SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 1, 2004
ISLAND PACIFIC, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-23049 33-0896617
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(Commission File Number) (IRS Employer Identification No.)
19800 MacArthur Boulevard, Suite 1200, Irvine, California 92612
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(Address of Principal Executive Offices) (Zip Code)
(949) 476-2212
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(Registrant's telephone number, including area code)
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired:
The financial statements required by Item 7(a) comprise pages F-1 to
F-28 of this report.
(b) Pro Forma Financial Information
The pro forma financial information required by Item 7(b) comprise
pages F-12 - F-14 of this report.
(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Amended and Restated Agreement of Merger and Plan or
Reorganization dated June 1, 2004 by and among Island Pacific,
Inc., Retail Technologies International, Inc., IPI Merger Sub,
Inc. IPI Merger Sub II, Inc., Michael Tomczak and Jeffrey
Boone, incorporated by reference from the Company's Form 8-K
filed on June 14, 2004.
2.2 Agreement of Merger dated June 1, 2004 between IPI Merger Sub
II, Inc. and Retail Technologies International, Inc.,
incorporated by reference from the Company's Form 8-K filed on
June 14, 2004.
3.1 Certificate of Designation dated June 2, 2004, incorporated by
reference from the Company's Form 8-K filed on June 14, 2004.
4.1 Registration Rights Agreement dated June 1, 2004 by and
between Island Pacific, Inc., Michael Tomczak, Jeffrey Boone
and Intuit Inc., incorporated by reference from the Company's
Form 8-K filed on June 14, 2004.
4.2 Form of Voting Agreement, incorporated by reference from the
Company's Form 8-K filed on June 14, 2004.
10.1 Employment Agreement dated June 1, 2004 by and between Island
Pacific, Inc. and Michael Tomczak, incorporated by reference
from the Company's Form 8-K filed on June 14, 2004.
10.2 Employment Agreement dated June 1, 2004 by and between Island
Pacific, Inc. and Jeffrey Boone, incorporated by reference
from the Company's Form 8-K filed on June 14, 2004.
10.3 Form of promissory notes for Michael Tomczak and Jeffrey
Boone, incorporated by reference from the Company's Form 8-K/A
filed on August 4, 2004.
10.4 Form of Amended and Restated promissory notes dated June 1,
2004, incorporated by reference from the Company's Form 8-K/A
filed on August 4, 2004.
10.5 Promissory note dated June 1, 2004, payable to Intuit Inc.,
incorporated by reference from the Company's Form 8-K/A filed
on August 4, 2004.
10.6 Stock Option Grant Notice dated June 1, 2004 for Michael
Tomczak, incorporated by reference from the Company's Form
8-K/A filed on August 4, 2004.
10.7 Stock Option Grant Notice dated June 1, 2004 for Jeffrey
Boone, incorporated by reference from the Company's Form 8-K/A
filed on August 4, 2004.
2
Retail Technologies International, Inc.
Financial Statements
For
Fiscal Years Ended
December 31, 2003 and 2002
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Retail Technologies International, Inc.
Folsom, California
We have audited the balance sheets of Retail Technologies International, Inc. as
of December 31, 2003 and 2002 and the related statements of operations,
shareholders' equity, and cash flows for the two years in the period ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Retail Technologies
International, Inc. as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the two years in the period ended December
31, 2003, in conformity with U.S. generally accepted accounting principles.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 20, 2004
except for Note 16 as to which
the date is November 4, 2004
F-2
FINANCIAL STATEMENTS
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
Balance Sheets
December 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 1,093,089 $ 286,952
Accounts receivable, net of allowance for doubtful accounts of
$265,181 and $207,621, respectively 2,379,285 1,662,421
Inventory -- 23,913
Prepaid expenses 246,654 44,616
------------ ------------
Total current assets 3,719,028 2,017,902
Property and equipment, net 391,412 532,764
Non-compete agreement, net 49,012 98,008
------------ ------------
Total assets $ 4,159,452 $ 2,648,674
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of notes payable $ 560,584 $ --
Current maturities of capital lease obligations 5,880 --
Accounts payable 225,979 320,876
Accrued expenses 923,838 363,176
Deferred revenue 1,772,302 1,445,449
Settlement agreement 200,786 97,153
Income tax payable 351,440 87,563
------------ ------------
Total current liabilities 4,040,809 2,314,217
Notes payable due to related parties 200,000 200,000
Notes payable, less current maturities 1,612,416 2,173,000
Capital lease obligations, less current maturities 6,880 --
Deferred revenue 906,457 632,337
Settlement agreement, less current maturities 127,724 328,510
------------ ------------
Total liabilities 6,894,286 5,648,064
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred Stock, no par value; 1,445,000 shares authorized and outstanding;
Series A 500,000 500,000
Common stock, no par value, 25,000,000 shares authorized;
7,055,000 shares issued and outstanding 211,650 211,650
Stock subscriptions (211,650) (211,650)
Retained deficit (3,234,834) (3,499,390)
------------ ------------
Total shareholders' equity (deficit) (2,734,834) (2,999,390)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 4,159,452 $ 2,648,674
============ ============
The accompany notes are an integral part of these financial statements.
F-3
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
Statements of Operations
Years ended December 31, 2003 and 2002
2003 2002
------------ ------------
Sales
License $ 6,235,094 $ 5,693,350
Equipment and hardware 196,592 397,534
Membership 1,953,389 1,453,828
Professional services 103,915 109,082
Other 120,787 738,331
------------ ------------
Total sales 8,609,777 8,392,125
Cost of sales
License 398,625 470,612
Equipment and hardware 265,332 411,804
Membership 98,156 66,826
------------ ------------
Total cost of sales 762,113 949,242
------------ ------------
Gross profit 7,847,664 7,442,883
Operating expenses:
Research and development 2,581,563 3,607,626
General and administrative 2,690,064 3,851,476
Selling and marketing 1,445,547 1,234,187
Depreciation and amortization 319,339 343,955
------------ ------------
Total operating expenses 7,036,513 9,037,244
------------ ------------
Income (loss) from operations 811,151 (1,594,361)
Other income (expense):
Interest income -- 4,225
Interest expense (133,392) (144,353)
Gain (loss) on sale of assets (55,473) 7,500,000
Other expenses (53,391) --
------------ ------------
Total other income (expense) (242,256) 7,359,872
------------ ------------
Income before provision for income taxes 568,895 5,765,511
Provision for income taxes 304,339 1,291,663
------------ ------------
Net income $ 264,556 $ 4,473,848
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
Statements of Shareholders' Equity
Years ended December 31, 2003 and 2002
Common Stock Treasury Treasury
-------------------------- Stock Stock Preferred
Shares Amount Shares Amount Shares
------------ ------------- ------------ --------------- ---------------
Balance at January 1, 2002 7,487,541 $ 1,137,529
Issuance of common stock upon
exercise of stock options 300 240
Repurchase of option shares (300) (240)
Shares repurchase of outstanding
common stock (7,478,541) $ (6,053,153)
Retirement of treasury stock (7,478,541) (1,137,529) 7,478,541 6,053,153
Issuance of common stock for notes
payable due to related parties 7,055,000 211,650
Preferred stock sale to Intuit Inc. 1,445,000
Net income
------------- ------------- ------------ --------------- --------------
Balance at December 31, 2002 7,055,000 211,650 -- -- 1,445,000
Net income
------------ ------------- ------------ --------------- --------------
Balance at December 31, 2003 7,055,000 $ 211,650 -- $ -- 1,445,000
============ ============= ============ =============== ==============
(continued)
Retained
Preferred Stock earnings
Amount Subscriptions (deficits) Total
-------------- ---------------- -------------- --------------
Balance at January 1, 2002 $ (3,055,354) $ (1,917,825)
Issuance of common stock upon
exercise of stock options 240
Repurchase of option shares (2,260) (2,500)
Shares repurchase of outstanding
common stock (6,053,153)
Retirement of treasury stock (4,915,624) --
Issuance of common stock for notes
payable due to related parties $ (211,650) --
Preferred stock sale to Intuit Inc. $ 500,000 500,000
Net income 4,473,848 4,473,848
-------------- ---------------- -------------- --------------
Balance at December 31, 2002 500,000 (211,650) (3,499,390) (2,999,390)
Net income -- 264,556 264,556
-------------- ---------------- -------------- --------------
Balance at December 31, 2003 $ 500,000 $ (211,650) $ (3,234,834) $ (2,734,834)
============== ================ ============== ==============
The accompanying notes are an integral part of these financial statements.
F-5
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
Statements of Cash Flows
Years ended December 31, 2003 and 2002
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 264,556 $ 4,473,848
Adjustments to reconcile net income to net cash provided (used) For
operating activities:
Depreciation and amortization 319,339 343,955
Gain on sale of intellectual property -- (7,500,000)
Loss on disposal of property and equipment 55,473 --
Compensation expense paid with notes payable -- 200,000
Stock-based compensation -- 893,000
Increase in allowance for doubtful accounts 127,408 69,848
Changes in assets and liabilities:
Accounts receivable (844,272) 57,668
Inventory 23,913 38,655
Prepaid expenses and other assets (202,038) 88,945
Accounts payable (94,897) (90,728)
Accrued expenses 560,662 (140,707)
Deferred revenue 600,973 (416,871)
Settlement agreement (97,153) 118,903
Income tax payable 263,879 59,165
------------ ------------
Net cash provided (used) for operating activities 977,843 (1,804,319)
------------ ------------
Cash flows from investing activities:
Purchases of furniture and equipment (196,773) (64,722)
Proceeds from sale of intellectual property -- 7,500,000
Proceeds from sale of property and equipment 12,307 127,289
Increase in note receivable -- 60,000
------------ ------------
Net cash provided (used) for investing activities (184,466) 7,622,567
------------ ------------
Cash flows from financing activities:
Issuance of common stock, net of redemption -- (2,260)
Sale of preferred stock -- 500,000
Repurchase of common stock -- (6,053,153)
Repurchase of stock options (90,000)
Payments on line of credit -- (199,808)
Proceeds from notes payable - related parties -- 1,370,000
Borrowings on obligations under capital lease 12,760 --
Principal payments on capital lease obligations -- (350,158)
Payments on notes payable -- (757,570)
------------ ------------
Net cash provided (used) for financing activities 12,760 (5,582,949)
------------ ------------
Net increase in cash and cash equivalents 806,137 235,299
Cash and cash equivalents, beginning of period 286,952 51,653
------------ ------------
Cash and cash equivalents, end of period $ 1,093,089 $ 286,952
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 79,800 $ 160,376
Income taxes paid $ 116,550 $ 1,289,900
Non-cash investing and financing activities:
Repurchase of common stock with note payable -- $ 1,370,000
Repurchase of stock option with note payable -- $ 803,000
Issuance of notes receivable for common stock -- $ 211,650
Compensation expense paid with note payable -- $ 200,000
The accompanying notes are an integral part of these financial statements.
F-6
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Retail Technologies International, Inc. (the "Company")
develops, markets and distributes point of sale and inventory management
software. The Company began operations in 1986 and was incorporated in
California on January 27, 1987. The Company sells its software solutions
primarily by partnering with and distributing its products through a network of
domestic and international value added resellers and distributors.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Accounts receivable -- The majority of the Company's accounts receivable is due
from companies in the direct commerce sales industry. Credit is extended based
on evaluation of a customers' financial condition and, generally, collateral is
not required. Accounts receivable are due according to contractual terms and are
stated at amounts due from customers net of an allowance for doubtful accounts.
Accounts that are outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company's previous loss history, the customer's ability to pay its
obligation to the Company, and the condition of the general economy and industry
as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Inventory -- Inventory consists primarily of equipment and packaging material
recorded at the lower of cost or market using the average cost method.
Property and Equipment -- Property and equipment, including leasehold
improvements, is stated at cost. Depreciation and amortization is computed using
the straight-line method over the estimated useful lives of the related assets
as follows:
Equipment and software 2.5 - 5 years
Furniture and fixtures 7 years
Leasehold improvements lease term
Non-compete covenant -- The non-compete covenant is stated at cost and amortized
using the straight-line method over its estimated useful life of four years.
Software Research & Development - Statement of Financial Accounting Standards
("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, requires companies that produce software to
capitalize software development costs when technological feasibility has been
established. Company management believes that technological feasibility is not
established until a beta version of the product exists and that costs incurred
during the period from when a beta version is available until general release
are not material and therefore are not capitalized.
Revenue Recognition -- Software license revenue is recognized when a
non-cancelable license agreement has been executed, the product has been
shipped, fees are fixed and determinable, and collection of the resulting
receivable is probable. For certain private label software license revenue,
which includes unspecified upgrades and enhancements, when and if developed,
amounts are included in deferred revenue and recognized ratably over the term of
the arrangement. Membership revenue is derived from the sale of rights to future
software upgrades, when and if developed, and is billed in advance and included
in deferred revenue and recognized ratably over the contracted period. Revenue
is recognized from the sale of equipment upon shipment. Service revenue consists
primarily of consulting and training services which is recognized as services
are performed. Deferred revenues include unearned amounts received under prepaid
membership and other contacts and amounts billed to customers but not yet
recognized as revenue.
F-7
Income Taxes -- In accordance with SFAS No. 109, Accounting for Income Taxes,
deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences in the timing of the recognition of certain revenues
and the deduction of certain expenses for financial reporting and income tax
reporting purposes, based on tax rates currently in effect for such periods when
the differences become recoverable and settled.
Advertising -- The Company records expenses for advertising when the liability
is incurred. The amounts expensed for the years ended December 31, 2003 and 2002
were $165,040 and $186,457, respectively.
Stock-Based Compensation -- The Company accounts for its stock-based awards to
employees using the intrinsic value method under Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Under this method, compensation expense is recorded on the date
of grant only if the current fair value exceeds the exercise price. In December
2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS
148"), "Accounting for Stock-Based Compensation-Transition and Disclosure." This
Statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has elected to continue to apply the
intrinsic value method of accounting described above, and has adopted the
disclosure requirements of SFAS 123, as amended.
Certain Significant Risks and Uncertainties -- Financial instruments which
potentially subject the Company to concentrations of credit risk consist of
cash, cash equivalents and accounts receivable. Cash and cash equivalents,
consisting of business checking and money market accounts are held at several
financial institutions. The Company considers all highly liquid debt instruments
purchased with a remaining maturity of 90 days or less to be cash equivalents.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of December 31, 2003 and 2002, the uninsured
portion of these balances held at financial institutions aggregated to $732,893
and $208,452, respectively. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents. The Company performs ongoing credit evaluations of
customers and generally does not require its customers to provide collateral or
other security to support accounts receivable.
The Company participates in a dynamic industry and believes that changes in any
of the following areas could have a material adverse effect on the Company's
future financial position or results of operations; advances and trends in new
technologies; competitive pressures in the form of new products or price
reductions on existing products; changes in overall demand for products and
services offered by the Company; changes in strategic partnerships or other
factors; risks associated with changes in domestic and international economic
and/or political conditions or regulations; litigation or claims against the
Company based on intellectual property, patent, product, regulatory or other
factors; and the Company's ability to attract and retain employees necessary to
support its growth.
F-8
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 and 2002 consisted of the following:
2003 2002
-------------- --------------
Equipment and software $ 813,750 $ 1,178,169
Furniture and fixtures 90,359 159,074
Leasehold improvements 21,128 105,135
-------------- --------------
925,237 1,442,378
Less accumulated depreciation and amortization 533,825 909,614
-------------- --------------
Total $ 391,412 $ 532,764
============== ==============
Depreciation and amortization expense for the years ended December 31, 2003 and
2002 was $319,339 and $343,955, respectively.
NOTE 3 - NON-COMPETE AGREEMENT
In a previous year, the Company entered into a settlement agreement with a
former employee consisting of a combined option forfeiture and covenant
not-to-compete, covering the four year period from January 1 2001 to December 31
2004. The amount of the non-compete agreement as of December 31 2003 and 2002
respectively, was as follows:
2003 2002
-------------- --------------
Cost $ 196,000 $ 196,000
Less accumulated amortization 146,988 97,992
-------------- --------------
$ 49,012 $ 98,008
============== ==============
Amortization expense for the years ended December 31, 2003 and 2002 was $48,996
and $51,773, respectively.
NOTE 4 - NOTES PAYABLE
Notes payable at December 31, 2003 and 2002 consisted of the following:
Note payable, to a former shareholder, secured by Company stock, payable in monthly
installments of $2,813 including interest at 4.0% per annum beginning January 31, 2004
through November 30, 2007 with a balloon payment due on December 31, 2007. Interest
only payments are to be made monthly for the year ended December 31, 2003 $ 123,344
Note payable, to a former option holder, secured by Company stock, payable in monthly
installments of $5,350 including interest at 4.50% per annum beginning January 31, 2004
through November 30, 2007 with a balloon payment due on December 31, 2007. Interest
only payments are to be made monthly for the year ended December 31, 2003 267,667
Note payable, to a former option holder, secured by Company stock, payable in monthly
installments of $5,350 including interest at 4.50% per annum beginning January 31, 2004
through November 30, 2007 with a balloon payment due on December 31, 2007 Interest only
payments are to be made monthly for the year ended December 31, 2003 267,667
F-9
Note payable, to a former option holder, secured by Company stock, payable in monthly
installments of $5,350 including interest at 4.50% per annum beginning January 31, 2004
through November 30, 2007 with a balloon payment due on December 31, 2007. Interest
only payments are to be made monthly for the year December 31, 2003 267,666
Note payable, to a former shareholder, secured by Company stock, payable in monthly
installments of $7,919 including interest at 4.50% per annum beginning January 31, 2004
through November 30, 2007 with a balloon payment due on December 31, 2007. Interest
only payments are to be made monthly for the year ended December 31, 2003 417,420
Note payable, to a former shareholder, secured by Company stock, payable in monthly
installments of $5,350 including interest at 4.50% per annum beginning January 31, 2004
through November 30, 2007 with a balloon payment due on December 31, 2007. Interest
only payments are to be made monthly for the year ended December 31, 2003 829,236
------------
Total notes payable $ 2,173,000
Less: current maturities 560,584
------------
Long-term portion of notes payable $ 1,612,416
============
Future annual minimum payments for the notes payable at December 31, 2003 are
summarized as follows:
Year Ending December 31:
2004 $ 510,555
2005 510,555
2006 510,555
2007 878,115
-------------
Total 2,409,780
Less: interest portion 236,780
-------------
$ 2,173,000
=============
Notes payable due to related parties - Notes payable due to officers, at 5%
interest per annum as of December 31, 2003 and 2002 are $200,000 (see note 14).
NOTE 5 - CAPITAL LEASE OBLIGATION
At December 31, 2003, The Company has an outstanding capital lease obligation
from a financial institution with a balance of $12,760 which bears interest at a
rate of 12.1% per annum. $5,880 of this amount is classified as a current
liability. The Company had no outstanding capital lease obligations at December
31, 2002.
Future annual minimum payments for the capital lease obligation at December 31,
2003 are summarized as follows:
Year Ending December 31:
2004 $ 6,985
2005 6,985
2006 1,164
--------------
Total minimum lease payments 15,134
Less amount representing interest 1,792
--------------
Present value of net minimum lease payments $ 13,342
==============
Interest expense on the capital lease obligation was $1,524 and $0 for the years
ended December 31, 2003 and 2002, respectively.
F-10
NOTE 6 - ACCRUED EXPENSES
Accrued expenses at December 31, 2003 and 2002 consist of the following:
2003 2002
------------ ------------
Payroll and payroll taxes $ 708,566 $ 333,267
Accrued miscellaneous expenses 164,075 29,909
Customer deposits 51,197 --
------------ ------------
$ 923,838 $ 363,176
============ ============
NOTE 7 - SETTLEMENT AGREEMENT
In a previous year, the Company entered into a Settlement Agreement, valued at
$412,350, with a former employee consisting of a combined option forfeiture
agreement and covenant not-to-compete. Under the terms of the Settlement
Agreement, the former employee was entitled to monthly payments of $10,000 from
January 2001 to December 31, 2004. During 2001, the Company entered into an
agreement with the former employee allowing for the deferral of several monthly
payments, bearing interest at 10%, which extended the loan to July 2005. As of
December 31, 2003 and 2002, the amount outstanding is $175,049 and $272,202,
respectively, of which $107,325 and $97,153, respectively, is classified as
current.
In February 2004, the Company entered into a Settlement and Release agreement
with a former employee who was terminated in 2002. Pursuant to the agreement,
the Company agreed to pay this employee a lump sum of $82,500 in severance and
$961 for expense reimbursement. In addition, the Company agreed to make future
bonus payments of up to $70,000, if and when certain milestones are achieved
prior to March 2005. As of December 31, 2003 and 2002, the Company has accrued
$153,461 related to the agreement, of which $93,461 and $0 is classified as
current in 2003 and 2002, respectively. $93,461 was paid in February 2004.
NOTE 8 - STOCK OPTION PLANS
Under the 1998 Stock Option Agreements, (the "Agreements") and the 2001 Stock
Option Plan ("the 2001 Plan"), the Company granted options to purchase up to
2,951,163 shares of common stock to eligible employees at prices not less than
the fair value of the common stock at the grant date. Options granted under the
plans vest ratably over four years and expire 10 years from the date of grant.
Pursuant to the management buyout agreement on December 6, 2002, (see note 14)
the Company entered into an agreement with the 1998 stock option holders to
repurchase their outstanding options, and subsequently options to purchase
1,102,458 shares of common stock were cancelled during the year ended December
31 2002. In connection with the cancellation of these options, the Company
issued promissory notes totaling $803,000 to the previous option holders and
recorded a compensation expense of $893,000 during the year ended December 31
2002.
In March 2003, the Company adopted the 2003 Stock Incentive Plan (the "2003
Plan"), which provides the granting of stock options to employees, director and
consultants of the Company. Options granted under the 2003 Plan may be either
incentive stock options ("ISOs") or non-qualified stock options ("NSOs"). ISOs
may be granted only to employees of the Company or a parent or a subsidiary of
the Company. NSOs may be granted to employees, directors and consultants.
F-11
The Company has authorized the grant of options up to 1,500,000 shares of the
Company's voting common stock. As of December 31, 2003, there were 684,500
shares available for future issuance under the 2003 Plan. All ISOs granted have
ten year terms and vest and become fully exercisable at the end of four years of
continued employment. In cases where ISOs are granted to employees that own more
than 10% of the Company stock, the term of the ISOs is five years.
The following table summarizes stock option transactions as of December 31, 2003
and 2002:
Weighted
Average
Exercise
Price Per
Options Share
------------ --------------
Options outstanding, January 1, 2002 1,593,458 $ 0.39
Exercised (300) $ 0.80
Canceled (612,500) $ 0.02
Repurchased and canceled (1,012,458) $ 0.02
Forfeited (17,200) $ 0.80
Granted 49,000 $ 0.80
------------
Options outstanding, December 31, 2002 -- $ --
Granted 862,000 $ 0.03
Forfeited (46,500) $ 0.03
------------
Options outstanding December 31, 2003 815,500 $ 0.03
============
Of those options outstanding at December 31, 2003 and 2002, none of the options
are currently exercisable. Outstanding options have a weighted-average remaining
contractual life of approximately 9.05 years at December 31, 2003.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense has been recognized.
The Company has adopted the disclosure requirements of SFAS 123. The fair value
of the employee stock options was estimated at the date of grant using the
minimum value method available for privately-held companies. Under this method,
the option value is determined as the excess of the fair value of the stock at
the date of grant over the present value of both the exercise price lump sum and
the expected dividend yields of 0%, each discounted at the risk-free rate of
3.375% over the expected 5-year life of option, with no volatility, in the year
ended December 31, 2003.
The following table presents pro forma disclosures required by SFAS 148 of net
income (loss) as if the fair-value method had been applied to all outstanding
and unvested employee awards in the years ended December 31, 2003 and 2002:
2003 2002
--------------- --------------
Net income as reported $ 264,556 $ 4,473,848
Less: stock-based compensation expense,
net of related tax effects -- --
--------------- ---------------
Pro forma net income $ 264,556 $ 4,473,848
=============== ===============
F-12
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2003
and 2002 consisted of the following components:
2003 2002
--------------- ----------------
Current:
Federal $ 303,539 $ 1,290,863
State 800 800
--------------- ----------------
Total 304,339 1,291,663
--------------- ----------------
Deferred:
Federal -- --
State -- --
--------------- ----------------
Total -- --
--------------- ----------------
Provision (benefit) for income taxes $ 304,339 $ 1,291,663
=============== ================
Significant components of deferred tax assets and liabilities at December 31,
2003 and 2002 are as follows:
2003 2002
------------ ------------
Current deferred tax assets
Tax credit and net operating loss carryforwards $ 70,322 $ 125,051
Accrued expenses 274,027 220,196
Deferred revenue 622,107 516,783
Allowance for bad debts 113,604 88,945
------------ ------------
Net current deferred tax assets 1,080,060 950,975
------------ ------------
Non-current deferred tax assets
Deferred stock compensation 703,772 703,772
Other -- 1,033
------------ ------------
Total non-current deferred tax assets 703,772 704,805
Non-current deferred tax liabilities
Intangible assets (13,280) --
Fixed assets (62,406) (57,718)
State taxes (141,587) (148,632)
------------ ------------
Total non-current deferred tax liability (217,273) (206,350)
------------ ------------
Net non-current deferred tax asset 486,499 498,455
------------ ------------
Net deferred tax asset 1,566,559 1,449,430
Valuation allowance (1,566,559) (1,449,430)
------------ ------------
Net deferred tax liability $ -- $ --
============ ============
F-13
The difference between the actual provision (benefit) and the amount
computed at the statutory United States federal income tax rate of 34%
for the years ended December 31, 2003 and 2002 is attributable to the
following:
2003 2002
--------------- ----------------
Provision (benefit) computed at statutory rate 34.0% 34.0%
Other 2.6% (2.2)%
Current year tax credits (8.7)% (3.8)%
State tax (net of federal benefit) 5.5% 5.1%
Change in valuation allowance 20.6% (10.7)%
--------------- ----------------
Total provision for income taxes 54.0% 22.4%
=============== ================
At December 31, 2003 and 2002, the Company had California tax net operating loss
carryforwards of approximately $268,000 and $268,000, respectively. The
California tax net operating loss carryforwards will be available for
utilization until 2013.
The Company also has California research and development tax credit
carryforwards of approximately $47,000 and $101,000 for 2003 and 2002,
respectively. The California credits may be carried forward indefinitely.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases -- In March 2003, the Company entered into a sub-lease agreement to lease
its principal operating facility. The lease expires January 4, 2006 and monthly
rental payments are $22,255. Under this lease, the Company is responsible for
certain maintenance costs, taxes and insurance. Prior to March 2003, the Company
leased its principal operating facility under a non-cancelable operating lease
agreement which expired in April 2003. Monthly lease payments equaled $16,125.
Under this lease, the Company was responsible for certain maintenance costs,
taxes and insurance.
Future annual minimum lease payments for the operating lease at December 31,
2003 are summarized as follows:
Year Ending December 31:
2004 $ 267,057
2005 267,057
2006 2,927
--------------
$ 537,041
==============
Rent expense was $264,507 and $195,787 for the years ended December 31, 2003 and
2002, respectively.
Defined Contribution Retirement Plan - The Company maintains a 401(k) profit
sharing plan covering substantially all its employees. The employees may
voluntarily contribute up to 15% of their wages to the plan on a tax-deferred
basis. Employer contributions are discretionary. The employer contributions for
the years ending December 31, 2003 and 2002 were $0 and $0, respectively.
F-14
NOTE 11 - SHAREHOLDERS' EQUITY
Shareholders' equity consists of the following:
COMMON STOCK -- There are twenty-five million (25,000,000) shares of common
stock, no par value, authorized with 7,055,000 shares outstanding as of December
31, 2003 and 2002. In connection with the management buyout in December 2002,
the Company reacquired 7,487,541 shares of its common stock for a total cost of
$6,053,153.
PREFERRED SERIES A STOCK -- At December 31, 2003 and 2002, one million four
hundred forty-five thousand (1,445,000) shares of preferred stock, no par value,
were authorized and outstanding. The preferred stock was issued in connection
with the sale of intellectual property to a third party (see Note 12).
NOTE 12 - SALE OF INTELLECTUAL PROPERTY AND PREFERRED STOCK
On December 6, 2002, the Company sold certain intellectual property for
$7,500,000 to a third party. In connection with the sale, the Company also sold
certain property and equipment for proceeds of $43,859 and 1,445,000 shares of
series A preferred stock at $0.346 per share, for $500,000 respectively. The
Company has recognized a total gain of $7,500,000 on the sale of the
intellectual property and property and equipment due to the tangible assets
being fully depreciated as of the date of sale. The third party also entered
into employment agreements with several of the Company's employees and also a
covenant not-to-compete with one of the original stockholders.
In connection with the sale of the intellectual property, the third party
granted back to the Company the right to sell various license agreements. Under
the terms of these agreements, the Company is obligated to pay royalties equal
to 75% of the sales made to certain customers. The terms of the license
agreements vary depending on the agreement with the minimum term being
approximately three years.
Note 13 - MANAGEMENT BUYOUT AGREEMENT
Concurrent with the sale of the intellectual property and preferred stock, on
December 6, 2002, the management of the Company repurchased all of the 7,478,541
shares of common stock outstanding for a total cost of $6,053,153. In connection
with the share repurchase, the Company issued notes payables of $2,373,000 to
the former shareholders. All of the shares of common stock were subsequently
retired. In addition, options to purchase 1,102,458 shares of common stock were
also repurchased from the stockholders for a total of $893,000, for which notes
payables of $803,000 were issued and remain outstanding at December 31 2003 and
2002 respectively. All stock options repurchased were subsequently cancelled.
A total of 7,055,000 shares of common stock were then issued to two of the
officers in exchange for notes receivables amounting to $211,650 (see note 14).
In connection with the change of control and under the terms of their employment
agreements, the officers received $100,000 each in bonuses for which notes
payables of $100,000 for each remain outstanding at December 31 2003 and 2002,
respectively (see note 14).
NOTE 14 - RELATED PARTIES
Affiliated Companies -- At December 31, 2001, the Company had outstanding note
receivable from LinkSource, with interest at 6.7% in the amount of $46,500,
which was fully reserved. This receivable was written off in full during the
year ended December 31, 2002. The founder and former CEO of the Company was an
investor and director of LinkSource. The Company had no transactions with
LinkSource in 2003 or 2002. At December 31, 2003 and 2002, there were no
outstanding balances related to LinkSource.
F-15
Notes receivable from officers -- On December 20, 2002, the Company issued
7,055,000 shares of common stock to two officers and shareholders in exchange
for notes receivable of $211,650. Interest on the principal balance of $105,825
of each note is computed from the date of issuance at a rate of 5% compounded
annually and will continue to accrue until paid. The notes are due at the time
of a change in control or the transfer of the officers' common stock holdings.
Under the terms of their employment agreements, certain bonuses were payable to
two officers and shareholders in the event of a change of control of the
Company. Pursuant to the management buyout in December 2002, the officers were
granted a bonus of $100,000 each. The Company issued two promissory notes that
bear interest at 5% per annum and are due on the earlier of a further change in
control or the transfer of their common stock holdings.
NOTE 15 - MAJOR CUSTOMERS
The Company had sales to a customer of approximately $997,771 and $963,703 in
the years ended December 31, 2003 and 2002, respectively, accounting for
approximately 12% and 11% of total sales, respectively. The related account
receivable balances at December 31, 2003 and 2002 were $520,686 and $371,257,
respectively, which constituted 19% and 20% of the total accounts receivable
balances outstanding at December 31, 2003 and 2002, respectively.
NOTE 16 - SUBSEQUENT EVENT (RESTATED)
Pursuant to an agreement dated June 1, 2004, the Company executed a Restated
Agreement of Merger and Plan of Reorganization with Island Pacific, Inc.
("Island Pacific") pursuant to which the Company will be acquired by Island
Pacific for a purchase price of approximately $11.6 million, consisting of
2,517,232 shares of Island Pacific's Series B convertible preferred stock with a
fair value of $1.2 million, 1,546,733 shares of Island Pacific's common stock
with a fair value of $5.7 million, promissory notes totaling $3.6 million,
assumption of the Company's stock option plan valued at $1.0 million and
acquisition costs totaling $110,000. In addition, Island Pacific assumed
approximately $2.3 million in debt owed to the former stockholders of the
company in connection with the management buyout agreement and the Company's
2003 Stock Option Plan. The outstanding stock options at June 1, 2004 were
converted into Island Pacific stock options at a conversion rate of 1.5562.
F-16
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
FINANCIAL STATEMENTS
FOR
THREE MONTHS ENDED
MARCH 31, 2004
F-17
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
BALANCE SHEET
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 523,697 $ 1,093,089
Accounts receivable, net of allowance for doubtful accounts of $270,070 and
$265,181, respectively 1,849,631 2,379,285
Prepaid expenses 127,349 246,654
------------ ------------
Total current assets 2,500,677 3,719,028
Property and equipment, net 533,098 391,412
Non-compete agreement, net 36,763 49,012
------------ ------------
Total assets $ 3,070,538 $ 4,159,452
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of notes payable $ 437,075 $ 560,584
Current maturities of capital lease obligations 5,916 5,880
Accounts payable 131,249 225,979
Accrued expenses 733,075 923,838
Deferred revenue 1,748,594 1,772,302
Settlement agreement 167,254 200,786
Income tax payable 231,442 351,440
------------ ------------
Total current liabilities 3,454,605 4,040,809
Notes payable due to related parties 200,000 200,000
Notes payable, less current maturities 1,392,594 1,612,416
Capital lease obligations, less current maturities 5,799 6,880
Deferred revenue 915,982 906,457
Settlement agreement, less current maturities 41,958 127,724
------------ ------------
Total liabilities 6,010,938 6,894,286
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred Stock, no par value; 1,445,000 shares authorized and outstanding;
Series A 500,000 500,000
Common stock, no par value, 25,000,000 shares authorized;
7,055,000 shares issued and outstanding 211,650 211,650
Stock subscriptions (211,650) (211,650)
Retained deficit (3,440,400) (3,234,834)
------------ ------------
Total shareholders' deficit (2,940,400) (2,734,834)
------------ ------------
Total liabilities and shareholders' deficit $ 3,070,538 $ 4,159,452
============ ============
The accompanying notes are an integral part of these financial statements.
F-18
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
MARCH 31, MARCH 31,
2004 2003
------------ ------------
Sales
License $ 1,351,039 $ 1,392,778
Membership 515,424 442,476
Professional services 118,013 120,910
Other 7,225 55,116
------------ ------------
Total sales 1,991,701 2,011,280
Cost of sales
License 207,277 87,151
Services 72,561 43,430
Other 16,391 41,471
------------ ------------
Total cost of sales 296,229 172,052
------------ ------------
Gross profit 1,695,472 1,839,228
Operating expenses:
Research and development 473,085 340,835
General and administrative 910,454 804,440
Selling and marketing 443,186 230,621
Depreciation and amortization 74,086 88,383
------------ ------------
Total operating expenses 1,900,811 1,464,279
------------ ------------
Income (loss) from operations (205,339) 374,949
Other income (expense):
Interest expense (28,488) (31,088)
Gain (loss) on sale of equipment -- 2,205
------------ ------------
Total other expense (28,488) (28,883)
------------ ------------
Income (loss) before provision for income taxes (233,827) 346,066
Provision for income taxes (benefits) (28,261) 119,000
------------ ------------
Net income (loss) $ (205,566) $ 227,066
============ ============
The accompanying notes are an integral part of these financial statements.
F-19
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
MARCH 31, MARCH 31,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (205,566) $ 227,066
Adjustments to reconcile net income (loss) to net cash provided
(used) for operating activities:
Depreciation and amortization 74,086 88,383
Gain on sale of equipment -- (2,205)
Increase in allowance for doubtful accounts 4,889 9,661
Changes in assets and liabilities:
Accounts receivable 524,765 (20,825)
Inventory -- 6,872
Prepaid expenses and other assets 119,305 (21,699)
Accounts payable (94,730) (164,855)
Accrued expenses (190,761) 3,715
Deferred revenue (14,183) 51,046
Settlement agreement (119,298) (23,389)
Income tax payable (120,000) 68,200
------------ ------------
Net cash provided (used) for operating activities (21,493) 221,970
------------ ------------
Cash flows from investing activities:
Purchases of furniture and equipment (203,523) (51,978)
Proceeds from sale of equipment -- 2,205
------------ ------------
Net cash provided (used) for investing activities (203,523) (49,773)
------------ ------------
Cash flows from financing activities:
Payments on notes payable (343,331) --
Borrowings on obligation under capital lease -- 17,639
Principal payments on capital lease obligation (1,045) (396)
------------ ------------
Net cash provided (used) for financing activities (344,376) 17,243
------------ ------------
Net increase in cash and cash equivalents (569,392) 189,440
Cash and cash equivalents, beginning of period 1,093,089 286,952
------------ ------------
Cash and cash equivalents, end of period $ 523,697 $ 476,392
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 28,488 $ 31,178
Income taxes paid $ 120,000 $ 50,800
The accompanying notes are an integral part of these financial statements.
F-20
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles applicable to interim financial
statements. Accordingly, they do not include all of the information and notes
required for complete financial statements. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows at March 31, 2004 and for the periods presented have
been made.
The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The unaudited balance sheet at March
31, 2004 and the unaudited statements of operations and unaudited statements of
cash flows for the three months ended March 31, 2004 and 2003 are not
necessarily indicative of the operating results or cash flows that may be
expected for the entire year.
NOTE 2 - DEFERRED REVENUE
Deferred revenue at March 31, 2004 and December 31, 2003 represents prepaid
support maintenance services, of which $1,748,594 and $1,772,302 are current.
F-21
NOTE 3 - NOTES PAYABLE
Notes payable at March 31, 2004 and December 31, 2003 consisted of the
following:
March 31, December 31,
2004 2003
---- ----
Note payable, to a former shareholder, secured by Company stock, payable in
monthly installments of $2,813 including interest at 4.0% per annum
beginning January 31, 2004 through November 30, 2007 with a balloon payment
due on December 31, 2007. Interest only payments are
to be made monthly for the year ended December 31, 2003 $ 102,769 $ 123,344
Note payable, to a former option holder, secured by Company stock, payable
in monthly installments of $5,350 including interest at 4.50% per annum
beginning January 31, 2004 through November 30, 2007 with a balloon payment
due on December 31, 2007. Interest only payments are
to be made monthly for the year ended December 31, 2003 225,284 267,667
Note payable, to a former option holder, secured by Company stock, payable
in monthly installments of $5,350 including interest at 4.50% per annum
beginning January 31, 2004 through November 30, 2007 with a balloon payment
due on December 31, 2007 Interest only payments are to
be made monthly for the year ended December 31, 2003 223,327 267,667
Note payable, to a former option holder, secured by Company stock, payable
in monthly installments of $5,350 including interest at 4.50% per annum
beginning January 31, 2004 through November 30, 2007 with a balloon payment
due on December 31, 2007. Interest only payments are
to be made monthly for the year December 31, 2003 225,301 267,666
Note payable, to a former shareholder, secured by Company stock, payable in
monthly installments of $7,919 including interest at 4.50% per annum
beginning January 31, 2004 through November 30, 2007 with a balloon payment
due on December 31, 2007. Interest only payments are
to be made monthly for the year ended December 31, 2003 352,604 417,420
Note payable, to a former shareholder, secured by Company stock, payable in
monthly installments of $5,350 including interest at 4.50% per annum
beginning January 31, 2004 through November 30, 2007 with a balloon payment
due on December 31, 2007. Interest only payments are
to be made monthly for the year ended December 31, 2003 700,384 829,236
---------------- ------------------
Total notes payable 1,829,669 2,173,000
Less: current maturities 437,075 560,584
---------------- ------------------
Long-term portion of notes payable $ 1,392,594 $ 1,612,416
================ ==================
F-22
NOTE 4 - SUBSEQUENT EVENT
Pursuant to an agreement dated June 1, 2004, the Company was acquired by Island
Pacific, Inc. ("Island Pacific") from Michael Tomczak and Jeffrey Boone (the
"Shareholders") and Intuit Inc. ("Intuit") in a merger transaction. On March 12,
2004, the Company, Island Pacific, IPI Merger Sub, Inc. ("Merger Sub"), and the
Shareholders entered the initial Agreement of Merger and Plan of Reorganization
(the "March 12, 2004 Merger Agreement") which provided Island Pacific would
acquire the Company in a merger transaction in which the Company would merge
with and into Merger Sub. The merger consideration contemplated by the March 12,
2004 Merger Agreement was a combination of cash and shares of Island Pacific's
common stock. The March 12, 2004 Merger Agreement was amended by the Amended and
Restated Agreement of Merger and Plan of Reorganization, dated June 1, 2004, by
and between the Company, Island Pacific, Merger Sub, IPI Merger Sub II, Inc.
("Merger Sub II") and the Shareholders (the "Amended Merger Agreement").
Pursuant to the Amended Merger Agreement, the Merger (as defined below) was
completed with the following terms: (i) Island Pacific assumed the Company's
obligations under those certain promissory notes issued by the Company on
December 20, 2002 with an aggregate principal balance of $2.3 million; (ii) the
total consideration paid at the closing of the Merger was $11.6 million paid in
shares of Island Pacific's common stock with fair value of $1.2 million, newly
designated Series B convertible preferred stock ("Series B Preferred") with fair
value of $5.7 million, promissory notes totaling $3.6 million, assumption of the
Company's stock option plan valued at $1.0 million and acquisition costs
totaling $110,000; (iii) the Shareholders and Intuit are entitled to price
protection payable if and to the extent that the average trading price of Island
Pacific's common stock is less than $0.76 at the time the shares of Island
Pacific's common stock issued in the Merger and issuable upon conversion of the
Series B Preferred are registered pursuant to the registration rights agreement
dated June 1, 2004 between Island Pacific, the Shareholders and Intuit (the
"Registration Rights Agreement"); and (iv) the merger consisted of two steps
(the "Merger"), first, Merger Sub merged with and into the Company, Merger Sub's
separate corporate existence ceased and the Company continued as the surviving
corporation (the "Reverse Merger"), immediately thereafter, the Company merged
with and into Merger Sub II, the Company's separate corporate existence ceased
and Merger Sub II continued as the surviving corporation (the "Second-Step
Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares of Series
B Preferred and a promissory note payable monthly over two years in the
principal amount of $1,295,000 bearing interest at 6.5% per annum. As a result
of the Merger, Intuit, the holder of all of the outstanding shares of the
Company's Series A Preferred stock, received 1,546,733 shares of Island
Pacific's common stock and a promissory note payable monthly over two years in
the principal amount of $530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under the
Registration Rights Agreement, Island Pacific agreed to register the common
stock issuable upon conversion of the Series B Preferred issued to the
Shareholders within 30 days of the automatic conversion of the Series B
Preferred into common stock. The automatic conversion will occur upon Island
Pacific filing an amendment to its certificate of incorporation with the
Delaware Secretary of State increasing the authorized number of shares of its
common stock ("Certificate of Amendment") after securing its shareholder
approval for the Certificate of Amendment. Under the Registration Rights
Agreement, Intuit is entitled to demand registration or to have its shares
included on any registration statement filed prior the registration statement
covering the Shareholders' shares, subject to certain conditions and
limitations, or if not previously registered to have its shares included on the
registration statement registering the Shareholders' shares. The Shareholders
and Intuit are entitled to price protection payments of up to a maximum of $0.23
per share payable by promissory note, if and to the extent that the average
closing price of Island Pacific's common stock for the 10 days immediately
preceding the date the registration statement covering their shares is declared
effective by the Securities and Exchange Commission, is less than the 10 day
average closing price as of June 1, 2004, which was $0.76
Upon the consummation of the Merger, Michael Tomczak, the Company's President
and Chief Executive Officer, was appointed Island Pacific's President, Chief
Operating Officer and director and Jeffrey Boone, the Company's Chief Technology
Officer, was appointed Island Pacific's Chief Technology Officer. Island Pacific
entered into two-year employment agreements and non-competition agreements with
Mr. Tomczak and Mr. Boone.
F-23
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ISLAND PACIFIC, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Pursuant to an agreement dated June 1, 2004, Island Pacific, Inc. ("Island
Pacific") acquired Retail Technologies International, Inc. ("RTI") from Michael
Tomczak and Jeffrey Boone (the "Shareholders") and Intuit Inc. ("Intuit") in a
merger transaction.
Pursuant to the Amended Merger Agreement, the Merger (as defined below) was
completed with the following terms: (i) Island Pacific assumed RTI's obligations
under those certain promissory notes issued by RTI on December 20, 2002 with an
aggregate principal balance of $2.3 million; (ii) the total consideration paid
at the closing of the Merger was $11.6 million paid in shares of its common
stock with fair value of $1.2 million, newly designated Series B convertible
preferred stock ("Series B Preferred") with fair value of $5.7 million,
promissory notes totaling $3.6 million, assumption of RTI's incentive stock
option plan valued at $1.0 million and acquisition costs of $110,000; (iii) the
Shareholders and Intuit are entitled to price protection payable if and to the
extent that the average trading price of its common stock is less than $0.76 at
the time the shares of its common stock issued in the Merger and issuable upon
conversion of the Series B Preferred are registered pursuant to the registration
rights agreement dated June 1, 2004 between Island Pacific, the Shareholders and
Intuit (the "Registration Rights Agreement"); and (iv) the merger consisted of
two steps (the "Merger"), first, Merger Sub merged with and into RTI, Merger
Sub's separate corporate existence ceased and RTI continued as the surviving
corporation (the "Reverse Merger"), immediately thereafter, RTI merged with and
into Merger Sub II, RTI's separate corporate existence ceased and Merger Sub II
continued as the surviving corporation (the "Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares of Series
B Preferred and a promissory note payable monthly over two years in the
principal amount of $1,295,000 bearing interest at 6.5% per annum. As a result
of the Merger, Intuit, the holder of all of the outstanding shares of RTI's
Series A Preferred stock, received 1,546,733 shares of our common stock and a
promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under the
Registration Rights Agreement, Island Pacific agreed to register the common
stock issuable upon conversion of the Series B Preferred issued to the
Shareholders within 30 days of the automatic conversion of the Series B
Preferred into common stock. The automatic conversion will occur upon Island
Pacific filing an amendment to its certificate of incorporation with the
Delaware Secretary of State increasing the authorized number of shares of its
common stock ("Certificate of Amendment") after securing shareholder approval
for the Certificate of Amendment. Under the Registration Rights Agreement,
Intuit is entitled to demand registration or to have its shares included on any
registration statement filed prior the registration statement covering the
Shareholders' shares, subject to certain conditions and limitations, or if not
previously registered to have its shares included on the registration statement
registering the Shareholders' shares. The Shareholders and Intuit are entitled
to price protection payments of up to a maximum of $0.23 per share payable by
promissory note, if and to the extent that the average closing price of our
common stock for the 10 days immediately preceding the date the registration
statement covering their shares is declared effective by the Securities and
Exchange Commission, is less than the 10 day average closing price as of June 1,
2004, which was $0.76.
Upon the consummation of the Merger, Michael Tomczak, RTI's former President and
Chief Executive Officer, was appointed Island Pacific's President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed Island Pacific's Chief Technology Officer. Island Pacific
entered into two-year employment agreements and non-competition agreements with
Mr. Tomczak and Mr. Boone.
F-24
The accompanying unaudited pro forma condensed consolidated balance sheet
contains the following:
1. Consolidated balance sheet of Island Pacific and its
subsidiaries as of March 31, 2004 (restated), including Page
Digital Incorporated ("Page Digital"), and
2. Balance sheet of RTI as of March 31, 2004.
The pro forma condensed consolidated balance sheet uses the purchase method of
accounting and is based on the assumptions set forth in the notes to the
statement.
The accompanying unaudited pro forma condensed consolidated statement of
operations for the twelve months ended March 31, 2004 contains the following:
1. Consolidated statement of operations of Island Pacific and its
subsidiaries for the twelve months ended March 31, 2004
(restated), including the operations of Page Digital from
February 1, 2004 to March 31, 2004,
2. Statement of operations of Page Digital for the period of
April 1, 2003 to January 31, 2004, which assumes the
acquisition of Page Digital occurred on April 1, 2003, and
3. Statement of operations of RTI for the twelve months ended
March 31, 2004, which assumes the acquisition of RTI occurred
on April 1, 2003.
The pro forma condensed consolidated statements of operations use the purchase
method of accounting and are based on the assumptions set forth in the notes to
this statement.
Island Pacific is in the process of determining how the purchase price will be
allocated to the net assets acquired and accordingly, the accompanying pro forma
condensed consolidated financial statements represent a preliminary estimate of
the allocation. The actual purchase price allocation may vary significantly.
These pro forma condensed consolidated financial statements are not necessarily
indicative of future operations or the actual results which would have occurred
had the transaction been consummated on the date indicated or that may be
achieved in the future.
The unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the historical consolidated financial statements of the
Company and the notes to such statements included in Island Pacific's Form 10-K
for the fiscal year ended March 31, 2004, as well as the historical financial
statements of RTI included in this Form 8-K/A.
F-25
Island Pacific, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
As of March 31, 2004
(in thousands)
Island Pro forma Pro Forma
Pacific RTI Adjustments Notes Consolidated
------------- ------------- ------------- -------------
(Restated) (Restated) (Restated)
ASSETS
Current assets
Cash $ 2,108 $ 524 $ (110) (A) $ 2,522
Accounts receivable, net 4,572 1,850 -- 6,422
Other receivables 143 -- -- 143
Inventories 46 -- -- 46
Current portion of non-compete agreements 668 -- -- 668
Current portion of note receivable 36 -- -- 36
Prepaid expenses and other current assets 682 127 -- 809
------------- ------------- ------------- -------------
Total current assets 8,255 2,501 (110) 10,646
Note receivable, less current maturities, net 126 -- -- 126
Property and equipment, net 821 533 -- 1,354
Goodwill, net 20,607 -- 10,658 (A) 31,265
Other intangibles, net 18,297 37 3,111 (A,B,C) 21,445
Other assets 421 -- -- 421
------------- ------------- ------------- -------------
Total assets $ 48,527 $ 3,071 $ 13,659 $ 65,257
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debts $ 146 $ 437 $ 650 (F) $ 1,233
Current portion of notes payable to officers -- -- 269 (F) 269
Current portion of capital leases 169 6 -- 175
Accounts payable 1,255 131 -- 1,386
Accrued expenses 3,301 733 -- 4,034
Deferred revenue 2,657 1,749 -- 4,406
Current portion of settlement agreements -- 167 -- 167
Income taxes payable -- 231 -- 231
------------- ------------- ------------- -------------
Total current liabilities 7,528 3,454 919 11,901
Convertible debentures, less current maturities 1,900 -- -- 1,900
Capital lease obligations, less current maturities 89 6 -- 95
Notes payable -- 1,393 448 (A,D,F) 1,841
Notes payable due to officers, less current maturities -- 200 2,490 (A,D,F) 2,690
Deferred revenue -- 916 -- 916
Settlement agreements, less current maturities -- 42 -- 42
Other liabilities 235 -- -- 235
------------- ------------- ------------- -------------
Total liabilities 9,752 6,011 3,857 19,620
------------- ------------- ------------- -------------
Stockholders' equity
Preferred stock 14,100 500 5,209 (A) 19,809
Common stock 5 212 (212)(A) 5
Stock subscription receivables -- (212) 212 (A) --
Additional paid in capital 74,088 -- 2,206 (A) 76,294
Retained earnings (deficit) (49,418) (3,440) 2,387 (A,B,C,D) (50,471)
------------- ------------- ------------- -------------
Total stockholders' equity 38,775 (2,940) 9,802 45,637
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 48,527 $ 3,071 $ 13,659 $ 65,257
============= ============= ============= =============
F-26
PRO FORMA ADJUSTMENTS:
(A) Purchase price of RTI:
Issuance of 2,517,233 shares of Series B Convertible
Preferred Stock $ 5,709
Issuance of 1,546,733 shares of common stock:
Common stock --
Paid in capital 1,169
Notes payable due to officers 2,591
Note payable due to Intuit 531
------------
10,000
Assumed additional principal on existing notes payable 500
Assumed stock option plan 1,037
Acquisition costs 110
------------
Purchase price $ 11,647
============
Net assets acquired:
Preferred stock $ 500
Common stock 212
Stock subscription receivable (212)
Retained deficits at March 31, 2003 (3,381)
Software (7 years life) 1,410
Customer relationships (10 years life) 1,660
Trademark 800
Goodwill 10,658
------------
$ 11,647
============
(B) Amortization expense for ten months ended January 31, 2004 related to
intangible assets resulted from Page Digital acquisition:
Software $ 241
Customer relationships 151
------------
Total $ 392
============
(C) Amortization expense for twelve months ended March 31, 2004 related to
intangible assets resulted from RTI acquisition:
Software $ 201
Customer relationships 166
------------
Total $ 367
============
(D) Interest expense at 6.5% per annum on notes payable issued in connection
with RTI acquisition
Notes payable to officers $ 168
Notes payable 68
------------
$ 235
============
(F) Current maturities of:
Notes payable $ 650
Notes payable to officers 269
------------
$ 919
============
F-27
Island Pacific, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
For the twelve Months Ended March 31, 2004
(in thousands, except for per share amounts)
Island Pro Forma Pro Forma
Pacific Page Digital RTI Adjustments Notes Consolidated
------------- ------------- ------------- ------------- -------------
(Restated) (Restated) (Restated)
Net sales $ 17,839 $ 4,202 $ 8,591 $ -- $ 30,632
Cost of goods sold 7,871 2,269 886 442 (A,B) 11,468
------------- ------------- ------------- ------------- -------------
Gross profit 9,968 1,933 7,705 (442) 19,164
Expenses
Research and development expenses 1,082 1,461 2,964 -- 5,507
Depreciation and amortization 1,215 169 57 317 (A,B) 1,758
Selling, general and admin. expenses 15,246 2,564 4,429 -- 22,239
------------- ------------- ------------- ------------- -------------
Total expenses 17,543 4,194 7,450 317 29,504
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (7,575) (2,261) 255 (759) (10,340)
Other income (expense):
Interest income 20 12 -- -- 32
Other income (expense) (7) 12 (139) -- (134)
Interest expense (1,952) (21) (93) (235) (C) (2,301)
------------- ------------- ------------- ------------- -------------
Total other income (expenses) (1,939) 3 (232) (235) (2,403)
------------- ------------- ------------- ------------- --------------
Income (loss) before income taxes (9,514) (2,258) 23 (994) (12,743)
Provision for income tax benefits (586) -- 8 -- (578)
------------- ------------- ------------- ------------- -------------
Net income (loss) (8,928) (2,258) 15 (994) (12,165)
Cumulative preferred dividends (1,024) -- -- -- (1,024)
------------- ------------- ------------- ------------- -------------
Net loss available to common stockholders $ (9,952) $ (2,258) $ 15 (994) $ (13,189)
============= ============= ============= ============= =============
Basic and diluted earnings per share based
on net loss available to common
stockholders $ (0.24) $ (0.31)
Basic and diluted weighted average shares
outstanding 41,450 1,547 (D) 42,997
F-28
PRO FORMA ADJUSTMENTS:
(A) Amortization expense for ten months ended January 31, 2004 related to
intangible assets resulted from Page Digital acquisition:
Software $ 241
Customer relationships 151
------------
Total $ 392
============
(B) Amortization expense for twelve months ended March 31, 2004 related to
intangible assets resulted from RTI acquisition:
Software $ 201
Customer relationships 166
------------
Total $ 367
============
(C) Interest expense at 6.5% per annum on notes payable issued
in connection with RTI acquisition $ 235
===========
(D) Issued 1,546,723 shares of common stock in connection with
RTI acquisition 1,547
============
F-28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Island Pacific, Inc.
Date: November 24, 2004 By: /s/ Ran Furman
--------------------------
Name: Ran Furman
Title: Chief Financial Officer