<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 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.)
7979 Ivanhoe Avenue, Suite 500, La Jolla, CA 92037
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(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code:
(858) 551-2365
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 - 32,502,045 shares as of July 30, 1999.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
June 30,1999 March 31, 1999
------------- --------------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,631,677 $ 13,006,153
Accounts receivable, net 9,173,077 3,310,008
Other receivables 2,630,356 2,994,836
Note receivable 13,875,013 13,608,000
Inventories 211,036 238,314
Prepaid expenses and other current assets 645,893 183,760
------------- -------------
Total current assets 28,167,052 33,341,071
Property and equipment, net 1,518,274 734,386
Capitalized software, net 35,581,221 14,053,186
Goodwill, net 14,578,955 4,534,570
Non-compete agreements, net 3,421,861 1,677,112
Deferred tax asset 774,594 762,910
Other assets 193,260 175,649
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Total assets $ 84,235,217 $ 55,278,884
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,073,500 $ 345,275
Accrued expenses 2,864,305 1,908,105
Line of credit 1,042,596 231,876
Short-term note payable 15,000,000 -
Current portion of long-term note payable 1,749,996 -
Income taxes payable 1,984,899 2,576,151
------------- -------------
Total current liabilities 23,715,296 5,061,407
Note payable 2,441,587 -
Due to stockholder 1,416,603 -
Long-term liabilities 2,000,000 2,000,000
Deferred tax liability 859,551 805,433
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Total liabilities 30,433,037 7,866,840
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Stockholders' Equity
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none
issued and outstanding - -
Common stock, $.0001 par value; 50,000,000 shares authorized;
32,335,045 and 29,741,278 shares issued and outstanding 3,256 2,987
Additional paid-in capital 45,227,249 39,435,921
Treasury stock, at cost; shares-225,400 and 127,400, respectively (2,133,404) (951,404)
Retained earnings 11,499,957 9,885,138
Accumulated other comprehensive income (794,878) (960,598)
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Total stockholders' equity 53,802,180 47,412,044
------------- -------------
Total Liabilities and Stockholders' Equity $ 84,235,217 $ 55,278,884
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended June 30,
1999 1998
------------- -------------
<S> <C> <C>
Net sales $ 11,767,259 $ 4,245,315
Cost of sales 3,549,258 887,257
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Gross profit 8,218,001 3,358,058
Research and development expenses 615,467 -
Depreciation and amortization 1,553,068 433,047
Selling, general and administrative expenses 3,816,287 2,206,708
------------- -------------
Income from operations 2,233,179 718,303
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Other income (expense):
Interest income 395,427 174,935
Other income 162,964 36,584
Interest expense (130,416) (19,064)
Gain (loss) on foreign currency transactions (93,505) 16,340
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Total other income (expense) 334,470 208,795
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Income before provision for income taxes 2,567,649 927,098
Provision for income taxes 952,830 411,802
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Income from continuing operations 1,614,819 515,296
Discontinued operations
Income from operations of IBIS Systems Ltd., net of
applicable income taxes of $239,500 - 1,600,288
------------- -------------
Net income $ 1,614,819 $ 2,115,584
============= =============
Basic earnings per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations - 0.06
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Net income $ 0.05 $ 0.08
============= =============
Diluted earnings per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations - 0.05
------------- -------------
Net income $ 0.05 $ 0.07
============= =============
Weighted-average common shares outstanding:
Basic 31,780,869 28,189,640
============= =============
Diluted 34,963,241 31,459,807
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended June 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,614,819 $ 2,115,584
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 1,553,068 630,750
Compensation expense - 240,000
(Gain) loss on foreign currency transactions 93,505 (16,340)
Changes in deferred taxes 42,434 7,924
Changes in assets and liabilities:
Accounts receivable and other receivables (3,353,348) (2,559,103)
Inventories 27,278 (17,079)
Prepaid expenses and other current assets (183,247) (647,420)
Accounts payable and accrued expenses (2,438,630) (557,084)
Income tax payable (591,252) -
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Net cash used for operating activities (3,235,373) (802,768)
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Cash flows from investing activities:
Acquisitions, net of cash acquired (33,657,303) (411,077)
Purchase of furniture and equipment (145,325) (247,572)
Increase in note receivable (267,013) -
Capitalized research and development (239,013) (104,616)
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Net cash used for investing activities (34,308,654) (763,265)
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Cash flows from financing activities:
Proceeds from issuance of common stock 4,926,284 213,300
Increase (decrease) in amount due to stockholders, net 1,416,603 (40,325)
Proceeds from line of credit 810,720 -
Proceeds from notes payable 19,191,583 -
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Net cash provided by financing activities 26,345,190 172,975
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Effect of exchange rate changes on cash (175,639) (167,845)
------------- -------------
Net decrease in cash and cash equivalents (11,374,476) (1,560,903)
Cash and cash equivalents, beginning of period 13,006,153 14,468,578
------------- -------------
Cash and cash equivalents, end of period $ 1,631,677 $ 12,907,675
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 114,668 $ 19,064
Income taxes paid $ 1,602,399 $ 1,488,510
Supplemental schedule of non-cash investing and financing activities:
Received 95,000 treasury shares in connection with
the sale of IBIS Systems Ltd. $ 1,140,000 $ -
Issued 55,000 shares of common stock as additional
consideration for an acquisition $ 402,188 $ -
Acquired Triple-S Ltd. by incurring a short-term liability $ - $ 453,955
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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. In the opinion of
management, all adjustments necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1999 and for all the periods
presented have been made.
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 months ended June 30, 1999 and 1998 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 Ltd.; approximately $4 million paid by Softline
Ltd., a majority stockholder, upon exercise of options; a $2.3 million loan from
Claudav Holdings Ltd., B.V., 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.
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 estimate 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 ended June 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.
Quarter ended
June 30, 1998
--------------
Total revenues $ 7,955,339
Net income $ 623,991
Basic earnings per share $ 0.02
Diluted earnings per share $ 0.02
<PAGE>
Note C - Discontinued Operations
Effective January 1, 1999, the Company sold its United Kingdom operations, IBIS
Systems Ltd. ("IBIS"), 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 ended June 30, 1998 are restated as
discontinued operations.
Note D - Treasury Stock
In November 1998, the Board of Directors authorized the Company to purchase up
to 1,000,000 shares of its common stock in the open market or in private
transactions during the eighteen months following such authorization. During the
quarter ended June 30, 1999, the Company acquired 95,000 shares in connection
with the sale of IBIS. The transaction was recorded at cost. As of June 30,
1999, the Company has 225,400 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 quarters ended June 30, 1999 and 1998, comprehensive income consisted
of:
<TABLE>
<CAPTION>
Quarters ended June 30,
1999 1998
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(unaudited)
<S> <C> <C>
Net income $ 1,614,819 $ 2,115,584
Other comprehensive income (loss):
Translation adjustment 165,720 (184,185)
------------- -------------
Comprehensive income $ 1,780,539 $ 1,931,399
============= =============
</TABLE>
Note F - Earnings Per Share
Earnings per share for the quarters ended June 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
Quarters Ended June 30,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
NET INCOME PER SHARE - BASIC
Net income $ 1,614,819 $ 2,115,584
============= =============
Weighted average number of common shares 31,780,869 28,189,640
============= =============
Net income per share $ 0.05 $ 0.08
============= =============
NET INCOME PER SHARE - DILUTED
Net income $ 1,614,819 $ 2,115,584
============= =============
Weighted average number of common and common
equivalent shares assuming issuance of all
dilutive contingent shares:
Common stock 31,780,869 28,189,640
Stock options 3,182,372 3,270,167
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Total 34,963,241 31,459,807
============= =============
Net income per share $ 0.05 $ 0.07
============= =============
</TABLE>
<PAGE>
Note G - 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 United Kingdom. The significant increase in United States based
revenue and identifiable assets 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>
Quarters Ended June 30,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
Revenues:
United States $ 7,965,980 $ 240,218
Australia 1,938,527 3,924,372
United Kingdom 1,335,511 80,725
United Kingdom (discontinued operations) - 4,250,122
South Africa 527,241 -
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Total revenues $ 11,767,259 $ 8,495,437
============= ============
Identifiable assets:
United States $ 73,286,846 $ 25,319,977
Australia 9,636,543 10,879,021
United Kingdom 311,867 72,647
United Kingdom (discontinued operations) - 12,469,274
South Africa 999,961 -
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Total identifiable assets $ 84,235,217 $ 48,740,919
============= =============
</TABLE>
Item 2. Management's Discussion and Analysis
Introduction
SVI Holdings, Inc. (the "Company") is a provider of computer and information
technology services to specialty industries in domestic and international
markets. More recently, the Company has narrowed its focus to two distinct
portions of the information industry:
o Open architecture point of sale and retail management computer
systems, and
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 which
offer products and services in the following businesses: point of sale and
retail management computer systems and PC courseware and skills assessment
products.
Acquisition
Effective April 1, 1999, the Company acquired all of the outstanding shares of
Island Pacific Systems Corporation ("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, Ltd.;
approximately $4 million paid by its majority stockholder upon exercise of
options; a $2.3 million loan from a major stockholder; and two bank loans. The
bank loans are secured by the shares of the Company's subsidiaries. The first
bank loan is in the amount of $15 million with interest only payments 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 fully amortizing over
two years. The secured loans bear interest at the bank's prime rate plus .25%
and .50%, respectively.
<PAGE>
Discontinued Operations
Effective January 1, 1999, the Company sold its United Kingdom operations, IBIS
Systems Ltd., 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 ended June 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, competition,
changes in demand for the Company's products, technological developments, and
other risk factors identified from time to time in future 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.
<PAGE>
Results of operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to sales:
<TABLE>
<CAPTION>
Quarters ended June 30,
---------------------------------------------------
(Unaudited)
1999 1998
Amount Percentage Amount Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $ 11,767,000 100% $ 4,245,000 100%
Cost of sales 3,549,000 30% 887,000 21%
----------------------- -----------------------
Gross profit 8,218,000 70% 3,358,000 79%
Research and development expenses 615,000 5% - - %
Selling, general and administrative
expenses 3,816,000 32% 2,207,000 52%
Other income 464,000 3% 228,000 5%
----------------------- -----------------------
Income before expense, income taxes,
interest, depreciation
and amortization 4,251,000 36% 1,379,000 32%
Interest expense 130,000 1% 19,000 -%
Depreciation and amortization 1,553,000 13% 433,000 10%
----------------------- -----------------------
Income before provision for
income taxes 2,568,000 22% 927,000 22%
Provision for income taxes 953,000 8% 411,000 10%
----------------------- -----------------------
Income from continuing operations 1,615,000 14% 516,000 12%
Discontinued operations
Income from operations of IBIS Systems
Ltd., net of applicable income taxes
of $240,000 - 1,600,000
------------- -------------
Net income $ 1,615,000 $ 2,116,000
============= =============
Basic earnings per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations - 0.06
------------- -------------
Net income $ 0.05 $ 0.08
============= =============
Diluted earnings per share:
Continuing operations $ 0.05 $ 0.02
Discontinued operations - 0.05
------------- -------------
Net income $ 0.05 $ 0.07
============= =============
</TABLE>
<PAGE>
NET INCOME
The Company reports consolidated net income of $1,615,000 and $2,116,000 for the
comparative quarters ended June 30, 1999 and 1998. The Company believes that
operational growth should be measured exclusive of discontinued operations,
income taxes, interest expense, depreciation and amortization. These elements
have grown substantially through recent disposals, acquisitions and debt and
have a significant impact on the net income reported. Excluding income of
$1,600,000 from discontinued operations for the quarter ended June 30, 1998,
income from continuing operations before income taxes, interest expense,
depreciation and amortization are $4,251,000 and $1,379,000 for the quarters
ended June 30, 1999 and 1998, respectively. This represents an operational
growth of $2,872,000 or 208% over the comparative quarter in the prior year.
This operational level growth is due largely to the acquisition of Island
Pacific effective April 1, 1999.
NET SALES
Net sales from continuing operations increased from $4,245,000 to $11,767,000
for the comparative quarters ended June 30, 1998 and 1999. This increase of
$7,522,000 or 177% is related directly to the inclusion in net sales of
$9,365,000 contributed from Island Pacific, Applied Retail Solutions, Inc.
("ARS") and Triple-S Pty. Ltd. ("Triple-S") which were all acquired after June
30, 1998. This increase is offset by a decline in net sales of $1,985,000 from
Divergent Technologies Pty. Ltd. ("Divergent") resulting from the completion of
several large contracts in the comparative period. The significant growth in net
sales is firmly based on acquisitions made by the Company since June 30, 1998.
COST OF SALES
Cost of sales for the quarters ended June 30, 1999 and 1998 were $3,549,000 and
$887,000, respectively. The increase of $2,662,000 or 300% resulted from
increases in related net sales and a change in accounting policy that now
assigns to cost of sales certain labor costs previously included in sales,
general and administrative expense.
GROSS PROFIT
Gross profit from operations increased from $3,358,000 at June 30, 1998 to
$8,218,000 at June 30, 1999. The respective gross profit percentage of net
sales, however, declined from 79% in the prior comparative period to 70% at June
30, 1999. This decline in gross profit percentage results from a change in
accounting policy that now assigns to cost of sales certain labor costs
previously included in sales, general and administrative expense.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the quarter ended June 30, 1999 were
$615,000 or 5% of net sales. There were no costs in the comparative period.
Research and development expense is composed primarily of labor and material
costs that the Company has chosen to directly expense. Research and development
costs were not a significant element in prior periods, however, the Company has
commenced an active research and development program to expedite the
introduction of new software products and expects this number to increase in
future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended June 30,
1999 were $3,816,000 compared to $2,207,000 for the same period ended June 30,
1998. This increase of $1,609,000 or 73% is related to the rapid expansion in
operations and the significant effort extended to complete the acquisition of
Island Pacific Systems Corporation and reorganize the Company. This
reorganization has led to a significant increase in U.S. based revenue and
significant cost savings through consolidated development efforts. Selling,
general and administrative expense declined as a percentage of net sales from
52% to 32% for the three month periods ended June 30, 1998 and June 30, 1999
respectively. This change is due partially to a change in accounting policy that
assigns to cost of sales certain elements previously included in selling,
general and administrative expense and also reflects the Company's increased
ability to absorb these expenses as a function of the expansion in consolidated
operations.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense, increased from $433,000 for the quarter
ended June 30, 1998 to $1,553,000 for the quarter ended June 30, 1999. This
increase of $1,120,000 or 259% is directly related to the acquisition by the
Company of Island Pacific, ARS and Triple-S. All of the acquisitions were
subsequent to June 30, 1998 and reflect significant additions to owned
technology and intangible assets. While this impact was negligible in the prior
comparative period, it has a significant negative impact on earnings for the
quarter ended June 30, 1999.
<PAGE>
BASIC EARNINGS PER SHARE
Basic earnings per share for the quarters ended June 30, 1999 and 1998 were
$0.05 and $0.08 per share, respectively. The basic earnings per share for the
quarter ended June 30, 1998 included $0.06 per share for income from
discontinued operations. The basic earnings per share for the quarter ended June
30, 1999 and 1998 included a loss of $0.08 and $0.03 per share, respectively,
for income taxes, interest, depreciation and amortization expenses. Excluding
discontinued operations and these expenses, the basic earnings per share
increased by $0.08 per share to $0.13 per share for the quarter ended June 30,
1999 from $0.05 per share for the comparable quarter in 1998.
DILUTED EARNINGS PER SHARE
Diluted earnings per share for the quarters ended June 30, 1999 and 1998 were
$0.05 and $0.07 per share, respectively. The quarter ended June 30, 1998 diluted
earnings per share included $0.05 per share for income from discontinued
operations. The diluted earnings per share for the quarter ended June 30, 1999
and 1998 included a loss of $0.07 and $0.02 per share, respectively, for income
taxes, interest, depreciation and amortization expenses. Excluding the
discontinued operations and these expenses, the diluted earnings per share from
continuing operations increased by $0.08 per share to $0.12 per share for the
three months ended June 30, 1999 from $0.04 per share for the comparable period
in 1998.
Liquidity and Capital Resources
At June 30, 1999, the Company had cash of $1,632,000, a decrease of $11,374,000
from $13,006,000 of cash at March 31, 1999. The decrease is due to the
acquisition of Island Pacific for a net cash payment of $33,657,000. Additional
cash for the acquisition came from two bank loans producing net cash proceeds of
$18,392,000, and a $2,300,000 loan from a major stockholder. The Company also
received $4,926,000 from stock options exercised during the quarter ended June
30, 1999, of which $3,989,000 from stock options exercised by the majority
stockholder.
The Company has $1,660,000 of lines of credit to support cash management. The
Company will use operating income to discharge the payments due on the loans and
lines of credit. The Company expects to apply the $13,608,000 due on October 1,
1999 from the purchaser of IBIS to the bank debt. The Company believes it has
sufficient cash to meet its working capital needs for the next twelve months.
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 information technology
market. There is a risk that such acquisition opportunities may not be available
on terms acceptable to the Company, or that any such acquisitions may not
ultimately be consummated. To the extent that the terms of any such acquisitions
call for payment in cash, the Company will likely need to seek an outside source
of capital. The Company has not identified any sources 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 connot 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 these products and services. However, some of the Company's customers
may not install the Year 2000 complaint versions of the Company's products in a
timely manner, which could lead to failure of customer systems and product
liability or warranty claims against the Company.
Although the Company believes that its systems are generally Year 2000
compliant, the Company utilizes third-party equipment and software that may not
be Year 2000 compliant. For this reason, the Company has implemented a four step
plan to address its 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.
Personnel from each operating subsidiary as well as outside consultants have
<PAGE>
been involved in the process. Senior management of the Company is coordinating
the effort. Assessment activities are estimated at approximately 98% complete.
Assessment data is continuously updated as new information becomes available.
Overall remediation efforts are estimated at 90% complete. The Company believes
it has adequate resources to complete these efforts, and anticipates completion
of all assessment and remediation efforts by September 30, 1999.
Communications with customers and suppliers to determine their Year 2000
preparedness are an integral part of the 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. The Company has received
replies from approximately 90% of its vendors.
The Company estimates its Year 2000 remediation effort will cost $250,000
including costs incurred to date. The Company does not believe that the cost of
Year 2000 remediation will have a material adverse effect on the Company's
consolidated financial position or results of operations. The estimated impact,
cost and timing of the Company's Year 2000 effort is based on the Company's best
estimates using information currently available. These estimates may not be
achieved, and actual results could differ materially from the Company's plans.
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. This could result in system failures or
generation of erroneous information and could cause significant disruption of
business activities. In the event the Company does not fully identify and
correct all Year 2000 problems in the products marketed by its subsidiaries,
those subsidiaries could become subject to warranty claims or returns, which
could have adverse effect on financial performance. Moreover, the Company's
subsidiaries could become subject to warranty claims, with or without merit,
returns and/or increased customer support expenses if the computer systems of
customer are not able to integrate the Company's products due to customers'
internal Year 2000 problems.
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.
The Company intends as part of the certification process to have each of its
operating subsidiaries perform a Year 2000 "dry run", where the dates on all
computers and microprocessor-controlled equipment are set ahead to a date within
the year 2000, and the Company hopes that the dry run will identify any
remaining internal Year 2000 issues before problems occur. These procedures will
not however identify external Year 2000 problems.
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
has 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. Under the Stock Purchase Agreement entered into
by the Company to acquire Island Pacific, the Company will provide the selling
shareholders of Island Pacific with reasonable assistance and authority to
defend and prosecute the ALT Litigation and contribute a maximum of $200,000 to
costs and damages arising from the ALT Litigation. The Island Pacific selling
shareholders are obligated to indemnify and hold the Company harmless from all
other claims, damages or losses arising from the ALT Litigation.
Item 2. Changes in Securities
During the quarter ended June 30, 1999, the Company issued the following
securities, which were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933:
<PAGE>
o 55,000 shares of common stock to Todds of Lincoln Limited as payment
for the earn-out provision in connection with the acquisition of the
service division of that company by IBIS in April 1998.
o 1,994,267 shares of common stock to Softline Limited upon exercise of
options at $2.00 per share for an aggregate exercise price of
$3,988,534.
o An aggregate of 430,000 shares of common stock to non-employees upon
exercise of options at exercise prices of $1.75 and $2.00 per share
for an aggregate exercise price of $809,500.
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
- ------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 14, 1999 disclosing the disposition of IBIS
Systems Ltd. The report included pro forma financial statements. The Company
also filed a Form 8-K on June 18, 1999 disclosing the acquisition of Island
Pacific Systems Corporation.
<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: August 10, 1999 David L. Reese
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial officer.
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