<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
Commission file Number 0-23049
SVI Holdings, Inc.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Nevada 84-1131608
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12707 High Bluff Drive, Suite 335, San Diego, CA 92130
------------------------------------------------------
(Address of principal executive offices - Zip Code)
Registrant's telephone number, including area code: (858) 481-0103
7979 Ivanhoe Avenue, Suite 500, La Jolla, California 92037
----------------------------------------------------------
(Former name, former address, and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $0.0001 Par Value 32,492,884 shares as of October 31, 1999.
<PAGE>
SVI Holdings, Inc.
Form 10-Q
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and
March 31, 1999 3
Consolidated Statements of Operations for Three Months
Ended September 30, 1999 and 1998 4
Consolidated Statements of Operations for Six Months
Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the six months
Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative disclosures About Market Risk 18
PART II: OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
2
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, March 31,
1999 1999
------------- -------------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 714,729 $ 13,006,153
Accounts receivable, net 14,189,083 3,310,008
Other receivables 782,263 2,994,836
Note receivable 13,963,572 13,608,000
Inventories 170,375 238,314
Prepaid expenses and other current assets 628,707 183,760
------------- -------------
Total current assets 30,448,729 33,341,071
Property and equipment, net 1,427,065 734,386
Capitalized software, net 35,223,877 14,053,186
Goodwill, net 23,767,977 4,534,570
Non-compete agreements, net 3,166,763 1,677,112
Deferred tax asset 771,015 762,910
Other assets 272,647 175,649
------------- -------------
Total assets $ 95,078,073 $ 55,278,884
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,214,561 $ 345,275
Accrued expenses 3,217,851 1,908,105
Line of credit 1,339,539 231,876
Short-term note payable 15,000,000 -
Current portion of long-term note payable 1,750,000 -
Income taxes payable 2,993,868 2,576,151
------------- -------------
Total current liabilities 25,515,819 5,061,407
Note payable 1,198,651 -
Due to stockholder 1,890,525 -
Long-term liabilities - 2,000,000
Deferred tax liability 9,712,535 805,433
------------- -------------
Total liabilities 38,317,530 7,866,840
------------- -------------
Stockholders' Equity
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.0001 par value; 100,000,000 shares authorized;
32,492,884 and 29,741,278 shares issued and outstanding 3,281 2,987
Additional paid-in capital 47,235,099 39,435,921
Treasury stock, at cost; shares-321,400 and 127,400, respectively (3,285,404) (951,404)
Retained earnings 13,629,650 9,885,138
Accumulated other comprehensive income (822,083) (960,598)
------------- -------------
Total stockholders' equity 56,760,543 47,412,044
------------- -------------
Total liabilities and stockholders' equity $ 95,078,073 $ 55,278,884
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Net sales $ 13,612,717 $ 4,232,695
Cost of sales 2,875,579 1,252,172
------------- -------------
Gross profit 10,737,138 2,980,523
Research and development expenses 1,211,304 -
Depreciation and amortization 1,824,249 694,091
Selling, general and administrative expenses 3,960,792 1,740,833
------------- -------------
Income from operations 3,740,793 545,599
------------- -------------
Other income (expense):
Interest income 148,717 167,112
Other income 24,065 503,179
Interest expense (425,875) (23,198)
Loss on foreign currency transactions (5,214) (10,739)
------------- -------------
Total other income (expense) (258,307) 636,354
------------- -------------
Income before provision for income taxes 3,482,486 1,181,953
Provision for income taxes 1,352,793 591,421
------------- -------------
Income from continuing operations 2,129,693 590,532
Discontinued operations:
Income from operations of IBIS Systems Ltd., net of
applicable income taxes of $432,094 - 1,691,980
------------- -------------
Net income $ 2,129,693 $ 2,282,512
============= =============
Basic earnings per share:
Continuing operations $ 0.07 $ 0.02
Discontinued operations - 0.06
------------- -------------
Net income $ 0.07 $ 0.08
============= =============
Diluted earnings per share:
Continuing operations $ 0.06 $ 0.02
Discontinued operations - 0.05
------------- -------------
Net income $ 0.06 $ 0.07
============= =============
Weighted-average common shares outstanding:
Basic 32,440,180 28,350,532
============= =============
Diluted 35,545,832 32,659,038
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Six months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Net sales $ 25,379,976 $ 8,453,554
Cost of sales 6,424,837 2,555,112
------------- -------------
Gross profit 18,955,139 5,898,442
Research and development expenses 1,826,771 -
Depreciation and amortization 3,377,317 1,050,230
Selling, general and administrative expenses 7,777,079 3,577,134
------------- -------------
Income from operations 5,973,972 1,271,078
------------- -------------
Other income (expense):
Interest income 544,144 341,869
Other income 187,029 536,997
Interest expense (556,291) (42,443)
Loss on foreign currency transactions (98,719) (8,471)
------------- -------------
Total other income (expense) 76,163 827,952
------------- -------------
Income before provision for income taxes 6,050,135 2,099,030
Provision for income taxes 2,305,623 995,327
------------- -------------
Income from continuing operations 3,744,512 1,103,703
Discontinued operations:
Income from operations of IBIS Systems Ltd., net of
applicable income taxes of $671,594 - 3,292,268
------------- -------------
Net income $ 3,744,512 $ 4,395,971
============= =============
Basic earnings per share:
Continuing operations $ 0.12 $ 0.04
Discontinued operations - 0.12
------------- -------------
Net income $ 0.12 $ 0.16
============= =============
Diluted earnings per share:
Continuing operations $ 0.11 $ 0.03
Discontinued operations - 0.11
------------- -------------
Net income $ 0.11 $ 0.14
============= =============
Weighted-average common shares outstanding:
Basic 31,902,516 28,270,526
============= =============
Diluted 35,285,392 32,158,956
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,744,512 $ 4,395,971
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 3,377,317 1,522,212
Stock-based compensation - 320,277
Loss on foreign currency transactions 98,719
Changes in deferred taxes 98,997 (207,571)
Loss on sale of fixed assets 15,552 6,896
Changes in assets and liabilities:
Accounts receivable and other receivables (8,753,349) (2,964,634)
Inventories 67,939 122,277
Prepaid expenses and other assets (245,448) (679,797)
Accounts payable and accrued expenses (1,924,023) (2,197,462)
Income tax payable 417,717 47,780
------------- -------------
Net cash provided by (used for) operating activities (3,102,067) 365,949
------------- -------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (33,672,985) (2,051,018)
Purchase of furniture and equipment (261,352) (488,632)
Increase in note receivable (355,572) -
Proceeds from sale of fixed assets 545 62,207
Capitalized software development costs (876,109) (1,554,635)
------------- -------------
Net cash used for investing activities (35,165,473) (4,032,078)
------------- -------------
Cash flows from financing activities:
Issuance of common stock 4,835,284 110,500
Increase (decrease) in amount due to stockholders, net 1,890,525 (14,552)
Proceeds from line of credit 1,107,663 -
Proceeds from notes payable 18,298,651 -
------------- -------------
Net cash provided by financing activities 26,132,123 95,948
------------- -------------
Effect of exchange rate changes on cash (156,007) (425,171)
------------- -------------
Net decrease in cash and cash equivalents (12,291,424) (3,995,352)
Cash and cash equivalents, beginning of period 13,006,153 14,468,578
------------- -------------
Cash and cash equivalents, end of period $ 714,729 $ 10,473,226
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 515,767 $ 42,443
Income taxes paid $ 1,846,122 $ 1,705,874
Supplemental schedule of non-cash investing and financing activities:
Received 178,500 treasury shares in connection with
the sale of IBIS $ 2,142,000 $ -
Received 12,500 treasury shares for exercise price of options $ 150,000 $ -
Issued 55,000 and 52,000, respectively, shares of common stock
in connection with the acquisition of Todds of Lincoln $ 402,182 $ 208,000
Acquired Triple-S Limited by incurring a short-term liability $ - $ 429,208
Issued 165,000 and 250,000, respectively, shares of common
stock in connection with the acquisition of Applied Retail
Solutions, Inc. $ 2,000,000 $ 1,000,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Organization and Basis of Preparation
The accompanying consolidated financial statements have been prepared from the
unaudited records of SVI Holdings, Inc. and subsidiaries (collectively, the
"Company"). In the opinion of management, all adjustments necessary to present
fairly the financial position, results of operations and cash flows at September
30, 1999 and for all the periods presented have been made.
Beginning with reports for the quarter ended June 30, 1999, the Company has
voluntarily elected to file its financial statements in accordance with
Regulation S-X promulgated by the Securities and Exchange Commission instead of
Rule 310 of Regulation S-B promulgated by the Securities and Exchange
Commission.
Certain amounts in the prior periods have reclassified to conform to the
presentation for three and six months ended September 30, 1999. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. Accounting policies followed by the Company are described
in the notes to the financial statements in its Annual Report on Form 10-KSB for
the year ended March 31, 1999. The financial information included in this
quarterly report should be read in conjunction with the consolidated financial
statements and related notes thereto in the Company's Form 10-KSB for the year
ended March 31, 1999.
The results of operations for the three and six months ended September 30, 1999
are not necessarily indicative of the results to be expected for the full year.
Note B - Acquisitions and Related Parties
Effective April 1, 1999, the Company acquired Island Pacific Systems Corporation
("Island Pacific"), a California corporation, for $35 million cash. The Company
also entered into three-year non-compete agreements with some of Island
Pacific's principals. The acquisition was funded by cash on hand; cash acquired
from the sale of IBIS Systems Pty. Ltd. ("IBIS"); approximately $4 million paid
by the majority stockholder upon exercise of options; a $2.3 million loan from a
major stockholder, with no stated maturity date and with interest at prime rate;
and two bank loans. The first bank loan is in the amount of $15 million with
interest-only payments at the bank's prime rate plus .25% for the first six
months, convertible thereafter to a fully-amortizing two-year loan. The second
loan is in the amount of $3.5 million and is a fully amortizing two-year loan
with interest at the bank's prime rate plus .50%. Island Pacific, founded in
1977, is based in Irvine, California, and develops and markets retail industry
merchandising and management software systems. Island Pacific's software
automates the full scope of a retailer's operations from inventory planning and
purchasing through distribution and final sale of goods. Island Pacific's
products have been licensed to over 245 clients worldwide.
7
<PAGE>
The Company is in the process of determining the appropriate values to be
assigned to the assets acquired and liabilities assumed in the acquisition of
Island Pacific. Accordingly, the Company's estimates of these values are subject
to revision upon the completion of the Company's evaluation which may result in
an adjustment to the current values assigned to such assets and liabilities.
The following unaudited pro forma consolidated results of continuing operations
for the quarter and six months ended September 30, 1998 assume the Island
Pacific acquisition occurred as of April 1, 1998. The pro forma results are not
necessarily indicative of the actual results that would have occurred had the
acquisition been completed as of the beginning of the period presented, nor are
they necessarily indicative of future consolidated results.
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, 1998
------------------ ---------------------
<S> <C> <C>
Total revenues $ 8,885,234 $ 16,816,117
Net income $ 870,810 $ 646,126
Basic earnings per share $ 0.03 $ 0.02
Diluted earnings per share $ 0.03 $ 0.02
</TABLE>
Note C - Discontinued Operations
Effective January 1, 1999, the Company sold its IBIS subsidiary for cash
proceeds of $2,250,000, surrender of Company common stock valued at $2,142,000
and a note receivable of $13,608,000. The sale, which was recorded in the year
ended March 31, 1999, resulted in a gain of $274,055, net of applicable income
taxes of $753,043. Accordingly, the results of operations of IBIS for the three
months and six months ended September 30, 1998 are restated as discontinued
operations. See Note F for further discussion.
Note D - Treasury Stock
During the six months ended September 30, 1999, the Company acquired
178,500 shares of its common stock in connection with the sale of IBIS. The
transaction was recorded using the cost method. As of September 30, 1999, the
Company holds in treasury 321,400 shares of its common stock.
Note E - Reporting Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") requires reporting and displaying comprehensive income and
its components in accordance with SFAS 130. The accumulated balance of other
comprehensive income is disclosed as a separate component of stockholders'
equity.
For the three months and six months ended September 30, 1999 and 1998,
comprehensive income consisted of:
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 2,129,693 $ 2,282,512 $ 3,744,512 $ 4,395,971
Other comprehensive income (loss):
Translation adjustment (27,205) (240,986) 138,515 (425,171)
------------- ------------- ------------- -------------
Comprehensive income $ 2,102,488 $ 2,041,526 $ 3,883,027 $ 3,970,800
============= ============= ============= =============
</TABLE>
Note F - Extension of Note Receivable
Effective October 1, 1999, the Company extended the due date on the $13,608,000
note receivable from the purchaser of IBIS. A former affiliate of the Company is
a principal of such purchaser. The note was originally due October 1, 1999, and
has been extended to February 15, 2000. Interest on the note is current through
September 30, 1999.
Note G - Earnings Per Share
Earnings per share for the three months and six months ended September 30, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Continuing operations $ 2,129,693 $ 590,532 $ 3,744,512 $ 1,103,703
Discontinued operations - 1,691,980 - 3,292,268
------------- ------------- ------------- -------------
Net income $ 2,129,693 $ 2,282,512 $ 3,744,512 $ 4,395,971
============= ============= ============= =============
Weighted average number
of common shares 32,440,180 28,350,532 31,902,516 28,270,526
============= ============= ============= =============
Per share
Continuing operations $ 0.07 $ 0.02 $ 0.12 $ 0.04
Discontinued operations - .06 - .12
------------- ------------- ------------- -------------
Net Income $ 0.07 $ 0.08 $ 0.12 $ 0.16
============= ============= ============= =============
DILUTED EARNINGS PER SHARE
Continuing operations $ 2,129,693 $ 590,532 $ 3,744,512 $ 1,103,703
Discontinued operations - 1,691,980 - 3,292,268
------------- ------------- ------------- -------------
Net income $ 2,129,693 $ 2,282,512 $ 3,744,512 $ 4,395,971
============= ============= ============= =============
Weighted average number of
common and common equivalent
shares assuming issuance of
all dilutive contingent shares:
Common stock 32,440,180 28,350,532 31,902,516 28,270,526
Stock options 3,105,652 4,308,506 3,382,876 3,888,430
------------- ------------- ------------- -------------
Total 35,545,832 32,659,038 35,285,392 32,158,956
============= ============= ============= =============
Per share
Continuing operations $ 0.06 $ 0.02 $ 0.11 $ 0.03
Discontinued operations - .05 - .11
------------- ------------- ------------- -------------
Net Income $ 0.06 $ 0.07 $ 0.11 $ 0.14
============= ============= ============= =============
</TABLE>
9
<PAGE>
Note H - Business Segments and Geographic Data
The Company provides global enterprise software solutions for the retail
industry. In accordance with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information," the
Company considers its business to consist of one reportable operating segment.
The Company operates in four countries, the United States, Australia, South
Africa and the United Kingdom. The significant increase in United States based
revenue results from the acquisition of Island Pacific, effective April 1, 1999,
and Applied Retail Solutions, Inc., effective July 1, 1998. Both acquired
entities are based in California. The following is a summary of local operations
by geographic area:
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
United States $ 5,403,330 $ 1,190,515 $ 13,369,310 $ 1,406,277
Australia 6,732,621 2,969,312 8,671,148 6,893,684
United Kingdom 913,269 72,868 2,248,780 153,593
United Kingdom
(discontinued operations) - 3,867,609 - 8,117,730
South Africa 563,497 - 1,090,738 -
------------- ------------- ------------- -------------
Total revenues $ 13,612,717 $ 8,100,304 $ 25,379,976 $ 16,571,284
============= ============= ============= =============
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
SVI Holdings, Inc. (the "Company") is a provider of computer and information
technology services to specialty businesses in domestic and international
markets. More recently, the Company has narrowed its focus to two distinct
portions of the information technology industry:
o Open architecture point of sale and retail management computer
systems.
o PC education courseware and computer skills assessment products.
The Company is a holding company and operates solely through its wholly-owned
subsidiaries. The Company currently has five major operating subsidiaries as
follows:
o Island Pacific Systems Corporation ("Island Pacific").
o Divergent Technologies Pty. Ltd. ("Divergent").
o Applied Retail Solutions, Inc. ("ARS").
o Triple-S Computers Pty. Ltd. ("Triple-S").
o SVI Training Products, Inc. ("SVI Training").
Island Pacific Acquisition
Effective April 1, 1999, the Company acquired all of the outstanding
shares of Island Pacific. Island Pacific, founded in 1977, is based in Irvine,
California, and develops and markets retail industry merchandising and
management software systems primarily in United States and the United
Kingdom. The Company paid the purchase price of $35 million cash
using cash on hand; cash acquired from sale of IBIS Systems Pty. Ltd. ("IBIS");
approximately $4 million paid by Softline Limited ("Softline"), the Company's
majority stockholder, upon exercise of options; a $2.3 million loan from Claudav
Holdings Ltd., B.V., a major stockholder; and two bank loans.
The bank loans are secured by certain shares of the Company's subsidiaries. The
first bank loan is in the amount of $15 million with interest only payments
until December 3, 1999, convertible thereafter to a fully-amortizing two-year
loan. The second bank loan is in the amount of $3.5 million and is fully
amortizing over two years. The secured loans bear interest at the bank's prime
rate plus .25% and .50%, respectively.
10
<PAGE>
Discontinued Operations
Effective January 1, 1999, the Company sold its IBIS subsidiary for cash
proceeds of $2,250,000, surrender of Company common stock valued at $2,142,000
and a note receivable of $13,608,000. The sale resulted in a gain of $274,055,
net of applicable income taxes of $753,043, which was recorded in the year ended
March 31, 1999. Accordingly, the operating results of IBIS for the three months
and six months ended September 30, 1998 are restated as discontinued operations.
Forward-Looking Statements
Certain statements in this report which are not historical facts are forward-
looking statements. These forward-looking statements involve risks and
uncertainties which could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include the effects on results of operations of the acquisition of
Island Pacific, the effects of the Company's efforts to integrate operations and
development efforts of its subsidiaries, the performance by the purchaser of
IBIS under the terms of the promissory note given to the Company, the
availability of capital when needed on terms and conditions acceptable to the
Company, competition, changes in demand for the Company's products,
technological developments, and other risk factors identified from time to time
in filings with the Commission. The Company urges investors to review the "Risk
Factors" set forth in the Company's Report on Form 10-KSB for the fiscal year
ended March 31, 1999. The Company undertakes no obligation to release publicly
any revisions to forward-looking statements to reflect events or circumstances
after the date of this report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------------------------
1999 1998
Amount Percentage Amount Percentage
------------ ---------- ------------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $13,613,000 100% $ 4,233,000 100%
Cost of sales 2,876,000 21% 1,252,000 30%
------------ ---------- ------------- ----------
Gross profit 10,737,000 79% 2,981,000 70%
Research and development expenses 1,211,000 9% - 0%
Selling, general and administrative
expenses 3,960,000 29% 1,741,000 41%
Other income 167,000 1% 659,000 16%
------------ ---------- ------------- ----------
Income before interest expense,
income taxes, depreciation
and amortization 5,733,000 39% 1,899,000 45%
Interest expense 426,000 3% 23,000 1%
Depreciation and amortization 1,824,000 12% 694,000 16%
------------ ---------- ------------- ----------
Income before provision for
income taxes 3,483,000 25% 1,182,000 28%
Provision for income taxes 1,353,000 9% 591,000 14%
------------ ---------- ------------- ----------
Income from continuing operations 2,130,000 16% 591,000 14%
Discontinued operations
Income from operations of IBIS Systems
Ltd., net of applicable income taxes
of $432,000 - 1,692,000
------------ -------------
Net income $ 2,130,000 $ 2,283,000
============ =============
Basic earnings per share:
Continuing operations $ 0.07 $ 0.02
Discontinued operations - 0.06
------------ -------------
Net income $ 0.07 $ 0.08
============ =============
Diluted earnings per share:
Continuing operations $ 0.06 $ 0.02
Discontinued operations - 0.05
------------ -------------
Net income $ 0.06 $ 0.07
============ =============
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Six months ended September 30,
---------------------------------------------------
1999 1998
Amount Percentage Amount Percentage
------------ ---------- ------------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $25,380,000 100% $ 8,453,000 100%
Cost of sales 6,425,000 25% 2,555,000 30%
------------ ---------- ------------- ----------
Gross profit 18,955,000 75% 5,898,000 70%
Research and development expenses 1,827,000 7% - 0%
Selling, general and administrative
expenses 7,777,000 31% 3,577,000 42%
Other income 632,000 2% 870,000 10%
------------ ---------- ------------- ----------
Income before interest expense,
income taxes, depreciation and
amortization 9,983,000 38% 3,191,000 38%
Interest expense 556,000 2% 42,000 0%
Depreciation and amortization 3,377,000 12% 1,050,000 12%
------------ ---------- ------------- ----------
Income before provision for
income taxes 6,050,000 23% 2,099,000 25%
Provision for income taxes 2,305,000 9% 995,000 12%
------------ ---------- ------------- ----------
Income from continuing operations 3,745,000 15% 1,104,000 13%
Discontinued operations
Income from operations of IBIS Systems
Ltd., net of applicable income taxes
of $672,000 - 3,292,000
------------ -------------
Net income $ 3,745,000 $ 4,396,000
============ =============
Basic earnings per share:
Continuing operations $ 0.12 $ 0.04
Discontinued operations - 0.12
------------ -------------
Net income $ 0.12 $ 0.16
============ =============
Diluted earnings per share:
Continuing operations $ 0.11 $ 0.03
Discontinued operations - 0.11
------------ -------------
Net income $ 0.11 $ 0.14
============ =============
</TABLE>
Net Income
The Company reports consolidated net income of $2,130,000 and $2,283,000 for the
comparative quarters ended September 30, 1999 and 1998, respectively. Net income
from the 1998 period includes $1,692,000 from discontinued operations. The
changes in net income are due to the following:
12
<PAGE>
o Increase of $2,028,000 in net income from Divergent. This increase is
due to a non-recurring sale of certain technology rights.
o Absence of IBIS net income in the 1999 period, which represented
$1,692,000 in the 1998 period.
The Company also reports consolidated net income of $3,745,000 and $4,396,000
for the six months ended September 30, 1999 and 1998, respectively. Net income
from the 1998 period includes $3,292,000 from discontinued operations. The
changes in net income are due to the following:
o Inclusion of net income of $781,000 from Island Pacific, which was
acquired April 1, 1999.
o Increase of $1,496,000 in net income from Divergent. This
increase is due to a non-recurring sale of certain technology rights,
offset by a reduction in Divergent net income during the six months
ended September 30, 1999 due to the completion of several large
contracts during the comparable 1998 period.
o Absence of IBIS net income in the 1999 period, which represented
$3,292,000 from discontinued operations during the 1998 period.
Net Sales
Net sales from continuing operations increased from $4,233,000 to $13,613,000
for the comparative quarters ended September 30, 1998 and 1999, respectively.
This increase of $9,380,000 or 222% consists primarily of the inclusion in net
sales of $4,184,000 contributed from Island Pacific and an increase of
$4,327,000 from Divergent resulting from a non-recurring sale of technology
rights.
Net sales from continuing operations for the six months ended September 30, 1999
increased by $16,927,000 or 200 % to $25,380,000 from $8,453,000 for the
comparable period ended September 30, 1998. The increase is due to the
following:
o Inclusion in net sales of $11,515,000 from Island Pacific.
o Increase of $2,526,000 in net sales of ARS, approximately
$1,572,000 of which represents ARS net sales in the quarter ended June
30, 1999. The Company acquired ARS during the second quarter of fiscal
1999, so no net sales from ARS are included in the quarter ended
June 30, 1998.
o Increase of $2,868,000 in net sales from Divergent.
The company does not expect Divergent's sale of technology rights to impact net
sales in future periods.
Cost of Sales
Cost of sales for the quarters ended September 30, 1999 and 1998 were $2,876,000
and $1,252,000, respectively. The increase of $1,624,000 or 130% resulted from
increases in related net sales.
For the same reason, cost of sales for the six months ended September 30, 1999
increased $3,870,000 or 151% to $6,425,000 from $2,555,000 for the comparable
period in 1998.
13
<PAGE>
Gross Profit
Gross profit from operations increased to $10,737,000 for the quarter ended
September 30, 1999 from $2,981,000 for the quarter ended September 30, 1998.
Gross profit as a percentage of net sales increased from 70% to 79% over the
comparative periods. This increase in gross profit percentage resulted from
Divergent's non-recurring sale of technology rights that had no cost component.
Gross profit from operations for the six months ended September 30, 1999
increased to $18,955,000 from $5,898,000 for the comparative six months ended
September 30, 1998. Gross profit as a percentage of net sales increased from 70%
to 75% over the comparable periods.
Research and Development Expenses
Research and development expenses for the quarter and six months ended September
30, 1999 were $1,211,000 or 9% and $1,827,000 or 7 % of net sales, respectively.
There were no research and development expenses in the comparative 1998 periods.
The Company has commenced an active research and development program to enhance
its current products and develop new retail software products to meet an
expanding range of customer demands. The Company expects research and
development expenses to increase in future periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 1999 were $3,960,000 compared to $1,741,000 for the same period
ended September 30, 1998. This increase of $2,219,000 or 127 % results from the
addition of Island Pacific operational expenses. Selling, general and
administrative expenses declined as a percentage of net sales from 41% to 29%
for the three month periods ended September 30, 1998 and September 30, 1999,
respectively. This change reflects economies of scale from increasing
operations. The Company believes its efforts to consolidate the operations of
its retail software subsidiaries will continue to result in decreased selling,
general and administrative costs as a percentage of net sales over time.
Selling, general and administrative expenses increased by $4,200,000 or 117% to
$7,777,000 for the six months ended September 30, 1999 from $3,577,000, for the
same period in the prior year. Selling, general and administrative expenses
declined as a percentage of net sales over the six month period, from 42% in the
1998 period to 31% in the 1999 period. The same factors discussed above led to
these changes.
Depreciation and Amortization
Depreciation and amortization increased to $1,824,000 for the quarter ended
September 30, 1999 from $694,000 for the quarter ended September 30, 1998. This
increase of $1,130,000 or 163% is primarily related to the acquisition by the
Company of Island Pacific on April 1, 1999. This acquisition resulted in
significant additions to capitalized software and goodwill.
Depreciation and amortization expense for the six months ended September 30,
1999 and 1998 were $3,377,000 and $1,050,000, respectively. This increase of
$2,327,000 or 222 % is due to the acquisition of goodwill and capitalized
software from Island Pacific and ARS.
14
<PAGE>
Interest Income and Expense
Interest expense was $426,000 and $23,000 for the quarters ended September 30,
1999 and 1998, respectively. The increase was due to interest paid or accrued on
the loans obtained in connection with the acquisition of Island Pacific.
Interest income was $149,000 for the quarter ended September 30, 1999 compared
to $167,000 for the quarter ended September 30, 1998. Interest income during the
1999 period consisted primarily of interest earned on the note payable from the
purchaser of IBIS. Interest income during the 1998 period consisted primarily of
interest earned from cash on hand.
For the six month periods ended September 30, 1999 and September 30, 1998,
interest expense was $556,000 and $42,000, respectively. This increase was also
due to the loans obtained to acquire Island Pacific. Interest income during the
six months ended September 30, 1999 was $544,000 compared to $342,000 for the
six months ended September 30, 1998. Approximately 55% of the interest income
during the 1999 period consisted of income from the note payable from the
purchaser of IBIS, and approximately 45% consisted of income earned from cash on
hand during the first quarter of fiscal 2000 prior to payment of the purchase
price for Island Pacific.
Basic Earnings Per Share
Basic earnings per share for the three months ended September 30, 1999 and 1998
were $0.07 and $0.08 per share, respectively. The basic earnings per share for
the three months ended September 30, 1998 included $0.06 per share for income
from discontinued operations.
Basic earnings per share for the six months ended September 30, 1999 and 1998
were $0.12 and $0.16 per share, respectively. The basic earnings per share for
the six months ended September 30, 1998 included $0.12 per share for income from
discontinued operations.
Diluted Earnings Per Share
Diluted earnings per share for the three months ended September 30, 1999 and
1998 were $0.06 and $0.07 per share, respectively. The quarter ended September
30, 1998 diluted earnings per share included $0.05 per share for income from
discontinued operations.
Diluted earnings per share for the six months ended September 30, 1999 and 1998
were $0.11 and $0.14 per share, respectively. The six months ended September 30,
1998 diluted earnings per share included $0.11 per share for income from
discontinued operations.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash and cash equivalents of $715,000, a
decrease of $12,291,000 from $13,006,000 of cash and cash equivalents at March
31, 1999. The decrease is due to the acquisition of Island Pacific for a net
cash payment of $33,673,000 ($35,000,000 purchase price less $1,327,000 cash
acquired). Approximately $20,800,000 in loans financed the remainder of the
purchase price.
15
<PAGE>
The Company has $3,400,000 of credit lines to support working capital
requirements. As of November 10, 1999, the outstanding balance on these lines is
$1,870,000. The Company has been using operating income to discharge the
payments due on the loans and lines of credit.
Accounts receivable increased from $3,310,000 at March 31, 1999 to $14,189,000
at September 30, 1999, due to the following factors:
o Inclusion of Island Pacific accounts receivable with the balance of
$4,647,000 at September 30, 1999. Island Pacific was acquired on
April 1, 1999.
o Increase of $4,866,000 in Divergent accounts receivable. The
increase is primarily due to the non-recurring sale of technology
rights in the quarter ended September 30, 1999.
o Increase of $1,312,000 in ARS accounts receivable due to an increase
in net sales.
The promissory note of Kielduff Investments Limited ("Kielduff") due to the
Company in connection with the sale of IBIS was originally due October 1, 1999.
The Company agreed to extend the due date on such note to February 15, 2000. The
current balance payable to the Company is $13,608,000. Interest payments on the
note are current, and the note remains secured by a pledge of 100% of the common
stock of IBIS. The Company believes that the market value of IBIS is
substantially greater than the current indebtedness of Kielduff.
Kielduff requested an extension of the maturity date on the note as it had not
completed a planned reorganization to provide the funds necessary to retire the
note. After obtaining assurances from Kielduff that its reorganization is likely
to occur before February 2000, the Company granted Kielduff the additional
period to complete the reorganization.
The Company intended to use the proceeds of the Kielduff note to retire one of
the bank loans in the amount of $15,000,000 obtained in connection with the
acquisition of Island Pacific. This loan has required interest only payments of
approximately $110,000 per month, but converts to a two year amortizing term
loan on December 3, 1999 if not sooner prepaid. If the loan converts, principal
and interest payments will be approximately $680,000 per month. The Company
believes it will have, or can generate, sufficient cash to meet these payments
until the February 15, 2000 due date of the Kielduff note. However, these
payments would deplete cash reserves and require a reallocation of uses of cash
during the period of payments. In the event Kielduff does not make the required
payment on or before February 15, 2000, the Company will be required to
restructure the bank obligation or to seek other sources of cash to make the
required amortizing payments.
In light of these factors, and in light of other anticipated uses of cash during
the next twelve months, the Company is pursuing various strategies for raising
capital to meet actual and potential cash demands during the next twelve months.
Strategies being considered include a private placement of securities and/or a
capital infusion from the Company's majority stockholder. Either of these
strategies, if pursued, would cause dilution to existing stockholders. The
Company has no current commitments for funding, and there is no guarantee that
funding will be available when needed, or on terms and conditions acceptable to
the Company.
16
<PAGE>
The Company expects to continue its strategy of seeking selected acquisition
opportunities within its target profile of companies with advanced technologies
and market leadership in the retail software sector of the information
technology market. To the extent that the terms of any such acquisitions call
for payment in cash, the Company will need to seek an outside source of capital.
The Company has no current commitments for such capital, and there can be no
guarantee that such capital will be available on terms acceptable to the Company
or at all.
Year 2000 Software Compliance ("Millennium Bug")
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. As a result, software and computer
systems, including machines controlled by microprocessors, may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements.
In general, the Company's operating subsidiaries develop and sell
software developed internally. The Company believes that no significant
Year 2000 issues exist with the current versions of these products and services.
The Company implemented a four step plan to address potential Year 2000 issues,
consisting of (i) assessing Year 2000 readiness; (ii) remediating non-compliant
hardware and software; (iii) testing remediated hardware and software; and (iv)
certifying Year 2000 compliance of customers. Personnel from each operating
subsidiary as well as outside consultants have been involved in the process.
Senior management of the Company coordinated the effort. All four phases are now
complete. The Company estimates its Year 2000 remediation efforts have cost
$250,000, and does not anticipate any further Year 2000 remediation costs.
The Company, as part of the testing process, had each of its operating
subsidiaries perform a Year 2000 "dry run," where the dates on all computers and
microprocessor-controlled equipment were set ahead to a date within the year
2000. This procedure revealed no material problems. These tests would not
however identify external Year 2000 problems.
Communications with customers and suppliers to determine their Year 2000
preparedness have been an integral part of the Company's Year 2000 program. The
Company's subsidiaries have reviewed all vendor contracts and have requested
written certification from each vendor that its products are Year 2000
compliant. Each of the Company's significant vendors has indicated that it is
Year 2000 compliant and that supplies to the Company will not be interrupted due
to the vendor's Year 2000 problems.
As part of the certification process, each of the Company's subsidiaries
contacted all of its customers and confirmed that each customer has installed
Year 2000 compliant versions of the subsidiary's software and that each
customer's software and hardware systems which interact with such software are
Year 2000 compliant. The Company has not however attempted to predict the
overall Year 2000 readiness of its customers. Despite these certifications, some
customers may still have older, non-compliant versions of the Company's software
installed, which could lead to system failure and/or product liability claims
against the Company. The Company could become subject to warranty claims, with
or without merit, returns and increased customer support expenses if the
computer systems of customers are not able to integrate the Company's products
due to customers' internal Year 2000 problems. In order to reduce this risk, the
Company has since October 1, 1999 adopted a policy of deferring all new software
installations until the customer has been fully certified as Year 2000 compliant
to the satisfaction of the Company.
17
<PAGE>
The Company has developed a contingency plan to respond to Year 2000 problems
which might occur.
o The Company will maintain three rapid response teams on call 24 hours per
day from December 31, 1999 through January 5, 2000. If needed, a team will
travel to a customer's location to assess and repair any Year 2000 problems
created by the Company's software.
o The Company's onsite technical support staff will be present through the
same period to provide support by phone and direct computer communication
as needed.
o The Company has identified alternate vendors for all of its significant
components and raw materials should any vendor, despite its representations
of Year 2000 compliance, experience a Year 2000 problem.
In the event that any of the Company's significant suppliers or customers do not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be adversely affected. Any unanticipated Year 2000 problems
could result in system failures or generation of erroneous information and could
cause significant disruption of business activities. Extended disruptions may
impact both short-term and long-term customer and vendor relationships and
further impact the Company's future profitability. The Company does not expect
the contingency plans referenced above to have a material effect on expenses.
However, if Year 2000 problems of vendors or customers prove worse than expected
or require more efforts than expected, these costs could become material. In
addition, service delays may result and revenue streams could be impaired, which
could impact results of operations.
The former shareholders of ARS have represented that ARS's express written
warranties to customers concerning Year 2000 compliance for ARS's products and
services are accurate, and such shareholders have agreed to indemnify the
Company in the event this representation proves not to be accurate, up to the
full value of the consideration paid by the Company in the acquisition of ARS.
The former shareholders of Island Pacific have made similar warranties and have
agreed to indemnify the Company for any breach of those warranties (subject to a
$1 million limitation on indemnification). The Company has no similar guarantees
with respect to its other operating subsidiaries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable due to Instruction 1. of Item 305(c) of Regulation S-K.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
In September 1998, ALT Consulting, LLC ("ALT") filed a complaint against Island
Pacific in the Orange County Superior Court (the "ALT Litigation") asserting
claims for breach of contract and of the implied covenant of good faith and fair
dealing, negligent and intentional misrepresentation, promissory fraud and
declaratory relief arising out of a software consulting contract. Island Pacific
answered the complaint and filed a cross-complaint against ALT and its principal
member asserting claims for rescission, breach of contract and of the implied
covenant of good faith and fair dealing, breach of fiduciary duty, intentional
and negligent misrepresentation, promissory fraud, misappropriation of trade
secrets and conversion.
In September 1999, the ALT Litigation was settled at a total cost to the Company
of $17,500. The settlement will have no material adverse effect on the Company.
Requests for dismissal with prejudice have been filed by all parties.
18
<PAGE>
Item 2. Changes in Securities
During the quarter ended September 30, 1999, the Company issued the following
securities, which were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933:
o 1,839 shares of common stock to an outside attorney for services
rendered valued at $20,000.
o 200,000 shares of common stock to a non-employee upon exercise of
options at an exercise price of $1.75 per share for an exercise
price of $350,000.
Item 4. Submission of Matters to a Vote of Security Holders
On August 30, 1999, the Company held its annual meeting of stockholders.
30,955,585 shares out of an eligible 32,502,045 shares were represented at the
meeting in person or by proxy. The following matters were considered and
approved:
<TABLE>
<CAPTION>
o Eight directors were elected. The nominees received the following votes
- --------------------------- ------------------ ------------------- ------------------- ----------------------
Name Votes For Votes Against Abstentions Broker Non-Votes
- --------------------------- ------------------ ------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
Barry M. Schechter 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
Arthur S. Klitofsky 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
David L. Reese 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
Donald S. Radcliffe 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
Ivan M. Epstein 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
Gerald Rubenstein 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
Ian Bonner 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
Marcel Golding 30,955,585 0 0 0
- --------------------------- ------------------ ------------------- ------------------- ----------------------
</TABLE>
o A change in the Company's state of incorporation from Nevada to Delaware.
The measure passed with 30,955,585 votes for, 0 votes against, 0 abstained
and 0 broker non-votes.
o A change in the corporate name to "SVI Systems, Inc." The measure passed
with 30,955,585 votes for, 0 votes against, 0 abstained and 0 broker
non-votes.
o An increase in the number of shares of common stock authorized from
50,000,000 to 100,000,000. The measure passed with 30,934,285 votes for,
21,300 votes against, 0 abstained and 0 broker non-votes.
o A reduction of the required quorum at meetings of stockholders from a
majority of the outstanding shares to one-third of the outstanding shares.
The measure passed with 30,909,285 votes for, 46,300 votes against, 0
abstained and 0 broker non-votes.
o Ratification of the Company's continued engagement of Deloitte & Touche
LLP as the Company's independent auditors for the fiscal year ending March
31, 2000. The measure passed with 30,955,585 votes for, 0 votes against, 0
abstained and 0 broker non-votes.
The Company has not yet effected the reincorporation to Delaware or the other
approved amendments to its charter documents.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 2.1 through 10.22 of the Form 10-KSB for the fiscal year ended March
31, 1999 are incorporated herein for reference.
Exhibit Description
-------- --------------
10.23 Amendment to Note, incorporated by reference to
exhibit 2.1 of the Form 8-K filed November 1, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K/A on August 16, 1999
attaching financial statements associated with the acquisition of Island Pacific
Systems Corporation.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SVI Holdings, Inc.
Registrant
/s/ David L. Reese
-------------------------------
Date: November 12, 1999 David L. Reese
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial officer.
21
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 14,675
<ALLOWANCES> 486
<INVENTORY> 170
<CURRENT-ASSETS> 30,449
<PP&E> 2,850
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<TOTAL-ASSETS> 95,078
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0
0
<COMMON> 3
<OTHER-SE> 56,758
<TOTAL-LIABILITY-AND-EQUITY> 95,078
<SALES> 25,380
<TOTAL-REVENUES> 25,380
<CGS> 6,425
<TOTAL-COSTS> 6,425
<OTHER-EXPENSES> 0
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