Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ____________
Commission file number 0-23049
-------
ISLAND PACIFIC, INC.
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0896617
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
19800 MACARTHUR BOULEVARD, 12TH FLOOR, IRVINE, CALIFORNIA 92612
- --------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(949) 476-2212
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $0.0001 Par Value - 62,894,387 shares as of October 31, 2004.
================================================================================
TABLE OF CONTENTS
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004
and March 31, 2004..............................................................3
Condensed Consolidated Statements of Operations for the Three
Months and the Six Months Ended September 30, 2004 and 2003.....................4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2004 and 2003........................................5
Notes to Condensed Consolidated Financial Statements..................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................45
Item 4. Controls and Procedures...............................................................45
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................45
Item 2. Changes in Securities and Use of Proceeds.............................................46
Item 3. Defaults Upon Senior Securities.......................................................46
Item 4. Submission of Matters to a Vote of Security Holders...................................46
Item 5. Other Information.....................................................................46
Item 6. Exhibits and Reports on Form 8-K......................................................47
SIGNATURES ....................................................................................53
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, MARCH 31,
2004 2004
-------------- --------------
(As Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 966 $ 2,108
Accounts receivable, net of allowance for doubtful accounts of $1,341
and $409, respectively 4,832 4,572
Other receivables, including $14 and $37 from related parties, respectively 115 143
Inventories 37 46
Current portion of non-compete agreements 310 668
Current portion of note receivable 36 36
Prepaid expenses and other current assets 701 682
-------------- --------------
Total current assets 6,997 8,255
Note receivable 117 126
Property and equipment, net 968 821
Goodwill, net 31,939 20,607
Other intangibles, net 20,627 18,297
Other assets 299 421
-------------- --------------
Total assets $ 60,947 $ 48,527
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable to related parties $ 982 $ --
Current portion of notes payable 1,798 --
Current portion of convertible debentures 2,294 146
Current portion of capital leases 169 169
Accounts payable 684 1,255
Accrued expenses 3,227 3,301
Deferred revenue 4,685 2,657
Income tax payable 127 --
-------------- --------------
Total current liabilities 13,966 7,528
Notes payable to related parties, less current maturities 1,565 --
Notes payable, less current maturities 266 --
Convertible debentures, net, less current maturities 4,159 1,900
Capital lease obligations, less current maturities 18 89
Deferred revenue 873 --
Long term liabilities 196 235
-------------- --------------
Total liabilities 21,043 9,752
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares authorized: Series A
Convertible Preferred, 7.2% cumulative 141,100 shares issued and
outstanding with a stated value of $100 per share, dividends in arrears
of $2,581 and $2,002, respectively 14,100 14,100
Common Stock, $.0001 par value; 100,000,000 shares authorized; 62,761,436
and 52,427,799 shares issued and outstanding, respectively 5 5
Additional paid in capital 84,296 74,088
Accumulated deficit (58,497) (49,418)
-------------- --------------
Total stockholders' equity 39,904 38,775
-------------- --------------
Total liabilities and stockholders' equity $ 60,947 $ 48,527
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Six Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- -------------- ----------- -------------
(As restated) (As restated)
Revenues:
Product $ 4,926 $ 1,825 $ 9,397 $ 5,011
Services 1,757 954 2,569 3,234
----------- -------------- ----------- -------------
Total revenues 6,683 2,779 11,966 8,245
----------- -------------- ----------- -------------
Cost of revenues:
Product 2,124 1,177 4,357 2,401
Services 956 476 1,434 1,489
----------- -------------- ----------- -------------
Total cost of revenues 3,080 1,653 5,791 3,890
----------- -------------- ----------- -------------
Gross profit 3,603 1,126 6,175 4,355
Expenses:
Application development 1,802 585 3,049 722
Depreciation and amortization 530 280 936 565
Restructuring 681 -- 681 --
Selling, general and administrative 3,988 3,001 8,299 5,797
----------- -------------- ----------- -------------
Total expenses 7,001 3,866 12,965 7,084
----------- -------------- ----------- -------------
Loss from operations (3,398) (2,740) (6,790) (2,729)
Other income (expense):
Interest income 4 (17) 4 9
Other income (expense) 5 (167) 102 (178)
Interest expense (2,088) (1,504) (2,389) (1,796)
----------- -------------- ----------- -------------
Total other expenses (2,079) (1,688) (2,283) (1,965)
----------- -------------- ----------- -------------
Loss before provision for income taxes (benefits) (5,477) (4,428) (9,073) (4,694)
Provision for income taxes (benefits) 6 67 6 (503)
----------- -------------- ----------- -------------
Net loss (5,483) (4,495) (9,079) (4,191)
Cumulative preferred dividends (294) (282) (580) (554)
----------- -------------- ----------- -------------
Net loss available to common stockholders $ (5,777) $ (4,777) $ (9,659) $ (4,745)
=========== ============== =========== =============
Basic and diluted loss per share:
Net loss $ (0.09) $ (0.13) $ (0.16) $ (0.13)
Cumulative preferred dividends (0.01) (0.01) (0.01) (0.01)
----------- -------------- ----------- -------------
Net loss available to common stockholders $ (0.10) $ (0.14) $ (0.17) $ (0.14)
=========== ============== =========== =============
Basic and diluted weighted-average common shares
outstanding 57,432 34,417 55,197 33,264
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------ -------------
(As restated)
Cash flows from operating activities:
Net loss $ (9,079) $ (4,191)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 2,687 1,766
Amortization of debt discount and conversion option 1,189 1,542
Gain on disposal of furniture and fixtures 169
Provision for allowance for doubtful accounts, net of recoveries 345 --
Stock-based compensation 29 126
Common stock issued for services rendered and settlement cost -- 25
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables 979 (630)
Income tax refund receivable -- (846)
Inventories 9 7
Prepaid expenses and other assets 255 (363)
Accounts payable and accrued expenses (2,088) (3,880)
Income tax payable -- 398
Accrued interest on stockholders' loans, convertible notes and term loan 312 187
Deferred revenue 212 125
------------ -------------
Net cash used for operating activities (5,150) (5,565)
------------ -------------
Cash flows from investing activities:
Payment from note receivable 9 9
Proceeds from acquisition of Retail Technologies International, Inc., net 562 --
Purchases of furniture and equipment (55) (264)
Capitalized software development costs (357) (2,243)
------------ -------------
Net cash provided by (used for) investing activities 159 (2,498)
------------ -------------
Cash flows from financing activities:
Sale of common stock, net of offering costs 8 7,232
Decrease in amount due to stockholders, net (300) --
Proceeds from convertible debts 7,000 700
Payments on capital leases (82) --
Payments on term loans and convertible debentures (2,778) (135)
------------ -------------
Net cash provided by financing activities 3,848 7,797
------------ -------------
Effect of exchange rate changes on cash 1 (1)
------------ -------------
Net decrease in cash and cash equivalents (1,142) (267)
Cash and cash equivalents, beginning of period 2,108 1,319
------------ -------------
Cash and cash equivalents, end of period $ 966 $ 1,052
============ =============
Supplemental disclosure of cash flow information:
Interest paid $ 279 $ 134
Income taxes paid $ 6 --
Supplemental schedule of non-cash investing and financing activities:
Issued 7,551,696 shares of common stock upon conversion of 2,517,232 shares of
Series B Convertible Preferred Stock issued in connection with the
acquisition of Retail Technologies International, Inc. $ 5,709 --
Issued 1,546,733 shares of common stock in connection with the acquisition of
Retail Technologies International, Inc. $ 1,169 --
Issued promissory notes in connection with the acquisition of Retail
Technologies International, Inc. $ 3,622 --
Issued 600,000 shares of common stock as payment for liquidated damages $ 240 --
Issued 223,052 shares of common stock upon cashless exercise of an incentive
stock option $ 22 --
Issued 4,103,161 shares of common stock upon conversion of the 9% debentures -- $ 4,200
Issued 2,287,653 shares of common stock upon conversion of the note due to
stockholders -- $ 1,374
Issued 500,000 shares of common stock as payment for dividend on preferred stock -- $ 421
Retired 10,700,000 shares of treasury stock -- $ (8,906)
Issued 84,849 shares of common stock as payments for bonuses and services
rendered in prior periods -- $ 83
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ISLAND PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2004 and for all
the periods presented have been made.
Certain amounts in the prior periods have been reclassified to conform to the
presentation for the six months ended September 30, 2004. The financial
information included in this quarterly report should be read in conjunction with
the consolidated financial statements and related notes thereto in our Form
10-K/A for the year ended March 31, 2004.
The results of operations for the six months ended September 30, 2004 and 2003
are not necessarily indicative of the results to be expected for the full year.
NOTE 2 - ACQUISITIONS
PAGE DIGITAL INCORPORATED
Effective January 30, 2004, we acquired all of the issued and outstanding shares
of Page Digital Incorporated ("Page Digital"), a Colorado-based developer of
multi-channel commerce software, through a merger with our newly-formed
wholly-owned subsidiary. The purchase price for the acquisition was $7.1
million, consisting of $2.0 million in cash, 2.5 million shares of our common
stock valued at $2.00 per share and acquisition costs of $138,000. Upon the
consummation of this transaction, we entered into two-year employment agreements
for executive officer positions with two of the principals of Page Digital and a
two-year non-compete agreement with one of the two principals of Page Digital.
The following unaudited pro forma consolidated results of continuing operations
for the three and six months ended September 30, 2003 assume the acquisition of
Page Digital occurred as of April 1, 2003. The pro forma results are not
necessarily indicative of the actual results that would have occurred had the
acquisitions been completed as of the beginning of the period presented, nor are
they necessarily indicative of future consolidated results.
Three Months Six Months
Ended Ended
September 30, September 30,
2003 2003
-------------- --------------
Revenues $ 4,307 $ 11,139
Net loss $ (4,734) $ (4,392)
Net loss available to common stockholders $ (5,016) $ (4,946)
Basic and diluted loss per share of common stock $ (0.14) $ (0.13)
Basic and diluted loss per share available to common stockholders $ (0.15) $ (0.15)
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
Pursuant to an agreement dated June 1, 2004, we acquired Retail Technologies
International, Inc. ("RTI") from Michael Tomczak, Jeffrey Boone and Intuit Inc.
("Intuit") in a merger transaction. On March 12, 2004, we, RTI, IPI Merger Sub,
Inc., ("Merger Sub") and Michael Tomczak and Jeffrey Boone (the "Shareholders")
entered the initial Agreement of Merger and Plan of Reorganization (the "March
12, 2004 Merger Agreement") which provided we would acquire RTI in a merger
transaction in which RTI would merge with and into Merger Sub. The merger
consideration contemplated by the March 12, 2004 Merger Agreement was a
combination of cash and shares of our common stock. The March 12, 2004 Merger
Agreement was amended by the Amended and Restated Agreement of Merger and Plan
of Reorganization, dated June 1, 2004, by and between us, RTI, Merger Sub, IPI
Merger Sub II, Inc. ("Merger Sub II") and the Shareholders (the "Amended Merger
Agreement").
6
Pursuant to the Amended Merger Agreement, the Merger (as defined below) was
completed with the following terms: (i) we assumed RTI's obligations under those
certain promissory notes issued by RTI on December 20, 2002 with an aggregate
principal balance of $2.3 million; (ii) the total consideration paid at the
closing of the Merger was $11.6 million paid in shares of our common stock with
fair value of $1.2 million, newly designated Series B convertible preferred
stock ("Series B Preferred") with fair value of $5.7 million, promissory notes
totaling $3.6 million, assumption of incentive stock options with fair value of
$1.0 million and acquisition costs of $110,000; (iii) the Shareholders and
Intuit are entitled to price protection payable if and to the extent that the
average trading price of our common stock is less than $0.76 at the time the
shares of our common stock issued in the Merger and issuable upon conversion of
the Series B Preferred are registered pursuant to the registration rights
agreement dated June 1, 2004 between us, the Shareholders and Intuit (the
"Registration Rights Agreement"); and (iv) the merger consisted of two steps
(the "Merger"), first, Merger Sub merged with and into RTI, Merger Sub's
separate corporate existence ceased and RTI continued as the surviving
corporation (the "Reverse Merger"), immediately thereafter, RTI merged with and
into Merger Sub II, RTI's separate corporate existence ceased and Merger Sub II
continued as the surviving corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares of Series
B Preferred and a promissory note payable monthly over two years in the
principal amount of $1,295,000 bearing interest at 6.5% per annum. As a result
of the Merger, Intuit, the holder of all of the outstanding shares of RTI's
Series A Preferred stock, received 1,546,733 shares of our common stock and a
promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under the
Registration Rights Agreement, we agreed to register the common stock issuable
upon conversion of the Series B Preferred issued to the Shareholders within 30
days of the automatic conversion of the Series B Preferred into common stock.
The automatic conversion occurred upon us filing an amendment to our certificate
of incorporation with the Delaware Secretary of State increasing the authorized
number of shares of our common stock ("Certificate of Amendment"). The
Shareholders and Intuit are entitled to price protection payments of up to a
maximum of $0.23 per share payable by promissory note, if and to the extent that
the average closing price of our common stock for the 10 days immediately
preceding the date the registration statement covering their shares is declared
effective by the Securities and Exchange Commission, is less than the 10 day
average closing price as of June 1, 2004, which was $0.76. We have not recorded
the liability relating to the price protection at the date of acquisition as the
contingency is based on future events and cannot yet be determined. We will
compute the total liability as soon as it can be determined and recorded as a
liability. The total cost of the price protection contingency will be deferred
and amortized over the shortest of the remaining useful lives of the assets
acquired in the acquisition in accordance with SFAS 141, "Business
Combinations".
Upon the consummation of the Merger, Michael Tomczak, RTI's former President and
Chief Executive Officer, was appointed our President, Chief Operating Officer
and director and Jeffrey Boone, RTI's former Chief Technology Officer, was
appointed our Chief Technology Officer. We entered into two-year employment
agreements and non-competition agreements with Mr. Tomczak and Mr. Boone.
We entered into an employment agreement with Michael Tomczak on June 1, 2004.
The term of the agreement is two years. Under the agreement, Mr. Tomczak is
entitled to $360,000 in annual compensation. He also received an option to
purchase 1,772,354 shares of our common stock. Mr. Tomczak's right to purchase
886,178 of the shares subject to the option shall vest at the first anniversary
date of this agreement, thereafter, the remaining option shall vest at the rate
of 73,848 shares per month during the second year of this agreement. If Mr.
Tomczak's employment with us is terminated without cause during the term of the
agreement, he will receive severance in the amount of the lesser of $360,000 or
the balance of compensation payable over the remaining term of the agreement,
but in no event should the amount be less than $180,000. We also entered into
non-competition agreement with Mr. Tomczak, pursuant to which Mr. Tomczak agreed
not to engage in any business or activity that in any way competes with us for a
period of two years after the termination of his employment with us.
7
We entered into an employment agreement with Jeffrey Boone on June 1, 2004. The
term of the agreement is two years. Under the agreement, Mr. Boone is entitled
to $240,000 in annual compensation. He also received an option to purchase
1,572,354 shares of our common stock. Mr. Boone's right to purchase 786,179 of
the shares subject to the option shall vest at the first anniversary date of
this agreement, thereafter, the remaining option shall vest at the rate of
65,514 shares per month during the second year of this agreement. If Mr. Boone's
employment with us is terminated without cause during the term of the agreement,
he will receive severance in the amount of the lesser of $240,000 or the balance
of his compensation payable over the remaining term of the agreement, but in no
event should the amount be less than $120,000. We also entered into
non-competition agreement with Mr. Boone, pursuant to which Mr. Boone agreed not
to engage in any business or activity that in any way competes with us for a
period of two years after the termination of his employment with us.
The acquisition has been accounted for as a purchase. The results of the
operations of RTI have been included in the consolidated financial statements
since the date of the acquisition. The excess of purchase price over the fair
values of net assets acquired was approximately $11.3 million and has been
recorded as goodwill. The fair value of assets acquired and liabilities assumed
were as follows (in thousands):
Cash $ 672
Accounts receivable 1,348
Prepaid expenses 148
Other receivables 212
Property and equipment 496
Non-compete agreement 29
Software technology 1,410
Customer relationship 1,660
Trademark 800
Capital lease obligation (11)
Accounts payable and accrued expenses (1,644)
Deferred revenue (2,689)
Income tax payable (127)
Notes due to stockholders (200)
Notes payable (1,789)
---------
Net assets 315
Excess of cost over fair value of net assets acquired 11,332
---------
Total purchase price $ 11,647
=========
The following unaudited pro forma consolidated results for the three and six
months ended September 30, 2004 and 2003 assume the acquisitions of RTI occurred
as of April 1, 2004 and 2003, respectively, and Page Digital occurred as of
April 1, 2003. The pro forma results are not necessarily indicative of the
actual results that would have occurred had the acquisitions been completed as
of the beginning of the period presented, nor are they necessarily indicative of
future consolidated results.
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues $ 6,683 $ 6,488 $ 13,359 $ 15,462
Net loss $ (5,483) $ (4,793) $ (10,011) $ (4,410)
Net loss available to common
stockholders $ (5,777) $ (5,075) $ (10,591) $ (4,964)
Basic and diluted loss per share of
common stock $ (0.10) $ (0.14) $ (0.18) $ (0.12)
Basic and diluted loss per share
available to common stockholders $ (0.10) $ (0.15) $ (0.19) $ (0.13)
8
NOTE 3 - NOTE RECEIVABLE
Effective April 1, 2003, we sold our wholly-owned subsidiary, SVI Training
Products, Inc. ("Training Products"), to its former president, for the sale
price of $180,000 plus earn-out payments equal to 20% of the total gross
revenues of Training Products in each of its next two fiscal years, to the
extent the revenues in each of those years exceed certain targets. We received a
promissory note for the amount of $180,000 and the earn-out payments, if any,
will be made in quarterly installments following each fiscal year, bearing an
annual interest rate of 5%. We agreed to postpone the payments due January 2004
and April 2004 until April 2008. The note has a balance of $153,000 and $162,000
at September 30, 2004 and March 31, 2004, respectively, of which $36,000 is
current.
NOTE 4 - INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost or
market, on a first-in, first-out basis.
NOTE 5 - GOODWILL AND OTHER INTANGIBLES
At September 30, 2004 and March 31, 2004, goodwill and other intangibles consist
of the following (in thousands):
SEPTEMBER 30, 2004 MARCH 31, 2004
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Net amount amortization Net
-------- ------------- --------- --------- ------------- --------
Goodwill $ 38,431 $ (6,492) $ 31,939 $ 27,099 $ (6,492) $ 20,607
-------- ------------- --------- --------- ------------- --------
Other intangibles:
Amortized intangible assets
Software technology 32,071 (14,917) 17,154 30,357 (13,219) 17,138
Non-compete agreements 7,014 (6,704) 310 6,986 (6,318) 668
Customer relationships 2,564 (176) 2,388 904 (30) 874
Unamortized intangible:
Trademark 1,085 -- 1,085 285 -- 285
-------- ------------- --------- --------- ------------- --------
42,734 (21,797) 20,937 38,532 (19,567) 18,965
Less: current portion of non-
compete agreements 310 -- 310 668 -- 668
-------- ------------- --------- --------- ------------- --------
Long-term portion of other
Intangibles 42,424 (21,797) 20,627 37,864 (19,567) 18,297
-------- ------------- --------- --------- ------------- --------
Long-term portion of
goodwill and other
intangibles $ 80,855 $ (28,289) $ 52,566 $ 64,963 $ (26,059) $ 38,904
======== ============= ========= ========= ============= ========
During the six months ended September 30, 2004, we recorded approximately $11.3
million in goodwill, $1.4 million in software, $1.7 million in customer
relationships, $800,000 in trademarks and $29,000 in a non-compete agreement in
connection with the acquisition of RTI (see Note 2). In addition, we recorded
$97,000 and $357,000 million in capitalized software during the three and six
months ended September 30, 2004, respectively. Software and customer
relationships are amortized on a straight-line basis over their useful lives,
seven and ten years, respectively. The goodwill and the trademark have
indefinite useful lives and are not subject to amortization. The non-compete
agreement is being amortized its remaining useful life of seven months.
Transactions in goodwill during the six months ended September 30, 2004 and
fiscal year ended March 31, 2004 are as follows (in thousands):
September 30, March 31,
2004 2004
------------- -------------
Cost:
Beginning balance $ 27,099 $ 21,287
Goodwill from acquisition of RTI and Page
Digital, respectively 11,332 5,812
------------- -------------
Ending balance $ 38,431 $ 27,099
============= =============
Accumulated amortization $ 6,492 $ 6,492
============= =============
9
We found no indication of impairment of the goodwill during the six months ended
September 30, 2004. Accordingly, absent of future indications of impairment, the
next annual impairment test will be performed in fourth quarter of fiscal 2005.
We also evaluated the remaining useful lives of our intangible assets in the
quarter ended June 30, 2004 and during the fourth quarter 2004. No adjustments
have been made to the useful lives of our intangible assets.
Amortization expense for the three months ended September 30, 2004 and 2003 was
$1.2 million and $0.8 million, respectively. Amortization expense for six months
ended September 30, 2004 and 2003 was $2.3 million and $1.7 million. We expect
amortization expense for the next five fiscal years to be as follows (in
thousands):
March 31,
2005 $ 2,376
2006 $ 4,047
2007 $ 3,792
2008 $ 3,760
2009 $ 3,613
NOTE 6 - DEBTS
NOTES PAYABLE TO RELATED PARTIES
In connection with the RTI acquisition, we issued promissory notes to RTI's two
principal officers totaling $2.6 million, payable in installments totaling
$20,000 per month for the period of June 1, 2004 through May 1, 2005 and
increasing to $200,000 per month from June 1, 2005 through June 1, 2006, at 6.5%
interest per annum. The notes have a balance of $2.5 million as of September 30,
2004, of which $982,000 is current. There were no notes payable due to related
parties at March 31, 2004.
NOTES PAYABLE
In connection with the acquisition of RTI, we issued a promissory note to Intuit
and assumed RTI's obligations totaling $1,789,000 under certain promissory notes
originally issued by RTI and additional notes totaling $500,000 to the existing
note holders of RTI. Notes payable consisted of the following (in thousands):
September 30, March 31,
2004 2004
------------- ----------
Notes payable, secured by common stock of our new subsidiary, IP Retail
Technologies International, Inc. ("IP RTI"), payable in monthly
installments totaling $197,000 including interest at 6.5% per annum
beginning May 31, 2004 through May 31, 2005 $ 1,542 $ --
Note payable, to Intuit, secured by IP RTI's common stock, payable in
monthly installments of $4,000 for the period from June 1, 2004 through
December 1, 2004 and $30,000 from January 1, 2005 through June 1, 2006,
including interest at 6.5% per annum 522 --
------------- ----------
Total notes payable $ 2,064 $ --
============= ==========
Total notes payable (including accrued interest) $ 2,064 $ --
Less: current maturities 1,798 --
------------- ----------
Long-term portion of notes payable $ 266 $ --
============= ==========
10
CONVERTIBLE DEBENTURES
Convertible debentures at September 30, 2004 and March 31, 2004 consist of the
following (in thousands):
September 30, March 31,
2004 2004
------------- ----------
Convertible note, secured by all of our assets, interest rate of
prime plus two percent per annum and matures in July 2007 $ 7,038 $ --
Convertible debentures, interest rate of 9% per annum and mature
in May 2006 1,209 3,012
------------- ----------
Total 8,247 3,012
Less: debt discount 1,794 966
------------- ----------
$ 6,453 $ 2,046
============= ==========
Total convertible debentures (including accrued interest), net of
debt discount $ 6,453 $ 2,046
Less: current maturities 2,294 146
------------- ----------
Long-term portion of convertible debentures $ 4,159 $ 1,900
============= ==========
Pursuant to a Securities Purchase Agreement dated July 12, 2004, we sold and
issued to Laurus Master Fund, Ltd. ("Laurus") a secured convertible term note
("Laurus Note") for gross proceeds of $7.0 million. In addition, we issued to
Laurus a warrant to purchase up to 3,750,000 shares of our common stock at a
price of $0.71 per share ("Laurus Warrant"). Our obligations under the Laurus
Note are secured by all of our assets. All our wholly owned subsidiaries
guaranteed our obligations under the Laurus Note. We also pledged all of our
interests in the outstanding stock of our subsidiaries as security for our
obligations under the Laurus Note.
The Laurus Note would have originally matured on September 1, 2004; however, the
maturity of the Laurus Note was automatically extended to July 12, 2007
("Maturity Date") upon the stockholders approving an amendment to our
Certificate of Amendment to increase our authorized share capital limit to 250
million shares and us filing an amendment to our Certificate of Amendment to
effect the increase with the Secretary of State of Delaware by August 31, 2004.
We would have been obligated to make monthly payments in the amount of $212,000
plus any unpaid interest commencing on August 1, 2004. In August 2004, Laurus
agreed to defer the August 1, 2004 payment until the Maturity Date.
In October 2004, Laurus agreed to amend the Laurus Note and defer the payments
due in September 2004 through February 2005 until the Maturity Date. Pursuant to
the amendment, we are required to make monthly payments in the amount of
$212,121 commencing on March 1, 2005 with a balloon payment of $1.1 million in
July 2007. We also issued Laurus a warrant to purchase 250,000 shares of our
common stock at a price of $0.41 per share ("October `04 Laurus Warrant").
The Laurus Note accrues interest at a rate per annum (the "Interest Rate") equal
to the "prime rate" (4.75% as of October 31, 2004) published in The Wall Street
Journal from time to time, plus two percent. Interest under the Laurus Note is
payable monthly in arrears commencing on August 1, 2004. The Interest Rate is
calculated on the last day of each month (the "Determination Date") and is
subject to adjustment as follows: (1) if the shares issuable upon conversion of
the Laurus Note or exercise of the Laurus Warrant have been registered with the
U.S. Securities and Exchange Commission ("SEC") under the Securities Act of
1933, as amended (the "Securities Act") and the market price of our common stock
for the five trading days immediately preceding the Determination Date exceeds
the then applicable conversion price for the Laurus Note by at least 25%, then
the Interest Rate for the succeeding calendar month shall be reduced by 2% for
each incremental 25% increase over the then applicable conversion price or (2)
if all of the conditions set forth in subparagraph (1) have been satisfied,
except that the shares issuable upon conversion of the Laurus Note or exercise
of Warrant have not been registered, then the Interest Rate for the succeeding
calendar month shall be reduced by 1% for each incremental 25% increase over the
then applicable conversion price. The initial conversion price under the Laurus
Note is $0.56 per share, subject to adjustment upon our issuance of securities
at a price per share below the fixed conversion price, a stock split or
combination, declaration of a dividend on our common stock or reclassification
of our common stock. We have the option to redeem the Laurus Note by paying
Laurus 125% of the principal amount due under the Laurus Note together with all
accrued and unpaid interest. Pursuant to the Amendment No. 1 to the Laurus Note,
the conversion price for $2.0 million of the $7.0 million Laurus Note was
reduced to $0.37 per share.
11
The Laurus Warrant and October `04 Laurus Warrant (collectively "Laurus
Warrants") are immediately exercisable and have a seven year term. We have the
right to require exercise of the Laurus Warrants in whole or in part if: (1) all
of our obligations under the Laurus Note have been irrevocably paid in full, (2)
the common stock underlying the Laurus Warrants has been registered on a
registration statement declared effective by the SEC, and such registration
statement remains effective, and (3) the average closing price of our common
stock for the ten (10) trading days immediately prior to the proposed date of
the mandatory exercise of the Laurus Warrants is greater than three hundred
percent (300%) of the then applicable exercise price.
We were obligated to file a registration statement on Form S-3 (or if Form S-3
is not available another appropriate form) (the "Registration Statement")
registering the shares of our common stock issuable upon conversion of the
Laurus Note or exercise of the Laurus Warrants (the "Underlying Shares")
pursuant to the Registration Rights Agreement between us and Laurus (the
"Registration Rights Agreement"). We filed the Registration Statement on
September 10, 2004 (the "Filing Date") and we are required to have the
Registration Statement declared effective by the SEC no later than 120 days
after it is filed (the "Effectiveness Date"). If the Registration Statement is
not declared effective by the Effectiveness Date, ceases to be effective for
more than 30 days in any calendar year or 10 consecutive calendar days or if our
common stock is not listed or traded or is suspended from trading for three
consecutive trading days, we are required to pay Laurus liquidated damages equal
to 2% of original principal balance on the Laurus Note for each 30 day period
(with partial periods prorated) that such event continues. We are obligated to
keep the Registration Statement effective until the earlier of when (1) all of
the Underlying Shares have been sold or (2) such time as all of the Underlying
Shares can be sold without registration or volume restrictions under Rule 144(k)
of the Securities Act (the "Effectiveness Period"). If there is not an effective
Registration Statement covering the Underlying Shares at any time during the
Effectiveness Period and we propose to file a registration statement for our own
account or the account of others, we will be obligated to include the Underlying
Shares on that registration statement.
In accordance with generally accepted accounting principles, the difference
between the original conversion price of $0.56 and our stock price on the date
of issuance of the Laurus Note amounted to $281,000 and is being amortized over
the term of the Laurus Note. We amortized $20,000 in the three and six months
ended September 30, 2004.
We allocated the proceeds received from the Laurus Note with a detachable
warrant using the relative fair market value of the individual elements at the
time of issuance. The amount allocated to the warrant was $531,000 and is being
amortized as interest expense over the life of the Laurus Note. We amortized
$37,000 in the three and six months ended September 30, 2004.
In connection with the amendment in October 2004, we will compute the difference
between the conversion price of $0.37 for the first $2.0 million of the Laurus
Note and our stock price on the date of issuance of the Laurus Note and will
amortize the difference over the remaining term of the Laurus Note.
In connection with the sale of $7.0 million Laurus Note, we had adjusted the
exercise price of outstanding warrants previously issued to certain investors to
$0.56 per share pursuant to the anti-dilution protection provision. Accordingly,
we recorded a charge of $254,000 as interest expense in the quarter ended
September 30, 2004.
In March 2004, we entered into a Securities Purchase Agreement for the sale of
convertible debentures (the "March '04 Debenture") to Omicron Master Trust
("Omicron") for gross proceeds of $1.75 million ("Omicron Debenture") and
Midsumer Investments, Ltd. ("Midsummer") for gross proceeds of $1.25 million
("Midsummer Debenture"). The debentures would have matured in May 2006, bore an
interest rate of 9% per annum and provided for interest only payments on a
quarterly basis, payable, at our option, in cash or shares of our common stock.
The debentures would have been convertible into shares of our common stock at a
conversion price of $1.32 per share, subject to adjustment if we offered or sold
any securities for an effective per share price that was less than 87% of the
then current conversion price, negatively restated any of our financial
statements or made any public disclosures that negatively revised or
supplemented any prior disclosure regarding a material transaction consummated
prior to March 15, 2004 or triggered other customary anti-dilution protections.
If certain conditions were met, we would have the option to redeem the March '04
Debentures at 110% of their face value, plus accrued but unpaid interest.
We would have been obligated to redeem the Omicron Debenture and Midsummer
Debenture at the initial monthly amounts of $136,110 and $97,223, respectively,
commencing on February 1, 2005. If the daily volume weighted average price of
our common stock on the American Stock Exchange exceeded $1.15 by more than 200%
for 15 consecutive trading days, we would have the option to cause the
Purchasers to convert the then outstanding principal amount of March '04
debentures into our common stock at the conversion price then in effect.
12
With the proceeds from the sale of the Laurus Note in July 2004 for $7.0 million
as discussed above, we paid off in full the Omicron Debenture with a balance of
$1.75 million plus $0.2 million in accrued interest, liquidated damages and
prepayment penalty.
In accordance with generally accepted accounting principles, the difference
between the original conversion price of $1.32 and our stock price of the date
of issuance of the Omicron Debenture amounted to $155,000 and was being
amortized over the term of the debt. A total of $21,000 had been amortized
during the period from the date of issuance to the date the debt was repaid.
Upon repayment of the debt, the remaining balance of $134,000 was expensed.
On July 30, 2004, we also amended the Midsummer Debenture. Pursuant to the
amendment agreement, we issued 600,000 shares of common stock which we valued at
$240,000 to Midsummer as payment in liquidated damages and as consideration for
Midsummer consenting to the sale of the $7.0 million Laurus Note.
The amended Midsummer Debenture matures in May 2006 and bears an interest rate
of 9% per annum. Interest only payments, payable, at our option, in cash or
shares of common stock, are payable on a monthly basis. The amended Midsummer
Debenture is convertible into shares of our common stock at a conversion price
of $0.56 per share, subject to adjustment if we offer or sell any securities for
an effective per share price that is less than 87% of the then current
conversion price, negatively restate any of our financial statement or make any
public disclosure that negatively restate any of our financial statement or make
any public disclosure that negatively revises or supplements any prior
disclosure regarding a material transaction consummated prior to March 15, 2004
or trigger other customary anti-dilution protections. If certain conditions are
met, we have the option to redeem the amended Midsummer Debenture at 100% of its
face value, plus accrued but unpaid interest. Triggering events have occurred
and we are currently in discussions with Midsummer concerning an adjustment of
the current conversion price.
We must redeem the amended Midsummer Debenture at the initial monthly amount of
$50,000 which commenced on September 1, 2004 and increases to $62,500 starting
February 1, 2005. If the daily volume weighted average price of our common stock
on the American Stock Exchange exceeds the then current conversion price by more
than 200% for 15 consecutive trading days, we have the option to cause Midsummer
to convert the then outstanding principal amount of amended Midsummer Debenture
into our common stock at the conversion price then in effect.
In accordance with generally accepted accounting principles, the difference
between the original conversion price of $1.32 and our stock price of the date
of issuance of the Midsummer Debenture amounted to $110,000 and was being
amortized over the term of the debt. Upon amending the debt, we computed the
difference between the amended conversion price of $0.56 and out stock price of
the date of issuance. We recorded an additional maximum charge of $785,000 and
will amortize it over the remaining term of the debt. We had amortized $115,000
and $128,000 in the three and six months ended September 30, 2004.
We also issued Omicron and Midsummer two warrants as follows: (1) Series A
Warrants to purchase up to an aggregate of 1,043,479 shares of our common stock
at an exercise price of $1.32 per share, which was adjusted to $0.56 in July
2004 as a result of the sale of $7.0 Laurus Note, with a five-year term,
exercisable at anytime after September 16, 2004, subject to adjustment if we
offer or sell any securities for an effective per share price that is less than
the then current exercise price, negatively restate any of our financial
statements or make any public disclosure that negatively revises or supplements
any prior disclosure regarding a material transaction consummated prior to March
15, 2004 or trigger other customary anti-dilution protections and (2) Series B
Warrants to purchase up to 8,500,000 shares of our common stock with an exercise
price of $5 per share, these warrants are immediately exercisable and expire on
the earlier of the six-month anniversary of the effective date of the
registration statement that is required to be filed or 18 months from March 15,
2004, subject to adjustment upon the issuance or sale of securities in a public
offering for an effective per share price that is less than the then-current
exercise price and upon the trigger of other customary anti-dilution
protections.
For a period of one hundred eighty (180) days following the date the
registration statement is declared effective ("Effective Date"), each Purchaser
has the right, in its sole discretion, to elect to purchase such Purchaser's pro
rata portion of additional Debentures and Series A Warrants for an aggregate
purchase price of up to $2,000,000 in a second closing (the "Second Closing").
The terms of the Second Closing shall be identical to the terms set forth in the
Purchase Agreement and related documents, except that, the conversion price for
the additional debentures and the exercise price for the additional warrants
shall be equal to 115% of the average of the daily volume weighted average price
of our common stock on the American Stock Exchange for the ten (10) days
preceding the Second Closing ("Second Closing Price"). The Series A Warrant
coverage for the Second Closing shall be 40% of each Purchaser's subscription
amount divided by the Second Closing Price.
13
For a period of one hundred eighty (180) days following the Effective Date, if
the daily volume weighted average price of our common stock for twenty (20)
consecutive trading days exceeds $2.00, subject to adjustment, we may, on one
occasion, in our sole determination, require the Purchasers to purchase each
such Purchaser's pro rata portion of additional debentures and Series A Warrants
for an aggregate purchase price of up to $2,000,000. Any such additional
investment shall be under the terms set forth in the Purchase Agreement and
related documents, except that, the conversion price for the additional
Debentures and the exercise price for the additional warrants shall be equal to
the then current conversion price and warrant exercise price for the 9%
Debentures and warrants purchased on March 15, 2004.
For a period of six (6) months from the Effective Date, the Purchasers have a
right of first refusal to participate in certain future financings by us
involving the sale of our common stock or equivalent securities. The Purchasers
were also granted registration rights under a Registration Rights Agreement
dated March 15, 2004, pursuant to which we were required to file a registration
statement respecting the common stock issuable upon the conversion of the
debentures and exercise of the warrants within thirty (30) days after March 15,
2004, and to use best efforts to have the registration statement declared
effective at the earliest date. If a registration statement was not filed within
such thirty (30) day period or declared effective within such ninety (90) day
period (or within one hundred twenty (120) days in the event of a full review by
the SEC), we became obligated to pay liquidated damages to the Purchasers equal
to 2% per month of each such Purchasers' subscription amount under the Purchase
Agreement plus the value of any warrants issued pursuant to the Purchase
Agreement then held by such Purchaser. The registration statement was filed on
August 24, 2004, but it has not been declared effective as of November 15, 2004.
As a result, liquidated damages in the amounts of $81,000 and $120,000 have been
recorded in the six months ended September 30, 2004 and the fiscal year ended
March 31, 2004, respectively. Outstanding liquidated damages totaling $201,000
were paid in July 2004.
We allocated the proceeds received from convertible debt with detachable
warrants using the relative fair market value of the individual elements at the
time of issuance and amortize the change over the term of the debt. The amount
allocated to the warrants issued to Omicron was $420,000. A total of $57,000 had
been amortized during the period from the issuance to the date the note was
repaid. Upon repayment of the Omicron Debenture, the remaining balance of
$363,000 was expensed. As a result of adjusting the exercise price of Omicron's
warrant to $0.56, we also recorded a charge of $112,000 as interest expense in
the quarter ended September 30, 2004.
The amount allocated to the warrants issued to Midsummer was originally
$300,000. Upon amending the Midsummer Debenture, we recomputed the amount
allocated warrants and recorded an additional maximum charge of $54,000. The
additional charge is being amortized over the remaining term of the debt. We
amortized $42,000 and $76,000 in the three and six months ended September 30,
2004, respectively.
NOTE 7 - CAPITAL LEASES
In connection with the acquisition of Page Digital, we assumed capital lease
obligations on certain office equipment and fixtures leases expiring from
November 2004 through November 2006. The capital leases bear interest at rates
between 7% and 11% per annum and monthly lease payments range between
approximately $1,000 to $8,000.
In connection with the acquisition of RTI, we assumed a capital lease obligation
for certain office equipment, expiring in February 2006. The capital lease bears
interest at a rate of approximately 11% per annum and monthly lease payments of
approximately $600.
The balance of capital leases is $187,000 and $258,000 at September 30, 2004 and
March 31, 2004, respectively, of which the current portion is $169,000.
NOTE 8 - LINE OF CREDIT
In connection with the acquisition of RTI, we assumed obligation under a line of
credit with a balance of $182,000 at June 30, 2004. The line of credit was paid
off in full in July 2004.
14
NOTE 9 - DEFERRED REVENUE
Deferred revenue at September 30, 2004 and March 31, 2004 consists of the
following (in thousands):
June 30, March 31,
2004 2004
-------- ---------
Prepaid support services $ 5,040 $ 2,528
Customer deposits 518 129
-------- ---------
Total 5,558 2,657
Long-term portion 873 --
-------- ---------
Current portion $ 4,685 $ 2,657
======== =========
NOTE 10 - PREFERRED STOCK
The Series A Convertible Preferred Stock (the "Series A Preferred") has a stated
value of $100 per share and is redeemed at our option any time prior to the
maturity date of December 31, 2006 for 107% of the stated value and accrued and
unpaid dividends. The preferred shares are entitled to cumulative dividends of
7.2% per annum, payable semi-annually, and have cumulative dividends of $2.6
million, or $18.31 per share, and $2.0 million, or $14.19 per share, at
September 30, 2004 and March 31, 2004, respectively. The holders may convert
each share of Series A Preferred at any time into the number of shares of our
common stock determined by dividing the stated value plus all accrued and unpaid
dividends, by a conversion price initially equal to $0.80. The conversion price
increases at an annual rate of 3.5% calculated on a semi-annual basis. The
conversion price as of July 1, 2004 is $0.87. The Series A Preferred is entitled
upon liquidation to an amount equal to its stated value plus accrued and unpaid
dividends in preference to any distributions to common stockholders. The Series
A Preferred has no voting rights prior to conversion into common stock, except
with respect to proposed impairments of the Series A Preferred rights and
preferences, or as provided by law. We have the right of first refusal to
purchase all but not less than all of any shares of Series A Preferred or shares
of common stock received on conversion which the holder may propose to sell to a
third party, upon the same price and terms as the proposed sale to a third
party.
On November 14, 2003, the Sage Group plc (the "Sage Group") acquired
substantially all the assets of Softline, including Softline's 141,000 shares of
our Series A Preferred, 8,923,915 shares of our common stock and options to
purchase 71,812 shares of our common stock. On September 17, 2003, 500,000
shares of common stock constituting accrued dividends on our Series A Preferred
were issued to various financial institutions.
The Series B Convertible Preferred Stock (the "Series B Preferred") had no
stated value and was entitled to cumulative dividends at the rate of $0.136 per
share per annum, payable annually commencing on January 1, 2005. Upon our filing
of an amendment to our Certificate of Incorporation increasing the number of
shares of common stock in August 2004, all Series B Preferred was converted into
7,551,696 shares of common stock. No dividends had been declared.
NOTE 11 - EQUITY TRANSACTIONS
During the quarter ended September 30, 2004, we had the following equity
transactions:
o Issued 600,000 shares of common stock, with a fair value of $240,000,
to Midsummer as payment for liquidated damages and as
consideration for its consent to the sale of the Laurus Note,
o Issued an aggregate of 7,551,696 shares of common stock, with a fair
value of $5,709,000, to Michael Tomczak, our President and COO, and
Jeffrey Boone, our CTO, upon conversion of all of 2,517,232 shares of
Series B Preferred Stock,
o Granted Laurus a warrant to purchase up to 3,750,000 shares of our
common stock at an exercise price of $0.71 in connection with the sale
of the Laurus Note,
o Granted incentive stock options to employees to purchase an aggregate
of 3,340,000 shares of common stock at exercise prices ranging from
$0.38 to $0.48,
o Granted a consultant a warrant to purchase up to 220,000 shares of
common stock at an exercise price of $0.50 per share, with a fair value
of $37,000, for public relation services, and
o Granted options to purchase an aggregate of 102,500 shares of common
stock at an exercise price of $0.44 to outside directors of the Board
as directors' fees for the quarter ended September 30, 2004.
15
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure." This Statement amends SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The following table presents pro forma disclosures required by SFAS 123 and SFAS
148 of net loss and basic and diluted loss per share as if stock-based employee
compensation had been recognized during the six months ended September 30, 2004
and 2003. The compensation expense for these periods has been determined under
the fair value method using the Black-Scholes pricing model, and assumes graded
vesting.
Six Months Ended
September 30,
2004 2003
--------- ---------
(in thousands, except per
share amounts)
(unaudited)
Net loss as reported $ (9,079) $ (4,191)
Less: stock-based compensation expense,
net of related tax effects (1,005) (1,081)
--------- ---------
Pro forma net loss $(10,084) $ (5,272)
========= =========
Basic and diluted earnings (loss) per share
- as reported $ (0.16) $ (0.13)
Basic and diluted earnings (loss) per share
- pro forma $ (0.18) $ (0.16)
NOTE 12 - EARNINGS (LOSS) PER SHARE
Basic loss per common share are calculated by dividing net loss by the weighted
average number of common shares outstanding during the reporting period. Diluted
earnings per common shares ("diluted EPS") reflect the potential dilutive
effect, determined by the treasury method, of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Earnings per share for the three and six months ended September 30, 2004
and 2003 is calculated as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net loss available to common
stockholders $ (5,777) $ (4,777) $ (9,659) $ (4,745)
Basic and diluted weighted average
shares 57,432 34,417 55,197 33,264
Basic and diluted loss per share $ (0.10) $ (0.14) $ (0.17) $ (0.14)
16
The following potential common shares have been excluded from the computation of
diluted net loss per share for the six months ended September 30, 2004 and 2003,
because the effect would have been anti-dilutive:
Three Months Ended
September 30,
2004 2003
---------- ----------
Outstanding options under our stock option plans 8,609,547 4,866,240
Outstanding options granted outside our stock
option plans 8,182,274 5,054,312
Warrants issued in conjunction with private
placements and financing 17,098,760 6,330,281
Warrants issued for services rendered 1,451,898 748,169
Series A Convertible Preferred Stock 19,124,693 18,444,424
Convertible debt 14,642,857 2,723,214
---------- ----------
Total 69,110,029 38,166,640
========== ==========
NOTE 13 - RESTRUCTURING CHARGE
We recorded a $681,000 restructuring charge in the quarter ended September 30,
2004 for one-time termination benefits related to workforce reduction of nine
full-time employees including 3 executive officers, 2 in sales and 4 in
administrative functions in the Americas. The termination benefits include
severance payments and benefits. All workforce reductions associated with this
charge were made on or before September 30, 2004. A summary of the restructuring
charge included in accrued expenses at September 30, 2004 is as follows (in
thousands):
Initial reserve $ 681
Paid (320)
-------
Balance $ 361
=======
$156,000 of the remaining balance will be paid in the third quarter of
2005, $47,000 each in the fourth quarter of 2005 and the first through third
quarter of 2006 and $17,000 in the fourth quarter of 2006.
NOTE 14 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a provider of software solutions and services to the retail industry. Our
solutions and services have been developed specifically to meet the needs of the
retail industry. We provide high value innovative solutions that help retailers
understand, create, manage and fulfill consumer demand. Our solutions help
retailers improve the efficiency and effectiveness of their operations and build
stronger, longer lasting relationships with their customers. We acquired Page
Digital, which offers multi-channel retail solutions, on January 31, 2004 and
RTI, which offers point-of-sale and inventory management solutions, on June 1,
2004.
17
We currently operate in the Americas and Europe. On June 1, 2004, we began to
operate in Asia. The geographic distribution of our revenues and long-lived
assets are as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
Revenues:
Americas $ 5,538 $ 2,288 $ 9,770 $ 7,214
Europe 993 491 2,006 1,031
Asia 152 -- 190 --
------- ------- ------- -------
Total revenues $ 6,683 $ 2,779 $11,966 $ 8,245
======= ======= ======= =======
September 30, March 31,
2004 2004
------------- ---------
Long-lived assets:
Americas $ 54,119 $ 40,783
Europe 24 30
------------- ---------
Total identifiable assets $ 54,143 $ 40,813
============= =========
In the three months ended September 30, 2004, revenues from three customers
represents 9%, 6% and 2%, respectively, of total revenues. In the six months
ended September 30, 2004, revenues from these three customers represents 6%, 4%
and 6% of total revenues, and accounts receivable balances at September 30, 2004
from these customers represent 3%, 0% and 10%, respectively, of total accounts
receivable. In the three and six months ended September 30, 2003, another
customer represents 7% and 18%, respectively, of total revenues and its account
receivable balance at September 30, 2003 represents 45% of total accounts
receivable.
We structure our operations into three business units that have separate
reporting infrastructures. Each unit is evaluated primarily based on total
revenues and operation income excluding depreciation and amortization.
Identifiable assets are also managed by business units. Our three business units
are as follows:
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") - offers suite
of applications, which builds on our long history in retail software
design and development. We provide our customers with an extremely
reliable, widely deployed, comprehensive and fully integrated retail
management solutions. Retail Management includes merchandise
management that optimizes workflow and provides the highest level of
data integrity. This module supports all operational areas of the
supply chain including planning, open-to-buy purchase order
management, forecasting, warehouse and store receiving distribution,
transfers, price management, performance analysis and physical
inventory. In addition, Retail Management includes a comprehensive
set of tools for analysis and planning, replenishment and
forecasting, event and promotion management, warehouse, ticketing,
financials and sales audit. Through collaborations with strategic
partners, Retail Management offers tools for loss prevention,
communication with stores and vendors, integration needs, purchase
and allocation decisions, analysis of weather impact, control and
management of business processes, consumer research, tracking
consumer shopping patterns, forecasting and replenishment, and
analyzing store people productivity.
o STORE SOLUTIONS - offers suites of applications built on our long
history of providing multi-platform, client server in-store
solutions. We market these sets of applications under the name
"OnePointe," TM and "Retail Pro"(R). With more than 15 years of
development, OnePointe TM is a solution with a high degree of fit
and value out of the box. Additionally, the software was designed for
easy customization, enabling our development team to quickly develop
solutions to meet retailers' specific point-of-sale ("POS") and
in-store processor (server) requirements. Retail Pro(R) is a leading
point-of-sale and inventory management software used by specialty
retailers worldwide.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL RETAIL") - Page
Digital designs its application to specifically address direct
commerce business processes, which primarily relate to interactions
with the end-user. Having developed its software out of necessity to
manage its own former direct commerce operation, Page Digital has
been extremely attentive to functionality, usability and scalability.
Its software components include applications for customer relations
management, order management, call centers, fulfillment, data mining
and financial management. Specific activities like partial ship
orders, payments with multiple tenders, back order notification,
returns processing and continuum marketing, represent just a few of
the more than 1,000 parameterized direct commerce activities that
have been built into its "Synaro"(R) applications. Page Digital makes
these components and its interfacing technology available to
customers, systems integrators and independent software developers
who may modify them to meet their specific needs. This growing base
of inherited functionality continues to improve the market relevance
of its products.
18
A summary of the revenues and operating income (loss) and identifiable assets
attributable to each of these business units are as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003
------------ --------- ---------- -----------
Revenues:
Retail Management Solutions $ 2,063 $ 2,406 $ 5,028 $ 7,470
Store Solutions 2,914 373 4,077 775
Multi-channel Retail 1,706 -- 2,861 --
------------ --------- ---------- -----------
Total revenues $ 6,683 $ 2,779 $ 11,966 $ 8,245
============ ========= ========== ===========
Operating income (loss):
Retail Management Solutions $ (1,375) $ (1,344) $ (2,066) $ (375)
Store Solutions (468) (415) (827) (639)
Multi-channel Retail (207) -- (721) --
Other (see below) (1,348) (981) (3,176) (1,715)
------------ --------- ---------- -----------
Total operating income (loss) $ (3,398) $ (2,740) $ (6,790) $ (2,729)
============ ========= ========== ===========
Other operating loss:
Depreciation $ (4) $ (8) $ (8) $ (25)
Administrative costs and other
non-allocated expenses (1,344) (973) (3,168) (1,690)
------------ --------- ---------- -----------
Total other operating loss $ (1,348) $ (981) $ (3,176) $ (1,715)
============ ========= ========== ===========
September 30, March 31,
2004 2004
------------- ------------
Identifiable assets:
Retail Management Solutions $ 29,872 $ 32,757
Store Solutions 20,448 3,790
Multi-channel Retail 9,729 10,093
------------- ------------
Total identifiable assets $ 60,049 $ 46,640
============= ============
Goodwill, net:
Retail Management Solutions $ 13,903 $ 13,903
Store Solutions 12,224 892
Multi-channel Retail Solutions 5,812 5,812
------------- ------------
Total goodwill, net $ 31,939 $ 20,607
============= ============
Operating income (loss) in Retail Management, Store Solutions and Multi-channel
Retail includes direct expenses for software licenses, maintenance services,
programming and consulting services, sales and marketing expenses, product
development expenses, and direct general and administrative expenses. The
"Other" caption includes non-allocated costs and other expenses that are not
directly identified with a particular business unit and which we do not consider
in evaluating the operating income of the business unit.
During the six months ended September 30, 2004, the Store Solutions business
unit acquired $11.3 million goodwill in connection with the acquisition of RTI.
There are no changes in goodwill of the Retail Management Solutions and
Multi-channel Retail Solutions business units.
19
In addition, during the three months and six month ended September 30, 2004, we
recorded restructuring charges in the amount of $82,000 in Store Solutions,
$10,000 in Retail Management, $5,000 in Multi-channel Retail and $584,000 in
corporate business units (see Note 13). There were no restructuring charges
recorded in the three and six months ended September 30, 2003.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Effective April 1, 2004, we entered into an agreement with a company ("Newco
PTY") 100% wholly-owned by QQQ. We previously purchased capitalized software
from QQQ, a company affiliated with the former management of our Australian
Subsidiary, which was sold in the third quarter of fiscal 2002. Under this
agreement, we granted Newco PTY a three year option to purchase our Store
Solutions subsidiary for the existing book value at the time of the option
exercise. After three years, the agreement automatically renews, but either
party may terminate this agreement with one month's written notice. Until the
option is exercised, the profit and losses of Newco shall be split as follows:
For profit, 50%/50% for the twelve months ended March 31, 2005, 60%/40%
(Newco PTY/Island Pacific) for the twelve months ended March 31, 2006 and
70%/30% (Newco PTY/Island Pacific) for the twelve months ended April 1, 2007.
Newco PTY may exercise its option at anytime with thirty day written notice.
Island Pacific shall bear all losses of Newco until September 30, 2004 and
then split any further losses 50/50 for the six months to March 31, 2005,
60/40 (Newco PTY/Island Pacific) for the twelve months ended March 31, 2005
and 70/30 (Newco PTY/Island Pacific) for the twelve months ended April 1,
2007. As of September 30, 2004, we have incurred Newco's total losses of
$56,000. As of September 30, 2004, the book value of the Store Solutions
subsidiary was approximately $2.2 million.
We decided in the third quarter of fiscal 2002 to sell certain assets of our
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with the former
management, and actively pursued the collection of receivables. If the sale
proceeds plus collections on receivables had been insufficient to discharge the
indebtedness to National Australia Bank, we might have been called upon to pay
the deficiency under our guarantee to the bank. At March 31, 2004 we accrued
$187,000 as the maximum amount of our potential exposure. In June 2004, we
settled this obligation by paying $69,000 to the bank. As a result, the $118,000
accrual in excess of settlement amount was written off to the consolidated
statement of operations as other income in the quarter ended June 30, 2004.
On May 15, 2002, an employee who was out on disability/worker's compensation
leave, Debora Hintz, filed a claim with the California Labor Commissioner
seeking $41,000 in alleged unpaid commissions. On or about December of 2002, Ms.
Hintz filed a discrimination claim against us with the Department of Fair
Employment and Housing, alleging harassment and sexual orientation
discrimination. We had responded appropriately to both the wage claim and the
discrimination allegations, which we believed lack merit based on present
information. On December 1, 2003, the Department of Fair Housing and Employment
closed the case on the basis of no probable cause to prove violation of statue,
and gave notice of right to sue. In January 2004, we terminated Ms. Hintz's
employment with us and, as a result, her medical insurance was terminated. On
February 12, 2004, Ms. Hintz filed a petition for violation of Labor Code
Section 132(a) before the Workers' Compensation Appeals Board of the State of
California.
On November 22, 2002, we and Sabica Ventures, Inc. ("Sabica", our wholly-owned
subsidiary), were sued in a matter entitled Stemley vs. Shea Homes, Inc. et. al.
in San Diego Superior Court Case No. GIC 787680, as Pacific Cabinets. The case
dealt with alleged construction defects. Pacific Cabinets was dismissed from the
litigation for a waiver of fees and costs. At this time, neither we nor Pacific
Cabinets are parties to this action. Because no significant discovery was done,
it is not possible at this time to provide an evaluation of potential exposure,
though it appears highly unlikely that Pacific Cabinets or we would be brought
back into this suit.
On April 2, 2004, we filed a federal court action in the Southern District of
California against 5R Online, Inc., John Frabasile, Randy Pagnotta, our former
officers, and Terry Buckley for fraud, breach of fiduciary duty, breach of
contract, and unfair business practice arising from their evaluation of,
recommendation for, and ultimately engagement in a development arrangement
between IPI and 5R. Pursuant to the development agreement entered into in June
2003 and upon reliance of the representations of the individual defendants that
product development was progressing, we paid and expensed $640,000 in
development payments in the fiscal year ended March 31, 2004 but received no
product. The amount in controversy is the $640,000 development payments as well
as a claim for punitive damages. Defendants Pagnotta and Buckley have
counterclaimed against defendant Frabasile, who has moved to dismiss in light of
a parallel action pending in Canada. Frabasile's and 5R Online, Inc.'s response
to IPI's complaint was due on August 9, 2004. Settlement negotiations are
currently underway.
20
RTI was named as a cross-defendant in an action by General Electric Capital
Corporation as plaintiff ("GE Capital"), against San Francisco City Stores LLC,
dated May 10, 2004. The cross-complaint filed on behalf of San Francisco City
Stores names GE Capital, Big Hairy Dog Information Systems, and RTI as
cross-defendants, claiming breach of warranty and unfair competition
(against RTI), and makes various other claims against GE Capital and Big Hairy
Dog Information Systems. The claim is for approximately $83,000. However, we
believe the claims made against RTI are without merit and we intend to
vigorously defend them.
Certain of our standard software license agreements contain a limited
infringement indemnity clause under which we agree to indemnify and hold
harmless our customers and business partners against certain liability and
damages arising from claims of various copyright or other intellectual property
infringement by our products. These terms constitute a form of guarantee that is
subject to the disclosure requirements, but not the initial recognition or
measurement provisions of Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of the Indebtedness of others." We
have never lost an infringement claim and our cost to defend such lawsuits have
been insignificant. Although it is possible that in the future third parties may
claim that our current or potential future software solutions infringe on their
intellectual property, we do not currently expect a significant impact on our
business, operating results or financial condition.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
NOTE 16 - RELATED-PARTY TRANSACTIONS
Included in other receivables at September 30, 2004 and March 31, 2004 are
amounts due from our officers and employees in the amount of $14,000 and
$37,000, respectively.
In connection with the Page Digital acquisition, we assumed a three-party lease
agreement for our Colorado offices between CAH Investments, LLC ("CAH"), wholly
owned by the spouse of one of our former executive officers, Larry Page, and
Southfield Crestone, LLC, whereby Page Digital agreed to lease offices for ten
years expiring on December 31, 2013. CAH and Southfield Crestone LLC are equal
owners of the leased property. Rent expense related to this lease is $200,000
and $0 for the three months ended September 30, 2004 and 2003, respectively, and
$400,000 and $0 for the six months ended September 30, 2004 and 2003,
respectively. A security deposit of $170,000 relating to this lease is included
in other long-term assets at September 30, 2004 and March 31, 2004.
We retained our former CEO and Chairman of the Board, Barry Schechter, to
provide consulting services starting August 2003. For three months ended
September 30, 2004 and 2003, the expense for this service was $108,000 and $0,
respectively. For the six months ended September 30, 2004 and 2003, the expense
for this service was $219,000 and $108,000, respectively.
In fiscal 2004, we retained an entity owned by an immediate family member of our
former CEO and Chairman, Harvey Braun, to provide recruiting and marketing
services. For the three months ended September 30, 2004 and 2003, the expense
for this service was $0 and $98,000, respectively. For the six months ended
September 30, 2004 and 2003, the expense for this service was $0 and $108,000,
respectively.
In May 2004, Mr. Braun resigned from his position as Chief Executive Officer.
Subsequent to September 30, 2004, we entered into a severance and separation
agreement with Mr. Braun. Pursuant to this agreement, we agreed to pay Mr. Braun
a total of $192,000 with $96,000 payable on October 28, 2004 and the remaining
$96,000 payable on November 28, 2004. In addition, Mr. Braun agreed to forfeit
an option for 500,000 shares. We accrued a severance payment of $192,000 in the
six months ended September 30, 2004 and included in accrued expenses at
September 30, 2004. As of November 10, 2004, the outstanding balance is
$192,000.
Effective as of July 14, 2004, Steven Beck resigned from our board of directors
and effective July 29, 2004, Mr. Beck resigned from his position as executive
officer. On July 29, 2004, we entered into an agreement to pay Mr. Beck
$325,000, including $30,000 of vacation accrual balance, with $109,000 payable
on July 29, 2004 and the balance payable in four monthly installments of $54,000
commencing on August 15, 2004. We accrued a restructuring charge of $295,000 in
the three and six months ended September 30, 2004. As of November 10, 2004, the
outstanding balance is $54,000.
21
NOTE 17 - SUBSEQUENT EVENTS
On October 25, 2004, we determined that our financial statements for the fiscal
year ended March 31, 2004 and our quarterly financial statements for the second
and third quarters of the fiscal year ending March 31, 2003, the first, second
and third quarters of the fiscal year ending March 31, 2004 and the first
quarter of the fiscal year ending March 31, 2005 needed to be restated in
accordance with GAAP. In connection with the restatements, we filed an 8-k on
October 29, 2004.
We completed the restatements and made the following revised filings: 10-K/A for
the fiscal year ended March 31, 2004; and a 10-Q/A for fiscal quarters ended
September 30, 2002, December 31, 2002, June 30, 2003, September 30, 2003,
December 31, 2003 and June 30, 2004. We do not intend to file a revised 10K for
the year ended March 31, 2003 due to the immateriality of the impact of the
restatements in that filing.
We determined that prior presentation of the financial statements as discussed
above needed to be restated for the following items, where applicable:
1. Reversal of revenue recognized on a one-time sale of software
technology rights;
2. Presentation of net sales and cost of sales as product and services
revenues and corresponding costs of revenues;
3. Reversal of a purchase of software technology;
4. Accrual of a royalty liability pursuant to the purchase agreement of
software technology;
5. Capitalization and amortization of the beneficial conversion charges
related to the March '03 and March '04 convertible debentures;
6. Capitalization of legal fees related to the acquisition of Page
Digital Incorporated and Retail Technologies International, Inc.,
7. Reclassification of the unamortized cost of debt discount and
beneficial conversion charges from additional paid in capital to
interest expense, and
8. Inclusion of the value of options assumed in the acquisition of RTI as
a purchase price adjustment.
22
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934 AND THE COMPANY INTENDS THAT CERTAIN MATTERS DISCUSSED IN THIS REPORT
ARE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY FOR THE SAFE HARBOR FROM
LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED BY THE CONTEXT OF
THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE COMPANY ("IPI," "WE" OR "US")
"BELIEVES," "ANTICIPATES," "EXPECTS," "FORECASTS," "ESTIMATES" OR OTHER WORDS
SIMILAR MEANING AND CONTEXT. SIMILARLY, STATEMENTS THAT DESCRIBE FUTURE PLANS,
OBJECTIVES, OUTLOOKS, TARGETS, MODELS, OR GOALS ARE ALSO DEEMED FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
FORECASTED OR ANTICIPATED AS OF THE DATE OF THIS REPORT. CERTAIN OF SUCH RISKS
AND UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY TO SUCH STATEMENTS AND
ELSEWHERE IN THIS REPORT INCLUDING ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." STOCKHOLDERS, POTENTIAL
INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE FACTORS IN EVALUATING
THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
SUCH FORWARD-LOOKING STATEMENTS OR CONSTRUE SUCH STATEMENTS TO BE A
REPRESENTATION BY US THAT OUR OBJECTIVES OR PLANS WILL BE ACHIEVED. THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE MADE ONLY AS OF THE DATE
OF THIS REPORT, AND WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS FORM 10-Q. READERS ARE ALSO URGED TO CAREFULLY
REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE FACTORS WHICH AFFECT OUR BUSINESS, INCLUDING WITHOUT
LIMITATION THE DISCLOSURES MADE UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN OUR ANNUAL
REPORT FILED ON FORM 10-K/A FOR THE YEAR ENDED MARCH 31, 2004, AND THE
DISCLOSURES UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K/A, AS WELL AS
OTHER REPORTS AND FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We are a provider of software solutions and services to the retail industry. We
provide solutions that help retailers understand, create, manage and fulfill
consumer demand. We derive the majority of our revenues from three sources: the
initial sale of application software licenses, or license revenues, professional
services and support, and maintenance. Application software license fees are
dependent upon the sales volume of our customers, the number of users of the
application(s), and/or the number of locations in which the customer plans to
install and utilize the application(s). As the customer grows in sales volume,
adds additional users and/or adds additional locations, we charge additional
license fees. Professional services relate to implementation of our software,
training of customer personnel and modification or customization work. Support,
maintenance and software updates are a source of recurring revenues and are
generally based on a percentage of the software license revenues and are charged
on an annual basis pursuant to renewable maintenance contracts. We typically
charge for professional services including consulting, implementation and
project management services on an hourly basis.
As the vast majority of our revenues are derived from the retail industry, we
are heavily dependent on the financial strength of retailers and their capital
budgets. Deterioration in the health of retailers, a reduction in their capital
budget or a decision to delay the purchase of new systems have a direct impact
on our business. Our sales cycles are long, generally three to twelve months,
and our ability to close a pipeline of potential transaction is very
unpredictable. As such, management believes that license revenue and growth in
license revenue are the best indicator of the Company's business as they signify
either new customers or an expansion of licenses of existing customers. While
there's generally a time lag between a sale of new license and when we provide
services and support, an increase in license revenue will generally lead to an
increase in services and support revenues in future quarters.
In recent periods, we have reported flat to decreased revenues and have suffered
operating and net losses, largely attributable to general economic and
competitive conditions. In this regard, we have taken a number of steps designed
to improve our operations, including:
o Acquired two complementary companies with substantial revenues and
earnings potential;
o Revamped our management team by adding a new President and COO and CTO,
as well as a new CFO;
23
o Implemented cost containment measures;
o Improved our IBM-based core products through continuing internal
research and development;
o Obtained the rights to distribute complementary products, including a
new easy-to-install and easy-to-use, open-architecture software system
for very small retailers, which we are currently offering;
o Established collaborations with several value added resellers to
provide a variety of options and product extensions;
o Improved our distribution capabilities by adding new third party
channels, such as IBM and IBM's resellers, and professional service
firms, such as CGI and LakeWest.
We believe that these actions will position us to achieve revenue growth and
profitability.
RECENT DEVELOPMENTS
o In June 2004, we completed the acquisition of RTI. See "Acquisition of
RTI" below.
o Upon completion of RTI's acquisition, Michael Tomczak, RTI's CEO and
President, was appointed our President, Chief Operating Officer and
director and Jeffrey Boone, RTI's Chief Technology Officer, was
appointed our CTO. Mr. Tomczak replaced Steve Beck, who was serving as
our president and Mr. Page, who was serving as our COO. Mr. Boone
replaced Mr. Page as our CTO. Mr. Beck served as our President from
April 2003 to June 2004 and our COO from April 2003 to February 2004.
Mr. Page served as our CTO from January 2004 to June 2004 and as our
COO from February 2004 to June 2004.
o Mr. Beck resigned from the board of directors and the position of
executive officer in July 2004. Donald Radcliffe, who previously served
as our director from May 1998 to October 2003, was appointed to replace
Mr. Beck as a director.
o Mr. Page resigned from the position of executive officer in September
2004.
o In July, we sold and issued a secured convertible note for a gross
proceed of $7.0 million. See "Indebtedness - Laurus" below.
o In November 2004, we completed the restatements and made the following
revised filings: 10-K/A for the fiscal year ended March 31, 2004 and
10-Q/A for the fiscal quarter ended September 30, 2002, December 31,
2002, June 30, 2003, September 30, 2003, December 31, 2003 and June 30,
2004.
ACQUISITION OF RTI
Pursuant to an agreement dated June 1, 2004, we acquired RTI from Michael
Tomczak, Jeffrey Boone and Intuit in a merger transaction. On March 12, 2004,
we, RTI, Merger Sub and the Shareholders entered the March 12, 2004 Merger
Agreement which provided we would acquire RTI in a merger transaction in which
RTI would merge with and into Merger Sub. The merger consideration contemplated
by the March 12, 2004 Merger Agreement was a combination of cash and shares of
our common stock. The March 12, 2004 Merger Agreement was amended by the Amended
Merger Agreement dated June 1, 2004.
Pursuant to the Amended Merger Agreement, the Merger was completed with the
following terms: (i) we assumed RTI's obligations under those certain promissory
notes issued by RTI on December 20, 2002 with an aggregate principal balance of
$2.3 million; (ii) the total consideration paid at the closing of the Merger was
$11.6 million paid in shares of our common stock with fair value of $1.2
million, newly designated Series B Preferred with fair value of $5.7 million,
promissory notes totaling $3.6 million, assumption of incentive stock options
with fair value of $1.0 million and acquisition costs of $110,000; (iii) the
Shareholders and Intuit are entitled to price protection payable if and to the
extent that the average trading price of our common stock is less than $0.76 at
the time the shares of our common stock issued in the Merger and issuable upon
conversion of the Series B Preferred are registered pursuant to the Registration
Rights Agreement dated June 1, 2004 between us, the Shareholders and Intuit; and
(iv) the Merger consisted of two steps, first, Merger Sub merged with and into
RTI, Merger Sub's separate corporate existence ceased and RTI continued as the
surviving corporation, immediately thereafter, RTI merged with and into Merger
Sub II, RTI's separate corporate existence ceased and Merger Sub II continued as
the surviving corporation.
24
As a result of the Merger, each Shareholder received 1,258,616 shares of Series
B Preferred and a promissory note payable monthly over two years in the
principal amount of $1,295,000 bearing interest at 6.5% per annum. As a result
of the Merger, Intuit, the holder of all of the outstanding shares of RTI's
Series A Preferred stock, received 1,546,733 shares of our common stock and a
promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under the
Registration Rights Agreement, we agreed to register the common stock issuable
upon conversion of the Series B Preferred issued to the Shareholders within 30
days of the automatic conversion of the Series B Preferred into common stock.
The automatic conversion occurred when we filed the Certificate of Amendment
with the Delaware Secretary of State increasing the authorized number of shares
of our common stock. The Shareholders and Intuit are entitled to price
protection payments of up to a maximum of $0.23 per share payable by promissory
note, if and to the extent that the average closing price of our common stock
for the 10 days immediately preceding the date the registration statement
covering their shares is declared effective by the Securities and Exchange
Commission, is less than the 10 day average closing price as of June 1, 2004,
which was $0.76. We have not recorded the liability relating to the price
protection at the date of acquisition as the contingency is based on future
events and cannot yet be determined. We will compute the total liability as soon
as it can be determined and recorded as a liability. The total cost of the price
protection contingency will be deferred and amortized over the shortest of the
remaining useful lives of the assets acquired in the acquisition in accordance
with SFAS 141, "Business Combinations.
Upon the consummation of the Merger, Michael Tomczak, RTI's former President and
Chief Executive Officer, was appointed our President, Chief Operating Officer
and director and Jeffrey Boone, RTI's former Chief Technology Officer, was
appointed our Chief Technology Officer. We entered into two-year employment
agreements and non-competition agreements with Mr. Tomczak and Mr. Boone.
The combination of Island Pacific and RTI, will enable us to offer a fully
integrated solution to mid-tier retailers that will be unique in the
marketplace. As a result of this transaction, smaller retailers will now be able
to cost-effectively acquire a solution that provides both front and back-end
support. The combination instantly expands our products, services offerings and
distribution channels.
RECENT ACCOUNTING PRONOUNCEMENTS
None.
QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2003
REVENUES
Product revenues increased $3.1 million, or 172%, to $4.9 million in the quarter
ended September 30, 2004 from $1.8 million in the quarter ended September 30,
2003, primarily due to the inclusion, in the quarter ended September 30, 2004,
of $2.4 million and $0.9 million of product revenues for RTI and Page Digital,
respectively. Excluding RTI and Page Digital product revenues, product revenues
decreased $0.2 million to $1.6 million, a 11% decrease, primarily due to a $0.2
million decrease in sale of partner products as we focused on selling our core
products. Services revenues increased by $0.8 million, or 84% to $1.8 million in
the quarter ended September 30, 2004 from $1.0 million in the quarter ended
September 30, 2003 primarily due to the inclusion of $0.8 million and $0.1
million of services revenue for Page Digital and RTI, respectively. Excluding
Page Digital and RTI services revenues, services revenues decreased $0.1 million
to $0.9 million, an 10% decrease. Toys accounted for $0 and $0.2 million of
services in the quarter ended September 30, 2004 and September 30, 2003,
respectively. Total revenues increased $3.9 million, or 139%, to $6.7 million in
the quarter ended September 30, 2004 from $2.8 million in the quarter ended
September 30, 2003, due primarily to the inclusion of $2.5 million and $1.7
million of RTI and Page Digital revenues recognized in the quarter ended
September 30, 2004. Excluding Page Digital and RTI, total revenues decreased
$0.3 million to $2.5 million, a 11% decrease, primarily due to the decrease in
sale of partner products and the inclusion, in the prior year quarter, or TRU
services revenue.
25