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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 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.
--------------------
(Formerly, SVI Solutions, 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 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 - 37,507,304 shares as of July 31, 2003.
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EXPLANATORY NOTE
This quarterly report on Form 10-Q/A is an amendment to the Form 10-Q filed by
the Registrant on August 14, 2003 for the quarter ended June 30, 2003.
This quarterly report on Form 10-Q/A is being filed to reflect the restatement
of the Registrant's Consolidated Financial Statements (the "Restatement"). The
Restatement reflects the following:
1. Presentation of revenues and cost of revenues as product and
services revenues and corresponding costs of revenues,
2. Reclassification of amortization expense of software products
from depreciation and amortization expense to cost of product
revenue, and
3. Capitalization and amortization of beneficial conversion
interest over the term of the debt.
The Company will not file an amended Form 10-K/A for the year ended March
31, 2003 due to the immateriality of adjustments. However, certain disclosures
that relate to and appear in Form 10-K/A for the year ended March 31, 2003 have
been updated in the restated filings.
THIS REPORT DOES NOT OTHERWISE ATTEMPT TO UPDATE THE INFORMATION PROVIDED HEREIN
BEYOND THE ORIGINAL FILING DATE.
TABLE OF CONTENTS
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003
(as restated) and March 31, 2003..............................3
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2003 (as restated) and 2002.............4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2003 (as restated) and 2002.............5
Notes to Condensed Consolidated Financial Statements ...............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........31
Item 4. Controls and Procedures............................................32
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings..................................................32
Item 2. Changes in Securities and Use of Proceeds..........................34
Item 4. Submission of Matters to a Vote of Security Holders................34
Item 6. Exhibits and Reports on Form 8-K...................................35
SIGNATURES....................................................................36
CERTIFICATIONS................................................................37
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, MARCH 31,
2003 2003
--------- ---------
(As restated -
See Note 11)
ASSETS
Current assets:
Cash and cash equivalents $ 7,053 $ 1,319
Accounts receivable, net of allowance for doubtful
accounts of $382 and $372, respectively 6,708 3,974
Income tax refund receivable 845 --
Other receivables, including $0 and $3 from related
parties, respectively 79 97
Inventories 86 91
Current portion of non-compete agreements 917 917
Net assets from discontinued operations -- 309
Prepaid expenses and other current assets 293 225
--------- ---------
Total current assets 15,981 6,932
Note receivable 180 --
Property and equipment, net 337 380
Purchased and capitalized software, net 15,121 14,804
Goodwill, net 14,795 14,795
Non-compete agreements, net 439 668
Other assets 64 58
--------- ---------
Total assets $ 46,917 $ 37,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due to stockholders $ 1,345 $ 1,320
Convertible note 500 500
Current portion of long-term debts 951 149
Accounts payable 2,211 2,941
Accrued expenses 4,253 4,517
Deferred revenue 3,044 1,561
Income tax payable 271 --
--------- ---------
Total current liabilities 12,575 10,988
Convertible debentures, net of debt discount of
$1,371 and $1,340, respectively 1,909 2,726
Other long-term liabilities 72 81
--------- ---------
Total liabilities 14,556 13,795
--------- ---------
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 authorized and outstanding
with a stated value of $100 per share, dividends in
arrears of $1,523 and $1,269, respectively 14,100 14,100
Committed common stock - 2,500,000 shares 1,383 1,383
Common stock, $.0001 par value; 100,000,000 shares
authorized; 36,906,490 and 42,199,632 shares issued;
and 36,906,490 and 31,499,632 shares outstanding 5 4
Additional paid in capital 57,059 57,751
Accumulated deficit (40,186) (40,490)
Treasury stock, at cost; shares - 10,700,000 -- (8,906)
--------- ---------
Total stockholders' equity 32,361 23,842
--------- ---------
Total liabilities and stockholders' equity $ 46,917 $ 37,637
========= =========
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 JUNE 30,
2003 2002
--------- ---------
(As restated -
See Note 11)
Revenues:
Product $ 3,186 $ 2,124
Services 2,280 2,769
--------- ---------
Total revenues 5,466 4,893
Cost of revenues:
Product 1,224 1,086
Services 1,013 1,685
--------- ---------
Total cost of revenues 2,237 2,771
-------- --------
Gross profit 3,229 2,122
Expenses:
Application development 137 901
Depreciation and amortization 285 316
Selling, general and administrative 2,796 1,937
--------- ---------
Total expenses 3,218 3,154
--------- ---------
Operating income (loss) 11 (1,032)
Other income (expense):
Interest income 26 1
Other expense (11) (1)
Interest expense (292) (408)
--------- ---------
Total other expense (277) (408)
--------- ---------
Loss before provision for income taxes (266) (1,440)
Provision for income tax benefits 570 --
--------- ---------
Income (loss) before cumulative effect of a change in accounting principle 304 (1,440)
Cumulative effect of changing accounting principle - goodwill
valuation under SFAS 142 -- (627)
--------- ---------
Income (loss) from continuing operations 304 (2,067)
Income from discontinued operations of the SVI Training Products, Inc.
subsidiary, net of applicable income taxes -- 50
--------- ---------
Net income (loss) 304 (2,017)
Cumulative preferred dividends (272) (254)
---------- ---------
Net income (loss) available to common stockholders $ 32 $ (2,271)
========= =========
Basic income (loss) per share:
Income (loss) before cumulative effect of a change in accounting principle $ 0.01 $ (0.05)
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- (0.02)
--------- ---------
Income (loss) from continuing operations 0.01 (0.07)
Income from discontinued operations -- --
Cumulative preferred dividends (0.01) (0.01)
--------- ---------
Net income (loss) available to common stockholders $ -- $ (0.08)
========= =========
Diluted income (loss) per share:
Income (loss) before cumulative effect of a change in accounting principle $ -- $ (0.05)
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- (0.02)
--------- ---------
Income (loss) from continuing operations -- (0.07)
Income from discontinued operations -- --
Cumulative preferred dividends -- (0.01)
--------- ---------
Net income (loss) available to common stockholders $ -- $ (0.08)
========= =========
Weighted-average common shares outstanding:
Basic 31,615 28,512
Diluted 64,743 28,512
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)
THREE MONTHS ENDED JUNE 30,
2003 2002
-------- --------
(As restated -
See Note 11)
Cash flows from operating activities:
Net income (loss) $ 304 $(2,017)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 868 1,034
Cumulative effect of a change in accounting principle - goodwill
valuation under SFAS 142 -- 627
Amortization of debt discount and conversion option 170 99
Common stock issued for services rendered 25 15
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (2,716) (965)
Income tax refund receivable (845) --
Inventories 5 4
Prepaid expenses and other assets (74) (59)
Accounts payable and accrued expenses (866) (29)
Income tax payable 271 (1)
Accrued interest on stockholders' loans, convertible notes and term loan 57 271
Deferred revenue 1,483 (350)
-------- --------
Net cash used for operating activities (1,318) (1,371)
-------- --------
Cash flows from investing activities:
Purchases of furniture and equipment (11) (26)
Capitalized software development costs (900) (194)
-------- --------
Net cash used for investing activities (911) (220)
-------- --------
Cash flows from financing activities:
Sale of common stock, net of offering costs 7,264 --
Decrease in amount due to stockholders, net -- (70)
Proceeds from convertible debts 700 874
Proceeds from short-term loan from related party -- 70
Payments on short-term loan from related party -- (70)
-------- --------
Net cash provided by financing activities 7,964 804
-------- --------
Effect of exchange rate changes on cash (1) (2)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,734 (789)
Cash and cash equivalents, beginning of period 1,319 1,309
-------- --------
Cash and cash equivalents, end of period $ 7,053 $ 520
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 61 $ 10
Supplemental schedule of non-cash investing and financing activities:
Issued 100,000 shares of common stock for services in connection
with an equity financing in December 2000 -- $ 45
Issued 140,000 shares of common stock to pay for penalty for late
effectiveness of the registration statement -- $ 60
Received 262,500 shares of common stock related to early termination
of a service contract -- $ (210)
Issued 9,849 and 151,666 shares of common stock as payments for bonuses
and services rendered in prior periods $ 8 $ 66
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 (as
restated) 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 June 30,
2003 and for all the periods presented have been made.
Certain amounts in the prior period have been reclassified to conform to the
presentation for the three months ended June 30, 2003. 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, 2003.
The results of operations for the three months ended June 30, 2003 and 2002 are
not necessarily indicative of the results to be expected for the full year.
NOTE 2 - DISCONTINUED OPERATIONS
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 target. We received a promissory
note for the amount of $180,000 and the earn-out payments, if any, will be made
in quarterly installments following each fiscal year, bearing an annual interest
rate of 5%. The sale of the Training Products subsidiary resulted in a loss of
$129,000, net of estimated income taxes, which was accrued for at March 31,
2003. Accordingly, the operating results of the Training Products subsidiary for
the three months ended June 30, 2002 are restated as discontinued operations.
NOTE 3 - INVENTORIES
Inventories consist of finished goods and are stated at the lower of cost or
market, on a first-in, first-out basis.
NOTE 4 - CONVERTIBLE DEBTS
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
During the quarter ended June 30, 2001, we entered into subscription agreements
with a limited number of accredited investors related to existing stockholders
for gross proceeds of $1.3 million. Each unit consisted of a convertible
promissory note to purchase 250 shares of our common stock for each $1,000
borrowed by us. The holders of the notes have the option to convert the unpaid
principal and interest to common stock at any time at a conversion price of
$0.60 per share. The notes mature on September 30, 2003 and earn interest at
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest, to be paid at maturity. We do not have a right to prepay
the notes.
We also issued to these investors warrants to purchase an aggregate of 1,600,000
shares at $0.60 per share, expiring July 19, 2007. The warrants are not callable
by us.
We filed a registration statement for the resale of all shares held by or
obtainable by these and other investors. The registration statement was declared
effective on July 18, 2003.
CONVERTIBLE NOTE DUE TO UNION BANK OF CALIFORNIA
Pursuant to the Discounted Loan Payoff Agreement dated March 31, 2003, we issued
to Union Bank of California a $500,000 unsecured, non-interest bearing
convertible note payable in either cash or shares of common stock, at our
option. If we elect to pay the principal amount or any portion thereof in shares
of common stock, the shares will be computed on a price per share of 80% of the
average share closing price of our common stock for the ten trading day period
immediately preceding the payoff date. The maturity date is March 31, 2004.
6
CONVERTIBLE DEBENTURES (AS RESTATED)
In March 2003, we entered into a Securities Purchase Agreement for the sale of
convertible debentures to a group of investors (the "March '03 Debenture
Investors"). The debentures are convertible into shares of our common stock at a
conversion price of $1.02 per share, for the total proceeds of $3.5 million. The
debentures mature in May 2005 and bear an interest rate of 9% per annum.
Interest is payable on a quarterly basis commencing on June 1, 2003, in cash or
shares of common stock, at our option. If certain conditions are met, we have
the right, but not the obligation, to redeem the debentures at 110% of their
face value, plus accrued interest. Commencing in February 2004, we must redeem
$219,000 per month of the debentures. Furthermore, if the daily volume weighted
average price of our common stock on the American Stock Exchange exceeds $1.02
by more than 200% for 15 consecutive trading days, we will have the option to
cause the investors to convert their debentures into common stock. Subsequent to
June 30, 2003, one of the investors converted $500,000 of its debenture into
488,472 shares of our common stock.
The investors were granted the right of first refusal to participate in our
future offerings of common stock or equivalent securities so long as any one of
them owns at least 5% of the debentures purchased by them. Monthly redemptions
shall be in cash, or, provided certain conditions are met, such as an effective
registration statement, in shares of common stock. If we elect to pay in shares
of common stock, the conversion price shall be the lessor of $1.02 and 90% of
the average of the daily volume weighted average price of the common stock for
the 20 trading days immediately prior to the redemption date.
We filed a registration statement covering 130% of the common stock issuable
upon the conversion of the debentures and warrants. The registration statement
was declared effective on July 18, 2003.
Additional debentures, aggregating up to $2 million, will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures amounted to $715,000 and is being amortized over the
term of the debentures. We recognized an interest expense of $83,000 in the
quarter ended June 30, 2003.
The March '03 Debenture Investors also received warrants to purchase up to, in
the aggregate, 1,572,858 shares of common stock with an exercise price equal to
$1.02 per share. The warrants expire five years from the date of issuance. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants was $625,000 and is being
amortized as interest expense over the term of the convertible debentures. We
recorded an interest expense of $72,000 in the quarter ended June 30, 2003.
In April 2003, we entered into a Securities Purchase Agreement with an investor
(the "April '03 Debenture Investor") for the sale of a 9% debenture, convertible
to shares of our common stock at a conversion price of $1.02, for the gross
proceeds of $400,000. Interest is due on a quarterly basis commencing on June 1,
2003, payable in cash or shares of common stock at our option. Commencing on
February 1, 2004, we must redeem $20,000 per month of the debenture. The
debenture matures in October 2005. The April '03 Debenture Investor was also
granted registration rights under a registration rights agreement, and certain
other rights similar to those granted to the March '03 Debenture Investors.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures amounted to $69,000 and is being amortized over the
term of the debt. We recognized this interest expense of $8,000 in the quarter
ended June 30, 2003.
The debenture issued to the April '03 Debenture investor was accompanied by a
five-year warrant to purchase 156,311 shares of our common stock with an
exercise price of $1.02 per share. We allocated the proceeds received from debt
or convertible debt with detachable warrants using the relative fair value of
the individual elements at the time of issuance. The amount allocated to the
warrants was determined to be $63,000 and is being amortized as interest expense
over the term of the convertible debentures. We recorded an interest expense of
$7,000 in the quarter ended June 30, 2003.
7
In May 2003, we entered into an agreement with a group of investors (the "May
'03 Debenture Investors") for the sale of 9% debentures, convertible into shares
of our common stock at a conversion price of $1.02 for the gross proceeds of
$300,000. Interest is due on a quarterly basis commencing on June 1, 2003,
payable in cash or shares of common stock at our option. Commencing on February
1, 2004, we must redeem $19,000 per month of the debentures. The debentures
mature in May 2005. The May '03 Debenture Investors were also granted
registration rights under a registration rights agreement, and certain other
rights similar to those granted to the March '03 Debenture Investors.
Additional debentures aggregating up to $300,000 will be sold to the May '03
Debenture Investors in a second closing, if within one year after the date of
first sale of debentures there occurs a period of 15 consecutive trading days
during which the daily volume weighted average closing price of our common stock
is maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
In accordance with generally accepted accounting principles, the difference
between the conversion price of $1.02 and our stock price on the date of
issuance of the debentures amounted to $38,000 and is being amortized over the
life of the debt. We recognized this interest expense of $3,000 in the quarter
ended June 30, 2003.
These debentures were accompanied by five-year warrants to purchase an aggregate
of 101,112 shares of common stock with an exercise price of $1.02 per share. We
allocated the proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants is $39,000 and is being amortized
as interest expense over the term of the convertible debentures. We recorded an
interest expense of $3,000 in the quarter ended June 30, 2003.
In June 2003, we entered into an agreement with various institutional investors
("Common Stock Institutional Investors") for the sale of 5,275,000 shares of
common stock at a per share price of $1.50 for an aggregate purchase price of
$7.9 million. In connection with this financing, we paid Roth Capital Partners,
LLC, as placement agent, cash compensation of 8% of the proceeds and issued a
five-year warrant to purchase 527,500 shares of common stock at an exercise
price of $1.65 per share. We also issued five-year warrants to purchase 375,000
shares of common stock at an exercise price of $1.65 to the March '04 Debenture
Investors and May '04 Debenture Investors in order to obtain their requisite
consents and waivers of rights they possessed to participate in the financing.
As of June 30, 2003 and March 31, 2003, the balance of all the 9% convertible
debentures was as follows (in thousands):
June 30, March 31,
2003 2003
---------- ----------
(As restated)
Convertible debentures $ 4,231 $ 3,500
Less: unamortized debt discount 1,371 625
---------- ----------
2,860 2,875
Current portion 951 149
---------- ----------
Long-term portion $ 1,909 $ 2,726
========== ==========
NOTE 5 - INCOME TAX BENEFITS
Income tax benefits in the quarter ended June 30, 2003 include $845,000 income
tax refund receivable; offset in part by income tax payable relating to prior
periods of $271,000. The net amount of $570,000 has been recorded as income
under provision for income taxes in the consolidated statement of operations.
The income tax refund results from carrying back net operating losses in the
last three years to prior periods.
8
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could indicate
that their value has diminished or been impaired. Other intangible assets will
continue to be amortized over their estimated useful lives. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.
Effective April 1, 2002, we adopted SFAS 142 and ceased amortization of goodwill
recorded in business combinations prior to June 30, 2001. We evaluate the
remaining useful lives of these intangibles on an annual basis to determine
whether events or circumstances warrant a revision to the remaining period of
amortization.
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $627,000 as a
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002.
NOTE 7 - EARNINGS (LOSS) PER SHARE (AS RESTATED)
Basic earnings (loss) per common share are calculated by dividing net income
(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 quarter ended June 30, 2003
and 2002 is calculated as follows (in thousands):
Three months ended June 30,
2003 2002
---------- -----------
(As restated)
Net income (loss) available to
common stockholders $ 32 $ (2,271)
========== ===========
Basic weighted average shares 31,615 28,512
Dilutive common stock equivalent 33,128 --
---------- -----------
Diluted weighted average shares 64,743 28,512
========== ===========
Basic and diluted earnings (loss)
per share available to common
stockholders $ -- $ (0.08)
========== ===========
The following potential common shares have been excluded from the computation of
diluted net loss per share for the quarter ended June 30, 2002, because the
effect would have been anti-dilutive:
Outstanding options under our stock option plans 4,318,346
Outstanding options granted outside our stock option plans 1,046,812
Warrants issued in conjunction with private placements 5,665,086
Warrants issued for services rendered 804,002
Convertible notes due to stockholders 1,098,047
Convertible note due to a major customer 2,500,000
Series A Convertible Preferred Stock 18,259,500
-----------
Total 33,691,793
===========
9
NOTE 8 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA (AS RESTATED)
We are a provider of software solutions and services to the retail industry. We
provide high value innovative solutions that help retailers understand, create,
manage and fulfill consumer demand. Our solutions and services have been
developed specifically to meet the needs of the retail industry. Our solutions
help retailers improve the efficiency and effectiveness of their operations and
build stronger, longer lasting relationships with their customers. We currently
operate in the United States and the United Kingdom. The geographic distribution
of our revenues and long-lived assets are as follows (in thousands):
Quarters Ended June 30,
2003 2002
---------- ----------
Revenues:
United States $ 4,925 $ 4,429
United Kingdom 541 464
---------- ----------
Total revenues $ 5,466 $ 4,893
========== ==========
June 30, March 31,
2003 2003
---------- ----------
(Restated)
Identifiable assets:
United States $ 45,835 $ 37,146
United Kingdom 1,082 491
---------- ----------
Total identifiable assets $ 46,917 $ 37,637
========== ==========
For the three months ended June 30, 2003 and 2002, revenues from one customer,
Toys "R" Us, Inc., accounted for 24% and 42% of total revenues, respectively.
We organized our business into two segments as follows:
o RETAIL MANAGEMENT SOLUTIONS - offer 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 Solutions include merchandise management that optimizes
workflow and provides the highest level of data integrity. This module
supports all operational areas of the supply chain including planning,
open-to-buy purchase order management, forecasting, warehouse and store
receiving distribution, transfers, price management, performance
analysis and physical inventory. In addition, Retail Management
Solutions include 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 Solutions
offer 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 - offer suite of applications builds on our long
history of providing multi-platform, client server in-store solutions.
We market this set of applications under the name "OnePointe," and
"OnePointe International" which is a full business to consumer software
infrastructure encompassing a range of integrated store solutions.
"OnePointe" is a complete application providing all point-of-sale
("POS") and in-store processor (server) functions for traditional
"brick and mortar" retail operations.
10
A summary of the revenues and operating income (loss) attributable to each of
these business units and identifiable assets is as follows (in thousands):
Three months ended June 30,
2003 2002
--------- ---------
(As restated)
Revenues:
Retail Management Solutions $ 5,064 $ 4,445
Store Solutions 402 448
--------- ---------
Total revenues $ 5,466 $ 4,893
========= =========
Operating income (loss):
Retail Management Solutions $ 969 $ (4)
Store Solutions (224) (381)
Other (see below) (734) (647)
--------- ---------
Total operating income (loss) $ 11 $ (1,032)
========= =========
Depreciation:
Retail Management Solutions $ 30 $ 49
Store Solutions 9 13
Other (see below) 17 25
--------- ---------
Total depreciation $ 56 $ 87
========= =========
Other operating loss:
Depreciation $ (17) (25)
Administrative costs and other non-allocated expenses (717) (622)
--------- ---------
Total other operating loss $ (734) $ (647)
========= =========
June 30, March 31,
2003 2003
--------- ---------
(Restated)
Identifiable assets:
Retail Management Solutions $ 34,151 $ 31,953
Store Solutions 4,132 4,404
--------- ---------
Total $ 38,283 $ 36,357
========= =========
Goodwill, net of amortization:
Retail Management $ 13,903 $ 13,903
Store Solutions 892 892
--------- ---------
Total $ 14,795 $ 14,795
========= =========
Operating income (loss) in Retail Management Solutions and Store Solutions
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 management does
not consider in evaluating the operating income of the business unit.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 further clarifies accounting for derivative
instruments. We believe the adoption of this statement will have no material
impact on our consolidated financial statements.
11
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. We do not believe the
adoption of SFAS 150 will have a material impact on our consolidated financial
statements.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. These matters are still pending and the parties have agreed to resolve
all claims in binding arbitrations, scheduled for September 2003.
We decided in the third quarter of fiscal 2002 to sell certain assets of our
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was, however, subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have reserved $187,000 as our potential exposure.
The receiver has also claimed that we are obligated to it for inter-company
balances of $636,000, but we do not believe any amounts are owed to the
receiver, who has not as of the date of this report acknowledged the monthly
corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against us with the Department
of Fair Employment and Housing, alleging harassment and sexual orientation
discrimination. We have responded appropriately to both the wage claim and the
discrimination allegations, which we believe lack merit based on present
information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claims damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertain to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. At this time, we cannot predict the merits of this case because it is
in its preliminary state and discovery has not yet commenced. However, SVI
Retail intends to defend vigorously the action and possibly file one or more
counter-claims. The U.S. District Court of Ohio has proper jurisdiction over us,
and a trial is scheduled for May 2004.
12
In mid-2002, we were the subject of an adverse judgment entered against us in
favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On December 16, 2002, Chapter 11 Debtors Natural Wonders, Inc. and World of
Science, Inc. (collectively "Debtors") filed an adversary proceeding against our
subsidiary SVI Retail, Inc. seeking to avoid and recover preferential transfers.
The Debtors sought recovery of approximately $84,000, which it had previously
paid to SVI Retail for goods and services rendered. On March 12, 2003, the
Debtors and SVI Retail settled the adversary proceeding for $18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. A hearing on Sabica's and Island Pacific's motion to
quash occurred on May 22, 2003 which was subsequently denied.
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 11 - RESTATEMENT
Subsequent to the issuance of our condensed consolidated financial statements
for the three months ended June 30, 2003, our management determined that:
o The revenues and cost of revenues should be presented separately as
product and services revenues,
o The amortization of capitalized software should be reported as cost of
product revenue, and
o The beneficial conversion interest should be capitalized and amortized
over the term of the convertible debt.
13
As a result, the condensed consolidated financial statements for the three
months ended June 30, 2003 have been restated from the amounts previously
reported. A summary of the significant effects of the restatement is as follows:
As Previously Restatement As
Reported Adjustment Restated Reference
------------ ------------- ------------ -----
At June 30, 2003:
Convertible debentures $ 2,636 $ (727) $ 1,909 [1]
Total liabilities 15,283 (727) 14,556
Additional paid-in capital 56,351 708 57,059 [2]
Accumulated deficit (40,205) 19 (40,186) [5]
For the three-month period ended June 30, 2003:
Cost of revenues $ 1,654 $ 583 $ 2,237 [3]
Gross profit 3,812 (583) 3,229
Depreciation and amortization 868 (583) 285 [4]
Total expenses 3,801 (583) 3,218
Interest expense (311) 19 (292) [5]
Net income 285 19 304
Net income available to common stockholders 13 19 32
1. Convertible debentures were revised to reflect the proper
capitalization of beneficial conversion interest and debt discount
charges.
2. Additional paid-in capital was revised to reclassify a beneficial
conversion charge, previously charged against additional paid-in
capital.
3. Cost of revenues was revised to include amortization of capitalized
software in the amount of $583,000 in the three-month period ended June
30, 2003, previously reported as depreciation and amortization expense.
4. Depreciation and amortization was revised to re-classify amortization
of capitalized and purchased software in the amount of $583,000 to cost
of revenues.
5. Interest expense and accumulated deficit were revised to include
amortization of beneficial conversion interest charges totaling $88,000
and capitalize $107,000 beneficial conversion interest charges
previously expensed.
14
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 MATTER DISCUSSED IN THIS REPORT ARE
"FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY FOR THE SAFE HARBOR FROM
LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED BY THE CONTEXT OF
THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE COMPANY ("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/A. 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, 2003, 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, or maintenance services. Application software license fees
are dependent upon the sales volume of our customers, the number of users of the
application(s), and/or the number of locations in which the customer plans to
install and utilize the application(s). As the customer grows in sales volume,
adds additional users and/or adds additional locations, we charge additional
license fees. 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 or 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.
15
RESTATEMENT OF QUARTERLY INFORMATION
As discussed in the notes to condensed consolidated financial statements, we
restated our June 30, 2003 financial statements to:
1. Present revenues and cost of revenues separately as product and
services and corresponding cost of revenues,
2. Report amortization of software products as cost of product revenue,
and
3. Capitalize and recognize amortization of debt discount and beneficial
conversion charge as interest expense over the term of the debt.
These changes had no impact on the net cash flows from operations.
RECENT DEVELOPMENTS
In March 2003, the Board adopted a resolution to change our name to "Island
Pacific, Inc.", and our shareholders approved of this change on July 9, 2003.
In April 2003, we issued $400,000 in 9% convertible debentures to MBSJ
Investors, LLC. Along with these debentures, warrants to purchase 156,311 shares
of common stock were issued to this investor. See "Indebtedness - MBSJ".
In May 2003, we issued $300,000 in 9% convertible debentures to Crestview
Capital Fund I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital
Offshore Fund, Inc. Along with these debentures, warrants to purchase 101,112
shares of common stock were issued to these investors. See "Indebtedness -
Crestview".
Under a securities purchase agreement dated June 27, 2003, we issued a total of
5,275,000 shares of common stock to various institutional investors for an
aggregate purchase price of $7.9 million. See "Financing Transaction below.
In July 2003, Harvey Braun, our CEO, was promoted to the position of Chairman of
the Board following Barry Schechter's resignation. Mr. Schechter remains as a
consultant.
In August 2003, we appointed Ran Furman to the position of Chief Financial
Officer.
DISCONTINUED OPERATIONS
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%. The sale of the Training Products subsidiary resulted in a loss of
$129,000, net of estimated income taxes, which was accrued for at March 31,
2003. The operating results of Training Products for the prior periods are
restated as discontinued operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
16
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements:
o REVENUE RECOGNITION. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of certain
expenses such as commissions and royalties. We follow specific and
detailed guidelines in measuring revenue; however, certain judgments
affect the application of our revenue policy.
We license software under non-cancelable agreements and provide related
services, including consulting, training, customization of software and
customer support. We recognize revenue in accordance with Statement of
Position 97-2 (SOP 97-2), Software Revenue Recognition, as amended and
interpreted by Statement of Position 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to certain transactions, as
well as Technical Practice Aids issued from time to time by the
American Institute of Certified Public Accountants.
Software license revenue, including third party license revenues or
partner products, is generally recognized when a license agreement
has been signed, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. If a software
license contains an undelivered element, the fair value of the
undelivered element is deferred and the revenue recognized once the
element is delivered. We can establish vendor specific objective
evidence ("VSOE") for all elements and not just undelivered elements.
The undeliverable elements are primarily training, consulting and
maintenance services. VSOE of fair value for training and consulting
services is based upon hourly rates charged when those services are
sold separately. VSOE of fair value for maintenance is the price the
customer will be required to pay when it is sold separately (that is,
the renewal rate). In addition, if a software license contains
contingencies, such as specific customer acceptance criteria, right of
return or a cancellation right, the software revenue is recognized
upon the later of customer acceptance or the expiration of the
acceptance period or cancellation right. Typically, payments for our
software licenses are due in installments within twelve months from
the date of delivery. Where software license agreements call for
payment terms of twelve months or more from the date of delivery,
revenue is recognized as payments become due and all other conditions
for revenue recognition have been satisfied. Deferred revenue consists
primarily of prepaid maintenance support revenues, prepaid services
revenue and deferred licenses.
Consulting services are separately priced, are generally available from
a number of suppliers, and are not essential to the functionality of
our software products. Consulting services, which include project
management, system planning, design and implementation, customer
configurations, and training are billed on both an hourly basis and
under fixed price contracts. Consulting services revenue billed on an
hourly basis is recognized as the work is performed. Under most fixed
price contracts, consulting services revenue is recognized using the
percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. In instances
where our fixed price contracts require the achievement of certain
milestones, the milestones are agreed with the customer and revenues
are recognized only when the milestones are delivered and accepted by
the customer.
Customization of software is billed on both an hourly basis and under
fixed price contracts. Customization services billed on an hourly basis
are recognized as the work is performed. Under most fixed price
contracts, customization services revenue is recognized using the
percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. In instances
where our fixed price contracts require the achievement of certain
milestones, the milestones are agreed with the customer and revenues
are recognized only when the milestones are delivered and accepted by
the customer.
Customer support services include post contract support and the rights
to unspecified upgrades and enhancements. Maintenance revenues from
ongoing customer support services are billed on a monthly basis and
recorded as revenue in the applicable month, or on an annual basis with
the revenue being deferred and recognized ratably over the maintenance
period. If an arrangement includes multiple elements, the fees are
allocated to the various elements based upon vendor-specific objective
evidence of fair value.
17
o ACCOUNTS RECEIVABLE. We typically extend credit to our customers.
Software licenses are generally due in installments within twelve
months from the date of delivery. Billings for customer support and
consulting services performed on a time and material basis are due upon
receipt. From time to time software and consulting services are
provided under fixed price contracts where the revenue is only
recognized and the payments are only due upon customer acceptance and
the achievement of certain milestones. Management estimates the
probability of collection of the receivable balances and provides an
allowance for doubtful accounts based upon an evaluation of our
customers ability to pay and general economic conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. For fiscal
2003, we have adopted SFAS No. 142 resulting in a change in the way we
value long-term intangible assets and goodwill. We completed the
initial transitional analysis of goodwill impairment as of April 1,
2002 and recorded an impairment of $0.6 million as a cumulative effect
of a change in accounting principle in the first quarter of fiscal
2003. We no longer amortize goodwill, but instead test goodwill for
impairment on an annual basis or more frequently if certain events
occur. Goodwill is to be measured for impairment by reporting units,
which currently consist of our operating segments. At each impairment
test for a business unit, we are required to compare the carrying value
of the business unit to the fair value of the business unit. If the
fair value exceeds the carrying value, goodwill will not be considered
impaired. If the fair value is less than the carrying value, we will
perform a second test comparing the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. The difference
if any between the carrying amount of that goodwill and the implied
fair value will be recognized as an impairment loss, and the carrying
amount of the associated goodwill will be reduced to its implied fair
value. These tests require us to make estimates and assumptions
concerning prices for similar assets and liabilities, if available, or
estimates and assumptions for other appropriate valuation techniques.
For our intangible assets with finite lives, including our capitalized
software and non-compete agreements, we assess impairment at least
annually or whenever events and circumstances suggest the carrying
value of an asset may not be recoverable based on the net future cash
flows expected to be generated from the asset on an undiscounted basis.
When we determine that the carrying value of intangibles with finite
lives may not be recoverable, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined
by our management to be commensurate with the risk inherent in our
current business model.
RECENT ACCOUNTING PRONOUNCEMENTS
A number of new pronouncements have been issued for future implementation as
discussed in the footnotes to our interim financial statements (see Note 9). As
discussed in the notes to the interim financial statements, the implementation
of some of these new pronouncements is not expected to have a material effect on
our financial position or results of operations.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
REVENUES
Product revenues increased $1.1 million, or 52%, to $3.2 million in the quarter
ended June 30, 2003 from $2.1 million in the quarter ended June 30, 2002,
primarily due to an increase of $0.6 million in new licenses and $0.3 million
from the sale of partner products. Services revenues decreased by $0.5 million,
or 18% to $2.3 million in the quarter ended June 30, 2003 from $2.8 million in
the quarter ended June 30, 2002 primarily due to a $0.7 million decrease from
Toys R Us., Inc. "(Toys"), offset by a $0.2 million increase in services. Total
revenues increased $0.6 million, or 12%, to $5.5 million in the quarter ended
June 30, 2003 from $4.9 million in the quarter ended June 30, 2002 due to the
above factors. Excluding Toys revenues of $1.3 million and $2.0 million in the
quarter ended June 30, 2003 and June 30, 2002, respectively, total revenues were
$4.2 million for the quarter ended June 30, 2003 compared to $2.9 million in the
quarter ended June 30, 2002, a 45% increase.
18
COST OF REVENUES/GROSS PROFIT
Cost of revenues decreased by $0.6 million, or 21%, to $2.2 million in the
quarter ended June 30, 2003 from $2.8 million in the quarter ended June 30,
2002. Cost of product revenues increased $0.1 million, or 9%, to $1.2 million in
the quarter ended June 30, 2003 from $1.1 million in the quarter ended June 30,
2002. Cost of services revenue decreased $0.7 million, or 41%, to $1.0 million
in the quarter ended June 30, 2003 from $1.7 million in the quarter ended June
30, 2002. Total gross profit increased $1.1 million, or 52%, to $3.2 million in
the quarter ended June 30, 2003 from $2.1 million in the quarter ended June 30,
2002. Total gross profit was 58% and 43% for the quarter ended June 30, 2003 and
June 30, 2002, respectively, as product revenues, which carry a higher gross
margin, accounted for 58% of total revenues in the quarter ended June 30, 2003
compared to 43% in the quarter ended June 30, 2002. Gross profit on products was
63% and 48% for the quarters ended June 30, 2003 and June 30, 2002,
respectively, while gross profit on services was 57% and 39% for the quarters
ended June 30, 2003 and June 30, 2002, respectively. Amortization of capitalized
software included in cost of product revenues decreased to $0.6 million in the
quarter ended September 30, 2003 from $0.7 million in the quarter ended
September 30, 2002. The increase in gross margin for product revenues is due
primarily to the increase in product revenues combined with a decrease in the
amortization of capitalized software costs. The increase in gross margin on
services was due to primarily to a decrease, in the quarter ended June 30, 2003,
of the percentage of reimbursed costs, which carry 100% costs, as a percentage
of total services as well as less modification work performed in the quarter
ended June 30, 2003, which generally carry lower margins.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $0.8 million, or 89%, to $0.1
million in the quarter ended June 30, 2003 from $0.9 million in the quarter
ended June 30, 2002. The decrease is primarily due to capitalizing $0.9 million
in development costs on new products. We've made significant investment in our
new products in the current quarter. These new products will be launched during
the second half of the fiscal 2004. In the prior comparative period, research
and development efforts was spent on enhancing existing products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization remained at $0.3 million in the quarter ended June
30, 2003 and June 30, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $0.9 million, or 47%,
to $2.8 million in the three months ended June 30, 2003 from $1.9 million in the
three months ended June 30, 2002. The first quarter of 2002 included a $0.6
million reversal of excess amount accrued in prior periods for a litigation
settlement. Additional, much of the current quarter was spent building the
infrastructure and developing our sales organization.
OPERATING INCOME
Operating income from continuing operations, which included depreciation and
amortization expense, was $0.01 million for the quarter ended June 30, 2003,
compared to a loss from continuing operations of $1.0 million for the quarter
ended June 30, 2002.
INTEREST EXPENSE
Interest expense decreased by $0.1 million, or 25%, to $0.3 million in the
quarter ended June 30, 2003 from $0.4 million in the quarter ended June 30,
2002. The decrease is due to a decrease of $3.7 million in interest-bearing
debts.
PROVISION FOR INCOME TAXES
Provision for income taxes produced an income of $0.6 million at June 30, 2003.
No provision was made at June 30, 2002 due to the availability of tax losses.
The income tax refund of $0.6 million at June 30, 2003 results from amending
prior years' income tax returns to carry back net operating losses incurred in
the past 2 years.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $0.6 million as the
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002. We also evaluated the remaining useful lives of our intangibles in the
quarter ended June 30, 2002 and no adjustments have been made to the useful
lives of our intangible assets. There have been no such charges in the quarter
ended June 30, 2003.
19
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the quarter ended June 30, 2003, we financed our operations using cash on
hand, internally generated cash, proceeds from the sale of common stock and
proceeds from sale of convertible debentures. At June 30, 2003 and March 31,
2003, we had cash of $7.1 million and $1.3 million, respectively.
Operating activities used cash of $1.3 million in the three months ended June
30, 2003 and $1.4 million in the three months ended June 30, 2002. Cash used for
operating activities in the three months ended June 30, 2003 resulted from $3.6
million increase in accounts receivable and other receivables and $0.9 million
decrease in accounts payable and accrued expenses; offset in part by $0.3
million net income, $0.9 million of non-cash depreciation and amortization, $0.2
million of non-cash amortization of debt discount related to the convertible
debentures and $1.5 million increase in deferred revenue.
Investing activities used cash of $0.9 million in the three months ended June
30, 2003 and $0.2 million in the three months ended June 30, 2002. Cash used for
investing activities in the current quarter was primarily for capitalization of
software development costs.
Financing activities provided cash of $8.0 million and $0.8 million in the three
months ended June 30, 2003 and 2002, respectively. The 2003 financing activities
included net proceeds of $7.3 million from the sale of common stock and $0.7
million from the issuance of convertible debentures.
Accounts receivable increased to $6.7 million at June 30, 2003 from $4.0 million
at March 31, 2003. The increase was due to $1.5 million in semi-annual
maintenance service billings for the period of July 2003 through December 2003
(with a balancing liability recorded for deferred revenue), $0.7 million
increase in current receivables from new sales and $0.4 million increase in
unbilled receivables.
We believe that our cash and cash equivalent and funds generated from operations
will provide adequate liquidity to meet our normal operating requirements for at
least the next twelve months. Our future capital requirements depend on many
factors, including our application development, sales and marketing activities.
In addition, we have incurred losses for the last three fiscal years. In the
next twelve months, we anticipate raising additional capital through public or
private equity or debt financings. In the long-term, we anticipate that cash
from operations will be sufficient to provide liquidity for our normal operating
requirements. As such, we do not know whether additional financing will be
available when needed, or available on terms acceptable to us. We may raise
capital through public or private equity or debt financings. If we are unable to
raise the needed funds, we may be forced to curtail some or all of our
activities and we may not be able to grow.
FINANCING TRANSACTION
On June 27, 2003, we entered into an agreement with various institutional
investors ("Common Stock Institutional Investors") for the sale to these
investors of 5,275,000 shares of common stock at a per share price of $1.50 for
an aggregate purchase price of $7.9 million. Pursuant to a registration rights
agreement, we filed a separate registration statement respecting their shares on
July 31, 2003. If this registration statement is not declared effective by the
SEC by September 29, 2003, or upon the occurrence of certain events, we will be
obligated to pay a cash penalty equal to the rate of 2% per month until such
event is cured. As of the date of this report, the registration statement has
not been declared effective.
In connection with this financing, we paid Roth Capital Partners, LLC, as
placement agent, cash compensation of 8% of the proceeds and issued a warrant to
purchase 527,500 shares of common stock at an exercise price of $1.65 per share.
We also issued warrants to purchase 375,000 shares of common stock at an
exercise price of $1.65 to certain holders of our 9% convertible debentures in
order to obtain their requisite consents and waivers of rights they possessed to
participate in the financing.
20
INDEBTEDNESS
UNION BANK
Pursuant to the Discounted Loan Payoff Agreement dated March 31, 2003, we issued
to Union Bank of California a $500,000 unsecured, non-interest bearing
convertible note payable in either cash or shares of common stock, at our
option. If we elect to pay the principal amount or any portion thereof in shares
of common stock, the shares will be computed on a price per share of 80% of the
average share closing price of our common stock for the ten trading day period
immediately preceding payoff date. The maturity date is March 31, 2004.
NATIONAL AUSTRALIA BANK LIMITED
We decided in the third quarter of fiscal 2002 to sell certain assets of the
Australian subsidiary to the former management of such subsidiary, and then
cease Australian operations. Such sale was however subject to the approval of
National Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002. The bank
caused a receiver to be appointed in February 2002 to sell substantially all of
the assets of the Australian subsidiary and pursue collections on any
outstanding receivables. The receiver proceeded to sell substantially all of the
assets for $300,000 in May 2002 to the entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. At June 30, 2002, we have accrued $187,000 as the
maximum amount of our potential exposure. The receiver has also claimed that we
are obligated to it for inter-company balances of $636,000, but we do not
believe any amounts are owed to the receiver, who has not as of the date of this
report acknowledged the monthly corporate overhead recovery fees and other
amounts charged by us to the Australian subsidiary offsetting the amount claimed
to be due.
ICM ASSET MANAGEMENT, INC.
During the quarter ended June 30, 2001, we entered into Subscription Agreements
with a limited number of accredited investors related to existing stockholders
for gross proceeds of $1.3 million. Each unit consisted of a convertible
promissory note to purchase 250 shares of our common stock for each $1,000
borrowed by us. The holders of the notes have the option to convert the unpaid
principal and interest to common stock at any time at a conversion price of
$0.60 per share. The notes mature on September 30, 2003 and earned interest at
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest, to be paid at maturity. We do not have a right to prepay
the notes.
We also issued to these accredited investors warrants to purchase an aggregate
of 1,600,000 shares at $0.60 per share, expiring July 19, 2007. The warrants are
not callable by us.
We filed a registration statement for the resale of all shares held by or
obtainable by these and other investors. The registration statement was declared
effective by the SEC on July 18, 2003.
TOYS "R" US
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million for the
purchase of a non-recourse convertible note and a warrant to purchase 2,500,000
common shares. The purchase price was received in installments through September
27, 2002. The note is non-interest bearing, and the face amount was either
convertible into shares of our stock valued at $0.553 per share or payable in
cash at our option, at the end of the term. In November 2002, the Board decided
that this note will be converted solely for equity and will not be repaid in
cash. The note is due May 29, 2009, or if earlier than that date, three years
after the completion of the development project contemplated in the development
agreement between us and Toys entered into at the same time. We do not have the
right to prepay the convertible note before the due date. The face amount of the
note is 16% of the $1.3 million purchase price as of May 29, 2002, and increases
by 4% of the $1.3 million purchase price on the last day of each succeeding
month, until February 28, 2004, when the face amount is the full $1.3 million
purchase price. The face amount will cease to increase if Toys terminates its
development agreement with us for a reason other than our breach. The face
amount will be zero if we terminate the development agreement due to an uncured
breach by Toys of the development agreement. We have received all of the $1.3
million proceeds.
21
The warrant entitles Toys to purchase up to 2,500,000 of our common shares at
$0.553 per share. The warrant was initially vested as to 400,000 shares as of
May 29, 2002, and vests at the rate of 100,000 shares per month until February
28, 2004. The warrant will cease to vest if Toys terminates its development
agreement with us for a reason other than our breach. The warrant will become
entirely non-exercisable if we terminate the development agreement due to an
uncured breach by Toys of the development agreement. Toys may elect a "cashless
exercise" where a portion of the warrant is surrendered to pay the exercise
price. As of July 31, 2003, 1.8 million shares of the warrant are exercisable.
The note conversion price and the warrant exercise price are each subject to a
10% reduction in the event of an uncured breach by us of certain covenants to
Toys. These covenants do not include financial covenants. Conversion of the note
and exercise of the warrant each require 75 days advance notice. As a result,
under the rules of the SEC, Toys will not be considered the beneficial owner of
the common shares into which the note is convertible and the warrant is
exercisable until 15 days after it has given notice of conversion or exercise,
and then only to the extent of such noticed conversion or exercise. We also
granted Toys certain registration rights for the common shares into which the
note is convertible and the warrant is exercisable, including the right to
demand registration on Form S-3 if such form is available to us, and the right
to include shares into which the note is convertible and the warrant is
exercisable in other registration statements we propose to file.
OMICRON/MIDSUMMER/ISLANDIA
On March 31, 2003, we entered into a securities purchase agreement with
Midsummer Investment, Ltd. ("Midsummer"), Omicron Master Trust ("Omicron"), and
Islandia, L.P. ("Islandia") for the sale to these investors of debentures,
convertible into shares of our common stock at a conversion price equal to
$1.0236 per share, for an aggregate amount of $3.5 million. The investors also
received a five-year warrant to purchase up to, in the aggregate, 1,572,858
shares of common stock with an exercise price equal to $1.0236 per share. The
debentures mature in May 2005 and bear an interest rate of 9% per annum.
Interest is payable on a quarterly basis commencing on June 1, 2003, in cash or
shares of common stock, at our option. If certain conditions are met, we have
the right, but not the obligation, to redeem the debentures at 110% of their
face value, plus accrued interest. Commencing in February 2004, we must redeem
$219,000 per month of the debentures. Furthermore, if the daily volume weighted
average price of our common stock on the American Stock Exchange exceeds $1.0236
by more than 200% for 15 consecutive trading days, we will have the option to
cause the investors to convert their debentures into common stock. In July 2003,
Omicron converted $500,000 of their debenture into 488,472 shares of our common
stock.
The investors were granted the right of first refusal to participate in our
future offerings of common stock or equivalent securities so long as any one of
them owns at least 5% of the debentures purchased by them. Monthly redemptions
shall be in cash, or, provided certain conditions are met, such as an effective
registration statement, in shares of common stock. If we elect to pay in shares
of common stock, the conversion price shall be the lessor of $1.0236 and 90% of
the average of the daily volume weighted average price of the common stock for
the 20 trading days immediately prior to the redemption date.
Pursuant to the registration rights agreement, we filed a registration statement
covering 130% of the common stock issuable upon the conversion of the debentures
and the warrants. The registration statement was declared effective July 18,
2003.
Additional debentures, aggregating up to $2 million, will be sold to these
investors in a second closing, if within one year after the date of first sale
of debentures there occurs a period of 15 consecutive trading days during which
the daily volume weighted average closing price of our common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions. The shares of common stock underlying these debentures and warrants
were not included in the registration statement declared effective in July 2003.
MBSJ INVESTORS, LLC
On April 1, 2003, we entered into a securities purchase agreement with MBSJ
Investors, LLC ("MBSJ") for the sale to MBSJ of a 9% debenture, convertible to
shares of our common stock at a conversion price of $1.0236, for $400,000. This
debenture was accompanied by a five-year warrant to purchase 156,311 shares of
common stock with an exercise price of $1.0236 per share. Interest is due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $20,000 per month of the
debenture. The debenture matures in October 2005. This debenture was accompanied
by a five-year warrant to purchase 156,311 shares of our common stock with an
exercise price of $1.0236 per share. MBSJ was also granted registration rights
under a registration rights agreement, and certain other rights similar to those
granted to Midsummer, Omicron and Islandia.
22
CRESTVIEW
On May 6, 2003, we entered into an agreement with Crestview Capital Fund I,
L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund, Inc.
(collectively, the "Crestview Investors") for the sale to the Crestview
Investors of 9% debentures, convertible into shares of our common stock at a
conversion price of $1.0236 for $300,000. These debentures were accompanied by
five-year warrants to purchase an aggregate of 101,112 shares of common stock
with an exercise price of $1.0236 per share. Interest is due on a quarterly
basis, payable in cash or shares of common stock at our option. Commencing on
February 1, 2004, we must redeem $19,000 per month of the debentures. The
debentures mature in May 2005. These debentures were accompanied by five-year
warrants to purchase an aggregate of 101,112 shares of common stock with an
exercise price of $1.0236 per share. The Crestview Investors were also granted
registration rights under a registration rights agreement, and certain other
rights similar to those granted to Midsummer, Omnicron and Islandia.
Additional debentures aggregating up to $300,000 will be sold to these investors
in a second closing, if within one year after the date of first sale of
debentures there occurs a period of 15 consecutive trading days during which the
daily volume weighted average closing price of our common stock is maintained at
a price at or above $1.75 per share, subject to certain conditions. The shares
of common stock underlying these debentures and warrants were not included in
the registration statement declared effective in July 2003.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including purchase
commitments at June 30, 2003, and the effect such obligations are expected to
have on our liquidity and cash flow in future periods.
For the fiscal years ending March 31,
-------------------------------------------
Contractual Cash Obligations 2004 2005 2006 2007 Thereafter
---------------------------- ------- ------- ------- ------- -------
(in thousands)
Operating leases $ 681 $ 867 $ 360 $ 107 $ 13
Capital leases 156 -- -- -- --
Convertible debentures 801 3,297 604 -- --
Convertible notes due stockholders 1,371 -- -- -- --
Payables aged over 90 days 2,994 -- -- -- --
------- ------- ------- ------- -------
Total contractual cash obligations $6,003 $4,164 $ 964 $ 107 $ 13
======= ======= ======= ======= =======
For the fiscal years ending March 31,
-------------------------------------------
Other Commercial Commitments 2004 2005 2006 2007 Thereafter
---------------------------- ------- ------- ------- ------- -------
(in thousands)
Guarantees $ 187
-------
Total commercial commitments $ 187
-------
BUSINESS RISKS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN OUR FORM 10-K/A FOR THE YEAR ENDED MARCH 31, 2003 AND
FORM 10-Q/A FOR THE QUARTER ENDED JUNE 30, 2003. INVESTING IN OUR COMMON STOCK
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THOSE DESCRIBED BELOW, RISKS AND
UNCERTAINTIES THAT ARE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE
ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING
RISKS OCCUR, OUR BUSINESS COULD BE HARMED, THE PRICE OF OUR COMMON STOCK COULD
DECLINE AND OUR INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT. SEE THE NOTE
REGARDING FORWARD-LOOKING STATEMENTS INCLUDED AT THE BEGINNING OF ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS IN THIS FORM 10-Q/A.
OUR SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS MAKES IT DIFFICULT
FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of sales cycles in our business makes it difficult to evaluate the
effectiveness of our sales strategies. Our sales cycles historically has ranged
from three to twelve months, which has caused significant fluctuations in
revenues from period to period. Due to our difficulties in completing new
application software sales in recent periods and our refocused sales strategy,
it is difficult to predict revenues and properly budget expenses.
23
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND THEY MAY
CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the past and
may fluctuate in the future as a result of several factors, many of which are
outside of our control. If revenue declines in a quarter, our operating results
will be adversely affected because many of our expenses are relatively fixed. In
particular, sales and marketing, application development and general and
administrative expenses do not change significantly with variations in revenue
in a quarter. It is likely that in some future quarter our revenues or operating
results will be below the expectations of public market analysts or investors.
If that happens, our stock price will likely decline.
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD, WHICH MAKES IT DIFFICULT TO PREDICT
FUTURE RESULTS.
Factors outside our control that could cause our revenue to fluctuate
significantly from period to period include:
o the size and timing of individual orders, particularly with respect to
our larger customers;
o general health of the retail industry and the overall economy;
o technological changes in platforms supporting our software products;
and
o market acceptance of new applications and related services.
In particular, we usually deliver our software applications when contracts are
signed, so order backlog at the beginning of any quarter may represent only a
portion of that quarter's expected revenues. As a result, application license
revenues in any quarter are substantially dependent on orders booked and
delivered in that quarter, and this makes it difficult for us to accurately
predict revenues. We have experienced, and we expect to continue to experience,
quarters or periods where individual application license or services orders are
significantly larger than our typical application license or service orders.
Because of the nature of our offerings, we may get one or more large orders in
one quarter from a customer and then no orders the next quarter.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD, WHICH COULD AFFECT QUARTERLY
RESULTS AND OUR STOCK PRICE.
If we incur additional expenses in a quarter in which we do not experience
increased revenue, our results of operations would be adversely affected and we
may incur losses for that quarter. Factors that could cause our expenses to
fluctuate from period to period include:
o the extent of marketing and sales efforts necessary to promote and sell
our applications and services;
o the timing and extent of our development efforts; and
o the timing of personnel hiring.
IT IS DIFFICULT TO EVALUATE OUR PERFORMANCE BASED ON PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
The many factors, which can cause revenues and expenses to vary, make meaningful
period to period comparisons of our results difficult. We do not believe period
to period comparisons of our financial performance are necessarily meaningful,
and you cannot rely on them as an indication of our future performance.
24
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from October
through December of each year as a result of retailers' focus on the holiday
retail-shopping season. This can negatively affect revenues in our third fiscal
quarter and in other quarters, depending on our sales cycles.
OUR DEBT COULD ADVERSELY AFFECT US.
As of July 31, 2003, our debt is as follows:
o $3.0 million in convertible debentures issued on March 31, 2003 to
Midsummer Investment, Ltd., Omicron Master Trust, and Islandia, L.P.
due in full in May 2005, with monthly redemptions to commence in
February 2004.
o $400,000 in convertible debentures issued on April 1, 2003 to MBSJ
Investors LLC due in full in October 2005, with monthly redemptions to
commence in February 2004.
o $300,000 in convertible debentures issued on May 7, 2003 to Crestview
Capital Fund I, L.P., Crestview Capital Fund II, L.P., and Crestview
Capital Offshore Fund, Inc. due in full in May 2005, with monthly
redemptions to commence in February 2004.
o $1.25 million in convertible notes reissued in July 2002 to entities
related to ICM Asset
Management, Inc. due September 30, 2003.
o $500,000 in a convertible note issued to Union Bank of California NA on
March 31, 2003, due March 31, 2004.
The substantial amount of our indebtedness impacts us in a number of ways:
o We have to dedicate a portion of cash flow from operations to principal
and interest payments on the debt, which reduces funds available for
other purposes.
o We may not have sufficient funds to pay principal and/or interest
payment when they become due, which could lead to a default.
These are just some factors pertaining to our debt that generally place us at a
disadvantage to our less leveraged competitors. Any or all of these factors
could cause our stock price to decline.
WE MAY NEED TO RAISE CAPITAL TO REPAY DEBT AND GROW OUR BUSINESS. OBTAINING THIS
CAPITAL COULD IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise capital to pay our $1.25 million convertible note
obligations to the entities related to ICM Asset Management, Inc. due in full in
September 2003, our $3.0 million and $300,000 convertible debenture obligations
due in full in May 2005,with monthly redemptions commencing in February 2004,
and our $400,000 convertible debenture obligations due in full in October 2005,
with monthly redemptions commencing in February 2004. We may also need to raise
further capital to:
o support unanticipated capital requirements;
o take advantage of acquisition or expansion opportunities;
o continue our current development efforts;
o develop new applications or services; or
o address working capital needs.
Our future capital requirements depend on many factors including our application
development, sales and marketing activities. We do not know whether additional
financing will be available when needed, or available on terms acceptable to us.
If we cannot raise needed funds for the above purposes on acceptable terms, we
may be forced to curtail some or all of the above activities and we may not be
able to grow our business or respond to competitive pressures or unanticipated
developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities or convertible debt securities, our stockholders may experience
substantial dilution and the new securities may have greater rights, preferences
or privileges than our existing common stock.
25
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other intangible
assets represent approximately 67% of our total assets as of June 30, 2003. We
may have to impair or write-off these assets, which will cause a
charge to earnings and could cause our stock price to decline. Any such
impairment will also reduce our assets, as well as the ratio of our assets to
our liabilities. These balance sheet effects could make it more difficult for us
to obtain capital, and could make the terms of capital we do obtain more
unfavorable to our existing stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our applications
and services and our expenses, and foreign currency losses will negatively
affect profitability or increase losses. Approximately 10% and 9% of our net
sales were in the United Kingdom, in the three months ended June 30, 2003 and
2002, respectively. Many of our expenses related to foreign sales, such as
corporate level administrative overhead and development, are denominated in U.S.
dollars. When accounts receivable and accounts payable arising from
international revenues and services are converted to U.S. dollars, the resulting
gain or loss contributes to fluctuations in our operating results. We do not
hedge against foreign currency exchange rate risks.
WE HAVE A SINGLE CUSTOMER REPRESENTING A SIGNIFICANT AMOUNT OF OUR BUSINESS.
Toys "R" Us, Inc. ("Toys") accounted for 24% and 42% of our total revenues for
the three months ended June 30, 2003 and 2002, respectively. While we have a
development agreement with this customer, Toys has the right to terminate the
agreement without cause with limited advance notice. A reduction, delay or
cancellation of orders from Toys would significantly reduce our revenues and
force us to substantially curtail operations. We cannot provide any assurances
that Toys or any of our current customers will continue at current or historical
levels or that we will be able to obtain orders from new customers.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on Harvey Braun, our Chief Executive Officer and
Chairman of the Board, and Steven Beck, our President and Chief Operating
Officer. We do not have any written employment agreements with Mr. Braun or Mr.
Beck. We also believe our future success will depend largely upon our ability to
attract and retain highly-skilled software programmers, managers, and sales and
marketing personnel. Competition for personnel is intense, particularly in
international markets. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. We compete
against numerous companies, including larger, more established companies, for
our personnel. We may not be successful in attracting or retaining skilled
sales, technical and managerial personnel. The loss of key employees or our
inability to attract and retain other qualified employees could negatively
affect our financial performance and cause our stock price to decline.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES
HAVE BEEN AND MAY CONTINUE TO BE SLOW.
Our future growth is critically dependent on increased sales to the retail
industry. We derive the substantial majority of our revenues from the licensing
of software applications and the performance of related professional and
consulting services to the retail industry. Demand for our applications and
services could decline in the event of consolidation, instability or more
downturns in the retail industry. This decline would likely cause reduced sales
and could impair our ability to collect accounts receivable. The result would be
reduced earnings and weakened financial condition, each or both of which would
likely cause our stock price to decline.
The success of our customers is directly linked to economic conditions in the
retail industry, which in turn are subject to intense competitive pressures and
are affected by overall economic conditions. In addition, the retail industry
may be consolidating, and it is uncertain how consolidation will affect the
industry. The retail industry as a whole is currently experiencing increased
competition and weakening economic conditions that could negatively impact the
industry and our customers' ability to pay for our products and services. Such
consolidation and weakening economic conditions have in the past, and may in the
26
future, negatively impact our revenues, reduce the demand for our products and
may negatively impact our business, operating results and financial condition.
Weakening economic conditions and the September 11, 2001 terrorist attack have
adversely impacted sales of our software applications, and we believe mid-tier
specialty retailers may be reluctant during the current economic slowdown to
make the substantial infrastructure investment that generally accompanies the
implementation of our software applications. The recent war in Iraq and the
anticipated burden of rebuilding that country's infrastructure has also led to
some uncertainty in the economic climate, which may adversely impact our
business.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS.
We have in the past and may in the future be impacted by customer bankruptcies.
During weak economic conditions, such as those currently being experienced in
many geographic regions around the world, there is an increased risk that
certain of our customers will file bankruptcy. When our customers file
bankruptcy, we may be required to forego collection of pre-petition amounts
owed, and to repay amounts remitted to us during the 90-day preference period
preceding the filing. Accounts receivable balances related to pre-petition
amounts may in certain of these instances be large due to extended payment terms
for software license fees, and significant billings for consulting and
implementation services on large projects. The bankruptcy laws, as well as the
specific circumstances of each bankruptcy, may severely limit our ability to
collect pre-petition amounts, and may force us to disgorge payments made during
the 90-day preference period. We also face risk from international customers
which file for bankruptcy protection in foreign jurisdictions, in that the
application of foreign bankruptcy laws may be less certain or harder to predict.
Although we believe that we have sufficient reserves to cover anticipated
customer bankruptcies, there can be no assurance that such reserves will be
adequate, and if they are not adequate, our business, operating results and
financial condition would be adversely affected.
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We conduct business in an industry characterized by intense competition. Most of
our competitors are very large companies with an international presence. We must
also compete with smaller companies which have been able to develop strong local
or regional customer bases. Many of our competitors and potential competitors
are more established, benefit from greater name recognition and have
significantly greater resources than us. Our competitors may also have lower
cost structures and better access to the capital markets than us. As a result,
our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Our competitors may:
o introduce new technologies that render our existing or future products
obsolete, unmarketable or less competitive;
o make strategic acquisitions or establish cooperative relationships
among themselves or with other solution providers, which would increase
the ability of their products to address the needs of our customers;
and
o establish or strengthen cooperative relationships with our current or
future strategic partners, which would limit our ability to compete
through these channels.
We could be forced to reduce prices and suffer reduced margins and market share
due to increased competition from providers of offerings similar to, or
competitive with, our applications, or from service providers that provide
services similar to our services. Competition could also render our technology
obsolete.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological change,
evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
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The success of application enhancements and new applications depends on a
variety of factors, including technology selection and specification, timely and
efficient completion of design, and effective sales and marketing efforts. In
developing new applications and services, we may:
o fail to respond to technological changes in a timely or cost-effective
manner;
o encounter applications, capabilities or technologies developed by
others that render our applications and services obsolete or
non-competitive or that shorten the life cycles of our existing
applications and services;
o experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new applications and
services; or
o fail to achieve market acceptance of our applications and services.
The life cycles of our applications are difficult to estimate, particularly in
the emerging electronic commerce market. As a result, new applications and
enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our success and competitive position is dependent in part upon our ability to
develop and maintain the proprietary aspects of our intellectual property. Our
intellectual property includes our trademarks, trade secrets, copyrights and
other proprietary information. Our efforts to protect our intellectual property
may not be successful. Effective copyright and trade secret protection may be
unavailable or limited in some foreign countries. We hold no patents.
Consequently, others may develop, market and sell applications substantially
equivalent to ours or utilize technologies similar to those used by us, so long
as they do not directly copy our applications or otherwise infringe our
intellectual property rights.
We may find it necessary to bring claims or litigation against third parties for
infringement of our proprietary rights or to protect our trade secrets. These
actions would likely be costly and divert management resources. These actions
could also result in counterclaims challenging the validity of our proprietary
rights or alleging infringement on our part. The ultimate outcome of any
litigation will be difficult to predict.
OUR APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to and defending claims related to our intellectual property rights,
even ones without merit, can be time consuming and expensive and can divert
management's attention from other business matters. In addition, these actions
could cause application delivery delays or require us to enter into royalty or
license agreements. Royalty or license agreements, if required, may not be
available on terms acceptable to us, if they are available at all. Any or all of
these outcomes could have a material adverse effect on our business, operating
results and financial condition.
DEVELOPMENT AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources necessary
to develop and market our offerings to their target markets, our business
strategy substantially depends on our strategic relationships. While some of
these relationships are governed by contracts, most are non-exclusive and all
may be terminated on short notice by either party. If these relationships
terminate or fail to deliver the intended benefits, our development and
marketing efforts will be impaired and our revenues may decline. We may not be
able to enter into new strategic relationships, which could put us at a
disadvantage to those of our competitors, which do successfully exploit
strategic relationships.
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OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Substantially all of our primary computer and telecommunications systems are
located in two geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business interruption
insurance may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product liability or
other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our applications are highly complex and sophisticated and they may occasionally
contain design defects or software errors that could be difficult to detect and
correct. In addition, implementation of our applications may involve
customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
We are not currently aware of any defects in our applications that might give
rise to future lawsuits. However, errors or integration problems may be
discovered in the future. Such defects, errors or difficulties could result in
loss of sales, delays in or elimination of market acceptance, damage to our
brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing costs. In
addition, third-party products, upon which our applications are dependent, may
contain defects which could reduce or undermine entirely the performance of our
applications.
Our customers typically use our applications to perform mission-critical
functions. As a result, the defects and problems discussed above could result in
significant financial or other damage to our customers. Although our sales
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims, we do not know if these
limitations of liability are enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
applications or the performance of our services. Our product liability insurance
may not cover all claims brought against us.
SOFTLINE LIMITED HAS THE RIGHT TO ACQUIRE A CONTROLLING PERCENTAGE OF OUR COMMON
STOCK, SO WE MAY BE EFFECTIVELY CONTROLLED BY SOFTLINE, AND OUR OTHER
STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING.
Softline Limited beneficially owns 49.3% of our outstanding common stock,
including shares Softline has the right to acquire upon conversion of its Series
A Convertible Preferred Stock. Ivan M. Epstein, Softline's Chief Executive
Officer, and Robert P. Wilkie, Softline's Chief Financial Officer, serve on our
board of directors. If Softline converts its Series A Preferred Stock, it may
have effective control over all matters affecting us, including:
o the election of all of our directors;
o the allocation of business opportunities that may be suitable for
Softline and us;
o any determinations with respect to mergers or other business
combinations involving us;
29
o the acquisition or disposition of assets or businesses by us;
o debt and equity financing, including future issuance of our common
stock or other securities;
o amendments to our charter documents;
o the payment of dividends on our common stock; and
o determinations with respect to our tax returns.
OUR BUSINESS MAY BE DISADVANTAGED OR HARMED IF SOFTLINE'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have and will continue to arise between Softline and us in
a number of areas relating to our past and ongoing relationships. Conflicts may
not be resolved in a manner that is favorable to us, and such conflicts may
result in harmful consequences to our business or prospects.
SOFTLINE'S INFLUENCE ON OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY
TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Softline's potential voting control could discourage others from initiating any
potential merger, takeover or other change of control transaction that may
otherwise be beneficial to our business or our stockholders. As a result,
Softline's control could reduce the price that investors may be willing to pay
in the future for shares of our stock, or could prevent any party from
attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to continue to be,
volatile. When we or our competitors announce new customer orders or services,
change pricing policies, experience quarterly fluctuations in operating results,
announce strategic relationships or acquisitions, change earnings estimates,
experience government regulatory actions or suffer from generally adverse
economic conditions, our stock price could be affected. Some of the volatility
in our stock price may be unrelated to our performance. Recently, companies
similar to ours have experienced extreme price fluctuations, often for reasons
unrelated to their performance.
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common stock. We
anticipate that we will use our earnings and cash flow for repayment of
indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Softline is entitled
to dividends on its Series A Convertible Preferred Stock in preference and
priority to common stockholders. Future equity financing(s) may further restrict
our ability to pay dividends.
THE TERMS OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock in one or
more series. We issued 141,000 shares of Series A Convertible Preferred Stock to
Softline in May 2002. Our board of directors may determine the terms of
subsequent series of preferred stock without further action by our stockholders.
If we issue additional preferred stock, it could affect your rights or reduce
the value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. We are actively seeking capital, and some of the
arrangements we are considering may involve the issuance of preferred stock.
FAILURE TO COMPLY WITH THE AMERICAN STOCK EXCHANGE'S LISTING STANDARDS COULD
RESULT IN OUR DELISTING FROM THAT EXCHANGE AND LIMIT THE ABILITY TO SELL ANY OF
OUR COMMON STOCK.
Our stock is currently traded on the American Stock Exchange. The Exchange has
published certain guidelines it uses in determining whether a security warrants
continued listing. These guidelines include financial, market capitalization and
other criteria, and as a result of our financial condition or other factors, the
American Stock Exchange could in the future determine that our stock does not
merit continued listing. If our stock were delisted from the American Stock
Exchange, the ability of our stockholders to sell our common stock could become
limited, and we would lose the advantage of some state and federal securities
regulations imposing lower regulatory burdens on exchange-traded issuers.
30
DELAWARE LAW AND SOME PROVISIONS OF OUR CHARTER AND BYLAWS MAY ADVERSELY AFFECT
THE PRICE OF YOUR STOCK.
Special meetings of our stockholders may be called only by the Chairman of the
Board, the Chief Executive Officer or the Board of Directors. Stockholders have
no right to call a meeting. Stockholders must also comply with advance notice
provisions in our bylaws in order to nominate directors or propose matters for
stockholder action. These provisions of our charter documents, as well as
certain provisions of Delaware law, could delay or make more difficult certain
types of transactions involving a change in control of the Company or our
management. Delaware law also contains provisions that could delay or make more
difficult change in control transactions. As a result, the price of our common
stock may be adversely affected.
SHARES ISSUED UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND CONVERTIBLE
NOTES COULD DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our employees and
certain other persons at various prices, some of which are or may in the future
have exercise prices at below the market price of our stock. As of July 31,
2003, we have outstanding options and warrants for 16,951,939 shares. Of these
options and warrants, 579,981 have exercise prices above the recent market price
of $3.40 per share (as of July 31, 2003), and 16,371,958 have exercise prices at
below that recent market price. If exercised, these options and warrants will
cause immediate and possibly substantial dilution to our stockholders.
Our existing stock option plan currently has approximately 2,267,583 shares
available for issuance as of July 31, 2003. Future options issued under the plan
may have further dilutive effects.
We issued to Toys "R" Us Inc., our major customer, a note convertible into
2,500,000 shares of common stock. This note has a conversion price of $0.553.
This note will have a dilutive effect on stockholders if converted.
We issued to entities related to ICM Asset Management notes that are convertible
into 2,083,333 shares of common stock. These notes have a conversion price of
$0.60 per share, which is currently below the recent market price of $3.40.
These notes will have a dilutive effect on stockholders if converted.
We also recently issued to a group of investors debentures that are convertible
into 3,603,165 shares of common stock. These debentures have a conversion price
of $1.0236, which is below the recent market price of $3.40. These debentures
will have a dilutive effect on stockholders if converted.
We issued to Union Bank of California, N.A. an unsecured note that is
convertible into shares of common stock at a price per share of eighty percent
(80%) of the average share closing price of our common stock for the ten trading
day period immediately preceding the payoff date. This note will have a dilutive
effect on stockholders if converted.
Sales of shares pursuant to exercisable options, warrants, convertible notes,
and convertible debentures could lead to subsequent sales of the shares in the
public market, and could depress the market price of our stock by creating an
excess in supply of shares for sale. Issuance of these shares and sale of these
shares in the public market could also impair our ability to raise capital by
selling equity securities.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risks, which include changes in interest rates, changes in foreign
currency exchange rate as measured against the U.S. dollar and changes in the
value of stock of a publicly traded company, which secures a promissory note we
hold.
INTEREST RATE RISK
We do not have debt or borrowings with variable rate term.
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FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe. Revenues
are typically denominated in the local foreign currency, which creates exposures
to changes in exchange rates. These changes in the foreign currency exchange
rates as measured against the U.S. dollar may positively or negatively affect
our sales, gross margins and retained earnings. We attempt to minimize currency
exposure risk through decentralized sales, development, marketing and support
operations, in which substantially all costs are local-currency based. There can
be no assurance that such an approach will be successful, especially in the
event of a significant and sudden decline in the value of the foreign currency.
We do not hedge against foreign currency risk. Approximately 10% and 9% of our
total revenues were denominated in currencies other than the U.S. dollar for the
quarters ended June 30, 2003 and 2002, respectively.
EQUITY PRICE RISK
WE HAVE NO DIRECT EQUITY INVESTMENTS.
ITEM 4. - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation of
our disclosure controls and procedures, as such term is defined under Rule
13a-14 (c) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of a date (the "Evaluation Date") within 90 days of the
filing date of this Annual Report on Form 10-K, our chief executive officer [and
principal accounting officer] have concluded that our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal
controls, as such term is defined under Section 13 (b) of the Exchange Act, or
to our knowledge, in other factors that could significantly affect these
controls subsequent to the Evaluation Date.
PART II. - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,894. On June 18, 2002, we filed
an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity affiliated
with him in San Diego Superior Court, Case No. GIC790833, alleging fraud and
other causes of action relating to transactions Mr. Dorosewicz caused us to
enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with us and other transactions he entered into
with us. These matters are still pending and the parties have agreed to resolve
all claims in binding arbitrations, scheduled for September 2003.
Due to the declining performance of our Australian subsidiary, we decided in the
third quarter of fiscal 2002 to sell certain assets of our Australian subsidiary
to the former management of such subsidiary, and then cease Australian
operations. Such sale was, however, subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to an entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have reserved $187,000 as our potential exposure. The
receiver has also claimed that we are obligated to it for inter-company balances
of $636,000, but we do not believe any amounts are owed to the receiver, who has
not as of the date of this report acknowledged the monthly corporate overhead
recovery fees and other amounts charged by us to the Australian subsidiary
offsetting the amount claimed to be due.
32
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against us with the Department
of Fair Employment and Housing, alleging harassment and sexual orientation
discrimination. We have responded appropriately to both the wage claim and the
discrimination allegations, which we believe lack merit based on present
information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claims damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertain to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. At this time, we cannot predict the merits of this case because it is
in its preliminary state and discovery has not yet commenced. However, SVI
Retail intends to defend vigorously the action and possibly file one or more
counter-claims. The U.S. District Court of Ohio has proper jurisdiction over us,
and a trial is scheduled for May 2004.
In mid-2002, we were the subject of an adverse judgment entered against us in
favor of Randall's Family Golf Centers, ("Randall") in the approximate sum of
$61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We and Randall have
agreed to settle this claim for $12,500, subject to the settlement receiving
approval by the U.S. Bankruptcy Court.
On December 16, 2002, Chapter 11 Debtors, Natural Wonders, Inc. and World of
Science, Inc. (collectively "Debtors"), filed an adversary proceeding against
our subsidiary SVI Retail, Inc. seeking to avoid and recover preferential
transfers. The Debtors sought recovery of approximately $84,000, which it had
previously paid to SVI Retail for goods and services rendered. On March 12,
2003, the Debtors and SVI Retail settled the adversary proceeding for $18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. A hearing on Sabica's and Island Pacific's motion to
quash occurred on May 22, 2003 which was subsequently denied.
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.
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ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2003, we issued:
o 48,000 shares of common stock to consultants for services rendered in
the quarter ended June 30, 2003, with value of $25,000.
o An aggregate of 9,849 shares of common stock to employees in lieu of
cash payments for commissions earned in prior periods, valued at
$8,000.
o An aggregate of 14,162 shares of common stock to employees from
exercises of incentive stock options granted in prior periods.
o 59,838 shares of common stock from exercise of warrants granted to
consultant in prior periods.
o 5,275,000 shares of common stock to various institutional investors
pursuant to the securities purchase agreement dated as of June 27,
2003.
o Warrant to purchase 527,500 shares of our common stock, at an exercise
price of $1.65 per share, to Roth Capital Partners, LLC as placement
agent fee for the sale of 5,275,000 shares of our common stock.
o 9% debenture to MBSJ Investors, LLC, convertible into our common stock
at a conversion price of $1.0236, for the gross proceed of $400,000.
This debenture was accompanied by a five-year warrant to purchase
156,311 shares of our common stock with an exercise price of $1.0236
per share.
o 9% debentures to Crestview Capital Fund I, L.P., Crestview Capital Fund
II, L.P. and Crestview Capital Offshore Fund, Inc., convertible into
our common stock at the conversion price of $1.0236, for the gross
proceeds of $300,000. These debentures were accompanied by five-year
warrants to purchase an aggregate of 101,112 shares of common stock
with an exercise price of $1.0236.
o warrants to Midsummer Investment, Ltd., Omicron Master Trust, Islandia,
L.P., Crestview Capital Fund I, L.P., Crestview Capital Fund II, L.P.
and Crestview Capital Offshore Fund, Inc. to purchase an aggregate of
375,000 shares of our common stock at an exercise price of $1.65. These
warrants were issued to obtain these debenture holders' requisite
consents and waivers of rights they possessed to participate in the
sale of 5,275,000 shares of common stock in June 2003.
The foregoing securities were offered and sold without registration under the
Securities Act of 1933 to sophisticated investors who had access to all
information which would have been in a registration statement, in reliance upon
the exemption provided by Section 4(2) under such Act and Regulation D
thereunder.
In May 2003, we canceled and retired 10,700,000 treasury shares.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 9, 2003, we held a special meeting of stockholders. All 32,577,343
shares were represented at the meeting in person or by proxy. The following
matters were considered and approved:
o Ratification of the sale and issuance of up to $6.5 million of 9%
convertible debentures and accompanying warrants to purchase shares of
common stock to certain investors. The measure passed with 21,475,900
votes for, 482,980 votes against, 11,835 abstained and 10,606,628
broker non-votes.
o Change of our name from "SVI Solutions, Inc." to "Island Pacific, Inc."
The measure passed with 32,508,306 votes for, 56,072 votes against,
12,965 abstained and no broker non-votes.
o Amendment and restatement of our Restated Certificate of Incorporation
to reflect the removal of Article XII, which restricts the
shareholders' ability to take actions by written consent. The measure
passed with 21,763,166 votes for, 82,572 votes against, 124,977
abstained and 10,606,628 broker non-votes.
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ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Business Sale Agreement dated May 3, 2002 among the receivers and
managers of the assets of SVI Retail (Pty) Limited and QQQ Systems
PTY Limited, incorporated by reference to exhibit 2.3 to the
Company's Form 10-K for the fiscal year ended March 31, 2002.
2.2 Securities Purchase Agreement dated March 31, 2003 by and among
the Company, Midsummer Investment, Ltd., Omicron Master Trust, and
Islandia, L.P., incorporated by reference to exhibit 2.1 to the
Company's Form 8-K filed April 15, 2003
2.3 Securities Purchase Agreement dated April 1, 2003 by and among the
Company and MBSJ Investors, LLC, incorporated by reference to
exhibit 2.2 to the Company's Form 8-K filed on April 15, 2003.
2.4 Agreement dated May 6, 2003 by and among the Company, Crestview
Capital Fund I, L.P., Crestview Capital Fund II, L.P. and
Crestview Capital Offshore Fund, Inc., incorporated by reference
to exhibit 2.12 to Company's Form S-1 filed May 12, 2003.
2.5 Securities Purchase Agreement dated June 27, 2003 by and among the
Company and the purchasers named therein, incorporated by
reference to exhibit 2.1 to the Company's Form 8-K filed on July
2, 2003.
3.1 Amended and Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's 8-K filed on July 15,
2003.
3.2 Certificate of Designation, incorporated by reference to exhibit
4.1 of the Company's Form 8-K filed May 16, 2002.
4.1 Registration Rights Agreement dated as of March 31, 2003 by and
among the Company, Midsummer Investment, Ltd., Omicron Master
Trust, and Islandia, L.P., incorporated by reference to exhibit
4.1 to the Company's Form 8-K filed April 15, 2003.
4.2 Registration Rights Agreement dated as of April 1, 2003 between
the Company and MBSJ Investors LLC., incorporated by reference to
exhibit 4.2 to the Company's Form 8-K filed April 15, 2003.
4.3 Registration Rights Agreement dated June 27, 2003 by and among the
Company and the parties named therein, incorporated by reference
to exhibit 4.1 to the Company's Form 8-K filed on July 2, 2003
10.1 Discounted Loan Payoff Agreement dated March 31, 2003 by and
amount Union Bank of California, N.A., SVI Solutions, Inc., SVI
Retail, Inc., Sabica Ventures, Inc. and SVI Training Products,
Inc., incorporated by reference to exhibit 10.3 to the Company's
Form 8-K filed on April 15, 2003.
10.2 Unsecured Promissory Note dated March 31, 2003 in favor of Union
Bank of California, N.A., incorporated by reference to exhibit
10.47 to the Company's Form S-1 filed on May 12, 2003.
10.3 Amendment Agreement to between the Company, Koyah Leverage
Partners, Koyah Partners, L.P., Raven Partners, L.P., Nigel Davey,
and Brian Cathcart dated July 15, 2002, incorporated by reference
to exhibit 10.11 to the Company's Form 10-K for the fiscal year
ended March 31, 2002.
10.4 First Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P.,
Nigel Davey, and Brian Cathcart dated December 5, 2002.Summary of
loan transactions between the Company and World Wide Business
Centres, incorporated by reference to exhibit 10.12 to the
Company's Form 10-K for the fiscal year ended March 31, 2002.
10.5 Second Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P.,
Nigel Davey, and Brian Cathcart dated March 14, 2003, incorporated
by reference to exhibit 10.29 to the Company's Form S-1 filed on
May 12, 2003.
35
10.6 Third Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P.,
Nigel Davey, and Brian Cathcart dated March 28, 2003, incorporated
by reference to exhibit 10.30 to the Company's Form S-1 filed on
May 12, 2003.
10.7 Fourth Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P.,
Nigel Davey, and Brian Cathcart dated April 3, 2003, incorporated
by reference to exhibit 10.31 to the Company's Form S-1 filed on
May 12, 2003.
10.8 Fifth Amendment to Amendment Agreement between the Company, Koyah
Leverage Partners, Koyah Partners, L.P., Raven Partners, L.P.,
Nigel Davey, and Brian Cathcart dated June 27, 2003 , incorporated
by reference to exhibit 10.32 to the Company's Form S-3 filed on
July 31, 2003.
10.9 Purchase Agreement between the Company and Toys "R" Us, Inc. dated
May 29, 2002, incorporated by reference to exhibit 10.14 to the
Company's Form 10-K for the fiscal year ended March 31, 2002.
10.10 Convertible Note in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.15 to the Company's Form
10-K for the fiscal year ended March 31, 2002.
10.11 Warrant in favor of Toys "R" Us, Inc. dated May 29, 2002,
incorporated by reference to exhibit 10.16 to the Company's Form
10-K for the fiscal year ended March 31, 2002.
10.12 Development Agreement between the Company and Toys "R" Us, Inc.
dated May 29, 2002, incorporated by reference to exhibit 10.17 to
the Company's Form 10-K for the fiscal year ended March 31, 2002.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment pursuant
to Rule 24b-2 of the Securities Exchange Act of 1934.
99.1 Certification of Principal Executive Officer.
99.2 Certification of Principal Financial Officer.
(b) REPORTS ON FORM 8-K
On April 15, 2003, we filed a Form 8-K disclosing as Item 5 the sale of 9%
convertible debentures for the gross proceeds of $3.5 million in March 2003 and
$400,000 in April 2003.
On May 21, 2003, we filed a Form 8-K disclosing as Item 5 the sale of our SVI
Training Products, Inc. subsidiary.
On July 2, 2003, we filed a Form 8-K disclosing as Item 5 the sale of 5,275,000
shares of our common stock to a group of institutional investors.
On July 15, 2003, we filed a Form 8-K disclosing as Item 5 the name change to
Island Pacific, Inc.
On August 1, 2003, we filed a Form 8-K disclosing as Item 5 the appointment of
Harvey Braun, our Chief Executive Officer, to the position of Chairman of the
Board and Ran Furman to the position of Chief Financial Officer.
On August 13, 2003, we filed a Form 8-K disclosing as Item 9 our first quarter
financial results for the quarter ended June 30, 2003.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Island Pacific, Inc.
Registrant
/S/ Ran Furman
-------------------------------------------------
Date: November 15, 2004 Ran Furman
Chief Financial Officer
Signing on behalf of the registrant
36
FORM 10-Q CERTIFICATIONS
I, Michael Tomczak, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Island Pacific,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2004 /s/ Michael Tomczak
-------------------------------------------------
Michael Tomczak
President, Chief Operating Officer and Director
(Principal Executive Officer)
37
FORM 10-Q CERTIFICATIONS
I, Ran Furman, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Island Pacific,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2004 /s/ Ran Furman
-------------------------------------------------
Ran Furman
Chief Financial Officer
(Principal Financial Officer)
38