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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 DECEMBER 31, 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
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ISLAND PACIFIC, INC.
--------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0896617
------------------------------- ----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
19800 MACARTHUR BOULEVARD, 12TH FLOOR, IRVINE, CALIFORNIA 92612
- --------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(949) 476-2212
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(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 - 63,486,885 shares as of January 31, 2005.
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TABLE OF CONTENTS
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004
and March 31, 2004.................................................................3
Consolidated Statements of Operations for the Three
Months and the Nine Months Ended December 31, 2004 and 2003........................4
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2004 and 2003............................................5
Notes to Consolidated Financial Statements ..............................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................48
Item 4. Controls and Procedures.................................................................48
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............................49
Item 3. Defaults Upon Senior Securities.........................................................49
Item 4. Submission of Matters to a Vote of Security Holders.....................................49
Item 5. Other Information.......................................................................49
Item 6. Exhibits and Reports on Form 8-K........................................................49
SIGNATURES.......................................................................................56
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
DECEMBER 31, MARCH 31,
2004 2004
------------- -------------
(As Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 1,129 $ 2,108
Accounts receivable, net of allowance for doubtful accounts of $1,363 and $409,
respectively 6,106 4,572
Other receivables, including $14 and $37 from related parties, respectively 95 143
Inventories 36 46
Current portion of non-compete agreements 149 668
Current portion of note receivable 36 36
Prepaid expenses and other current assets 684 682
------------- -------------
Total current assets 8,235 8,255
Note receivable 108 126
Property and equipment, net 880 821
Goodwill, net 31,939 20,607
Other intangibles, net 19,593 18,297
Other assets 262 421
------------- -------------
Total assets $ 61,017 $ 48,527
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable to related parties $ 1,542 $ --
Current portion of notes payable 1,285 --
Current portion of convertible debentures 1,679 146
Current portion of capital leases 154 169
Accounts payable 1,157 1,255
Accrued expenses 2,814 3,301
Deferred revenue 7,802 2,657
Income tax payable 127 --
------------- -------------
Total current liabilities 16,560 7,528
Notes payable to related parties, less current maturities 986 --
Notes payable, less current maturities 179 --
Convertible debentures, net, less current maturities 3,915 1,900
Capital lease obligations, less current maturities 3 89
Deferred revenue 849 --
Long term liabilities 177 235
------------- -------------
Total liabilities 22,669 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 $2,881 and $2,002, respectively 14,100 14,100
Common Stock, $.0001 par value; 100,000,000 shares authorized; 63,270,576 and
52,427,799 shares issued and outstanding, respectively 6 5
Additional paid in capital 85,958 74,088
Accumulated deficit (61,716) (49,418)
------------- -------------
Total stockholders' equity 38,348 38,775
------------- -------------
Total liabilities and stockholders' equity $ 61,017 $ 48,527
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
3
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
--------- --------- --------- ---------
(As restated) (As restated)
Revenues:
Product $ 5,859 $ 4,207 $ 15,256 $ 9,218
Services 1,343 683 3,912 3,917
--------- --------- --------- ---------
Total revenues 7,202 4,890 19,168 13,135
--------- --------- --------- ---------
Cost of revenues:
Product 2,583 1,627 6,941 4,028
Services 746 434 2,180 1,923
--------- --------- --------- ---------
Total cost of revenues 3,329 2,061 9,121 5,951
--------- --------- --------- ---------
Gross profit 3,873 2,829 10,047 7,184
Expenses:
Application development 1,757 361 4,806 1,083
Depreciation and amortization 388 272 1,324 837
Restructuring -- -- 681 --
Selling, general and administrative 4,018 2,808 12,317 8,605
--------- --------- --------- ---------
Total expenses 6,163 3,441 19,128 10,525
--------- --------- --------- ---------
Loss from operations (2,290) (612) (9,081) (3,341)
Other income (expense):
Interest income 1 7 5 16
Other income (expense) 37 112 139 (66)
Interest expense (965) -- (3,356) (1,796)
--------- --------- --------- ---------
Total other expenses (927) 119 (3,212) (1,846)
--------- --------- --------- ---------
Loss before provision for income taxes (benefits) (3,217) (493) (12,292) (5,187)
Provision for income taxes (benefits) -- (19) 6 (522)
--------- --------- --------- ---------
Net loss (3,217) (474) (12,298) (4,665)
Cumulative preferred dividends (300) (184) (880) (738)
--------- --------- --------- ---------
Net loss available to common stockholders $ (3,517) $ (658) $(13,178) $ (5,403)
========= ========= ========= =========
Basic and diluted loss per share:
Net loss $ (0.05) $ (0.01) $ (0.21) $ (0.12)
Cumulative preferred dividends (0.01) (0.00) (0.02) (0.02)
--------- --------- --------- ---------
Net loss available to common stockholders $ (0.06) $ (0.01) $ (0.23) $ (0.14)
========= ========= ========= =========
Basic and diluted weighted-average common shares outstanding 63,031 46,172 57,818 38,656
The accompanying notes are an integral part of these consolidated financial statements.
4
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
DECEMBER 31,
2004 2003
---------- ----------
(As
restated)
Cash flows from operating activities:
Net loss $ (12,298) $ (4,665)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 4,022 2,688
Amortization of debt discount and conversion option 1,112 1,542
Gain on disposal of furniture and fixtures -- 169
Provision for allowance for doubtful accounts, net of recoveries 368 (112)
Stock-based compensation 850 195
Common stock issued for services rendered and settlement cost -- 385
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (297) (2,575)
Income tax refund receivable --
Inventories 10 7
Prepaid expenses and other assets 306 (1,270)
Accounts payable and accrued expenses (2,047) (3,691)
Income tax payable -- 64
Accrued interest on stockholders' loans, convertible notes and term loan 532 187
Deferred revenue 3,305 1,682
---------- ----------
Net cash used for operating activities (4,137) (5,394)
---------- ----------
Cash flows from investing activities:
Payment from note receivable 18 18
Proceeds from acquisition of Retail Technologies International, Inc., net 562 --
Purchases of furniture and equipment (106) (301)
Capitalized software development costs (357) (3,002)
---------- ----------
Net cash provided by (used for) investing activities 117 (3,285)
---------- ----------
Cash flows from financing activities:
Sale of common stock, net of offering costs 9 11,929
Decrease in amount due to stockholders, net (360) --
Proceeds from convertible debts 7,000 700
Payments on capital leases (112) --
Payments on term loans and convertible debentures (3,497) (135)
---------- ----------
Net cash provided by financing activities 3,040 12,494
---------- ----------
Effect of exchange rate changes on cash 1 (3)
---------- ----------
Net decrease in cash and cash equivalents (979) 3,812
Cash and cash equivalents, beginning of period 2,108 1,319
---------- ----------
Cash and cash equivalents, end of period $ 1,129 $ 5,131
========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 507 $ 135
Income taxes paid $ 6 --
Supplemental schedule of non-cash investing and financing activities:
Issued 7,551,696 shares of common stock upon conversion of 2,517,233 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 penalty $ 240 --
Issued 223,052 shares of common stock upon cashless exercise of an incentive stock option $ 22 --
Issued 132,433 shares of common stock to Midsummer for monthly convertible debenture payment $ 50 --
Issued 169,340 shares of common stock to Midsummer for monthly convertible debenture payment $ 59 --
Issued 188,998 shares of common stock to Midsummer for monthly convertible debenture payment $ 58 --
Issued 5,428 shares of common stock upon cashless exercise of an incentive stock option $ 1 --
Issued 4,103,161 shares of common stock upon conversion of the 9% debentures $ 4,200
Repaid a convertible note by offsetting against outstanding account receivable $ 1,382
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 consolidated financial statements.
5
ISLAND PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The financial statements for the three and nine months
ended December 31, 2003 have been restated.)
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited 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 December 31, 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 nine months ended December 31, 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 nine months ended December 31, 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 nine months ended December 31, 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 Nine Months
Ended Ended
December 31, December 31,
2003 2003
------------- -------------
Revenues $ 5,208 $ 16,347
Net loss $ (1,816) $ (6,215)
Net loss available to common stockholders $ (2,000) $ (6,953)
Basic and diluted loss per share of common stock $ (0.04) $ (0.15)
Basic and diluted loss per share available to common stockholders $ (0.04) $ (0.17)
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
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 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").
In 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. In 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 and
to register the common stock issued to Intuit either on the next registration
statement we filed after the closing or upon Intuit's demand. We filed a
registration statement on Form S-3 covering Intuit's common stock on August 25,
2004. The automatic conversion occurred when we filed an amendment to our
certificate of incorporation with the Delaware Secretary of State increasing our
authorized shares of common stock on August 27, 2004. We filed a registration
statement on Form S-3 covering the common stock issued on conversion of the
Series B on September 13, 2004. The registration statements on Form S-3 filed on
August 25, 2004 and September 13, 2004 were subsequently combined into one
registration statement on Form S-3 pursuant to Amendment No. 1 to the Forms S-3
filed on December 2, 2004. We filed Amendment No. 2 to this Form S-3 on January
25, 2005 but it has not yet become effective. 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 (the "SEC") 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 employment agreement with Michael Tomczak was executed 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 will vest on the first anniversary date of the
employment agreement, thereafter, the remaining option will vest at the rate of
73,848 shares per month during the second year of this agreement. If Mr.
Tomczak's employment 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 a
non-competition agreement with Mr. Tomczak pursuant to which he 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
The employment agreement with Jeffrey Boone was executed 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 will vest on the first anniversary date of this
agreement, thereafter, the remaining option will vest at the rate of 65,514
shares per month during the second year of this agreement. If Mr. Boone's
employment 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 a non-competition
agreement with Mr. Boone pursuant to which he 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 nine
months ended December 31, 2004 and 2003 assume the acquisitions of RTI and Page
Digital occurred as of April 1, 2004 and 2003, respectively. 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 Nine Months Ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
------------- ------------- ------------- --------------
Revenues $ 7,202 $ 7,488 $ 20,561 $ 22,950
Net loss $ (3,217) $ (2,037) $ (13,230) $ (6,454)
Net loss available to common
stockholders $ (3,517) $ (2,221) $ (14,110) $ (7,192)
Basic and diluted loss per share of
common stock $ (0.05) $ (0.04) $ (0.23) $ (0.15)
Basic and diluted loss per share
available to common stockholders $ (0.06) $ (0.05) $ (0.24) $ (0.17)
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
8
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 $144,000 and $162,000
at December 31, 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 December 31, 2004 and March 31, 2004, goodwill and other intangibles consist
of the following (in thousands):
DECEMBER 31, 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 (15,864) 16,207 30,357 (13,219) 17,138
Non-compete agreements 7,014 (6,865) 149 6,986 (6,318) 668
Customer relationships 2,564 (263) 2,301 904 (30) 874
Unamortized intangible:
Trademark 1,085 -- 1,085 285 -- 285
------------ ------------ ------------ ------------ ------------ ------------
42,734 (22,992) 19,742 38,532 (19,567) 18,965
Less: current portion of
non-compete agreements 149 -- 149 668 -- 668
------------ ------------ ------------ ------------ ------------ ------------
Long-term portion of other
intangibles 42,585 (22,992) 19,593 37,864 (19,567) 18,297
------------ ------------ ------------ ------------ ------------ ------------
Long-term portion of
goodwill and other
intangibles $ 81,016 $ (29,484) $ 51,532 $ 64,963 $ (26,059) $ 38,904
============ ============ ============ ============ ============ ============
During the nine months ended December 31, 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 non-compete agreements in
connection with the acquisition of RTI (see Note 2). In addition, we recorded $0
and $357,000 million in capitalized software during the three and nine months
ended December 31, 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 remaining balance of the non-compete
agreement is being amortized over the remaining three months of its useful life.
Transactions in goodwill during the nine months ended December 31, 2004 and
fiscal year ended March 31, 2004 are as follows (in thousands):
December 31, 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 nine months
ended December 31, 2004. Accordingly, absent 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 December 31, 2004. No adjustments have been made to the useful
lives of our intangible assets.
Amortization expense for the three months ended December 31, 2004 and 2003 was
$1.2 million and $0.9 million, respectively. Amortization expense for nine
months ended December 31, 2004 and 2003 was $3.5 million and $2.5 million. We
expect amortization expense for the next five fiscal years to be as follows (in
thousands):
March 31,
2005 $ 1,182
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 December 31,
2004, of which $1.5 million 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):
December 31, 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 $ 972 $ --
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
492 --
------------ ------------
Total notes payable $ 1,464 $ --
============ ============
Total notes payable (including accrued interest) $ 1,464 $ --
Less: current maturities 1,285 --
------------ ------------
Long-term portion of notes payable $ 179 $ --
============ ============
10
CONVERTIBLE DEBENTURES
Convertible debentures at December 31, 2004 and March 31, 2004 consist of the
following (in thousands):
December 31, 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 $ 7,042 $ --
Convertible debentures, interest rate of 9% per annum and mature in
May 2006 1,096 3,012
------------ ------------
Total 8,138 3,012
Less: debt discount 2,544 966
------------ ------------
$ 5,594 $ 2,046
============ ============
Total convertible debentures (including accrued interest), net of
debt discount $ 5,594 $ 2,046
Less: current maturities 1,679 146
------------ ------------
Long-term portion of convertible debentures $ 3,915 $ 1,900
============ ============
LAURUS
On July 12, 2004, we sold and issued a secured convertible term note (the
"Laurus Note") to Laurus Master Fund, Ltd. ("Laurus") for gross proceeds of $7.0
million pursuant to a Securities Purchase Agreement. In addition, we issued
Laurus a warrant to purchase up to 3,750,000 shares of our common stock at a
price of $0.71 per share (the "Laurus Warrant").
The Laurus Note initially matured on September 1, 2004, however, the maturity
date was automatically extended to July 12, 2007 (the "Maturity Date") upon our
stockholders approving an increase to our authorized common stock from 100 to
250 million shares and our filing an amendment to our certificate of
incorporation to effect such change on August 27, 2004. The Laurus Note accrues
interest at a rate per annum (the "Interest Rate") equal to the "prime rate"
published in The Wall Street Journal from time to time, plus two percent.
Interest under the Note is payable monthly in arrears and interest payments
commenced on August 1, 2004. The Interest Rate is calculated on the last day of
each month and is subject to adjustment based on the then-current price of our
common stock. The initial conversion price under the Note was $0.56 per share,
subject to adjustment upon our issuance of securities at a price 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. Our obligations
under the Laurus Note are secured by all of our assets. In addition, all our
wholly owned subsidiaries guarantied our obligations under the Laurus Note and
we pledged all of our interests in the outstanding stock of our subsidiaries as
security for our obligations under the Laurus Note.
The Laurus Warrant is immediately exercisable and has a seven year term. We have
the right to require exercise of the Laurus Warrant 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 Warrant 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 Warrant is greater than three hundred
percent (300%) of the then applicable exercise price.
In August 2004, Laurus agreed to defer the interest payments due under the
Laurus Note on August 1, 2004 until the Maturity Date. In October 2004, Laurus
agreed to amend the Laurus Note and defer the payments due from 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 due in July 2007. In connection
with the amendment to the Laurus Note and the related amendment to the Laurus
Registration Rights Agreement (as defined below): (1) the conversion price on $2
million of the $7 million Laurus Note was reduced to $0.37, (2) we issued Laurus
an additional warrant (the "October '04 Warrant") to purchase 250,000 shares of
our common stock at a price of $0.41 per share with the same terms as the Laurus
Warrant, and (3) the Effectiveness Date (as defined below) under the Laurus
Registration Rights Agreement was extended. We have assessed but not recorded
any charge to expense in connection with the issuance of the October '04 Warrant
because the impact on the statement of operations is not material.
11
Pursuant to the registration rights agreement between us and Laurus executed in
connection with the sale of the Laurus Note (the "Laurus Registration Rights
Agreement"), we were obligated to file a registration statement registering the
shares of our common stock issuable upon conversion of the Laurus Note or
exercise of the Laurus Warrant or the October '04 Warrant (the "Underlying
Shares") within 60 days of July 12, 2004 and have the Registration Statement
declared effective by the SEC no later than March 1, 2005. If (1) the
Registration Statement is not filed or declared effective within the requisite
periods, (2) the Registration Statement ceases to be effective for more than
30 days in any calendar year or any 10 consecutive calendar days, or (3) 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 filed a registration statement for the Underlying Shares on Form S-3 (the
"Laurus Registration Statement") on September 13, 2004 and filed amendments to
the Form S-3 on December 2, 2004 and January 25, 2005. The Laurus Registration
Statement has not yet been declared effective.
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 $23,000 in the three months and
$43,000 in the nine months ended December 31, 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
$44,000 in the three months and $81,000 in the nine months ended December 31,
2004.
In connection with the amendment to the Laurus Note in October 2004, 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
amounted to $1.0 million and is being amortized over the remaining term of the
Laurus Note. We amortized $62,000 in the three and nine months ended December
31, 2004.
In connection with the amendment to the Laurus Note in October 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 $24,000 and is being amortized
as interest expense over the life of the Laurus Note. We amortized $2,000 in the
three and nine months ended December 31, 2004.
The balance of the Laurus Note, including accrued interest, is $7.0 million at
December 31, 2004.
OMICRON/MIDSUMMER
On March 15, 2004, we sold Omicron Master Trust ("Omicron") and Midsummer
Investment, Ltd. ("Midsummer") convertible debentures (the "March 2004
Debentures") for an aggregate price of $3.0 million pursuant to a securities
purchase agreement (the "March 2004 Debenture Purchase Agreement"). The March
2004 Debentures bear interest at a rate of 9% per annum, and provide for
interest only payments on a quarterly basis, payable, at our option, in cash or
shares of our common stock. The March 2004 Debentures mature on May 15, 2006.
The March 2004 Debentures were initially convertible into shares of our common
stock at a conversion price of $1.32 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 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.
We also issued Omicron and Midsummer two warrants each as follows: (i) Series A
Warrants to purchase up to an aggregate of 1,043,479 shares of our common stock
at an exercise price of $1.15 per share 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 (ii) Series B Warrants to purchase
up to an aggregate of 8,500,000 shares of our common stock with an exercise
price of $5 per share, 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. The Series B Warrants are immediately exercisable and
expire on the earlier of the six-month anniversary of the effective date of the
registration statement covering the shares underlying the warrant or 18 months
from March 15, 2004.
12
In July 2004, with the proceeds from the sale of the Laurus Note, we paid
Omicron $1.75 million, the full amount due under its March 2004 Debenture, plus
$0.2 million in accrued interest, liquidated damages pursuant to the
Omicron/Midsummer Registration Rights Agreement (described below) and prepayment
penalties. In accordance with generally accepted accounting principles, the
difference between the original conversion price of $1.32 and our stock price on
the date Omicron's March 2004 Debenture was issued 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.
In July 2004, we issued 600,000 shares of our common stock, which we valued at
$240,000, to Midsummer as payments for liquidated damages due under the
Omicron/Midsummer Registration Rights Agreement (described below) and as partial
consideration for Midsummer consenting to our issuance of the Laurus Note. We
also amended Midsummer's March 2004 Debenture in exchange for its consent to the
transaction with Laurus. Pursuant to Amendment No. 1 to the 9% Debenture Due May
15, 2006 Issued to Midsummer Investments, Ltd. And Waiver, the terms of
Midsummer's March 2004 Debenture were amended as follows: (i) the prepayment
penalty was eliminated, (ii) the conversion price was reduced to $0.56 per
share, (iii) interest payments are due on a monthly, rather than quarterly,
basis, (iv) the commencement of monthly redemption payments was accelerated to
September 1, 2004 and (v) the monthly redemption payments were revised such that
payments of $50,000 are due monthly commencing September 1, 2004 and increase to
$62,500 starting February 1, 2005. In connection with the issuance of the Laurus
Note, the exercise price of the Series A Warrants held by both Omicron and
Midsummer was reduced to $0.56 per share. During the months of October, November
and December 2004 132,433, 169,340 and 188,998 shares of common stock were
issued, respectively, valued at $50,000, $58,905 and $58,533, respectively, for
payment of principal and interest. Computation of the number of shares is in
accordance with agreement and share price is based upon 20 day average VWAP less
20% discount. Management considers this to be the fair value of the shares of
common stock issued.
We entered into a registration rights agreement with Omicron and Midsummer dated
March 15, 2004 (the "Omicron/Midsummer Registration Rights Agreement"), pursuant
to which we were required to file a registration statement respecting the common
stock issuable upon the conversion of the March 2004 Debentures and exercise of
the warrants within 30 days after March 15, 2004, and to use best efforts to
have the registration statement declared effective at the earliest date but in
no event later than 90 days after March 15, 2004 (or 120 days in the event of
full review). If we fail to file a registration statement within such 30 day
period or have it declared effective within such 90 day period (or 120 day
period in the event of a full review), we are obligated to pay liquidated
damages to Omicron and Midsummer equal to 2% per month of each of their initial
subscription amounts plus the value of any outstanding warrants. A registration
statement on Form S-3 registering the shares issuable upon conversion of
Midsummer's March 2004 Debenture and the shares issuable on exercise of both
Omicron's and Midsummer's Series A Warrants was filed on August 25, 2004. A
registration statement on Form S-3 registering the shares issuable upon exercise
of Midsummer's and Omicron's Series B Warrants was filed on September 13, 2004.
The registration statements were combined into one registration statement on
Form S-3 pursuant to Amendment No. 1 to the Forms S-3 filed on December 2, 2004.
Amendment No. 2 to the registration statement was filed on January 25, 2005, but
it has not been declared effective as of February 10, 2005. Outstanding
liquidated damages totaling $201,000 were paid in July 2004. Additional
liquidated damages were waived pursuant to Amendment No. 2 to Midsummer's March
2004 Debenture (as described below). We will accrue liquidated damages beginning
February 1, 2005 until the registration statement is declared effective.
On November 30, 2004, we entered into Amendment No. 2 to Midsummer's March 2004
Debenture ("Amendment No. 2"). Pursuant to Amendment No. 2, the terms of
Midsummer's March 2004 Debenture were amended as follows: (i) the conversion
price for the March 2004 Debenture and the exercise price for the Series A
Warrant were reduced to $0.37 per share, (ii) all outstanding accrued and unpaid
liquidated damages and all liquidated damages that may accrue through January
31, 2005 were waived, (iii) until the shares are registered, we may make monthly
redemption and interest payments in shares of restricted stock valued at 80% of
the value weighted average price for the 20 days prior to either the interest
payment date or the date the shares are issued, whichever is lower and (iv) the
date by which the registration statement covering the shares issuable upon
conversion of Midsummer's March 2004 Debenture and the related warrants must be
declared effective was extended to January 31, 2005. In addition, we issued
Midsummer an additional warrant to purchase 200,000 shares of our common stock
with an exercise price of $0.41. We have assessed but not recorded any charge to
expense in connection with the issuance of the additional warrant to Midsummer
because the impact on the statement of operations is not material.
In accordance with generally accepted accounting principles, the difference
between the original conversion price of $1.32 and our stock price on the date
of issuance of the Midsummer March 2004 Debenture amounted to $110,000 and was
being amortized over the term of the debt. Upon amending the debt, we recomputed
the difference between the amended conversion price of $0.56 and our stock price
on the date of issuance. We recorded an additional maximum charge of $785,000
13
and will amortize it over the remaining term of the debt. We had amortized
$115,000 and $243,000 in the three and nine months ended December 31, 2004. No
additional amounts were recorded for the second amendment of the Midsummer's
March 2004 Debenture as maximum amounts were recorded in the first amendment.
For a period of 180 days following the date the registration statement covering
the shares issuable upon conversion of the March 2004 Debentures and related
warrants is declared effective (the "Omicron/Midsummer Registration Effective
Date"), both Omicron and Midsummer have the right, in their sole discretion, to
elect to purchase their pro rata portion of additional March 2004 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 would be
identical to the terms set forth in the March 2004 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 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.
For a period of 180 days following the Omicron/Midsummer Registration Effective
Date, if the daily volume weighted average price of our common stock for 15
consecutive trading days exceeds the then current conversion price by more than
200%, subject to adjustment, we may, on one occasion, in our sole determination,
require Omicron and Midsummer to purchase each of their 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 March 2004 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 March 2004 Debenture and Series A Warrants.
For a period of 6 months from the Omicron/Midsummer Registration Effective Date,
Omicron and Midsummer have a right of first refusal to participate in certain
future financings by us involving the sale of our common stock or equivalent
securities.
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 amortized 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 debenture was
repaid. Upon repayment of the Omicron Debenture, the remaining balance of
$363,000 was expensed.
The amount allocated to the warrants issued to Midsummer was originally
$300,000. Upon amending Midsummer's March 2004 Debenture, we recomputed the
amount allocated to the 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 $118,000 in the three and nine months ended
December 31, 2004, respectively. No additional amounts were recorded for the
second amendment as maximum amounts were recorded in the first amendment.
In connection with the sale and subsequent amendments of the convertible notes
during the quarters ended September 30, 2004 and December 31, 2004, we adjusted
the exercise price of outstanding warrants previously issued to certain
investors to $0.56 per share pursuant to the anti-dilution protection
provisions. Accordingly, we recorded charges of $366,000 and $417,000 as
interest expense in the quarters ended September 30, 2004 and December 31, 2004,
respectively.
The outstanding balance of Midsummer Debenture, including accrued interest, is
$1.0 million at December 31, 2004.
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.
14
The balance of capital leases is $157,000 and $258,000 at December 31, 2004 and
March 31, 2004, respectively, of which the current portion is $154,000 and
$169,000, respectively.
NOTE 8 - LINE OF CREDIT
In connection with the acquisition of RTI, we assumed an obligation under a line
of credit with a balance of $182,000 at June 30, 2004. In July 2004, the line of
credit was paid off in full.
NOTE 9 - DEFERRED REVENUE
Deferred revenue at December 31, 2004 and March 31, 2004 consists of the
following (in thousands):
December 31, March 31,
2004 2004
------------ ------------
Prepaid support services $ 7,250 $ 2,528
Customer deposits 1,401 129
------------ ------------
Total 8,651 2,657
Long-term portion 849 --
------------ ------------
Current portion $ 7,802 $ 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 $2.9
million, or $20.44 per share, and $2.0 million, or $14.19 per share, at December
31, 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 January 1, 2005 is $0.89. 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 Limited ("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 our authorized
common stock in August 2004, all of the 2,517,232 shares of Series B Preferred
outstanding were converted into 7,551,696 shares of common stock. No dividends
had been declared.
NOTE 11 - EQUITY TRANSACTIONS
During the quarter ended December 31, 2004, we had the following equity
transactions:
o Issued 132,433 shares of common stock, with a fair value of
$50,000, to Midsummer as monthly principal and interest
payment of convertible debenture,
o Issued 169,340 shares of common stock, with a fair value of
$58,905, to Midsummer as monthly principal and interest
payment of convertible debenture,
o Issued 188,998 shares of common stock, with a fair value of
$58,533, to Midsummer as monthly principal and interest
payment of convertible debenture,
15
o Granted incentive stock options to employees to purchase an
aggregate of 49,000 shares of common stock at exercise prices
ranging from $0.39 to $0.43,
o Granted options to purchase an aggregate of 82,500 shares of
common stock at exercise prices ranging from $0.41 to $0.42 to
outside directors of the Board as directors' fees for the
quarter ended December 31, 2004,
o Employees, pursuant to the RTI acquisition, exercised options
to purchase 18,369 shares of common stock at exercise price of
$0.02.
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 nine months ended December 31, 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.
Nine Months Ended
December 31,
2004 2003
------------ ------------
(in thousands, except per share amounts)
(unaudited)
Net loss as reported $ (12,298) $ (4,665)
Less: stock-based compensation expense,
net of related tax effects (1,507) (1,621)
------------ ------------
Pro forma net loss $ (13,805) $ (6,286)
============ ============
Basic and diluted earnings (loss) per share
- as reported $ (0.21) $ (0.12)
Basic and diluted earnings (loss) per share
- pro forma $ (0.24) $ (0.16)
NOTE 12 - EARNINGS (LOSS) PER SHARE
Basic loss per common share is 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 nine months ended December 31, 2004
and 2003 is calculated as follows (in thousands):
Three months ended December 31, Nine months ended December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss available to common
Stockholders $ (3,517) $ (658) $ (13,178) $ (5,403)
Basic and diluted weighted average
shares 63,031 46,712 57,818 38,656
Basic and diluted loss per share $ (0.06) $ (0.01) $ (0.23) $ (0.14)
16
The following potential common shares have been excluded from the computation of
diluted net loss per share for the nine months ended December 31, 2004 and 2003,
because the effect would have been anti-dilutive:
Three Months Ended
December 31,
2004 2003
------------ ------------
Outstanding options under our stock option plans 8,364,575 4,371,974
Outstanding options granted outside our stock
option plans 7,682,274 4,994,312
Warrants issued in conjunction with private
placements and financing 17,548,760 3,830,281
Warrants issued for services rendered 1,243,565 1,108,898
Series A Convertible Preferred Stock 19,469,045 18,449,674
Convertible debt 17,272,723 239,739
------------ ------------
Total 71,580,942 32,994,878
============ ============
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 December 31, 2004 is as follows (in
thousands):
Initial reserve $ 681
Paid (476)
-----------
Balance $ 205
===========
Of the remaining balance, $47,000 will be paid quarterly from the fourth quarter
of 2005 through the third quarter of 2006. The balance of $17,000 will be paid
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 December 31, Nine months ended December 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Americas $ 5,816 $ 3,275 $ 15,586 $ 10,489
Europe 1,263 1,615 3,269 2,646
Asia 123 -- 314 --
------------ ------------ ------------ ------------
Total revenues $ 7,202 $ 4,890 $ 19,168 $ 13,135
============ ============ ============ ============
December 31, March 31,
2004 2004
------------ ------------
Long-lived assets:
Americas $ 52,797 $ 40,783
Europe 26 30
------------ ------------
Total identifiable assets $ 52,823 $ 40,813
============ ============
In the three months ended December 31, 2004, revenues from three customers
represents 2%, 3% and 1%, respectively, of total revenues. In the nine months
ended December 31, 2004, revenues from these three customers represents 4%, 3%
and 4% of total revenues, and accounts receivable balances at December 31, 2004
from these customers represent 10%, 0% and 3%, respectively, 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
18
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.
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 Nine months ended
December 31, December 31,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Retail Management Solutions $ 2,655 $ 4,602 $ 7,683 $ 12,071
Store Solutions 3,318 288 7,395 1,064
Multi-channel Retail 1,229 -- 4,090 --
------------- ------------- ------------- -------------
Total revenues $ 7,202 $ 4,890 $ 19,168 $ 13,135
============= ============= ============= =============
Operating income (loss):
Retail Management Solutions $ (670) $ 300 $ (2,736) $ (75)
Store Solutions 15 (299) (812) (938)
Multi-channel Retail (610) -- (1,331) --
Other (see below) (1,025) (613) (4,202) (2,328)
------------- ------------- ------------- -------------
Total operating income (loss) $ (2,290) $ (612) $ (9,081) $ (3,341)
============= ============= ============= =============
Other operating loss:
Depreciation $ (4) $ (4) $ (13) $ (29)
Administrative costs and other
non-allocated expenses (1,021) (609) (4,189) (2,300)
------------- ------------- ------------- -------------
Total other operating loss $ (1,025) $ (613) $ (4,202) $ (2,328)
============= ============= ============= =============
December 31, March 31,
2004 2004
------------- -------------
Identifiable assets:
Retail Management Solutions $ 30,918 $ 32,757
Store Solutions 20,010 3,790
Multi-channel Retail 9,687 10,093
------------- -------------
Total identifiable assets $ 60,615 $ 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 nine months ended December 31, 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.
In addition, during the three months and nine month ended December 31, 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 nine months ended December 31, 2003.
19
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Effective April 1, 2004, we entered into an agreement with Newco PTY, a company
owned by QQQ ("Newco"). 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 a three year option to purchase the OnePointe product line of our
Store Solutions business unit ("OnePointe") 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/Island Pacific) for the twelve months ended March 31, 2006
and 70%/30% (Newco/Island Pacific) for the twelve months ended April 1, 2007.
Newco may exercise its option at anytime with thirty day written notice. We
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/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. At
September 30, 2004, we have incurred Newco's total losses of $56,000. No
additional losses have been incurred during the three months ended December 31,
2004. As of December 31, 2004, the book value of OnePointe was approximately
$2.2 million.
In the third quarter of fiscal 2002 we sold certain assets of our Australian
subsidiary to the former management of such subsidiary, and ceased 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 required 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, Debora Hintz, an employee who was out on disability/worker's
compensation leave, 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
responded appropriately to both the wage claim and the discrimination
allegations, both of which we believe 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. A
mandatory settlement conference in this matter is scheduled for April 14, 2005.
We have initiated settlement discussions with Ms. Hintz but at this time
management cannot predict the outcome of the discussion or any liability.
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 will 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. ("5R Online"), 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 involvement in a development
arrangement between us and 5R Online. 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 our complaint was due on August 9, 2004. A
settlement was entered, which was conditioned upon payment by the defendants of
a first installment of $50,000. The defendants failed to pay the first
installment and the litigation is therefore proceeding.
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. We believe the
claims made against RTI are without merit and we intend to vigorously defend
them.
On November 30, 2004, MPB Contractors, Inc. ("MPB") filed a lawsuit against our
subsidiary, IPI Acquisition, Inc., a Delaware corporation (now known as Page
Digital Incorporated) as successor in interest to Page Digital Incorporated, a
Colorado corporation ("Page"), in the District Court in the County of Arapahoe,
in the State of Colorado. The lawsuit alleges that Page breached the contract
between Page and MPB dated on or about December 1, 2000, pursuant to which MPB
provided tenant finish services to Page at 6450 South Revere Parkway, Englewood,
Colorado, by failing to pay $86,793.00 due under such contract. The response was
due on December 20, 2004. The Company has demanded that Lawrence Page and David
Joseph indemnify the Company in this matter based on the obligations in the
Agreement of Merger and Plan of Reorganization by and among the Company, Page
and IPI Acquisition, Inc. dated November 20, 2003. Lawrence Page and David
Joseph have agreed to defend and indemnify the Company. An answer to the
compliant and counterclaim was filed by counsel to Mr. Page. MPB filed a reply
to the counter-claim denying certain allegations and asserting certain
affirmative defenses on January 10, 2005.
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 December 31, 2004 and March 31, 2004 are
amounts due from our 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 directors' and former executive officer, 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 December 31, 2004 and 2003,
respectively, and $600,000 and $0 for the nine months ended December 31, 2004
and 2003, respectively. A security deposit of $170,000 relating to this lease is
included in other long-term assets at December 31, 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
December 31, 2004 and 2003, the expense for this service was $108,000 and
$113,000, respectively. For the nine months ended December 31, 2004 and 2003,
the expense for this service was $327,000 and $187,000, respectively. We
terminated our consulting arrangement with Mr. Schechter effective as of January
1, 2005 (see Note 18 - Subsequent Events below).
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 December 31, 2004 and 2003, the expense for
this service was $0 and $10,000, respectively. For the nine months ended
December 31, 2004 and 2003, the expense for this service was $0 and $118,000,
respectively.
21
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 it in accrued expenses at
September 30, 2004. As of December 31, 2004, the outstanding balance is $0.
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 December 31, 2004, the
outstanding balance is $0.
NOTE 17 - RESTATEMENT OF FINANCIAL STATEMENTS
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 filed the following revised filings on November 16, 2004: 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 determined that prior presentation 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 and related
amortization;
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, April '03, May '03 and March
'04 convertible debentures;
6. Recognition and amortization of debt discount on the March
'03, April '03, May '03 and Toys "R" Us, Inc. convertible debt
as interest expense;
7. Capitalization of legal fees related to the acquisition of
Page Digital and RTI;
8. Reclassify amortization of software technology to cost of
product revenue;
9. Record fair value of RTI's stock options assumed at
acquisition;
10. Reclassificiation of impairment of prepaid development expense
from other expense to selling, general and administrative
expense; and
11. Reclassification of a gain on debt forgiveness from
extraordinary item to other income.
NOTE 18 - SUBSEQUENT EVENTS
Ran Furman resigned from the position of Chief Financial Officer effective
January 10, 2005. We entered into a separation agreement dated January 7, 2005
to pay Mr. Furman $50,000 in severance over the next four months and $5,059 of
accrued vacation. Corinne Bertrand replaced Mr. Furman as our Chief Financial
Officer effective January 10, 2005.
On February 8, 2005, we filed 10-Q/As amending our quarterly reports for the
quarters ended September 30, 2002, December 31, 2002, June 30, 2003 and
September 30, 2003. On February 10, 2005, we filed 10-Q/As amending our
quarterly reports for the quarters ended June 30, 2004 and September 30, 2004.
The foregoing amendments did not include any additional adjustments to our
financial statements; they included additional information and revised the
officers' certifications to be consistent with the current forms required by the
SEC.
On January 5, 2005, we entered into Amendment No. 2 (the "Amendment") to the
Retail Pro Software License Agreement dated December 6, 2002 between Intuit Inc.
and Retail Technologies International, Inc. ("RTI") (the "License Agreement"),
which we were assigned and assumed in connection with its acquisition of RTI.
22
Pursuant to the License Agreement, certain license rights were to expire on
December 6, 2005 and December 6, 2006. The Amendment extends the term of those
license rights as follows: (1) the definition of Existing RTI Customer was
amended to include any person or entity that purchases or licenses Retail Pro
Software from the effective date of the License Agreement through December 31,
2006; the previous definition only applied to customers through December 31,
2005, (2) our license to use the source code for the Retail Pro Software for
support and development purposes was extended one year to December 6, 2007, (3)
our license to the object code for the Retail Pro Software, which provides us
the right to resell the Retail Pro Software, was extended one year to December
6, 2006, and (4) our license to use and distribute upgrades and updates to the
Retail Pro Software developed for or by us was extended one year to December 6,
2007.
Effective January 1, 2005, we terminated our consulting arrangement with Barry
Schechter, our former CEO and Chairman. In connection with the termination of
this arrangement, we agreed to continue to provide certain services and benefits
to Mr. Schechter, including permitting him to continue to use office space in
our La Jolla office and certain of our computer and telecommunications equipment
and furniture and providing certain healthcare benefits, for a period of six
months. Mr. Schechter agreed to continue to be available to our board to advise
them regarding historical information about the company or provide further
services going forward.
23
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