer satisfaction. The software supports multi-channel, multi-language,
multi-currency and multi-taxation requirements.
Under a agreement with Wazagua LLC ("Wazagua"), Island Pacific will
exclusively offer to retailers worldwide Wazagua's products and services
including web-based Loss Prevention Case Management Package, ASP Data Hosting
and POS Exception Reporting. WAZAGUA(TM) ASP Hosted Suite of Modules automates
data management for the Loss Prevention, Operations, Human Resources, Safety &
Risk Management community. These ASP-hosted productivity tools enable retailers
to capture the power of the internet. Retailers can create efficiencies, manage
and share information, make better use of their staff, eliminate redundant data
entry - and work from virtually any point in the world.
Under terms of a reseller agreement, Island Pacific will market, sell,
install, interface to, and support ANT USA Inc.'s ("ANT") products including
Buyer's Toolbox(tm), a leading suite of merchandise and assortment planning
software that has been successfully implemented by over 140 retailers worldwide.
The software will extend Island Pacific's assortment and planning capabilities
by providing a solid planning methodology accessed through an easy-to-use
interface, in a cost-effective offering.
A marketing license agreement with IT Resources Inc. enables Island Pacific
to market, sell, install, support and integrate IT Resources' Buyer's
WorkMate(r) Suite, an innovative decision support software platform developed
for merchandising organizations. The software will bring mobility and other
timesaving benefits to the buying process.
Under a marketing alliance agreement with BIGresearch, Island Pacific will
provide retailers, suppliers and third party companies with an end-to-end
information solution to forecast consumer demand, better utilize assets,
merchandise, and develop strategy and market position.
4
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, and SVI Training Products, Inc. Effective April 1, 2003, we
agreed to sell our shares of SVI Training Products, Inc., our wholly-owned
subsidiary, to Arthur Klitofsky. Mr. Klitofsky resigned from the Board in March
2003. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the heading "Discontinued Operations" 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 in fiscal 2001.
In July 2002, we amended the convertible notes to extend the maturity date to
September 30, 2003 and we replaced the warrants issued to these investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Liquidity and Capital Resources -- Indebtedness
- -- ICM Asset Management, Inc." below.
In July 2002, we negotiated an extension of our senior bank lending
facility to August 31, 2003, and then we subsequently satisfied this debt under
the Discounted Loan Payoff Agreement dated March 31, 2003. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Liquidity and Capital Resources -- Indebtedness -- Union Bank"
below.
In May 2002, we completed an integrated series of transactions with
Softline Limited ("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 to Softline new preferred securities. Softline
also returned to us 10,700,000 shares of our common stock. Steven Cohen,
Softline's Chief Operating Officer, and Gerald Rubenstein, a director of
Softline, resigned from our board of directors in May 2002. Ivan Epstein,
Softline's Chief Executive Officer, continues to serve on our board, and in June
2002, Robert P. 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."
In May 2002, we entered into a new two-year software development and
services agreement with our largest customer, Toys "R' Us, Inc. ("Toys"). Toys
also agreed to invest $1.3 million for the purchase of a non-recourse
convertible note and a warrant to purchase up to 2,500,000 common shares. For a
further details, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the heading "Liquidity and Capital
Resources - Indebtedness -- Toys "R" Us' below.
In March 2003, we issued a total of $3.5 million in 9% convertible
debentures to Midsummer Investment, Ltd., Omicron Master Trust and Islandia,
L.P. Along with these debentures, warrants to purchase an aggregate of 1,572,858
shares of common stock were issued to these investors. See "Financing
Transactions - Midsummer/Omicron/Islandia" below.
In April 2003, we issued $400,000 in 9% convertible debentures to MBSJ
Investors, LLC. Along with these debentures, warrants to purchase 156,311 shares
of common stock were issued to this investor. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
"Financing Transactions - MBSJ".
In March 2003, the Board adopted a resolution to change our name to
"Island Pacific, Inc.", subject to approval by our shareholders.
In May 2003, we issued $300,000 in 9% convertible debentures to
Crestview Capital Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview
Capital Offshore Fund, Inc. Along with these debentures, warrants to purchase
101,112 shares of common stock were issued to these investors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Financing Transactions - Crestview".
STRATEGY
Our mission is to provide the small to medium sized retailer all the
intelligence, tools and infrastructure necessary to success in a highly
competitive environment.
Our mission is to make this information and these tools and infrastructure
useable, affordable and reliable for end-use in highly volatile environments.
5
Our mission is to make our products and services easy to acquire, easy to
install and easy to live with.
Our mission is to create value for retailers by providing valuable
intelligence and innovative technology solutions that help to understand,
create, manage, and fulfill consumer demand.
Our strategies are as follows:
o INCREASE OUR MARKET SHARE. We believe we can continue to build
and expand our position of leadership within the retail packaged
software applications market as the retail industry increasingly
turns to packaged software applications as an alternative to
expensive in-house and custom developed applications.
o PROVIDE HIGH LEVELS OF CUSTOMER SATISFACTION. The retail industry
is strongly influenced by formal and informal references. We
believe we have the opportunity to expand market share by
providing high levels of customer satisfaction with our current
customers, thereby fostering strong customer references to
support sales activities.
o DELIVER VALUE TO OUR CUSTOMERS. We believe that maximizing our
customers' return on investment will help us compete in our
market space and increase our market share.
o BECAME THE PREFERRED APPLICATION AND TECHNOLOGY ARCHITECTURE FOR
THE SMALL TO MEDIUM SIZED RETAILERS GLOBALLY. By leveraging our
25 years of success, we believe we are uniquely positioned to
become the preferred application and technology architecture
provider for retail software and associated services to this
market.
PRODUCTS
We partner, develop and sell business intelligence and software solutions
that support virtually all of the operational activities of a typical retailer.
Our business intelligence is critical to sound strategy and execution. Our
software solutions create value by applying innovative technology that help our
customers efficiently and effectively understand, create, manage and fulfill
consumer demand. Our products can be deployed individually to meet specific
business needs, or as part of a fully integrated, end-to-end solution.
Our solution set consists of the following components:
[IP INTEGRATOR GRAPHIC APPEARS HERE]
THE ISLAND PACIFIC RETAIL MANAGEMENT suite of applications builds on our
long history in retail software design and development and provides our
customers with an extremely reliable, widely deployed, comprehensive and fully
integrated retail management solution. Our complete enterprise-level offering of
applications and services is designed to assist our customers in maximizing
their business potential.
Our offerings are a combination of collaborations with partner companies
and solutions developed internally by us. They are all completely integrated.
Our offerings include:
o IP GLADIATOR: is a collaborative solution with Wazagua that
orchestrates a myriad of processes across retail enterprise to
deliver effective loss prevention. To do so, IP Gladiator enables
an integrated asset protection workflow spanning exception
management, investigation management, case management and civil
collection. The salient features of this solution include: (a)
availability in ASP or in-house modes, (b) advanced data mining
to recognize loss patterns, and (c) POS platform independence.
o IP GLOBAL NETWORK: is an offering that cost-effectively enables
retailer collaboration with vendors, including product design
collaboration, and facilitates improved communication with
stores. This will feature services such as teleconferencing,
voice-over-IP, and instant messaging to deliver the collaboration
capabilities.
6
o IP INTEGRATOR: is a common integration platform that seamlessly
unifies all IP applications with partner applications as well as
enables integrations to 3rd party and legacy applications of a
retailer. It leverages an industry proven technology to deliver
speed, reliability, maintainability and shorter implementation
cycles in addressing integration needs. This solution is jointly
developed with Bostech.
o IP BUYER'S WORKMATE: features a suite of integrated modules that
enable, automate and enforce best practices leading to sound
merchandise purchase and allocation decisions, in compliance with
the approved budgets. This suite, along with the range of
capabilities provided through IP Consumer Research, IP Weather
Impacts, IP Profiling and the IP Core Merchandising suite,
enables the retailer to plan and execute consumer-sensitive
merchandising, placement, pricing and promotion decisions. The
suite consists of:
o IP DECISION SUPPORT: features an analytical processing tool
designed to provide retailers with relevant, timely and
detailed business information.
o IP ASSORTMENT PLANNING: enables retailer to arrive at a
well-researched and sound buying decisions - yielding
merchandise assortments that meet local consumer demand,
minimize inventory investment, accelerate sales, lessen
inter-store transfers and reduce markdowns.
o IP ALLOCATION: enables allocation of purchase order
receipts, advanced shipping notices and warehouse back-stock
in a manner sensitive to the assortment plan, merchandise
performance, and store stocking levels.
o IP WEATHER IMPACTS: is a collaborative offering with Planalytics
to enable retailers to understand and address the impact that
weather has had and will have on their businesses, helping them
to avoid surprises and improve bottom line profitability.
o IP BUSINESS PROCESS OPTIMIZATION: is a collaborative retail
process management solution offered in partnership with KMG that
enables the retailers to improve productivity and reduce
inefficiencies through better control and management of business
processes. The applications of interest to retailers can range
from operational activities such as new store construction and
opening, global sourcing, distribution center optimization and
promotions management to fiduciary responsibilities and processes
such tracking and control of financial reporting.
o IP CONSUMER RESEARCH: is a collaborative offering with
BIGresearch to leverage syndicated consumer intelligence from
over 8,000 shoppers each month to provide retailers a projected
look at consumers demand. The deep and proven consumer research
insights can enable retailers to anticipate consumer demand,
correct market focus, develop strategy and market positioning, to
understand simultaneous media usage and exposure to determine
what they are actually receiving from their media expenditures.
o IP PROFILING: is a collaborative offering to develop Sales
Profiles by recognizing common selling patterns from voluminous
sales history. It features an advanced statistical pattern
coupled with an interactive graphical approach to the creation,
maintenance and monitoring of seasonal profiles.
o IP FORECASTING AND REPLENISHMENT: is a collaborative offering of
a full feature forecasting and replenishment solution to address
the needs of retailers seeking a higher end solution in this
area.
o IP OMNICARD: provides a loyalty card application, with advanced
features such as secure authentication, data storage, and
radio frequency identification, to retailers that enables them to
provide consumers with reason to carry a retailer loyalty card.
o IP STORE PEOPLE PRODUCTIVITY: application helps retailer analyze
store, people and item and transaction level sales productivity.
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At the foundation of our application suite are the integrated modules that
comprise our core-merchandising solution. They are:
o MERCHANDISING MANAGEMENT
o The Island Pacific Merchandising module is a comprehensive
solution for management of core retail processes, which
optimizes workflow and provides the highest level of data
integrity.
o This module supports all operational areas of the supply
chain: Planning, Open-To-Buy, Purchase Order Management,
Forecasting, Warehouse and Store Receiving, Distribution,
Transfers, Price Management, Performance Analysis, and
Physical Inventory.
o THE EYE (TM) ANALYSIS AND PLANNING
o The Eye(TM), Island Pacific's datamart is a comprehensive
analysis and planning tool that provides answers to
retailer's merchandising questions. The specific "who, what,
where, when and why" are defined in a multi-dimensional
format. The Eye is completely integrated to IP Core
Merchandising.
o This application enables the retailer to develop completely
user-defined inquiries and reports. The capacity of The Eye
to store, manipulate, and present information is limited
only by the retailer's imagination.
o REPLENISHMENT AND FORECASTING
o The Island Pacific Replenishment module is a tool that
ensures the retailer will have the right merchandise in the
right stores at the right time by dynamically forecasting
accurate merchandise need, reducing lost sales, increasing
stock turn, and reducing cost of sales.
o PROMOTIONS AND EVENTS
o The Island Pacific Event and Promotion Management tool
enables the retailer to manage, plan and track all
promotional and event related activities including price
management, in-store display, deal, and media related
promotions. The promotions addressed through this module can
include non-price promotions as well. The analysis includes
actual to plan comparisons prior to, during and after the
event.
o WAREHOUSE
o The Island Pacific Warehouse module provides enhanced
control and visibility of product movement through the
warehouse. Item, quantity and bin integrity is ensured
through directed put away, task confirmation, RF procedures,
automated cycle counts and carton control.
o TICKETING
o The Island Pacific Ticketing module supports both
merchandise and warehouse location identification utilizing
multiple printers and bar codes. User-configured tickets may
include desired product characteristics, including but not
limited to retail price, compare at pricing, item, style,
color and size information.
o FINANCIALS
o The Island Pacific Financials module incorporates a General
Ledger that is synchronized with the Merchandising Stock
Ledger.
o This module also includes a robust Accounts Payable
application, which supports 3-way automated matching of
invoices, receipts, and purchase orders that streamline
workflow to optimize operations.
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o SALES AUDIT
o This module is an integrated conduit between Point-of-Sale
applications and the Island Pacific Host System, which
manages the upload- and download- processes. The Upload
process manages all transactional information that occurs at
the store such as Sales, Customer Returns, Physical
Inventory, Transfers, Acknowledgements, Purchase Order Drop
Ship Receipts, Layaway, and Special Order. The Download
process manages all Store pricing including Price Look Up,
Promotional pricing, Deal pricing, Event pricing, Price
Changes, Markdowns, On Order to Stores, In-transit, Current
Inventory, Company definitions (Hierarchy, Constants,
Vendors, Stores)
o This application is flexible relative to POS requirements,
while featuring full integration to IP POS product,
OnePointe.
The ISLAND PACIFIC 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," and "OnePointe
International" which is a full business to consumer software infrastructure
encompassing a range of integrated store solutions. "OnePointe" is a complete
application providing all point-of-sale ("POS") and in-store processor (server)
functions for traditional "brick and mortar" retail operations.
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 in 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.
Up until April 1, 2003, we also developed and distributed retail system
training products and general computer courseware and computer skills testing
products through our SVI Training Products, Inc. subsidiary. Effective April 1,
2003, we sold the SVI Training Products, Inc. subsidiary and discontinued this
line of business.
Our executive offices are located at 5607 Palmer Way, Carlsbad, California
92008, telephone number (877) 784-7978.
MARKETS AND CUSTOMERS
Our 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
9
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.
COMPETITION
The markets for our application technology and services are highly
competitive, subject to rapid change and sensitive to new product introductions
or enhancements and marketing efforts by industry participants. We expect
competition to increase in the future as open systems architecture becomes more
common and as more companies compete in the emerging electronic commerce market.
The largest of our competitors offering end-to-end retail solutions is JDA
Software Group, Inc. Other suppliers offer one or more of the components of our
solution. In addition, new competitors may enter our markets and offer
merchandise management systems that target the retail industry. For enterprise
solutions, our competitors include Retek Inc., SAP AG, nsb Retail Systems PLC,
Essentus, Inc., GERS, Inc., Marketmax, Inc., Micro Strategies Incorporated and
NONSTOP Solutions. For SVI Store Solutions, our competitors include Datavantage,
Inc., CRS Business Computers, nsb Retail Systems PLC, Triversity, ICL, NCR and
IBM. Our Direct applications compete with Smith Gardner & Associates, Inc., and
CommercialWare, Inc. Our professional services offerings compete with the
professional service groups of our competitors, major consulting firms
associated or formerly associated with the "Big 4" accounting firms, as well as
locally based service providers in many of the territories in which we do
business. Our strategic partners, including IBM, NCR and Fujitsu, represent
potential competitors as well.
We believe the principal competitive factors in the retail solutions
industry are price, application features, performance, retail application
expertise, availability of expert professional services, quality, reliability,
reputation, timely introduction of new offerings, effective distribution
networks, customer service, and quality of end-user interface.
We believe we currently compete favorably with respect to these factors. In
particular, we believe that our competitive advantages include:
o Proven, single version technology, reducing implementation costs and
risks and providing continued forward migration for our customers.
o Extensive retail application experience for all elements of the
customer's business, including Professional Services, Development,
Customer Support, Sales and Marketing/Technology Management.
o Ability to provide expert Professional Services.
o Large and loyal customer base.
o Hardware platform independent Store Solution (POS) application.
o Breadth of our application technology suite including our
multi-channel retailing capabilities. o Our corporate culture focusing
on the customer.
10
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.
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
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 May 31,2003, we had a total of 123 employees, 107 of which were based in
the United States and 16 of which were based in the United Kingdom. Of the
total, 13% were engaged in sales and marketing, 43% were engaged in application
technology development projects, 27% were engaged in professional services, and
17% were in general and administrative. We believe our relations with our
employees are good. We have never had a work stoppage and none of our employees
are subject to a collective bargaining agreement.
11
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 $56,148 plus common area maintenance charges. 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 $44,425 (payable quarterly) plus common area maintenance charges
and real estate taxes.
ITEM 3. LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with
the California Labor Commissioner for $256,250 in severance benefits allegedly
due under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. These matters are still pending and the parties have agreed to resolve
all claims in binding arbitrations, scheduled for September 2003.
Due to the declining performance of our Australian subsidiary, we decided
in the third quarter of fiscal 2002 to sell certain assets of our Australian
subsidiary to the former management of such subsidiary, and then cease
Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have reserved $187,000 as our potential exposure.
The receiver has also claimed that we are obligated to it for inter-company
balances of $636,000, but we do not believe any amounts are owed to the
receiver, who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against us with the Department
of Fair Employment and Housing, alleging harassment and sexual orientation
discrimination. We have responded appropriately to both the wage claim and the
discrimination allegations, which we believe lack merit based on present
information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claims damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertain to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. At this time, we cannot predict the merits of this case because it is
in its preliminary state and discovery has not yet commenced. However, SVI
Retail intends to defend vigorously the action and possibly file one or more
counter-claims. The U.S. District Court of Ohio has proper jurisdiction over us,
and a trial is scheduled for May 2004.
12
In mid-2002, we were the subject of an adverse judgment entered against us
in favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On December 16, 2002, Chapter 11 Debtors Natural Wonders, Inc. and World of
Science, Inc. (collectively "Debtors") filed an adversary proceeding against our
subsidiary SVI Retail, Inc. seeking to avoid and recover preferential transfers.
The Debtors sought recovery of approximately $84,000, which it had previously
paid to SVI Retail for goods and services rendered. On March 12, 2003, the
Debtors and SVI Retail settled the adversary proceeding for $18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. A hearing on Sabica's and Island Pacific's motion to
quash occurred on May 22, 2003 and was subsequently denied.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
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, 2003 HIGH LOW
First Quarter $ 0.66 $ 0.30
Second Quarter $ 1.30 $ 0.21
Third Quarter $ 1.25 $ 0.40
Fourth Quarter $ 1.17 $ 0.55
YEAR ENDED MARCH 31, 2002 HIGH LOW
First Quarter $ 1.60 $ 0.65
Second Quarter $ 1.04 $ 0.69
Third Quarter $ 1.01 $ 0.67
Fourth Quarter $ 0.92 $ 0.58
We have never declared any dividends. Our agreement with Union Bank
prohibited us from paying dividends while the term loan from Union Bank was
outstanding. This loan was paid off on March 31, 2003. 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, 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 May 31, 2003 there were 31,560,016 shares of our common stock
outstanding, which were held by approximately 142 stockholders of record.
13
During the quarter ended March 31, 2003, we issued the following securities
without registration under the Securities Act of 1933:
o 1,000,000 shares of common stock to Union Bank of California
pursuant to the Loan Discount Payout agreement, valued at
$788,000.
o 25,000 shares of common stock to a consultant for investor
relation services, valued at $8,000.
The foregoing securities were offered and sold without registration under
the Securities Act to sophisticated investors who had access to all information,
which would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and Regulation D
thereunder, and an appropriate legend was placed on the shares.
In addition, we received 367,000 shares, valued at $264,000, from a former
consultant as a result of early termination of an investor relation service
agreement. These shares were canceled and retired in the fourth quarter of 2003.
Information concerning securities authorized for issuance under our equity
compensation plans is included below under the heading "Security Ownership of
Certain Beneficial Owners and Management."
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 five fiscal years are derived from our consolidated
financial statements. The consolidated financial statements as of March 31,
2003, 2002, and 2001 and the independent auditors' report thereon, are included
elsewhere in this report.
YEAR ENDED MARCH 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 22,296 $ 26,715 $ 28,049 $ 25,027 $ 3,648
Cost of sales 8,045 11,003 10,815 6,176 1,206
--------- --------- --------- --------- ---------
Gross profit 14,251 15,712 17,234 18,851 2,442
Application development expenses 4,643 4,203 5,333 4,877 --
Depreciation and amortization 4,148 6,723 8,299 7,201 1,672
Selling, general and administrative expenses 8,072 12,036 16,985 13,769 3,181
Impairment of intangible assets -- -- 6,519 -- --
Impairment of note receivable received in
connection with the sale of IBIS Systems
Limited -- -- 7,647 -- --
--------- --------- --------- --------- ---------
Total expenses 16,863 22,962 44,783 25,847 4,853
--------- --------- --------- --------- ---------
Loss from operations (2,612) (7,250) (27,549) (6,996) (2,411)
Other income (expense):
Interest income 1 7 620 1,069 516
Other income (expense) 24 (56) 74 (202) 769
Interest expense (1,088) (3,018) (3,043) (1,493) (1)
--------- --------- --------- --------- ---------
Total other income (expense) (1,063) (3,067) (2,349) (626) 1,284
--------- --------- --------- --------- ---------
Loss before provision (benefit) for income taxes (3,675) (10,317) (29,898) (7,622) (1,127)
Provision (benefit) for income taxes 11 2 (4,778) (2,435) 30
--------- --------- --------- --------- ---------
Loss before extraordinary item and change
in accounting principle (3,686) (10,319) (25,120) (5,187) (1,157)
Extraordinary item- Gain on debt forgiveness 1,476 -- -- -- --
Cumulative effect of changing accounting principle
- Goodwill valuation under SFAS 142 (627) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (2,837) (10,319) (25,120) (5,187) (1,157)
Income (loss) from discontinued operations 119 (4,339) (3,825) 1,133 6,742
--------- --------- --------- --------- ---------
Net income (loss) $ (2,718) $(14,658) $(28,945) $ (4,054) $ 5,585
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Loss before extraordinary item and
change in accounting principle $ (0.12) $ (0.29) $ (0.72) $ (0.15) $ (0.04)
Extraordinary item - gain on debt forgiveness 0.05 -- -- -- --
Loss from change in accounting principle (0.02) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (0.09) (0.29) (0.72) (0.15) (0.04)
Income (loss) from discontinued operations -- (0.12) (0.11) 0.13 0.24
--------- --------- --------- --------- ---------
Net income (loss) $ (0.09) $ (0.41) $ (0.83) $ (0.12) $ 0.20
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Loss before extraordinary item and
change in accounting principle $ (0.12) $ (0.29) $ (0.72) $ (0.15) $ (0.03)
Extraordinary item - gain on debt forgiveness 0.05 -- -- -- --
Loss from change in accounting principle (0.02) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations (0.09) (0.29) (0.72) (0.15) (0.03)
Income (loss) from discontinued operations -- (0.12) (0.11) 0.03 0.20
--------- --------- --------- --------- ---------
Net income (loss) $ (0.09) $ (0.41) $ (0.83) $ (0.12) $ 0.17
========= ========= ========= ========= =========
Weighted average common shares:
Basic 29,599 35,698 34,761 32,459 28,600
Diluted 29,599 35,698 34,761 32,459 33,071
15
YEAR ENDED MARCH 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands)
BALANCE SHEET DATA:
Working capital $ (4,056) $ (5,337) $ (2,782) $ 2,628 $ 26,387
Total assets $ 37,637 $ 40,005 $ 56,453 $ 94,083 $ 52,374
Long-term obligations $ 2,807 $ 8,013 $ 18,554 $ 21,586 $ 2,043
Stockholders' equity $ 23,842 $ 21,952 $ 26,993 $ 53,497 $ 45,270
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading provider of software solutions and services to the retail
industry. We provide high value innovative solutions that help retailers
understand, create, manage and fulfill consumer demand. Our solutions and
services have been developed specifically to meet the needs of the retail
industry. Our solutions help retailers improve the efficiency and effectiveness
of their operations and build stronger, longer lasting relationships with their
customers. Up until April 1, 2003, we also developed and distributed 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 management
solution. 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
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. Effective
April 1, 2003, we sold the SVI Training Products, Inc. unit and discontinued the
training product line of business. 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 manage long-lived assets by geographic region. The geographic
distribution of our revenues and long-lived assets for the fiscal years ended
March 31, 2003, 2002 and 2001 is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
------------ ------------ ------------
(in thousands)
Net Sales:
Continuing operations:
United States $ 19,616 $ 24,246 $ 25,930
United Kingdom 2,680 2,469 2,119
------------ ------------ ------------
22,296 26,715 28,049
------------ ------------ ------------
Discontinued operations:
United States 1,370 1,390 1,300
Australia -- 2,363 4,959
United Kingdom 147 146 216
------------ ------------ ------------
1,517 3,899 6,475
------------ ------------ ------------
Total net sales $ 23,813 $ 30,614 $ 34,524
============ ============ ============
Long-lived assets:
United States $ 31,595 $ 36,154 $ 48,270
Australia (discontinued operations) -- -- 1,370
United Kingdom 27 22 59
------------ ------------ ------------
Total long-lived assets $ 31,622 $ 36,176 $ 49,699
============ ============ ============
Up to April 1, 2003, 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, 2003 to have consisted of one reportable operating
segment. Effective April 1, 2003, we sold our training products subsidiary and
discontinued the training products line of business.
Results of operations for fiscal 2003 reflect continued weakness in new
license sales of our application software suites. As a result of our net losses,
we experienced significant strains on our cash resources throughout the 2003
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 January 2003, we appointed Harvey Braun, a well-known and
highly-respected retail industry veteran, to the position of
Chief Executive Officer of Island Pacific, one of our business
units. In April 2003, our Board of Directors appointed Mr. Braun
to the position of Chief Executive Officer and director of SVI.
o In October 2002, we appointed Steven Beck, a retail industry
expert, to the position of President of our Island Pacific unit.
In April 2003, our Board of Directors appointed Mr. Beck to the
position of President and Chief Operating Officer and director of
SVI.
o We are strengthening our product offerings through strategic
relationships with Planalytics, KMG Solutions, VisionCompass
Inc., Raymark, Inc., Wazagua LLC, ANT USA, Inc. and IT Resources
Inc.
o Under a partnership agreement with Planalytics Inc., Island
Pacific will market Impact LR, an internet-based application that
measures the specific effects of future weather on consumer
demand by product, location and time. Using Impact LR, our
customers can plan the timing of in-season markdowns, as well as
the season-to-season flow of merchandise into their stores with
maximum effectiveness.
17
o Under a marketing license agreement with KMG Solutions, Island
Pacific will integrate, market and support Traxion(TM)process
management solutions. Traxion's business process management
solution consists of three modules. Traxion ProcessEngine(TM)is
the real-time process management platform that retailers use to
actively manage and support their organizations' unique business
processes. Traxion ProcessModeler(TM), includes simulation
functions such as same-time comparison of process variations and
the use of actual cost data to produce process-based financial
estimates. Traxion OrganizationModeler(TM) simplifies the
creation of sophisticated models including inter-company
workgroups, payroll information, and roles.
o Island Pacific will market VisionCompass(TM) collaborative
enterprise management software, which uniquely combines the best
of performance management, business intelligence, resource
planning, and collaboration capabilities into one
straightforward, web-based application. The system enables
decision makers and teams to develop specific business goals,
work on them together, and measure their collective results
objectively. The highly flexible system is easily customizable to
fit each organization's unique needs and leads directly to
improved quality and visibility of key indicators throughout the
enterprise.
o Under an OEM agreement with Raymark, Inc., Island Pacific will
integrate, market and support Xpert Store point-of-sale ("POS")
software solution under the Island Pacific brand. Raymark's
full-featured POS solution streamlines the checkout process in
order to increase sales associate efficiency and augment customer
satisfaction. The software supports multi-channel,
multi-language, multi-currency and multi-taxation requirements.
o Under a agreement with Wazagua LLC, Island Pacific will
exclusively offer to retailers worldwide Wazagua's products and
services including web-based Loss Prevention Case Management
Package, ASP Data Hosting and POS Exception Reporting.
WAZAGUA(TM) ASP Hosted Suite of Modules automates data management
for the Loss Prevention, Operations, Human Resources, Safety &
Risk Management community. These ASP-hosted productivity tools
enable retailers to capture the power of the internet. Retailers
can create efficiencies, manage and share information, make
better use of their staff, eliminate redundant data entry - and
work from virtually any point in the world.
o Under terms of a reseller agreement, Island Pacific will market,
sell, install, interface to, and support ANT USA's products
including Buyer's Toolbox(tm), a leading suite of merchandise and
assortment planning software that has been successfully
implemented by over 140 retailers worldwide. The software will
extend Island Pacific's assortment and planning capabilities by
providing a solid planning methodology accessed through an
easy-to-use interface, in a cost-effective offering.
o A marketing license agreement with IT Resources Inc. enables
Island Pacific to market, sell, install, support and integrate IT
Resources' Buyer's WorkMate(r) Suite, an innovative decision
support software platform developed for merchandising
organizations. The software will bring mobility and other
timesaving benefits to the buying process.
o Under a marketing alliance agreement with BIGresearch, we will
provide retailers, suppliers and third party companies with an
end-to-end information solution to forecast consumer demand,
better utilize assets and merchandise, and develop strategy and
market position.
o 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, and SVI Training
Products, Inc. Effective April 1, 2003, we agreed to sell our
shares of SVI Training Products, Inc., our wholly-owned
subsidiary, to Arthur Klitofsky. Mr. Klitofsky resigned from the
Board in March 2003. See "Discontinued Operations" below.
18
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 fiscal 2001. In July 2002, we
amended the convertible notes to extend the maturity date to
September 30, 2003 and we replaced the warrants issued to these
investors. See "Liquidity and Capital Resources -- Indebtedness
-- ICM Asset Management, Inc." below.
o In July 2002, we negotiated an extension of our senior bank
lending facility to August 31, 2003, and then we subsequently
satisfied this debt under the Discounted Loan Payoff Agreement
dated March 31, 2003. See "Liquidity and Capital Resources --
Indebtedness -- Union Bank" below.
o In May 2002, we completed an integrated series of transactions
with Softline Limited 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 to Softline new
preferred securities. Softline also returned to us 10,700,000
shares of our common stock. Steven Cohen, Softline's Chief
Operating Officer, and Gerald Rubenstein, a director of Softline,
resigned from our board of directors in May 2002. Ivan Epstein,
Softline's Chief Executive Officer, continues to serve on our
board, and in June 2002, Robert P. 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 "Financing Transactions --
Softline."
o In May 2002, we entered into a new two-year software development
and services agreement with our largest customer, Toys "R' Us,
Inc. ("Toys"). Toys also agreed to invest $1.3 million for the
purchase of a non-recourse convertible note and a warrant to
purchase up to 2,500,000 common shares. For a further details,
see "Liquidity and Capital Resources - Indebtedness -- Toys "R"
Us' below.
o In March 2003, we issued a total of $3.5 million in 9%
convertible debentures to Midsummer Investment, Ltd., Omicron
Master Trust and Islandia, L.P. Along with these debentures,
warrants to purchase an aggregate of 1,572,858 shares of common
stock were issued to these investors. See "Financing Transactions
- Midsummer/Omicron/Islandia" below.
o In April 2003, we issued $400,000 in 9% convertible debentures to
MBSJ Investors, LLC. Along with these debentures, warrants to
purchase 156,311 shares of common stock were issued to this
investor. See "Financing Transactions - MBSJ".
o In March 2003, the Board adopted a resolution to change our name
to "Island Pacific, Inc.", subject to approval by our
shareholders.
o In May 2003, we issued $300,000 in 9% convertible debentures to
Crestview Capital Fund I, L.P., Crestview Capital Fund II, L.P.
and Crestview Capital Offshore Fund, Inc. Along with these
debentures, warrants to purchase 101,112 shares of common stock
were issued to these investors. See "Financing Transactions -
Crestview".
DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our wholly-owned subsidiary, SVI Training
Products, Inc. ("Training Products") to our former president of Training
Products for the sale price of $180,000 plus earn-out payments equal to 20% of
the total gross revenues of Training Products in each of its next two fiscal
years, to the extent the revenues in each of those years exceed certain targets.
We received a promissory note for the amount of $180,000 and the earn-out
payments, if any, will be made in quarterly installments following each fiscal
year, bearing an annual interest rate of 5%. The sale of the Training Products
subsidiary resulted in a loss of $129,000, net of estimated income taxes, which
was accrued for at March 31, 2003. The operating results of Training Products of
$248,000 are shown as discontinued operations, net of the loss on sale of
Training Products with the prior period results restated.
19
Due to the declining performance of our Australian subsidiary, we decided
in the third quarter of fiscal 2002 to sell certain assets of the Australian
subsidiary to the former management of such subsidiary, and then cease
Australian operations. Such sale was however subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in April 2002 to sell substantially all of the assets
of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sale 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.
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 at March 31, 2002 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.
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.
20
Typically, payments for our software licenses are due in
installments within twelve months from the date of delivery.
Where software license agreements call for payment terms of
twelve months or more from the date of delivery, revenue is
recognized as payments become due and all other conditions for
revenue recognition have been satisfied. Deferred revenue
consists primarily of deferred license, prepaid services revenue
and maintenance support revenue.
Consulting services are separately priced, are generally
available from a number of suppliers, and are not essential to
the functionality of our software products. Consulting services,
which include project management, system planning, design and
implementation, customer configurations, and training are billed
on both an hourly basis and under fixed price contracts.
Consulting services revenue billed on an hourly basis is
recognized as the work is performed. On fixed price contracts,
consulting services revenue is recognized using the percentage of
completion method of accounting by relating hours incurred to
date to total estimated hours at completion. We have from time to
time provided software and consulting services under fixed price
contracts that require the achievement of certain milestones. The
revenue under such arrangements is recognized as the milestones
are achieved. Customer support services include post contract
support and the rights to unspecified upgrades and enhancements.
Maintenance revenues from ongoing customer support services are
billed on a monthly basis and recorded as revenue in the
applicable month, or on an annual basis with the revenue being
deferred and recognized ratably over the maintenance period. If
an arrangement includes multiple elements, the fees are allocated
to the various elements based upon vendor-specific objective
evidence of fair value.
o ACCOUNTS RECEIVABLE. We typically extend credit to our customers.
Software licenses are generally due in installments within twelve
months from the date of delivery. Billings for customer support
and consulting services performed on a time and material basis
are due upon receipt. From time to time software and consulting
services are provided under fixed price contracts where the
revenue and the payment of related receivable balances are due
upon the achievement of certain milestones. Management estimates
the probability of collection of the receivable balances and
provides an allowance for doubtful accounts based upon an
evaluation of our customers ability to pay and general economic
conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. For
fiscal 2003, we have adopted SFAS No. 142 resulting in a change
in the way we value long-term intangible assets and goodwill. We
were required to perform an initial transitional analysis of
goodwill impairment. We concluded this analysis as of April 1,
2002 and recorded an impairment of $0.6 million as a cumulative
effect of a change in accounting principle in the first quarter
of fiscal 2003. We will no longer amortize goodwill, but will
instead test goodwill for impairment on an annual basis or more
frequently if certain events occur. Goodwill is to be measured
for impairment by reporting units, which currently consist of our
operating segments. At each impairment test for a business unit,
we are required to compare the carrying value of the business
unit to the fair value of the business unit. If the fair value
exceeds the carrying value, goodwill will not be considered
impaired. If the fair value is less than the carrying value, we
will perform a second test comparing the implied fair value of
reporting unit goodwill with the carrying amount of that
goodwill. The difference if any between the carrying amount of
that goodwill and the implied fair value will be recognized as an
impairment loss, and the carrying amount of the associated
goodwill will be reduced to its implied fair value. These tests
require us to make estimates and assumptions concerning prices
for similar assets and liabilities, if available, or estimates
and assumptions for other appropriate valuation techniques.
21
For our intangible assets with finite lives, including our
capitalized software and non-compete agreements, we assess
impairment at least annually or whenever events and circumstances
suggest the carrying value of an asset may not be recoverable
based on the net future cash flows expected to be generated from
the asset on an undiscounted basis. When we determine that the
carrying value of intangibles with finite lives may not be
recoverable, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
updates, clarifies, and simplifies existing accounting pronouncements. This
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded.
SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends
SFAS No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in the same
manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The accounting prescribed in SFAS 145 was applied in connection with the gain
from extinguishment of our debt to Union Bank of California.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 replaces current accounting literature and requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
provisions of the SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. We do not expect adoption of SFAS No. 146
to have a significant effect on our results of operations or financial
condition.
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 ("SFAS 147"), "Acquisition of certain Financial Institutions".
SFAS 147 removes the requirement in SFAS 72 and Interpretation 9 thereto, to
recognize and amortize any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those transactions
be accounted for in accordance with SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". In addition, this
statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets, to include certain financial institution related intangibles.
This statement is not likely to have any impact on our consolidated financial
statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. We will provide the
comparative interim pro forma disclosures required by SFAS 148 beginning in
first quarter ending June 30, 2003. SFAS 148 is not expected to have a material
impact on the Company's financial statements.
22
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accountings and disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others", which clarifies the requirement of SFAS No. 5, "Accounting for
Contingencies", relating to a guarantor's accounting for and disclosures of
certain guarantee issues. FIN 45 was applied to our guarantee of a line of
credit facility from National Australia Bank Limited to our former Australian
subsidiary.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities".
Variable interest entities are defined as entities with a level of invested
equity that is not sufficient to fund future activities to permit it to operate
on a stand-alone basis. We do not participate in variable interest entities and
therefore have not applied FIN 46.
In November 2002, the FASB reached consensus on Emerging Issues Task Force
Issue No. 00-21 ("EITF No. 00-21"), "Accounting for Revenue Arrangements with
Multiple Deliverables." In general, this issue addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, this issue addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one earnings process and, if so, how to divide the arrangement into
separate units of accounting consistent with the identified earnings processes
for revenue recognition purposes. This issue also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. EITF Issue 00-21 is applicable to arrangements
entered into after June 15, 2003. We do not believe the application of EITF
Issuer 00-21 will have any material impact on our consolidated financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 further clarifies accounting for derivative
instruments. We believe the adoption of this statement will have no material
impact on our consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity," ("SFAS 150"). SFAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. We do not believe the
adoption of SFAS 150 will have a material impact on our consolidated financial
statements.
FINANCING TRANSACTIONS
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.
23
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.
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 Asset Management, Inc. The investors agreed to
replace the existing notes with new notes having a maturity date of September
30, 2003. The interest rate on the new notes was reduced to 8% per annum,
increasing to 13% in the event of a default in payment of principal or interest.
We are required to pay accrued interest on the new notes calculated from July
19, 2002, in quarterly installments beginning September 30, 2002. The investors
agreed to reduce accrued interest and late charges on the original notes by up
to $16,000, and to accept the reduced amount in 527,286 shares of our common
stock valued at $0.41 per share which was the average closing price of our
shares on the American Stock Exchange for the 10 trading days prior to July 19,
2002. The new notes are convertible at the option of the holders into shares of
our common stock valued at $0.60 per share. We do not have a right to prepay the
notes. In December 2002, the investors agreed to extend the payments of accrued
interest to September 30, 2003.
We also agreed that the warrants previously issued to the investors to
purchase an aggregate of 3,033,085 shares at exercise prices ranging from $0.85
to $1.50, and expiring on various dates between December 2002 and June 2004,
would be replaced by new warrants to purchase an aggregate of 1,600,000 shares
at $0.60 per share, expiring July 19, 2007. The replacement warrants are not
callable by us.
We also agreed to file a registration statement for the resale of all
shares held by or obtainable by these investors. In the event such registration
statement is not declared effective by the SEC by June 30, 2003, we will be
obligated to issue five-year penalty warrants for the purchase of 5% of the
total number of registrable securities at an exercise price of $0.60 per share.
For the first 30 day period after June 30, 2003 in which the registration
statement is not effective, we will be obligated to issue additional warrants
for the purchase of 5% of the total number of registrable securities at an
exercise price of $0.60 per share. For each 30 day period thereafter in which
the registration statement is not effective, we will be obligated to issue
additional penalty warrants for the purchase of 2.5% of the total number of
registrable securities at an exercise price of $0.60. No further penalty
warrants will accrue from our original registration obligation. The registration
statement was filed in May 2003; however, it has not been declared effective as
of the date of this report.
SOFTLINE
In May 2002, we entered into an integrated series of transactions with
Softline by which:
1. We transferred to Softline the note received in connection with the
sale of IBIS Systems Limited.
2. We issued to Softline 141,000 shares of newly-designated Series A
Convertible Preferred Stock .
3. Softline released us from approximately $12.3 million in indebtedness
due to Softline under a promissory note.
4. Softline surrendered 10,700,000 shares of our common shares held by
Softline.
24
The Series A Preferred Stock has a stated value of $100 per share and is
redeemable at our option any time prior to the maturity date of December 31,
2006 for 107% of the stated value and accrued and unpaid dividends. The shares
are entitled to cumulative dividends of 7.2% per annum, payable semi-annually
when, as and if declared by the board of directors. Softline may convert each
share of Series A Preferred Stock at any time into the number of common shares
determined by dividing the stated value plus all accrued and unpaid dividends,
by a conversion price initially equal to $0.80. The conversion price increases
at an annual rate of 3.5% calculated on a semi-annual basis. The Series A
Preferred Stock is entitled upon liquidation to an amount equal to its stated
value plus accrued and unpaid dividends in preference to any distributions to
our common stockholders. The Series A Preferred Stock has no voting rights prior
to conversion into common stock, except with respect to proposed impairments of
the Series A Preferred rights and preferences, or as provided by law. We have
the right of first refusal to purchase all but not less than all of any shares
of Series A Preferred Stock or common shares received on conversion which
Softline may propose to sell to a third party, upon the same price and terms as
the proposed sale to a third party. We also granted Softline certain
registration rights for the common shares into which the Series A Preferred
Stock is convertible, including the right to demand registration on Form S-3 if
such form is available to us and Softline proposes to sell at least $5 million
of registrable common shares, and the right to include shares obtainable upon
conversion of the Series A Preferred Stock in other registration statements we
propose to file.
These transactions were recorded for accounting purposes on January 1,
2002, the date when Softline took effective control of the IBIS note and we
ceased accruing interest on the Softline note. We did not recognize any gain or
loss in connection with the disposition of the IBIS note or the other components
of the transactions.
TOYS "R" US, INC.
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million for
the purchase of a non-recourse convertible note and a warrant to purchase
2,500,000 common shares. The purchase price was received in installments through
September 27, 2002. The note is non-interest bearing, and the face amount was
either convertible into shares of our stock valued at $0.553 per share or
payable in cash at our option, at the end of the term. In November 2002, the
Board decided that this note will be converted solely for equity and will not be
repaid in cash. The note is due May 29, 2009, or if earlier than that date,
three years after the completion of the development project contemplated in the
development agreement between us and Toys entered into at the same time. We do
not have the right to prepay the convertible note before the due date. The face
amount of the note is 16% of the $1.3 million purchase price as of May 29, 2002,
and increases by 4% of the $1.3 million purchase price on the last day of each
succeeding month, until February 28, 2004, when the face amount is the full $1.3
million purchase price. The face amount will cease to increase if Toys
terminates its development agreement with us for a reason other than our breach.
The face amount will be zero if we terminate the development agreement due to an
uncured breach by Toys of the development agreement.
The warrant entitles Toys to purchase up to 2,500,000 of our common shares
at $0.553 per share. The warrant is initially vested as to 400,000 shares as of
May 29, 2002, and vests at the rate of 100,000 shares per month until February
28, 2004. The warrant will cease to vest if Toys terminates its development
agreement with us for a reason other than our breach. The warrant will become
entirely non-exercisable if we terminate the development agreement due to an
uncured breach by Toys of the development agreement. Toys may elect a "cashless
exercise" where a portion of the warrant is surrendered to pay the exercise
price. As of May 31, 2003, 1.6 million shares of the warrant are exercisable.
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.
25
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, afte