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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2007
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
_________.
Commission file number 0-23049
ISLAND PACIFIC, INC.
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(FORMERLY KNOWN AS SVI SOLUTIONS, INC.)
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(Exact Name of Registrant as specified in its charter)
DELAWARE 33-0896617
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3252 HOLIDAY COURT, SUITE 226, LA JOLLA, CA 92037
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 550-3355
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.0001 par value Electronic Interdealer Quotation and
Trading System
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X}
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act.
Yes [ ] No [X]
The aggregate market value of the registrant's voting and non-voting common
stock held by non-affiliates, based on the closing sale price of the
registrant's common stock on September 30, 2007 as reported on the Electronic
Interdealer Quotation and Trading System, was approximately $4.0 million.
Excludes shares of common stock held by directors, officers and each person who
holds 5% or more of the registrant's common stock.
The number of shares outstanding of the registrant's Common Stock was 60,509,964
on October 31, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I
Item 1. Business............................................................................................2
Item 1A. Risk Factors.......................................................................................13
Item 1B. Unresolved Staff Comments..........................................................................21
Item 2. Properties.........................................................................................21
Item 3. Legal Proceedings..................................................................................22
Item 4. Submission of Matters to a Vote of Security Holders................................................23
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.................................23
Item 6. Selected Financial Data............................................................................26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................48
Item 8. Financial Statements and Supplementary Data........................................................49
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures..............49
Item 9A. Controls and Procedures............................................................................49
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................51
Item 11. Executive Compensation.............................................................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................58
Item 13. Certain Relationship and Related Transactions......................................................60
Item 14. Principal Accountants' Fees and Services...........................................................62
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................63
Signatures.........................................................................................70
Certifications.......................................................................................
INTRODUCTORY NOTE
THE ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 AND THE COMPANY INTENDS THAT CERTAIN MATTER
DISCUSSED IN THIS REPORT ARE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY
FOR THE SAFE HARBOR FROM LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE
IDENTIFIED BY THE CONTEXT OF THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE
COMPANY ("ISLAND PACIFIC", "IPI", "WE" OR "US") "BELIEVES", "ANTICIPATES",
"EXPECTS", "FORECASTS", "ESTIMATES" OR OTHER WORDS SIMILAR MEANING AND CONTEXT.
SIMILARLY, STATEMENTS THAT DESCRIBE FUTURE PLANS, OBJECTIVES, OUTLOOKS, TARGETS,
MODELS, OR GOALS ARE ALSO DEEMED FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE FORECASTED OR
ANTICIPATED AS OF THE DATE OF THIS REPORT. CERTAIN OF SUCH RISKS AND
UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY TO SUCH STATEMENTS AND ELSEWHERE
IN THIS REPORT, INCLUDING ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." STAKEHOLDERS, POTENTIAL
INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE FACTORS IN EVALUATING
THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
SUCH FORWARD-LOOKING STATEMENTS OR CONSTRUE SUCH STATEMENTS TO BE A
REPRESENTATION BY US THAT OUR OBJECTIVES OR PLANS WILL BE ACHIEVED. THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE MADE ONLY AS OF THE DATE
OF THIS REPORT, AND WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
ITEM 1. BUSINESS
GENERAL
Island Pacific, Inc. was formed in the state of Delaware as SVI Solutions,
Inc. on February 24, 2000. We are a provider of software solutions and services
to the retail industry. We provide solutions that help retailers understand,
create, manage and fulfill consumer demand. The Company is organized in three
strategic business units - Retail Management Solutions, Store Solutions and
Multi-channel Retail Solutions.
2
Our solutions and services have been developed specifically to meet the
needs of the retail industry. Our solutions help retailers improve the
efficiency and effectiveness of their operations and build stronger, longer
lasting relationships with their customers.
We market our software solutions through direct and indirect sales channels
primarily to retailers who sell to their customers through traditional retail
stores, catalogs and/or Internet-enabled storefronts. To date, we have licensed
our solutions to more than 9,000 retailers across a variety of retail sectors.
ISLAND PACIFIC
Historically, retailers have relied upon custom-built systems, often
self-developed, to manage business processes and business information with both
trading partners and customers. These legacy systems are typically built on
1960s business models and 1970s technology. They are not Internet-enabled, and
do not permit collaboration among a retailer's customers, partners, suppliers
and other members of the supply/demand chain. Moreover, they reflect the
thinking of a seller's market.
Over the past few years, retailers have begun to purchase packaged
solutions designed specifically for the retail industry. Most of these systems
are very expensive to license, and very expensive, time-consuming and difficult
to implement. They have been primarily positioned to the largest companies, who
have enormous amounts of managerial, technical and financial resources at their
disposal - organizations for which distraction and mistakes are affordable.
These solutions ignore the needs of the small to medium sized retailers,
who have many of the same needs and face many of the same challenges as do the
larger retailers, but lack the managerial, financial and technological capacity
of the larger retailers.
Our solutions serve the small to medium sized market.
All retailers today face the challenge of operating in a very competitive
environment, an environment that can be best described as over-stored and
over-homogenized -- an environment in which power has shifted from the seller to
the buyer.
As retailers expand their businesses to include the Internet, catalog,
kiosk and other distribution channels, the complexity of managing inventory and
meeting customer demands places tremendous pressure on their business processes
and their technology infrastructure.
To meet an ever more mobile and demanding consumer's expectations,
retailers need to deliver on the customer's terms. This means having the right
product, at the right time and in the right place across multi-channel touch
points. To do this, retailers need valuable consumer insights and intelligence
on external factors that shape consumer response. This intelligence, augmented
by powerful communications, strong forecasting, planning, assortment planning,
allocation, event planning, replenishment and merchandising functions are
critical to profitably achieve this goal. These represent the contents of our
product offerings.
Small to medium sized retailers need a cost-effective, easily installed,
affordable, comprehensive, integrated software infrastructure that spans
supplier to consumer and gives the retailer visibility, flexibility and control
of all business processes to meet all competitive challenges.
We believe a market opportunity exists to provide these retailers with a
software solution that is designed specifically for their needs. This solution
should be easy-to-use, leverage a retailer's existing investments in information
technology and be sufficiently flexible to meet the specific needs of a broad
range of retail sectors, such as fashion, hard-lines and mass merchandise.
We have developed, acquired and deployed software solutions that enable
retailers to manage the entire scope of their operations. These operations
include point-of-sale, customer relationship management, vendor relationship
management, merchandising, demand chain management, planning, and forecasting.
Key areas, which differentiate our software solutions, include:
o Value - Our integrated and modular architecture helps retailers meet
return on investment objectives by allowing them to implement the most
critical and valuable applications first. This modular architecture
decreases migration path risk for the replacement of legacy systems
and increases the probability of an on-time, on-budget implementation
project.
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o Proven - We are a leading provider of retail infrastructure software
and services. We understand the complex needs of retailers and have
designed our solutions specifically for the retail industry. We
provide certain software products and services infrastructure for
retailers with combined revenues of over $200 billion annually.
o Scalable - Our solutions are engineered to provide scalability to
efficiently handle large volumes of transactions and users. Our
solutions work in environments that span from one to five thousand
stores.
o Innovative - Our partnerships and our solutions include some of the
most advanced technologies available to retailers.
STRATEGY
Our mission is to provide the small to medium sized retailer all the
intelligence and tools necessary to succeed in a highly competitive environment.
Our mission is to make this information and these tools useable, affordable
and reliable for end-use in highly volatile environments.
Our mission is to make our products and services easy to acquire, easy to
install and easy to live with.
Our mission is to create value for retailers by providing valuable
intelligence and innovative technology solutions that help to understand,
create, manage, and fulfill consumer demand.
Our strategies are as follows:
o Increase Our Market Share. We believe we can continue to build and
expand our position of leadership within the retail packaged software
applications market as the retail industry increasingly turns to
packaged software applications as an alternative to expensive in-house
and custom developed applications.
o Provide High Levels of Customer Satisfaction. The retail industry is
strongly influenced by formal and informal references. We believe we
have the opportunity to expand market share by providing high levels
of customer support to our current customers, thereby fostering strong
customer references to support sales activities.
o Deliver Value to our Customers. We believe that maximizing our
customers' return on investment will help us compete in our market
space and increase our market share.
o Become the Preferred Application and Technology Architecture for the
Small to Medium Sized Retailers Globally. By leveraging our 25 years
of success, we believe we are uniquely positioned to become the
preferred application and technology architecture provider for retail
software and associated services to this market.
o Fulfill the Multi-Channel Requirements of Retailers. Through our Page
Digital Solutions, we believe we will be able to address the expanding
needs of retailers to cohesively manage their varied channels of
distribution.
RECENT DEVELOPMENTS
OPERATIONAL IMPROVEMENTS
In recent periods, we have taken a number of steps designed to improve our
balance sheet and operations, including:
o On June 4, 2004, we completed the acquisition of RTI, a provider of
management systems for retailers. See "Recent Transactions -
Acquisition of RTI" below.
4
o On August 27, 2004 we increased the number of shares of common stock
we are authorized to issue to 250 million shares.
o In November 2004, we restated certain of our financial statements and
made the following revised filings: 10-K/A for the fiscal year ended
March 31, 2004 and 10-Q/A for the fiscal quarter ended September 30,
2002, December 31, 2002, June 30, 2003, September 30, 2003, December
31, 2003 and June 30, 2004.
o On January 5, 2005, we entered into Amendment No. 2 (the "Amendment")
to the Retail Pro Software License Agreement dated December 6, 2002
between Intuit Inc. and Retail Technologies International, Inc.
("RTI") (the "License Agreement"), which we were assigned and assumed
in connection with its acquisition of RTI. Pursuant to the Amendment,
we extended certain of our license rights under the License Agreement.
The License Agreement was further amended and restated on December 21,
2006 as described under the caption Proprietary Rights below.
o In April 2005, Barry Schechter, our founder and former CEO, returned
as the Company's CEO.
o In April 2007, our Board of Directors appointed Philip Bolles to the
position of Interim Chief Financial Officer.
o We completed a number of debt and equity financing transactions. See
"Liquidity and Capital Resources - Financing Transactions" below.
o Our board adopted a strategic plan to return the Company to positive
cash flows and profitability, which included:
o Appointment of a new management team.
o A headcount reduction, office space downsize, and reduction of
other operating expenses.
o A new focus on R & D for core products and termination
unprofitable partner ventures.
o Introduction of new products to the market.
o Annual cost savings approaching $8 million.
o A reduction in annual cash overhead from $27 million to $19
million.
o Opening of a Europe, Middle East and Africa division through our
UK office to better serve the business partners in these regions
marketing Retail Pro.
o Opening an Asia Pacific office in Sydney, Australia, opening an
office in Beijing, China to serve the GCG (Greater Chinese
Geography - China, Hong Kong, Taiwan and Macau) and developing a
dedicated team to better service Latin America.
o Annual maintenance charges have been increased for IPMS users to be
more in line with industry standards.
We believe that these actions have positioned us for a return to a positive
cash flow, sustained revenue growth and profitability.
ACQUISITION OF RTI
Pursuant to an Amended Merger Agreement dated June 1, 2004, we acquired
Retail Technologies International, Inc. ("RTI") from Michael Tomczak, Jeffrey
Boone and Intuit Inc. ("Intuit") in a merger transaction. The Merger (as defined
below) was completed with the following terms: (i) we assumed RTI's obligations
under those certain promissory notes issued by RTI on December 20, 2002 with an
aggregate principal balance of $2.3 million; (ii) the total consideration paid
at the closing of the Merger was $11.6 million; paid in shares of our common
stock with a fair value of $1.2 million, newly designated Series B convertible
preferred stock ("Series B Preferred") with a fair value of $5.7 million,
promissory notes totaling $3.6 million, assumption of incentive stock options
with a fair value of $1.0 million and acquisition costs of $110,000; (iii) the
Shareholders and Intuit are entitled to price protection payable if and to the
extent that the average trading price of our common stock is less than $0.76 at
the time the shares of our common stock issued in the Merger and issuable upon
conversion of the Series B Preferred are registered pursuant to the registration
rights agreement dated June 1, 2004 between us, the Shareholders and Intuit (the
"Registration Rights Agreement"); and (iv) the Merger consisted of two steps,
first, Merger Sub merged with and into RTI, Merger Sub's separate corporate
existence ceased and RTI continued as the surviving corporation. Immediately
thereafter, RTI merged with and into Merger Sub II, RTI's separate corporate
existence ceased and Merger Sub II continued as the surviving corporation.
5
As a result of the Merger, each Shareholder received 1,258,616 shares of
Series B Preferred and a promissory note payable monthly over two years in the
principal amount of $1,295,000 bearing interest at 6.5% per annum. As a result
of the Merger, Intuit, the holder of all of the outstanding shares of RTI's
Series A Preferred stock, received 1,546,733 shares of our common stock and a
promissory note payable monthly over two years in the principal amount of
$530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under
the Registration Rights Agreement, we agreed to register the common stock
issuable upon conversion of the Series B Preferred issued to the Shareholders
within 30 days of the automatic conversion of the Series B Preferred into common
stock. The automatic conversion to 7,551,696 shares of common stock occurred on
August 30, 2004 following our filing an amendment to our certificate of
incorporation with the Delaware Secretary of State on August 27, 2004 increasing
the authorized number of shares of our common stock to 250,000,000 ("Certificate
of Amendment") after securing shareholder approval for the Certificate of
Amendment.
Under the Registration Rights Agreement, Intuit is entitled to demand
registration of its 1,546,733 shares of our common stock 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. We have recorded the
liability relating to the price protection at the date of acquisition in the
full amount of $0.23 per share in accordance with SFAS 5, "Accounting for
Contingencies" as a charge to Additional Paid In Capital in accordance with SFAS
141, "Business Combinations".
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director, and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone. We terminated both Mr. Tomczak and Mr. Boone in October 2005.
The combination of Island Pacific and RTI has enabled us to offer a fully
integrated solution to mid-tier retailers that is unique in the marketplace. As
a result of this transaction, smaller retailers are now able to cost-effectively
acquire a solution that provides both front and back-end support. The
combination instantly expanded our products, services offerings and distribution
channels.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
We currently structure our operations into three strategic business units.
The business units are retail management solutions, store solutions and
multi-channel retail solutions. Our operations are conducted principally in the
United States and the United Kingdom. In addition, we manage long-lived assets
by geographic region. The business units are as follows:
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") - offers a suite of
applications, which builds on our long history in retail software
design and development. We provide our customers with extremely
reliable, widely deployed, comprehensive and fully integrated retail
management solutions. Retail Management Solutions includes merchandise
management that optimizes workflow and provides the highest level of
data integrity. This module supports all operational areas of the
supply chain including planning, open-to-buy purchase order
management, forecasting, warehouse and store receiving distribution,
transfers, price management, performance analysis and physical
inventory. In addition, Retail Management Solutions includes a
comprehensive set of tools for analysis and planning, replenishment
and forecasting, event and promotion management, warehouse, ticketing,
financials and sales audit.
o STORE SOLUTIONS - Through our acquisition of RTI, we expanded our
Store Solutions offerings to include "Retail Pro(R)," which provides a
total solution for small to mid-tier retailers worldwide. Retail
Pro(R) is currently used by approximately 9,000 businesses in over
24,000 stores in 63 countries. The product is translated into eighteen
languages making it one of the few quality choices for the global
retailer. At its core, Retail Pro(R) is a high performance, 32-bit
Windows application offering point-of-sale, inventory control and
customer relations management. Running on WindowsNT, Windows2000,
Windows XP Professional and Windows.Net platforms, Retail Pro(R)
combines a fully user-definable graphical interface with support for a
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variety of input devices (from keyboard to touch screen). Its Retail
Business Analytics module includes an embedded Oracle(R) 9i database.
Retail Pro(R) is fast and easy to implement. The software has been
developed to be very flexible and adaptable to the way a retailer runs
its business.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL RETAIL") - Our
Multi-Channel Retail application is designed to specifically address
direct commerce business processes, which primarily relate to
interactions with the end-user. This application was originally
designed by Page Digital to manage its own former direct commerce
operation, with attention to functionality, usability and scalability.
Its components include applications for customer relations management,
order management, call centers, fulfillment, data mining and financial
management. Specific activities like partial ship orders, payments
with multiple tenders, back order notification, returns processing and
continuum marketing represent just a few of the more than 1,000
parameterized direct commerce activities that have been built into
"synaro"(TM), our Multi-Channel Solution and its applications. These
components and the interfacing technology are available to customers,
systems integrators and independent software developers who may modify
them to meet their specific needs.
For further financial information about our business segments and
geographic areas see our Financial Statements section and "Notes to Consolidated
Financial Statements for the Year Ended March 31, 2007 - Note 13" thereunder.
PRODUCTS
We develop, partner and sell business intelligence and software solutions
that support virtually all of the operational activities of a typical retailer.
Our business intelligence is critical to sound strategy and execution. Our
software solutions create value by applying innovative technology that helps our
customers efficiently and effectively understand, create, manage and fulfill
consumer demand. Our products can be deployed individually to meet specific
business needs, or as part of a fully integrated, end-to-end solution consisting
of the following components.
At the foundation of our RETAIL MANAGEMENT SOLUTIONS is our application
suite of integrated modules that comprise our core-merchandising solution. They
are as follows:
1. Merchandising Management
o The Island Pacific Merchandising module is a comprehensive
solution for management of core retail processes, which optimizes
workflow and provides the highest level of data integrity.
o This module supports all operational areas of the supply chain:
Planning, Open-To-Buy, Purchase Order Management, Forecasting,
Warehouse and Store Receiving, Distribution, Transfers, Price
Management, Performance Analysis, and Physical Inventory.
2. The Eye(TM) Analysis And Planning
o The Eye(TM), our datamart is a comprehensive analysis and
planning tool that provides answers to retailers' merchandising
questions. The specific "who, what, where, when and why" are
defined in a multi-dimensional format. The Eye is completely
integrated to IP Core Merchandising.
o This application enables retailers to develop completely
user-defined inquiries and reports. The capacity of The Eye to
store, manipulate, and present information is limited only by a
retailer's imagination.
3. Replenishment and Forecasting
o The Island Pacific Replenishment module is a tool that ensures
retailers will have the right merchandise in the right stores at
the right time by dynamically forecasting accurate merchandise
need, reducing lost sales, increasing stock turn, and reducing
cost of sales.
4. Promotions and Events
o The Island Pacific Event and Promotion Management tool enables
retailers to manage, plan and track all promotional and event
related activities including price management, in-store display,
deal and media related promotions. The promotions addressed
through this module can include non-price promotions as well. The
analysis includes actual to plan comparisons prior to, during and
after the event.
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5. Warehouse
o The Island Pacific Warehouse module provides enhanced control and
visibility of product movement through the warehouse. Item,
quantity and bin integrity is ensured through directed put away,
task confirmation, RF procedures, automated cycle counts and
carton control.
6. Ticketing
o The Island Pacific Ticketing module supports both merchandise and
warehouse location identification utilizing multiple printers and
bar codes. User-configured tickets may include desired product
characteristics, including but not limited to retail price,
compare at pricing, item, style, color and size information.
7. Financials
o The Island Pacific Financials module incorporates a General
Ledger that is synchronized with the Merchandising Stock Ledger.
o This module also includes a robust Accounts Payable application,
which supports 3-way automated matching of invoices, receipts,
and purchase orders that streamline workflow to optimize
operations.
8. Sales Audit
o This module is an integrated conduit between Point-of-Sale
applications and the Island Pacific Host System, which manages
the upload- and download- processes. The upload process manages
all transactional information that occurs at the store such as
sales, customer returns, physical inventory, transfers,
acknowledgements, purchase order drop ship receipts, layaway, and
special order. The Download process manages all Store pricing
including price look up, promotional pricing, deal pricing, event
pricing, price changes, markdowns, on order to stores,
in-transit, current inventory, company definitions (Hierarchy,
Constants, Vendors, Stores)
o This application is flexible relative to POS requirements, while
featuring full integration to the Retail Pro product suite.
9. Planning
o This module is a decision support tool encompassing Merchandise
Planning, Store Planning and Assortment Planning. Workflow and a
Modeling Studio are key features. It has a three tier
architecture and embodies best practices in retail planning
methodology combined with state of the art technology. It is
written in C++ and runs on both Linux and Windows and is both
database and platform independent,
o It delivers ROI in increased sales and improved margin and
cashflow by monitoring key performance indicators.
o This module was introduced to our customers during the user
conference in Las Vegas in September 2005 and is expected to be a
significant contributor to revenues and profitability over the
next few years. It is being developed as a joint development
project which, when completed, is expected to provide Island
Pacific certain exclusive territorial marketing rights.
Recognizing that the strongest potential for future growth is in our Store
Solutions business unit, on October 31, 2007, we consummated an agreement for
the sale of the Retail Management Solutions business unit. Refer to Note 16 to
the financial statements accompanying this report for details of the
transaction.
8
THE STORE SOLUTIONS IS offered through our "Retail Pro(R)" products.
Retail Pro(R) is a leading point-of-sale and inventory management software
used by specialty retailers worldwide. The following is brief description of
some of the functionality of Retail Pro(R):
POINT OF SALE
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CASH DRAWER AND Data is captured for analysis and inventory is
RECEIPT FUNCTIONS updated in real time. Drives all required hardware
at point of sale.
INTEGRATED CREDIT Supports authorization and processing of all major
CARD PROCESSING payment types including credit, debit and gift
cards.
CUSTOMER DATA Customer name and address information is entered
at point of sale where buying history can be
viewed. Purchase history can aid in controlling
merchandise returns and discounts.
LAYAWAYS AND SPECIAL Layaways are tracked and special orders can be
ORDERS created for out-of-stock merchandise or custom
item.
ITEM QUANTITY AND Retail Pro(R) allows an instant view of whether an
PRICE LOOKUP item is in stock at any location and of correct
price.
POS SUMMARY REPORTS Daily x/z out report provides summary of each
day's activity for each clerk and store and
reconciles the cash drawer.
INVENTORY CONTROL
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STOCK ON HAND, IN Inventory information can be sorted in variety of
TRANSIT, ON ORDER ways and viewed in a matrix based on user-defined
filters. This information can be viewed either in
a report or while generating a purchase order or
other activity.
PURCHASE ORDERS, Purchase orders can be created and are integrated
RECEIVING AND TICKETING with data from the inventory files. Merchandise
may be received against the purchase order and
returns can be generated. Bar codes for the
merchandise can be generated based on receiving
information.
PRICING AND MARKDOWNS Retail Pro(R) displays margin % by item number to
aid in determining price. Alternate pricing levels
can be set up for employees, preferred customers
and wholesale accounts.
MULTI-STORE DISTRIBUTION Retail Pro(R) will automatically inform all the
AND TRANSFERS sending and receiving stores as part of the daily
polling process. By comparing days of supply the
system can recommend transfers to optimize sales.
PRE-SET AND USER Retail Pro(R) comes with a variety of pre-designed
DEFINED REPORTS reports for any store or group of stores and a
built-in report designer. Retail Pro(R) also
allows for a retailer to set preferences as to how
it will view reports.
PHYSICAL INVENTORY Physical inventories can be taken with a portable
terminal or PDA to promote accuracy and speed.
CUSTOMER FUNCTIONS
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CUSTOMER LISTS AND Information by customer such as total amount
MAILINGS spent, time since last visit, size, birthday, etc.
can be sorted and viewed. In a multi-store
operation, names can be distributed to all stores
so each customer can be recognized
PREFERRED CUSTOMER Retail Pro(R) allows pricing to be based on a
PRICING customers level. It can also plan for a
predetermined markdown schedule for preferred
customers.
GIFT REGISTRY The system will keep track of a list of items that
someone would like other people to buy for them
and keep track of those items already purchased.
9
The MULTI-CHANNEL RETAIL SOLUTIONS offered through our SYNARO(R) products
were designed for plug-and-play use to allow companies to rapidly capitalize on
direct commerce opportunities, both through the Internet as well as through call
centers and catalogs that augment Web-based components or as a complete
integrated solution. The table below provides a brief description of the
associated benefits of each of SYNARO(R) products.
SYNARO(R) PRODUCT DESCRIPTIONS
---------------------------------------------------------------------------
PRODUCT DESCRIPTION
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INTEGRATOR A powerful middleware processor that seamlessly
integrates disparate front- and back-end business
systems to allow for the creation of best-of-breed
solutions. Integrator is specially tuned to
provide real-time integration for high volume and
high performance requirements. SYNARO(R)
components are tightly integrated out-of-the-box
for rapid deployment of best practice
functionality.
ERM A platform to manage communications between a
company and its customers across all channels,
which utilizes segmentation, list management,
campaign management and forecasting functions that
can be applied to both interactive and traditional
channels. ERM provides a graphical user interface
that allows our customers to configure screens and
keystrokes to accommodate their specific
requirements. It includes features such as
multi-channel order entry, e-mail management and
response, closed loop workflow and real-time
communications with customers to name a few.
WEBSTORE A real-time, online front-end for manufacturers,
retailers, wholesalers, direct marketers and other
businesses who seek to facilitate sales
transactions over the Internet. WebStore comes
with preset templates, a shopping cart metaphor,
SSL security, search engine and databases for
configuring the site to handle product
information, special selling situations, etc. It
is compatible with multiple web servers such as
BEA's WebLogic, IBM's WebSphere, and Sun's
iPlanet.
ORDER MANAGEMENT A multi-faceted component application, which
ensures proper accounting for orders e.g. back
order, customer hold, hold until complete, date
sensitive orders, continuity orders, etc.;
exceptions are brought to management's attention;
and orders can be processed and verified from any
Web application. It includes a comprehensive Call
Center capability including Computer Telephony
Integration and customer relations management.
ORDER FULFILLMENT A comprehensive application that monitors and
controls all fulfillment parameters including
specifications, replenishment orders, continuity
programs, drop ship orders, ship complete orders,
gift orders, backorders and shipping and handling
orders.
MARKETING Controls offer and promotion set-up, which
includes customer list segmentation, campaign
management including targeted e-mail capability,
item selection and placement and pricing. Targeted
marketing promotions and offers provide the
opportunity to improve margins and accelerate
return on investment.
PRODUCT MANAGEMENT Controls inventory management issues such as item
type and attributes. Multiple item types such as
configured, kits, gift certificates, serialized,
drop ship, special order, and club membership
allow for significant flexibility.
WAREHOUSE MANAGEMENT Provides pick ticket processing, cycle count
physical inventory, bin location control, cross
docking and location maintenance.
WORK FLOW MANAGEMENT Provides for closed loop issues management and
future chain of events processing of marketing
campaigns.
DATA ANALYSIS A report writer and query tool for mining,
visualizing and analyzing data that supports
Business Objects, Crystal Reports, FOCUS and any
ORACLE SQL-compliant DB.
FORECASTING The Oracle-based Forecasting application allows
for flexible inventory and merchandise forecasting
that enables direct commerce companies to increase
turns and reduce back orders.
FINANCIALS A product suite that includes all financial
components necessary to run a business, including
real-time or batch credit card processing,
accounts receivable and accounts payable
management and general ledger operations.
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Our PROFESSIONAL SERVICES provide our customers with expert retail business
consulting, project management, implementation, application training, technical
and documentation services to ensure that our customers' technology selection
and implementation projects are planned, and timely and effectively implemented.
We also provide development services to customize our applications to meet
specific requirements of our customers and ongoing support and maintenance
services.
We market our applications and services through an experienced professional
direct sales force in the United States and in the United Kingdom as well as a
worldwide network of approximately 67 value-added resellers ("VARS"). We believe
our knowledge of the complete needs of multi-channel retailers enables us to
help our customers identify the optimal systems for their particular businesses.
The customer relationships we develop build recurring support, maintenance and
professional service revenues and position us to continuously recommend changes
and upgrades to existing systems.
Our executive offices are located at 3252 Holiday Court, Suite 226, La
Jolla, California 92037, telephone number (858) 550-3355.
MARKETS AND CUSTOMERS
Our software is installed in over 9,000 retailers. Our applications are
used by the full spectrum of retailers including specialty goods sellers, mass
merchants and department stores. Most of our U.S. customers are in the Tier 1 to
Tier 3 retail market sectors.
MARKETING AND SALES
We sell our Retail Management and Multi-Channel applications and services
primarily through a direct sales force that operates in the United States and
the United Kingdom. Retail Pro is sold through an international and domestic
Value Added Reseller network (VAR). Sales efforts involve comprehensive
consultations with current and potential customers prior to completion of the
sales process. Our Sales Executives, Retail Application Consultants (who operate
as part of the sales force) and Marketing and Technology Management associates
use their collective knowledge of the needs of multi-channel retailers to help
our customers identify the optimal solutions for their individual businesses.
We maintain a comprehensive web site describing our applications, services
and company. We regularly engage in cooperative marketing programs with our
strategic alliance partners. We host an annual Users Conference which hundreds
of our customers attend to network and to share experiences and ideas regarding
their business practices and implementation of our, and our partners'
technology. This Users Conference also provides us with the opportunity to meet
with our customers on a concentrated basis to provide training and insight into
new developments and to gather valuable market requirements information.
We are aggressively focusing on our Product Marketing and Product
Management functions to better understand the needs of our markets in advance of
required implementation, and to translate those needs into new applications,
enhancements to existing applications and related services. We hope these
efforts will position Island Pacific optimally with customers and prospects in
our target market.
We have VARs distributing products in North America, South America, Europe,
Asia, Australia, and Africa. In general, each VAR is responsible for a
particular geographical region. Currently, we have 27 VARs in North America, 7
in South America, 19 in Europe and the Middle East, 11 in Asia, 2 in
Australia/New Zealand and 1 in Africa. Our VARs primarily distribute Retail
Pro(R), are trained and certified on Retail Pro(R) and provide users with
technical expertise and a localized and translated product.
COMPETITION
The markets for our application technology and services are highly
competitive, subject to rapid change and sensitive to new product introductions
or enhancements and marketing efforts by industry participants. We expect
competition to increase in the future as open systems architecture becomes more
common and as more companies compete in the emerging electronic commerce market.
The largest of our competitors offering end-to-end retail solutions is JDA
Software Group, Inc. Other suppliers offer one or more of the components of our
solutions. In addition, new competitors may enter our markets and offer
merchandise management systems that target the retail industry. For enterprise
solutions, our competitors include Retek Inc., SAP AG, nsb Retail Systems PLC,
11
Essentus, Inc., GERS, Inc., Marketmax, Inc., Micro Strategies Incorporated and
Evant, Inc., formerly NONSTOP Solutions. Our primary competitors in the
multi-channel retail market include Ecometry, CommercialWare and Sigma-Micro.
Retail Pro(R)'s primary competitors include Celerant Technology Corp., 360
Commerce, CRS Business Computers, NSB Retail Systems PLC, Micro Strategies
Incorporated, Retek, Inc. and JDA Software Group, Inc. Our professional services
offerings compete with the professional service groups of our competitors, major
consulting firms associated or formerly associated with the "Big 4" accounting
firms, as well as locally based service providers in many of the territories in
which we do business. Our strategic partners, including IBM, NCR and Fujitsu,
represent potential competitors as well.
We believe the principal competitive factors in the retail solutions
industry are price, application features, performance, retail application
expertise, availability of expert professional services, quality, reliability,
reputation, timely introduction of new offerings, effective distribution
networks, customer service and quality of end-user interface. We believe we
currently compete favorably with respect to these factors. In particular, we
believe that our competitive advantages include:
o Proven, single version technology, reducing implementation costs and
risks and providing continued forward migration for our customers.
o Extensive retail application experience for all elements of the
customer's business, including Professional Services, Development,
Customer Support, Sales and Marketing/Technology Management.
o Ability to provide expert Professional Services.
o Large and loyal customer base.
o Hardware platform independent Store Solution (POS) application.
o Breadth of our application technology suite including our
multi-channel retailing capabilities.
o Our corporate culture focusing on the customer.
Many of our current and potential competitors are more established, benefit
from greater name recognition, have greater financial, technical, production
and/or marketing resources, and have larger distribution networks, any or all of
which could give them a competitive advantage over us. Moreover, our current
financial condition has placed us at a competitive disadvantage to many of our
larger competitors, as we are required to provide assurance to customers that we
have the financial ability to support the products we sell. We believe strongly
that we provide and will continue to provide excellent support to our customers,
as demonstrated by the continuing upgrade purchases by our top-tier established
customer base.
PROPRIETARY RIGHTS
Our success and ability to compete depend in part on our ability to develop
and maintain the proprietary aspects of our technologies. We rely on a
combination of copyright, trade secret and trademark laws, and nondisclosure and
other contractual provisions, to protect our various proprietary applications
and technologies. We seek to protect our source code, documentation and other
written materials under copyright and trade secret laws. We license our software
under license agreements that impose restrictions on the ability of the customer
to use and copy the software. These safeguards may not prevent competitors from
imitating our applications and services or from independently developing
competing applications and services, especially in foreign countries where legal
protection of intellectual property may not be as strong or consistent as in the
United States.
We hold no patents. Consequently, others may develop, market and sell
applications substantially equivalent to our applications, or utilize
technologies similar to those used by us, so long as they do not directly copy
our applications or otherwise infringe our intellectual property rights.
Intellectual property rights are often the subject of large-scale
litigation in the software and Internet industries. We may find it necessary to
bring claims or litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. These actions would likely
be costly and divert management resources. These actions could also result in
counterclaims challenging the validity of our proprietary rights or alleging
infringement on our part. We cannot guarantee the success of any litigation we
might bring to protect our proprietary rights.
Although we believe that our application technology does not infringe on
any third-party's patents or proprietary rights, we cannot be certain that we
will not become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to, defending or bringing claims related to our intellectual property
rights may require our management to redirect our human and monetary resources
to address these claims. In addition, these actions could cause delivery delays
or require us to enter into royalty or license agreements. Royalty or license
agreements, if required, may not be available on terms acceptable to us, if they
are available at all. Any or all of these outcomes could have a material adverse
effect on our business, operating results and financial condition.
12
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 has
been insignificant. Although it is possible that, in the future, third parties
may claim that our current or potential future solutions infringe on their
intellectual property, we do not currently expect a significant impact on our
business, operating results or financial condition.
Our application Retail Pro(R) is licensed from Intuit. On December 6, 2002,
RTI sold certain intellectual property for $7,500,000 to Intuit. In connection
with the sale, RTI also sold certain property and equipment for proceeds of
$44,000 and 1,445,000 shares of its series A preferred stock at $0.346 per
share, for $500,000 respectively. RTI recognized a total gain of $7.5 million on
the sale of the intellectual property and property and equipment due to the
tangible assets being fully depreciated as of the date of sale. Intuit also
entered into employment agreements with several of RTI's employees and a
covenant not-to-compete with one of the original stockholders. Under a license
agreement, Intuit granted back to RTI the right to sell various products and
licenses. Under the terms of the license agreement, RTI is obligated to pay
royalties equal to 75% of the sales made to certain customers. The terms of the
license agreement vary depending on the product. As part of the amended and
restated agreement with Intuit that became effective on December 21, 2006, our
right to license the older Retail Pro product to new customers in North America
and the U.K expires at the end of 2007, and at the end of 2008 elsewhere.
Incremental licenses to existing customers may be sold through the end of 2009
with the exception of select named customers who may purchase licenses through
2011. We will continue to develop maintenance updates to the older product
through the end of 2011 and thereafter will provide technical support as
determined necessary. Customers of the older product that are current on
maintenance agreements will be eligible to upgrade to the new product at no
additional license fee. Our right to license the new product is perpetual,
except to certain smaller customers where the license is currently scheduled to
end on December 31, 2011 but will be revisited for possible extension and/or
purchase prior to ending.
EMPLOYEES
As of October 31, 2007, we had a total of 185 employees, 164 of which were
based in the United States. Of the total, 15% were engaged in sales and
marketing, 31% were engaged in application technology development projects, 38%
were engaged in professional services, and 16% were in general and
administrative. We believe our relations with our employees overall are good. We
have never had a work stoppage and none of our employees are subject to a
collective bargaining agreement.
We file registration statements, periodic and current reports, proxy
statements and other materials with the Securities and Exchange Commission. You
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site at WWW.SEC.GOV that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including our filings.
Our Internet address is www.islandpacific.com. We make available, free of
charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K, and any amendments to those reports filed pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 through our
website, as soon as reasonably practicable after they are electronically filed
with or furnished to the SEC. The contents of our website are not incorporated
into, or otherwise to be regarded as a part of, this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Investors should carefully consider the following risk factors and all
other information contained in this Form 10-K. 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 this Form
10-K.
13
WE INCURRED LOSSES FOR FISCAL YEARS 2007, 2006 AND 2005.
We incurred losses of $7.2 million, $10.4 million and $ 20.9 million in the
fiscal years ended March 31, 2007, 2006, and 2005, respectively. The losses in
the past three years have generally been due to difficulties completing sales
for new application software licenses, deferral of gross profit from contracts
in process to future periods, a change in sales mix toward lower margin
services, and debt service expenses. We will need to generate additional revenue
and reduce expenses to achieve profitability in future periods. In that regard,
on April 28, 2005 we announced a strategic plan to integrate our product lines
and unify our processes and operations. This plan is a continuation of Island
Pacific's drive towards profitability, with a primary goal to accelerate the
achievement of that milestone, and includes a reduction of the Company's
workforce by approximately 14% percent or 30 employees worldwide, which has
resulted in approximately $6.0 million in annual savings compared to costs
incurred in the year ended March 31, 2005, as well as consolidating the
Company's accounting and finance team into its La Jolla executive offices. If we
are unable to achieve profitability, or maintain profitability if achieved, our
business and stock price may be adversely affected and we may be unable to
continue operations at current levels, if at all.
WE HAVE NEGATIVE WORKING CAPITAL IN THE CURRENT FISCAL YEAR, AND WE HAVE
EXTENDED PAYMENT TERMS WITH A NUMBER OF OUR SUPPLIERS.
At March 31, 2007, we have negative working capital of $17.2 million. We
have had difficulty meeting operating expenses, including interest payments on
debt, lease payments and supplier obligations. We have extended payment terms
with our trade creditors wherever possible.
As a result of extended payment arrangements with suppliers, we may be
unable to secure products and services necessary to continue operations at
current levels from these suppliers. In that event, we will have to obtain these
products and services from other parties, which could result in adverse
consequences to our business, operations and financial condition, and we may be
unable to obtain these products from other parties on terms acceptable to us, if
at all.
OUR FINANCIAL CONDITION MAY INTERFERE WITH OUR ABILITY TO SELL NEW APPLICATION
SOFTWARE LICENSES.
Future sales growth may depend on our ability to improve our financial
condition. Our past financial condition has made it difficult for us to complete
sales of new application software licenses. Because our applications typically
require lengthy implementation and extended servicing arrangements, potential
customers require assurance that these services will be available for the
expected life of the application. These potential customers may defer buying
decisions until our financial condition improves, or may choose the products of
our competitors whose financial conditions are, or are perceived to be,
stronger. Customer deferrals or lost sales will adversely affect our business,
financial conditions and results of operations.
OUR OPERATING RESULTS AND REVENUES 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, which are
outside of our control including: the size and timing of orders, the general
health of the retail industry, the length of our sales cycles and technological
changes. 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 net sales or
operating results will be below the expectations of public market analysts or
investors. If that happens, our stock price will likely decline.
Further, due to these fluctuations, we do not believe period to period
comparisons of our financial performance are necessarily meaningful nor should
they be relied on as an indication of our future performance.
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.
14
WE MAY NEED TO RAISE CAPITAL TO GROW OUR BUSINESS. OBTAINING THIS CAPITAL COULD
IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise 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.
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, non-compete agreements and other intangible
assets represent approximately 90% of our total assets as of March 31, 2007. 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 17%, 13% and
29% of our net sales from continuing operations were outside North America,
principally in Europe and the United Kingdom, in the fiscal years ended March
31, 2007, 2006 and 2005, 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 sales 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.
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 our CEO, Barry Schechter. We 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, which 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. The retail industry as a whole is
currently experiencing increased competition and weakening economic conditions
15
that could negatively impact the industry and our customers' ability to pay for
our products and services. In addition, the retail industry may be
consolidating, and it is uncertain how consolidation will affect the industry.
Such consolidation and weakening economic conditions have in the past, and may
in the future, negatively impact our revenues, reduce the demand for our
products and may negatively impact our business, operating results and financial
condition. Specifically, uncertain economic conditions and the specter of
terrorist activities have adversely impacted sales of our software applications,
and we believe mid-tier specialty retailers may be reluctant during the current
economic climate to make the substantial infrastructure investment that
generally accompanies the implementation of our software applications, which may
adversely impact our business.
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 we have. Our competitors may also have
lower cost structures and better access to the capital markets than we have. 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. For a further discussion of competitive
factors in our industry, see "Description of Business - Competition" below.
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.
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 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 INITIATE
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
16
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 initiate 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 subject to 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,
including licensing software and technology that is integrated into our
applications. 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.
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 four geographic areas, and 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 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. 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.
17
We are not currently aware of any material 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.
LAURUS MASTER FUND, LTD. (LAURUS) HAS THE RIGHT TO ACQUIRE A SIGNIFICANT
PERCENTAGE OF OUR COMMON STOCK, WHICH IF ACQUIRED BY LAURUS, MAY ENABLE LAURUS
TO EXERCISE EFFECTIVE CONTROL OF US.
On July 12, 2004 and June 15, 2005, Laurus purchased convertible notes from
us in the amounts of $7 million and $3.2 million, respectively which are secured
by all of our assets. In addition, Laurus purchased our term note dated November
16, 2005 in the amount of $637,500, which was amended to $1,275,000, $2,025,000
and $2,625,000 on March 23, 2006, November 27, 2006 and March 30, 2007,
respectively. The convertible notes may be converted into 50,000,000 shares of
our common stock. In addition, warrants and options issued in connection with
the sale of the convertible and term notes are exercisable for approximately
28,700,000 shares of our common stock. Consequently, Laurus beneficially owns
approximately 48.3% of our outstanding common stock. If Laurus converts the
convertible notes to common stock and exercises the warrants and options, it may
have effective control over all matters affecting us, including:
o The election of all of our directors;
o The undertaking of business opportunities that may be suitable for us;
o Any determinations with respect to mergers or other business
combinations involving us;
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.
LAURUS MASTER FUND, LTD.'S POTENTIAL INFLUENCE ON US COULD MAKE IT DIFFICULT FOR
ANOTHER COMPANY TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Laurus's potential effective 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, Laurus's potential effective 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. For further information on our
stock price trends, see "Price Range of Common Stock" below.
18
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS ON OUR COMMON STOCK 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 on our common stock in the foreseeable future.
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. Our board of directors may determine the terms of preferred
stock without further action by our stockholders. If we issue 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.
SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS OR WARRANTS, CONVERSION OF
DEBENTURES, DIVIDENDS ON CONVERTIBLE PREFERRED STOCK, OR ANTI-DILUTION
PROVISIONS IN CERTAIN AGREEMENTS 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. We
currently have outstanding options and warrants for 57,701,422 shares as of
March 31, 2007. Of these options and warrants, as of March 31, 2007,
approximately 31,000,000 have exercise prices above the recent market price of
$0.09 per share (as of March 31, 2007), and approximately 27,000,000 have
exercise prices at or below that recent market price.
Our existing stock option plans currently have approximately 6,500,000
shares available for issuance as of March 31, 2007. Future options issued under
the plan may have further dilutive effects.
The issuance of additional shares pursuant to these options, warrants,
convertible debentures or anti-dilution provisions will cause immediate and
possibly substantial dilution to our stockholders. Further, subsequent sales of
the shares in the public market 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.
WE MAY BE UNABLE TO REALIZE ALL OF THE ANTICIPATED BENEFITS OF THE ACQUISITIONS
OF PAGE DIGITAL OR RTI.
On January 30, 2004, we acquired Page Digital and on June 1, 2004, we
acquired Retail Technologies, Inc. (see "Recent Transactions" below). These
acquisitions involve integrating two companies that previously operated
independently into Island Pacific. The difficulties of combining these
companies' operations include the following business risks.
BUSINESS RISKS FACED BY PAGE DIGITAL COULD DISADVANTAGE OUR BUSINESS.
Page Digital is a developer of multi-channel commerce software and faces
several business risks that could disadvantage our business. These risks include
many of the risks that we face, described above, as well as:
o DEFECTS IN PRODUCTS COULD DIMINISH DEMAND FOR PRODUCTS AND RESULT IN
LOSS OF REVENUES - From time to time errors or defects may be found in
Page Digital's existing, new or enhanced products, resulting in delays
in shipping, loss of revenues or injury to Page Digital's reputation.
Page Digital's customers use its products for business critical
applications. Any defects, errors or other performance problems could
result in damage to Page Digital's customers' businesses. These
customers could seek significant compensation from Page Digital for
any losses. Further, errors or defects in Page Digital's products may
be caused by defects in third-party software incorporated into Page
Digital products. If so, Page Digital may not be able to fix these
defects without the assistance of the software providers.
19
o FAILURE TO FORMALIZE AND MAINTAIN RELATIONSHIPS WITH SYSTEMS
INTEGRATORS COULD REDUCE REVENUES AND HARM PAGE DIGITAL'S ABILITY TO
IMPLEMENT PRODUCTS - A significant portion of Page Digital's sales are
influenced by the recommendations of systems integrators, consulting
firms and other third parties who assist with the implementation and
maintenance of Page Digital's products. These third parties are under
no obligation to recommend or support Page Digital's products. Failing
to maintain strong relationships with these third parties could result
in a shift by these third parties toward favoring competing products,
which could negatively affect Page Digital's software license and
service revenues.
o PAGE DIGITAL'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, SO PAGE DIGITAL'S SUCCESS DEPENDS HEAVILY ON ITS 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.
Page Digital must cost-effectively develop and introduce new
applications and related services that keep pace with technological
developments to compete. If Page Digital fails to gain market
acceptance for its existing or new offerings or if Page Digital fails
to introduce progressive new offerings in a timely or cost-effective
manner, our financial performance may suffer.
o FAILURE TO PROTECT PROPRIETARY RIGHTS OR INTELLECTUAL PROPERTY, OR
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST PAGE DIGITAL COULD
RESULT IN PAGE DIGITAL LOSING VALUABLE ASSETS OR BECOMING SUBJECT TO
COSTLY AND TIME-CONSUMING LITIGATION - Page Digital's success and
ability to compete depend on its proprietary rights and intellectual
property. Page Digital relies on trademark, trade secret and copyright
laws to protect its proprietary rights and intellectual property. Page
Digital also has one issued patent. Despite Page Digital's efforts to
protect intellectual property, a third party could obtain access to
Page Digital's software source code or other proprietary information
without authorization, or could independently duplicate Page Digital's
software. Page Digital may need to litigate to enforce intellectual
property rights. If Page Digital is unable to protect its intellectual
property it may lose a valuable asset. Further, third parties could
claim Page Digital has infringed their intellectual property rights.
Any claims, regardless of merit, could be costly and time-consuming to
defend.
o COMPETITION IN THE SOFTWARE MARKET IS INTENSE AND COULD REDUCE PAGE
DIGITAL'S SALES OR PREVENT THEM FROM ACHIEVING PROFITABILITY - The
market for Page Digital's products is intensely competitive and
subject to rapid technological change. Competition is likely to result
in price reductions, reduced gross margins and loss of Page Digital's
market share, any one of which could reduce future revenues or
earnings. Further, most of Page Digital's competitors are large
companies with greater resources, broader customer relationships,
greater name recognition and an international presence. As a result,
Page Digital's competitors may be able to better respond to new and
emerging technologies and customer demands.
BUSINESS RISKS FACED BY RTI COULD DISADVANTAGE OUR BUSINESS.
RTI is a provider of retail management store solutions to small through
mid-tier retailers via an international network of retailers and faces several
business risks that could disadvantage our business. These risks include many of
the risks that we face, described above, as well as:
o RTI FACES INTENSE COMPETITION IN THE RETAIL POINT OF SALE INDUSTRY -
RTI operates in an extremely competitive industry, which is subject to
rapid technological and market changes. We anticipate that the
competition will increase as more companies focus on providing
technology solutions to small and mid-tier retailers. Many of our
current and potential competitors, such as Microsoft, have more
resources to devote to product development, marketing and
distribution. While RTI believes that it has competitive strengths in
its market, there can be no assurance that RTI will continue to
compete successfully against larger more established competitors.
o RTI IS DEPENDENT ON THEIR VALUE-ADDED RESELLERS (VARS) - RTI does not
have a direct sales force and relies on VARs to distribute and sell
its products. RTI currently has approximately 67 VARs - 27 in North
America, 7 in South America, 11 in Asia, 19 in Europe and the Middle
East, 1 in Africa, and 1 each in Australia and New Zealand. Combined,
RTI's five largest VARs account for approximately 14% of its revenues,
although no one is over 4%. RTI's VARs are independently owned
businesses and there can be no assurance that one or more will not go
out of business or cease to sell RTI products. Until a replacement VAR
could be recruited, and trained, or until an existing VAR could expand
into the vacated territory, such a loss could result in a disruption
in RTI's revenue and profitability. Furthermore, there can be no
assurance that an adequate replacement could be located.
20
o A PROLONGED SLOWDOWN IN THE GLOBAL ECONOMY COULD ADVERSELY IMPACT
RTI'S REVENUES - A slowdown in the global economy might lead to
decreased capital spending, fewer new retail business start ups, and
slower new store expansion at existing retail businesses. Such
conditions, even on a regional basis, could severely impact one or
more of RTI's VARs and result to a disruption in RTI's revenues and
profitability.
o RTI'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO
RTI'S SUCCESS DEPENDS HEAVILY ON ITS ABILITY TO DEVELOP AND INTRODUCE
NEW APPLICATIONS AND RELATED SERVICES - We believe RTI's ability to
succeed in its market is partially dependent on its ability to
identify new product opportunities and rapidly, cost-effectively bring
them to market. However, there is no guarantee that they will be able
to gain market acceptance for any new products. In addition, there is
no guarantee that one of RTI competitors will not be able to bring
competing applications to market faster or market them more
effectively. Failure to successfully develop new products, bring them
to market and gain market acceptance could result in decreased market
share and ultimately have a material adverse affect on RTI.
o RTI DOES NOT HOLD ANY PATENTS OR COPYRIGHTS; ANY TERMINATION OF OR
ADVERSE CHANGE TO RTI'S LICENSE RIGHTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON ITS BUSINESS - RTI has a license to develop, modify, market,
sell, and support its core technology from a third party. Any
termination of, or disruption in this license could have a material
adverse affect on RTI's business. Further, we believe that most of the
technology used in the design and development of RTI's core products
is widely available to others. Consequently, there can be no assurance
that others will not develop, and market applications that are similar
to RTI's, or utilize technologies that are equivalent to RTI's.
Likewise, while RTI believes that its products do not infringe on any
third party's intellectual property, there can be no assurance that
they will not become involved in litigation involving intellectual
property rights. If such litigation did occur, it could have a
material adverse affect on RTI's business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Effective April 1, 2007, we relocated our principal corporate headquarters
to new office spaces in La Jolla, California under a five-year lease for
approximately 6,400 square feet at an initial cost of $17,726 per month. In
addition to the monthly rental, we are obligated to pay 10% of the increase in
building operating costs over the base year of calendar 2007. The corporate
headquarters is also used for certain of our sales, marketing, consulting,
customer support, training and product development functions.
Our Retail Management Solutions business unit occupies 22,107 square feet
in a building located in Irvine, California. This facility is occupied under a
lease that expires on June 30, 2011. The current monthly rent is $55,000 plus
7.49% of building maintenance costs. We have sublet approximately 50% of the
leased premises.
We occupy premises in the United Kingdom located at The Old Building, Mill
House Lane, Wendens Ambo, Essex, England. The lease for this office building
expires August 31, 2008. Annual rent is $78,000 (payable quarterly) plus common
area maintenance charges and real estate taxes.
Prior to January 1, 2007, we leased a 44,505 square-foot office space in
Englewood, Colorado for our Page Digital subsidiary. This lease commenced on
January 1, 2004 and expires on December 31, 2013 with a five-year renewal
option. The monthly rent at March 31, 2006 was $69,000 plus the increase in
building operating expenses. We assumed this lease in connection with the
acquisition of Page Digital. Prior to our assumption, the lease was entered
between CAH Investments, LLC ("CAH"), which is wholly owned by the spouse of
Lawrence Page, Page Digital's former president, and Southfield Crestone, LLC
("Southfield"). Effective January 1, 2007, we negotiated a restructuring of the
lease with CAH, reducing the size of our premises to approximately 2,800 square
feet and reducing the monthly lease rate to $6,500, subject to a 5% annual
increase through December 31, 2011. Concurrent with the lease restructuring, we
agreed to pay $30,000 per month to Southfield from November 1, 2006 through
December 31, 2011 in lieu of a pro rata portion of the building operating
expenses and our obligation under the old lease.
21
We lease an office and training facility that consists of 13,519 square
feet of rentable space in a building located in Folsom, California for our Store
Solutions business unit. This lease expires on March 31, 2011 and has a monthly
rent commencing April 1, 2007 of $21,000.
ITEM 3. LEGAL PROCEEDINGS
The sale of our Australian subsidiary in the third quarter of fiscal 2002
was subject to the approval of National Australia Bank, the subsidiary's secured
lender. The bank did not approve the sale and the subsidiary ceased operations
in February 2002. The bank caused a receiver to be appointed in February 2002 to
sell substantially all of the assets of the Australian subsidiary and pursue
collections on any outstanding receivables. The receiver proceeded to sell
substantially all of the assets for $300,000 in May 2002 to an entity affiliated
with former management, and actively pursued the collection of receivables. If
the sale proceeds plus collections on receivables would have been insufficient
to discharge the indebtedness to National Australia Bank, we could have been
called upon to pay the deficiency under our guarantee to the bank. We accrued
$187,000 as the maximum amount of our potential exposure as of March 31, 2004.
In June 2004, we settled this obligation by paying $69,000 to the bank. As a
result, the $118,000 accrual in excess of settlement amount was written off to
the consolidated statement of operations as other income in the nine months
ended December 31, 2004.
On November 22, 2002, we and Sabica Ventures, Inc. ("Sabica", our
wholly-owned subsidiary), were sued in a matter entitled Stemley vs. Shea Homes,
Inc. et. al. in San Diego Superior Court Case No. GIC 787680, as Pacific
Cabinets. The case dealt with alleged construction defects. Pacific Cabinets was
dismissed from the litigation for a waiver of fees and costs. At this time,
neither we nor Pacific Cabinets are parties to this action. Because no
significant discovery was done, it is not possible at this time to provide an
evaluation of potential exposure, though it appears highly unlikely that Pacific
Cabinets or we will be brought back into this suit.
On April 2, 2004, we filed a federal court action in the Southern District
of California against 5R Online, Inc. ("5R Online"), John Frabasile, Randy
Pagnotta, our former officers, and Terry Buckley for fraud, breach of fiduciary
duty, breach of contract, and unfair business practice arising from their
evaluation of, recommendation for, and ultimately involvement in a development
arrangement between us and 5R Online. Pursuant to the development agreement
entered into in June 2003 and upon reliance of the representations of the
individual defendants that product development was progressing, we paid and
expensed $640,000 in development payments in the fiscal year ended March 31,
2004 but received no product. The amount in controversy is the $640,000
development payments as well as a claim for punitive damages. Defendants
Pagnotta and Buckley have counterclaimed against defendant Frabasile, who has
moved to dismiss in light of a parallel action pending in Canada. Frabasile's
and 5R Online, Inc.'s response to our complaint was due on August 9, 2004. We
obtained a consent judgment against 5R Online and Frabasile on April 8, 2005. A
settlement agreement was entered on November 28, 2006 under which we received
$15,000 from 5R Online, defendants Pagnotta and Buckley agreed to cause 5R
Online to tender to us all Canadian Scientific Research & Experimental
Development funds received, if any, in consideration of our agreement not to
take any enforcement action against 5R Online with regard to the consent
judgment, and the fraud allegations against defendants Pagnotta and Buckley have
been dropped and we are no longer pursuing them. Frabasile is not a party to the
settlement agreement.
RTI was named as a cross-defendant in an action by General Electric Capital
Corporation as plaintiff ("GE Capital"), against San Francisco City Stores LLC,
dated May 10, 2004. The cross-complaint filed on behalf of San Francisco City
Stores names GE Capital, Big Hairy Dog Information Systems, and RTI as
cross-defendants, claiming breach of warranty and unfair competition (against
RTI), and makes various other claims against GE Capital and Big Hairy Dog
Information Systems. The claim is for approximately $83,000. We believe the
claims made against RTI are without merit and we intend to vigorously defend
them.
On May 10, 2006, Holden Marketing Support Services, LLC filed a complaint
against Island Pacific, Inc. alleging breach of contract and fraud in relation
to a contract under which Page Digital provided software and professional
services. We filed a counterclaim alleging breach of contract on May 30, 2006.
Effective April 5, 2007, the software license was cancelled and we agreed to pay
$100,000 in settlement of claims made by Holden.
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 has
been insignificant. Although it is possible that, in the future, third parties
may claim that our current or potential future solutions infringe on their
intellectual property, we do not currently expect a significant impact on our
business, operating results or financial condition.
22
In November 2005, certain of our Retail Pro(R) software customers had been
contacted by Acacia Technologies Group ("Acacia") regarding alleged infringement
of U.S. Patent 4,707,592 (the "`592 Patent") and are requesting indemnification
for any infringement claim regarding the `592 Patent which expired in October
2005. We retained patent counsel and, based on his advice, have notified
customers in question that it is our position that there is no merit to any
potential claim that Retail Pro(R) software infringes the patent. In direct
discussions between our counsel and Acacia, no information was provided
indicating that Retail Pro(R) software infringes the`592 Patent. Acacia had
alleged infringement against a number of retailers including a small number of
Retail Pro(R) software users. We are not named in the lawsuit and, although some
customers have indicated that they may seek indemnification, no actual lawsuits
have been filed against us.
On May 25, 2005, the United States Securities and Exchange Commission
("SEC") notified us that it had begun an informal inquiry relating to the
Company. We cooperated completely with the SEC's informal inquiry. On July 20,
2005, the SEC informed us that it had issued a formal order of investigation in
this matter. In connection with the investigation, the SEC is seeking
information regarding our, and our subsidiaries, financial condition, results of
operations, business, accounting policies and procedures, internal controls,
issuances of common stock and stock options, sales of common stock and option
exercises by insiders, employees and consultants as well as our internal revenue
recognition investigation relating to the timing of revenue recognition for
certain transactions during the fiscal years ended March 31, 2003, 2004 and
2005. The scope, focus and subject matter of the SEC investigation may change
from time to time and we may be unaware of matters under consideration by the
SEC. We are cooperating with the SEC in its investigation.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
year ended March 31, 2007.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was traded on the American Stock Exchange commencing July
8, 1998 under the symbol "IPI" but was delisted on October 25, 2005. Our common
stock is now traded on the Electronic Interdealer Quotation and Trading System
(Pink Sheets) under the symbol "IPIN". Up until July 16, 2003, our common stock
was traded under the symbol "SVI". The following table indicates the high and
low sales prices for our shares for each quarterly period for each of our two
most recent fiscal years.
YEAR ENDING MARCH 31, 2007 HIGH LOW
First Quarter $ 0.15 $ 0.12
Second Quarter $ 0.14 $ 0.06
Third Quarter $ 0.17 $ 0.07
Fourth Quarter $ 0.14 $ 0.09
YEAR ENDED MARCH 31, 2006 HIGH LOW
First Quarter $ 0.25 $ 0.16
Second Quarter $ 0.19 $ 0.10
Third Quarter $ 0.12 $ 0.06
Fourth Quarter $ 0.18 $ 0.06
As of October 31, 2007, there were approximately 200 holders of record of
our common stock. That number does not include beneficial owners of common stock
whose shares are held in the name of banks, brokers, nominees or other
fiduciaries.
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We have never declared any dividends on our common stock. We are required
to pay dividends on our Series A Convertible Preferred Stock in preference and
priority to dividends on our common stock. We currently intend to retain any
future earnings to discharge indebtedness and finance the growth and development
of the business. We, therefore, do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Any future determination to pay cash
dividends on our common stock when we are permitted to do so will be at the
discretion of the board of directors and will be dependent upon the future
financial condition, results of operations, capital requirements, general
business conditions and other factors that the board of directors may deem
relevant.
During the quarter ended March 31, 2007 and subsequent periods prior to the
filing of this report, we issued the following securities without registration
under the Securities Act of 1933:
o March 30, 2007 - An option to purchase 1,000,000 shares of our common
stock, exercisable at $0.01 per share to Laurus Master Fund, Ltd. in
conjunction with the sale of our term note dated March 30, 2007.
o September 20, 2007 - 200,000 restricted shares of our common stock and
an option to purchase an additional 200,000 shares of our common stock
related to the termination of a product distribution agreement.
o October 4, 2007 - 93,713 restricted shares of our common stock related
to the partial exercise of stock options by Laurus Master Fund, Ltd.
o October 15, 2007 - 466,667 restricted shares of our common stock to
members of the Board of Directors in lieu of stock options due for
directors' fees.
The foregoing securities were offered and sold without registration under
the Securities Act to sophisticated investors who had access to all information,
which would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and Regulation D
thereunder, and an appropriate legend was placed on the shares.
On February 15, 2006, we entered into a Stock Repurchase Agreement to
repurchase the following from the Sage Group: (1) 8,923,915 shares of our common
stock, (2) 141,000 shares of our Series A Preferred and (3) an option to
purchase 71,812 shares of our common stock (collectively, the "Repurchased
Shares"). The aggregate purchase price for the Repurchased Shares was $750,000,
payable in monthly increments of $100,000 commencing February 28, 2006 with a
final payment of $50,000 paid on October 5, 2006, completing the transaction. By
resolution of the Board of Directors on October 26, 2006, the Repurchased Shares
were cancelled. The effect of this repurchase has been to reduce the common
shares outstanding at October 26, 2006 by approximately 13% and the total
outstanding shares on a fully diluted basis by approximately 15%. In addition,
the repurchase eliminated the annual dividend of $1,360,000 due to the Series A
Preferred shareholder, and Additional Paid-In Capital was increased by the
$13,350,000 excess of the book value of the shares over the purchase price.
Information concerning securities authorized for issuance under our equity
compensation plans is included below under Item 12 under the heading "Security
Ownership of Certain Beneficial Owners and Management."
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of, each of our last five fiscal years are derived from our consolidated
financial statements. The consolidated financial statements as of March 31,
2007, 2006, and 2005 and the independent auditors' report on the consolidated
financial statements as of March 31, 2007 and March 31, 2006 are included
elsewhere in this report.
YEAR ENDED MARCH 31, (1)
------------------------------------------------------------------
2007 2006 2005 2004 2003
---------- ---------- ---------- ---------- ----------
(Restated) (Restated)
(Unaudited) (Unaudited)
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product $ 21,759 $ 20,300 $ 19,857 $ 11,316 $ 10,194
Service 3,754 3,504 5,102 3,141 9,268
---------- ---------- ---------- ---------- ----------
Total Revenues 25,513 23,804 24,959 14,457 19,462
---------- ---------- ---------- ---------- ----------
Cost of Revenues:
Product 8,205 8,272 8,280 4,612 3,861
Services 2,109 2,181 3,203 1,879 5,756
---------- ---------- ---------- ---------- ----------
Total Cost of Revenues 10,314 10,453 11,483 6,491 9,617
---------- ---------- ---------- ---------- ----------
Gross profit 15,199 13,351 13,476 7,966 9,845
---------- ---------- ---------- ---------- ----------
Application development expenses 3,176 3,130 6,117 833 4,338
Depreciation and amortization 460 727 1,604 866 878
Selling, general and administrative expenses 12,012 12,183 18,307 14,456 7,296
Impairment of intangible assets 798 1,325 5,959 -- --
---------- ---------- ---------- ---------- ----------
Total expenses 16,446 17,365 31,987 16,155 12,512
---------- ---------- ---------- ---------- ----------
Loss from operations (1,247) (4,014) (18,511) (8,189) (2,667)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income -- -- 5 20 1
Other income (expense) 77 4 131 17 2,115
Interest expense (6,066) (5,884) (6,357) (1,985) (1,795)
Derivative valuation -- 2,115 4,802 215 --
Gain (loss) on disposal of fixed assets 4 (27) 2 -- --
---------- ---------- ---------- ---------- ----------
Total other expense (5,985) (3,792) (1,417) (1,713) 321
---------- ---------- ---------- ---------- ----------
Loss before provision (benefit) for income taxes (7,232) (7,806) (19,928) (9,922) (2,346)
Provision (benefit) for income taxes -- -- 10 (586) 11
---------- ---------- ---------- ---------- ----------
Loss before change in accounting principles (7,232) (7,806) (19,938) (9,336) (2,357)
Cumulative effect of changing accounting
principle- Goodwill valuation under
SFAS No. 142 -- -- -- -- (627)
---------- ---------- ---------- ---------- ----------
Loss from continuing operations (7,232) (7,806) (19,938) (9,336) (2,984)
25
YEAR ENDED MARCH 31, (1)
------------------------------------------------------------------
2007 2006 2005 2004 2003
---------- ---------- ---------- ---------- ----------
(Restated) (Restated)
(Unaudited) (Unaudited)
(in thousands except for per share data)
Loss from discontinued operations -- (93) (935) (1,054) (522)
Loss on disposal of discontinued operations -- (2,533) -- -- --
---------- ---------- ---------- ---------- ----------
Net loss (7,232) (10,432) (20,873) (10,390) (3,506)
Preferred dividends -- (939) (1,185) (1,116) (1,052)
---------- ---------- ---------- ---------- ----------
Net loss available to common stockholders $ (7,232) $ (11,371) $ (22,058) $ (11,506) $ (4,558)
========== ========== ========== ========== ==========
Basic and diluted earnings (loss) per share:
Loss before change in accounting principle $ (0.11) $ (0.12) $ (0.34) $ (0.23) $ (0.08)
Loss from change in accounting principle -- -- -- -- (0.02)
---------- ---------- ---------- ---------- ----------
Loss from continuing operations (0.11) (0.12) (0.34) (0.23) (0.10)
Loss from discontinued operations -- -- (0.02) (0.02) (0.02)
Loss on disposal of discontinued operations -- (0.04) -- -- --
Preferred dividends -- (0.01) (0.02) (0.03) (0.04)
---------- ---------- ---------- ---------- ----------
Net loss available to common stockholders $ (0.11) $ (0.17) $ (0.38) $ (0.28) $ (0.16)
========== ========== ========== ========== ==========
Weighted average common shares:
Basic 64,796 66,702 59,337 41,450 29,599
Diluted 64,796 66,702 59,337 41,450 29,599
BALANCE SHEET DATA:
Working capital $ (17,191) $ (10,066) $ (11,499) $ (553) $ (4,056)
Total assets $ 40,055 $ 43,701 $ 49,185 $ 48,399 $ 37,637
Long-term obligations $ 8,103 $ 11,136 $ 10,080 $ 3,422 $ 2,807
Stockholders' equity $ 10,886 $ 18,163 $ 23,676 $ 36,297 $ 23,482
(1) Certain reclassifications are reflected in the above data since the filing
of such annual reports on forms 10K and 10K/A. Such reclassifications did not
result in changes in net income (loss), net income (loss) per share or
stockholders' equity.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a provider of software solutions and services to the retail industry
that help retailers understand, create, manage and fulfill consumer demand. We
derive the majority of our revenues from three sources; the sale of application
software licenses (license revenues), professional services, and support
(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. We typically charge
for professional services including consulting, implementation and project
management services on an hourly basis. Support, which includes maintenance and
software updates, is a source of recurring revenues, is generally based on a
percentage of the software license revenues, and is charged on an annual basis
pursuant to renewable maintenance contracts.
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, reduction in their
capital budgets, or decisions 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 potential transaction is very unpredictable.
As such, management believes that license revenue and growth in license revenue
is the best indicator of the Company's business -- they signify either new
customers or an expansion of licenses to existing customers. Generally, we
commence professional services shortly after the sale of a new license, and
there is a time lag between a sale of new licenses and the commencement of
support. An increase in license revenue, whether new licenses or fee increases
based on usage, will generally lead to an increase in support revenues in future
quarters.
In recent periods, we have maintained relatively flat period over period
revenues and suffered operating and net losses, largely attributable to general
economic and competitive conditions, and to previous management not recognizing
changes in the market. In this regard, we have taken a number of steps, in
addition to the acquisitions noted below, designed to improve our financial
position and results of operations, which are presented under the heading
"Results of Operations" in this section.
RECENT ACQUISITIONS
ACQUISITION OF PAGE DIGITAL
On January 30, 2004, we acquired Page Digital, a developer of multi-channel
commerce software, through a merger transaction for total consideration of $7.1
million. The acquisition was accounted for as a purchase, and accordingly, the
operating results of Page Digital have been included in our consolidated
financial statements from the date of acquisition. In connection with the Page
Digital acquisition, we added approximately 40 employees and recorded $5.8
million of goodwill, $1.4 million in software technology, $904,000 in customer
relationships and $285,000 in trademark.
The legitimization of business to business and business to consumer direct
commerce (Internet, brick-and-mortar, catalog, and other) has rapidly created a
substantial market for the Page Digital suite of direct commerce applications.
The acquisition of Page Digital will enable us to continue to provide our
customers with Page Digital's e-commerce, customer relations management, and
Catalog Management solutions. We expect to further integrate these solutions
into our offerings to enable customers to complete the multi-channel retail
distribution and customer service chain. In addition, the acquisition will also
allow us to offer Page Digital's customers the IP Merchandising solution, as
well as Point of Sale, Loss Prevention, and IP's other alliance solutions.
ACQUISITION OF RTI
Pursuant to an agreement dated June 1, 2004, we acquired RTI from Michael
Tomczak, Jeffrey Boone and Intuit in a merger transaction. As a result of the
Merger, each RTI Shareholder received 1,258,616 shares of Series B Preferred and
a promissory note payable monthly over two years in the principal amount of
$1,295,000 bearing interest at 6.5% per annum. In addition, 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.
27
The acquisition was accounted for as a purchase and we recorded, in
addition to the obligations to shareholders and others noted above, $1,410,000
in software technology, $1,660,000 in customer relationship value, $800,000 for
trademarks, $10,487,000 in goodwill, $713,000 in unearned compensation related
to the assumption of RTI's incentive stock option plan, and $2,800,000 as an
obligation for the performance of future services.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director, and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone. We terminated both Mr. Tomczak and Mr. Boone in October 2005.
The combination of Island Pacific, RTI and Page Digital, has enabled us to
offer a fully integrated solution to mid-tier retailers that is unique in the
marketplace. As a result of this transaction, smaller retailers will now be able
to cost-effectively acquire a solution that provides both front and back-end
support. The combination instantly expands our products, services offerings and
distribution channels.
DISCONTINUED OPERATIONS
Effective March 31, 2006, we sold the operating assets of our Store
Solutions division to Applied Retail Solutions, Inc., a subsidiary of 3Q
Holdings Limited, an Australian corporation for a total consideration of
$211,000. With a broader base of customers and highly scalable point of sale
software, the Retail Pro(R) product acquired in the RTI transaction has become
our principal store solutions software. The disposal of the Store Solutions
assets resulted in a loss of $2.56 million. The operating results of the Store
Solutions division are shown on our financial statements as discontinued
operations in the years ended March 31, 2006, 2005, 2004, 2003 and 2002.
Effective April 1, 2003, we sold our subsidiary, SVI Training Products
("Training Products") to its president and our former director, Arthur
Klitofsky, for the sale price of $180,000 plus earn-out payments equal to 20% of
the total gross revenues of the Training Products unit in each of its next two
fiscal years, if the revenues in each of those years exceed certain targets. We
received a promissory note for the amount of $180,000 and the earn-out payments,
if any, will be made in quarterly installments following each fiscal year,
bearing an annual interest rate of 5%. The sale of Training Products resulted in
a loss of $129,000, net of estimated income taxes, which was accrued as of March
31, 2003. Training Product's $248,000 of operating results are shown as
discontinued operations, net of the loss on sale of the Training Products unit
at March 31, 2003. In April 2004, we agreed to defer the payments due in January
2004 and April 2004 until April 2008. Based on collections made through July
2005, the balance of the note receivable of $121,000 was written off as
uncollectible as of March 31, 2005.
Due to the declining performance of our Australian subsidiary, we sold
certain assets of the Australian subsidiary to its former management and ceased
Australian operations in February 2002. However, the sale was subject to the
approval of National Australia Bank, the subsidiary's secured lender. The bank
did not approve the sale and caused a receiver to be appointed in April 2002 to
sell substantially all of the assets of the Australian subsidiary and pursue
collections on any outstanding receivables. The receiver sold substantially all
of the assets for $300,000 in May 2002 to the entity affiliated with former
management, and actively pursued the collection of receivables. If the sale
proceeds plus collections on receivables were insufficient to discharge the
indebtedness to National Australia Bank, we could have been called upon to pay
the deficiency under our guarantee to the bank. We accrued $187,000 as the
maximum amount of our potential exposure as of March 31, 2004. In June 2004, we
settled this obligation by paying $69,000 to the bank. As a result, the $118,000
accrual in excess of settlement amount was written off to the consolidated
statement of operations as other income in the nine months ended December 31,
2004.
RESULTS OF OPERATIONS
Results of operations for the fiscal year ended March 31, 2007 ("Fiscal
2007") reflect a marginal increase in new license sales of our application
software suites. As a result of our net losses, we experienced significant
strains on our cash resources throughout the Fiscal 2007. Anticipating
improvement in domestic economic conditions and new global market opportunities,
we have taken a number of affirmative steps to address our operating situation
and liquidity problems, and to position us for improved results of operations.
o On June 4, 2004, we completed the acquisition of RTI, a provider of
management systems for retailers. We commenced the application of our
Retail Pro software to enterprise-wide applications in Fiscal 2006.
See "Recent Transactions - Acquisition of RTI" above.
28
o On August 27, 2004 we increased the number of shares of common stock
we are authorized to issue to 250 million shares.
o In November 2004, we restated certain of our financial statements and
made the following revised filings: 10-K/A for the fiscal year ended
March 31, 2004 and 10-Q/A for the fiscal quarter ended September 30,
2002, December 31, 2002, June 30, 2003, September 30, 2003, December
31, 2003 and June 30, 2004.
o On January 5, 2005, we entered into Amendment No. 2 (the "Amendment")
to the Retail Pro Software License Agreement dated December 6, 2002
between Intuit Inc. and Retail Technologies International, Inc.
("RTI") (the "License Agreement"), which we assumed in connection with
our acquisition of RTI. Pursuant to the Amendment, we extended certain
of our license rights under the License Agreement. . The License
Agreement was further amended and restated on December 21, 2006 as
described under the caption Proprietary Rights below.
o In April 2005, Barry Schechter, our founder and former CEO, returned
as the Company's CEO.
o In June 2005, our Board of Directors appointed Darren Williams to the
position of Chief Operating Officer.
o Our board adopted a strategic plan to return the Company to positive
cash flows and profitability, which included:
o Appointment of a new management team.
o A headcount reduction, office space downsize and other operating
expenses reduction.
o A new focus on R & D for core products and termination of
unprofitable partner ventures.
o Introduction of new products to the market.
o Annual cost savings approaching $8 million.
o A reduction in annual cash overhead from $27 million to $19
million.
o Opening of a Europe, Middle East and Africa division (EMEA),
opening an Asia Pacific division, opening a GCG division and a
division to serve Latin America with the intention of better
serving our business partners in those regions as well as to
increase the number of business partners in the regions.
o Opening an Asia Pacific office in Sydney, Australia, opening an
office in Beijing, China to serve the GCG (Greater Chinese
Geography - China, Hong Kong, Taiwan and Macau) and developing a
dedicated team to better service Latin America, opening an Asia
Pacific office in China to better serve the Retail Pro business
community for that region.
o In the period since Barry Schechter was appointed Chief Executive
Officer of Island Pacific, with the help of other members of Island
Pacific's management team, Island Pacific has:
o Completely reengineered the organization and built an
experienced, enthusiastic and motivated management team, which is
supported by experienced and motivated sales, support,
administration and accounting personnel.
o Acquired from The Sage Group, plc common stock, preferred stock
and options, which on an as converted basis equaled approximately
30% of Island Pacific's outstanding stock.
o Negotiated a rent reduction for our premises in Denver, which
will result in annual savings of approximately $720,000.
o Successfully launched version 3.1 of the Island Pacific
Management System ("IPMS").
o Commenced testing version 9.1 of RetailPro in beta sites.
o Continued to close new business deals for each of our products,
including a number of deals for our recently launched RetailPro
Planning Solution.
o Added experienced team members to better support our US and
Canadian regions, as well as our office in the UK that serves
Europe, the Middle East and Africa.
o Established a new division to take advantage of the opportunity
to provide our existing customer base with additional payment
processing services.
o Expanded our in-house marketing team and provided them funding
and resources to enable them to better inform the retail market
of the world class products we provide.
o Launched a new global channel development initiative to fuel the
further development of existing Business Partners and appoint new
Business Partners in high growth potential markets around the
world, appointing a number of industry veterans and promoting
other executives to new leadership positions to support this
initiative.
29
o Annual maintenance charges have been increased for IPMS users to be
more in line with industry standards.
o On October 31, 2007, recognizing the strong global growth potential of
our Retail Pro software product line, we signed an agreement to
dispose of the Retail Merchandising Solutions business unit (IPMS).
See Note 16 to the accompanying financial statements.
o We completed a number of debt and equity financing transactions. See
"Liquidity and Capital Resources - Financing Transactions" below.
We believe that these actions have positioned us to achieve sustained
revenue growth and profitability.
RESTATEMENT OF FISCAL 2004 AND FISCAL 2003 INFORMATION
We have previously restated our March 31, 2004 financial statements to:
1. Reverse $3.9 million revenue recognized on a one-time sale of software
technology rights,
2. Separately present revenues from product and services and
corresponding costs of revenues,
3. Reclassify amortization of software products from depreciation and
amortization expense to cost of product revenue,
4. Reverse a $3.9 million purchase of software technology ("Software
Technology") and related amortization,
5. Accrue $450,000 royalty liability and related recognition of royalty
fees pursuant to the purchase agreement of Software Technology,
6. Recognize amortization of debt discount on the March `03, April `03,
May `03 and Toys "R" Us convertible debt as interest expense,
7. Capitalize and amortize beneficial conversion interest charge related
to the convertible debentures acquired in March 2003, April 2003, May
2003 and March 2004,
8. Capitalize legal fees incurred in connection with the acquisitions of
Page Digital and RTI,
9. Reclassify $640,000 impairment of prepaid development expense from
other expense to selling, general and administrative expense, and
10. Reclassify a $1.5 million gain on debt forgiveness from extraordinary
item to other income.
Concurrent with the filing of this report, we are restating the March 31,
2004 and March 31, 2003 financial information included in this report to:
1. Defer revenues previously recorded for which the earnings process
has been or will be completed at a later date, and
2. Reverse the recognition of debt discounts and beneficial
conversion interest charges as previously recorded and recognize
the effect of accounting for the conversion features embedded in
the convertible debt as derivative instruments.
The previous and current restatements had no impact on the net cash flows
from operations.
30
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
fiscal years ended March 31, 2007, 2006 and 2005 (in thousands):
YEAR ENDED MARCH 31,
2007 2006 2005
--------------------- --------------------- ---------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
-------- -------- -------- -------- -------- --------
Revenues:
Product $ 21,759 85% $ 20,300 85% $ 19,857 80%
Service 3,754 15% 3,504 15% 5,102 20%
-------- -------- -------- -------- -------- --------
Total Revenues 25,513 100% 23,804 100% 24,959 100%
-------- -------- -------- -------- -------- --------
Cost of Revenues:
Product 8,205 32% 8,272 35% 8,280 33%
Service 2,109 8% 2,181 9% 3,203 13%
-------- -------- -------- -------- -------- --------
Total Cost of Revenues 10,314 40% 10,453 44% 11,483 46%
-------- -------- -------- -------- -------- --------
Gross Profit 15,199 60% 13,351 56% 13,476 54%
-------- -------- -------- -------- -------- --------
Application development expense 3,176 12% 3,130 13% 6117 25%
Depreciation and amortization 460 2% 727 3% 1,604 6%
Selling, general and administration expenses 12,012 47% 12,183 51% 18,307 73%
Impairment of intangible assets 798 3% 1,325 6% 5,959 24%
-------- -------- -------- -------- -------- --------
Total expenses 16,446 64% 17,365 73% 31,987 128%
-------- -------- -------- -------- -------- --------
Loss from operations (1,247) (4)% (4,014) (17)% (18,511) (74)%
-------- -------- -------- -------- -------- --------
Other income (expense):
Interest income -- --% -- --% 5 --%
Other income (expense) 77 --% 4 --% 131 1%
Interest expense (6,066) (24)% (5,884) (25)% (6,357) (26)%
Derivative valuation -- --% 2,115 9 % 4,802 19%
Gain (loss) on disposal of fixed assets 4 --% (27) --% 2 --%
-------- -------- -------- -------- -------- --------
Total other expense (5,985) (24)% (3,792) (16)% (1,417) (6)%
-------- -------- -------- -------- -------- --------
Loss before provision (benefit) for income taxes (7,232) (28)% (7,806) (33)% (19,928) (80)%
Provision (benefit) for income taxes -- --% -- --% 10 --%
-------- -------- -------- -------- -------- --------
Loss from continuing operations (7,232) (28)% (7,806) (33)% (19,938) (80)%
Loss from discontinued operations -- (93) (935)
Loss on disposal of discontinued operations -- (2,533) --
-------- -------- --------
Net loss (7,232) (10,432) (20,873)
Preferred dividends -- (939) (1,185)
-------- -------- --------
Net loss available to
common stockholders $ (7,232) $(11,371) $(22,058)
======== ======== ========
31
FISCAL YEAR ENDED MARCH 31, 2007 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2006
NET SALES
Product revenues consist of license sales, recurring maintenance revenues,
and sale of partner products and hardware. Service revenue consists of
professional services incurred in implementation, training and modifications, as
well as reimbursed costs. The increase in total revenues compared to the year
ended March 31, 2006 is attributable to an increase in incremental license
revenue from our Store Solutions and Retail Merchandising products.
Consequently, total revenue increased by $1.7 million - $1.5 million in license
revenue and $0.2 million in professional services. Our other products and
services kept pace with the year ended March 31, 2006, however we have not
significantly increased our customer base. Our financial condition combined with
the delay in resolving our revenue reporting issues may have interfered with our
ability to increase our customer base through sales of new application software
licenses and related services. We believe that our reputation for providing high
quality support services coupled with the value of superior software solutions
to our customers will establish our continuing ability to implement and service
new large-scale systems. Significant sales growth may however depend in part on
our ability to improve our financial condition. Despite the softness in the
market for retail software and our financial weakness, the value of our products
and services is demonstrated by our client retention and continued maintenance
and service revenues.
COST OF REVENUES/GROSS PROFIT
The Cost of License and Service revenues remained comparable to the year
ended March 31, 2006 because our customer base remained stable. Consequently,
the overall Gross Profit percentage increased due to an increase in high profit
margin incremental license revenues from existing customers. Included in the
Cost of Product revenues is $3.3 million in amortization of software development
costs, equivalent to the year ended March 31, 2006.
APPLICATION DEVELOPMENT EXPENSE
Application Development Expense is comparable to the year ended March 31,
2006 reflecting our continued development of our core Retail Management
Solutions software and the continued capitalization of development costs
associated with the latest version of our Store Solutions software which is now
in Beta testing.
DEPRECIATION AND AMORTIZATION
The decrease in Depreciation and Amortization compared to the year ended
March 31, 2006 is principally attributable to certain furniture, equipment and
the Multi-channel Retail Solutions customer list becoming fully depreciated.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The decrease in Selling, General and Administrative Expenses compared to
the year ended March 31, 2006 is represented by a decline in professional
service fees related to the restatement of prior years' revenue recognition.
INTEREST EXPENSE
Interest Expense is attributable to our continuing need to increase our
debt in order to meet cash flow demands. In the current year, the increase in
interest paid is offset by the decrease in the amortization of debt discount.
The increase in interest expense overall is represented by the fair value of
options issued to lenders on increases in short-term notes.
FISCAL YEAR ENDED MARCH 31, 2006 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2005
NET SALES
Product revenues consist of license sales, recurring maintenance revenues,
and sale of partner products and hardware. Service revenue consists of
professional services incurred in implementation, training and modifications, as
well as reimbursed costs. The decline in total revenues compared to the year
ended March 31, 2005 is attributable to a reduction in market demand for our
Multi-channel Retail Solutions product. Consequently, total revenue decreased by
$1.3 million - $0.9 million in professional services and $0.4 million in new
license revenue. Our other products and services kept pace with the year ended
March 31, 2005, however we did not significantly increase our customer base in
the year ended March 31, 2006. As in the year ended March 31, 2005, our
financial condition combined with the delay in resolving our revenue reporting
32
issues may have interfered with our ability to sell new application software
licenses. We believe that our reputation for providing high quality support
services coupled with the value of superior software solutions to our customers
will establish our continuing ability to implement and service new large-scale
systems. Significant sales growth may however depend in part on our ability to
improve our financial condition. Despite the softness in the market for retail
software and our financial weakness, the value of our products and services is
demonstrated by our client retention and continued maintenance and service
revenues.
COST OF REVENUES/GROSS PROFIT
The decrease in Cost of Service revenues is directly attributable to the
decline in professional service revenues. Consequently, the overall Gross Profit
percentage increased due to an increase in high profit margin incremental
license revenues from existing customers. Included in the Cost of Product
revenues is $3.3 million in amortization of software development costs, a
decrease of $0.3 million compared to the year ended March 31, 2005.
APPLICATION DEVELOPMENT EXPENSE
The decrease in Application Development Expense compared to the year ended
March 31, 2005 is attributable to a $1.5 million decline in customer-generated
modifications to the Retail Management Solutions software, a $0.7 million
decline in Multi-channel Retail Solutions software, and the capitalization of
development costs associated with the latest version of our Store Solutions
software achieving technological feasibility.
DEPRECIATION AND AMORTIZATION
The decrease in Depreciation and Amortization compared to the year ended
March 31, 2005 is principally attributable to an employment covenant becoming
fully amortized at March 31, 2005.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The decrease in Selling, General and Administrative Expenses compared to
the year ended March 31, 2005 is directly attributable to the cost savings
generated by the strategic plan adopted to improve profitability and cash flow
noted previously as well as a decline in professional service fees related to
the restatement of prior years' revenue recognition.
INTEREST EXPENSE
Interest Expense is a reflection of our continuing need to increase our
debt in order to meet cash flow demands. Compared to the year ended March 31,
2005, we did not incur charges for the write off of unamortized debt discount
associated with debt paid in advance ($1.2 million), the increase in debt
discount associated with warrants previously issued declined by $0.5 million,
and we did not incur liquidated damages charges associated with Registration
Rights Agreements ($0.5 million). These savings of $2.2 million were offset by
increases in interest paid and debt discount amortized of $1.7 million.
DERIVATIVE VALUATION
The conversion feature embedded in the convertible debt issued in the year
ended March 31, 2005 and on June 15, 2005 is accounted for as a derivative
liability because it contains anti-dilution reset provisions. The initial
recorded amount is re-evaluated at the end of each quarter and the change in
valuation is recorded as other income or expense. As of November 15, 2005, the
reset provision was waived by the lenders, the derivative liability was
converted to Additional Paid-in Capital, and the quarterly valuation ceased.
CUMULATIVE PREFERRED DIVIDEND
Dividends on the outstanding Series A convertible preferred stock
attributable to the fiscal years ended March 31, 2006 and 2005 were $0.9 and
$1.2 million, respectively. Dividends on the Series A convertible preferred
stock terminated with the repurchase agreement finalized on October 5, 2006.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 2007, we financed our investments
using proceeds from operations and the sale of term notes. At March 31, 2007 and
2006, we had cash of $0.5 million and $0.5 million, respectively.
33
Operations provided $1.7 million in the fiscal year ended March 31, 2007
and consumed $3.2 million in the fiscal year ended March 31, 2006. Cash provided
by operating activities in the fiscal year ended March 31, 2007 resulted from
$7.2 million net loss offset in part by non-cash charges of $3.8 million for
depreciation and amortization, $0.8 million of asset impairment write offs, $3.7
million for amortized debt discount on convertible debt and on related
detachable warrants, and $0.5 million of stock-based compensation. Collections
on accounts receivable in excess of current year's revenues contributed $0.2
million, reductions of prepaid expenses contributed $0.8 million, net reductions
of accounts payable and accrued expenses consumed $0.6 million in financing, and
$0.6 million in current year revenue billings was deferred to the next year.
Cash in the amount of $2.0 million in the fiscal year ended March 31, 2007,
increased our capital investment in a significant software upgrade of our Retail
Pro(R) product which commenced with an initial investment of $1.6 million in the
fiscal year ended March 31, 2006.
Financing activities provided cash of $0.5 million and $5.3 million in the
fiscal years ended March 31, 2007 and 2006, respectively. The financing
activities in the current year included $2.0 million from the issuance of
convertible and other term notes, less payments made of $1.5 million.
Changes in the currency exchange rates of our foreign operation had the
effect of decreasing cash by $0.09 million in the fiscal year ended March 31,
2006. The effect on the fiscal year ended March 31, 2007 was negligible.
We believe that our cash and cash equivalent and funds generated from
operations will not 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 and we had a negative working capital in fiscal 2007. 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.
CASH POSITION
As a result of our indebtedness and net losses for the past three years, we
have experienced significant strains on our cash resources. In order to manage
our cash resources, we have extended payment terms with many of our trade
creditors wherever possible, have diligently focused our collection efforts on
our accounts receivable and have been actively engaged in raising capital. See
"Financing Transactions" below. We had a negative working capital of $17.2
million at March 31, 2007 and $10.1 million at March 31, 2006.
We have been actively engaged in attempts to resolve our liquidity
problems. On March 15, 2004, we issued 9% convertible debentures and warrants
for an aggregate of $3.0 million, less expenses, in a private placement
transaction, and on July 12, 2004, we sold a convertible note and warrants in
the amount of $7.0 million, using a portion of the proceeds to retire a portion
of the convertible debentures sold on March 15, 2004. On April 18, 2005, we sold
a secured term note for $2.0 million, less expenses, in a private placement
transaction. That note was replaced with convertible term notes, warrants and
stock options in the aggregate amount of $4.2 million on June 15, 2005. We
obtained additional term financing of $850,000 each on November 15, 2005 and
March 23, 2006, $1.0 million in October/November 2006, and $500,000 on March 30,
2007. These financing activities, described in detail under the title "Financing
Transactions" following have provided sufficient cash to remain in compliance
with our debt obligations, and meet our critical operating obligations for the
twelve months following March 31, 2007. We may continue to seek private or
public equity and/or debt placements to help discharge aged payables, pursue
growth initiatives and prepay term note indebtedness. We have no binding
commitments for funding at this time. If we do decide to seek financing, it may
not be available on terms and conditions acceptable to us, or at all.
FINANCING TRANSACTIONS
2005 DEBT ISSUES (FISCAL YEAR ENDED MARCH 31, 2006)
34
Multi-Channel Holdings
----------------------
On April 18, 2005, we sold and issued a secured term note to Multi-Channel
Holdings, Inc. ("Multi-Channel") for gross proceeds of $2.0 million (the
"Multi-Channel Note"). The maturity date of the Multi-Channel Note was October
18, 2005 with interest payable on maturity at a rate per annum equal to the
"prime rate" published in The Wall Street Journal from time to time, plus three
percent, calculated each day that the prime rate changes, and the Multi-Channel
Note was secured by all of our assets. The Multi-Channel Note and accrued
interest were paid from the proceeds of the June 2005 Convertible Notes (defined
below).
June 2005 Convertible Notes
---------------------------
On June 15, 2005, we sold and issued secured convertible term notes to
Laurus for gross proceeds of $3.2 million (the "Laurus June 2005 Convertible
Note") and to Midsummer for gross proceeds of $1.0 million (the "Midsummer June
2005 Convertible Note") (together the "June 2005 Convertible Notes") pursuant to
Securities Purchase Agreements. We also issued Laurus and Midsummer warrants to
purchase up to 4,444,444 and 1,388,889 shares of our common stock, respectively,
at a price of $0.23 per share (the "June 2005 Warrants") and options to purchase
up to 17,142,857 and 5,357,143 shares of our common stock, respectively, at the
price of $0.01 per share (the "June 2005 Options").
The June 2005 Convertible Notes mature on June 15, 2008 and accrue interest
at a rate per annum equal to the "prime rate" published in The Wall Street
Journal from time to time, plus one percent, calculated each day that the prime
rate changes, payable monthly in arrears commencing on July 1, 2005. In addition
to accrued interest, commencing on October 3, 2005, the June 2005 Convertible
Notes require monthly principal payments to Laurus and Midsummer of $106,667 and
$40,000, respectively. The principal payments have been deferred pursuant to
November 2005, March 2006, October/November 2006, and March/April 2007
Amendments below. The June 2005 Convertible Notes are convertible to common
stock at $0.20 per share, subject to adjustment upon our issuance of securities
at a price below the fixed conversion price, a stock split or combination,
declaration of a dividend on our common stock or reclassification of our common
stock. Our obligations under the June 2005 Convertible Notes are secured by all
of our assets and guaranteed by our subsidiaries pursuant, with respect to
Laurus, to the Master Security Agreement and Subsidiary Guaranty in favor of
Laurus dated July 12, 2004 (the "Laurus Security Instruments") and, with respect
to Midsummer, to the Master Security Agreement and the Subsidiary Guaranty in
favor of Midsummer dated June 15, 2005 (the "Midsummer Security Instruments").
The June 2005 Warrant and June 2005 Option issued to Laurus expire on May
31, 2012 and May 31, 2015, respectively. The June 2005 Warrant and June 2005
Option issued to Midsummer expire on June 15, 2012 and June 15, 2015,
respectively. The warrants and options are immediately exercisable. The exercise
prices under the June 2005 Warrants and June 2005 Options are subject to
adjustment in the event of common stock splits and combinations, dividends and
distributions.
Pursuant to Registration Rights Agreements between us and Laurus and
Midsummer entered into concurrently with the sales of the June 2005 Convertible
Notes, we were obligated to file a Registration Statement registering the shares
of our common stock issuable upon conversion of the June 2005 Convertible Notes,
and exercise of June 2005 Warrants and June 2005 Options no later than August
15, 2005, and have the Registration Statement declared effective by the SEC no
later than October 29, 2005. These deadlines were extended to March 15, 2006
pursuant to the November 2005 Amendments (defined below) and further extended to
May 15, 2006 and October 31, 2007 pursuant to the March 2006 and March/April
2007 Amendments (defined below). If (1) the Registration Statement is not filed
or declared effective within the requisite periods, (2) the Registration
Statement ceases to be effective for more than 30 days in any calendar year or
more than 20 consecutive calendar days, or (3) our common stock is not listed or
quoted or is suspended from trading for three consecutive trading days, we were
required to pay Laurus and Midsummer liquidated damages equal to 2% of original
principal balances under the June 2005 Convertible Notes for each 30 day period
(with partial periods prorated) that such event continues.
Adjustment of Prior Beneficial Conversion and Warrant Exercise Prices -
-----------------------------------------------------------------------
2005
----
In connection with the sales of the June 2005 Convertible Notes, we
adjusted the conversion price of the Laurus 2004 Convertible Note and the
Midsummer March 2004 Debentures (defined below) to $0.20 per share, and the
exercise price of outstanding warrants previously granted anti-dilution price
protection to $0.01 per share.
35
Derivative Liabilities and Debt Discount
----------------------------------------
In accordance with SFAS 133, we accounted for the Conversion Feature
embedded in the June 2005 Convertible Notes as a derivative liability and
recorded the following derivative liability transactions in the year ended March
31, 2006 and 2007.
Increase (Decrease) in Net Income
----------------------------------------------------
Initial Derivative
Liability/Debt Amortization of Debt Change in Fair Value of
Year Ended Discount Discount Derivative Liability
----------------------- ---------------------- ----------------------- -------------------------
March 31, 2006 $3,229,400 $(846,500) $2,179,500
March 31, 2007 $(1,069,200)
On November 16, 2005, the reset price of the Conversion Feature embedded in
the June 2005 Convertible Notes became fixed at $0.20 per share, and the balance
of the derivative liability of $1,049,900 was added to Additional Paid-in
Capital.
After bifurcation of the derivative liability, we allocated the proceeds
received from the June 2005 Convertible Notes with the detachable June 2005
Warrants and the June 2005 Options using the relative fair value of the warrants
and options ($807,690) at the time of issuance. The allocation to the warrants
and options is being amortized as interest expense over the term of the June
2005 Convertible Notes. Amortization in the years ended March 31, 2007 and 2006
was $276,500 and $218,900, respectively.
The balance of the June 2005 Convertible Notes, including accrued interest,
is $4.3 million at March 31, 2007.
November 2005 Term Notes
------------------------
On November 16, 2005, we sold and issued secured term notes to Laurus for
gross proceeds of $637,500 (the "Laurus November 2005 Term Note") and to
Midsummer for gross proceeds of $212,500 (the "Midsummer November 2005 Term
Note") (together the "November 2005 Term Notes") pursuant to securities purchase
agreements. In addition, we issued Laurus and Midsummer options to purchase up
to 1,125,000 and 375,000 shares of our common stock, respectively at the price
of $0.01 per share (the "November 2005 Options).
The November 2005 Term Notes initially matured on February 1, 2006 but the
maturity dates were extended to August 31, 2006 pursuant to the March 2006
Amendments, to February 28, 2007 pursuant to the October/November 2006
Amendments, and to June 30, 2007 pursuant to the March/April 2007 Amendments.
The November 2005 Term Notes accrue interest at a rate per annum equal to the
"prime rate" published in The Wall Street Journal from time to time, plus two
percent, calculated each day that the prime rate changes, payable monthly in
arrears commencing on December 1, 2005. Our obligations under the November 2005
Term Notes are secured by all of our assets and guaranteed by our subsidiaries
pursuant to the Laurus Security Instruments and the Midsummer Security
Instruments.
The November 2005 Options are immediately exercisable. The exercise prices
of the November 2005 Options are subject to adjustment in the event of common
stock splits and combinations, dividends and distributions. The November 2005
Options expire on November 16, 2015.
Pursuant to Registration Rights Agreements between us and Laurus and
Midsummer entered into in connection with the sales of the November 2005 Term
Notes, we were obligated to file a Registration Statement registering the shares
of our common stock issuable upon exercise of the November 2005 Options no later
than March 15, 2006 and have the Registration Statement declared effective by
the SEC no later than 135 days following the filing date of such registration
statement. The filing deadline was extended as part of amendments to the
November 2005 Term Notes as described below. If (1) the Registration Statement
is not filed or declared effective within the requisite periods, (2) the
Registration Statement ceases to be effective for more than 30 days in any
calendar year or more than 20 consecutive calendar days, or (3) our common stock
is not listed or quoted or is suspended from trading for three consecutive
trading days, we are required to pay Laurus and Midsummer liquidated damages
equal to 2% of the original principal balance on the November 2005 Term Notes
for each 30 day period (with partial periods prorated) that such event
continues.
November 2005 Amendments
------------------------
Pursuant to separate Amendment and Waiver Agreements (the "November 2005
Amendments") entered into concurrently with the issuance of the November 2005
Term Notes, Laurus and Midsummer (1) postponed principal payments due from
November 2005 through February 2006 on the June 2005 Convertible Notes, the
Laurus 2004 Convertible Note (defined below), and Midsummer's March 2004
Debenture (defined below), (2) amended the financial reporting requirements
36
associated with the previously noted debts, (3) waived the right to
anti-dilution adjustments to conversion/exercise prices for the June 2005
Convertible Notes, the Laurus 2004 Convertible Note, and Midsummer's March 2004
Debenture triggered by the issuance of the November 2005 Options, and (4)
adjusted the Filing and Effective dates of all previous Registration Rights
Agreements to conform to the Registration Rights Agreements entered into
concurrently with the November 2005 Term Notes. In addition, Midsummer waived
the right to anti-dilution adjustments to the exercise prices for the following
warrants to purchase our common stock: warrant dated March 15, 2004 for 434,783
shares, warrant dated July 1, 2003 for 138,158 shares, warrant dated March 31,
2003 for 629,143 shares, and warrant dated November 30, 2004 for 200,000 shares.
Options Exercised
-----------------
On August 31, 2005 and August 31, 2007, Laurus exercised its right to
acquire 3,000,000 and 96,713 shares, respectively of our common stock granted by
its June 2005 Option. On March 8, 2006, Midsummer exercised its right to acquire
375,000 shares of our common stock granted by its November 2005 Option, and on
August 4, 2006, Midsummer exercised its right to acquire 375,000 shares of our
common stock granted by its March 2006 Option (defined below).
March 2006 Amendments
---------------------
We entered into Amendment and Waiver Agreements (the "March 2006
Amendments") with Laurus and Midsummer dated March 22, 2006 and March 23, 2006,
respectively, pursuant to which, among other things: (1) the November 2005 Term
Notes were amended and restated to increase their aggregate principal balances
by $850,000 and to extend their maturity dates until August 31, 2006; (2) the
principal portions of the monthly payments due for March through August 2006
under Midsummer's March 2004 Debenture, the Laurus 2004 Convertible Note and
June 2005 Convertible Notes were postponed until the maturity dates under the
respective notes; (3) our obligations to file registration statements pursuant
to the registration rights agreements dated March 15, 2004, July 12, 2004, June
15, 2005 and November 16, 2005 registering the shares issuable to Laurus and
Midsummer upon conversion of the Laurus 2004 Convertible Note, the June 2005
Convertible Notes, Midsummer's March 2004 Debenture, and the shares issuable on
exercise of outstanding options and warrants held by Midsummer and Laurus were
extended to May 15, 2006; and (4) Midsummer and Laurus waived certain other
rights under the foregoing agreements and related agreements. In exchange for
Laurus and Midsummer agreeing to the foregoing, we issued them additional
options, with ten-year terms, to purchase an aggregate of One Million Five
Hundred Thousand (1,500,000) shares of our common stock for $0.01 per share (the
"March 2006 Options"). We were required to register the shares issuable upon
exercise of the March 2006 Options by May 15, 2006, pursuant to the terms of the
registration rights agreements between us and Laurus and Midsummer dated
November 16, 2005.
October/November 2006 Amendments
--------------------------------
We entered into Amendment and Waiver Agreements (the "October/November 2006
Amendments") with Laurus and Midsummer dated November 27, 2006 and October 9,
2006, respectively, pursuant to which, among other things: (1) the November 2005
Term Notes were amended and restated to increase their aggregate principal
balances by $1,000,000 and to extend their maturity dates until February 28,
2007; (2) the principal portions of the monthly payments due for September 2006
through February 2007 under Midsummer's March 2004 Debenture, the Laurus 2004
Convertible Note and June 2005 Convertible Notes were postponed until the
maturity dates under the respective notes; and (3) the maturity date under the
March 2004 Debenture was extended to February 28, 2007. In exchange for Laurus
and Midsummer agreeing to the foregoing, we issued them additional options, with
9.5-year terms, to purchase an aggregate of Two Million Two Hundred Seventy-Five
Thousand (2,275,000) shares of our common stock for $0.01 per share (the
"October/November 2006 Options"). We are required to register the shares
issuable upon exercise of the October/November 2006 Options, pursuant to the
terms of the registration rights agreements between us and Laurus and Midsummer
dated November 16, 2005.
March/April 2007 Amendments
---------------------------
We entered into Amendment and Waiver Agreements (the March/April 2007)
Amendments with Laurus and Midsummer dated March 30, 2007 and April 23, 2007,
respectively, pursuant to which, among other things: (1) the Laurus November
2005 Term Note was amended and restated to increase the principal balances by
$600,000 and to extend the maturity date until June 30, 2007; (2) the Midsummer
November 2005 Term Note was amended and restated to extend the maturity date
until April 30, 2007, (3) the principal portions of the monthly payments due for
March 2007 through June 2007 under Midsummer's March 2004 Debenture, the Laurus
2004 Convertible Note and June 2005 Convertible Notes were postponed until the
maturity dates under the respective notes; (4) the maturity date under the March
2004 Debenture was extended to April 30, 2007; and (5) our obligations to file
registration statements pursuant to the registration rights agreements dated
March 15, 2004, July 12, 2004, June 15, 2005 and November 16, 2005 registering
the shares issuable to Laurus and Midsummer upon conversion of the Laurus 2004
Convertible Note, the June 2005 Convertible Notes, Midsummer's March 2004
Debenture, and the shares issuable on exercise of outstanding options and
warrants held by Midsummer and Laurus were extended to October 31, 2007. In
37
exchange for Laurus agreeing to the foregoing, we issued them an additional
option, with a 10-year term, to purchase up to One Million (1,000,000) shares of
our common stock for $0.01 per share (the "March 2007 Option"). We are required
to register the shares issuable upon exercise of the March 2007 Option pursuant
to the terms of the registration rights agreements between us and Laurus and
Midsummer dated November 16, 2005.
The relative fair value of the options issued in connection with the
November 2005 Term Notes in the years ended March 31, 2007 and 2006 in the
amount of $324,800 and $258,100, respectively was charged directly to interest
expense.
The balance of the November 2005 Term Notes, including accrued interest, is
$3.3 million at March 31, 2007.
LAURUS MASTER FUND, LTD. - 2004 (FISCAL YEAR ENDED MARCH 31, 2005)
On July 12, 2004, we sold and issued a secured convertible term note (the
"Laurus 2004 Convertible Note") to Laurus for gross proceeds of $7.0 million
pursuant to a Securities Purchase Agreement. In addition, we issued Laurus a
warrant to purchase up to 3,750,000 shares of our common stock at a price of
$0.71 per share (the "Laurus 2004 Warrant").
The Laurus 2004 Convertible Note initially matured on September 1, 2004,
however, the maturity date was automatically extended to July 12, 2007 (the
"Maturity Date") upon our stockholders approving an increase in our authorized
common stock from 100 to 250 million shares and our filing an amendment to our
certificate of incorporation to effect such change on August 27, 2004. The
Laurus 2004 Convertible Note accrues interest at a rate per annum equal to the
"prime rate" published in The Wall Street Journal from time to time, plus two
percent. Interest under the Laurus 2004 Convertible Note is payable monthly in
arrears commencing August 1, 2004. The Interest Rate is recalculated with each
change in the prime rate and is subject to adjustment based on the then-current
price of our common stock. The initial conversion price under the Laurus 2004
Convertible Note was $0.56 per share, subject to adjustment upon our issuance of
securities at a price below the fixed conversion price, a stock split or
combination, declaration of a dividend on our common stock or reclassification
of our common stock. We have the option to redeem the Laurus 2004 Convertible
Note by paying Laurus 125% of the principal amount due under the Laurus 2004
Convertible Note together with all accrued and unpaid interest. Our obligations
under the Laurus 2004 Convertible Note are secured by all of our assets and
guaranteed by our subsidiaries, pursuant to the Laurus Security Instruments.
The Laurus 2004 Warrant is immediately exercisable with a seven year term
ending July 12, 2011. We have the right to require exercise of the Laurus 2004
Warrant in whole or in part if: (1) all of our obligations under the Laurus 2004
Convertible Note have been irrevocably paid in full, (2) the common stock
underlying the Laurus 2004 Warrant has been registered on a registration
statement declared effective by the SEC, and such registration statement remains
effective, and (3) the average closing price of our common stock for the ten
(10) trading days immediately prior to the proposed date of the mandatory
exercise of the Laurus 2004 Warrant is greater than three hundred percent (300%)
of the then applicable exercise price. The Laurus 2004 Warrant exercise price is
subject to adjustment in the event of common stock splits and combinations,
dividends and distributions.
Amendment No. 1
---------------
In August 2004, Laurus agreed to defer the interest payments due under the
Laurus 2004 Convertible Note on August 1, 2004 until the Maturity Date. On
October 29, 2004, Laurus agreed to amend ("Amendment No. 1") the Laurus 2004
Convertible Note and defer the payments due from September 2004 through February
2005 until the Maturity Date. Pursuant to Amendment No. 1, (1) we are required
to make monthly payments in the amount of $212,121 to Laurus commencing on March
1, 2005 - deferred by March 2005 (Amendment No. 2 below), November 2005, March
2006, October/November 2006 and March/April 2007 Amendments noted previously-
with a balloon payment of $1.1 million due in July 2007, (2) the conversion
price on the first $2 million of the $7 million Laurus 2004 Convertible Note was
reduced from $0.56 to $0.37, (3) we issued Laurus an additional warrant (the
"October `04 Warrant") to purchase 250,000 shares of our common stock at a price
of $0.41 per share with the same terms as the Laurus 2004 Warrant, and (4) the
Effectiveness Date under the Laurus Registration Rights Agreement was extended.
Pursuant to the registration rights agreement as amended in October 2004
between us and Laurus executed in connection with the sale and issuance of the
Laurus 2004 Convertible Note (the "Laurus Registration Rights Agreement"), we
were obligated to file a Registration Statement registering the shares of our
common stock issuable upon conversion of the Laurus 2004 Convertible Note, or
exercise of the Laurus 2004 Warrant or the October `04 Warrant (collectively the
"Underlying Shares") within 60 days of July 12, 2004 and have the Registration
Statement declared effective by the SEC no later than January 8, 2005. The
filing date has been extended pursuant to the March/April 2007 Amendments to
October 31, 2007, and the initial effectiveness date has been amended to 135
days after the filing date. If (1) the Registration Statement was not filed or
declared effective within the requisite periods, (2) the Registration Statement
ceased to be effective for more than 30 days in any calendar year or any 10
38
consecutive calendar days, or (3) our common stock was not listed or traded or
was suspended from trading for three consecutive trading days, we were required
to pay Laurus liquidated damages equal to 2% of original principal balance on
the Laurus 2004 Convertible Note for each 30 day period (with partial periods
prorated) that such event continued.
We filed a registration statement for the Underlying Shares on Form S-3
(the "Laurus Registration Statement") on September 13, 2004 and filed amendments
to the Form S-3 on December 2, 2004 and January 25, 2005. The amended
registration statements did not become effective, and we withdrew the filing on
January 3, 2006. Liquidated damages in the amount of $390,000, which was cured
by the November 2005 Amendments, had accrued as of March 31, 2005 due to our
failure to meet the filing and effectiveness deadlines prior to the extension of
such deadlines.
Amendment No. 2
---------------
Effective March 31, 2005, Laurus agreed to amend ("Amendment No. 2") the
Laurus 2004 Convertible Note and defer the principal payments due from April
2005 through September 2005 until the Maturity Date. In addition, Laurus agreed
(1) to postpone the balance due at March 31, 2005 accrued for liquidated damages
related to our failure to meet the filing and effectiveness deadlines under the
Laurus Registration Rights Agreement, (2) waived its right to liquidated damages
for the months of April and May 2005, and (3) entered into a Subordination
Agreement with Multi-Channel to facilitate the Multi-Channel Note transaction.
The liability for liquidated damages and any other defaults related to the terms
of the Laurus 2004 Convertible Note, were cured by the November 2005 Amendments
issued in conjunction with the Laurus November 2005 Term Note.
In consideration of Laurus' agreements in Amendment No. 2, we issued a
warrant (the "Laurus March 2005 Warrant") to purchase 1,200,000 shares of common
stock at an exercise price of $0.20 per share. The Laurus March 2005 Warrant is
immediately exercisable with a ten year term ending March 31, 2012. We have the
right to require exercise of the Laurus March 2005 Warrant in whole or in part
if: (1) all of our obligations under the Laurus 2004 Convertible Note have been
irrevocably paid in full, (2) the common stock underlying the Laurus March 2005
Warrant has been registered on a registration statement declared effective by
the SEC, and such registration statement remains effective, and (3) the average
closing price of our common stock for the ten (10) trading days immediately
prior to the proposed date of the mandatory exercise of the Laurus March 2005
Warrant is greater than three hundred percent (300%) of the then applicable
exercise price. The Laurus March 2005 Warrant exercise price is subject to
adjustment in the event of common stock splits and combinations, dividends and
distributions.
Adjustment of Prior Beneficial Conversion and Warrant Exercise Prices -
-----------------------------------------------------------------------
2005
----
In connection with the sale and subsequent amendment of the Laurus 2004
Convertible Note, during the quarters ended September 30, 2004, December 31,
2004, and March 31, 2005 we adjusted the exercise price of outstanding warrants
previously granted anti-dilution price protection to $0.56 per share (July
2004), to $0.37 per share (November 2004), and to $0.20 per share (March 2005).
The additional charges of $911,000 arising from these adjustments have been
charged to operations in the year ended March 31, 2005.
Derivative Liabilities and Debt Discount
----------------------------------------
In accordance with SFAS 133, we have accounted for the Conversion Feature
embedded in the Laurus 2004 Convertible Note as a derivative liability and have
recorded the following derivative liability transactions in the years ended
March 31, 2005, 2006 and 2007.
Increase (Decrease) in Net Income
------------------------------------------------------
Initial Derivative Change in Fair Value of
Liability/Debt Amortization of Derivative Liability to
Year Ended Discount Debt Discount March 31, 2006
------------------ --------------------- --------------------- -----------------------------
March 31, 2005 $5,051,100 $(1,204,800) $3,443,700
March 31, 2006 $(1,683,200) $(73,900)
March 31, 2007 $(1,683,200)
On November 16, 2005, the reset price of the Conversion Feature embedded in
the Laurus 2004 Convertible Note became fixed at $0.20 per share, and the
balance of the derivative liability of $1,681,300 was added to Additional
Paid-in Capital.
39
After bifurcation of the derivative liability, we allocated the proceeds
received from the Laurus 2004 Convertible Note with the detachable Laurus 2004
Warrant using the relative fair value of the warrant ($796,700) at the time of
issuance. The allocation to the warrant is being amortized as interest expense
over the term of the Laurus 2004 Convertible Note, and the relative fair values
of the October '04 Warrant ($20,600) and the Laurus March 2005 Warrant ($45,000)
are being amortized from the date of issue to the maturity date of the Laurus
2004 Convertible Note. Amortization in the years ended March 31, 2007, 2006 and
2005 was $270,300, $270,300 and $180,700, respectively.
The balance of the Laurus 2004 Convertible Note, including accrued
interest, is $6.9 million at March 31, 2007.
INTUIT
In connection with the RTI acquisition in June 2004, we issued a promissory
note to Intuit for $0.5 million ("Intuit Note"). The balance of the Intuit Note
which was $0.4 million including accrued interest at March 31, 2005 was paid in
full in December 2005.
RTI NOTE HOLDERS
In connection with the RTI acquisition in June 2004, we assumed RTI's
obligations on notes payable totaling $1.8 million and issued an additional $0.5
million in debt to the holders of these notes. The outstanding balance on these
notes which was $0.6 million including accrued interest at March 31, 2005 was
paid in full as of May 31, 2005.
TOMCZAK/BOONE
In connection with the RTI acquisition in June 2004, we issued promissory
notes to RTI's two principals, Michael Tomczak and Jeffrey Boone
("Noteholders"), totaling $2.6 million ("Officers Notes"). As of March 31, 2005,
the Officers Notes were due on June 1, 2006 and were payable in monthly
installments in the aggregate of $20,000 from June 1, 2004 through May 1, 2005,
increasing to $200,000 from June 1, 2005. The Officers Notes earn interest at a
rate of 6.5% per annum. The balance of the Officers Notes is $2.5 million at
March 31, 2007.
On April 18, 2005, in conjunction with the issuance of a secured term note
to Multi-Channel, pursuant to a Subordinated Seller Note Subordination Agreement
("Subordination Agreement"), the Officers Notes were subordinated to the debts
owed by us to Multi-Channel and Laurus ("Senior Debts"), prohibiting any payment
of principal or interest on the Officers Notes until the Senior Debts have been
paid in full.
MARCH 2004 DEBENTURES
On March 15, 2004, we sold Omicron Master Trust ("Omicron") and Midsummer
Investment, Ltd. ("Midsummer") convertible debentures (the "March 2004
Debentures") for an aggregate price of $3.0 million pursuant to a securities
purchase agreement (the "March 2004 Debenture Purchase Agreement"). The March
2004 Debentures bear an interest rate of 9% per annum, and provide for interest
only payments on a quarterly basis, payable, at our option, in cash or shares of
our common stock. The March 2004 Debentures initially matured on May 15, 2006,
but the maturity date was extended to September 30, 2006, pursuant to the
Amendment Agreement between us and Midsummer dated March 23, 2006 (the
"Midsummer Additional Amendment"), to February 28, 2007, pursuant to the
Amendment and Waiver Agreement between us and Midsummer dated October 9, 2007
(the "October 2006 Amendment"), and to April 30, 2007 pursuant to the Amendment
and Waiver between us and Midsummer dated April 23, 2007.
The March 2004 Debentures were initially convertible into shares of our
common stock at a conversion price of $1.32 per share, subject to adjustment if
we offer or sell any securities for an effective per share price that is less
than 87% of the then current conversion price, negatively restate any of our
financial statements or make any public disclosure that negatively revises or
supplements any prior disclosure regarding a material transaction consummated
prior to March 15, 2004, or trigger other customary anti-dilution protections.
Accordingly, the conversion price has been adjusted as described below.
We also issued Omicron and Midsummer two warrants each as follows: (1)
Series A Warrants to purchase up to an aggregate of 1,043,479 shares of our
common stock at an exercise price of $1.15 per share with a five-year term,
exercisable at anytime after September 16, 2004, subject to adjustment if we
offer or sell any securities for an effective per share price that is less than
the then current exercise price, negatively restate any of our financial
statements or make any public disclosure that negatively revises or supplements
any prior disclosure regarding a material transaction consummated prior to March
15, 2004, or trigger other customary anti-dilution protections, and (2) Series B
Warrants to purchase up to an aggregate of 8,500,000 shares of our common stock
40
with an exercise price of $5 per share, subject to adjustment upon the issuance
or sale of securities in a public offering for an effective per share price that
is less than the then-current exercise price, and upon the trigger of other
customary anti-dilution protections. The Series B Warrants expired on September
15, 2005. The conversion price of March 2004 Debentures and the exercise price
of the Series A Warrants have been adjusted as described below.
We entered into a registration rights agreement with Omicron and Midsummer
dated March 15, 2004 (the "Omicron/Midsummer Registration Rights Agreement"),
pursuant to which we were required to file a registration statement respecting
the common stock issuable upon the conversion of the March 2004 Debentures and
exercise of the warrants within 30 days after March 15, 2004, and to use best
efforts to have the registration statement declared effective at the earliest
date but in no event later than 90 days after March 15, 2004 (or 120 days in the
event of full review). The Omicron/Midsummer Registration Rights Agreement
provided that if we failed to file a registration statement within such 30 day
period or have it declared effective within such 90 day period (or 120 day
period in the event of a full review), we were obligated to pay liquidated
damages to Omicron and Midsummer equal to 2% per month of each of their initial
subscription amounts plus the value of any outstanding warrants. The filing
deadline was extended to March 15, 2006 pursuant to the November 2005
Amendments, further extended to May 16, 2006, pursuant to the March 2006
Amendments, and further extended to October 31, 2007 pursuant to the March/April
2007 Amendments, and the initial effectiveness date was amended to 135 days
after the filing date.
A registration statement on Form S-3 registering the shares issuable upon
conversion of Midsummer's March 2004 Debenture and the shares issuable on
exercise of both Omicron's and Midsummer's Series A Warrants was filed on August
25, 2004. A registration statement on Form S-3 registering the shares issuable
upon exercise of Midsummer's and Omicron's Series B Warrants was filed on
September 13, 2004. The registration statements were combined into one
registration statement on Form S-3 pursuant to Amendment No. 1 to the Forms S-3
filed on December 2, 2004. Amendment No. 2 to the registration statement was
filed on January 25, 2005. The amended registration statements did not become
effective, and we withdrew the filing on January 3, 2006. The liability for
liquidated damages caused by the withdrawal of the filing as of March 31, 2005
was $53,000 which, along with any other defaults related to the terms of
Midsummer's March 2004 Debenture, was cured by the November 2005 Amendments
issued in conjunction with the November 2005 Term Notes.
Amendment No 1
--------------
In July 2004, we entered into Amendment No. 1 to Midsummer's March 2004
Debenture in exchange for its consent to the Laurus 2004 Convertible Note
transaction. The terms of Midsummer's March 2004 Debenture were amended as
follows: (1) the prepayment penalty was eliminated, (2) the conversion price for
the March 2004 Debenture and the exercise price for the Series A Warrant were
reduced to $0.56 per share, (3) interest payments are due on a monthly, rather
than quarterly, basis, (4) the commencement of monthly redemption payments was
accelerated to September 1, 2004 and (5) the monthly redemption payments were
revised such that payments of $50,000, which increased to $62,500 starting
February 1, 2005, were due monthly commencing September 1, 2004. During the
three months ended March 31, 2005, 185,672, 184,871 and 229,851 shares of common
stock were issued valued at $58,155, $69,905 and $69,436 respectively, for
payment of principal and interest. Computation of the number of shares is in
accordance with the agreement and the share price is based upon the 20 day
average volume weighted average price less a 20% discount. Management considers
this to be the fair value of the shares of common stock issued.
As part of Amendment No. 1, we issued 600,000 shares of our common stock,
which we valued at $240,000, to Midsummer as payment for liquidated damages due
under the Omicron/Midsummer Registration Rights Agreement and as partial
consideration for Midsummer consenting to our issuance of the Laurus 2004
Convertible Note.
With a portion of the proceeds from the sale of the Laurus 2004 Convertible
Note, we paid Omicron $1.75 million, the full amount due under its March 2004
Debenture, plus $0.2 million in accrued interest, liquidated damages pursuant to
the Omicron/Midsummer Registration Rights Agreement, and prepayment penalties.
Amendment No. 2
---------------
On November 30, 2004, we entered into Amendment No. 2 to Midsummer's March
2004 Debenture ("Amendment No. 2"). The terms of Midsummer's March 2004
Debenture were amended as follows: (1) the conversion price for the March 2004
Debenture and the exercise price for the Series A Warrant were reduced to $0.37
per share, (2) all outstanding accrued and unpaid liquidated damages and all
liquidated damages that may accrue through January 31, 2005 were waived, (3)
until the shares are registered, we may make monthly interest payments in shares
of restricted stock valued at 80% of the value weighted average price for the 20
days prior to either the interest payment date or on the date the shares are
issued, whichever is lower, and (4) the date by which the registration statement
covering the shares issuable upon conversion of Midsummer's March 2004 Debenture
and the related warrants must be declared effective was extended to January 31,
2005 (further extended to October 31, 2007 pursuant to the March/April 2007
Amendments). In addition, we issued Midsummer an additional warrant (the
"November 2004 Warrant") with a five-year term to purchase 200,000 shares of our
common stock at an exercise price of $0.41 per share.
41
Midsummer Additional Amendment
------------------------------
In conjunction with the March 2006 Amendments associated with the November
2005 Term Notes, on March 23, 2006, we also entered into an Amendment Agreement
to the Securities Purchase Agreement dated March 15, 2004 (the "Midsummer
Additional Amendment") pursuant to which: (1) the maturity date under the March
2004 Debenture was extended to September 30, 2006 and (2) the Company agreed to
commence paying Midsummer monthly interest in the amount of $35,613 commencing
on April 28, 2006 and continuing until September 29, 2006 as payment in full of
accrued but unpaid interest under the March 2004 Debenture (through September
29, 2006) and Midsummer's June 2005 Note (through August 28, 2006). In exchange
for Midsummer agreeing to the foregoing, the Company agreed to adjust the
exercise price under the warrants issued to Midsummer dated March 31, 2003, July
1, 2003, March 15, 2004 and November 30, 2004 for an aggregate of 1,402,084
shares of common stock to $0.01 and issued Midsummer an additional warrant (the
"Midsummer Additional Warrant") to purchase up to 1,610,005 shares of the
Company's common stock for $0.20 per share.
Derivative Liabilities and Beneficial Conversion
------------------------------------------------
In accordance with SFAS 133, we accounted for the Conversion Feature
embedded in the March 2004 Debentures as a derivative liability and recorded the
following derivative liability transactions in the years ended March 31, 2004,
2005, 2006 and 2007.
Increase (Decrease) in Net Income
--------------------------------------------------
Initial Derivative Amortization of Change in Fair Value of
Year Ended Liability/Debt Discount Debt Discount Derivative Liability
-------------------- ------------------------- -------------------- --------------------------
March 31, 2004 $1,736,000 $(35,600) $214,900
March 31, 2005
Debt Reduction $(858,200) $193,200
Period Expense $(467,800) $1,165,300
March 31, 2006 $(334,600) $9,800
March 31, 2007 $(39,800)
On November 16, 2005, the reset price of the Conversion Feature embedded in
Midsummer's March 2004 Debenture became fixed at $0.20 per share, and the
balance of the derivative liability of $152,800 was added to Additional Paid-in
Capital.
After bifurcation of the derivative liability, we allocated the proceeds
received from the March 2004 Debentures with the detachable Series A and Series
B Warrants using the relative fair value of the warrants ($782,200) at the time
of issuance. The allocation to the warrants is being amortized as interest
expense over the term of the March 2004 Debentures, and the relative fair value
of the November 2004 Warrant ($9,200) and the Midsummer Additional Warrant
($19,400) is being amortized from the date of issue to the maturity date of the
Midsummer March 2004 Debentures. Amortization in the years ended March 31, 2007,
2006 and 2005 was $39,000, $155,000 and $212,500, respectively.
The outstanding balance of Midsummer's March 2004 Debenture, including
accrued interest, is $926,000 at March 31, 2007.
For a period of one hundred eighty (180) days following the date the
registration statement covering the shares issuable upon conversion of the March
2004 Debentures and related warrants is declared effective (the
"Omicron/Midsummer Registration Effective Date"), both Omicron and Midsummer
have the right, in their sole discretion, to elect to purchase their pro rata
portion of additional March 2004 Debentures and Series A Warrants for an
aggregate purchase price of up to $2.0 million in a second closing (the "Second
Closing"). The terms of the Second Closing would be identical to the terms set
forth in the March 2004 Purchase Agreement and related documents, except that,
the conversion price for the additional debentures and the exercise price for
the additional warrants shall be equal to 115% of the average of the daily
volume weighted average price of our common stock for the 10 days preceding the
Second Closing ("Second Closing Price"). The Series A Warrant coverage for the
Second Closing shall be 40% of each Purchaser's subscription amount in the
Second Closing divided by the Second Closing Price.
For a period of one hundred eighty (180) days following the
Omicron/Midsummer Registration Effective Date, if the daily volume weighted
average price of our common stock for fifteen (15) consecutive trading days
exceeds the then current conversion price by more than 200%, subject to
adjustment, we may, on one occasion, in our sole determination, require Omicron
and Midsummer to purchase each of their pro rata portion of additional
42
debentures and Series A Warrants for an aggregate purchase price of up to $2.0
million. Any such additional investment shall be under the terms set forth in
the March 2004 Purchase Agreement and related documents, except that, the
conversion price for the additional debentures and the exercise price for the
additional warrants shall be equal to the then current conversion price and
warrant exercise price for the March 2004 Debentures and Series A Warrants.
For a period of six (6) months following the Omicron/Midsummer Registration
Effective Date, Omicron and Midsummer have a right of first refusal to
participate in certain future financings by us involving the sale of our common
stock or equivalent securities.
CONVERSION OF SERIES B PREFERRED STOCK
On August 30, 2004, Michael Tomczak and Jeffrey Boone converted the
2,517,232 shares of Series B Convertible Preferred Stock received as part of the
consideration for our acquisition of Retail Technologies International, Inc.
into 7,551,696 shares of our common stock in accordance with the terms of the
Amended and Restated Agreement of Merger and Plan of Reorganization, dated June
1, 2004. As of March 31, 2007, there are no shares of Series B Convertible
Preferred Stock outstanding.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including
purchase commitments at March 31, 2007, and the effect such obligations are
expected to have on our liquidity and cash flow in future periods.
Payment due by period
---------------------
Contractual Cash Obligations Total Less than 1 year 1-3 years 3-5 years Thereafter
---------------------------- ----- ---------------- --------- --------- ----------
(in thousands)
Long-term debt obligations $ 17,952 $ 12,637 $ 5,315 $ -- $ --
Operating leases 7,386 1,638 3,294 2,454 --
Purchase obligations 4,618 4,618 -- -- --
Stock Price Protection Accrual 1,737 -- 1,737
------------------------------------------------------------------------
Total contractual cash obligations $ 31,693 $ 18,893 $ 10,346 $ 2,454 $ --
========================================================================
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.
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 and customer support. We
recognize revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), 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 Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition",
updated by SABs 103 and 104, "Update of Codification of Staff
Accounting Bulletins", and Technical Practice Aids issued from time to
time by the American Institute of Certified Public Accountants. When a
43
software sales arrangement requires professional services related to
significant production, modification or customization of software, or
when a customer considers our professional services essential to the
functionality of the software product, we follow the guidance in
Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.".
We recognize software license revenue, including third party license
revenues or partner products, from sales to end users or resellers
upon the occurrence of all of the following events:
a) execution of agreements, contracts, purchase orders, or
other arrangements, generally signed by both parties (except
in customer specific or procedural instances in which we
have a customary business practice of accepting orders
without signed agreements);
b) delivery of the software;
c) establishment of a fixed or determinable license fee;
d) reasonable assurance of the collectibility of the proceeds,
and
e) determination that vendor specific objective evidence
("VSOE") of fair value exists for any undelivered elements
of the arrangement.
If a software license arrangement with an end user contains customer
acceptance criteria, revenue is recognized when we can objectively
demonstrate that the software can meet the acceptance criteria or the
acceptance period lapses, whichever occurs earlier. If a software
license arrangement with an end user contains a cancellation right,
the software revenue is recognized upon the expiration of the
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.
Software license revenue derived from sales to resellers who purchase
our product for resale to end users is recognized upon delivery of the
software to the reseller based on our Business Partner contracts and
our Business Partner Return Policy which limits our exposure to costs
and losses that may occur in connection with the return of software
licenses. Our selection of resellers to act as business partners and
the terms of the related contracts meet the qualifications for revenue
recognition under SFAS No. 48, "Revenue Recognition When Right of
Return Exists". Based on our experience with out return policy, our
exposure to losses from returns by resellers at the end of any
reporting period is immaterial.
We have established VSOE for all elements included in our sales
contracts - license fees and upgrades, professional services, and
maintenance services. License fees and upgrades are based on an
established matrix of prices applicable to each customer's system
requirements. Professional services related to modification,
implementation, and installation of systems and training of customer
personnel are based on standardized hourly rates for the skill level
of service performed. Maintenance revenues are based on a schedule of
fees applicable to the customers' varying maintenance requirements,
and are generated by contracts that are separate from arrangements to
provide licenses and/or services to our customers. The revenue from
undelivered elements in an arrangement at the end of any reporting
period is deferred based on the VSOE of that element. Deferred revenue
consists primarily of deferred license fees, unearned maintenance
contract revenue, and unearned contract revenue accounted for using
the completed contract method.
Some of our software license arrangements require professional
services for significant production, customization or modification of
the software, or to meet the customer's requirements for services that
are essential to the functionality of the software product. In these
arrangements, both the software licenses revenue and the professional
services revenue are recognized using the percentage of completion
method, based on labor hours incurred versus the estimate of total
hours required to complete the project under the guidance of SOP 81-1.
Any expected losses on contracts in progress are recorded in the
period in which the losses become probable and reasonably estimable.
Contracts whose scope does not allow a reasonable estimation of the
percentage of completion, that contain clauses that present a
significant potential impediment to completion, or that contain a
cancellation right are accounted for using the completed contract
method.
In addition to professional services performed in conjunction with the
sales of new licenses or license upgrades, we perform consulting
services that are separately priced, are generally available from a
number of suppliers, and include project management, system planning,
design and implementation, customer configurations, and training.
These consulting services are billed on both an hourly basis (Time and
Material) and under fixed price contracts. Consulting services revenue
billed on an hourly basis is recognized as the work is performed. On
fixed price contracts, consulting services revenue is recognized using
44
the percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. We have, from
time to time, provided software and consulting services under fixed
price contracts having a payment schedule based on the achievement of
certain milestones. Provided that we are able to determine that the
services being performed will meet the milestone criteria, we
recognize revenue on these contracts on the percentage of completion
method without reference to the milestones. Otherwise, we defer the
earned revenue determined under the percentage of completion method
until the milestone(s) has been achieved.
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.
o Estimation of Derivative Liabilities. In accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") and Emerging Issues Task Force Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock" ("EITF 00-19"), we have determined that, as
a result of anti-dilution reset provisions that make the number of
shares issuable upon conversion of our various long-term debt
instruments variable, the conversion features embedded in our
long-term debt instruments qualify as derivative instruments.
SFAS 133 requires a periodic valuation of the fair value of the
derivative instruments and a corresponding recognition of liabilities
associated with such derivatives. The recognition of derivative
liabilities related to the issuance of long-term debt instruments is
applied first to the proceeds of such issuance as a debt discount at
the date of issuance, and the excess of derivative liabilities over
the proceeds is recognized as other expense in the financial
statements. A valuation is made at each quarterly balance sheet date,
and any subsequent increase or decrease in the fair value of the
derivative liabilities is recognized as other expense or other income,
respectively. The valuation of the derivative liabilities requires
significant judgment. The models used to value the derivative
liabilities use several assumptions including estimates of time
required to comply with Registration Rights Agreements, historical
stock price volatility, risk-free interest rates, remaining maturity,
and management's interpretation of the agreements related to the
derivatives.
We classify the liquidated damages clause contained in the
Registration Rights Agreements entered concurrently with the various
long-term debt instruments pursuant to Emerging Issues Task Force
Issue No. 05-4, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to Issue No. 00-19" ("EITF
05-4") as a separate financial instrument. Following the guidance of
FASB Staff Position No. EITF 00-19-2, we recognize the contingent
obligation to make future payments under the Registration Rights
Agreements in accordance with SFAS No. 5, "Accounting for
Contingencies".
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 and the payment
of related receivable balances are due upon 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. Starting
fiscal 2003, we adopted SFAS No. 142 resulting in a change in the way
we value long-term intangible assets and goodwill. Accordingly, 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 the business
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.
45
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
in accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". 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.
o Application Development. The costs to develop new software products
and enhancements to existing software products are expensed as
incurred until Technological Feasibility has been established.
Technological Feasibility has occurred when all planning, designing,
coding and testing have been completed according to design
specifications. Once Technological Feasibility is established, any
additional costs would be capitalized, in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed".
o Stock-Based Compensation. We do not record compensation expense for
options granted to our employees as all options granted under our
stock option plans have an exercise price equal to the market value of
the underlying common stock on the date of grant. In addition, we do
not record compensation expense for shares issued under our employee
stock purchase plan. As permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", we account for
costs of stock based compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and accordingly, disclose the pro forma effect
on net income (loss) and related per share amounts using the
fair-value method defined in SFAS No. 123, updated by SFAS No. 148.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter
4, previously stated that "...under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges..." This
statement requires that those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of this Statement are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not expect
adoption of SFAS No. 151 to have a material impact, if any, on our financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions". The FASB issued this Statement as a result of the
guidance provided in AICPA Statement of Position (SOP) 04-2, "Accounting for
Real Estate Time-Sharing Transactions". SOP 04-2 applies to all real estate
time-sharing transactions. Among other items, the SOP provides guidance on the
recording of credit losses and the treatment of selling costs, but does not
change the revenue recognition guidance in SFAS No. 66, "Accounting for Sales of
Real Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152
also amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of
Real Estate Projects", to state that SOP 04-2 provides the relevant guidance on
accounting for incidental operations and costs related to the sale of real
estate time-sharing transactions. The provisions of this Statement are effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
We do not expect adoption of SFAS No. 152 to have a material impact, if any, on
our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets", an amendment to APB Opinion No. 29, "Accounting for Nonmonetary
Transactions". Statement No. 153 eliminates certain differences in the guidance
in Opinion No. 29 as compared to the guidance contained in standards issued by
the International Accounting Standards Board. The amendment to APB Opinion No.
29 eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
Statement are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not expect adoption of SFAS No. 153 to have
a material impact, if any, on our financial position or results of operations.
46
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment".
SFAS No. 123(R) amends SFAS No. 123, "Accounting for Stock-Based Compensation",
and APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No.
123(R) requires that the cost of share-based payment transactions (including
those with employees and non-employees) be recognized in the financial
statements. SFAS No. 123(R) applies to all share-based payment transactions in
which an entity acquires goods or services by issuing (or offering to issue) its
shares, share options, or other equity instruments (except those held by an
ESOP) or by incurring liabilities (1) in amounts based (even in part) on the
price of the entity's shares or other equity instruments, or (2) that require
(or may require) settlement by the issuance of an entity's shares or other
equity instruments. For public issuers, this Statement is effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005. Early adoption for financial statements that have not been issued is
encouraged. Consequently, commencing in the first quarter of fiscal 2006, we
have adopted SFAS No. 123(R).
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements",
and changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No.154 requires retrospective application to prior
periods' financial statements of changes in accounting principle as if that
principle had always been used, changes in the reporting entity, and redefines
restatement as the revising of previously issued financial statements to reflect
the correction of an error. SFAS No.154 is effective for our financial
statements commencing with the first quarter of fiscal 2007.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies SFAS No. 133 with regard to interest-only strips,
requires evaluation of interests in securitized financial assets to identify
freestanding derivatives or hybrid financial instruments that contain embedded
derivatives requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives, and amends SFAS No.
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding certain derivative financial instruments. SFAS No. 155 is effective for
our financial statements commencing with the first quarter of fiscal 2008.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets", which amends SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 156
requires recognition of a servicing asset or servicing liability each time an
obligation is undertaken to service certain financial assets, requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable, permits the selection of alternate
subsequent measurement methods for each class of separately recognized servicing
assets, permits a one-time reclassification of available-for-sale securities to
trading securities upon adoption, and requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value.
SFAS No. 156 is effective for our financial statements commencing with the first
quarter of fiscal 2008. We do not expect adoption of SFAS No. 156 to have a
material impact, if any, on our financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No.109".
Interpretation No. 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits from tax
positions should be recognized in the financial statements only when it is more
likely than not that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of all relevant
information. The amount of tax benefits to be recognized for a tax position that
meets the more-likely-than-not recognition threshold is measured as the largest
amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. Tax benefits relating to tax positions that previously
failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent financial reporting period in which that
threshold is met or certain other events have occurred. Previously recognized
tax benefits relating to tax positions that no longer meet the
more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer met.
Interpretation No. 48 also provides guidance on the accounting for and
disclosure of tax reserves for unrecognized tax benefits, interest and penalties
and accounting in interim periods. Interpretation No. 48 is effective for fiscal
years beginning after December 15, 2006. We do not expect adoption of
Interpretation No. 48 to have a material impact, if any, on our financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which amends all previously issued and effective Accounting Principals Board
Opinions and Statements of Financial Accounting Standards containing references
to fair value measurement including SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", SFAS No. 141,
"Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets",
47
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
and SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for our financial statements commencing with the first
quarter of fiscal 2009.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 improves financial
reporting by requiring an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in its
statement of financial position, to recognize changes in that funded status in
the year in which changes occur through comprehensive income of a business
entity or changes in unrestricted net assets of a not-for-profit corporation,
and to measure the funded status of a plan as of the date of its year-end
statement of financial position. The required date of adoption of the
recognition and disclosure provisions of this Statement is March 31, 2007. We do
not expect adoption of SFAS No. 158 to have a material impact, if any, on our
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value, the objective being to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is effective for our financial
statements commencing April 1, 2008, and early adoption is permitted provided
that we elect to apply the provisions of SFAS No. 157, "Fair Value Measurements"
concurrently.
ITEM 7A. 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 and changes in foreign
currency exchange rate as measured against the U.S. dollar.
INTEREST RATE RISK
At March 31, 2007, we have $6.8 million of outstanding debt under the
Laurus 2004 Convertible Note issued July 12, 2004 bearing interest at the prime
rate plus 2%. During the year ended March 31, 2007, the applicable interest rate
has increased from 9.5% to 10.25%. The applicable interest rate at October 31,
2007, based on the prime rate, is 9.5%.
At March 31, 2007, we have $4.2 million outstanding under the June 2005
Convertible Notes issued June 15, 2005 bearing interest at the prime rate plus
1%. During the year ended March 31, 2007, the applicable interest rate has
increased from 8.5% to 9.25%. The applicable interest rate at October 31, 2007,
based on the prime rate, is 8.5%.
At March 31, 2007, we have $3.3 million outstanding under term notes to
Laurus and Midsummer bearing interest at the prime rate plus 2% (effective rate
at October 31, 2007 - 9.5%).
In the year ended March 31, 2007, the prime rate increased ratably with
each increase in the Federal Reserve Target Rate. To the extent that the Federal
Reserve Target Rate increases or decreases during the term of the outstanding
debt, we expect that the prime rate will increase or decrease and, accordingly
change our cost of financing.
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe.
Sales 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 17%, 13%
and 31% of our total net sales from continuing operations were denominated in
currencies other than the U.S. dollar for the periods ended March 31, 2007, 2006
and 2005, respectively.
48
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements at March 31, 2007, 2006 and 2005 and
the report of Goldman & Parks, LLP, independent accountants are included in this
report on pages beginning on F-1. Unaudited quarterly financial data is included
as Note 14 to the financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On February 13, 2007, our Audit Committee made a recommendation, which our
board of directors approved, to dismiss Singer Lewak Greenbaum & Goldstein LLP
("SLGG") as its independent registered public accounting firm. On February 15,
2007, before we notified SLGG of our decision and filed a Current Report on Form
8-K, we received a letter from SLGG advising us that it had resigned, effective
immediately, as our independent accountants and auditors and that it would cease
providing audit services to the Company in connection with the audit of its
fiscal year ending March 31, 2005, and would not opine on the opening balance
sheet of Retail Technologies, Inc. as of June 1, 2004.
In its letter of resignation, SLGG advised us that it recently had been
made aware of information concerning items addressed in previous audits that it
believes conflicts with information and representations presented by us at the
time of the audits. SLGG stated it believes the information it received at the
time of the audits was incomplete or misleading and, as a result, reliance can
no longer be placed on its audit opinions for the fiscal years ending March 31,
2002, 2003 and 2004. In addition, SLGG withdrew its auditor's reports on the
Company's financial statements for the same time periods. SLGG's audit reports
on the consolidated financial statements of the Company for the three fiscal
years ended March 31, 2004 did not contain any adverse opinion or disclaimer of
opinion nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
From mid-to-late 2006, we made separate presentations to SLGG detailing our
proposed accounting treatment related to revenue recognition, accounting for
certain convertible debt, and discontinued operations. SLGG had an initial
difference of opinion on each presentation and proposed accounting treatment,
and we resolved the issues in favor of SLGG.
Except as described above, for the three fiscal years ending March 31,
2005, and in the subsequent interim periods preceding the resignation of SLGG,
there have been no disagreements (as described in Regulation S-K Item 304) with
SLGG on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of SLGG, would have caused SLGG to make reference thereto in
its report on the financial statements for such years.
We requested that SLGG furnish us with a letter addressed to the Securities
and Exchange Commission stating whether or not it agrees with the above
statements and, if not, stating the respects in which SLGG does not agree. On
March 5, 2007, we received SLGG's response letter which was filed as an exhibit
to Form 8-K on March 6, 2007. By filing the letter as an exhibit as required by
Item 304 of Regulation S-K, we are not necessarily indicating our agreement with
the statements contained therein.
On February 13, 2007, acting on the recommendation of the Company's Audit
Committee, our Board of Directors approved the appointment of Goldman & Parks,
LLP as the Company's independent registered public accounting firm. Goldman &
Parks, LLP was formally retained on February 20, 2007. During the fiscal years
ended March 31, 2007, 2006, 2005, and 2004, the Company has not consulted with
Goldman & Parks, LLP regarding (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or (ii) on any matter that was the subject of a disagreement (as
defined in Regulation S-K Item 304(a)(1)(iv) or a reportable event (as described
in Regulation S-K Item 304(a)(1)(v)).
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal
financial and accounting officer, have conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
49
amended (the "Exchange Act"), that were in effect at the end of the period
covered by this report. Based on their evaluation, our principal executive
officer and principal financial and accounting officer have concluded that, as a
result of material weaknesses in internal control over financial reporting, as
discussed below, existing at March 31, 2005, our disclosure controls and
procedures were not effective to ensure that all material information relating
to us that is required to be included in the reports that we file with the SEC
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms.
As of June 30, 2005, we identified material weaknesses in our internal
control over financial reporting that have delayed the filing of this report and
have caused us to conclude that a restatement of the financial statements for
the years ended March 31, 2003 and 2004 is necessary. The material weaknesses
were comprised of the following:
a) As of March 31, 2003, deficiencies arose from the misinterpretation of
the accounting principles regulating the recognition of revenue from
software sales contracts. In addition, our license revenue recognition
and, to some extent, the revenue recognition from contracts requiring
professional services in conjunction with the implementation of the
license, were not independently reviewed in sufficient detail by an
employee with adequate technical accounting training and experience to
verify that the revenue was recorded in the appropriate period.
b) As of March 31, 2004, we failed to recognize the existence of embedded
derivatives in our various debt instruments that have the
characteristics of both debt and equity. These contracts were not
independently reviewed in sufficient detail by an employee with
adequate technical accounting training and experience to recognize the
characteristics of the clauses and features contained in the debt
instruments that would require an analysis to determine the existence
of embedded derivatives and the appropriate accounting treatment.
Subsequent to the discovery of the material weaknesses, we have instituted
procedures related to the standardization of our software sales contracts,
identification of the elements of the contracts and their functional
relationship, communications between the project management and financial
reporting functions, and we have retained the services of qualified
professionals to perform periodic evaluations of our debt instruments to
determine the existence and fair value of embedded derivatives. There have been
no other changes in internal controls over financial reporting that were
identified during the evaluation that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B.
All information required to be disclosed on Form 8-K during the quarter
ended March 31, 2007 has been reported.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors are elected at each annual meeting of the shareholders. Officers
are elected at the first meeting of the Board of Directors following each annual
meeting of the shareholders for such terms as are determined by the Board of
Directors. Our directors and executive officers, and their ages as of October
31, 2007, are as follows:
NAME AGE POSITION
---- --- --------
Michael Silverman (1) (2) 62 Chairman of the Board
Barry Schechter 54 Chief Executive Officer and Director
Darren Williams 40 Chief Operating Officer
Philip Bolles 64 Chief Financial Officer
Ian Bonner (1) (2) 51 Director
Donald Radcliffe (2) 62 Director
Stephen Spector (1) 60 Director
Julia Eakes (1) 57 Director
Ken Sapp 46 Senior Vice President, Global Sales
Richard Gaetano 34 Vice President / General Manager, IPMS
Kerry Kodatt 41 Vice President, Retail Pro Payment
Solutions
Stacey Shulman 34 Vice President, Development
Mike Dotson 41 Managing Director, European Operations
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
There are no family relationships among the directors. There are no
arrangements or understandings between any director and any other person
pursuant to which that director was or is to be elected.
Michael Silverman became a director in January 2001 and Chairman in
February 2004. Mr. Silverman founded Advanced Remote Communications Solutions,
Inc. (formerly known as Boatracs, Inc.) in 1990. He previously served as its
Chairman until May 2002, and as Chief Executive Officer and President until
October 1997, and from November 1999 to May 2002. Mr. Silverman is a Chartered
Accountant (South Africa) and has an M.B.A. from Stanford University. Mr.
Silverman is a member of the Audit and Compensation Committees.
With over 25 years of experience in the management of software companies,
Barry Schechter has extensive industry knowledge of retail software systems and
products. This depth of knowledge and experience provides him with a unique
perspective on the future of retail software technology. Barry has previously
held numerous executive positions within the Company. He was Chief Executive
Officer from February 1994 to January 2001 and again from October 2001 through
December 2002. He was also Chief Executive Officer of our predecessor company,
Sabica Ventures, Inc., from its inception in February 1990. He returned to
Island Pacific in April 2005 as Chief Executive Officer and a Director of the
Board. Through his leadership, the Company has recently undergone extensive
refocusing and rededication to its technology, customers, business partners and
staff. Barry holds a Bachelor's degree in accounting and is a Chartered
Accountant.
51
Darren Williams is a seasoned mid-market business software leader who
joined Island Pacific in 2004 from the Sage Group where he served as Vice
President, Strategic Sales. Prior to Sage, Darren was Executive Vice President
of Business Development at Retail Technologies International where he led the
team that formulated the agreement with Intuit for QuickBooks POS. Other key
executive positions in the past include Senior Vice President, General Manager
of e-commerce at Rival Networks, contributing in the formation and growth of the
company; and Team Spirit, a retail chain featuring licensed team logo
merchandise, which he founded. Darren holds a Bachelor's degree in Business
Administration from the University of Washington.
Philip Bolles has over forty years experience as an independent CPA, CFO
and, for the past fifteen years, a consultant providing services related to
business combinations, financial reconstructions and SEC reporting compliance to
a variety of public companies and private companies preparing to register as
public companies. In that time, Phil has developed his expertise in the specific
accounting principles and reporting practices associated with the software
industry. Phil holds a Bachelor of Science degree in Accounting, with Honors
from the University of San Diego.
Ian Bonner became a director in May 1998. He is the former President and
Chief Executive Officer of Terraspring, Inc., a software and Internet
infrastructure company. From 1993 until April 2001, he held various positions
with IBM Corporation, including Vice President of Partner Marketing and Programs
for the IBM/Lotus/Tivoli Software Group. His responsibilities included the
development and implementation of marketing campaigns and programs designed to
serve the business partners of IBM, Lotus and Tivoli, including major accounts,
independent software vendors and global systems integrators. He also oversaw the
IBM BESTeam and the Lotus Business Partner programs which are designed to
provide enhanced opportunities, including education, marketing and training
support, to qualified providers of IBM's and Lotus's portfolio of network
solutions. Mr. Bonner received a Bachelor of Commerce from the University of the
Witwatersrand in 1976 and a graduate degree in Marketing Management and Market
Research and Advertising from the University of South Africa in 1978. Mr. Bonner
is a member of the Audit and Compensation Committees.
Donald Radcliffe rejoined the Board of Directors as a director in August
2004. He first became our director in May 1998 and served until October 2003. He
has been President of Radcliffe & Associates since 1990. Radcliffe & Associates
provides financial consulting services to public companies. Since 1984 he has
also been Executive Vice President and Chief Operating and Financial Officer of
World-Wide Business Centres, which is a privately held operator of shared office
space facilities. Mr. Radcliffe received a B.S. from Lehigh University and an
M.B.A. from Dartmouth College. He is a Certified Public Accountant and a member
of the Audit Committee.
Stephen Spector became a director in August 2004. Mr. Spector has been a
practicing lawyer since 1972 specializing in banking, finance and corporate
reorganization although he maintains general business consulting engagements
with public and private companies. Mr. Spector is Chairman of the Board of
Directors of CaminoSoft Corp (OTCBB:CMSF). CaminoSoft is in the business of
developing and selling storage solutions based on its proprietary multi-tiered
high availability and hierarchical data storage management software products.
Mr. Spector also serves on CaminoSoft's Board of Directors Audit and
Compensation Committees. Mr. Spector serves on Island Pacific's Compensation
Committee.
Julia Eakes became a director in August 2004. Ms. Eakes is the Executive
Vice President and Managing Director of DHR International. Prior to her
appointment with DHR, she was a Partner with Highland Partners in the Los
Angeles office. She is a member of the Retail, Consumer Products and Global
Technology Practices. In addition, Ms. Eakes serves as the sector coordinator
for diversity initiatives and is an active member of the Women's Board of
Directors Network. Prior to joining Highland Partners, Ms. Eakes was a Partner
with KPMG Consulting for 5 years in the Consumer Markets Practice where she
focused on leading major change initiatives requiring the implementation of new
technologies, processes, and organizational structures to enhance supply chain
effectiveness and retail channel integration. Ms. Eakes served as the National
Accounts Partner for key accounts including ARAMARK, Circuit City and Home
Depot. Ms. Eakes is a graduate of the University of South Carolina with a BA in
Business Administration and Education. She is actively involved in The National
Retail Association of Corporate Directors and Council of Logistics Management.
Ms. Eakes serves on the Compensation Committee.
Ken Sapp has over 20 years of industry sales experience including a
comprehensive blend of enterprise sales, mid-market channel sales and
international business development skills garnered at the likes of Oracle, NCR,
FieldCentrix and most recently as Director of North American Channel Sales at
Sage Software. He is also the recipient of several honors and awards for sales
achievements and sales management, and has earned a reputation for creating
ground-breaking, revenue boosting strategies. Ken's role is to further develop
our existing business partners, add new business partners in underserved markets
and position RetailPro and its business partners to better capitalize on large
and multi-national retail chain opportunities. Ken holds a Bachelor's degree in
Finance from California State University, Long Beach.
52
For nearly 20 years Richard Gaetano has been a retailing expert, first with
a major North American retailer involved in inventory controls, assortment
selection, store layouts and more; and for the last 12 years with Island
Pacific. As VP/General Manager for Island Pacific's IPMS division, Richard is
responsible for overseeing all aspects of this key product including development
and customizations, professional services, technical support and worldwide
sales. Well qualified for his job, Richard has served stints in several
departments; as a Technical Lead for POS interface and utilities within Quality
Assurance; as a Senior Technical Consultant in Professional Services responsible
for POS, Warehouse and Planning system integration and customizations; and as
Technical Services/Development Manager and Senior Director of Product
Architecture, overseeing all development both core and custom.
Kerry Kodatt has over two decades of sales, marketing, business development
and international P&L experience with financial and transaction processing based
entities, including First Data Corporation and Paymentech Solutions, the world
leaders in their respective spaces. He has led multi-cultural, multi-lingual and
geographically-diverse teams to deliver value to all key stakeholders and
constituencies. Kerry has been instrumental in launching 16 new business
ventures in his career, working from the ground floor levels to bring these
entities to successful fruition. Kerry earned his Bachelor's degree in Economics
and his Masters Degree in Business Administration with a concentration in
Marketing at Bellarmine University in Louisville.
With over 17 years experience managing advanced computer technology, Stacey
Shulman is a former retail buyer with both large and small chains specializing
in general merchandise, sporting goods and home improvement. Her experiences
also include instruction in software development for clients such as Hewlett
Packard, Xerox Corporation, California Department of Corrections and the FBI.
She originally taught certification classes for Retail Pro's predecessor, RTI,
and then began managing the development team principally responsible for
creating the framework upon which the Retail Pro 9 Series product is based.
Mike Dotson began with Island Pacific in 1994 and has worked his way up
from an application specialist to a project manager, and now Managing Director
of all European operations. Prior to joining Island Pacific, Mike was Senior
Merchandise Manager for JC Penney, responsible for a wide variety of merchandise
areas including planning, buying, merchandising and inventory control. Mike's
extensive retail experience is a key element in helping Island Pacific customers
in the UK receive advanced, superior solutions for their retail management
challenges. His extended experience at Island Pacific includes a noted IPMS
implementation with the Foothold Group where Mike's project team successfully
implemented the Merchandising, Warehousing and Sales Audit systems which
resulted in Foothold being operational in just three months. Mike became
Managing Director of our United Kingdom Operations in April 2001. Mike received
a B.A. in Political Science and Economy from University of California at Irvine
in May 1988.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires our officers, directors and persons who own more than
10% of a class of our securities registered under Section 12 of the Exchange Act
to file reports of ownership and changes in ownership with the SEC and the
National Association of Securities Dealers. Officers, directors and greater than
10% stockholders are required by SEC regulations to furnish us with copies of
all Section 16(a) forms they file.
Based solely on a review of copies of such reports furnished to us and
written representations that no Form 5 report was required for the fiscal year
ended March 31, 2007, we believe that all persons subject to the reporting
requirements of Section 16(a) were in compliance during the fiscal year ended
March 31, 2007.
CODE OF ETHICS AND BUSINESS CONDUCT
We have adopted a Code of Ethics and Business Conduct ("Code of Ethics"),
which is posted on our website at www.islandpacific.com that applies to all of
our employees, officers and directors. Any amendment to the Code of Ethics, and
any waiver of the provisions of the Code of Ethics granted to any executive
officer, financial officer, director or persons performing similar functions
will be immediately disclosed on our website.
53
BOARD COMMITTEES
We have established a Compensation Committee and an Audit Committee.
The Board of Directors formed a Compensation Committee in April 1998. The
Compensation Committee's primary function is to establish the compensation
policies and recommend compensation arrangements for senior management and
directors to the Board of Directors. The Compensation Committee also recommends
the adoption of compensation plans, in which officers and directors are eligible
to participate, and the granting of stock options or other benefits to executive
officers. The Compensation Committee is composed entirely of independent
directors (as "independence" is defined in Section 121(A) of the listing
standards of the American Stock Exchange). Current members of the Compensation
Committee are Michael Silverman, Ian Bonner, Steven Spector and Julia Eakes. The
Compensation Committee met four times during the fiscal year ended March 31,
2007.
The Compensation Committee reviews and approves our compensation strategy
to ensure that management is rewarded appropriately for its contributions to our
growth and profitability, and that the strategy supports organization objectives
and stockholder interests. In addition, the Compensation Committee reviews and
approves corporate goals and objectives relevant to CEO compensation, evaluates
the CEO's performance in light of those goals and objectives, and determines the
CEO's compensation level based on this evaluation, provided that the salary and
other short-term compensation is subject to approval of the Board of Directors.
The Board of Directors also formed an Audit Committee in April 1998. The
purpose of the Audit Committee is to assist the Board of Directors in fulfilling
its responsibilities for our financial reporting. The Audit Committee recommends
the engagement and discharge of independent auditors, reviews the audit plan and
the results of the audit with independent auditors, reviews the independence of
the independent auditors, reviews internal accounting procedures and discharges
such other duties as may from time to time be assigned to it by the Board of
Directors. Current members of the Audit Committee are Michael Silverman, Ian
Bonner, and Donald Radcliffe. The Audit Committee is composed entirely of
independent directors. The Audit Committee met four times during the fiscal year
ended March 31, 2007.
54
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation for the last three fiscal years received by each person who served
as Chief Executive Officer during the last completed fiscal year, the four other
most highly compensated persons serving as executive officers at the end of the
last completed fiscal year, and two other persons who were executive officers
during the last completed fiscal year but were not executive officers at the end
of the last completed fiscal year. These individuals are referred to as the
"named executive officers."
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------------- ------------
SECURITIES ALL OTHER
NAME AND OTHER ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS/SARS ($)
------------------ ---- --------- -------- ------------------ ------------ -------------
Barry Schechter 2007 477,500 10,000 -- 3,500,000 --
(Chief Executive 2006 285,000 -- -- -- --
Officer)
Darren Williams (2) 2007 240,000 -- -- 1,500,000 --
(Chief Operating 2006 220,625 -- -- -- --
Officer) 2005 88,356 -- -- 200,000 --
Colin Levy (3) 2007 190,588 -- -- -- --
(Chief Financial 2006 147,550 -- -- 200,000 --
Officer)
Richard Gaetano 2007 165,000 -- -- 110,000 --
(Vice President) 2006 125,300 -- -- -- --
Mike Dotson 2007 181,200 -- -- 125,000 --
(Vice President) 2006 196,000 -- -- -- --
2005 100,000 -- -- 75,000 5,000
Michael Tomczak (4) 2006 192,050 -- -- -- 192,050
(Former President and 2005 294,250 140,000 -- 1,772,354 --
Chief Operating Officer)
Jeffrey Boone (5) 2006 128,500 -- -- -- 128,500
(Former Chief 2005 229,500 140,000 -- 1,572,354 --
Technology Officer)
(1) We provide certain compensatory benefits and other non-cash
compensation to the named executive officers. Except as set forth above, our
incremental cost of all such benefits and other compensation paid in the years
indicated to each such person was less than 10% of his or her reported
compensation and also less than $50,000.
(2) Mr. Williams began his employment with us in September 2004.
(3) Mr. Levy began his employment with us in June 2005.
(4) Mr. Tomczak was employed with us from June 2004 to October 2005. All
Other Compensation represents severance payments.
(5) Mr. Boone was employed with us from June 2004 to October 2005. All
Other Compensation represents severance payments.
55
STOCK OPTION GRANTS AND EXERCISES
The following table sets forth the information concerning individual grants
of stock options during the last fiscal year to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM ($)
------------------------------------------------------------------------ --------------------------
EXERCISE OR
DATE OF OPTIONS BASE PRICE EXPIRATION
NAME GRANT GRANTED(#) % OF TOTAL ($/SH.) DATE 5% 10%
---- ----- ---------- ---------- ------- ---- -- ---
Barry Schechter 8/17/2006 500,000 (1) 5.88% 0.10 8/17/2006 31,445 79,687
10/3/2006 3,000,000 (2) 35.30% 0.09 10/3/2009 42,559 89,370
Darren Williams 8/17/2006 500,000(1) 5.88% 0.10 8/17/2006 31,445 79,687
10/3/2006 1,000,000 (2) 11.77% 0.09 10/3/2009 14,186 29,790
Mike Dotson 8/1/2006 125,000 (1) 1.47% 0.13 8/1/2016 10,220 25,898
Richard Gaetano 5/9/2006 110,000 (1) 1.29% 0.14 5/9/2016 9,685 24,544
(1) Options vest as to one-third of the shares on the first anniversary of
the grant and the remaining two-thirds of the shares in 24 equal
monthly installments after the first vesting date, subject to
continuing service.
(2) Options are fully vested on issuance.
The potential realizable value is calculated based on the term of the
option at its time of grant and the number of shares underlying the grant at
fiscal year end. It is calculated based on assumed annualized rates of total
price appreciation from the market price at the date of grant of 5% and 10%
(compounded annually) over the full term of the grant with appreciation
determined as of the expiration date. The 5% and 10% assumed rates of
appreciation are mandated by SEC rules and do not represent our estimate or
projections of future common stock prices. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not be
achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth the information concerning the fiscal year
end value of unexercised options held by the named executive officers.
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY END (#) OPTIONS AT FY END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- -----------------------------
Barry Schechter 4,516,854/500,000 --/--
Darren Williams 1,166,666/533,334 --/--
Colin Levy 116,666/83,334 --/--
Richard Gaetano 77,500/122,500 --/--
Mike Dotson 102,500/137,500 --/--
Michael Tomczak --/-- --/--
Jeffrey Boone --/-- --/--
(1) Based upon the market price of $0.09 per share, determined on the basis of
the closing sale price per share of our common stock on the Electronic
Interdealer Quotation and Trading System on the last trading day of the
2007 fiscal year, less the option exercise price payable per share.
On November 6, 2005, Michael Tomczak's and Jeffrey Boone's options to
purchase 1,772,354 and 1,572,354 shares of our common stock were cancelled as a
result of their terminations on October 7, 2005.
56
LONG TERM INCENTIVE PLANS/BENEFIT OR ACTUARIAL PLANS
We do not have any long-term incentive plans, as those terms are defined in
SEC regulations. We have no defined benefit or actuarial plans covering any
named executive officer.
COMPENSATION OF DIRECTORS
We have established a compensation plan for Directors providing for
quarterly payments of $12,500 to the Chairman, quarterly payments of $5,000 to
all other Directors, and $2,500 quarterly for serving on the Compensation
Committee and the Audit Committee. Under that plan, we paid cash compensation to
Michael Silverman ($70,000), Ian Bonner ($40,000), Stephen Spector ($27,500),
Julia Eakes ($30,000) and Donald Radcliffe ($30,000) for their service on the
Board of Directors and as members of the Compensation and Audit Committees
during the fiscal year ended March 31, 2007. Unpaid Directors' compensation of
$100,000 has been accrued at March 31, 2007.
On April 18, 2007, in lieu of accumulated, unissued stock options
authorized as Directors' compensation through March 31, 2007, the Compensation
Committee recommended and the Board approved the issuance of an aggregate of
566,667 restricted common shares having a market value of $0.09 per share to the
Directors.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Michael Tomczak on June 1,
2004. The term of the agreement was two years. Under the agreement, Mr. Tomczak
was entitled to $360,000 in annual compensation. He also received an option to
purchase 1,772,354 shares of our common stock, one-half of which (886,178
shares) vested on June 1, 2005. Thereafter, the remaining option vested at the
rate of 73,848 shares per month during the second year of the agreement. We also
entered into non-competition agreement with Mr. Tomczak, pursuant to which Mr.
Tomczak agreed not to engage in any business or activity that in any way
competes with us for a period of two years after the termination of his
employment with us. Mr. Tomczak's employment was terminated effective October 7,
2005. The vested portion of his common stock option expired on November 6, 2005.
Pursuant to the terms of his employment agreement, he received his base
compensation under the agreement until June 1, 2006.
We entered into an employment agreement with Jeffrey Boone on June 1, 2004.
The term of the agreement was two years. Under the agreement, Mr. Boone was
entitled to $240,000 in annual compensation. He also received an option to
purchase 1,572,354 shares of our common stock, one-half of which (786,179
shares) vested on June 1, 2005 Thereafter, the remaining option vested at the
rate of 65,514 shares per month during the second year of the agreement. We also
entered into non-competition agreement with Mr. Boone, pursuant to which Mr.
Boone agreed not to engage in any business or activity that in any way competes
with us for a period of two years after the termination of his employment with
us. Mr. Boone's employment was terminated effective October 7, 2005. The vested
portion of his common stock option expired on November 6, 2005. Pursuant to the
terms of his employment agreement, he received his base compensation under the
agreement until June 1, 2006.
Barry Schechter, our current CEO and director, served as a consultant to us
during the fiscal year ended March 31, 2005. The expense for Mr. Schechter's
consulting services was $320,000 in the fiscal year ended March 31, 2005.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Michael Silverman, Ian Bonner, Stephen Spector and Julia Eakes served as
the members of the Compensation Committee during Fiscal 2007. No member of our
Compensation Committee has ever been an officer of the Company or any of its
subsidiaries. During the last completed fiscal year, none of our executive
officers served as a member of a Compensation Committee or Board of Directors of
any entity that had one or more of its executive officers serving as a member of
our Compensation Committee.
57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership of shares of our common
stock as of October 31, 2007 (i) by all persons known by us to beneficially own
more than 5% of such stock, (ii) by each director, (iii) each of the named
executive officers, and (iv) all directors and executive officers as a group.
Except as otherwise specified, the address for each person is 3252 Holiday
Court, Suite 226, La Jolla, California 92037. As of October 31, 2007 there were
60,509,964 shares of common stock outstanding. Each of the named persons has
sole voting and investment power with respect to the shares shown (subject to
community property laws), except as stated below.
Name and Address of Amount and Nature of
Beneficial Owner (1) Beneficial Ownership Percent Of Class*
---------------------- -------------------- ----------------
Laurus Master Fund, Ltd. 81,664,954 (2) 48.3%
c/o Ironshore Corporate Services, Ltd.
P.O. Box 1234 G.T
Queensgate House, South Church Street
Grand Cayman, Cayman Islands
Midsummer Investments, Ltd. 23,697,446 (3) 14.0%
485 Madison Avenue
23rd Floor
New York, NY 10022
Directors:
Michael Silverman 325,267 (4) <1%
10675 Sorrento Valley Road, #200
San Diego, CA 92121
Ian Bonner 317,000 (5) <1%
5527 Inverrary Court
Dallas, Texas 75287
Barry Schechter 5,208,724 (6) 3.1%
3252 Holiday Court, #226
La Jolla, CA 92037
Donald Radcliffe 737,500 (7) <1%
575 Madison Avenue
New York, NY 10022
Stephen Spector 25,000 (10) <1%
9903 Santa Monica Blvd., #734
Beverly Hills, CA 90212
Julia Eakes 125,000 (8) <1%
3252 Holiday Court, #226
La Jolla, CA 92037
Named Executive Officers:
Michael Tomczak 3,775,848 2.2%
Jeffrey Boone 3,775,848 2.2%
Darren Williams 1,380,555 (10) <1%
Mike Dotson 160,139 (10) <1%
All directors and executive officers as 15,929,219 (9) 9.4%
a group (11 persons)
58
* Percent of shares of common stock beneficially owned by each investor
is based upon 60,043,297 shares of our common stock outstanding as of
September 30, 2007, plus all shares of common stock issuable to such
investors within 60 days of September 30, 2007 pursuant to outstanding
options, warrants and preferred stock.
(1) This table is based on information supplied by officers, directors and
principal stockholders. The inclusion in this table of such shares
does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of, or receives the economic
benefit of, such shares.
(2) Includes 9,644,444 shares issuable pursuant to outstanding warrants,
18,984,402 shares issuable pursuant to outstanding stock options,
33,939,395 shares issuable upon conversion of the Laurus 2004
Convertible Note, and 16,000,000 shares issuable upon conversion of
the Laurus 2005 Convertible Note within 60 days of September 30, 2007.
Laurus' beneficial ownership is limited to 4.99% pursuant to
limitations in the Laurus 2004 Convertible Note and warrants sold on
July 12, 2004, the Laurus 2005 Convertible Note, warrants and option
sold on June 15, 2005, the option sold with the Laurus 2005 Term Note
on November 16, 2005 and the options issued in connection with the
March 2006 Amendment and the November 2006 Amendment, which amended
the November 2005 Term Note. This limitation is effective as long as
the above-noted debts are not in default.
(3) Includes 4,400,978 shares issuable pursuant to outstanding warrants,
5,925,893 shares issuable pursuant to outstanding stock options,
4,561,680 shares issuable upon conversion of the March 2004
Debentures, and 5,000,000 shares issuable upon conversion of
Midsummer's June 2005 Convertible Note within 60 days of September 30,
2007. Midsummer Capital, LLC is the investment manager to Midsummer.
By virtue of such relationship, Midsummer Capital, LLC may be deemed
to have dispositive power over the shares owned by Midsummer.
Midsummer Capital, LLC disclaims beneficial ownership of such shares.
Mr. Michel Amsalem and Mr. Scott Kaufman have delegated authority from
the members of Midsummer Capital, LLC with respect to the shares of
common stock owned by Midsummer. Messrs. Amsalem and Kaufman may be
deemed to share dispositive power over the shares of our common stock
owned by Midsummer. Messrs. Amsalem and Kaufman disclaim beneficial
ownership of such shares of our common stock and neither person has
any legal right to maintain such delegated authority. Midsummer's
beneficial ownership is limited to 4.99% pursuant to limitations in
the March 2004 Debentures and warrants sold on March 15, 2004,
Midsummer's June 2005 Convertible Note, the warrant and option sold on
June 15, 2005, the option sold with Midsummer's November 2005 Term
Note, and the options and warrant issued in connection with the March
2006 Amendment and the October 2006 Amendment, which amended the
November 2005 Term Note. This limitation is effective as long as the
above-noted debts are not in default.
(4) Includes 120,973 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of October 31, 2007.
(5) Includes 217,000 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of October 31, 2007.
(6) Includes 4,697,409 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of October 31, 2007.
(7) Includes 275,000 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of October 31, 2007.
(8) Includes 25,000 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of October 31, 2007.
(9) Includes 6,991,076 shares of common stock issuable pursuant to
outstanding options exercisable within 60 days of October 31, 2007.
(10) Consists of outstanding options exercisable within 60 days of
September 30, 2007.
59
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We have three stock incentive plans, approved by the shareholders, that
authorize the issuance of shares of common stock through incentive stock
options, non-statutory stock options, stock bonuses, stock appreciation rights
("1998 Plan"), and stock purchase agreements ("1998 Plan"), presented in the
following table.
---------------------------------------------------------------------------------------------------------------------
PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF
TO BE ISSUED UPON EXERCISE PRICE OF SECURITIES
EXERCISE OF OUTSTANDING REMAINING
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AVAILABLE FOR
WARRANTS AND RIGHTS AND RIGHTS FUTURE ISSUANCE
---------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Approved by Shareholders
---------------------------------------------------------------------------------------------------------------------
1989 Plan 165,425 $5.33 Per Share 0
---------------------------------------------------------------------------------------------------------------------
1998 Plan 2,704,377 $0.92 Per Share 3,019,822
---------------------------------------------------------------------------------------------------------------------
2004 Plan 6,549,957 $0.21 Per Share 3,448,793
---------------------------------------------------------------------------------------------------------------------
Our 1989 Incentive Stock Option Plan ("1989 Plan") terminated in October
1999. It provided for issuance of incentive stock options to purchase up to
1,500,000 shares of common stock to employees of which 165,425 remain subject to
option as of March 31, 2007. The 1989 Plan was administered by the Board of
Directors, which established the terms and conditions of each option grant.
Our 1998 Incentive Stock Plan ("1998 Plan") authorizes the issuance of
shares of common stock through incentive stock options, non-statutory options,
stock bonuses, stock appreciation rights and stock purchase agreements. The 1998
Plan was amended in August 2000 to:
a) increase the number of shares reserved for issuance from 3,500,000 to
4,000,000,
b) authorize a further automatic annual increase in reserved shares to
take place on the first trading day of each fiscal year, and
c) implement a limit on stock awards to any one person in excess of
500,000 shares in any calendar year.
The 1998 Plan was further amended in August 2002 to:
a) increase the number of shares reserved for issuance from 4,600,000 to
5,600,000, and
b) increase the limit on stock awards to 1,000,000 shares.
The number of shares available for issuance under the 1998 Plan
automatically increases on an annual basis by 2% of the total number of shares
of common stock outstanding on the last trading day of the immediately prior
fiscal year. The automatic annual increase cannot however be more than 600,000
shares, and the Board may in its discretion provide for a lesser increase. Our
stockholders approved the August 2000 amendment at our annual meeting held
November 16, 2000 and the August 2002 amendment at our annual meeting held
September 19, 2002. On April 1, 2003 and April 1, 2004, the automatic increase
of 600,000 shares was affected, so that the total number of shares reserved
under the 1998 Plan at March 31, 2006 is 7,365,872. The exercise price of
options is determined by the Board of Directors, but the exercise price may not
be less than 100% of the fair market value on the date of the grant, in the case
of incentive stock options, or 85% of the fair market value on the date of the
grant, in the case of non-statutory stock options.
Our 2004 Equity Incentive Plan ("2004 Plan"), approved by the shareholders
on August 11, 2004 and terminating August 11, 2014 authorizes the issuance of an
aggregate of 10,000,000 shares of common stock through incentive stock options,
non-statutory stock options, and stock bonuses. The 2004 Plan is administered by
the Board of Directors, established a limit to stock awards of 500,000 shares to
any one person in a calendar year, and provides that the exercise price of
incentive stock options may not be less than 100% of the fair market value of
the stock on the date of the grant or, with regard to non-statutory stock
options, not less than 50% of the fair market value of the stock on the date of
the grant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions following the fiscal year
ended March 31, 2007 to which we have been a party, in which any director,
executive officer or holder of more than 5% of our common stock had or will have
a direct or indirect interest, other than compensation arrangements with our
directors and named executive officers described above under "Executive
Compensation". Certain of these transactions will continue in effect and may
result in conflicts of interest between the Company and such individuals.
Although these persons may owe fiduciary duties to our stockholders, there is a
risk that such conflicts of interest may not be resolved in our favor.
60
On January 30, 2004, we acquired Page Digital for a total consideration of
$7.0 million, consisting of $2.0 million in cash and 2,500,000 shares of our
common shares valued at $2.00. In conjunction with the acquisition, we assumed a
lease for office premises with CAH Investment, a company owned by Mr. Page and
his spouse. In the year ended March 31, 2007 we incurred $545,050 in rent,
operating costs and management fees payable to CAH Investment.
On March 15, 2004, we sold Midsummer the March 2004 Debentures for a price
of $1.25 million pursuant to a Securities Purchase Agreement. The March 2004
Debentures bear an interest rate of 9% per annum, and provide for interest only
payments on a quarterly basis, payable, at our option, in cash or shares of our
common stock. The initial and amended terms of the March 2004 Debentures are
fully described under Financing Transactions above. We incurred interest expense
in the amount of $83,250 related to this debt in the year ended March 31, 2007.
On July 12, 2004, we sold and issued the Laurus 2004 Convertible Note to
Laurus for gross proceeds of $7.0 million pursuant to a Securities Purchase
Agreement. The Laurus 2004 Convertible Note accrues interest at a rate per annum
equal to the "prime rate" published in The Wall Street Journal from time to
time, plus two percent. Interest under the Laurus 2004 Convertible Note is
payable monthly in arrears commencing August 1, 2004. The initial and amended
terms of the Laurus 2004 Convertible Note are fully described under Financing
Transactions above. We incurred interest in the amount of $689,800 related to
this debt in the year ended March 31, 2007.
On June 15, 2005, we sold and issued the June 2005 Secured Convertible Term
Notes to Laurus and Midsummer for gross proceeds of $3.2 million and $1.0
million, respectively. The June 2005 Convertible Notes mature on June 15, 2008
and accrue interest at a rate per annum equal to the "prime rate" published in
The Wall Street Journal from time to time, plus one percent, calculated each day
that the prime rate changes, payable monthly in arrears commencing on July 1,
2005. The initial and amended terms of the June 2005 Secured Convertible Term
Notes are fully described under Financing Transactions above. We incurred
interest in the amount of $389,600 related to this debt in the year ended March
31, 2007.
On November 16, 2005, we sold and issued the November 2005 Term Notes to
Laurus and Midsummer for gross proceeds of $637,500 and $212,500, respectively.
The November 2005 Term Notes initially matured on February 28, 2006, but the
maturity dates were extended to June 30, 2007 pursuant to the March and
October/November 2006 and March/April 2007 Amendments fully described under
Financing Transactions above. The November 2005 Term Notes accrue interest at a
rate per annum equal to the "prime rate" published in The Wall Street Journal
from time to time, plus two percent, calculated each day that the prime rate
changes, payable monthly in arrears commencing on December 1, 2005. We incurred
interest in the amount of $232,700 related to this debt in the year ended March
31, 2007.
Pursuant to an agreement dated June 1, 2004, we acquired RTI from Michael
Tomczak, Jeffrey Boone and Intuit in a merger transaction. Messrs. Tomczak and
Boone and Intuit are entitled to price protection payable if and to the extent
that the average trading price of our common stock is less than $0.76 at the
time the shares of our common stock issued in the Merger and issuable upon
conversion of the Series B Preferred are registered pursuant to a related
Registration Rights Agreement dated June 1, 2004. We have recorded the liability
relating to the price protection at the date of acquisition in the full amount
of $0.23 per share in accordance with SFAS 5, "Accounting for Contingencies" as
a charge to Additional Paid In Capital in accordance with SFAS 141, "Business
Combinations".
As a result of the Merger, Messrs. Tomczak and Boone each 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. Messrs. Tomczak and Boone each converted the Series B Preferred into
3,775,848 share of our common stock on August 30, 2004. In addition, we incurred
interest expense of $163,500 on the promissory notes in the year ended March 31,
2007.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief Technology
Officer, was appointed our Chief Technology Officer. We entered into two-year
employment agreements and non-competition agreements with Mr. Tomczak and Mr.
Boone. For a further description of the terms of these employment agreements,
see "Employment Agreements" above. We terminated Messrs. Tomczak's and Boone's
employment with on October 7, 2005.
61
ITEM 14. PRINCIPAL ACCOUNTANTS' FEES AND SERVICES
During fiscal years ended March 31, 2007 and 2006, we retained our
principal auditors, Singer Lewak Greenbaum and Goldstein LLP in several
capacities (in thousands):
2007 2006
-------------- --------------
Audit fees related to the restatement of the years
ended March 31, 2003 and 2004 and the audit
of the fiscal year ended March 31, 2005 $ 495 $ 575
Audit-related fees -- 30
Tax fees 7 11
All other fees -- 6
-------------- --------------
Total $ 502 $ 622
============== ==============
AUDIT FEES
Audit Fees represent aggregate fees billed, including out-of-pocket
expenses, associated with the annual audits of our consolidated financial
statements and review of consolidated financial statements included in our Forms
10-Q.
AUDIT-RELATED FEES
Audit-Related Fees represent fees billed, including out-of-pocket expenses,
for services rendered during the fiscal years ended March 31, 2007 and 2006, for
assistance with acquisitions and financing transactions, and review of all other
documents filed with the Securities and Exchange Commission.
TAX FEES
Tax fees represent amounts billed primarily for tax compliance services and
include assistance with tax audits.
ALL OTHER FEES
All other fees represent the aggregate fees billed for services rendered by
our principal auditors, principally for conferences and correspondence regarding
technical issues other than "audit fees," "audit-related fees," and "tax fees,"
as defined above.
All of the audit and non-audit services listed above under the categories
"Audit Fees," "Audit-Related Fees," "Tax Fees" or "All Other Fees" were
pre-approved by the Audit Committee for the fiscal years ended March 31, 2007
and 2006.
POLICY FOR APPROVING AUDIT AND PERMITTED NON-AUDIT SERVICES OF THE INDEPENDENT
AUDITOR
The Audit Committee has established procedures to pre-approve all audit and
permitted non-audit services provided by our independent auditor. These services
may include audit services, audit-related services, certain tax services and
other services. Under our policy, pre-approval is generally provided for up to
one year and any pre-approval is detailed as to the particular service or
category of services and is generally subject to a specific budget. Although the
rules of the SEC permit DE MINIMIS exceptions, it is our policy to pre-approve
all audit and permitted non-audit services performed by our independent auditor.
The Audit Committee has delegated pre-approval authority to the Chairman of the
Audit Committee when expedition of services is necessary and such service has
not been previously pre-approved under our pre-approval policy or when, pursuant
to our pre-approval policy, pre-approval is required on a case-by-case basis.
The Chairman is required to report any such pre-approval decisions to the full
Audit Committee at its next regularly scheduled meeting.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules
Independent Auditor's Report of Goldman & Parks, LLP.................. F-1
Consolidated Balance Sheets as of March 31, 2007 and 2006............. F-2
Consolidated Statements of Operations for the Fiscal Years ended
March 31, 2007, 2006, and 2005........................................ F-3
Consolidated Statements of Stockholders' Equity for the Fiscal
Years Ended March 31, 2006, 2006 and 2005............................. F-4
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2007, 2006 and 2005................................... F-5
Notes to Consolidated Financial Statements............................ F-6
Supplemental Information
Independent Auditor's Report on Financial Statement Schedule...... F-41
Valuation and Qualifying Accounts - Schedule II................... F-42
Consolidated Balance Sheet as of June 30, 2007........................ F-43
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not considered necessary and therefore have been
omitted.
(b) Reports on Form 8-K
On January 14, 2005, we filed a Form 8-K dated January 10, 2005 disclosing
as Item 5.02 the departure of Ran Furman as our Chief Financial Officer and
the appointment of Corinne Bertrand to the position of Chief Financial
Officer.
On February 11, 2005, we filed a Form 8-K dated January 5, 2005 disclosing
as Item 1.01 Amendment No. 2 to the Retail Pro Software License Agreement
with Intuit Inc. extending the definition of Existing RTI Customer, and our
rights to the source code, object code and the license to use and
distribute upgrades and updates.
On February 15, 2005, we filed a Form 8-K/A dated October 25, 2004
disclosing as Item 4.02 the restatements of financial statements for the
fiscal year ended March 31, 2004 and our quarterly financial statements for
the second and third quarters of the fiscal year ended March 31, 2003, the
first, second and third quarters of the fiscal year ended March 31, 2004,
and the first quarter of the fiscal year ended March 31, 2005, and
reporting that restating the financial statements for the year ended March
31, 2003 was unnecessary.
On March 25, 2005, we filed a Form 8-K dated March 23, 2005 disclosing as
Item 8.01 the retention of Oppenheimer & Co. to explore a range of
strategic options including refinancing, capitalization, and merger and
acquisition.
On April 6, 2005, we filed a Form 8-K dated April 6, 2005 disclosing as
Item 5.02 the resignation of Lawrence Page as a director.
63
On April 20, 2005, we filed a Form 8-K dated April 18, 2005 disclosing as
Item 1.01 and Item 3.02 the sale of a Secured Term Note in the amount of
$2,000,000 to Multi-Channel, Inc. maturing on October 18, 2005 and issued a
warrant to purchase 1,200,000 shares of our common stock to Laurus Master
Fund, Ltd. (Laurus) in consideration of an amendment to the terms of our
outstanding debt to Laurus.
On April 27, 2005, we filed a Form 8-K dated April 22, 2005 disclosing as
Item 5.02 (c) and (d) the appointment of Barry Schechter as interim Chief
Executive Officer and a director.
On May 2, 2005, we filed a Form 8-K dated April 28, 2005 disclosing as Item
8.01 the announcement of a strategic plan to integrate our product lines
and unify our processes and operations.
On May 23, 2005, we filed a Form 8-K dated May 17, 2005 disclosing as Item
5.02 (a) (1) and (b) the resignation of Corinne Bertrand as Chief Financial
Officer and Michael Tomczak as a director.
On June 10, 2005, we filed a Form 8-K dated June 6, 2005 disclosing as Item
3.01 the receipt of notice from the American Stock Exchange ("Amex")
stating that we were not in compliance with certain Amex continued listing
standards.
On June 16, 2005, we filed a Form 8-K dated June 15, 2005 disclosing as
Item 1.01 the sale of secured convertible three-year term notes dated June
15, 2005 to Laurus Master Fund, Ltd. and Midsummer Investment, Ltd. in the
aggregate amount of $4,200,000, convertible at the rate of $0.20 per share,
bearing interest at the prime rate plus 1%, accompanied by options to
purchase an aggregate of 22,500,000 shares of our common stock at $0.01 per
share and warrants to purchase an aggregate of 5,833,333 shares of our
common stock at $0.23 per share.
On July 29, 2005, we filed a Form 8-K dated July 21, 2005 disclosing as
Item 3.01 the receipt of notice from Amex stating that it had accepted our
plan of compliance presented in response to the notice of non-compliance
that we received on June 6, 2005, and that Amex was granting an extension
until September 6, 2005 to regain compliance with the listing standards.
On August 25, 2005, we filed a Form 8-K dated August 22, 2005 disclosing as
Item 3.01 the receipt of a notice from Amex stating that we were not in
compliance with the continued listing standards as a result of our failure
to file Form 10-K for the fiscal year ended March 31, 2005 and our Form
10-Q for the quarter ended June 30, 2005.
On September 12, 2005, we filed a Form 8-K dated September 7, 2005
disclosing as Item 3.01 the receipt of a notice from Amex stating that, due
to our non-compliance with continued listing standards related to the
filing of Form 10-K for the year ended March 31, 2005 and Form 10-Q for the
quarter ended June 30, 2005 and related to our sustained operating losses,
Amex had determined to proceed with the filing of an application to strike
our common stock from listing and registration on the Amex.
On October 12, 2005, we filed a Form 8-K dated October 7, 2005 disclosing
as Item 1.02 and as Item 5.02 the termination of the employment agreements
with Michael Tomczak and Jeffrey Boone.
On October 31, 2005, we filed a Form 8-K dated October 25, 2005 disclosing
as Item 3.01 that Amex had decided to delist our common stock from the Amex
due to our non-compliance with certain continued listing standards.
64
On November 22, 2005, we filed a Form 8-K dated November 16, 2005
disclosing as Item 1.01 the sale of secured term notes, subject to
Securities Purchase Agreements, to Laurus Master Fund, Ltd. (Laurus) and
Midsummer Investment, Ltd. (Midsummer) in the aggregate amount of $850,000
due on February 28, 2006 together with options to purchase 1,500,000 shares
of our common stock at $0.01 per share, and Amendments and Waivers related
to existing debt due to Laurus and Midsummer to postpone certain principal
payments, amend certain filing and reporting dates, and eliminate the
requirement that we maintain the listing of our common stock on Amex.
On February 22, 2006, we filed a Form 8-K dated February 15, 2006
disclosing as Item 1.01 a stock repurchase agreement to repurchase from the
Sage Group 8,923,915 shares of our common stock, 141,000 shares of our
Series A Convertible Preferred Stock and an option to purchase 71,812
shares of our common stock for an aggregate purchase price of $750,000.
On March 28, 2006, we filed a Form 8-K dated March 22, 2006 disclosing as
Item 1.01 a material definitive agreement to amend the secured term notes
dated November 16,2005 to Laurus Master Fund, Ltd. (Laurus) and Midsummer
Investment, Ltd. (Midsummer), extend their maturity dates to August 31,
2006, increase the aggregate principal balances by $850,000, issue
additional options to purchase an aggregate of 1,500,000 shares of our
common stock, postpone certain principal payments related to existing debt
due to Laurus and Midsummer, and extend the maturity date of the March 2004
Debenture due to Midsummer to September 30, 2006, commencing fixed interest
payments on that debt on April 28, 2006 in consideration of the issuance of
an additional warrant to Midsummer to purchase 1,610,005 shares of our
common stock.
On October 10, 2006, we filed a Form 8-K dated October 9, 2006 disclosing
as Item 1.01 a material definitive agreement to issue to certain executive
officers fully-vested options to purchase an aggregate of 4,000,000 shares
of our common stock at $0.09 per share.
On November 30, 2006, we filed a Form 8-K dated November 30, 2006
disclosing as Item 1.01 a material definitive agreement to amend the
secured term notes dated November 16, 2005 to Laurus Master Fund, Ltd.
(Laurus) and Midsummer Investment, Ltd. (Midsummer), extend their maturity
dates to February 28, 2007, increase the aggregate principal balances by
$1,000,000, issue additional options to purchase an aggregate of 2,275,000
shares of our common stock, postpone certain principal payments related to
existing debt due to Laurus and Midsummer, and extend the maturity date of
the March 2004 Debenture due to Midsummer to February 28, 2007.
On February 21, 2007, we filed a Form 8-K dated February 21, 2007
disclosing as Item 4.01 the termination of our Certifying Accountant,
Singer Lewak Greenbaum & Goldstein LLP and the retention of the Certifying
Accountant, Goldman & Parks LLP.
On March 6, 2007, we filed a Form 8-K dated March 6, 2007 disclosing as
Item 4.01 the receipt of a letter from Singer Lewak Greenbaum & Goldstein
LLP responding to the statements made in our Form 8-K filed on February 21,
2007, and as Item 4.02 that reliance can no longer be placed on the audit
opinions of Singer Lewak Greenbaum & Goldstein LLP for the fiscal years
ending March 31, 2002, 2003 and 2004.
On March 14, 2007, we filed a Form 8-K dated March 14, 2007 disclosing as
Item 5.02 (b) the resignation of Colin Levy as Chief Financial Officer
effective on March 15, 2007, and (c) the retention of Philip C. Bolles as
interim Chief Financial Officer effective April 1, 2007.
On April 5, 2007, we filed a Form 8-K dated April 5, 2007 disclosing as
Item 1.01 a material definitive agreement to amend the secured term notes
dated November 16, 2005 to Laurus Master Fund, Ltd. (Laurus), extend the
maturity dates to June 30, 2007, extend the deadline to file registration
statements pursuant to certain registration rights agreements to October
31, 2007, increase the aggregate principal balances by $600,000, issue
additional options to purchase 1,000,000 shares of our common stock, and
postpone certain principal payments related to existing debt due to Laurus.
65
On April 24, 2007, we filed a Form 8-K dated April 24, 2007 disclosing as
Item 1.01 a material definitive agreement to amend the secured term notes
dated November 16, 2005 to Midsummer Investments, Ltd. (Midsummer), extend
the maturity dates to April 30, 2007, extend the deadline to file
registration statements pursuant to certain registration rights agreements
to October 31, 2007, postpone certain principal payments related to
existing debt due to Midsummer, and extend the maturity date of the 9%
Convertible Debenture dated March 15, 2004 to April 30, 2007.
On October 17, 2007, we filed a Form 8-K dated October 15, 2007 disclosing
as Item 2.02 the company's preliminary financial results for the fiscal
years ended March 31, 2005, 2006 and 2007, and disclosing as Item 7.01 the
final negotiations to sell our Island Pacific Merchandising Solutions
Division for $16.0 million.
On November 5, 2007, we filed a Form 8-K dated November 1, 2007 disclosing
as Item 1.01 the entry into a material definitive agreement to sell the
Island Pacific Merchandising Solutions (IPMS) division and the "Island
Pacific" name, related trademarks, service marks, trade names and all
goodwill for $16.0 million to 3Q Holdings Limited, subject to certain
working capital adjustments at the time the transaction is closed.
(c) Exhibits
EXHIBIT DESCRIPTION
------- -----------
2.1 Agreement of Merger and Plan of Reorganization dated March 12, 2004 by
and among Island Pacific, Inc., Retail Technologies International,
Inc. and IPI Merger Sub, Inc., incorporated by reference to the
Company's Form 8-K filed on March 17, 2004.
2.2 Amended and Restated Agreement of Merger and Plan of Reorganization
dated June 1, 2004 by and between Island Pacific, Inc., Retail
Technologies International, Inc., IPI Merger Sub, Inc., IPI Merger Sub
II, Inc., Michael Tomczak and Jeffrey Boone, incorporated by reference
to exhibit 2.1 to the Company's Form 8-K filed on June 14, 2004.
2.3 Agreement of Merger dated June 1, 2004 between IPI Merger Sub II, Inc.
and Retail Technologies International, Inc., incorporated by reference
to exhibit 2.2 to the Company's Form 8-K filed on June 14, 2004.
2.4 Asset Purchase Agreement (the "Asset Purchase Agreement") Between
Island Pacific, Inc. and 3Q Holdings Limited ("3Q Holdings") under
which 3Q Holdings will purchase from the Company the assets of the
Company used in connection with the Company's Retail Management
Solutions business unit and the "Island Pacific" name and related
trademarks, service marks, trade names and all goodwill associated
with the name "Island Pacific" (collectively, the "Purchased Assets"),
incorporated by reference to exhibit 2.1 to the Form 8-K filed on
November 5, 2007.
3.1 Amended and Restated Certificate of Incorporation, incorporated by
reference to exhibit 3.1 to the Company's Form 10-K for the fiscal
year ended March 31, 2001.
3.2 Certificate of Designation for Series A of Convertible Preferred
Stock, incorporated by reference to exhibit 4.1 of the Company's Form
8-K filed May 16, 2002.
3.3 Certificate of Designation for Series B of Convertible Preferred
Stock, incorporated by reference to exhibit 3.1 to the Company's Form
8-K filed on June 14, 2004.
3.4 Restated Bylaws, incorporated by reference to exhibit 3.2 to the
Company's Form 10-K for the fiscal year ended March 31, 2001.
66
4.1 Securities Purchase Agreement dated March 15, 2004 by and among Island
Pacific, Inc., Omicron Master Trust and Midsummer Investments, Ltd,
incorporated by reference to exhibit 4.1 to the Company's Form 8-K
filed on March 17, 2004.
4.2 Registration Rights Agreement dated March 15, 2004 by and among the
Company, Omicron Master Trust and Midsummer Investments, Ltd.,
incorporated by reference to exhibit 4.2 to the Company's Form 8-K
filed on March 17, 2004.
4.3 Registration Rights Agreement dated June 1, 2004 by and between Island
Pacific, Inc., Michael Tomczak, Jeffrey Boone and Intuit, Inc.,
incorporated by reference to exhibit 4.1 to the Company's Form 8-K
filed on June 14, 2004.
4.4 Form of Voting Agreement, incorporated by reference to exhibit 4.2 to
the Company's Form 8-K filed on June 14, 2004.
4.5 Securities Purchase Agreement dated July 12, 2004 by and among Island
Pacific, Inc. and Laurus Master Fund, Ltd., incorporated by reference
to exhibit 4.1 to the Company's Form 8-K filed on July 21, 2004.
4.6 Registration Rights Agreement dated July 12, 2004 by and between
Island Pacific, Inc. and Laurus Master Fund, Ltd., incorporated by
reference to exhibit 4.4 to the Company's Form 8-K filed on July 21,
2004.
4.7 Amended and Restated Secured Convertible Term Note dated October 29,
2004 issued by Island Pacific, Inc. in favor of Laurus Master Fund,
Ltd., incorporated by reference to exhibit 4.1 to the Company's Form
8-K filed on November 2, 2004.
4.8 Amended and Restated Registration Rights Agreement dated October 29,
2004 between Island Pacific, Inc. and Laurus Master Fund, Ltd.,
incorporated by reference to exhibit 4.3 to the Company's Form 8-K
filed on November 2, 2004.
4.9 Amendment No. 2 to the 9% Convertible Debenture, due May 15, 2006,
issued to Midsummer Investment Ltd. and Waiver dated November 30, 2004
between Island Pacific, Inc. and Midsummer Investment, Ltd.,
incorporated by reference to exhibit 4.10 to the Company's Form S-3
filed on December 2, 2004.
4.10 Securities Purchase Agreements dated June 15, 2005 by and among Island
Pacific, Inc., Laurus Master Fund, Ltd. and Midsummer Investment,
Ltd., incorporated by reference to exhibit 4.1 to the Company's Form
8-K filed on June 16, 2005.
4.11 Registration Rights Agreements dated June 15, 2005 by and between
Island Pacific, Inc., Laurus Master Fund, Ltd., and Midsummer
Investment, Ltd., incorporated by reference to exhibit 4.5 to the
Company's Form 8-K filed on June 16, 2005.
4.12 Securities Purchase Agreements dated November 16, 2005 by and between
Island Pacific, Inc., Laurus Master Fund, Ltd., and Midsummer
Investment, Ltd., incorporated by reference to exhibit 4.1 to the
Company's Form 8-K filed on November 22, 2005.
4.13 Registration Rights Agreements dated November 16, 2005 by and between
Island Pacific, Inc., Laurus Master Fund, Ltd., and Midsummer
Investment, Ltd., incorporated by reference to exhibit 4.4 to the
Company's Form 8-K filed on November 22, 2005.
10.1 Employment Agreement dated June 1, 2004 by and between Island Pacific,
Inc. and Michael Tomczak, incorporated by reference to exhibit 10.1 to
the Company's Form 8-K filed on June 14, 2004.
67
10.2 Employment Agreement dated June 1, 2004 by and between Island Pacific,
Inc. and Jeffrey Boone, incorporated by reference to exhibit 10.2 to
the Company's Form 8-K filed on June 14, 2004.
10.3 Amendment No. 2 to the Retail Pro Software License between Intuit,
Inc. and Retail Technologies International, Inc dated January 5, 2005,
incorporated by reference to the Company's Form 8-K filed on February
11, 2005.
10.4 Master Security Agreement dated June 15, 2005 by and between Island
Pacific, Inc., Laurus Master Fund, Ltd., and Midsummer Investment,
Ltd., incorporated by reference to exhibit 10.1 to the Company's Form
8-K filed on June 16, 2005.
10.5 Amendment and Waiver between Island Pacific, Inc. and Laurus Master
Fund, Ltd. dated November 16, 2005, incorporated by reference to
exhibit 10.2 to the Company's Form 8-K filed on November 22, 2005.
10.6 Amendment and Waiver between Island Pacific, Inc. and Midsummer
Investment, Ltd. dated November 16, 2005, incorporated by reference to
exhibit 10.3 to the Company's Form 8-K filed on November 22, 2005.
10.7 Stock Repurchase Agreement between Island Pacific, Inc. and The Sage
Group, plc dated February 15, 2006, incorporated by reference to
exhibit 10.1 to the Form 8-K filed on February 22, 2006.
10.8 Voting Agreement between Island Pacific, Inc. and The Sage Group, plc
dated February 15, 2006, incorporated by reference to exhibit 10.2 to
the Form 8-K filed on February 22, 2006.
10.9 Amendment and Waiver between Island Pacific, Inc. and Laurus Master
Fund, Ltd. dated March 22, 2006, incorporated by reference to exhibit
10.1 to the Form 8-K filed on March 28, 2006.
10.10 Amendment Agreement between Island Pacific, Inc. and Midsummer
Investment, Ltd. dated March 23, 2006, incorporated by reference to
exhibit 10.3 to the Form 8-K filed on March 28, 2006.
10.11 Form of Stock Option Agreement between Island Pacific, Inc. and
certain executive officers dated October 3, 2006, incorporated by
reference to exhibit 10.1 to the Form 8-K filed on October 10, 2006.
10.12 Form of Amendment and Waiver between Island Pacific, Inc. and Laurus
Master Fund, Ltd. dated November 27, 2006, incorporated by reference
to exhibit 10.1 to the Form 8-K filed on November 30, 2006.
10.13 Amendment and Waiver between Island Pacific, Inc. and Laurus Master
Fund, Ltd. dated March 30, 2007, incorporated by reference to exhibit
10.1 to the Form 8-K filed on April 5, 2007.
10.14 Amendment Agreement between Island Pacific, Inc. and Midsummer
Investment, Ltd. dated April 23, 2007, incorporated by reference to
exhibit 10.1 to the Form 8-K filed on April 24, 2007.
10.15 IRVINE LEASE SUMMARY
10.16 COLORADO LEASE SUMMARY
10.17 FOLSOM LEASE SUMMARY
68
10.18 LA JOLLA LEASE SUMMARY
14 Code of Ethics and Business Conduct (included herewith).
16.1 Resignation letter of Singer Lewak Greenbaum & Goldstein LLP dated
February 15, 2007, incorporated by reference to exhibit 16.1 to the
Form 8-K filed on February 21, 2007.
16.2 Singer Lewak Greenbaum & Goldstein LLP response letter to the Form 8-K
filed on February 21, 2007, dated March 5, 2007 and incorporated by
reference to exhibit 16.1 to the Form 8-K filed on March 6, 2007.
21 List of Subsidiaries.
22 MATTER SUBMITTED TO SECURITY HOLDERS
31.1 Rule 13a-14(a) Certification of Principal Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification of Principal Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
69
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 12, 2007 ISLAND PACIFIC, INC., A DELAWARE CORPORATION
By: /s/ Barry Schechter
-----------------------------------------
Barry Schechter, Chief Executive Officer
(Principal Executive Officer)
By: /s/ Philip C. Bolles
-----------------------------------------
Philip C. Bolles, Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURES CAPACITY DATE
/s/ Michael Silverman Chairman of the Board November 12, 2007
-----------------------------
Michael Silverman
/s/ Barry Schechter President, Chief Executive Officer November 12, 2007
----------------------------- and Director
Barry Schechter
/s/ Darren Williams Chief Operating Officer November 12, 2007
-----------------------------
Darren Williams
/s/ Donald Radcliffe Director November 12, 2007
-----------------------------
Donald Radcliffe
/s/ Ian Bonner Director November 12, 2007
-----------------------------
Ian Bonner
/s/ Stephen Spector Director November 12, 2007
-----------------------------
Stephen Spector
/s/ Julia Eakes Director November 12, 2007
-----------------------------
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Island Pacific, Inc.
Irvine, California
We have audited the accompanying consolidated balance sheets of Island Pacific,
Inc. and subsidiaries (the Company) as of March 31, 2007 and 2006 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 2007. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Island Pacific, Inc.
and subsidiaries as of March 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2007 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit of $81,979,000 as of March 31,
2007. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Goldman & Parks LLP
Encino, California
October 15, 2007
F-1
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
2007 2006
---------- ----------
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 565 $ 542
Accounts receivable, net of allowance for doubtful
accounts of $386 and $203, respectively 2,913 3,207
Other receivables 136 193
Inventories 4 4
Prepaid expenses and other current assets 257 390
---------- ----------
Total current assets 3,875 4,336
Property and equipment, net 307 384
Goodwill, net 22,984 23,776
Other intangibles, net 12,574 14,109
Unearned Compensation 13 124
Other assets 302 972
---------- ----------
Total assets $ 40,055 $ 43,701
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 3,537 $ 2,250
Current portion of long-term debts 7,185 832
Accounts payable 1,286 1,837
Accrued audit fees 300 1,022
Accrued interest and financing costs 1,202 416
Accrued employment expenses 1,029 951
Accrued expenses 801 611
Deferred revenue 5,599 6,356
Income tax payable 127 127
---------- ----------
Total current liabilities 21,066 14,402
Debt due to stockholders 2,515 2,515
Convertible debentures, less current maturities 2,520 5,493
Deferred Revenue 1,126 926
Accrued price protection 1,736 2,093
Deferred rent 206 109
---------- ----------
Total liabilities 29,169 25,538
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred stock, 7.2% cumulative convertible 141,100 shares
authorized and outstanding with a stated value of $100 per
share, dividends in arrears of $0 and $4,125 -- 14,100
Common stock, $0.0001 par value; 250,000,000 shares authorized;
59,842,047 and 68,386,423 shares issued and outstanding 6 7
Additional paid-in capital 92,859 78,808
Accumulated deficit (81,979) (74,752)
---------- ----------
Total stockholders' equity 10,886 18,163
---------- ----------
Total liabilities and stockholders' equity $ 40,055 $ 43,701
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-2
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
--------------------------------------
2007 2006 2005
---------- ---------- ----------
(in thousands, except per share data)
Net sales $ 25,513 $ 23,804 $ 24,959
Cost of sales 10,314 10,453 11,483
---------- ---------- ----------
Gross profit 15,199 13,351 13,476
---------- ---------- ----------
Expenses:
Application development 3,176 3,130 6,117
Depreciation and amortization 460 727 1,604
Selling, general and administrative 12,012 12,183 18,307
Impairment of intangible assets 798 1,325 5,959
---------- ---------- ----------
Total expenses 16,446 17,365 31,987
---------- ---------- ----------
Loss from operations (1,247) (4,014) (18,511)
---------- ---------- ----------
Other income (expense):
Interest income -- -- 5
Other income (expense) 77 4 131
Interest expense, including $164, $164 and $124 to
related parties (6,066) (5,884) (6,357)
Derivative valuation -- 2,115 4,802
Gain (Loss) on disposal of fixed assets 4 (27) 2
---------- ---------- ----------
Total other expenses (5,985) (3,792) (1,417)
---------- ---------- ----------
Loss before provision (benefit) for income taxes (7,232) (7,806) (19,928)
Provision (benefit) for income taxes -- -- 10
---------- ---------- ----------
Loss from continuing operations (7,232) (7,806) (19,938)
---------- ---------- ----------
Discontinued operations:
Loss from operations of Store Solutions division -- (93) (935)
Loss on disposal of Store Solutions division -- (2,533) --
---------- ---------- ----------
Loss from discontinued operations -- (2,626) (935)
---------- ---------- ----------
Net loss (7,232) (10,432) (20,873)
Preferred dividends -- (939) (1,185)
---------- ---------- ----------
Net loss available to common stockholders $ (7,232) $ (11,371) $ (22,058)
========== ========== ==========
Basic and diluted earnings (loss) per share:
Loss from continuing operations (0.11) (0.12) (0.34)
Loss from discontinued operations -- -- (0.02)
Loss on disposal of discontinued operations -- (0.04) --
Preferred dividends -- (0.01) (0.02)
---------- ---------- ----------
Net loss available to common stockholders $ (0.11) $ (0.17) $ (0.38)
========== ========== ==========
Basic and diluted weighted average common shares outstanding 64,796 66,702 59,337
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED OTHER
PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK STOCK CAPITAL (DEFICIT) LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Balance April 1, 2004(1) $ 14,100 $ 5 $ 73,885 $ (51,693) $ 36,297
Exercise of stock options 10 10
Issuance of common stock for
severance 20 20
Issuance of common stock for
principal and interest payments on
convertible debentures 364 364
Issuance of common stock in
connection with acquisition of
Retail Technologies International,
Inc. 1 5,838 5,839
Issuance of common stock for
liquidated damage charge for late
effectiveness of the registration
statement 240 240
Debt discount on convertible notes 1,731 1,731
Issuance of common stock for
services 65 65
Comprehensive loss:
Net Loss (20,873) $ (20,873) (20,873)
Foreign currency translation (17) (17) (17)
---------
Comprehensive loss $ (20,890)
=========
---------- ---------- ---------- ---------- ---------- ----------
Balance, March, 31, 2005 $ 14,100 $ 6 $ 82,153 $ (72,583) $ 23,676
Exercise of stock options 1 36 37
Debt discount on convertible notes 1,523 1,523
Issuance of common stock for
services 81 81
Settlement of derivative liability
arising from conversion feature on
convertible notes 2,884 2,884
Fair value of stock-based
compensation related to shares
issued and vesting in year ended
March 31, 2006 131 131
Capital accounts of Store Solutions
division disposed (8,000) 8,353 353
Comprehensive loss:
Net Loss (10,432) $ (10,432) (10,432)
Foreign currency translation (90) (90) (90)
---------
Comprehensive loss $ (10,522)
==========
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2006 $ 14,100 $ 7 $ 78,808 $ (74,752) $ 18,163
Exercise of stock options 4 4
Debt discount on convertible notes 325 325
Fair value of stock-based
compensation related to shares
issued and vesting in year ended
March 31, 2007 371 371
Retirement of Preferred Stock and
Common Stock repurchased from Sage
Group PLC (14,100) (1) 13,351 (750)
Comprehensive loss:
Net Loss (7,232) $ (7,232) (7,232)
Foreign currency translation 5 5 5
----------
Comprehensive loss $ (7,227)
==========
---------- ---------- ---------- ---------- ----------
Balance, March 31, 2007 $ - $ 6 $ 92,859 $ (81,979) $ 10,886
========== ========== ========== ========== ==========
(1) Committed stock, additional paid-in capital and the retained deficit have been restated in the year ended March
31, 2004, see Note
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------------
2007 2006 2005
---------- ---------- ----------
(in thousands, except share amounts)
Cash flows from operating activities:
Net loss $ (7,232) $ (10,432) $ (20,873)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization 3,807 4,722 5,305
Impairment of intangible assets 798 1,325 5,959
Write off capitalized software -- -- 696
Derivative valuation -- (2,115) (4,802)
Loss on disposal of Store Solutions division -- 2,343 --
Compensation expense for stock options and warrants 482 361 (345)
Debt discount amortization on convertible debt 3,705 3,767 3,310
Additional anti-dilution debt discount on outstanding warrants -- 438 911
Provision for allowance for doubtful accounts, net of recoveries 183 (519) 434
Common stock issued for services rendered, severance and
interest payments -- 81 374
Loss on sale of furniture and equipment -- 27 --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable and other receivables 169 116 1,325
Income tax refund receivable -- 284 (354)
Inventories -- 19 23
Prepaid expenses and other current assets 803 (657) 410
Accounts payable and accrued expenses (642) (2,438) 4,514
Accrued interest on stockholders' loans and note payable 164 164 27
Deferred revenue (558) (670) 2,975
Income taxes payable -- -- 127
---------- ---------- ----------
Net cash provided by (used for) operating activities 1,679 (3,184) 16
---------- ---------- ----------
Cash flows from investing activities:
Purchase of software and capitalized software development costs (1,975) (1,460) (1,263)
Acquisition of Retail Technologies International, Inc., net -- -- (9,069)
Purchase of furniture and equipment (226) (153) (142)
Proceeds from sale of furniture and equipment -- -- 36
Payments received on note receivable -- 14 27
---------- ---------- ----------
Net cash used for investing activities (2,201) (1,599) (10,411)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 4 36 1
Proceeds from notes due to stockholders -- -- 3,122
Proceeds from other term loans 1,955 4,450 2,289
Proceeds from convertible debentures and notes -- 4,200 7,000
Purchase of Preferred and Common shares (750) -- --
Payments made on notes due to stockholders -- (464) (170)
Payments made on convertible debentures and notes -- -- (1,997)
Payments on term loans (669) (2,786) (1,703)
Payments on capital lease obligations -- (109) (149)
---------- ---------- ----------
Net cash provided by financing activities 540 5,327 8,393
---------- ---------- ----------
Effect of exchange rate changes on cash 5 (91) (17)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 23 453 (2,019)
Cash and cash equivalents, beginning of year 542 89 2,108
---------- ---------- ----------
Cash and cash equivalents, end of year $ 565 $ 542 $ 89
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
-------------------------------------
2007 2006 2005
---------- ---------- ----------
(in thousands, except share amounts)
Supplemental disclosure of non-cash information:
Interest paid $ 1,398 $ 1,331 $ 706
Income taxes paid (refunded) -- -- (10)
Supplemental disclosure of non-cash investing and financing activities:
Fair value of warrants issued in conjunction with
convertible debentures and notes 325 827 820
Derivative liability related to conversion feature on
debentures and notes -- 3,229 5,051
Debt discount on convertible debentures and notes -- (4,056) (5,871)
Issued 9,098,429 shares of common stock in connection with
acquisition of Retail Technologies International, Inc. -- -- 6,877
Issued 50,000 shares of common stock as severance compensation -- -- 20
Issued 1,091,165 shares of common stock in lieu of principal
and interest payments on convertible debt -- -- 365
Issued 600,000 shares of common stock for accrued
liquidated damages for late effectiveness of the
registration statement -- -- 240
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ISLAND PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS CONDITIONS - We are a leading 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.
GOING CONCERN UNCERTAINTY - We incurred losses of $7.2 million, $10.4
million and $20.9 million in the fiscal years ended March 31, 2007, 2006,
and 2005, respectively. The losses in the past three years have generally
been due to difficulties completing sales for new application software
licenses, deferral of gross profit from contracts in process to future
periods, a change in sales mix toward lower margin services, and debt
service expenses. We will need to generate additional revenue and reduce
expenses to achieve profitability in future periods. In that regard, on
April 28, 2005 we announced a strategic plan to integrate our product lines
and unify our processes and operations. This plan is a continuation of
Island Pacific's drive towards profitability, with a primary goal to
accelerate the achievement of that milestone, and includes a reduction of
the Company's workforce by approximately 14% percent or 30 employees
worldwide, which will result in approximately $2.7 million in annual
savings, as well as consolidating the Company's accounting and finance team
into its Irvine headquarters.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION - The
consolidated financial statements include the accounts of Island Pacific,
Inc. and our wholly-owned subsidiaries, Page Digital Incorporated, Retail
Technologies International, Inc., based in U.S., and Island Pacific, Inc.
(UK) based in the United Kingdom. All material intercompany balances and
transactions have been eliminated in consolidation. The consolidated
financial statements are stated in U.S. dollars and are prepared under
accounting principles generally accepted in the United States of America.
RECLASSIFICATIONS - Certain amounts in the prior periods have been
reclassified to conform to the presentation for the fiscal year ended March
31, 2007. Such reclassifications did not have any effect on losses reported
in prior periods.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
highly liquid investments with original maturities of not more than three
months.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of short-term
financial instruments, including cash and cash equivalents, trade accounts
receivable, other receivables, prepaid expenses, other assets, accounts
payable, accrued expenses, lines of credit and demands due to stockholders
approximate their carrying amounts in the financial statements due to the
short maturity of and/or the variable nature of interest rates associated
with such instruments.
The amounts shown for convertible debentures approximate fair values
because current interest rates offered to us for debt of similar maturity
are substantially the same or the difference is immaterial.
INVENTORIES - Inventories consist of finished goods and are stated at the
lower of cost or market, on a first-in, first-out basis.
F-7
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, generally ranging from three to ten years.
Leasehold improvements are amortized using the straight-line method, over
the shorter of the life of the improvement or lease term. Expenditures for
maintenance and repairs are charged to operations as incurred while
renewals and betterments are capitalized.
GOODWILL - Goodwill represents the excess of the purchase price over the
fair value of net assets acquired in our business combinations. Beginning
April 1, 2002, we adopted Statement of Financial Accounting Standard
("SFAS") No. 142, "Goodwill and Other Intangible Assets" and ceased
amortization of goodwill recorded in business combinations prior to June
30, 2001 (see Note 5). We review goodwill for impairment at least annually
or on an interim basis if an event occurs or circumstances change that
could indicate that its value has diminished or been impaired.
INTANGIBLE ASSETS - Intangible assets consist of the values allocated to
purchased and capitalized software costs, non-compete agreements, customer
relationships and trademark in connection with various business
combinations.
Pursuant to the provisions of SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," we capitalize
internally developed software and software purchased from third parties if
the related software product under development has reached technological
feasibility or if there are alternative future uses for the purchased
software. These costs are amortized on a product-by-product basis typically
over three to ten years using the straight-line method over the remaining
estimated economic life of the product. At each balance sheet date, we
evaluate on a product-by-product basis the unamortized capitalized cost of
computer software compared to the net realizable value of that product. The
amount by which the unamortized capitalized costs of a computer software
product exceed its net realizable value is written off (see Note 5).
Non-compete agreements represent agreements to retain key employees of
acquired subsidiaries for a certain period of time and prohibit those
employees from competing with us within a stated period of time after
terminating employment with us. The amounts incurred are capitalized and
amortized over the life of the agreements, generally ranging from two to
six years.
Amortization of customer relationships is computed on a straight-line basis
over estimated useful lives of five years.
Our capitalized trademark was acquired in connection with the acquisition
of Page Digital Incorporated in January 2004 (see Note 2). Trademark has
indefinite useful life and is not subject to amortization. However, in
accordance with SFAS No. 142, we test trademark for impairment annually or
more frequently if events or changes in circumstances indicate that the
asset might be impaired.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF -
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies
to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 develops one accounting model for long-lived assets that are
to be disposed of by sale. SFAS No. 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value
or fair value cost to sell. Additionally SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The accounting prescribed in SFAS No. 144 was
applied in connection with the disposal of the Store Solutions division on
March 31, 2006.
F-8
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 and customer support. We recognize revenue
in accordance with Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), 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 Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition", updated by SABs 103 and 104, "Update of
Codification of Staff Accounting Bulletins", and Technical Practice Aids
issued from time to time by the American Institute of Certified Public
Accountants. When a software sales arrangement requires professional
services related to significant production, modification or customization
of software, or when a customer considers our professional services
essential to the functionality of the software product, we follow the
guidance in Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.".
We recognize software license revenue, including third party license
revenues or partner products, from sales to end users or resellers upon the
occurrence of all of the following events:
a) execution of agreements, contracts, purchase orders, or other
arrangements, generally signed by both parties (except in customer
specific or procedural instances in which we have a customary business
practice of accepting orders without signed agreements);
b) delivery of the software;
c) establishment of a fixed or determinable license fee,
d) reasonable assurance of the collectibility of the proceeds, and
e) determination that vendor specific objective evidence ("VSOE") of fair
value exists for any undelivered elements of the arrangement.
If a software license arrangement with an end user contains customer
acceptance criteria, revenue is recognized when we can objectively
demonstrate that the software can meet the acceptance criteria or the
acceptance period lapses, whichever occurs earlier. If a software license
arrangement with an end user contains a cancellation right, the software
revenue is recognized upon the expiration of the 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.
Software license revenue derived from sales to resellers who purchase our
product for resale to end users is recognized upon delivery of the software
to the reseller based on our Business Partner contracts and our Business
Partner Return Policy which limits our exposure to costs and losses that
may occur in connection with the return of software licenses. Our selection
of resellers to act as business partners and the terms of the related
contracts meet the qualifications for revenue recognition under SFAS No.
48, "Revenue Recognition When Right of Return Exists". Based on our
experience with our return policy, our exposure to losses from returns by
resellers at the end of any reporting period is immaterial.
We have established VSOE for all elements included in our sales contracts -
license fees and upgrades, professional services, and maintenance services.
License fees and upgrades are based on an established matrix of prices
applicable to each customer's system requirements. Professional services
related to modification, implementation, and installation of systems and
training of customer personnel are based on standardized hourly rates for
the skill level of service performed. Maintenance revenues are based on a
schedule of fees applicable to the customers' varying maintenance
requirements, and are generated by contracts that are separate from
arrangements to provide licenses and/or services to our customers. The
revenue from undelivered elements in an arrangement at the end of any
reporting period is deferred based on the VSOE of that element. Deferred
revenue consists primarily of deferred license fees, unearned maintenance
contract revenue, and unearned contract revenue accounted for using the
completed contract method.
F-9
Some of our software license arrangements require professional services for
significant production, customization or modification of the software, or
to meet the customer's requirements for services that are essential to the
functionality of the software product. In these arrangements, both the
software licenses revenue and the professional services revenue are
recognized using the percentage of completion method, based on labor hours
incurred versus the estimate of total hours required to complete the
project under the guidance of SOP 81-1. Any expected losses on contracts in
progress are recorded in the period in which the losses become probable and
reasonably estimable. Contracts whose scope does not allow a reasonable
estimation of the percentage of completion, that contain clauses that
present a significant potential impediment to completion, or that contain a
cancellation right are accounted for using the completed contract method.
In addition to professional services performed in conjunction with the
sales of new licenses or license upgrades, we perform consulting services
that are separately priced, are generally available from a number of
suppliers, and include project management, system planning, design and
implementation, customer configurations, and training. These consulting
services are billed on both an hourly basis (Time and Material) and under
fixed price contracts. Consulting services revenue billed on an hourly
basis is recognized as the work is performed. On 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. We have, from time to time, provided
software and consulting services under fixed price contracts having a
payment schedule based on the achievement of certain milestones. Provided
that we are able to determine that the services being performed will meet
the milestone criteria, we recognize revenue on these contracts on the
percentage of completion method without reference to the milestones.
Otherwise, we defer the earned revenue determined under the percentage of
completion method until the milestone(s) has been achieved.
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.
ESTIMATION OF DERIVATIVE LIABILITIES - In accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
and Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's
Own Stock" ("EITF 00-19"), we have determined that, as a result of
anti-dilution reset provisions that made the number of shares issuable upon
conversion of our various long-term debt instruments variable, until
November 15, 2005, the conversion features embedded in our long-term debt
instruments qualified as derivative instruments.
SFAS 133 requires a periodic valuation of the fair value of the derivative
instruments and a corresponding recognition of liabilities associated with
such derivatives. The recognition of derivative liabilities related to the
issuance of long-term debt instruments is applied first to the proceeds of
such issuance as a debt discount at the date of issuance, and the excess of
derivative liabilities over the proceeds is recognized as other expense in
the financial statements. A valuation is made at each quarterly balance
sheet date, and any subsequent increase or decrease in the fair value of
the derivative liabilities is recognized as other expense or other income,
respectively. The valuation of the derivative liabilities requires
significant judgment. The models used to value the derivative liabilities
use several assumptions including estimates of time required to comply with
Registration Rights Agreements, historical stock price volatility,
risk-free interest rates, remaining maturity, and management's
interpretation of the agreements related to the derivatives.
We are classifying the liquidated damages clause contained in the
Registration Rights Agreements entered concurrently with the various
long-term debt instruments pursuant to Emerging Issues Task Force Issue No.
05-4, "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to Issue No. 00-19" ("EITF 05-4") as a
separate financial instrument. Following the guidance of FASB Staff
Position No. EITF 00-19-2, we are recognizing the contingent obligation to
make future payments under the Registration Rights Agreements in accordance
with SFAS No. 5, "Accounting for Contingencies".
REIMBURSABLE OUT-OF-POCKET EXPENSES - We adopted Financial Accounting
Standards Board Emerging Issues Task Force No. 01-14 ("EITF 01-14"),
"Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred". EITF 01-14 establishes that
reimbursements received for out-of-pocket expenses should be reported as
revenue in the income statement. The adoption of EITF 01-14 increased
reported net sales and cost of sales; however, it did not affect the net
income or loss in any past or future periods. Reimbursed expenses of
$228,000, $269,000 and $520,000 have been classified in both net sales and
cost of sales for the years ended March 31, 2007, 2006 and 2005,
respectively.
F-10
NET INCOME (LOSS) PER SHARE - As required by SFAS No. 128, "Earnings per
Share," we have presented basic and diluted earnings per share amounts.
Basic earnings per share is calculated based on the weighted-average number
of shares outstanding during the year, while diluted earnings per share
also gives effect to all potential dilutive common shares outstanding
during the year such as stock options, warrants and contingently issuable
shares.
INCOME TAXES - We utilize SFAS No. 109, "Accounting for Income Taxes,"
which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
TRANSLATION OF FOREIGN CURRENCY - The financial position and results of
operations of our foreign division are measured using local currency as the
functional currency. Revenues and expenses of such division have been
translated into U.S. dollars at average exchange rates prevailing during
the period. Assets and liabilities have been translated at the rates of
exchange at the balance sheet date. Transaction gains and losses are
deferred as a separate component of stockholders' equity, unless there is a
sale or complete liquidation of the underlying foreign investments.
Aggregate foreign currency transaction gains and losses are included in
determining net earnings.
ADVERTISING AND PROMOTIONAL EXPENSES - Advertising and promotional expenses
are charged to expense as incurred and amounted to $3,000, $75,000, and
$201,000 for the years ended March 31, 2007, 2006 and 2005, respectively.
COMPREHENSIVE INCOME - We utilize SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting comprehensive
income and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities and are included as a component of
stockholders' equity.
STOCK-BASED COMPENSATION - Effective April 1, 2005, we commenced accounting
for stock-based compensation in accordance with the provisions of SFAS No.
123(R), "Share-Based Payment", issued in December 2004 as a revision of
SFAS No. 123 and requiring that the cost resulting from share based
payments be recognized n the financial statements using a fair value
measurement. The share-based payments arise from the grant of stock options
from one of the plans described in Note 12 and compensation is recorded
using a closed-form option-pricing model which assumes that the option
exercises occur at the end of the contractual term and that the expected
volatility, expected dividends, and risk-free interest rates are constant
over the option's term.
We account for the cost of stock-based compensation on a straight-line
basis over the requisite service period for the entire award. In adopting
the provisions of SFAS 123(R), we used the Modified Prospective Application
to account for the compensation cost of the portion of previously-issued
stock options for which the requisite service period had not been rendered
at March 31, 2005.
The effect on loss from operations, net loss and net loss per share in the
year ended March 31, 2006 of accounting for stock-based compensation in
accordance with SFAS No. 123(R) follows:
Modified Prospective Application related to unvested
portion of previously-issued stock options $130,300
Current period stock options issued 400
--------
$130,700
========
Basic and diluted loss per share $ Nil
F-11
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation",
prior to April 1, 2005, we accounted for costs of stock based compensation
in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and accordingly,
disclosed the pro forma effect on net income (loss) and related per share
amounts using the fair-value method defined in SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This Statement amends SFAS No.
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 No.
148 amends the disclosure requirements of SFAS No. 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.
As required by SFAS No. 123 and SFAS No. 148 following is the pro forma
effect on net income (loss) and basic and diluted earnings (loss) per share
as if stock-based employee compensation had been recognized during the
fiscal year ended March 31, 2005 (in thousands, except per share data). The
compensation expense for these periods has been determined under the fair
value method using the Black-Scholes pricing model, and assumes graded
vesting.
Net loss as reported $ (20,873)
Less: stock-based compensation expense,
net of related tax effects (2,165)
------------
Pro forma net loss $ (23,038)
============
Basic and diluted loss per share:
As reported $ (0.35)
Pro forma $ (0.39)
CONCENTRATIONS - We maintain cash balances and short-term investments at
several financial institutions. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. We have not
experienced any losses in such accounts and believe it is not exposed to
any significant credit risk on cash and cash equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS - In November 2004, the FASB issued SFAS
No. 151, "Inventory Costs". SFAS No. 151 amends the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) under the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing." Paragraph 5 of ARB No. 43, Chapter 4, previously stated that
"...under some circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal
as to require treatment as current period charges..." This statement
requires that those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal". In
addition, this statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
We do not expect adoption of SFAS No. 151 to have a material impact, if
any, on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions." The FASB issued this Statement as a result of
the guidance provided in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions." SOP 04-2 applies to
all real estate time-sharing transactions. Among other items, the SOP
provides guidance on the recording of credit losses and the treatment of
selling costs, but does not change the revenue recognition guidance in SFAS
No. 66, "Accounting for Sales of Real Estate," for real estate time-sharing
transactions. SFAS No. 152 amends Statement No. 66 to reference the
guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67,
"Accounting for Costs and Initial Rental Operations of Real Estate
Projects," to state that SOP 04-2 provides the relevant guidance on
accounting for incidental operations and costs related to the sale of real
estate time-sharing transactions. This Statement is effective for financial
statements for fiscal years beginning after June 15, 2005. We do not expect
adoption of SFAS No. 152 to have a material impact, if any, on its
financial position or results of operations.
F-12
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions." Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in
standards issued by the international Accounting Standards Board. The
amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of this Statement are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. We do not expect adoption of SFAS No. 153 to have a material
impact, if any, on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS 123(R) amends SFAS No. 123. "Accounting for Stock-Based Compensation"
and APB Opinion 25 "Accounting for Stock Issued to Employees." SFAS No.
123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of the entity's shares or other equity
instruments, or (2) that require (or may require) settlement by the
issuance of an entity's shares or other equity instruments. For public
issuers, this Statement is effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. Early
adoption for financial statements that have not been issued is encouraged.
Consequently, commencing in the first quarter of fiscal 2006, we have
adopted SFAS No. 123(R).
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which replaces APB Opinion No. 20, "Accounting Changes", and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements", and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 requires
retrospective application to prior periods' financial statements of changes
in accounting principle as if that principle had always been used, changes
in the reporting entity, and redefines restatement as the revising of
previously issued financial statements to reflect the correction of an
error. SFAS 154 is effective for our financial statements commencing with
the first quarter of fiscal 2007.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", which amends SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise
would require bifurcation, clarifies SFAS No. 133 with regard to
interest-only strips, requires evaluation of interests in securitized
financial assets to identify freestanding derivatives or hybrid financial
instruments that contain embedded derivatives requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives, and amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding certain
derivative financial instruments. SFAS No. 155 is effective for our
financial statements commencing with the first quarter of fiscal 2008.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets", which amends SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
156 requires recognition of a servicing asset or servicing liability each
time an obligation is undertaken to service certain financial assets,
requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable, permits
the selection of alternate subsequent measurement methods for each class of
separately recognized servicing assets, permits a one-time reclassification
of available-for-sale securities to trading securities upon adoption, and
requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value. SFAS No. 156 is effective
for our financial statements commencing with the first quarter of fiscal
2008. We do not expect adoption of SFAS No. 156 to have a material impact,
if any, on our financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No.109".
Interpretation No. 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits from tax
positions should be recognized in the financial statements only when it is
more likely than not that the tax position will be sustained upon
examination by the appropriate taxing authority that would have full
F-13
knowledge of all relevant information. The amount of tax benefits to be
recognized for a tax position that meets the more-likely-than-not
recognition threshold is measured as the largest amount of benefit that is
greater than fifty percent likely of being realized upon ultimate
settlement. Tax benefits relating to tax positions that previously failed
to meet the more-likely-than-not recognition threshold should be recognized
in the first subsequent financial reporting period in which that threshold
is met or certain other events have occurred. Previously recognized tax
benefits relating to tax positions that no longer meet the
more-likely-than-not recognition threshold should be derecognized in the
first subsequent financial reporting period in which that threshold is no
longer met. Interpretation No. 48 also provides guidance on the accounting
for and disclosure of tax reserves for unrecognized tax benefits, interest
and penalties and accounting in interim periods. Interpretation No. 48 is
effective for fiscal years beginning after December 15, 2006. We do not
expect adoption of Interpretation No. 48 to have a material impact, if any,
on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which amends all previously issued and effective Accounting Principals
Board Opinions and Statements of Financial Accounting Standards containing
references to fair value measurement including SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", SFAS No. 141, "Business Combinations",
SFAS No. 142, "Goodwill and Other Intangible Assets", SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", and SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity". SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for our financial statements
commencing with the first quarter of fiscal 2009.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 improves
financial reporting by requiring an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position, to recognize changes in
that funded status in the year in which changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit corporation, and to measure the funded status of a plan as
of the date of its year-end statement of financial position. The required
date of adoption of the recognition and disclosure provisions of this
Statement is March 31, 2007. We do not expect adoption of SFAS No. 158 to
have a material impact, if any, on our financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at
fair value, the objective being to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 is
effective for our financial statements commencing April 1, 2008, and early
adoption is permitted provided that we elect to apply the provisions of
SFAS No. 157, "Fair Value Measurements" concurrently.
2. ACQUISITION
Pursuant to an agreement dated June 1, 2004, we acquired Retail
Technologies International, Inc. ("RTI") from Michael Tomczak, Jeffrey
Boone and Intuit Inc. ("Intuit") in a merger transaction. On March 12,
2004, we, RTI, IPI Merger Sub, Inc., ("Merger Sub") and Michael Tomczak and
Jeffrey Boone (the "Shareholders") entered the initial Agreement of Merger
and Plan of Reorganization (the "March 12, 2004 Merger Agreement") which
provided we would acquire RTI in a merger transaction in which RTI would
merge with and into Merger Sub. The merger consideration contemplated by
the March 12, 2004 Merger Agreement was a combination of cash and shares of
our common stock. The March 12, 2004 Merger Agreement was amended by the
Amended and Restated Agreement of Merger and Plan of Reorganization, dated
June 1, 2004, by and between us, RTI, Merger Sub, IPI Merger Sub II, Inc.
("Merger Sub II") and the Shareholders (the "Amended Merger Agreement").
Pursuant to the Amended Merger Agreement, the Merger (as defined below) was
completed with the following terms: (i) we assumed RTI's obligations under
those certain promissory notes issued by RTI on December 20, 2002 with an
aggregate principal balance of $2.3 million; (ii) the total consideration
paid at the closing of the Merger was $11.6 million; paid in shares of our
common stock with a fair value of $1.2 million, newly designated Series B
convertible preferred stock ("Series B Preferred") with a fair value of
$5.6 million, promissory notes totaling $3.6 million, assumption of
incentive stock options with a fair value of $1.0 million, and acquisition
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costs of $110,000; (iii) the Shareholders and Intuit are entitled to price
protection payable if and to the extent that the average trading price of
our common stock is less than $0.76 at the time the shares of our common
stock issued in the Merger and issuable upon conversion of the Series B
Preferred are registered pursuant to the registration rights agreement
dated June 1, 2004 between us, the Shareholders and Intuit (the
"Registration Rights Agreement"); and (iv) the merger consisted of two
steps (the "Merger"), first, Merger Sub merged with and into RTI, Merger
Sub's separate corporate existence ceased and RTI continued as the
surviving corporation (the "Reverse Merger"); immediately thereafter, RTI
merged with and into Merger Sub II, RTI's separate corporate existence
ceased and Merger Sub II continued as the surviving corporation (the
"Second-Step Merger").
As a result of the Merger, each Shareholder received 1,258,616 shares of
Series B Preferred and a promissory note payable monthly over two years in
the principal amount of $1,295,000 bearing interest at 6.5% per annum. As a
result of the Merger, Intuit, the holder of all of the outstanding shares
of RTI's Series A Preferred stock, received 1,546,733 shares of our common
stock and a promissory note payable monthly over two years in the principal
amount of $530,700 bearing interest at 6.5% per annum.
The Shareholders and Intuit were also granted registration rights. Under
the Registration Rights Agreement, we agreed to register the common stock
issuable upon conversion of the Series B Preferred issued to the
Shareholders within 30 days of the automatic conversion of the Series B
Preferred into common stock. The automatic conversion to 7,551,696 shares
of common stock occurred on August 30, 2004 following our filing an
amendment to our certificate of incorporation with the Delaware Secretary
of State on August 27, 2004 increasing the authorized number of shares of
our common stock to 250,000,000 ("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 1,546,733 shares of our common stock 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. We have recorded the liability relating to the price protection at
the date of acquisition in the full amount of $0.23 per share in accordance
with SFAS 5, "Accounting for Contingencies" as a charge to Additional Paid
In Capital in accordance with SFAS 141, "Business Combinations".
We issued promissory notes to RTI's two principals, Michael Tomczak and
Jeffrey Boone ("Noteholders"), totaling $2.6 million ("Officers Notes"). As
of March 31, 2005, the Officers Notes were due on June 1, 2006 and were
payable in monthly installments in the aggregate of $20,000 from June 1,
2004 through May 1, 2005, increasing to $200,000 from June 1, 2005. The
Officers Notes earn interest at a rate of 6.5% per annum. The balance of
the Officers Notes is $2.5 million at March 31, 2007. On April 18, 2005, in
conjunction with the issuance of a secured term note to Multi-Channel,
pursuant to a Subordinated Seller Note Subordination Agreement
("Subordination Agreement"), the Officers Notes were subordinated to the
debts owed by us to Multi-Channel and Laurus ("Senior Debts"), prohibiting
any payment of principal or interest on the Officers Notes until the Senior
Debts have been paid in full.
Pursuant to the Amended Merger Agreement, The Sage Group, plc as well as
certain officers and directors signed voting agreements that provide they
will not dispose of or transfer their shares of our capital stock and that
they will vote their shares of our capital stock in favor of the
Certificate of Amendment and the Amended Merger Agreement and transactions
contemplated therein.
Upon the consummation of the Merger, Michael Tomczak, RTI's former
President and Chief Executive Officer, was appointed our President, Chief
Operating Officer and director and Jeffrey Boone, RTI's former Chief
Technology Officer, was appointed our Chief Technology Officer. We entered
into two-year employment agreements and non-competition agreements with Mr.
Tomczak and Mr. Boone.
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The acquisition has been accounted for as a purchase. The results of the
operations of RTI have been included in the consolidated financial
statements since the date of the acquisition. The excess of purchase price
over the fair values of net assets acquired was approximately $10.5 million
and has been recorded as goodwill. The fair value of assets acquired and
liabilities assumed were as follows (in thousands):
Cash $ 673
Accounts receivable 1,348
Prepaids and other assets 742
Property and equipment 496
Software technology 1,410
Customer relationships 1,660
Trademark 800
Deferred Compensation Costs 713
Capital lease obligations (11)
Accounts Payable and Accrued Expenses (1,723)
Income Tax Payable (127)
Deferred Revenue (2,818)
Notes Payable (1,989)
----------
Net assets 1,174
Excess of cost over fair value of net assets acquired 10,474
----------
Total purchase price $ 11,648
==========
3. DISCONTINUED OPERATIONS
Effective March 31, 2006, we sold the assets of our Store Solutions
division for $211,000. The sale of the Store Solutions division resulted in
a loss of $2,533,000, which was recognized at March 31, 2006. At March 31,
2006, the Store Solutions division was classified as a discontinued
operation and the results of operations are separately reported for all
periods presented. Summarized financial information in thousands, except
per share data, for the discontinued operations is set forth below:
Year ended March 31,
2006 2005
---------- ----------
Net sales $ 1,961 $ 1,497
Loss from discontinued operations $ (93) $ (935)
Loss per share of common stock $ Nil $ (0.02)
4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2007 and 2006 consisted of the
following (in thousands):
2007 2006
------------- -------------
Computer and office equipment and purchased software $ 3,000 $ 2,805
Furniture and fixtures 308 485
Leasehold improvements 332 319
------------- -------------
3,640 3,609
Less accumulated depreciation and amortization 3,333 3,225
------------- -------------
Total $ 307 $ 384
============= =============
Depreciation and amortization expense from continuing operations for the
fiscal years ended March 31, 2007, 2006 and 2005 was $294,000, $480,000 and
$646,000, respectively.
F-16
5. GOODWILL AND OTHER INTANGIBLES
At March 31, 2007 and 2006, goodwill and other intangibles consist of the
following (in thousands):
MARCH 31, 2007 MARCH 31, 2006
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Net amount amortization Net
-------- ------------ -------- -------- ------------ --------
Goodwill $ 28,993 $ (6,009) $ 22,984 $ 29,785 $ (6,009) $ 23,776
-------- -------- -------- -------- -------- --------
Other intangibles:
Amortized intangible
assets
Software technology 30,818 (20,267) 10,551 28,842 (16,929) 11,913
Customer relationships 1,836 (646) 1,190 1,836 (480) 1,356
Unamortized intangible
Trademark 833 -- 833 840 -- 840
-------- -------- -------- -------- -------- --------
33,487 (20,913) 12,574 31,518 (17,409) 14,109
Goodwill and other
intangibles $ 62,480 $(26,922) $ 35,558 $ 61,303 $(23,418) $ 37,885
======== ======== ======== ======== ======== ========
During the fiscal year ended March 31, 2007, we recorded approximately $2.0
million capitalized development costs. Software and customer relationships
are amortized on a straight-line basis over their useful lives of five to
ten years. The goodwill and the trademark have indefinite useful lives and
are not subject to amortization.
Transactions in goodwill during the fiscal years ended March 31, 2007 and
2006 are as follows (in thousands):
Accumulated
Cost Amortization
---------- ----------
Balance April 1, 2005 $ 32,010 $ 6,493
Goodwill of the Store Solutions division disposed (1,375) (484)
Impairment of Page Digital Goodwill (850) --
---------- ----------
Balance March 31, 2006 29,785 6,009
Impairment of Page Digital Goodwill (792) --
---------- ----------
Balance March 31, 2007 $ 28,993 $ 6,009
========== ==========
We adopted SFAS No. 142 effective April 1, 2002 and ceased amortization of
goodwill that we recorded in business combinations prior to June 30, 2001.
SFAS No. 142 prohibits the amortization of goodwill and certain other
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 continue to
be amortized over their useful lives.
We completed our annual test for goodwill impairment during fourth quarter
of 2007, 2006 and 2005 and determined that the goodwill allocated to the
Page Digital reporting unit at March 31, 2007 and 2006, and allocated to
the Island Pacific and Page Digital reporting units at March 31, 2005 was
impaired. Accordingly, we reduced the value of the goodwill in the amount
of $792,000, $850,000 and $5,577,000 in the years ended March 31, 2007,
2006 and 2005, respectively.
We completed tests for impairment of our other intangible assets and also
evaluated the remaining useful lives of our intangible assets during the
fourth quarter 2007, 2006 and 2005. We determined that the customer
relationships values allocated to the Page Digital reporting unit were
impaired at March 31, 2006 and 2005, and that the trademark value allocated
to the Page Digital reporting unit was impaired at March 31, 2007 and 2006.
Accordingly, we reduced the value of customer relationships in the years
ended March 31, 2006 and 2005 by $230,000 and $383,000, respectively, and
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we reduced the value of the trademark by $6,000 and $245,000 in the year
ended March 31, 2007 and 2006, respectively. The software and customer
relationships acquired in the acquisition of RTI are being amortized over
useful lives of seven and ten years, respectively.
Amortization expense from continuing operations for fiscal years ended
March 31, 2007, 2006 and 2005 was $3.5 million, $3.6 million and $4.7
million, respectively. We expect amortization expense for the next five
years to be as follows (in thousands):
Year Ending March 31:
2008 $ 3,504
2009 $ 3,166
2010 $ 558
2011 $ 558
2012 $ 92
6. CONVERTIBLE DEBENTURES AND TERM NOTES
Convertible debentures and long-term notes at March 31, 2007 and 2006
consist of the following (in thousands):
2007 2006
-------- --------
9% convertible debentures, due May 2007, net of
unamortized debt discount of $0 and $80,respectively $ 913 $ 832
Convertible term note, bearing interest at the prime rate
plus 2%, due July 2007, net of unamortized debt
discount of $570 and $2,523, respectively 6,218 4,265
Convertible term notes, bearing interest at the prime rate
plus 1%, due June 2008, net of unamortized debt
discount of $1,626 and $2,972, respectively 2,574 1,228
-------- --------
9,705 6,325
Less: current maturities 7,185 832
-------- --------
Long-term portion of term loans $ 2,520 $ 5,493
======== ========
MARCH 2004 DEBENTURES
On March 15, 2004, we sold Omicron Master Trust ("Omicron") and Midsummer
Investment, Ltd. ("Midsummer") convertible debentures (the "March 2004
Debentures") for an aggregate price of $3.0 million pursuant to a
securities purchase agreement (the "March 2004 Debenture Purchase
Agreement"). The March 2004 Debentures bear an interest rate of 9% per
annum, and provide for interest only payments on a quarterly basis,
payable, at our option, in cash or shares of our common stock. The March
2004 Debentures initially matured on May 15, 2006, but the maturity date
was extended to September 30, 2006, pursuant to the Amendment Agreement
between us and Midsummer dated March 23, 2006 (the "Midsummer Additional
Amendment"), to February 28, 2007, pursuant to the Amendment and Waiver
Agreement between us and Midsummer dated October 9, 2007 (the "October 2006
Amendment"), and to April 30, 2007 pursuant to the Amendment and Waiver
between us and Midsummer dated April 23, 2007.
The March 2004 Debentures were initially convertible into shares of our
common stock at a conversion price of $1.32 per share, subject to
adjustment if we offer or sell any securities for an effective per share
price that is less than 87% of the then current conversion price,
negatively restate any of our financial statements or make any public
disclosure that negatively revises or supplements any prior disclosure
regarding a material transaction consummated prior to March 15, 2004, or
trigger other customary anti-dilution protections. Accordingly, the
conversion price has been adjusted as described below.
We also issued Omicron and Midsummer two warrants each as follows: (1)
Series A Warrants to purchase up to an aggregate of 1,043,479 shares of our
common stock at an exercise price of $1.15 per share with a five-year term,
exercisable at anytime after September 16, 2004, subject to adjustment if
we offer or sell any securities for an effective per share price that is
less than the then current exercise price, negatively restate any of our
financial statements or make any public disclosure that negatively revises
or supplements any prior disclosure regarding a material transaction
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consummated prior to March 15, 2004, or trigger other customary
anti-dilution protections, and (2) Series B Warrants to purchase up to an
aggregate of 8,500,000 shares of our common stock with an exercise price of
$5 per share, subject to adjustment upon the issuance or sale of securities
in a public offering for an effective per share price that is less than the
then-current exercise price, and upon the trigger of other customary
anti-dilution protections. The Series B Warrants expired on September 15,
2005. The conversion price of March 2004 Debentures and the exercise price
of the Series A Warrants have been adjusted as described below.
We entered into a registration rights agreement with Omicron and Midsummer
dated March 15, 2004 (the "Omicron/Midsummer Registration Rights
Agreement"), pursuant to which we were required to file a registration
statement respecting the common stock issuable upon the conversion of the
March 2004 Debentures and exercise of the warrants within 30 days after
March 15, 2004, and to use best efforts to have the registration statement
declared effective at the earliest date but in no event later than 90 days
after March 15, 2004 (or 120 days in the event of full review). The
Omicron/Midsummer Registration Rights Agreement provided that if we failed
to file a registration statement within such 30 day period or have it
declared effective within such 90 day period (or 120 day period in the
event of a full review), we were obligated to pay liquidated damages to
Omicron and Midsummer equal to 2% per month of each of their initial
subscription amounts plus the value of any outstanding warrants. The filing
deadline was extended to March 15, 2006 pursuant to the November 2005
Amendments, further extended to May 16, 2006, pursuant to the March 2006
Amendments, and further extended to October 31, 2007 pursuant to the
March/April 2007 Amendments, and the initial effectiveness date was amended
to 135 days after the filing date.
A registration statement on Form S-3 registering the shares issuable upon
conversion of Midsummer's March 2004 Debenture and the shares issuable on
exercise of both Omicron's and Midsummer's Series A Warrants was filed on
August 25, 2004. A registration statement on Form S-3 registering the
shares issuable upon exercise of Midsummer's and Omicron's Series B
Warrants was filed on September 13, 2004. The registration statements were
combined into one registration statement on Form S-3 pursuant to Amendment
No. 1 to the Forms S-3 filed on December 2, 2004. Amendment No. 2 to the
registration statement was filed on January 25, 2005. The amended
registration statements did not become effective, and we withdrew the
filing on January 3, 2006. The liability for liquidated damages caused by
the withdrawal of the filing as of March 31, 2005 was $53,000 which, along
with any other defaults related to the terms of Midsummer's March 2004
Debenture, was cured by the November 2005 Amendments issued in conjunction
with the November 2005 Term Notes.
Amendment No 1
In July 2004, we entered into Amendment No. 1 to Midsummer's March 2004
Debenture in exchange for its consent to the Laurus 2004 Convertible Note
transaction. The terms of Midsummer's March 2004 Debenture were amended as
follows: (1) the prepayment penalty was eliminated, (2) the conversion
price for the March 2004 Debenture and the exercise price for the Series A
Warrant were reduced to $0.56 per share, (3) interest payments are due on a
monthly, rather than quarterly, basis, (4) the commencement of monthly
redemption payments was accelerated to September 1, 2004 and (5) the
monthly redemption payments were revised such that payments of $50,000,
which increased to $62,500 starting February 1, 2005, were due monthly
commencing September 1, 2004. During the three months ended March 31, 2005,
185,672, 184,871 and 229,851 shares of common stock were issued valued at
$58,155, $69,905 and $69,436 respectively, for payment of principal and
interest. Computation of the number of shares is in accordance with the
agreement and the share price is based upon the 20 day average volume
weighted average price less a 20% discount. Management considers this to be
the fair value of the shares of common stock issued.
As part of Amendment No. 1, we issued 600,000 shares of our common stock,
which we valued at $240,000, to Midsummer as payment for liquidated damages
due under the Omicron/Midsummer Registration Rights Agreement and as
partial consideration for Midsummer consenting to our issuance of the
Laurus 2004 Convertible Note.
With a portion of the proceeds from the sale of the Laurus 2004 Convertible
Note (see below), we paid Omicron $1.75 million, the full amount due under
its March 2004 Debenture, plus $0.2 million in accrued interest, liquidated
damages pursuant to the Omicron/Midsummer Registration Rights Agreement,
and prepayment penalties.
Amendment No. 2
On November 30, 2004, we entered into Amendment No. 2 to Midsummer's March
2004 Debenture ("Amendment No. 2"). The terms of Midsummer's March 2004
Debenture were amended as follows: (1) the conversion price for the March
2004 Debenture and the exercise price for the Series A Warrant were reduced
F-19
to $0.37 per share, (2) all outstanding accrued and unpaid liquidated
damages and all liquidated damages that may accrue through January 31, 2005
were waived, (3) until the shares are registered, we may make monthly
interest payments in shares of restricted stock valued at 80% of the value
weighted average price for the 20 days prior to either the interest payment
date or on the date the shares are issued, whichever is lower, and (4) the
date by which the registration statement covering the shares issuable upon
conversion of Midsummer's March 2004 Debenture and the related warrants
must be declared effective was extended to January 31, 2005 (further
extended to October 31, 2007 pursuant to the March/April 2007 Amendments).
In addition, we issued Midsummer an additional warrant (the "November 2004
Warrant") with a five-year term to purchase 200,000 shares of our common
stock at an exercise price of $0.41 per share.
Midsummer Additional Amendment
In conjunction with the March 2006 Amendments associated with the November
2005 Term Notes, on March 23, 2006, we also entered into an Amendment
Agreement to the Securities Purchase Agreement dated March 15, 2004 (the
"Midsummer Additional Amendment") pursuant to which: (1) the maturity date
under the March 2004 Debenture was extended to September 30, 2006 and (2)
the Company agreed to commence paying Midsummer monthly interest in the
amount of $35,613 commencing on April 28, 2006 and continuing until
September 29, 2006 as payment in full of accrued but unpaid interest under
the March 2004 Debenture (through September 29, 2006) and Midsummer's June
2005 Note (through August 28, 2006). In exchange for Midsummer agreeing to
the foregoing, the Company agreed to adjust the exercise price under the
warrants issued to Midsummer dated March 31, 2003, July 1, 2003, March 15,
2004 and November 30, 2004 for an aggregate of 1,402,084 shares of common
stock to $0.01 and issued Midsummer an additional warrant (the "Midsummer
Additional Warrant") to purchase up to 1,610,005 shares of the Company's
common stock for $0.20 per share.
Derivative Liabilities and Beneficial Conversion
In accordance with SFAS 133, we accounted for the Conversion Feature
embedded in the March 2004 Debentures as a derivative liability and
recorded the following derivative liability transactions in the years ended
March 31, 2004, 2005, 2006and 2007.
Increase (Decrease) in Net Income
-------------------------------------------------
Initial Derivative Amortization of Change in Fair Value of
Year Ended Liability/Debt Discount Debt Discount Derivative Liability
------------------------ ------------------------- -------------------- -------------------------
March 31, 2004 $1,736,000 $(35,600) $214,900
March 31, 2005
Debt Reduction $(858,200) $193,200
Period Expense $(467,800) $1,165,300
March 31, 2006 $(334,600) $9,800
March 31, 2007 $(39,800)
On November 16, 2005, the reset price of the Conversion Feature embedded in
Midsummer's March 2004 Debenture became fixed at $0.20 per share, and the
balance of the derivative liability of $152,800 was added to Additional
Paid-in Capital.
After bifurcation of the derivative liability, we allocated the proceeds
received from the March 2004 Debentures with the detachable Series A and
Series B Warrants using the relative fair value of the warrants ($782,200)
at the time of issuance. The allocation to the warrants is being amortized
as interest expense over the term of the March 2004 Debentures, and the
relative fair value of the November 2004 Warrant ($9,200) and the Midsummer
Additional Warrant ($19,400) is being amortized from the date of issue to
the maturity date of the Midsummer March 2004 Debentures. Amortization in
the years ended March 31, 2007, 2006 and 2005 was $39,000, $155,000 and
$212,200, respectively.
The outstanding balance of Midsummer's March 2004 Debenture, including
accrued interest, is $926,000 at March 31, 2007.
For a period of one hundred eighty (180) days following the date the
registration statement covering the shares issuable upon conversion of the
March 2004 Debentures and related warrants is declared effective (the
"Omicron/Midsummer Registration Effective Date"), both Omicron and
Midsummer have the right, in their sole discretion, to elect to purchase
their pro rata portion of additional March 2004 Debentures and Series A
F-20
Warrants for an aggregate purchase price of up to $2.0 million in a second
closing (the "Second Closing"). The terms of the Second Closing would be
identical to the terms set forth in the March 2004 Purchase Agreement and
related documents, except that, the conversion price for the additional
debentures and the exercise price for the additional warrants shall be
equal to 115% of the average of the daily volume weighted average price of
our common stock for the 10 days preceding the Second Closing ("Second
Closing Price"). The Series A Warrant coverage for the Second Closing shall
be 40% of each Purchaser's subscription amount in the Second Closing
divided by the Second Closing Price.
For a period of one hundred eighty (180) days following the
Omicron/Midsummer Registration Effective Date, if the daily volume weighted
average price of our common stock for fifteen (15) consecutive trading days
exceeds the then current conversion price by more than 200%, subject to
adjustment, we may, on one occasion, in our sole determination, require
Omicron and Midsummer to purchase each of their pro rata portion of
additional debentures and Series A Warrants for an aggregate purchase price
of up to $2.0 million. Any such additional investment shall be under the
terms set forth in the March 2004 Purchase Agreement and related documents,
except that, the conversion price for the additional debentures and the
exercise price for the additional warrants shall be equal to the then
current conversion price and warrant exercise price for the March 2004
Debentures and Series A Warrants.
For a period of six (6) months following the Omicron/Midsummer Registration
Effective Date, Omicron and Midsummer have a right of first refusal to
participate in certain future financings by us involving the sale of our
common stock or equivalent securities.
Laurus Master Fund, Ltd
On July 12, 2004, we sold and issued a secured convertible term note (the
"Laurus 2004 Convertible Note") to Laurus for gross proceeds of $7.0
million pursuant to a Securities Purchase Agreement. In addition, we issued
Laurus a warrant to purchase up to 3,750,000 shares of our common stock at
a price of $0.71 per share (the "Laurus 2004 Warrant").
The Laurus 2004 Convertible Note initially matured on September 1, 2004,
however, the maturity date was automatically extended to July 12, 2007 (the
"Maturity Date") upon our stockholders approving an increase in our
authorized common stock from 100 to 250 million shares and our filing an
amendment to our certificate of incorporation to effect such change on
August 27, 2004. The Laurus 2004 Convertible Note accrues interest at a
rate per annum equal to the "prime rate" published in The Wall Street
Journal from time to time, plus two percent. Interest under the Laurus 2004
Convertible Note is payable monthly in arrears commencing August 1, 2004.
The Interest Rate is recalculated with each change in the prime rate and is
subject to adjustment based on the then-current price of our common stock.
The initial conversion price under the Laurus 2004 Convertible Note was
$0.56 per share, subject to adjustment upon our issuance of securities at a
price below the fixed conversion price, a stock split or combination,
declaration of a dividend on our common stock or reclassification of our
common stock. We have the option to redeem the Laurus 2004 Convertible Note
by paying Laurus 125% of the principal amount due under the Laurus 2004
Convertible Note together with all accrued and unpaid interest. Our
obligations under the Laurus 2004 Convertible Note are secured by all of
our assets and guaranteed by our subsidiaries, pursuant to the Laurus
Security Instruments.
The Laurus 2004 Warrant is immediately exercisable with a seven year term
ending July 12, 2011. We have the right to require exercise of the Laurus
2004 Warrant in whole or in part if: (1) all of our obligations under the
Laurus 2004 Convertible Note have been irrevocably paid in full, (2) the
common stock underlying the Laurus 2004 Warrant has been registered on a
registration statement declared effective by the SEC, and such registration
statement remains effective, and (3) the average closing price of our
common stock for the ten (10) trading days immediately prior to the
proposed date of the mandatory exercise of the Laurus 2004 Warrant is
greater than three hundred percent (300%) of the then applicable exercise
price. The Laurus 2004 Warrant exercise price is subject to adjustment in
the event of common stock splits and combinations, dividends and
distributions.
Amendment No. 1
In August 2004, Laurus agreed to defer the interest payments due under the
Laurus 2004 Convertible Note on August 1, 2004 until the Maturity Date. On
October 29, 2004, Laurus agreed to amend ("Amendment No. 1") the Laurus
2004 Convertible Note and defer the payments due from September 2004
through February 2005 until the Maturity Date. Pursuant to Amendment No. 1,
(1) we are required to make monthly payments in the amount of $212,121 to
F-21
Laurus commencing on March 1, 2005 - deferred by March 2005 (Amendment No.
2 below), November 2005, March 2006, October/November 2006 and March/April
2007 Amendments noted previously - with a balloon payment of $1.1 million
due in July 2007, (2) the conversion price on the first $2 million of the
$7 million Laurus 2004 Convertible Note was reduced from $0.56 to $0.37,
(3) we issued Laurus an additional warrant (the "October `04 Warrant") to
purchase 250,000 shares of our common stock at a price of $0.41 per share
with the same terms as the Laurus 2004 Warrant, and (4) the Effectiveness
Date under the Laurus Registration Rights Agreement was extended.
Pursuant to the registration rights agreement as amended in October 2004
between us and Laurus executed in connection with the sale and issuance of
the Laurus 2004 Convertible Note (the "Laurus Registration Rights
Agreement"), we were obligated to file a Registration Statement registering
the shares of our common stock issuable upon conversion of the Laurus 2004
Convertible Note, or exercise of the Laurus 2004 Warrant or the October `04
Warrant (collectively the "Underlying Shares") within 60 days of July 12,
2004 and have the Registration Statement declared effective by the SEC no
later than January 8, 2005. The filing date has been extended pursuant to
the March/April 2007 Amendments to October 31, 2007, and the initial
effectiveness date has been amended to 135 days after the filing date. If
(1) the Registration Statement was not filed or declared effective within
the requisite periods, (2) the Registration Statement ceased to be
effective for more than 30 days in any calendar year or any 10 consecutive
calendar days, or (3) our common stock was not listed or traded or was
suspended from trading for three consecutive trading days, we were required
to pay Laurus liquidated damages equal to 2% of original principal balance
on the Laurus 2004 Convertible Note for each 30 day period (with partial
periods prorated) that such event continued.
We filed a registration statement for the Underlying Shares on Form S-3
(the "Laurus Registration Statement") on September 13, 2004 and filed
amendments to the Form S-3 on December 2, 2004 and January 25, 2005. The
amended registration statements did not become effective, and we withdrew
the filing on January 3, 2006. Liquidated damages in the amount of
$390,000, which was cured by the November 2005 Amendments, had accrued as
of March 31, 2005 due to our failure to meet the filing and effectiveness
deadlines prior to the extension of such deadlines.
Amendment No. 2
Effective March 31, 2005, Laurus agreed to amend ("Amendment No. 2") the
Laurus 2004 Convertible Note and defer the principal payments due from
April 2005 through September 2005 until the Maturity Date. In addition,
Laurus agreed (1) to postpone the balance due at March 31, 2005 accrued for
liquidated damages related to our failure to meet the filing and
effectiveness deadlines under the Laurus Registration Rights Agreement, (2)
waived its right to liquidated damages for the months of April and May
2005, and (3) entered into a Subordination Agreement with Multi-Channel to
facilitate the Multi-Channel Note transaction. The liability for liquidated
damages and any other defaults related to the terms of the Laurus 2004
Convertible Note, were cured by the November 2005 Amendments issued in
conjunction with the Laurus November 2005 Term Note.
In consideration of Laurus' agreements in Amendment No. 2, we issued a
warrant (the "Laurus March 2005 Warrant") to purchase 1,200,000 shares of
common stock at an exercise price of $0.20 per share. The Laurus March 2005
Warrant is immediately exercisable with a ten year term ending March 31,
2012. We have the right to require exercise of the Laurus March 2005
Warrant in whole or in part if: (1) all of our obligations under the Laurus
2004 Convertible Note have been irrevocably paid in full, (2) the common
stock underlying the Laurus March 2005 Warrant has been registered on a
registration statement declared effective by the SEC, and such registration
statement remains effective, and (3) the average closing price of our
common stock for the ten (10) trading days immediately prior to the
proposed date of the mandatory exercise of the Laurus March 2005 Warrant is
greater than three hundred percent (300%) of the then applicable exercise
price. The Laurus March 2005 Warrant exercise price is subject to
adjustment in the event of common stock splits and combinations, dividends
and distributions.
Adjustment of Prior Beneficial Conversion and Warrant Exercise Prices -
2005
In connection with the sale and subsequent amendment of the Laurus 2004
Convertible Note, during the quarters ended September 30, 2004, December
31, 2004, and March 31, 2005 we adjusted the exercise price of outstanding
warrants previously granted anti-dilution price protection to $0.56 per
share (July 2004) to $0.37 per share (November 2004), and to $0.20 per
share (March 2005). The additional charges of $911,000 arising from these
adjustments have been charged to operations in the year ended March 31,
2005.
F-22
Derivative Liabilities and Debt Discount
In accordance with SFAS 133, we accounted for the Conversion Feature
embedded in the Laurus 2004 Convertible Note as a derivative liability and
recorded the following derivative liability transactions in the years ended
March 31, 2005, 2006 and 2007.
Increase (Decrease) in Net Income
----------------------------------------------------
Initial Derivative Change in Fair Value of
Liability/Debt Amortization of Debt Derivative Liability to
Year Ended Discount Discount March 31, 2006
------------------- ---------------------- ------------------------ --------------------------
March 31, 2005 $5,051,100 $(1,204,800) $3,443,700
March 31, 2006 $(1,683,200) $(73,900)
March 31, 2007 $(1,683,200)
On November 16, 2005, the reset price of the Conversion Feature embedded in
the Laurus 2004 Convertible Note became fixed at $0.20 per share, and the
balance of the derivative liability of $1,681,300 was added to Additional
Paid-in Capital.
After bifurcation of the derivative liability, we allocated the proceeds
received from the Laurus 2004 Convertible Note with the detachable Laurus
2004 Warrant using the relative fair value of the warrant ($796,700) at the
time of issuance. The allocation to the warrant is being amortized as
interest expense over the term of the Laurus 2004 Convertible Note, and the
relative fair values of the October '04 Warrant ($20,600) and the Laurus
March 2005 Warrant ($45,000) are being amortized from the date of issue to
the maturity date of the Laurus 2004 Convertible Note. Amortization in the
years ended March 31, 2007, 2006 and 2005 was $270,300, $270,300 and
$180,700, respectively.
The balance of the Laurus 2004 Convertible Note, including accrued
interest, is $6.9 million at March 31, 2007.
Multi-Channel Holdings
On April 18, 2005, we sold and issued a secured term note to Multi-Channel
Holdings, Inc. ("Multi-Channel") for gross proceeds of $2.0 million (the
"Multi-Channel Note"). The maturity date of the Multi-Channel Note was
October 18, 2005 with interest payable on maturity at a rate per annum
equal to the "prime rate" published in The Wall Street Journal from time to
time, plus three percent, calculated each day that the prime rate changes,
and the Multi-Channel Note was secured by all of our assets. The
Multi-Channel Note and accrued interest were paid from the proceeds of the
June 2005 Convertible Notes (defined below).
June 2005 Convertible Notes
On June 15, 2005, we sold and issued secured convertible term notes to
Laurus for gross proceeds of $3.2 million (the "Laurus June 2005
Convertible Note") and to Midsummer for gross proceeds of $1.0 million (the
"Midsummer June 2005 Convertible Note") (together the "June 2005
Convertible Notes") pursuant to Securities Purchase Agreements. We also
issued Laurus and Midsummer warrants to purchase up to 4,444,444 and
1,388,889 shares of our common stock, respectively, at a price of $0.23 per
share (the "June 2005 Warrants") and options to purchase up to 17,142,857
and 5,357,143 shares of our common stock, respectively, at the price of
$0.01 per share (the "June 2005 Options").
The June 2005 Convertible Notes mature on June 15, 2008 and accrue interest
at a rate per annum equal to the "prime rate" published in The Wall Street
Journal from time to time, plus one percent, calculated each day that the
prime rate changes, payable monthly in arrears commencing on July 1, 2005.
In addition to accrued interest, commencing on October 3, 2005, the June
2005 Convertible Notes require monthly principal payments to Laurus and
Midsummer of $106,667 and $40,000, respectively. The principal payments
have been deferred pursuant to November 2005, March 2006, October/November
2006, and March/April 2007 Amendments below. The June 2005 Convertible
Notes are convertible to common stock at $0.20 per share, subject to
adjustment upon our issuance of securities at a price below the fixed
conversion price, a stock split or combination, declaration of a dividend
on our common stock or reclassification of our common stock. Our
obligations under the June 2005 Convertible Notes are secured by all of our
assets and guaranteed by our subsidiaries pursuant, with respect to Laurus,
to the Master Security Agreement and Subsidiary Guaranty in favor of Laurus
dated July 12, 2004 (the "Laurus Security Instruments") and, with respect
to Midsummer, to the Master Security Agreement and the Subsidiary Guaranty
in favor of Midsummer dated June 15, 2005 (the "Midsummer Security
Instruments").
F-23
The June 2005 Warrant and June 2005 Option issued to Laurus expire on May
31, 2012 and May 31, 2015, respectively. The June 2005 Warrant and June
2005 Option issued to Midsummer expire on June 15, 2012 and June 15, 2015,
respectively. The warrants and options are immediately exercisable. The
exercise prices under the June 2005 Warrants and June 2005 Options are
subject to adjustment in the event of common stock splits and combinations,
dividends and distributions.
Pursuant to Registration Rights Agreements between us and Laurus and
Midsummer entered into concurrently with the sales of the June 2005
Convertible Notes, we were obligated to file a Registration Statement
registering the shares of our common stock issuable upon conversion of the
June 2005 Convertible Notes, and exercise of June 2005 Warrants and June
2005 Options no later than August 15, 2005, and have the Registration
Statement declared effective by the SEC no later than October 29, 2005.
These deadlines were extended to March 15, 2006 pursuant to the November
2005 Amendments (defined below) and further extended to May 15, 2006 and
October 31, 2007 pursuant to the March 2006 and March/April 2007 Amendments
(defined below). If (1) the Registration Statement is not filed or declared
effective within the requisite periods, (2) the Registration Statement
ceases to be effective for more than 30 days in any calendar year or more
than 20 consecutive calendar days, or (3) our common stock is not listed or
quoted or is suspended from trading for three consecutive trading days, we
were required to pay Laurus and Midsummer liquidated damages equal to 2% of
original principal balances under the June 2005 Convertible Notes for each
30 day period (with partial periods prorated) that such event continues.
Adjustment of Prior Beneficial Conversion and Warrant Exercise Prices -
2005
In connection with the sales of the June 2005 Convertible Notes, we
adjusted the conversion price of the Laurus 2004 Convertible Note and the
Midsummer March 2004 Debentures (defined below) to $0.20 per share, and the
exercise price of outstanding warrants previously granted anti-dilution
price protection to $0.01 per share.
Derivative Liabilities and Debt Discount
In accordance with SFAS 133, we accounted for the Conversion Feature
embedded in the June 2005 Convertible Notes as a derivative liability and
recorded the following derivative liability transactions in the years ended
March 31, 2006 and 2007.
Increase (Decrease) in Net Income
---------------------------------------------
Change in Fair
Value of
Derivative
Year Ended Initial Derivative Amortization of Liability to March
Liability/Debt Discount Debt Discount 31, 2006
------------------- ------------------------------ --------------------- --------------------
March 31, 2006 $3,229,400 $(846,500) $2,179,500
March 31, 2007 $(1,069,200)
On November 16, 2005, the reset price of the Conversion Feature embedded in
the June 2005 Convertible Notes became fixed at $0.20 per share, and the
balance of the derivative liability of $1,049,900 was added to Additional
Paid-in Capital.
After bifurcation of the derivative liability, we allocated the proceeds
received from the June 2005 Convertible Notes with the detachable June 2005
Warrants and the June 2005 Options using the relative fair value of the
warrants and options ($807,690) at the time of issuance. The allocation to
the warrants and options is being amortized as interest expense over the
term of the June 2005 Convertible Notes. Amortization in the years ended
March 31, 2007 and 2006 was $276,500 and $218,900, respectively.
The balance of the June 2005 Convertible Notes, including accrued interest,
is $4.3 million at March 31, 2007.
November 2005 Term Notes (Classified as Notes Payable) On November 16,
2005, we sold and issued secured term notes to Laurus for gross proceeds of
$637,500 (the "Laurus November 2005 Term Note") and to Midsummer for gross
proceeds of $212,500 (the "Midsummer November 2005 Term Note") (together
the "November 2005 Term Notes") pursuant to securities purchase agreements.
In addition, we issued Laurus and Midsummer options to purchase up to
1,125,000 and 375,000 shares of our common stock, respectively at the price
of $0.01 per share (the "November 2005 Options).
F-24
The November 2005 Term Notes initially matured on February 1, 2006 but the
maturity dates were extended to August 31, 2006 pursuant to the March 2006
Amendments, to February 28, 2007 pursuant to the October/November 2006
Amendments, and to June 30, 2007 pursuant to the March/April 2007
Amendments. The November 2005 Term Notes accrue interest at a rate per
annum equal to the "prime rate" published in The Wall Street Journal from
time to time, plus two percent, calculated each day that the prime rate
changes, payable monthly in arrears commencing on December 1, 2005. Our
obligations under the November 2005 Term Notes are secured by all of our
assets and guaranteed by our subsidiaries pursuant to the Laurus Security
Instruments and the Midsummer Security Instruments.
The November 2005 Options are immediately exercisable. The exercise prices
of the November 2005 Options are subject to adjustment in the event of
common stock splits and combinations, dividends and distributions. The
November 2005 Options expire on November 16, 2015.
Pursuant to Registration Rights Agreements between us and Laurus and
Midsummer entered into in connection with the sales of the November 2005
Term Notes, we were obligated to file a Registration Statement registering
the shares of our common stock issuable upon exercise of the November 2005
Options no later than March 15, 2006 and have the Registration Statement
declared effective by the SEC no later than 135 days following the filing
date of such registration statement. The filing deadline was extended as
part of amendments to the November 2005 Term Notes as described below. If
(1) the Registration Statement is not filed or declared effective within
the requisite periods, (2) the Registration Statement ceases to be
effective for more than 30 days in any calendar year or more than 20
consecutive calendar days, or (3) our common stock is not listed or quoted
or is suspended from trading for three consecutive trading days, we are
required to pay Laurus and Midsummer liquidated damages equal to 2% of the
original principal balance on the November 2005 Term Notes for each 30 day
period (with partial periods prorated) that such event continues.
November 2005 Amendments
Pursuant to separate Amendment and Waiver Agreements (the "November 2005
Amendments") entered into concurrently with the issuance of the November
2005 Term Notes, Laurus and Midsummer (1) postponed principal payments due
from November 2005 through February 2006 on the June 2005 Convertible
Notes, the Laurus 2004 Convertible Note (defined below), and Midsummer's
March 2004 Debenture (defined below), (2) amended the financial reporting
requirements associated with the previously noted debts, (3) waived the
right to anti-dilution adjustments to conversion/exercise prices for the
June 2005 Convertible Notes, the Laurus 2004 Convertible Note, and
Midsummer's March 2004 Debenture triggered by the issuance of the November
2005 Options, and (4) adjusted the Filing and Effective dates of all
previous Registration Rights Agreements to conform to the Registration
Rights Agreements entered into concurrently with the November 2005 Term
Notes. In addition, Midsummer waived the right to anti-dilution adjustments
to the exercise prices for the following warrants to purchase our common
stock: warrant dated March 15, 2004 for 434,783 shares, warrant dated July
1, 2003 for 138,158 shares, warrant dated March 31, 2003 for 629,143
shares, and warrant dated November 30, 2004 for 200,000 shares.
Options Exercised
On August 31, 2005 and August 31, 2007 Laurus exercised its right to
acquire 3,000,000 and 96,713 shares, respectively of our common stock
granted by its June 2005 Option. On March 8, 2006, Midsummer exercised its
right to acquire 375,000 shares of our common stock granted by its November
2005 Option, and on August 4, 2006, Midsummer exercised its right to
acquire 375,000 shares of our common stock granted by its March 2006 Option
(defined below).
March 2006 Amendments
We entered into Amendment and Waiver Agreements (the "March 2006
Amendments") with Laurus and Midsummer dated March 22, 2006 and March 23,
2006, respectively, pursuant to which, among other things: (1) the November
2005 Term Notes were amended and restated to increase their aggregate
principal balances by $850,000 and to extend their maturity dates until
August 31, 2006; (2) the principal portions of the monthly payments due for
March through August 2006 under Midsummer's March 2004 Debenture, the
Laurus 2004 Convertible Note and June 2005 Convertible Notes were postponed
until the maturity dates under the respective notes; (3) our obligations to
file registration statements pursuant to the registration rights agreements
dated March 15, 2004, July 12, 2004, June 15, 2005 and November 16, 2005
registering the shares issuable to Laurus and Midsummer upon conversion of
F-25
the Laurus 2004 Convertible Note, the June 2005 Convertible Notes,
Midsummer's March 2004 Debenture, and the shares issuable on exercise of
outstanding options and warrants held by Midsummer and Laurus were extended
to May 15, 2006; and (4) Midsummer and Laurus waived certain other rights
under the foregoing agreements and related agreements. In exchange for
Laurus and Midsummer agreeing to the foregoing, we issued them additional
options, with ten-year terms, to purchase an aggregate of One Million Five
Hundred Thousand (1,500,000) shares of our common stock for $0.01 per share
(the "March 2006 Options"). We were required to register the shares
issuable upon exercise of the March 2006 Options by May 15, 2006, pursuant
to the terms of the registration rights agreements between us and Laurus
and Midsummer dated November 16, 2005.
October/November 2006 Amendments
We entered into Amendment and Waiver Agreements (the "October/November 2006
Amendments") with Laurus and Midsummer dated November 27, 2006 and October
9, 2006, respectively, pursuant to which, among other things: (1) the
November 2005 Term Notes were amended and restated to increase their
aggregate principal balances by $1,000,000 and to extend their maturity
dates until February 28, 2007; (2) the principal portions of the monthly
payments due for September 2006 through February 2007 under Midsummer's
March 2004 Debenture, the Laurus 2004 Convertible Note and June 2005
Convertible Notes were postponed until the maturity dates under the
respective notes; and (3) the maturity date under the March 2004 Debenture
was extended to February 28, 2007. In exchange for Laurus and Midsummer
agreeing to the foregoing, we issued them additional options, with 9.5-year
terms, to purchase an aggregate of Two Million Two Hundred Seventy-Five
Thousand (2,275,000) shares of our common stock for $0.01 per share (the
"October/November 2006 Options"). We are required to register the shares
issuable upon exercise of the October/November 2006 Options, pursuant to
the terms of the registration rights agreements between us and Laurus and
Midsummer dated November 16, 2005.
March/April 2007 Amendments
We entered into Amendment and Waiver Agreements (the March/April 2007)
Amendments with Laurus and Midsummer dated March 30, 2007 and April 23,
2007, respectively, pursuant to which, among other things: (1) the Laurus
November 2005 Term Note was amended and restated to increase the principal
balances by $600,000 and to extend the maturity date until June 30, 2007;
(2) the Midsummer November 2005 Term Note was amended and restated to
extend the maturity date until April 30, 2007, (3) the principal portions
of the monthly payments due for March 2007 through June 2007 under
Midsummer's March 2004 Debenture, the Laurus 2004 Convertible Note and June
2005 Convertible Notes were postponed until the maturity dates under the
respective notes; (4) the maturity date under the March 2004 Debenture was
extended to April 30, 2007; and (5) our obligations to file registration
statements pursuant to the registration rights agreements dated March 15,
2004, July 12, 2004, June 15, 2005 and November 16, 2005 registering the
shares issuable to Laurus and Midsummer upon conversion of the Laurus 2004
Convertible Note, the June 2005 Convertible Notes, Midsummer's March 2004
Debenture, and the shares issuable on exercise of outstanding options and
warrants held by Midsummer and Laurus were extended to October 31, 2007. In
exchange for Laurus agreeing to the foregoing, we issued them an additional
option, with a 10-year term, to purchase up to One Million (1,000,000)
shares of our common stock for $0.01 per share (the "March 2007 Option").
We are required to register the shares issuable upon exercise of the March
2007 Option pursuant to the terms of the registration rights agreements
between us and Laurus and Midsummer dated November 16, 2005.
The relative fair value of the options issued in connection with the
November 2005 Term Notes in the years ended March 31, 2007 and 2006 in the
amount of $324,800 and $258,100, respectively was charged directly to
interest expense.
The balance of the November 2005 Term Notes, including accrued interest, is
$3.3 million at March 31, 2007.
7. DEFERRED REVENUE
Deferred revenue as of March 31, 2007 and March 31, 2006 consists of the
following (in thousands):
2007 2006
-------- --------
Contracts in Process $ 236 $ 430
Prepaid Support Service 5,861 5,549
Customer Deposits 628 1,303
-------- --------
Less Current Portion 6,725 7,282
-------- --------
5,599 6,356
-------- --------
Long-Term Deferred Revenue $ 1,126 $ 926
======== ========
F-26
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - We lease office spaces, automobile and various equipment
under non-cancelable operating leases that expire at various dates through
the fiscal year 2012. Certain leases contain renewal options. Future annual
minimum lease payments for non-cancelable operating leases at March 31,
2007 are summarized as follows (in thousands):
YEAR ENDING MARCH 31:
2008 $ 1,638
2009 1,639
2010 1,654
2011 1,679
2012 776
---------
$ 7,386
=========
Rent expense was $1.3 million, $1.5 million and $2.2 million for the fiscal
years ended March 31, 2007, 2006 and 2005, respectively.
LITIGATION - The sale of our Australian subsidiary in the third quarter of
fiscal 2002 was subject to the approval of National Australia Bank, the
subsidiary's secured lender. The bank did not approve the sale and the
subsidiary ceased operations in February 2002. The bank caused a receiver
to be appointed in February 2002 to sell substantially all of the assets of
the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets
for $300,000 in May 2002 to an entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale
proceeds plus collections on receivables were insufficient to discharge the
indebtedness to National Australia Bank, we could have been called upon to
pay the deficiency under our guarantee to the bank. We accrued $187,000 as
the maximum amount of our potential exposure as of March 31, 2004. In June
2004, we settled this obligation by paying $69,000 to the bank. As a
result, the $118,000 accrual in excess of settlement amount was written off
to the consolidated statement of operations as other income in the nine
months ended December 31, 2004.
On November 22, 2002, we and Sabica Ventures, Inc. ("Sabica," our
wholly-owned subsidiary), were sued in a matter entitled Stemley vs. Shea
Homes, Inc. et. al. in San Diego Superior Court Case No. GIC 787680, as
Pacific Cabinets. The case dealt with alleged construction defects. Pacific
Cabinets was dismissed from the litigation for a waiver of fees and costs.
At this time, neither we nor Pacific Cabinets are parties to this action.
Because no significant discovery was done, it is not possible at this time
to provide an evaluation of potential exposure, though it appears highly
unlikely that Pacific Cabinets or we will be brought back into this suit.
On April 2, 2004, we filed a federal court action in the Southern District
of California against 5R Online, Inc. ("5R Online"), John Frabasile, Randy
Pagnotta, our former officers, and Terry Buckley for fraud, breach of
fiduciary duty, breach of contract, and unfair business practice arising
from their evaluation of, recommendation for, and ultimately involvement in
a development arrangement between us and 5R Online. Pursuant to the
development agreement entered into in June 2003 and upon reliance of the
representations of the individual defendants that product development was
progressing, we paid and expensed $640,000 in development payments in the
fiscal year ended March 31, 2004 but received no product. The amount in
controversy is the $640,000 development payments as well as a claim for
punitive damages. Defendants Pagnotta and Buckley have counterclaimed
against defendant Frabasile, who has moved to dismiss in light of a
parallel action pending in Canada. Frabasile's and 5R Online, Inc.'s
response to our complaint was due on August 9, 2004. We obtained a consent
judgment against 5R Online and Frabasile on April 8, 2005. A settlement
agreement was entered on November 28, 2006 under which we received $15,000
from 5R Online, defendants Pagnotta and Buckley agreed to cause 5R Online
to tender to us all Canadian Scientific Research & Experimental Development
funds received, if any, in consideration of our agreement not to take any
enforcement action against 5R Online with regard to the consent judgment,
and the fraud allegations against defendants Pagnotta and Buckley have been
dropped and we are no longer pursuing them. Frabasile is not a party to the
settlement agreement.
RTI was named as a cross-defendant in an action by General Electric Capital
Corporation as plaintiff ("GE Capital"), against San Francisco City Stores
LLC, dated May 10, 2004. The cross-complaint filed on behalf of San
Francisco City Stores names GE Capital, Big Hairy Dog Information Systems,
and RTI as cross-defendants, claiming breach of warranty and unfair
F-27
competition (against RTI), and makes various other claims against GE
Capital and Big Hairy Dog Information Systems. The claim is for
approximately $83,000. We believe the claims made against RTI are without
merit and we intend to vigorously defend them.
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 has been insignificant.
In November 2005, certain of our Retail Pro(R) software customers had been
contacted by Acacia Technologies Group ("Acacia") regarding alleged
infringement of U.S. Patent 4,707,592 (the "`592 Patent") and are
requesting indemnification for any infringement claim regarding the `592
Patent which expired in October 2005. We retained patent counsel and, based
on his advice, have notified customers in question that it is our position
that there is no merit to any potential claim that Retail Pro(R) software
infringes the patent. In direct discussions between our counsel and Acacia,
no information was provided indicating that Retail Pro(R) software
infringes the`592 Patent. Acacia had alleged infringement against a number
of retailers including a small number of Retail Pro(R) software users. We
are not named in the lawsuit and, although some customers have indicated
that they may seek indemnification, no actual lawsuits have been filed
against us.
On May 25, 2005, the United States Securities and Exchange Commission
("SEC") notified us that it had begun an informal inquiry relating to the
Company. We cooperated completely with the SEC's informal inquiry. On July
20, 2005, the SEC informed us that it had issued a formal order of
investigation in this matter. In connection with the investigation, the SEC
is seeking information regarding our, and our subsidiaries, financial
condition, results of operations, business, accounting policies and
procedures, internal controls, issuances of common stock and stock options,
sales of common stock and option exercises by insiders, employees and
consultants as well as our internal revenue recognition investigation
relating to the timing of revenue recognition for certain transactions
during the fiscal years ended March 31, 2003, 2004 and 2005. The scope,
focus and subject matter of the SEC investigation may change from time to
time and we may be unaware of matters under consideration by the SEC. We
are cooperating with the SEC in its investigation.
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.
9. PREFERRED STOCK, COMMON STOCK, TREASURY STOCK, STOCK OPTIONS AND WARRANTS
PREFERRED STOCK - The Series A Preferred has a stated value of $100 per
share and could have been redeemed at our option any time prior to the
maturity date of December 31, 2006 ("Maturity Date") for 107% of the stated
value and accrued and unpaid dividends. The shares were entitled to
cumulative dividends of 7.2% per annum, payable semi-annually. At March 31,
2006, dividends in arrears amounted to $4.1 million or $29.23 per share.
On February 15, 2006, we entered into a Stock Repurchase Agreement to
repurchase the following from the Sage Group: (1) 8,923,915 shares of our
common stock, (2) 141,000 shares of our Series A Preferred and (3) an
option to purchase 71,812 shares of our common stock (collectively, the
"Repurchased Shares"). The aggregate purchase price for the Repurchased
Shares was $750,000, payable in monthly increments of $100,000 commencing
February 28, 2006 with a final payment of $50,000 paid on October 5, 2006,
completing the transaction. By resolution of the Board of Directors on
October 26, 2006, the Repurchased Shares were cancelled. The effect of this
repurchase has been to reduce the common shares outstanding at October 26,
2006 by approximately 13% and the total outstanding shares on a fully
diluted basis by approximately 15%. In addition, the repurchase eliminated
the annual dividend of $1,360,000 due to the Series A Preferred
shareholder. The $13,351,000 excess of the book value of the purchased
shares over the purchase price has been credited to Additional Paid-In
Capital in the fiscal year ended March 31, 2007.
F-28
COMMON STOCK - During fiscal year ended March 31, 2007, we issued the
following:
o 375,000 shares of common stock, with a fair value of $3,713 to
lenders upon exercise of stock options associated with
convertible and term debt..
STOCK OPTION PLAN - On March 31, 2007, we have three incentive stock option
plans in force. Our principal share-based compensation plan is the 2004
Plan described below. Having adopted SFAS 123(R ) in the year ended March
31, 2006, the compensation cost charged against income for all plans in the
fiscal years ended March 31, 2007 and 2006 was $371,500 and $130,700,
respectively.
We adopted an incentive stock option plan during fiscal year 1990 (the
"1989 Plan"). Options under this plan may be granted to our employees and
officers. There were initially 1,000,000 shares of common stock reserved
for issuance under this plan. Effective April 1, 1998, the board of
directors approved an amendment to the 1989 Plan increasing the number of
shares of common stock authorized under the 1989 Plan to 1,500,000. The
exercise price of the options is determined by the board of directors, but
the exercise price may not be less than the fair market value of the common
stock on the date of grant. Options vest immediately and expire between
three to ten years from the date of grant. The 1989 Plan terminated in
October 1999 and 165,425 options remain outstanding at March 31, 2007.
On October 5, 1998, the Board of Directors and stockholders approved a new
plan entitled the 1998 Incentive Stock Plan (the "1998 Plan"). The 1998
Plan authorizes 3,500,000 shares to be issued pursuant to incentive stock
options, non-statutory options, stock bonuses, stock appreciation rights or
stock purchases agreements. The options may be granted at a price not less
than the fair market value of the common stock at the date of grant. The
options generally become exercisable over periods ranging from zero to five
years, commencing at the date of grant, and expire in one to ten years from
the date of grant. The 1998 Plan terminates in October 2008. On August 18,
2000, the Board approved certain amendments to the 1998 Plan. On November
16, 2000, the shareholders approved certain amendments. These amendments:
(a) increased number of shares authorized in the Plan from 3,500,000 to
4,000,000, (b) authorized an "automatic" annual increase in the number of
shares reserved for issuance by an amount equal to the lesser of 2% of
total number of shares outstanding on the last day of the fiscal year,
600,000 shares, or an amount approved by the Board of Directors, and (c) to
limit the number of stock awards of any one participant under the 1998 Plan
to 500,000 shares in any calendar year. On September 19, 2002, the
shareholders approved increasing the number of shares authorized in the
1998 Plan by 1,000,000 shares and increasing the number of stock awards
that may be granted to any one participant in any calendar year under the
1998 Plan from 500,000 shares to 1,000,000 shares.
On August 11, 2004, the Board of Directors and stockholders approved our
2004 Equity Incentive Plan ("2004 Plan"), which terminates on August 11,
2014 and authorizes the issuance of an aggregate of 10,000,000 shares of
common stock through incentive stock options that have a 10-year life and
become exercisable over a period of three years, non-statutory stock
options, and stock bonuses. The 2004 Plan is administered by the Board of
Directors, established a limit to stock awards of 500,000 shares to any one
person in a calendar year, and provides that the exercise price of
incentive stock options may not be less than 100% of the fair market value
of the stock on the date of the grant or, with regard to non-statutory
stock options, not less than 50% of the fair market value of the stock on
the date of the grant.
The fair value of each option award is estimated on the date of the grant
using a closed-form option pricing model that used the assumptions noted in
the following table. The weighted average volatility is based on the
historical volatility of our common stock over the vesting period of the
option award. We use historical data to estimate option exercise and
employee termination within the valuation model. The expected term of
options is based on the vesting period. The risk-free rate for periods
within the contractual life of the option award is based on the U.S.
Treasury yield curve in effect at the time of the grant.
Weighted-average volatility 106%
Expected dividends 0.00%
Expected term (in years) 3.0
Risk-free rate 4.62% - 4.83%
F-29
The following summarizes our stock option transactions under the stock
option plans:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
------------- -------------
Options outstanding, April 1, 2004 4,788,942 $ 1.70
Granted 6,125,911 $ 0.48
Exercised (700,649) $ 0.02
Expired/canceled (2,219,083) $ 1.24
-------------
Options outstanding, March 31, 2005 7,995,121 $ 1.01
Granted 1,142,500 $ 0.14
Exercised (108,732) $ 0.02
Expired/canceled (3,298,303) $ 0.72
-------------
Options outstanding March 31, 2006 5,730,586 $ 0.94
Granted 5,197,500 $ 0.12
Exercised (5,789) $ 0.11
Expired/canceled (1,502,538) $ 0.83
-------------
Options outstanding March 31, 2007 9,419,759 $ 0.51
=============
Exercisable, March 31, 2005 3,599,777 $ 1.36
=============
Exercisable, March 31, 2006 4,389,752 $ 1.10
=============
Exercisable, March 31, 2007 4,480,932 $ 0.91
=============
In addition to options issued pursuant to the stock option plans described
above, we issued additional options outside the plans to employees,
consultants, lenders and third parties. The following summarizes our other
stock option transactions:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
------------- ------------
Options outstanding, April 1, 2004 5,015,066 $ 0.80
Granted 3,344,708 $ 0.76
Exercised (1,620,754) $ 0.28
Expired/Canceled (677,500) $ 0.53
-------------
Options outstanding, March 31, 2005 6,061,520 $ 0.95
Granted 25,500,000 $ 0.01
Exercised (3,375,000) $ 0.01
Expired/Canceled (4,844,708) $ 0.61
-------------
Options outstanding, March 31, 2006 23,341,812 $ 0.13
Granted 7,275,000 $ 0.05
Exercised (375,000) $ 0.01
Expired/Canceled (701,812) $ 1.91
-------------
Options outstanding, March 31, 2007 29,540,000 $ 0.07
=============
Exercisable, March 31, 2005 2,716,812 $ 0.95
=============
Exercisable, March 31, 2006 23,341,812 $ 0.13
=============
Exercisable, March 31, 2007 29,540,000 $ 0.07
=============
F-30
During the fiscal years ended March 31, 2007, 2006 and 2005, we did not
recognize compensation expense for stock options granted to non-employees
for services provided to us.
The weighted-average grant-date fair value of option awards granted during
the years ended March 31, 2007 and 2006 was $0.07 and $0.08, respectively
per share. The total intrinsic value of option awards exercised during the
years ended March 31, 2007, 2006, 2005 was $229, $2,175 and $14,000,
respectively. A summary of our non-vested shares as of March 31, 2007 and
changes during the year ended March 31, 2007 follows:
WEIGHTED
AVERAGE
GRANT-DATE
OPTIONS FAIR VALUE
------------ ------------
Non-vested at April 1, 2006 986,471 $ 0.09
Granted 7,552,500 $ 0.07
Vested (5,385,258) $ 0.07
Forfeited (10,008) $ 0.09
------------
Non-vested at March 31, 2007 3,143,705 $ 0.08
============
As of March 31, 2007, there was $236,500 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted
under the plans. That cost is expected to be recognized over a period of
approximately 1.5 years. The total fair value of shares vested during the
years ended March 31, 2007 and 2006 was $371,500 and $130,300,
respectively.
The following table summarizes information as of March 31, 2007 concerning
currently outstanding and exercisable options:
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range Of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- --------------- --------------- -------------- ---------------- ---------------
(years)
$0.01 - 0.50 36,550,627 6.12 $ 0.04 31,614,162 $ 0.03
$0.51 - 1.00 914,678 5.98 $ 0.88 912,594 $ 0.88
$1.01 - 1.50 659,129 6.20 $ 1.48 658,851 $ 1.39
$1.51 - 2.00 319,500 3.93 $ 6.72 319,500 $ 6.72
$2.01 - 4.00 217,500 4.64 $ 4.19 217,500 $ 4.13
$4.01 - 11.75 298,325 2.46 $ 6.93 298,325 $ 6.93
---------------- ---------------
38,959,759 6.06 $ 0.22 34,020,932 $ 0.23
================ ===============
F-31
WARRANTS - At March 31, 2007 and 2006, we had outstanding warrants to
purchase 18,741,663 and 18,935,663 shares of common stock, respectively, at
exercise prices ranging from $0.01 to $1.71 per share. The lives of the
warrants range from two to seven years from the grant date.
The following summarizes our warrant transactions:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
-------------- -----------
Warrants outstanding, April 1, 2004 14,560,658 $ 3.36
Granted 5,640,000 $ 0.56
Expired/canceled (208,333) $ 1.00
-------------
Warrants outstanding, March 31, 2005 19,992,325 $ 2.43
Granted 7,443,338 $ 0.22
Expired/canceled (8,500,000) $ 5.00
-------------
Warrants outstanding March 31, 2006 18,935,663 $ 0.44
Expired/canceled (194,000) $ 2.06
-------------
Warrants outstanding March 31, 2007 18,741,663 $ 0.42
==========
Exercisable, March 31, 2005 19,992,325 $ 2.43
=============
Exercisable, March 31, 2006 18,785,663 $ 0.42
=============
Exercisable, March 31, 2007 18,741,663 $ 0.42
=============
10. INCOME TAXES
The provision (benefit) for income taxes consisted of the following
components (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2007 2006 2005
--------------- ---------------- ---------------
Current:
Federal $ -- $ -- $ --
State -- -- 1
Foreign -- -- --
--------------- ---------------- ---------------
Total -- -- 1
--------------- ---------------- --------------
Deferred:
Federal -- -- --
State -- -- --
Foreign -- -- --
--------------- ---------------- ---------------
Total -- -- --
--------------- ---------------- ---------------
Provision (benefit) for income taxes $ -- $ -- $ 1
=============== ================ ==============
F-32
Significant components of our deferred tax assets and liabilities at March
31, 2007 and 2006 are as follows (in thousands):
MARCH 31,
--------------------
2007 2006
-------- --------
Current deferred tax assets/(liabilities):
State taxes $ (143) $ (114)
Accrued expenses 457 491
Deferred revenue 2,881 3,120
Warrants and options for services 342 185
Allowance for bad debts 165 293
-------- --------
Net current deferred tax assets 3,702 3,975
-------- --------
Non-current deferred tax assets/(liabilities):
Research and expenditure credits 2,938 2,938
Net operating loss 17,418 14,980
Fixed assets 33 33
Deferred rent -- --
State taxes (820) (764)
-------- --------
Total non-current deferred tax assets 19,569 17,187
-------- --------
Intangible assets (1,801) (2,456)
-------- --------
Total non-current deferred tax liability (1,801) (2,456)
-------- --------
Net non-current deferred tax asset/(liability) 21,470 18,706
-------- --------
Valuation allowance (21,470) (18,706)
-------- --------
Net deferred tax asset (liability) $ -- $ --
======== ========
The difference between the actual provision (benefit) and the amount
computed at the statutory United States federal income tax rate of 34% for
the fiscal years ended March 31, 2007, 2006 and 2005 is attributable to the
following:
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2007 2006 2005
---------- ---------- ----------
Provision (benefit) computed at statutory rate (34.0)% (34.0)% (34.0)%
Nondeductible goodwill 3.8 4.3 9.7
Interest expense 17.4 6.8 (1.0)
Change in valuation allowance 26.5 30.6 30.6
State income tax, net of federal tax benefit (2.1) (3.9) (4.3)
Other (11.4) (3.8) (1.0)
---------- ---------- ----------
Total provision (benefit) for income taxes 0.0% 0.0% 0.0%
========== ========== ==========
At March 31, 2007, we had Federal and California tax net operating loss
carryforwards of approximately $44.2 million and $27.2 million,
respectively. The Federal and California tax net operating loss
carryforwards will begin expiring after 2008.
We also have Federal and California research and development tax credit
carryforwards of approximately $2.9 million and $317,000, respectively. The
Federal credits will begin expiring after 2008. The California credits may
be carried forward indefinitely.
F-33
11. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the fiscal years ended March 31, 2006, 2005
and 2004, are as follows (in thousands, except share amounts and per share
data):
FISCAL YEAR ENDED MARCH 31, 2007
-------------------------------------
Loss Shares Per Share
(Numerator) (Denominator)
---------- ----------
Amount
----------------------------------------------
Basic and diluted EPS:
Loss available to common stockholders $ (7,232) 64,795,937 $ (0.11)
========== ========== ==========
FISCAL YEAR ENDED MARCH 31, 2006
-------------------------------------
Loss Shares Per Share
(Numerator) (Denominator)
---------- ----------
Amount
----------------------------------------------
Basic and diluted EPS:
Loss available to common stockholders $ (11,371) 68,103,147 $ (0.17)
========== ========== ==========
FISCAL YEAR ENDED MARCH 31, 2005
-------------------------------------
Loss Shares Per Share
(Numerator) (Denominator)
---------- ----------
Amount
----------------------------------------------
Basic and Diluted EPS:
Loss available to common stockholders $ (22,058) 59,337,345 $ (0.38)
========== ========== ==========
The following potential common shares have been excluded from the
computation of diluted net loss per share for the periods presented because
the effect would have been anti-dilutive:
FOR FISCAL YEARS ENDED MARCH 31,
2007 2006 2005
----------- ----------- -----------
Options outstanding under our stock option plans 9,419,759 5,730,586 7,995,121
Options granted outside our stock option plans 29,540,000 23,341,812 6,061,520
Warrants issued in conjunction with private placements 1,600,000 1,600,000 1,600,000
Warrants issued for services rendered 1,049,565 1,243,565 1,243,565
Warrants issued in conjunction with convertible
debentures 16,092,098 16,092,098 17,148,760
Series A Convertible Preferred Stock -- 19,834,785 19,477,023
Convertible debentures 59,501,075 59,501,075 17,712,354
----------- ----------- -----------
Total 117,202,497 127,343,921 71,238,343
=========== =========== ===========
12. RELATED PARTIES
The following is a description of transactions during the year ended March
31, 2007 to which we have been a party, in which any director, executive
officer or holder of more than 5% of our common stock had or will have a
direct or indirect interest, other than compensation arrangements with our
directors and named executive officers described above under "Executive
Compensation." Certain of these transactions will continue in effect and
may result in conflicts of interest between the Company and such
individuals. Although these persons may owe fiduciary duties to our
stockholders, there is a risk that such conflicts of interest may not be
resolved in our favor.
On January 30, 2004, we acquired Page Digital for a total consideration of
$7.0 million, consisting of $2.0 million in cash and 2,500,000 shares of
our common shares valued at $2.00. In conjunction with the acquisition, we
assumed a lease for office premises with CAH Investment, a company owned by
Mr. Page and his spouse. In the year ended March 31, 2007 we incurred
$545,050 in rent, operating costs and management fees payable to CAH
Investment.
F-34
On July 12, 2004, we sold and issued the Laurus 2004 Convertible Note to
Laurus for gross proceeds of $7.0 million pursuant to a Securities Purchase
Agreement. The Laurus 2004 Convertible Note accrues interest at a rate per
annum equal to the "prime rate" published in The Wall Street Journal from
time to time, plus two percent. Interest under the Laurus 2004 Convertible
Note is payable monthly in arrears commencing August 1, 2004. We incurred
interest in the amount of $689,800 related to this debt in the year ended
March 31, 2007. For further discussion of this transaction, refer to Note 6
Convertible Debentures and Term Notes above.
On June 15, 2005, we sold and issued the June 2005 Secured Convertible Term
Notes to Laurus and Midsummer for gross proceeds of $3.2 million and $1.0
million, respectively. The June 2005 Convertible Notes accrue interest at a
rate per annum equal to the "prime rate" published in The Wall Street
Journal from time to time, plus one percent, calculated each day that the
prime rate changes, payable monthly in arrears commencing on July 1, 2005.
We incurred interest in the amount of $389,600 related to this debt in the
year ended March 31, 2007. For further discussion of this transaction,
refer to Note 6 Convertible Debentures and Term Notes above.
On November 16, 2005, we sold and issued the November 2005 Term Notes to
Laurus and Midsummer for gross proceeds of $637,500 and $212,500,
respectively. The November 2005 Term Notes accrue interest at a rate per
annum equal to the "prime rate" published in The Wall Street Journal from
time to time, plus two percent, calculated each day that the prime rate
changes, payable monthly in arrears commencing on December 1, 2005. We
incurred interest in the amount of $232,700 related to this debt in the
year ended March 31, 2007. For further discussion of this transaction,
refer to Note 6 Convertible Debentures and Term Notes above.
13. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a leading provider of software solutions and services that have been
developed specifically to meet the needs of the retail industry. We provide
high value innovative solutions that help retailers understand, create,
manage and fulfill consumer demand. Our solutions help retailers improve
the efficiency and effectiveness of their operations and build stronger,
longer lasting relationships with their customers. We structured our
operations into three business units that have separate reporting
infrastructures. Effective January 31, 2004, we acquired Page Digital
subsidiary which offers multi-channel retail solutions, and effective June
1, 2004, we acquired Retail Technologies International which offers store
solutions.
We currently structure our operations into three strategic business units.
The business units are retail management solutions, store solutions and
multi-channel retail solutions. Our operations are conducted principally in
the United States and the United Kingdom. In addition, we manage long-lived
assets by geographic region. The business units are as follows:
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") - Offers a
suite of applications, which builds on our long history in retail
software design and development. We provide our customers with
extremely reliable, widely deployed, comprehensive and fully
integrated retail management solutions. Retail Management
Solutions includes merchandise management that optimizes workflow
and provides the highest level of data integrity. This module
supports all operational areas of the supply chain including
planning, open-to-buy purchase order management, forecasting,
warehouse and store receiving distribution, transfers, price
management, performance analysis and physical inventory. In
addition, Retail Management Solutions includes a comprehensive
set of tools for analysis and planning, replenishment and
forecasting, event and promotion management, warehouse,
ticketing, financials and sales audit. We entered an agreement to
dispose of this business unit on October 31, 2007. See Note 16.
o STORE SOLUTIONS - Through our acquisition of RTI, we focused our
Store Solutions offerings on "Retail Pro(R)," which provides a
total solution for small to mid-tier retailers worldwide. Retail
Pro(R) is currently used by approximately 9,000 businesses in
over 24,000 stores in 63 countries. The product is translated
into eighteen languages making it one of the few quality choices
for the global retailer. At its core, Retail Pro(R) is a high
performance, 32-bit Windows application offering point-of-sale,
inventory control and customer relations management. Running on
F-35
WindowsNT, Windows2000, Windows XP Professional and Windows.Net
platforms, Retail Pro(R) combines a fully user-definable
graphical interface with support for a variety of input devices
(from keyboard to touch screen). Its Retail Business Analytics
module includes an embedded Oracle(r) 9i database. Retail Pro(R)
is fast and easy to implement. The software has been developed to
be very flexible and adaptable to the way a retailer runs its
business.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL RETAIL") - Our
Multi-Channel Retail application is designed to specifically
address direct commerce business processes, which primarily
relate to interactions with the end-user. This application was
originally designed by Page Digital to manage its own former
direct commerce operation, with attention to functionality,
usability and scalability. Its components include applications
for customer relations management, order management, call
centers, fulfillment, data mining and financial management.
Specific activities like partial ship orders, payments with
multiple tenders, back order notification, returns processing and
continuum marketing represent just a few of the more than 1,000
parameterized direct commerce activities that have been built
into "Synaro"(TM), our Multi-Channel Solution and its
applications. These components and the interfacing technology are
available to customers, systems integrators and independent
software developers who may modify them to meet their specific
needs.
A summary of the net sales and operating income (loss), excluding
depreciation and amortization expense, and identifiable assets attributable
to each of these business units from continuing operations are as follows
(in thousands):
Year Ended March 31,
--------------------------------
2007 2006 2005
-------- -------- --------
Net sales from continuing operations:
Retail Management $ 11,585 $ 10,288 $ 10,629
Store Solutions 11,892 10,985 9,412
Multi-channel Retail 2,036 2,531 4,918
-------- -------- --------
Consolidated net sales $ 25,513 $ 23,804 $ 24,959
======== ======== ========
Operating income (loss):
Retail Management $ 2,894 $ (663) $ (8,198)
Store Solutions 1,296 5,040 1,885
Multi-channel Retail (291) (547) (3,289)
Other (see below) (5,146) (7,844) (8,996)
-------- -------- --------
Consolidated operating loss $ (1,247) $ (4,014) $(18,511)
======== ======== ========
Other operating loss:
Depreciation (460) (727) (1,604)
Administrative costs and other
non-allocated expenses (4,686) (7,117) (7,305)
-------- -------- --------
Consolidated other operating loss $ (5,146) $ (7,844) $ (8,909)
======== ======== ========
March 31
--------------------
2007 2006
-------- --------
Identifiable assets:
Retail Management $ 16,519 $ 19,185
Store Solutions 19,524 18,289
Multi-channel Retail 3,962 5,274
-------- --------
Consolidated identifiable assets $ 40,005 $ 42,748
======== ========
Goodwill, Net of amortization
Retail Management $ 9,474 $ 9,474
Store Solutions 10,488 10,488
Multi-channel Retail 3,022 3,814
-------- --------
Consolidated goodwill $ 22,984 $ 23,776
======== ========
Operating income (loss) in Retail Management, Store Solutions and
Multi-channel Retail includes direct expenses for software licenses,
maintenance services, programming and consulting services, sales and
marketing expenses, product development expenses, and direct general,
administrative and depreciation expenses. The "Other" caption includes
depreciation, amortization of intangible assets, non-allocated costs and
other expenses that are not directly identified with a particular business
unit and which we do not consider in evaluating the operating income of the
business unit.
F-36
During the year ended March 31, 2006 the disposal of our Store Solutions
division reduced the Store Solutions business unit goodwill by $0.9
million. During the fiscal year ended March 31, 2005, the Store Solutions
business unit acquired $10.5 million goodwill in connection with the
acquisition of Retail Technologies International.
We currently operate in the United States and the United Kingdom. The
following is a summary of local operations by geographic area (in
thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2007 2006 2005
---------- ---------- ----------
Net Sales:
Continuing operations:
United States $ 21,144 $ 20,747 $ 21,293
United Kingdom 4,369 3,057 3,666
---------- ---------- ----------
25,513 23,804 24,959
---------- ---------- ----------
Discontinued operations:
United States -- 1,962 1,497
United Kingdom -- -- --
---------- ---------- ----------
-- 1,962 1,497
---------- ---------- ----------
Total net sales $ 25,513 $ 25,766 $ 26,456
========== ========== ==========
Long-lived assets:
United States $ 36175 $ 39,354 $ 45,234
United Kingdom 5 11 21
---------- ---------- ----------
Total long-lived assets $ 36,180 $ 39,365 $ 45,255
========== ========== ==========
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31, 2007 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 TOTAL
-----------------------------------------------------------------------------------------------
Net Sales $ 5,951 $ 6,260 $ 7,142 $ 6,160 $ 25,513
Gross Profit 3,506 3,812 4,459 3,422 15,199
Net Income (Loss) (1,764) (1,886) (1,938) (1,644) (7,232)
Net Income (Loss) Available to
Common Stockholders (1,764) (1,886) (1,938) (1,644) (7,232)
Basic and diluted Income (Loss)
Per Share (0.03) (0.03) (0.03) (0.03) (0.11)
Basic and diluted Income (Loss)
Available To Common Stockholders $ (0.03) $ (0.03) $ (0.03) $ (0.03) $ (0.11)
MARCH 31, 2006 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 TOTAL
-----------------------------------------------------------------------------------------------
Net Sales $ 6,678 $ 5,808 $ 5,564 $ 5,754 $ 23,804
Gross Profit 3,533 3,171 3,100 3,547 13,351
Net Income (Loss) (6,782) 548 407 (4,605) (10,432)
Net Income (Loss) Available to
Common Stockholders (7,088) 232 90 (4,605) (11,371)
Basic and diluted Income (Loss)
Per Share (0.10) 0.01 0.01 (0.07) (0.16)
Basic and diluted Income (Loss)
Available To Common Stockholders $ (0.11) $ 0.00 $ 0.00 $ (0.07) $ (0.17)
F-37
The summation of quarterly net income (loss) per share may not equate to
the year-end calculation as quarterly calculations are performed on a
discrete basis.
15. RESTATEMENT
Subsequent to the issuance of our consolidated financial statements for the
fiscal year ended March 31, 2004, our management determined that:
o The revenue from a one-time sale of software technology rights
should not have been recorded in the second quarter of fiscal
2004,
o The total revenues should be presented as product and service
revenues and corresponding costs of revenues,
o The amortization of capitalized software should be reported as
cost of revenues,
o The purchase of a software technology right and related
amortization should not have been recorded,
o The royalty liability in connection with the above software
technology right purchase should have been accrued and related
royalty fees should have been recognized,
o The unamortized balance of debt discount related to the March
'03, April '03 and May '03 convertible debentures and Toys
convertible note should have been recognized as interest expense
when the debentures were converted into common stock,
o The beneficial conversion interest charge related to the March
'04, April '04 and May '04 convertible debentures should have
been capitalized and amortized over the term of debt,
o The legal fees incurred in connection with acquisition of Page
Digital and RTI should have been capitalized,
o The impairment of prepaid development expense should be reported
as selling, general and administrative, rather than as other
expense, and
o The gain on debt forgiveness should be reported as other income,
rather than as an extraordinary item.
As a result, the consolidated financial statements for the fiscal year
ended March 31, 2004 were restated from the amounts previously reported and
certain amounts were reclassified for the fiscal year ended March 31, 2003.
In addition, subsequent to the issuance of the restated financial
statements for the year ended March 31, 2004, and prior to this issuance of
the financial statements for the year ended March 31, 2005, management
determined that it was necessary to correct our method of recognizing
revenue and it was necessary to recognize the existence of embedded
derivatives in our various debt instruments having the characteristics of
both debt and equity. A summary of the significant effects of the
subsequent adjustments on the results of operations and financial position
for the year ended March 31, 2004 follows:
As
Previously Subsequent
Restated Adjustment As Restated Reference
-------- ---------- ----------- ---------
For the fiscal year ended March 31, 2004
----------------------------------------
Total Revenues $ 17,839 $ (1,741) $ 16,098 [A]
Cost of Revenues 7,871 (96) 7,775 [A]
-------- -------- --------
Gross profit 9,968 (1,645) 8,323
Application development expense 1,082 1,082
Depreciation and amortization expense 1,215 1,215
Selling, general and administrative
expense 15,246 15,246
Other income (expense) 13 215 228 [B]
Interest expense (1,953) (32) (1,985) [C]
Net loss (8,928) (1,462) (10,390)
Net loss available to common
stockholders (9,952) (1,462) (11,414)
Basic and diluted EPS available to
common stockholders $ (0.24) $ (0.04) $ (0.28)
F-38
As
Previously Subsequent
Restated Adjustment As Restated Reference
-------- ---------- ----------- ---------
At March 31, 2004
----------------------------------------
Accounts receivable $ 4,572 $ (116) $ 4,456 [D]
Prepaid expenses and other current
assets 682 (12) 670 [D]
Goodwill 20,607 20,607
Other intangible assets 18,297 18,297
Other assets 421 421
Total assets $ 48,527 $ (128) $ 48,399
Accrued expenses $ 3,301 $ 9 $ 3,310 [D]
Convertible debentures, less current
maturities 2,034 (1,500) 534 [C]
Deferred revenue 2,657 2,320 4,977 [A]
Derivative liability 1,521 1,521 [B]
Other long-term liabilities 235 235
Total liabilities 9,752 2,350 12,102
Additional paid-in capital 74,088 (203) 73,885 [E]
Accumulated deficit (49,418) (2,275) (51,693) [F]
Total stockholders' equity $ 38,775 $ (2,478) $ 36,297
Subsequent adjustments to the financial statements for fiscal year ended
March 31, 2004 are as follows:
A. Net effect of recording contract revenue commencing in December
2002 using the percentage of completion method.
B. Derivative liabilities arising from the conversion feature of
debt instruments are adjusted to fair value quarterly.
C. Debt discount associated with convertible debt has increased as a
result of the recognition of derivative liabilities, increasing
interest amortization.
D. Excess billings of $116,000, prepaid expenses of $12,000, and an
additional accrual of $9,000 were charged to operations in
conjunction with the analysis of revenues on the percentage of
completion method.
E. The net change in additional paid in capital arising from the
treatment of the conversion feature of debt instruments as a
derivative liability is a reduction of $203,000.
F. Accumulated deficit was revised to reflect:
a. The effect of the change in accounting for contract revenues
in the year ended March 31, 2003 of $788,000, and
b. The effect of the change in accounting for contract revenues
and embedded derivatives in the year ended March 31, 2004.
The restatements detailed above do not include the reclassification of the
revenue and expenses of our Store Solutions division to loss from
discontinued operations. See Note 3.
F-39
16. SUBSEQUENT EVENTS (Unaudited)
On October 31, 2007, Island Pacific, Inc. (the "Company") and 3Q Holdings
Limited ("3Q Holdings") entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") under which 3Q Holdings will purchase from the
Company the assets of the Company used in connection with the Company's
Retail Management Solutions business unit and the "Island Pacific" name and
related trademarks, service marks, trade names and all goodwill associated
with the name "Island Pacific" (collectively, the "Purchased Assets").
Prior to entering the Asset Purchase Agreement, the Company conducted an
extensive auction process commencing July 2006 during which 61 potential
buyers were pursued, with 22 of them signing Non-Disclosure Agreements and
conducting further due diligence, and 5 buyers making offers based on a
determined price range of $10.0 million to $16.0 million.
The purchase price for the Purchased Assets, determined based upon
arms-length negotiation between the parties, is $16.0 million, subject to
certain working capital adjustments at the time the transaction is closed.
The Asset Purchase Agreement is subject to a number of closing conditions
including, among others, the receipt by both parties of all required
consents, waivers and amendments from respective lenders, the accuracy at
the time of closing of the parties' representations and warranties made in
the Asset Purchase Agreement, and the absence of certain changes or events
having a material adverse effect on the Purchased Assets.
The proforma effect of the transaction on our financial position and
results of operations for the fiscal year ended March 31, 2007 is presented
in the following table:
Proforma Effect Proforma Result
As Reported of Proposed Sale of Proposed Sale
----------- ---------------- ----------------
At March 31, 2007
-----------------
Current Assets $ 3,875 $ 15,007 $ 18,882
Property and Equipment, Net 307 (83) 224
Goodwill 22,984 (9,474) 13,510
Other Intangible Assets 12,574 (5,400) 7,174
Other Assets 315 (15) 300
------------ ------------ ------------
Total Assets $ 40,055 $ 35 $ 40,090
------------ ------------ ------------
Current Liabilities $ 21,066 -- $ 21,066
Long Term Liabilities 8,103 -- 8,103
------------ ------------ ------------
Total Liabilities 29,169 -- 29,169
------------ ------------ ------------
Stockholders' Equity $ 10,886 $ 35 $ 10,921
------------ ------------ ------------
For the Year Ended March 31, 2007
---------------------------------
Net Sales $ 25,513 $ 11,585 $ 13,928
Gross Profit 15,199 5,705 9,494
Income (Loss) from Operations (1,247) 1,292 (2,539)
Net Loss (7,232) (884) (6,348)
Basic and diluted EPS $ (0.11) $ (0.01) $ (0.10)
F-40
SUPPLEMENTAL INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE
To the Board of Directors
Island Pacific, Inc. and subsidiaries
Irvine, California
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ Goldman & Parks LLP
Encino, California
October 15, 2007
F-41
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
FOR THE FISCAL YEARS ENDED MARCH 31, 2007, 2006 AND 2005
Additions
Balance, (Deductions) Additions
Beginning of Charged to (Deductions) Balance,
Year Operations from Reserve End of Year
Allowance for doubtful accounts
March 31, 2007 $ 203 $ 390 $ (207) $ 386
March 31, 2006 $ 722 $ (467) $ (52) $ 203
March 31, 2005 $ 409 $ 1,826 $ (1,513) $ 722
F-42
ISLAND PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2007
(UNAUDITED)
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 731
Accounts receivable, net of allowance for doubtful
accounts of $383 3,897
Other receivables 137
Inventories 4
Prepaid expenses and other current assets 564
------------
Total current assets 5,333
Property and equipment, net 355
Goodwill, net 22,984
Other intangibles, net 12,197
Unearned Compensation 11
Other assets 346
------------
Total assets $ 41,226
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 3,300
Convertible debts 10,529
Accounts payable 1,963
Accrued audit fees 289
Accrued interest and financing costs 506
Accrued employment expenses 1,188
Accrued expenses 1,225
Deferred revenue 7,246
Income tax payable 127
------------
Total current liabilities 26,373
Debt due to stockholders 2,515
Deferred Revenue 1,534
Accrued price protection 1,736
Deferred rent 208
------------
Total liabilities 32,366
------------
Stockholders' equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized
Common stock, $0.0001 par value; 250,000,000 shares authorized;
59,843,297 shares issued and outstanding 6
Additional paid-in capital 92,891
Accumulated deficit (84,037)
------------
Total stockholders' equity 8,860
------------
Total liabilities and stockholders' equity $ 41,226
============
F-43