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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, 2004
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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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ISLAND PACIFIC, INC.
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(FORMERLY KNOWN AS 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
incorporation or organization) Identification Number)
19800 MACARTHUR BLVD, SUITE 1200, IRVINE, CA 92612
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 476-2212
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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 [ ] No [X]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates, based on the closing sale price of the
registrant's common stock on September 30 2003 as reported on the American Stock
Exchange, was approximately $65.5 million. Excludes shares of common stock held
by directors, officers and each person who holds 5% or more of the registrant's
common stock.
The number of shares outstanding of the registrant's Common Stock was 53,974,532
on June 1, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I
Item 1. Business............................................................................................2
Item 2. Properties.........................................................................................14
Item 3. Legal Proceedings..................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders................................................15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................15
Item 6. Selected Financial Data............................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............18
Business Risks.....................................................................................33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................43
Item 8. Financial Statements and Supplementary Data........................................................44
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures..............44
Item 9A. Controls and Procedures............................................................................44
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................44
Item 11. Executive Compensation.............................................................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................51
Item 13. Certain Relationship and Related Transactions......................................................54
Item 14. Principal Accountant Fees and Services.............................................................57
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................58
Signatures.........................................................................................64
Certifications.....................................................................................
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 ("ISLAND PACIFIC", "IPI", "WE" OR "US") "BELIEVES", "ANTICIPATES",
"EXPECTS", "FORECASTS", "ESTIMATES" OR OTHER WORDS SIMILAR MEANING AND CONTEXT.
SIMILARLY, STATEMENTS THAT DESCRIBE FUTURE PLANS, OBJECTIVES, OUTLOOKS, TARGETS,
MODELS, OR GOALS ARE ALSO DEEMED FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE FORECASTED OR
ANTICIPATED AS OF THE DATE OF THIS REPORT. CERTAIN OF SUCH RISKS AND
UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY TO SUCH STATEMENTS AND ELSEWHERE
IN THIS REPORT, INCLUDING ITEM 7, "MANAGEMENT'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. BUSINESS
GENERAL
We are a provider of software solutions and services to the retail
industry. We provide solutions that help retailers understand, create, manage
and fulfill consumer demand. The Company is organized in three strategic
business units - Retail Management Solutions, Store Solutions and Multi-channel
Retail Solutions.
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.
ISLAND PACIFIC
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
1960s 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 difficult
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 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 product 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 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.
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.
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:
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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 BECOME 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.
o FULFILL THE MULTI-CHANNEL REQUIREMENTS OF RETAILERS. Through
the acquisition of Page Digital, we believe we will be able to
address the expanding needs of retailers to cohesively manage
their varied channels of distribution.
RECENT DEVELOPMENTS
OPERATIONAL IMPROVEMENTS
In recent periods, we have taken a number of steps designed to improve
our balance sheet and operations, including:
o Purchased complementary businesses, with substantial revenues
and earnings potential.
o Revamped our management team by adding a new President and COO
and CTO with longstanding industry experience, as well as a
new CFO.
o Recapitalized our balance sheet, eliminating substantial debt
and raising new equity in its place.
o Improved our IBM-based core products through continuing
internal research and development.
o Obtained the rights to distribute complementary products,
including a new easy-to-install and easy-to-use,
open-architecture software system for very small retailers,
which we will introduce in 2004.
o Established partnerships with several value added resellers to
provide a variety of options and product extensions.
o Improved our distribution capabilities by adding new third
party channels, such as IBM and IBM's resellers, and
professional service firms such as CGI and LakeWest.
We believe that these actions have positioned us for a return to sustained
revenue growth and profitability.
ACQUISITION OF PAGE DIGITAL
As part of our strategy to meet the expanding needs of multi-channel
retailers, on January 30, 2004, we acquired Page Digital Incorporated ("Page
Digital" through a merger transaction for total consideration of $7.0 million,
consisting of $2.0 million in cash and 2,500,000 shares of our common shares
valued at $2.00 per share. Page Digital develops multi-channel commerce software
solutions and has a suite of direct commerce applications that complete the
multi-channel retail distribution and customer service chain for Internet,
telephone, brick and mortar, catalog and other direct commerce channels. Our
acquisition of Page Digital will continue to enhance our ability to provide our
combined customer bases with e-commerce, customer relationship management and
catalog management solutions. In connection with the Page Digital acquisition,
we added approximately 40 employees. Page Digital had total assets of $2.1
million as of October 31, 2003 and generated annual revenues of $5.3 million in
the fiscal year ended October 31, 2003.
The legitimization of business to business and business to consumer
direct commerce (Internet, brick-and-mortar, catalog, and other) has rapidly
created a substantial market for the Page Digital suite of direct commerce
applications. According to the United States Department of Commerce, the market
for multi-channel direct commerce applications was just $15 billion in 1999,
grew to $27.3 billion in 2000, grew to $32.6 billion in 2001, and it is growing
at a rate 2.5 times greater than traditional retailing (Source: Internet
Retailer, April 2002). The acquisition of Page Digital will enable us to
continue to provide our customers with Page Digital's e-commerce, customer
relations management, and Catalog Management solutions. We expect to further
integrate these solutions into our offerings to enable customers to complete the
multi-channel retail distribution and customer service chain. In addition, the
acquisition will also allow us to offer Page Digital's customers the IP
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Merchandising solution, as well as Point of Sale, Loss Prevention, and IP's
other alliance solutions.
ACQUISITION OF RTI
Pursuant to an agreement dated June 1, 2004, we acquired Retail
Technologies International, Inc. ("RTI") from Michael Tomczak, Jeffrey Boone and
Intuit Inc. ("Intuit") in a merger transaction. On March 12, 2004, we, RTI, IPI
Merger Sub, Inc., ("Merger Sub") and Michael Tomczak and Jeffrey Boone (the
"Shareholders") entered the initial Agreement of Merger and Plan of
Reorganization (the "March 12, 2004 Merger Agreement") which provided we would
acquire RTI in a merger transaction in which RTI would merge with and into
Merger Sub. The merger consideration contemplated by the March 12, 2004 Merger
Agreement was a combination of cash and shares of our common stock. The March
12, 2004 Merger Agreement was amended by the Amended and Restated Agreement of
Merger and Plan of Reorganization, dated June 1, 2004, by and between us, RTI,
Merger Sub, IPI Merger Sub II, Inc. ("Merger Sub II") and the Shareholders (the
"Amended Merger Agreement").
Pursuant to the Amended Merger Agreement, the Merger (as defined below)
was completed with the following terms: (i) we assumed RTI's obligations under
those certain promissory notes issued by RTI on December 20, 2002 with an
aggregate principal balance of $2.3 million; (ii) the total consideration paid
at the closing of the Merger was $10.0 million paid in shares of our common
stock and newly designated Series B convertible preferred stock ("Series B
Preferred") and promissory notes; (iii) the Shareholders and Intuit are entitled
to price protection payable if and to the extent that the average trading price
of our common stock is less than $0.76 at the time the shares of our common
stock issued in the Merger and issuable upon conversion of the Series B
Preferred are registered pursuant to the registration rights agreement dated
June 1, 2004 between us, the Shareholders and Intuit (the "Registration Rights
Agreement"); and (iv) the merger consisted of two steps (the "Merger"), first,
Merger Sub merged with and into RTI, Merger Sub's separate corporate existence
ceased and RTI continued as the surviving corporation (the "Reverse Merger"),
immediately thereafter, RTI merged with and into Merger Sub II, RTI's separate
corporate existence ceased and Merger Sub II continued as the surviving
corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares
of Series B Preferred and a promissory note payable monthly over two years in
the principal amount of $1,295,000 bearing interest at 6.5% per annum. As a
result of the Merger, Intuit, the holder of all of the outstanding shares of
RTI's Series A Preferred stock, received 1,546,733 shares of our common stock
and a promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights.
Under the Registration Rights Agreement, we agreed to register the common stock
issuable upon conversion of the Series B Preferred issued to the Shareholders
within 30 days of the automatic conversion of the Series B Preferred into common
stock. The automatic conversion will occur upon us filing an amendment to our
certificate of incorporation with the Delaware Secretary of State increasing the
authorized number of shares of our common stock ("Certificate of Amendment")
after securing shareholder approval for the Certificate of Amendment. Under the
Registration Rights Agreement, Intuit is entitled to demand registration or to
have its shares included on any registration statement filed prior the
registration statement covering the Shareholders' shares, subject to certain
conditions and limitations, or if not previously registered to have its shares
included on the registration statement registering the Shareholders' shares. The
Shareholders and Intuit are entitled to price protection payments of up to a
maximum of $0.23 per share payable by promissory note, if and to the extent that
the average closing price of our common stock for the 10 days immediately
preceding the date the registration statement covering their shares is declared
effective by the Securities and Exchange Commission, is less than the 10 day
average closing price as of June 1, 2004, which was $0.76.
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well
as certain officers and directors signed voting agreements that provide they
will not dispose of or transfer their shares of our capital stock and that they
will vote their shares of our capital stock in favor of the Certificate of
Amendment and the Amended Merger Agreement and transactions contemplated
therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone.
The combination of Island Pacific, RTI and Page Digital, will enable us
to offer a fully integrated solution to mid-tier retailers that will be unique
in the marketplace. As a result of this transaction, smaller retailers will now
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be able to cost-effectively acquire a solution that provides both front and
back-end support. The combination instantly expands our products, services
offerings and distribution channels.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
We currently structure our operations into three strategic business
units. The business units are retail management solutions, store solutions and
multi-channel retail solutions. Our operations are conducted principally in the
United States and the United Kingdom. In addition, we manage long-lived assets
by geographic region. The business units are as follows:
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") - offers a
suite of applications, which builds on our long history in
retail software design and development. We provide our
customers with extremely reliable, widely deployed,
comprehensive and fully integrated retail management
solutions. Retail Management Solutions includes merchandise
management that optimizes workflow and provides the highest
level of data integrity. This module supports all operational
areas of the supply chain including planning, open-to-buy
purchase order management, forecasting, warehouse and store
receiving distribution, transfers, price management,
performance analysis and physical inventory. In addition,
Retail Management Solutions includes a comprehensive set of
tools for analysis and planning, replenishment and
forecasting, event and promotion management, warehouse,
ticketing, financials and sales audit. Through collaborations
with strategic partners, Retail Management offers tools for
loss prevention, communication with stores and vendors,
integration needs, purchase and allocation decisions, analysis
of weather impact, control and management of business
processes, consumer research, tracking consumer shopping
patterns, forecasting and replenishment, and analyzing store
people productivity.
o STORE SOLUTIONS - offers a suite of applications that builds
on our long history of providing multi-platform, client server
in-store solutions. We market this set of applications under
the name "OnePointe," which is a feature-rich application
created with the specialty retailer in mind. More than 15
years of development has resulted in a solution with a high
degree of fit and value out of the box. Additionally, the
software was designed for easy customization, enabling our
development team to quickly develop solutions to meet
retailers' specific point-of-sale ("POS")and in-store
processor (server) requirements.
In connection with our acquisition of RTI, Store Solutions
also offers POS application under the name "Retail Pro(R)"
which provides a total solution for small to mid-tier
retailers worldwide. Today, Retail Pro(R) is used by
approximately 9,000 businesses in over 24,000 stores in 63
countries. The product is translated into fourteen languages
making it one of the few quality choices for the global
retailer. At its core, Retail Pro(R) is a high performance,
32-bit Windows application offering point-of-sale, inventory
control and customer relations management. Running on
WindowsNT, Windows2000, Windows XP Professional and
Windows.Net platforms, Retail Pro(R) combines a fully
user-definable graphical interface with support for a variety
of input devices (from keyboard to touch screen). Its Retail
Business Analytics module includes an embedded Oracle(r) 9i
database. Retail Pro(R) is fast and easy to implement. The
software has been developed to be very flexible and adaptable
to the way a retailer runs its business.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL RETAIL") - Page
Digital designs its application to specifically address direct
commerce business processes, which primarily relate to
interactions with the end-user. Having developed its software
out of necessity to manage its own former direct commerce
operation, Page Digital has been extremely attentive to
functionality, usability and scalability. Its software
components include applications for customer relations
management, order management, call centers, fulfillment, data
mining and financial management. Specific activities like
partial ship orders, payments with multiple tenders, back
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order notification, returns processing and continuum marketing
represent just a few of the more than 1,000 parameterized
direct commerce activities that have been built into its
"Synaro"(TM)applications. Page Digital makes these components
and its interfacing technology available to customers, systems
integrators and independent software developers who may modify
them to meet their specific needs. This growing base of
inherited functionality continues to improve the market
relevance of its products.
For further financial information about our business segments and geographic
areas see our Financial Statements section and "Notes to Consolidated Financial
Statements for the Year Ended March 31, 2004 - Note 15" thereunder.
PRODUCTS
We develop, partner 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 helps
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:
THE RETAIL MANAGEMENT SOLUTIONS 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.
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 retailers to arrive
at a well-researched and sound buying decisions -
yielding merchandise assortments that meet local
consumer demand, minimize inventory investment,
accelerate sales, reduce 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 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.
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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 STORE PEOPLE PRODUCTIVITY: application helps retailers
analyze the productivity of stores, people and items, and
transaction level sales productivity.
At the foundation of our application suite are the integrated modules
that comprise our core-merchandising solution. They are as follows:
1. Merchandising Management
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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.
2. The Eye(TM) Analysis and Planning
---------------------------------
o The Eye(TM), our datamart is a comprehensive analysis
and planning tool that provides answers to retailers'
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 retailers to develop
completely user-defined inquiries and reports. The
capacity of The Eye to store, manipulate, and present
information is limited only by a retailer's
imagination.
3. Replenishment and Forecasting
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o The Island Pacific Replenishment module is a tool
that ensures retailers 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.
4. Promotions and Events
---------------------
o The Island Pacific Event and Promotion Management
tool enables retailers 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.
5. Warehouse
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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.
6. Ticketing
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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.
7. Financials
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o The Island Pacific Financials module incorporates a
General Ledger that is synchronized with the
Merchandising Stock Ledger.
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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.
8. 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 STORE SOLUTIONS offers applications under the names "OnePointe,"
and "Retail Pro(R)."
"OnePointe" is a complete application providing all point-of-sale and
in-store processor (server) features along with multi-channel capability
(peer-to-peer) for traditional "brick and mortar" retail operations. The
features are as follows:
o POS Terminal is a robust, easy to use system. Some of key
features are transaction processing, merchandise recording,
handling tendering, handling exceptions and administrative
functions
o In-Store Processor houses the back-office functions and allows
central management of the store and POS system. This is a
full-featured, easy-to-use application. Functions supported by
the system include modifiable parameters, reports, store
operations, back office operations and maintenance functions.
o For Multi-Channel capability, "OnePointe" utilizes advanced
communications technology that provides connectivity between
different retail touch points in real time, allowing any
devise on the network, via LAN, WAN, internet or intranet, the
ability to access another at any time.
Retail Pro(R) is a leading point-of-sale and inventory management
software used by specialty retailers worldwide. The following is brief
description of some of the functionality of Retail Pro(R):
POINT OF SALE
- -------------
CASH DRAWER AND RECEIPT Data is captured for analysis and inventory is
FUNCTIONS updated in real time. Drives all required hardware at
point of sale.
INTEGRATED CREDIT CARD Supports authorization and processing of all major
PROCESSING payment types including credit, debit and gift cards.
CUSTOMER DATA Customer name and address information is entered at
point of sale where buying history can be viewed.
Purchase history can aid in controlling merchandise
returns and discounts.
LAYAWAYS AND SPECIAL Layaways are tracked and special orders can be
ORDERS created for out-of-stock merchandise or custom item.
ITEM QUANTITY AND PRICE Retail Pro(R) allows an instant view of whether an
LOOKUP item is in stock at any location and of correct
price.
POS SUMMARY REPORTS Daily x/z out report provides summary of each day's
activity for each clerk and store and reconciles the
cash drawer.
INVENTORY CONTROL
- -----------------
STOCK ON HAND, IN Inventory information can be sorted in variety of
TRANSIT, ON ORDER ways and viewed in a matrix based on user-defined
filters. This information can be viewed either in a
report or while generating a purchase order or other
activity.
PURCHASE ORDERS, Purchase orders can be created and are integrated
RECEIVING AND TICKETING with data from the inventory files. Merchandise may
be received against the purchase order and returns
can be generated. Bar codes for the merchandise can
be generated based on receiving information.
9
PRICING AND MARKDOWNS Retail Pro(R) displays margin % by item number to aid
in determining price. Alternate pricing levels can be
set up for employees, preferred customers and
wholesale accounts.
MULTI-STORE DISTRIBUTION Retail Pro(R) will automatically inform all the
AND TRANSFERS sending and receiving stores as part of the daily
polling process. By comparing days of supply the
system can recommend transfers to optimize sales.
PRE-SET AND USER DEFINED Retail Pro(R) comes with a variety of pre-designed
REPORTS reports for any store or group of stores and a
built-in report designer. Retail Pro(R) also allows
for a retailer to set preferences as to how it will
view reports.
PHYSICAL INVENTORY Physical inventories can be taken with a portable
terminal or PDA to promote accuracy and speed.
CUSTOMER FUNCTIONS
- ------------------
CUSTOMER LISTS AND Information by customer such as total amount spent,
MAILINGS time since last visit, size, birthday, etc. can be
sorted and viewed. In a multi-store operation, names
can be distributed to all stores so each customer can
be recognized
PREFERRED CUSTOMER Retail Pro(R) allows pricing to be based on a
PRICING customers level. It can also plan for a predetermined
markdown schedule for preferred customers.
GIFT REGISTRY The system will keep track of a list of items that
someone would like other people to buy for them and
keep track of those items already purchased.
The MULTI-CHANNEL RETAIL SOLUTIONS offered through our SYNARO(R) products were
designed for plug-and-play use to allow companies to rapidly capitalize on
direct commerce opportunities, both through the Internet as well as through call
centers and catalogs that augment Web-based components or as a complete
integrated solution. The table below provides a brief description of the
associated benefits of each of SYNARO(R) products.
SYNARO(R) PRODUCT DESCRIPTIONS
- --------------------------------------------------------------------------------
PRODUCT DESCRIPTION
- ------- -----------
INTEGRATOR A powerful middleware processor that seamlessly integrates
disparate front- and back-end business systems to allow for
the creation of best-of-breed solutions. Integrator is
specially tuned to provide real-time integration for high
volume and high performance requirements. SYNARO(R)
components are tightly integrated out-of-the-box for rapid
deployment of best practice functionality.
ERM A platform to manage communications between a company and
its customers across all mediums, which utilizes
segmentation, list management, campaign management and
forecasting functions that can be applied to both
interactive and traditional channels. ERM provides a
graphical user interface that allows our customers to
configure screens and keystrokes to accommodate their
specific requirements. It includes features such as
multi-channel order entry, e-mail management and response,
closed loop workflow and real-time communications with
customers to name a few.
WEBSTORE A real-time, online front-end for manufacturers, retailers,
wholesalers, direct marketers and other businesses who seek
to facilitate sales transactions over the Internet. WebStore
comes with preset templates, a shopping cart metaphor, SSL
security, search engine and databases for configuring the
site to handle product information, special selling
situations, etc. It is compatible with multiple web servers
such as BEA's WebLogic, IBM's WebSphere, and Sun's iPlanet.
ORDER MANAGEMENT A multi-faceted component application, which ensures proper
accounting for orders e.g. back order, customer hold, hold
until complete, date sensitive orders, continuity orders,
etc.; exceptions are brought to management's attention; and
orders can be processed and verified from any Web
application. It includes a comprehensive Call Center
capability including Computer Telephony Integration and
customer relations management.
ORDER FULFILLMENT A comprehensive application that monitors and controls all
fulfillment parameters including specifications,
replenishment orders, continuity programs, drop ship orders,
ship complete orders, gift orders, backorders and shipping
and handling orders.
MARKETING Controls offer and promotion set-up, which includes customer
list segmentation, campaign management including targeted
e-mail capability, item selection and placement and pricing.
Targeted marketing promotions and offers provide the
opportunity to improve margins and accelerate return on
investment.
10
PRODUCT Controls inventory management issues such as item type and
MANAGEMENT attributes. Multiple item types such as configured, kits,
gift certificates, serialized, drop ship, special order, and
club membership allow for significant flexibility.
WAREHOUSE Provides pick ticket processing, cycle count physical
MANAGEMENT inventory, bin location control, cross docking and location
maintenance.
WORK FLOW Provides for closed loop issues management and future chain
MANAGEMENT of events processing of marketing campaigns.
DATA ANALYSIS A report writer and query tool for mining, visualizing and
analyzing data that supports Business Objects, Crystal
Reports, FOCUS and any ORACLE SQL-compliant DB.
FORECASTING The Oracle-based Forecasting application allows for flexible
inventory and merchandise forecasting that enables direct
commerce companies to increase turns and reduce back orders.
FINANCIALS A product suite that includes all financial components
necessary to run a business, including real-time or batch
credit card processing, accounts receivable and accounts
payable management and general ledger operations.
Our PROFESSIONAL SERVICES provide our customers with expert retail
business consulting, project management, implementation, application training,
technical and documentation services. This product 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.
Our executive offices are located at 19800 MacArthur Boulevard, Suite
1200, Irvine, California 92612, telephone number (949) 476-2212.
MARKETS AND CUSTOMERS
Our software is installed in over 200 retailers. With the acquisition
of Page Digital in January 2004 and Retail Technologies, Inc. in June 2004, our
software is installed in over 9,000 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 is listed below:
Nike Limited Brands American Eagle Outfitters Disney
Phillips-Van Heusen Signet (UK) Shoefayre (UK) Pacific Sunwear
Timberland Vodaphone (UK) Academy Sports Michaels' Stores
IBM Lands' End Hershey Foods Mason Shoe Company
A&E Television Network Turner Broadcasting Betsey Johnson The Luggage Center
IKEA Play it Again Sports Patagonia Squaw Valley Ski Resort
SafeCo Field The Body Shop Staples Center Gucci Group
Swarovsky Louis Vuitton Fashion Group
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.
11
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 distribute our Retail Pro(R) products in North America, South
America, Europe, Asia, Australia, and Africa via a network of value-added
resellers (VARs). In general, each VAR is responsible for a particular
geographical region. Currently, RTI has 27 VARs in North America, 7 in South
America, 19 in Europe and the Middle East, 11 in Asia, 2 in Australia/New
Zealand and 1 in Africa. These resellers are trained and certified on Retail
Pro(R) and provide users with technical expertise, and a localized and
translated product.
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 solutions. 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
Evant, Inc., formerly NONSTOP Solutions. For 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 primary competitors in the
multi-channel retail market include Ecometry, CommercialWare and Sigma-Micro.
RTI's primary competitors include Celerant Technology Corp., 360 Commerce, CRS
Business Computers, NSB Retail Systems PLC, Micro Strategies Incorporated,
Retek, Inc. and JDA Software Group, 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.
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 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
12
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.
Our application Retail Pro(R) is licensed from a third party. On
December 6, 2002, RTI sold certain intellectual property for $7,500,000 to the
third party. In connection with the sale, RTI also sold certain property and
equipment for proceeds of $44,000 and 1,445,000 shares of series A preferred
stock at $0.346 per share, for $500,000 respectively. RTI recognized a total
gain of $7.5 million on the sale of the intellectual property and property and
equipment due to the tangible assets being fully depreciated as of the date of
sale. The third party also entered into employment agreements with several of
RTI's employees and a covenant not-to-compete with one of the original
stockholders. Under a license agreement, the third party granted back to RTI the
right to sell various products and licenses. Under the terms of the license
agreement, RTI is obligated to pay royalties equal to 75% of the sales made to
certain customers. The terms of the license agreement vary depending on the
product with the minimum term being approximately three years. Any termination
of, or disruption in this license could have a material adverse affect on RTI's
business.
EMPLOYEES
As of June 4, 2004, following the acquisition of RTI, we had a total of
224 employees, 208 of which were based in the United States. Of the total, 14%
were engaged in sales and marketing, 45% were engaged in application technology
development projects, 24% were engaged in professional services, and 17% were in
general and administrative. We believe our relations with our employees overall
are good. We have never had a work stoppage and none of our employees are
subject to a collective bargaining agreement.
We file registration statements, periodic and current reports, proxy
statements and other materials with the Securities and Exchange Commission. You
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site at WWW.SEC.GOV that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including our filings.
Our Internet address is WWW.ISLANDPACIFIC.COM. We make available, free
of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to those reports filed pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 through our
website, as soon as reasonably practicable after they are electronically filed
with or furnished to the SEC. The contents of our website are not incorporated
into, or otherwise to be regarded as a part of, this Annual Report on Form 10-K.
13
ITEM 2. PROPERTIES
Our principal corporate headquarters consists of 26,521 square feet in
a building located in Irvine, California. The corporate headquarters is also
used for certain of our sales, marketing, consulting, customer support, training
and product development functions. This facility is occupied under a lease that
expires on June 30, 2005. The current monthly rent is $56,000. 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 June
30, 2008. Annual rent is $72,000 (payable quarterly) plus common area
maintenance charges and real estate taxes. We also lease 44,505 square-foot
office space in Englewood, Colorado for our Page Digital subsidiary. This lease
commenced on January 1, 2004 and expires on December 31, 2013 with a five-year
renewal option. The monthly rent is $71,000. We assumed this lease in connection
with the acquisition of Page Digital. Prior to our assumption, the lease was
entered between CAH Investments, LLC ("CAH"), which is wholly owned by the
spouse of Lawrence Page, Page Digital's former president and our current
Executive Vice President - Special Projects and director, and Southfield
Crestone, LLC. We also lease an office that consists of 12,717 square feet of
rentable space in a building located in Folsom, California for our RTI
subsidiary. This lease expires in January 2006 and has a monthly rent of
$22,000.
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 the
Company and other transactions he entered into with the Company. The parties
agreed to resolve all claims in binding arbitration. The dispute was heard by an
arbitrator the week of October 3, 2003. The arbitrator issued an award on
November 7, 2003, resolving most of the disputed issues in favor of the Company
as follows: (a) the Company was awarded a refund of rental payments amounting to
$66,951; (b) the excessive equipment leasing financing charges by Mr. Dorosewicz
were recast substantially reducing the Company's unpaid balance; (c) Mr.
Dorosewicz was ordered to repay attorneys' fees reimbursement he had previously
been provided by the Company; (d) Mr. Dorosewicz was denied severance benefits;
(e) Mr. Dorosewicz's claims with respect to options were denied; and (f) Mr.
Dorosewicz was awarded his unpaid bonus in the amount of $56,719. The net amount
awarded to Mr. Dorozewicz was $85,339, which was paid in January 2004.
The sale of our Australian subsidiary in the third quarter of fiscal
2002 was subject to the approval of National Australia Bank, the subsidiary's
secured lender. The bank did not approve the sale and the subsidiary ceased
operations in February 2002. The bank caused a receiver to be appointed in
February 2002 to sell substantially all of the assets of the Australian
subsidiary and pursue collections on any outstanding receivables. The receiver
proceeded to sell substantially all of the assets for $300,000 in May 2002 to an
entity affiliated with former management, and is actively pursuing the
collection of receivables. If the sale proceeds plus collections on receivables
are insufficient to discharge the indebtedness to National Australia Bank, we
may be called upon to pay the deficiency under our guarantee to the bank. We
have accrued $187,000 as our potential exposure. The receiver has also claimed
that we are obligated to it for inter-company balances of $636,000, but we do
not believe any amounts are owed to the receiver, who has not as of the date of
this report acknowledged the monthly corporate overhead recovery fees and other
amounts charged by us to the Australian subsidiary offsetting the amount claimed
to be due.
On May 15, 2002, an employee who was out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. 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 had responded appropriately to both the wage claim and the
discrimination allegations, which we believed lack merit based on present
information. On December 1, 2003, the Department of Fair Housing and Employment
closed the case on the basis of no probable cause to prove violation of statute,
and gave notice of right to sue. In January 2004, we terminated Ms Hintz's
employment with us and, as a result, her medical insurance was terminated. On
February 12, 2004, Ms. Hintz filed a petition for violation of Labor Code
Section 132(a) before the Workers' Compensation Appeals Board of the State of
California.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation
("Cord Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail,
Inc. ("SVI Retail") 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
14
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. We settled this case on September 30, 2003. The terms
of the settlement agreement are subject to a confidentiality covenant.
In mid-2002, we were the subject of an adverse judgment entered 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 we 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 settled this matter by an agreement to
pay $12,500 to Randall.
On November 22, 2002, UDC Homes, Inc. and UDC Corporation now known as
Shea Homes, Inc. served Sabica Ventures, Inc. ("Sabica"), our wholly owned
subsidiary and then our Island Pacific division (now are retail management
solutions division) with a cross-complaint for indemnity on behalf of an entity
identified in the summons as Pacific Cabinets. We filed a notice of motion and
motion to quash service of summons on the grounds that we have never done
business as Pacific Cabinets and have no other known relation to the
construction project that is the subject of the cross-complaint and underlying
complaint. A hearing on our motion to quash occurred on May 22, 2003 and was
subsequently denied.
On April 2, 2004, we filed a federal court action in the Southern
District of California against 5R Online, Inc. ("5R"), John Frabasile, Randy
Pagnotta, and Terry Buckley for fraud, breach of fiduciary duty, breach of
contract, and unfair business practice arising from their evaluation of,
recommendation for, and ultimately engagement in a development arrangement
between IPI and 5R. Pursuant to the development agreement entered into in June
2003 upon reliance of the representations of the individual defendants that
product development was progressing, we paid $640,000 in development payments
but received no product. Responsive pleadings will be served shortly, and the
parties are exploring a business solution to the dispute. For fiscal year ended
March 31, 2004, we have expensed payments of $640,000 and shown as other
expense.
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
No matters were submitted to a vote of security holders during fourth
quarter of fiscal year ended March 31, 2004.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the American Stock Exchange since July 8,
1998 under the symbol "IPI". Up until July 16, 2003, our common stock was traded
under the symbol "SVI". 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 ENDING MARCH 31, 2004 HIGH LOW
First Quarter $ 2.65 $ 0.88
Second Quarter $ 3.65 $ 2.10
Third Quarter $ 2.38 $ 1.77
Fourth Quarter $ 2.93 $ 0.84
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
15
As of June 1, 2004, the last reported sale price on the American Stock
Exchange for our common stock was $0.77. On this date, there were approximately
204 holders of record of our common stock. That number does not include
beneficial owners of common stock whose shares are held in the name of banks,
brokers, nominees or other fiduciaries.
We have never declared any dividends on our common stock. We are
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 on our common stock in the foreseeable future. Any future
determination to pay cash dividends on our common stock 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.
During the quarter ended March 31, 2004, we issued the following
securities without registration under the Securities Act of 1933:
o 239,739 shares of common stock upon conversion of a
convertible note initially issued to Union Bank of California
pursuant to a Loan Discount Payout agreement, valued at
$500,000.
o 9% Debentures to Omicron Master Trust and Midsummer
Investment, Ltd. convertible into our common stock at a
conversion price of $1.32 per share, for aggregate proceeds of
$3.0 million. These debentures were accompanied by five-year
warrants to purchase up to 1,043,479 shares of our common
stock at an exercise price of $1.15 per share and warrants to
purchase up to 8,500,000 shares of our common stock at an
exercise price of $5.00 per share with an expiration date of
the earlier of the six-month anniversary of the effective date
of a registration statement or September 15, 2005.
o warrants to an investor relations consulting firm to purchase
up to an aggregate of 103,000 shares of our common stock at
exercise prices ranging from $1.50 to $1.75 per share.
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.
Information concerning securities authorized for issuance under our
equity compensation plans is included below under Item 12 under the heading
"Security Ownership of Certain Beneficial Owners and Management."
16
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,
2004, 2003, and 2002 and the independent auditors' report thereon, are included
elsewhere in this report.
YEAR ENDED MARCH 31, (1)
------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ---------- ----------- ----------- -----------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 21,739 $ 22,296 $ 26,715 $ 28,049 $ 25,027
Cost of sales 5,252 8,045 11,003 10,815 6,176
----------- ---------- ----------- ----------- -----------
Gross profit 16,487 14,251 15,712 17,234 18,851
Application development expenses 1,043 4,643 4,203 5,333 4,877
Depreciation and amortization 3,896 4,148 6,723 8,299 7,201
Selling, general and administrative expenses 14,798 8,072 12,036 16,985 13,769
Impairment of intangible assets -- -- -- 6,519 --
Impairment of note receivable received in
connection with the sale of IBIS Systems
Limited -- -- -- 7,647 --
----------- ---------- ----------- ----------- -----------
Total expenses 19,737 16,863 22,962 44,783 25,847
----------- ---------- ----------- ----------- -----------
Loss from operations (3,250) (2,612) (7,250) (27,549) (6,996)
Other income (expense):
Interest income 20 1 7 620 1,069
Other income (expense) (647) 24 (56) 74 (202)
Interest expense (937) (1,088) (3,018) (3,043) (1,493)
----------- ---------- ----------- ----------- -----------
Total other expense (1,564) (1,063) (3,067) (2,349) (626)
----------- ---------- ----------- ----------- -----------
Loss before provision (benefit) for income taxes (4,814) (3,675) (10,317) (29,898) (7,622)
Provision (benefit) for income taxes (586) 11 2 (4,778) (2,435)
----------- ---------- ----------- ----------- -----------
Loss before extraordinary item and change
in accounting principle (4,228) (3,686) (10,319) (25,120) (5,187)
Extraordinary item - Gain on debt forgiveness -- 1,476 -- -- --
Cumulative effect of changing accounting
principle
- Goodwill valuation under SFAS No. 142 -- (627) -- -- --
----------- ---------- ----------- ----------- -----------
Loss from continuing operations (4,228) (2,837) (10,319) (25,120) (5,187)
Income (loss) from discontinued operations -- 119 (4,339) (3,825) 1,133
----------- ---------- ----------- ----------- -----------
Net loss (4,228) (2,718) (14,658) (28,945) (4,054)
Cumulative preferred dividends (1,024) (1,015) (254) -- --
----------- ---------- ----------- ----------- -----------
Net loss available to common stockholders $ (5,252) $ (3,733) $ (14,912) $ (28,945) $ (4,054)
=========== ========== =========== =========== ===========
17
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- ----------- --------- --------- ---------
(in thousands)
Basic and diluted earnings (loss) per share:
Loss before extraordinary item and
change in accounting principle $ (0.10) $ (0.12) $ (0.29) $ (0.72) $ (0.15)
Extraordinary item - gain on debt forgiveness -- 0.05 -- -- --
Loss from change in accounting principle -- (0.02) -- -- --
--------- ----------- --------- --------- ---------
Loss from continuing operations (0.10) (0.09) (0.29) (0.72) (0.15)
Income (loss) from discontinued operations -- -- (0.12) (0.11) 0.13
Cumulative preferred dividends (0.03) (0.04) (0.01) -- --
--------- ----------- --------- --------- ---------
Net loss available to common stockholders $ (0.13) $ (0.13) $ (0.42) $ (0.83) $ (0.12)
========= =========== ========= ========= =========
Weighted average common shares:
Basic 41,450 29,599 35,698 34,761 32,459
Diluted 41,450 29,599 35,698 34,761 32,459
BALANCE SHEET DATA:
Working capital $ 802 $ (4,056) $ (5,337) $ (2,782) $ 2,628
Total assets $ 51,762 $ 37,637 $ 40,005 $ 56,453 $ 94,083
Long-term obligations $ 2,319 $ 2,807 $ 8,013 $ 18,554 $ 21,586
Stockholders' equity $ 42,200 $ 23,842 $ 21,952 $ 26,993 $ 53,497
(1) Except for the year ended March 31, 2004, certain reclassifications are
reflected in the above data since the filing of such annual reports on forms 10K
and 10K/A. Such reclassifications did not result in changes in net income
(loss), net income (loss) per share or stockholders' equity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a provider of software solutions and services to the retail
industry. We provide solutions that help retailers understand, create, manage
and fulfill consumer demand. We derive the majority of our revenues from the
sale of application software licenses and the provision of related professional
and support services. Application software license fees are dependent upon the
sales volume of our customers, the number of users of the application(s), and/or
the number of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds additional users
and/or adds additional locations, we charge additional license fees. We
typically charge for support, maintenance and software updates on an annual
basis pursuant to renewable maintenance contracts. We typically charge for
professional services including consulting, implementation and project
management services on an hourly basis.
In recent periods, we have maintained relatively flat period over
period revenues and suffered operating and net losses, largely attributable to
general economic and competitive conditions. However, as economic conditions
have improved, we have begun to experience an increase in revenues and
profitability. In this regard, we have taken a number of steps designed to
improve our balance sheet and operations, including:
o Acquired two complementary companies with substantial revenues
and earnings potential;
o Revamped our management team by adding a new President and COO
and CTO, as well as a new CFO;
o Recapitalized our balance sheet, eliminating substantial debt
and raising new equity in its place;
o Improved our IBM-based core products through continuing
internal research and development;
o Obtained the rights to distribute complementary products,
including a new easy-to-install and easy-to-use,
open-architecture software system for very small retailers,
which we will introduce in 2004;
o Established partnerships with several value added resellers to
provide a variety of options and product extensions;
o Improved our distribution capabilities by adding new third
party channels, such as IBM and IBM's resellers, and
professional service firms, such as CGI and LakeWest.
18
We believe that these actions have positioned us to achieve sustained revenue
growth and profitability.
RECENT ACQUISITIONS
ACQUISITION OF PAGE DIGITAL
On January 30, 2004, we acquired Page Digital, a developer of
multi-channel commerce software, through a merger transaction for total
consideration of $7.0 million, consisting of $2.0 million in cash and 2,500,000
shares of our common shares valued at $2.00 per share. The acquisition was
accounted for as a purchase, and accordingly, the operating results of Page
Digital have been included in our consolidated financial statements from the
date of acquisition. In connection with the Page Digital acquisition, we added
approximately 40 employees and recorded $6.1 million of goodwill, $1.4 million
in software technology, $904,000 in customer relationships and $285,000 in
trademark. For pro forma operating results, see "Notes to Consolidated Financial
Statements - Note 2" in the Financial Statements section.
The legitimization of business to business and business to consumer
direct commerce (Internet, brick-and-mortar, catalog, and other) has rapidly
created a substantial market for the Page Digital suite of direct commerce
applications. According to the United States Department of Commerce, the market
for multi-channel direct commerce applications was just $15 billion in 1999,
grew to $27.3 billion in 2000, grew to $32.6 billion in 2001, and it is growing
at a rate 2.5 times greater than traditional retailing (Source: Internet
Retailer, April 2002). The acquisition of Page Digital will enable us to
continue to provide our customers with Page Digital's e-commerce, customer
relations management, and Catalog Management solutions. We expect to further
integrate these solutions into our offerings to enable customers to complete the
multi-channel retail distribution and customer service chain. In addition, the
acquisition will also allow us to offer Page Digital's customers the IP
Merchandising solution, as well as Point of Sale, Loss Prevention, and IP's
other alliance solutions.
ACQUISITION OF RTI
Pursuant to an agreement dated June 1, 2004, we acquired RTI from
Michael Tomczak, Jeffrey Boone and Intuit in a merger transaction. On March 12,
2004, we, RTI, Merger Sub and the Shareholders entered the March 12, 2004 Merger
Agreement which provided we would acquire RTI in a merger transaction in which
RTI would merge with and into Merger Sub. The merger consideration contemplated
by the March 12, 2004 Merger Agreement was a combination of cash and shares of
our common stock. The March 12, 2004 Merger Agreement was amended by the Amended
Merger Agreement dated June 1, 2004.
Pursuant to the Amended Merger Agreement, the Merger was completed with
the following terms: (i) we assumed RTI's obligations under those certain
promissory notes issued by RTI on December 20, 2002 with an aggregate principal
balance of $2.3 million; (ii) the total consideration paid at the closing of the
Merger was $10.0 million paid in shares of our common stock and newly designated
Series B Preferred and promissory notes; (iii) the Shareholders and Intuit are
entitled to price protection payable if and to the extent that the average
trading price of our common stock is less than $0.76 at the time the shares of
our common stock issued in the Merger and issuable upon conversion of the Series
B Preferred are registered pursuant to the Registration Rights Agreement dated
June 1, 2004 between us, the Shareholders and Intuit; and (iv) the merger
consisted of two steps (the "Merger"), first, Merger Sub merged with and into
RTI, Merger Sub's separate corporate existence ceased and RTI continued as the
surviving corporation (the "Reverse Merger"), immediately thereafter, RTI merged
with and into Merger Sub II, RTI's separate corporate existence ceased and
Merger Sub II continued as the surviving corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares
of Series B Preferred and a promissory note payable monthly over two years in
the principal amount of $1,295,000 bearing interest at 6.5% per annum. As a
result of the Merger, Intuit, the holder of all of the outstanding shares of
RTI's Series A Preferred stock, received 1,546,733 shares of our common stock
and a promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights.
Under the Registration Rights Agreement, we agreed to register the common stock
issuable upon conversion of the Series B Preferred issued to the Shareholders
within 30 days of the automatic conversion of the Series B Preferred into common
stock. The automatic conversion will occur upon us filing the Certificate of
Amendment with the Delaware Secretary of State increasing the authorized number
of shares of our common stock after securing shareholder approval for the
Certificate of Amendment. Under the Registration Rights Agreement, Intuit is
entitled to demand registration or to have its shares included on any
registration statement filed prior the registration statement covering the
19
Shareholders' shares, subject to certain conditions and limitations, or if not
previously registered to have its shares included on the registration statement
registering the Shareholders' shares. The Shareholders and Intuit are entitled
to price protection payments of up to a maximum of $0.23 per share payable by
promissory note, if and to the extent that the average closing price of our
common stock for the 10 days immediately preceding the date the registration
statement covering their shares is declared effective by the Securities and
Exchange Commission, is less than the 10 day average closing price as of June 1,
2004, which was $0.76.
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well
as certain officers and directors signed voting agreements that provide they
will not dispose of or transfer their shares of our capital stock and that they
will vote their shares of our capital stock in favor of the Certificate of
Amendment and the Amended Merger Agreement and transactions contemplated
therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone.
The combination of Island Pacific, RTI and Page Digital, will enable us
to offer a fully integrated solution to mid-tier retailers that will be unique
in the marketplace. As a result of this transaction, smaller retailers will now
be able to cost-effectively acquire a solution that provides both front and
back-end support. The combination instantly expands our products, services
offerings and distribution channels.
DISCONTINUED OPERATIONS
Effective April 1, 2003, we sold our subsidiary, SVI Training Products
("Training Products") to its president and our former director, Arthur
Klitofsky, for the sale price of $180,000 plus earn-out payments equal to 20% of
the total gross revenues of the Training Products unit in each of its next two
fiscal years, if 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 Training Products resulted in
a loss of $129,000, net of estimated income taxes, which was accrued as of March
31, 2003. Training Product's $248,000 of operating results are shown as
discontinued operations, net of the loss on sale of the Training Products unit
at March 31, 2003. In April 2004, we agreed to defer the payments due in January
2004 and April 2004 until April 2008. The balance of the note receivable was
$153,000 as of June 22, 2004.
Due to the declining performance of our Australian subsidiary, we sold
certain assets of the Australian subsidiary to its former management and ceased
Australian operations in February 2002. However, the sale was subject to the
approval of National Australia Bank, the subsidiary's secured lender. The bank
did not approve the sale and 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 sold substantially all
of the assets for $300,000 in May 2002 to the entity affiliated with former
management, and is actively pursuing the collection of receivables. If the sale
proceeds plus collections on receivables are insufficient to discharge the
indebtedness to National Australia Bank, we may be called upon to pay the
deficiency under our guarantee to the bank. We have accrued $187,000 as our
potential exposure but could be subject to further liability.
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.
RESULTS OF OPERATIONS
Results of operations for the fiscal year ended March 31, 2004 ("Fiscal
2004") 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 Fiscal 2004. 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 On June 4, 2004, we completed the acquisition of RTI, a
provider of management systems for retailers. See "Recent
Transactions - Acquisition of RTI" above.
o Upon completion of RTI's acquisition, Michael Tomczak, RTI's
CEO and President, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's CTO,
was appointed our Chief Technology Officer. Mr. Tomczak
replaced Steve Beck, who was serving as our president and Mr.
20
Page, who was serving as our COO and CTO. Mr. Beck served as
our President from April 2003 to June 2004 and our COO from
April 2003 to February 2004. Mr. Page served as our CTO from
January 2004 to June 2004 and as our COO from February 2004 to
June 2004.
o Effective January 30, 2004, we completed the acquisition of
Page Digital, a provider of direct commerce solutions to
retailers. See "Recent Transactions - Acquisition of Page
Digital" above.
o In February 2004, Michael Silverman was appointed to the
position of Chairman of the Board of Directors. Mr. Silverman
has been on our board of directors since January 2001. He
founded Advanced Remote Communication Solutions, Inc.
(formerly known as Boatracs, Inc.) in 1990. He served as its
Chairman until May 2002, and as Chief Executive Officer and
President until October 1997, and again from November 1999 to
May 2002. Mr. Silverman replaced Harvey Braun who was serving
as Chief Executive Officer and Chairman of the board. Mr.
Braun was our Chief Executive Officer from January 2003
through May 2004 and our Chairman of the board from July 2004
to February 2004.
o In January 2004, David Joseph, Page Digital's Senior Vice
President of Sales, was appointed our Senior Vice President of
Sales. Mr. Joseph has over 20 years of sales and marketing
experience in the software industry.
o In July 2003, our Board of Directors appointed Ran Furman to
the position of Chief Financial Officer.
o We completed a number of debt and equity financing
transactions. See "Liquidity and Capital Resources - Financing
Transactions" below.
21
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
fiscal years ended March 31, 2004, 2003 and 2002 (in thousands):
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- ---------- --------- ---------- --------- ----------
Net sales $ 21,739 100% $ 22,296 100% $ 26,715 100%
Cost of sales 5,252 24% 8,045 36% 11,003 41%
--------- ---------- --------- ---------- --------- ----------
Gross profit 16,487 76% 14,251 64% 15,712 59%
Application development expense 1,043 5% 4,643 21% 4,203 16%
Depreciation and amortization 3,896 18% 4,148 19% 6,723 25%
Selling, general and administration expenses 14,798 68% 8,072 36% 12,036 45%
Impairment of intangible assets -- -- -- -- -- --%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited -- -- -- -- -- --%
--------- ---------- --------- ---------- --------- ----------
Total expenses 19,737 91% 16,863 76% 22,962 86%
--------- ---------- --------- ---------- --------- ----------
Loss from operations (3,250) (15)% (2,612) (12)% (7,250) (27)%
Other income (expense)
Interest income 20 --% 1 0% 7 --%
Other income (expense) (647) --% 24 0% (56) --%
Interest expense (937) (4)% (1,088) (5)% (3,018) (11)%
--------- ---------- --------- ---------- --------- ----------
Total other expense (1,564) (4)% (1,063) (5)% (3,067) (11)%
--------- ---------- --------- ---------- --------- ----------
Loss before provision (benefit) for income taxes (4,814) (19)% (3,675) (17)% (10,317) (38)%
Provision (benefit) for income taxes (586) (2)% 11 0% 2 --%
--------- ---------- --------- ---------- --------- ----------
Loss before extraordinary item and
change in accounting principle (4,228) (17)% (3,686) (17)% (10,319) (38)%
Extraordinary item - gain on debt forgiveness -- 1,476 --
Cumulative effect of changing accounting
principle - Goodwill valuation under
SFAS No. 142 -- (627) --
--------- --------- ---------
Loss from continuing operations (4,228) (2,837) (10,319)
Income (loss) from discontinued operations,
net of taxes -- 119 (4,339)
--------- --------- ---------
Net loss (4,228) (2,718) (14,658)
Cumulative preferred dividends (1,024) (1,015) (254)
--------- --------- ---------
Net loss available to
common stockholders $ (5,252) $ (3,733) $(14,912)
========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2003
NET SALES
Net sales was $21.7 million and $22.3 million in the fiscal years ended
March 31, 2004 and 2003, respectively. Net sales included $1.5 million and $7.5
million in fiscal 2004 and 2003, respectively, from Toys R Us, Inc. ("Toys").
Net sales in fiscal 2004 also included a one-time sale of software technology
rights of $3.9 million. Excluding Toys and the one-time software license sale,
net sales increased $1.5 million, or 10%, to $16.3 million in the fiscal year
ended March 31, 2004 from $14.8 in the fiscal year ended March 31, 2003. The
increase is mainly due to an increase in sales on partner products.
Fiscal 2004 and 2003 were challenging years for the sale of new
application licenses. The slow down in the U.S. and world economies combined
with the fear of future terrorist attacks and the ongoing hostilities in the
world caused the retail industry to be more cautious with their investment in
information systems and deliberately evaluating solutions, which resulted in
22
decreases in sales and in extended sales cycles. In addition, our financial
condition may have interfered with our ability to sell new application software
licenses, as implementation of our applications generally requires extensive
future services and support, and some potential customers have expressed concern
about our financial ability to provide these ongoing services. We believe
strongly that we provide and will continue to provide excellent support to our
customers, as demonstrated by the continuing upgrade purchases by our top-tier
established customer base. Significant sales growth may however depend in part
on our ability to improve our financial condition.
COST OF SALES/GROSS PROFIT
Cost of sales decreased $2.7 million, or 35%, to $5.3 million in the
fiscal year ended March 31, 2004 from $8.0 million in the fiscal year ended
March 31, 2003. Gross profit as a percentage of net sales increased to 76% in
fiscal 2004 from 64% in fiscal 2003. The increase in gross profit margin was due
to a decrease in modification and professional services sales, which have low
margins. Modification and professional services sales represented 20% and 45%,
respectively, of total net sales during fiscal 2004 and 2003.
Cost of sales for fiscal 2004 and 2003 included $0.4 million and $2.4
million, respectively, in costs associated with the development or modification
of modules for Toys, including the use of higher cost outsource development
services (subcontractors) for certain components of the overall project. These
costs are neither capitalized nor included in application technology development
expenses, but we consider them to be part of our overall application technology
development program.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $3.6 million, or 78%, to
$1.0 million in fiscal year ended March 31, 2004 from $4.6 million in the fiscal
year ended March 31, 2003. The decrease in application development expense is
primarily due to capitalization of $3.1 million development costs on our new
modules and products which have reached technological feasibility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $6.7 million,
or 83%, to $14.8 million compared to $8.1 million in the fiscal year ended March
31, 2003 due to the following:
o $4.8 million increase in sales and administrative expenses as
we focused on developing our sales organization, increasing
marketing efforts and building infrastructure in the current
year,
o $0.3 million operating expenses for Page Digital which was
acquired on January 31, 2004,
o $0.7 million increase in bad debt expense resulted from a
write-off of an account receivable due to the termination of
Toys agreement,
o $0.5 million accounting and legal costs for acquisitions of
Page Digital and RTI and
o $0.4 million increase in audit, accounting and legal fees
relating to financing activities during fiscal 2003 and 2004.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.2 million, or 5%, to $3.9
million in the fiscal year ended March 31, 2004 from $4.1 million in the fiscal
year ended March 31, 2003. The decrease is mainly due to a decrease in
amortization of purchased software as it became fully amortized.
OTHER EXPENSE
Other expense included a write-off of development payments totaling
$0.6 million paid to a software development company. For further discussion, see
Item 3 under heading "Legal Proceedings".
INTEREST EXPENSE
Interest expense decreased by $0.2 million, or 18%, to $0.9 million in
the fiscal year ended March 31, 2004 from $1.1 million in the fiscal year ended
March 31, 2003. The decrease is due to $0.5 million decrease in interest expense
due to 72% decrease in average balance of interest-bearing loans as compared to
prior year; offset in part by $0.3 million increase in amortization of debt
discounts on convertible debts.
23
PROVISION FOR INCOME TAXES
Provision for income taxes produced an income of $0.6 million in the
fiscal year ended March 31, 2004. The income tax refund of $0.6 million in the
fiscal 2004 resulted from amending prior years' income tax returns to carry back
net operating losses incurred in the past two years.
EXTRAORDINARY ITEM - GAIN ON DEBT FORGIVENESS
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement
with Union Bank of California (the "Bank"), our senior lender. Under this
agreement, we paid the Bank $2.8 million acquired from the sale of 9%
convertible debentures to certain investors. We also issued to the Bank 1
million shares of our common stock and a $500,000 one-year unsecured,
non-interest bearing convertible note payable in either cash or stock, at our
option. The cash payment, shares and convertible note were accepted by the Bank
in full satisfaction of our debt to the Bank. The Bank also canceled the warrant
to purchase 1.5 million shares of our common stock and returned all collateral
held, including 10.7 million shares of our common stock pledged as security. In
connection with the settlement of the debt to the Bank, we reported an
extra-ordinary gain of $1.5 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE