<PAGE> 1
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 December 31, 1998
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
--------------------------------------------------
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code:
(619) 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 - 29,618,684 shares as of January 20, 1999.
<PAGE> 2
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------------ ------------------
Assets (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,155,735 $ 14,468,578
Accounts receivable, net of allowance for doubtful accounts
of $504,805 at December 31, 1998 and $342,537 at March 31, 1998 6,755,865 3,214,402
Other receivables 933,769 -
Inventories 210,630 326,807
Prepaid expenses and other current assets 907,668 388,456
------------------ ------------------
Total current assets 13,963,667 18,398,243
Furniture and equipment, net of accumulated depreciation of
$1,526,534 at December 31, 1998 and $486,678 at March 31, 1998 1,440,900 885,276
Capitalized software, net of accumulated amortization of
of $2,519,382 at December 31, 1998 and $1,357,766 at March 31, 1998 14,097,044 12,354,371
Goodwill, net of accumulated amortization of $892,528 at December
31, 1998 and $313,183 at March 31, 1998 14,863,835 14,586,102
Not-to-compete agreements, net of accumulated amortization of
$160,534 at December 31, 1998 1,765,471 -
Note receivable from affiliate 5,301,201 -
Deferred tax asset 451,930 239,690
Other assets - 16,974
------------------ ------------------
TOTAL ASSETS $ 51,884,048 $ 46,480,656
================== ==================
Current Liabilities
Accounts payable $ 1,551,562 $ 3,520,223
Accrued expenses 3,108,846 2,477,699
Income taxes payable 2,957,120 2,637,424
------------------ ------------------
Total current liabilities 7,617,528 8,635,346
Due to stockholder - 14,552
Long-term liabilities - 35,299
Deferred tax liability 503,357 720,464
------------------ ------------------
Total liabilities 8,120,885 9,405,661
------------------ ------------------
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;
28,786,384 and 28,146,684 issued and outstanding at
December 31, 1998 and March 31, 1998, respectively 2,879 2,815
Additional paid-in capital 35,044,001 33,137,939
Treasury stock (666,904) -
Retained earnings 10,026,323 4,299,994
Cumulative foreign currency translation adjustment (643,136) (365,753)
------------------ ------------------
Total stockholders' equity 43,763,163 37,074,995
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 51,884,048 $ 46,480,656
================== ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE> 3
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Net sales $ 8,893,845 $ 10,016,343
Cost of sales 2,337,185 5,100,118
----------------- -----------------
Gross profit 6,556,660 4,916,225
Selling, general and administrative expenses 4,781,814 2,994,823
----------------- -----------------
Income from operations 1,774,846 1,921,402
Other income (expense):
Interest income 140,895 109,425
Other income 13,713 15,258
Interest expense (24,294) (22,868)
Gain on sale of Softline Limited shares - 4,018,407
Loss on foreign currency transaction (68,148) (32,782)
----------------- -----------------
Income before income taxes 1,837,012 6,008,842
Income tax provision 508,779 2,040,493
----------------- -----------------
NET INCOME $ 1,328,233 $ 3,968,349
================= =================
Earnings per share:
BASIC $ 0.05 $ 0.14
================= =================
DILUTED $ 0.04 $ 0.13
================= =================
Weighted average common shares outstanding:
BASIC 28,618,963 27,562,282
DILUTED 32,743,958 30,969,526
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE> 4
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1998 1997
----------------- ----------------
<S> <C> <C>
Net sales $ 25,489,585 $ 16,520,057
Cost of sales 5,444,798 6,984,331
----------------- ----------------
Gross profit 20,044,787 9,535,726
Selling, general and administrative expenses 13,222,033 6,499,337
----------------- ----------------
Income from operations 6,822,754 3,036,389
Other income (expense):
Interest income 496,418 140,508
Other income 719,856 (4,891)
Interest expense (66,556) (50,526)
Equity in earnings of Softline Limited - 279,427
Gain on sale of Softline Limited shares - 7,839,909
Loss on foreign currency transaction (62,547) (120,919)
----------------- ----------------
Income before income taxes 7,909,925 11,119,897
Income tax provision 2,183,596 2,866,355
----------------- ----------------
NET INCOME $ 5,726,329 $ 8,253,542
================= ================
Earnings per share:
BASIC $ 0.20 $ 0.43
================= ================
DILUTED $ 0.18 $ 0.40
================= ================
Weighted average common shares outstanding
BASIC 28,387,094 19,048,881
DILUTED 32,284,928 20,559,899
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE> 5
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,726,329 $ 8,253,542
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,109,015 1,555,886
Equity in earnings in Softline Limited - (279,427)
Foreign currency transaction loss - 88,137
Gain on sale of Softline Limited shares - (7,839,909)
Stock-based compensation 400,277 202,500
Changes in deferred taxes (249,347) (116,197)
Loss on sale of fixed assets 9,991 -
(Increase) decrease in:
Accounts receivable (2,653,979) (251,205)
Inventories 150,995 128,094
Other receivables (818,767) 90,344
Prepaid expenses and other current assets (441,608) (196,271)
Deposits and other assets 16,974 (43,881)
Increase (decrease) in:
Accounts payable (2,093,366) 1,883,720
Accrued expenses (871,376) 233,161
Other liabilities (35,299) (609,467)
Income taxes payable 319,696 1,025,929
----------------- -----------------
Net cash provided by operating activities 1,569,535 4,124,956
----------------- -----------------
Cash flows from investing activities
Acquisition of Todds of Lincoln (252,680) -
Acquisition of Applied Retail Solutions, Inc., net (1,403,035) -
Acquisition of Quest Software Limited (298,229)
Acquisition of Open Support Limited (149,348) -
Acquisition of Divergent Technologies, net - 237,294
Cash acquired on acquisitions - 542,534
Net proceeds from sale of Softline Limited - 11,662,014
Purchase of furniture and equipment (572,411) (393,620)
Proceeds from sale of fixed assets 67,197 -
Capitalized R&D and purchase of software (2,201,881) 5,915
Loan to affiliate (5,301,201)
Maturity of certificates of deposit - 700,000
Other assets - 133,709
----------------- -----------------
Net cash provided (used) by investing activities (10,111,588) 12,887,846
----------------- -----------------
Cash flows from financing activities:
Stock options exercised 188,048 -
Decrease in due to stockholders, net (14,552) (4,331,033)
Purchased treasury stock (666,904)
Proceeds from note payable - 172,910
Proceeds from sale of common stock 7,694,560
Payments on line of credit - (3,364,299)
Payments on note payable (243,233)
Due from affiliates - 1,078,022
----------------- -----------------
Net cash provided (used) by financing activities (493,408) 1,006,927
----------------- -----------------
Effect of exchange rate changes on cash (277,382) (243,353)
----------------- -----------------
Net increase (decrease) in cash (9,312,843) 17,776,376
Cash and cash equivalents, beginning of period 14,468,578 216,453
================= =================
Cash and cash equivalents, end of period $ 5,155,735 $ 17,992,829
================= =================
Supplemental disclosure of cash flow information:
Interest paid $ 93,948 $ 73,126
Income taxes paid $ 2,005,439 $ 168,076
Supplemental disclosure of non-cash investing and financing activities:
Issued 52,000 shares @ $3.90 per share as part of
consideration for Todds of Lincoln acquisition $ 202,800 $ -
Acquired Triple-S Limited by incurring a short-term liability $ 429,208 $ -
Issued 250,000 shares @$4.00 per share as purchase
consideration for Applied Retail Solutions, Inc. acquisition $ 1,000,000 $ -
Issued 1,620,000 shares of common stock in connection with
purchase of software $ - $ 3,770,231
Issued 5,000,000 shares as purchase consideration for acquisition
of IBIS Systems Limited $ - $ 7,500,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE> 6
SVI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1998 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 Transition Report on
Form 10-KSB for the six months ended March 31, 1998. 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 six months ended March 31, 1998.
Certain numbers in the comparative periods ended December 31, 1997 have been
reclassified to conform to the presentation for the three and nine months ended
December 31, 1998.
The results of operations for the nine months ended December 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
Note B - Acquisitions and Related Parties
Effective April 1, 1998, Divergent Technologies Pty. Ltd., a wholly-owned
subsidiary located in Australia, acquired Triple-S Computers Pty. Limited
("Triple-S") of Cape Town, South Africa, by assignment from the Company's
majority stockholder, for the consideration of R 3,200,000 (US $635,000).
Triple-S develops and installs computerized point of sale retail systems
throughout southern Africa.
Effective April 1, 1998, IBIS acquired the service division of Todds of Lincoln
Limited for the consideration of 125,000 pounds (US $210,000) and 52,000 shares
of the Company's common stock. Under the terms of the purchase agreement, Todds
of Lincoln is entitled to additional consideration based on pre-tax net income
for the acquired assets for the fiscal year ending March 31, 1999. The deferred
consideration will be paid in cash and in shares of the Company's common stock.
Effective July 1, 1998, the Company acquired Applied Retail Solutions, Inc.
("ARS"), a San Diego based company specializing in point of sale software
systems. The acquisition was accomplished via a merger with a newly-formed,
wholly-owned subsidiary of the Company. The Company issued a total of 250,000
shares of common stock at $4.00 per share to the former owners of ARS as merger
consideration, and paid a total of $1,926,000 to the two principals of ARS for
entering into two-year employment and four-year non-compete agreements. In
addition, the Company issued 750,000 shares which were placed in escrow and were
subject to return to the Company if certain profit and license fee targets for
ARS were not achieved. The Company also agreed to issue additional shares of
common stock, valued up to $2,000,000 based upon the fair market value at the
time of issuance, if certain profit and license fee targets for ARS were
exceeded.
Subsequent to the end of the quarter, the Company and representatives of the
former ARS shareholders agreed that the conditions for release of the escrow
shares and the payment of the maximum additional consideration have been
satisfied. Accordingly, the 750,000 shares were released from escrow effective
January 28, 1999, and the Company agreed to pay the additional consideration
value of $2,000,000 in accordance with the original acquisition agreement.
Neither the 750,000 escrowed shares or the shares issuable for the additional
consideration were considered outstanding for purposes of earnings per share
calculations on December 31, 1998.
Effective July 1, 1998, IBIS Systems Pty. Limited ("IBIS"), a wholly-owned
subsidiary located in United Kingdom, acquired Quest Software Limited ("Quest"),
a United Kingdom corporation, for 170,000 British pounds (US $284,000). In
connection with the acquisition, the Company granted the former owner of Quest
options to purchase 205,000 shares of the Company's common stock at $5.00 per
share as consideration for entering into a three-year employment agreement.
105,000 of these options are immediately exercisable and will expire after two
years. The remaining 100,000 options will be exercisable only to the extent that
pre-tax profits of Quest for the twelve months ending July 31, 1999 exceed
certain targets.
Effective July 1, 1998, IBIS also acquired Open Support Limited ("Open"), a
United Kingdom corporation, for 100,000 British pounds (US $167,000), net of
prepayment charges of 103,000 British pounds (US $172,000). In connection with
the acquisition, the Company granted the former owner of Open options to
purchase up to 200,000 shares of the Company's common stock at $5.00 per share
as consideration for entering into a three-year employment agreement. The
options will be exercisable only to the extent that pre-tax profits of Open for
the twelve months ending March 31, 1999 exceed certain targets.
<PAGE> 7
The results of operations for these acquisitions have been included in the
consolidated results of the Company from the respective dates of acquisition
through December 31, 1998.
On October 13, 1998, the Company loaned $5,215,500 to the Company's majority
shareholder to facilitate the payment by the majority shareholder of an earn-out
due to an officer of the Company by the majority shareholder. The Company
received a promissory note bearing interest at 7% per annum which is expected to
be paid during the quarter ending March 31, 1999.
Note C - Stock Options
Stock Option Plans:
Effective April 1, 1998, the Company amended its Incentive Stock Option Plan
(the "1989 Plan") to increase the number of shares available for issuance from
1,000,000 to 1,500,000.
On April 1, 1998, the Company granted options under the 1989 Plan for 412,375
shares at a weighted average exercise price of $3.24 per share. The Company
recognized compensation expenses of $240,000 resulting from these options. On
July 9, 1998, the Company granted options under the 1989 Plan for 38,000 shares
at an exercise price of $6.00 per share.
During the third quarter ended December 31, 1998, the Company granted various
options under the 1989 Plan at exercise prices of $6.125 and $6.70 per share.
On October 5, 1998, the Board of Directors adopted the 1998 Plan (the "1998
Plan"). The 1998 Plan is in addition to the Company's 1989 Plan described
above. 3,500,000 shares of common stock are reserved for issuance under the
1998 Plan and may be issued pursuant to incentive stock options, non-statutory
options, stock bonuses, stock appreciation rights and stock purchase agreements.
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.
Options must vest over a period not to exceed five years.
During the third quarter ended December 31, 1998, the Company granted various
options under the 1998 Plan at exercise prices of $6.125 and $6.25 per share.
Other Option Grants:
On July 1, 1998, the Company granted three-year options to one of its directors
to purchase 20,000 shares at $5.00 per share.
In conjunction with the acquisitions of Quest and Open, the Company granted
options to the former owners of such companies for a total of 300,000 shares of
the Company's common stock at an exercise price of $5.00 per share. These
options are exercisable based upon realization by the acquired companies of
certain profitability targets. As of December 31,1998, no compensation expense
has been recorded for these options. In addition, 105,000 options at an exercise
price of $5.00 per share were granted to the former owner of Quest upon signing
the employment agreement.
The Company recognized compensation expenses of $80,277 and $80,000 in the
quarters ended September 30, 1998 and December 31, 1998, respectively, resulting
from the foregoing option grants.
Note D - Treasury Stock
On November 4, 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. As of
December 31, 1998, the Company repurchased 96,000 shares in the open market. The
transactions were recorded under the cost method.
<PAGE> 8
Note E. Earnings Per Share
Earnings Per Share
Earnings per share for the three months and nine months ended December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
For the quarter ended December 31, 1998
(unaudited)
-------------------------------------------------------
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $ 1,328,233 28,618,963 $ 0.05
================
Effect of dilutive securities options - 4,124,995
--------------------------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 1,328,233 32,743,958 $ 0.04
=======================================================
</TABLE>
<TABLE>
<CAPTION>
For the quarter ended December 31, 1997
(unaudited)
-------------------------------------------------------
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $ 3,968,349 27,562,282 $ 0.14
================
Effect of dilutive securities options - 3,407,244
--------------------------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 3,968,349 30,969,526 $ 0.13
=======================================================
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended December 31, 1998
(unaudited)
-------------------------------------------------------
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $ 5,726,329 28,387,094 $ 0.20
================
Effect of dilutive securities options - 3,897,834
--------------------------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 5,726,329 32,284,928 $ 0.18
=======================================================
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended December 31, 1997
(unaudited)
-------------------------------------------------------
Income Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $ 8,253,542 19,048,881 $ 0.43
================
Effect of dilutive securities options - 1,511,018
--------------------------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 8,253,542 20,559,899 $ 0.40
=======================================================
</TABLE>
Pursuant to the acquisition agreement of ARS, 750,000 shares held in escrow are
excluded from the EPS calculations for the quarter and nine months ended
December 31, 1998.
<PAGE> 9
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. The Company is a holding company and operates solely through its
wholly-owned subsidiaries. The Company currently has four significant operating
subsidiaries which offer products and services in the following businesses:
point of sale and retail management computer systems; PC courseware and skills
assessment products; and general financial application software.
On July 8, 1998, the Company's common stock was approved for listing on the
American Stock Exchange under the symbol "SVI".
Acquisitions
Effective April 1, 1998, the Company's United Kingdom subsidiary, IBIS Systems
Pty. Ltd. ("IBIS"), acquired the computer service division of Todds of Lincoln
Limited for 125,000 British pounds (US $210,000) and 52,000 shares of the
Company's common stock. Under the terms of the purchase agreement, Todds of
Lincoln is entitled to additional consideration based on pre-tax net income for
the acquired assets for the fiscal year ending March 31, 1999. The deferred
consideration will be paid in cash and in shares of the Company's common stock.
This acquisition has enhanced IBIS's customer base in the U.K.
Effective April 1, 1998, a wholly-owned subsidiary of the Company's Divergent
Technologies Pty. Ltd. ("Divergent") subsidiary, acquired Triple-S Computers
Pty. Limited ("Triple-S") of Cape Town, South Africa. The acquisition was by
assignment of the acquisition agreement from Softline Limited ("Softline") and a
wholly-owned subsidiary of Softline. Softline beneficially owns approximately 60
percent of the Company's common stock. Triple-S develops and installs
computerized point of sale retail systems throughout southern Africa. The
Company reimbursed Softline for the 3,200,000 South African Rand (US $635,000)
paid by Softline for Triple-S. This acquisition has allowed Divergent to expand
its operations to the African continent.
Effective July 1, 1998, the Company acquired Applied Retail Solutions, Inc.
("ARS"), a San Diego-based company specializing in point of sale software
systems. The acquisition was accomplished via a merger with a new formed,
wholly-owned subsidiary of the Company. ARS's "Retail Solutions Package" is
installed in over 4,000 locations world-wide. The package utilizes an open
architecture and is designed to work in a client-server environment. The former
shareholders of ARS were issued 1,000,000 shares of the Company's common stock.
750,000 shares of the 1,000,000 shares issued (the "Pledged Shares") were held
in escrow and subject to return to the Company if certain profit and license fee
targets for ARS were not achieved. The Company also agreed to issue additional
shares of common stock, valued up to $2,000,000 based upon the fair market
value at the time of issuance, if certain profit and license fee targets were
exceeded.
On January 28, 1999, the Company and representatives of the former shareholders
of ARS agreed that the conditions for release of the escrowed shares and the
payment of the maximum additional consideration have been satisfied.
Accordingly, the 750,000 shares were released from escrow, and the Company
agreed to pay the additional consideration value of $2,000,000 in accordance
with the original agreement.
<PAGE> 10
In connection with the merger, the Company also paid a total of $1,926,000 to
the two principals of ARS for entering into two-year employment agreements and
four-year non-compete agreements. The source of funds for the employment and
non-compete agreements was the working capital of the Company.
Effective July 1, 1998, IBIS acquired Quest Software Limited ("Quest"), a United
Kingdom corporation, for 170,000 British pounds (US $284,000). In connection
with the acquisition, the Company granted the former owner of Quest options to
purchase 205,000 shares of the Company's common stock at $5.00 per share as
consideration for entering into a three-year employment agreement. 105,000 of
these options are immediately exercisable and will expire after two years. The
remaining 100,000 options will be exercisable only to the extent that pre-tax
profits of Quest for the twelve months ending July 31, 1999 exceed certain
targets.
Effective July 1, 1998, IBIS also acquired Open Support Limited ("Open"), a
United Kingdom corporation, for 100,000 British pounds (US $167,000), net of the
prepayment charges of 103,000 British pounds (US $172,000). In connection with
the acquisition, the Company granted the former owner of Open options to
purchase up to 200,000 shares of the Company's common stock at $5.00 per share
as consideration for entering into a three-year employment agreement. The
options will be exercisable only to the extent that pre-tax profits of Open for
the twelve months ending March 31, 1999 exceed certain targets.
Stock Option Plans
Effective April 1, 1998, the Board of Directors approved an amendment to the
Company's Incentive Stock Option Plan (the "1989 Plan") increasing the number of
shares of common stock authorized under the Plan to 1,500,000 from 1,000,000. On
the same date, the Company granted options under the Plan for 347,000 shares of
common stock at an exercise price of $3.00 per share and 65,375 shares at an
exercise price of $4.54 per share. On July 9, 1998, the Company granted options
for an additional 38,000 shares at an exercise price of $6.00 per share.
During the third quarter ended December 31, 1998, the Company granted various
options under the 1989 Plan at exercise prices of $6.125 and $6.70 per share.
On October 5, 1998, the Board of Directors approved a new plan entitled the 1998
Incentive Stock Plan (the "1998 Plan"). The 1998 Plan is in addition to the 1989
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 purchase agreements.
During the third quarter ended December 31, 1998, the Company granted various
options under the 1998 Stock Option Plan at exercise prices of $6.125 and $6.25
per share.
<PAGE> 11
Loan to Softline
On October 13, 1998, the Company advanced $5,215,500 to Softline to facilitate a
payment by Softline to Peter Nagle, the Managing Director of IBIS. Softline was
obligated to pay this amount to Mr. Nagle in connection with an earnout which
was not assumed by the Company in the Company's acquisition of IBIS from
Softline in October 1997. Softline issued a promissory note to the Company in
the amount of the loan. The note bears interest at 7% per annum and is expected
to be paid during the quarter ended March 31, 1999. The note is secured by a
pledge of 1,000,000 shares of SVI common stock held by Softline.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this report regarding matters that are not
historical facts are forward-looking statements. Because such forward-looking
statements include risks and uncertainties, actual results may differ materially
from those expressed in or implied by such forward-looking statements. Factors
that could cause actual results to differ materially include, but are not
limited to, competition, fluctuations in currency exchange rates, the demand for
the Company's products and services internationally, especially in the United
Kingdom, Australia and South Africa, and other risk factors identified from time
to time in the Company's filings with the Securities and Exchange Commission.
The Company urges readers to review the risk factors listed in the Company's
Transition Report on Form 10-KSB for the six months ended March 31, 1998.
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 or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the relative
percentages of certain income and expense items to net sales and certain
information concerning earnings per share:
<PAGE> 12
<TABLE>
<CAPTION>
Three months ended December 31,
--------------------------------------------------------------------
1998 1997
Amount Percentage Amount Percentage
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net sales $ 8,894,000 100% $ 10,016,000 100%
Cost of sales 2,337,000 26% 5,100,000 51%
-------------------------------- -------------------------------
Gross profit 6,557,000 74% 4,916,000 49%
Selling, general and administrative
expenses 4,782,000 54% 2,995,000 30%
Other income (excluding gain on
sale of Softline Limited shares) 62,000 1% 69,000 1%
-------------------------------- -------------------------------
Income before taxes 1,837,000 21% 1,990,000 20%
Income tax provision 509,000 6% 719,000 7%
-------------------------------- -------------------------------
INCOME FROM CONTINUING OPERATIONS 1,328,000 15% 1,271,000 13%
Gain on sale of Softline Limited shares,
net of $1,321,000 estimated
income taxes - 0% 2,697,000 27%
-------------------------------- -------------------------------
NET INCOME $ 1,328,000 15% $ 3,968,000 40%
================================ ===============================
BASIC EARNINGS PER SHARE:
Continuing operations $ 0.05 $ 0.05
Gain on sale of Softline shares - 0.09
------------------ -----------------
$ 0.05 $ 0.14
================== =================
DILUTED EARNINGS PER SHARE:
Continuing operations $ 0.04 $ 0.04
Gain on sale of Softline shares - 0.09
------------------ -----------------
$ 0.04 $ 0.13
================== =================
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
Nine months ended December 31,
--------------------------------------------------------------------
1998 1997
Amount Percentage Amount Percentage
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net sales $ 25,490,000 100% $ 16,520,000 100%
Cost of sales 5,445,000 21% 6,984,000 42%
-------------------------------- -------------------------------
Gross profit 20,045,000 79% 9,536,000 58%
Selling, general and administrative
expenses 13,222,000 52% 6,499,000 39%
Other income (excluding gain on
sale of Softline Limited shares) 1,087,000 4% 243,000 1%
-------------------------------- -------------------------------
Income before taxes 7,910,000 31% 3,280,000 20%
Income tax provision 2,184,000 9% 279,000 2%
-------------------------------- -------------------------------
INCOME FROM CONTINUING OPERATIONS 5,726,000 22% 3,001,000 18%
Gain on sale of Softline Limited shares,
net of $2,587,000 estimated income
taxes - 0% 5,253,000 32%
-------------------------------- -------------------------------
NET INCOME $ 5,726,000 22% $ 8,254,000 50%
================================ ===============================
BASIC EARNINGS PER SHARE:
Continuing operations $ 0.20 $ 0.16
Gain on sale of Softline shares - 0.27
------------------ -----------------
$ 0.20 $ 0.43
================== =================
DILUTED EARNINGS PER SHARE:
Continuing operations $ 0.18 $ 0.15
Gain on sale of Softline shares - 0.25
------------------ -----------------
$ 0.18 $ 0.40
================== =================
</TABLE>
<PAGE> 14
Net Income
The Company reports a consolidated net income of $1,328,000 and $3,968,000 for
the quarters ended December 31, 1998 and 1997, respectively. The results for the
quarter ended December 31, 1997 included a gain of $4,018,000 ($2,697,000 after
estimated income taxes) from the sale of Softline shares. Income from continuing
operations (excluding the Softline gain) for the quarter ended December 31, 1997
was $1,271,000. The quarter ended December 31, 1998 results therefore represent
an increase of $57,000, or 4%, in net income from continuing operations,
compared to the quarter ended December 31, 1997.
The Company also reports a consolidated net income of $5,726,000 and $8,254,000
for the nine months ended December 31, 1998 and 1997, respectively. The results
for the 1997 period included a gain of $7,840,000 ($5,253,000 after estimated
income taxes) from the sale of Softline shares. Excluding this gain, net income
from continuing operations for the nine months ended December 31, 1997 was
$3,001,000. The nine months ended December 31,
1998 results therefore represent an increase of $2,725,000, or 91%, in net
income from continuing operations, compared to the nine months ended December
31, 1997.
Net income (excluding the sale of Softline shares) represented 15% of net sales
for the quarter ended December 31, 1998, compared to 13% for the comparable
quarter in 1997. Similarly, net income (excluding the sale of Softline shares)
increased as a percentage of net sales for the nine month period ended December
31, 1998, to 22%, compared to 18% for the 1997 period.
Both the absolute and the percentage increases in net income (excluding the sale
of Softline shares) were due primarily to the Company's ARS and IBIS
subsidiaries. The company acquired IBIS as of October 1, 1997 and ARS as of July
1, 1998.
Net Sales
Net sales decreased by $1,122,000, or 11%, for the three months ended December
31, 1998, to $8,894,000, compared to $10,016,000 for the comparable period ended
December 31, 1997. This decrease is primarily attributable to a decrease of
$4,238,000, or 42%, from net sales generated by Divergent. Divergent sales for
the 1997 period included revenue generated from several contracts with a major
retail group in Australia which were completed in March 1998. The decrease in
Divergent sales was offset by an increase of $2,657,000, or 27%, in net sales
generated by IBIS, and the inclusion $1,262,000 in net sales generated from ARS,
which was acquired on July 1, 1998.
Net sales for the nine months ended December 31, 1998 increased by $8,970,000,
or 54%, to $25,490,000 from $16,520,000 for the comparable period ended
December 31, 1997. The increase in net sales for the nine month period reflects
the inclusion of IBIS sales for all nine months of fiscal 1998 and of ARS in the
second and third quarters of fiscal 1998. This increase was offset by a decrease
in Divergent sales due to the completion by Divergent of several contracts with
a major retail group in Australia which were completed in March 1998.
Cost of Sales
Cost of sales for the quarters ended December 31, 1998 and 1997 were $2,337,000
and $5,100,000, respectively. The $2,763,000, or 54%, decrease reflects
decreases in cost of sales at Divergent related to the major Australian retailer
group contracts. Gross profit increased $1,641,000, or 33%, to $6,557,000 in the
1998 period, compared to $4,916,000 in the 1997 period. Gross profit increased
as a percentage of sales from 49% for the 1997 period to 74% for the 1998
period, primarily due to a shift in total sales mix from lower margin hardware
components to higher margin service components. This shift is in turn primarily
attributable to the acquisitions of IBIS and ARS.
Cost of sales decreased $1,539,000, or 22%, to $5,445,000 for the nine months
ended December 31, 1998, from $6,984,000 for the comparable period in 1997.
Gross profit increased $10,509,000, or 110%, to $20,045,000 for the nine months
ended December 31, 1998, from $9,536,000 for the comparable period ended
December 31, 1997. As a percentage of sales, gross profit increased from 58% for
the nine months ended December 31, 1997 to 79% for the comparable period in
1998. The increase in gross profit was again due to the inclusion of IBIS and
ARS and the increased service components of their customer contracts.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended December
31, 1998 were $4,782,000 compared to $2,995,000 for the three months ended
December 31, 1997, representing an increase of $1,787,000, or 60%. Selling,
general and administrative expenses increased $6,723,000, or 103%, to
$13,222,000 for the nine months ended December 31, 1998 from $6,499,000 for the
comparable period in 1997. The increases in expenses were due to growth in the
Company's operations including acquisitions.
<PAGE> 15
During the three month period ended December 31, 1998, selling, general and
administrative expenses increased as a percentage of sales to 54%, compared to
30% for the three month period ended December 31, 1997. This increase was
primarily due to costs associated with the rapid integration of ARS, Quest and
Open Support into the operations of the Company. For the nine month periods
ended December 31, 1998 and 1997, selling, general and administrative expenses
increased as a percentage of sales from 39% to 52%.
Earnings Per Share
Basic earnings per share for the quarters ended December 31, 1998 and 1997 were
$0.05 and $0.14 per share, respectively. The basic earnings per share for the
quarter ended December 31, 1997 included $0.09 per share from the sale of
Softline shares. Excluding this gain, the basic earnings per share would be the
same as the comparable quarter of 1997.
Diluted earnings per share for the quarters ended December 31, 1998 and 1997
were $0.04 and $0.13 per share, respectively. The quarter ended December 31,
1997 diluted earnings per share included $0.09 per share from the sale of
Softline shares. Excluding this gain, the diluted earnings per share would be
the same as the comparable quarter of 1997.
Basic earnings per share for the nine months ended December 31, 1998 and 1997
were $0.20 and $0.43 per share, respectively. The basic earnings per share for
the nine months ended December 31, 1997 included $0.27 per share from the sale
of Softline shares. Excluding this non-recurring item, the basic earnings per
share for the nine month period represent an increase of $0.04 per share over
the comparable period in 1997.
Diluted earnings per share for the nine months ended December 31, 1998 and 1997
were $0.18 and $0.40, respectively. The diluted earnings per share for the
period ended December 31, 1997 included $0.25 per share from the sale of
Softline shares. Excluding this non-recurring item, the diluted earnings per
share for the nine month period represent an increase of $0.03 per share over
the comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash of $5,156,000, a decrease of
$9,313,000 from $14,469,000 of cash at March 31, 1998. The significant uses of
cash were as follows:
- Income tax payments of $2,005,000;
- Loan to Softline of $5,216,000;
- Net payments related to the ARS acquisition of $1,403,000;
- Payments for other acquisitions of $656,000; and
- Repurchases of common stock at market for $667,000.
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 acquisition
opportunities within its target profile of companies with advanced technologies
and market leadership in specialty areas of information technology. There can be
no assurance that any such acquisition opportunities will be available on terms
acceptable to the Company, or that any such acquisitions will ultimately be
consummated.
<PAGE> 16
YEAR 2000 ISSUES
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, many 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 are reliant on software
developed internally. The Company believes that no significant Year 2000 issues
exist with these internal systems and services.
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
been involved in the process. Senior management of the Company is coordinating
the effort.
Communications with customers and suppliers to determine their Year 2000 issues
are an integral part of the program. The Company has reviewed all vendor
contracts and has requested written certification from each vendor that its
products are Year 2000 compliant.
Assessment activities are estimated at approximately 85% complete. Assessment
data is continuously updated as new information becomes available. Overall
remediation efforts are estimated at 65% complete.
Because the assessment process is not yet complete, the Company cannot yet
accurately estimate the costs and risks that will be associated with Year 2000
assessment and remediation. As of the date of this report, the Company has
identified necessary remediation efforts which are estimated to cost $355,000.
It is probable that this estimate will increase as the Company collects further
assessment data. Costs for Year 2000 compliance are not being accounted for
separately. Much of the cost is being accounted for as part of normal operating
budgets. Overall, the costs are not expected to have a significant effect on the
Company's consolidated financial position or results of operations.
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 an 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
customers are not able to properly integrate the Company's products due to
customers' internal Year 2000 problems. Finally, Year 2000 problems could have a
ripple effect through world economies which could adversely affect the demand
for some or all of the Company's products and services.
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 or to be paid by the Company in the
acquisition of ARS. The Company has no similar commitments 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 such dry runs will identify all
remaining internal Year 2000 issues before problems occur. These procedures will
not however identify external Year 2000 problems, and they will not provide any
information as to how Year 2000 problems throughout world economies may affect
the Company. The Company intends to create a contingency plan to address these
latter types of risks, but it has not yet done so.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which supersedes Statement of
Financial Accounting Standards No. 14. The new statement changes the way that
public companies report information about operating segments. SFAS 131 will be
effective for the Company's fiscal year ending March 31, 1999. The Company does
not expect the implementation of SFAS 131 to have any material effect on the
Company's financial position or results of operations.
<PAGE> 17
PART II. - OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended December 31, 1998, the Company issued options to
purchase an aggregate of 299,500 shares of common stock to certain employees and
directors of the Company and its subsidiaries. The options are exercisable for
five years at exercise price of $6.125 and $6.25 per share. These grants were
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2) of such Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 2.3 to 2.6, 3.1, 3.2, and 10.02 to 10.14 included in the Company's
report on Form 10-KSB for the transition period ended March 31, 1998; Exhibit
10.2 included in the Company's report on Form 10-QSB for the three
months ended June 30, 1998; and Exhibits 2.1 to 10.4 included in the Company's
report on Form 10-QSB for the quarter ended September 30, 1998, are incorporated
herein by reference.
<PAGE> 18
Exhibit Description
- ------- -----------
2.1 First Amendment to the Agreement and Plan of Reorganization dated
January 28, 1999 among SVI Holdings, Inc. and its wholly-owned
subsidiary; Applied Retail Solutions, Inc.; and the shareholders of
Applied Retail Solutions, Inc. (included herewith).
10.1 Promissory note dated October 13, 1998 between SVI Holdings, Inc. and
Softline Limited (included herewith).
10.2 Pledge Agreement dated October 13, 1998 between SVI Holdings, Inc. and
Softline Limited (included herewith).
27 Financial Data Schedule (included herewith).
(b) Reports on Form 8-K
On September 14, 1998, the Company filed a Form 8-K/A which included
the required financial data (Item 7) associated with the Company's acquisition
of ARS (Item 2).
<PAGE> 19
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: February 3, 1999 David L. Reese
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial officer.
<PAGE> 20
Exhibit 2.1
FIRST AMENDMENT TO AGREEMENT AND
PLAN OF REORGANIZATION
This First Amendment to Agreement and Plan of Reorganization ("Amendment") is
entered into as of January 28, 1999, by and among SVI Holdings, Inc., a Nevada
corporation ("SVI"), Applied Retail Solutions, Inc., a Delaware corporation
("Merger Sub"), Applied Retail Solutions, Inc., a California corporation
("ARS"), Sam Pickard ("Pickard") and Larry Lahodny ("Lahodny"). Pickard and
Lahodny and/or their respective successors in title, are collectively referred
to as the "Former Shareholders." The capitalized terms used in this Amendment
shall have the meanings ascribed such terms in the Agreement and Plan of
Reorganization entered into among the parties hereto as of July 1, 1998 (the
"Merger Agreement").
1. Recitals.
---------
1.1. Under the Merger Agreement parties provided for certain adjustment
procedure set forth in Sections 1.13 through 1.16.
1.2. The parties to the Amendment have agreed that the conditions described
in Section 1.13(a) of the Merger Agreement has been satisfied and wish
to facilitate implementation of the procedures set forth in Section
1.14 of the Merger Agreement.
2. Agreement.
----------
The parties hereby acknowledge, agree and consent to the following:
2.1. The calculations of Post-Closing Profits and Run Time Fees have been
determined to their satisfaction;
2.2. Waiver of the requirement for the "Accountants' Letter" provided in
Section 1.13(b);
2.3. The Post-Closing Profits and Run Time Fees result in a positive
Adjustment Amount; and,
2.4. The Former Shareholders shall be entitled to receive the maximum
consideration specified in Section 1.14(a)(ii) namely, $2,000,000
subject to the terms of the Merger Agreement.
2.5. The Former Shareholders are entitled to release of all Escrowed
Shares.
3. Payment of Additional Consideration.
------------------------------------
The Additional Consideration of $2,000,000 shall be paid in accordance
with the Merger Agreement no later than June 30, 2000.
<PAGE> 21
4. Release of Escrowed Shares.
---------------------------
The parties hereby irrevocably authorize and instruct Chicago Title
Company, Park Camino branch, to release the Escrowed Shares as follows:
Name of
- -------
Janet Lahodny, as successor in title and interest of Larry
Lahodny 321,750
Sam Pickard 428,250
Applied Retail Solutions, Inc.
a Delaware corporation
SVI Holdings, Inc. formerly, Applied Retail Solutions, Inc.
a Nevada corporation a California corporation
By: /s/ Barry M. Schechter By: /s/ Sam Pickard
Name: Barry M. Schechter Name: Sam Pickard
--------------------------- ----------------------------
Its: Chief Executive Officer Its: President
---------------------------- ----------------------------
Sam Pickard
/s/ Sam Pickard
-----------------------------------
Janet Lahodny, as successor in title
and interest of Larry Lahodny
/s/ Janet Lahodny
-----------------------------------
<PAGE> 22
Exhibit 10.1
PROMISSORY NOTE
---------------
$5,215,500.00 October 13, 1998
SOFTLINE LIMITED, a South African corporation ("Maker"), promises to
pay to SVI HOLDINGS, INC, a Nevada corporation or order ("Holder"), at 7979
Ivanhoe Ave, Suite 500, La Jolla, California 92037, the principal sum of FIVE
MILLION TWO HUNDRED FIFTEEN THOUSAND FIVE HUNDRED AND NO/100 DOLLARS
($5,215,500.00), with interest on such principal sum from the date of this Note
until paid, with interest on the principal balance outstanding from the date of
disbursement at the rate of Eight and One Half Percent (8.5%) per annum, payable
as more fully set forth below:
1. PAYMENTS. Principal and interest under this Note shall be payable
as follows:
1.1. MATURITY. On or before December 29, 1998, all unpaid
principal and accrued interest under this Note shall become due and payable. The
term of this Note may be extended by Holder in its sole and absolute discretion.
1.2. INTEREST. Accrued interest shall be added to principal on
a monthly basis and shall thereafter bear interest at the interest rate set
forth above.
2. MANNER OF PAYMENTS. All payments by Maker under this Note shall be
(a) made in lawful money of the United States of America without set-off,
deduction or counterclaim of any kind whatsoever, (b) credited first to amounts
for late charges, if any, second to amounts for Holder's costs of enforcing this
Note, if any, third to any accrued interest under this Note and finally to the
principal balance under this Note, and (c) deemed paid by Maker upon their
actual receipt by Holder. Interest for any period less than one year shall be
calculated on the basis of 1/360th of one year's interest multiplied by the
number of days during such period.
3. DEFAULT INTEREST. In addition to any late charge assessed pursuant
to Paragraph 4, if any payment under this Note is not received by Holder when
due, then, without any requirement for notice to Maker, the rate of interest on
such overdue amount shall increase to twelve (12) percent until such late
payment is made. Such default interest represents a fair and reasonable estimate
of the costs that Holder will incur by reason of any late payment by Maker.
Acceptance of such default interest by Holder shall not constitute a waiver of
Maker's default with respect to such overdue amount, nor prevent Holder from
exercising any of the other rights and remedies available to Holder under this
Note.
4. LATE CHARGE. If any amount of interest and/or principal under this
Note is not received by Holder within ten (10) calendar days after its due date,
then, without any requirement for notice to Maker, Maker shall immediately pay
to Holder an additional sum of five (5) percent of such overdue amount as a late
charge. Such late charge represents a fair and reasonable estimate of the costs
that Holder will incur by reason of any late payment by Maker. Acceptance of
such late charge by Holder shall not constitute a waiver of Maker's default with
respect to such overdue amount, nor prevent Holder from exercising any of the
other rights and remedies available to Holder under this Note.
5. ACCELERATION. All unpaid principal and accrued and unpaid interest
under this Note shall, at Holder's election, be immediately due and payable upon
the occurrence of any failure by Maker to timely satisfy all of its obligations
under this Note, any other Note or Agreement made by Maker.
<PAGE> 23
6. MAKER'S REPRESENTATIONS AND WARRANTIES. The truth and accuracy of
the following shall constitute a condition to this Note and Maker represents and
warrants that the following are true and accurate:
6.1. LEGAL POWER, RIGHT AND AUTHORITY. As of the date of this
Note, Maker has the legal power, right and authority to enter into this Note.
6.2. ACTION. As of the date of this Note, all requisite
corporate actions have been taken by Maker in connection with entering into this
Note and the consummation of the transactions contemplated by this Note.
6.3. INDIVIDUAL EXECUTING. The individual executing this Note
on behalf of Maker has the legal power, right, and actual authority to bind
Maker to the terms and conditions of this Note.
6.4. GOVERNMENTAL APPROVAL. Maker has requested all permits,
approvals, licenses and other governmental consent necessary or desirable in
connection with the loan evidenced by this Note and the repayment of all
indebtedness evidenced by this Note. To their best knowledge and belief, Maker
knows and believes, after due investigation that such approvals will be obtained
within the Note period and agrees to make every effort and extend every
cooperation to accomplish this task. Any request, representation or warranty
regarding permits, approvals, licenses and governmental consent herein is
intended to include, without limitation, all necessary approval by the South
African Exchange Control to repay the principal and accrued interest on the Note
on or before December 29, 1998.
6.5. NO CONFLICT. The loan evidenced by this Note does not
violate or breach any agreement, license, permit, judgment, decree, order,
statute, ordinance, rule or regulation to which maker, or any of its assets are
subject or bound. Maker is not subject to any agreement, license, permit,
judgment, decree, order, statute, ordinance, rule or regulation that would
impair the power of Maker to enter into and carry out the undertakings required
under this Note. This Note does not violate, conflict with, result in the breach
of, or constitute a default under any Applicable Laws. The term "Applicable
Laws" means all applicable constitutional, legislative, judicial and
administrative provisions, statutes, regulations, decisions, rulings, orders,
ordinances and other laws of the State of California, the United States of
America, and South Africa.
7. COMMERCIAL PURPOSES. Maker acknowledges that the loan evidenced by
this Note is obtained for business or commercial purposes and that the proceeds
of such loan will not be used primarily for personal, family, household or
agricultural purposes.
8. NOTE WAIVERS. Maker waives presentment, demand, protest, notice of
demand and dishonor.
9. SECURITY. This Note is secured by a Pledge evenly dated with this
Note from Maker to Holder and naming Solomon Ward Seidenwurm & Smith as Pledge
Holder.
10. PREPAYMENT WITHOUT PENALTY. This Note may be prepaid in whole or
in part at any time without penalty.
11. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California, irrespective of
California's choice-of-law principles.
<PAGE> 24
12. FURTHER ASSURANCES. Maker shall execute all instruments and
documents and take all actions as may be reasonably required to effectuate this
Note.
13. VENUE AND JURISDICTION. All actions and proceedings arising in
connection with this Agreement must be tried and litigated exclusively in the
State and Federal courts located in the County of San Diego, State of
California, which courts have personal jurisdiction and venue over each of the
parties to this Agreement for the purpose of adjudicating all matters arising
out of or related to this Agreement. Each party authorizes and accepts service
of process sufficient for personal jurisdiction in any action against it as
contemplated by this paragraph by registered or certified mail, return receipt
requested, postage prepaid, to its address for the giving of notices set forth
in this Agreement.
14. TIME OF ESSENCE. Time and strict and punctual performance are of
the essence with respect to each provision of this Note.
15. ATTORNEY'S FEES. In the event any litigation, arbitration,
mediation, or other proceeding ("Proceeding") is initiated by any party(ies)
against any other party(ies) to enforce, interpret or otherwise obtain judicial
or quasi-judicial relief in connection with this Note, the prevailing party(ies)
in such Proceeding shall be entitled to recover from the unsuccessful party(ies)
all costs, expenses, actual attorney's and expert witness fees, relating to or
arising out of (a) such Proceeding (whether or not such Proceeding proceeds to
judgment), and (b) any post-judgment or post-award proceeding including without
limitation one to enforce any judgment or award resulting from any such
Proceeding. Any such judgment or award shall contain a specific provision for
the recovery of all such subsequently incurred costs, expenses, actual
attorney's and expert witness fees.
16. MODIFICATION. This Note may be modified only by a contract in
writing executed by Maker and Holder.
17. HEADINGS. The headings of the Paragraphs of this Note have been
included only for convenience, and shall not be deemed in any manner to modify
or limit any of the provisions of this Note, or be used in any manner in the
interpretation of this Note.
18. PRIOR UNDERSTANDINGS. This Note contains the entire Note between
the parties to this Note with respect to the subject matter of this Note, is
intended as a final expression of such parties' Note with respect to such terms
as are included in this Note, is intended as a complete and exclusive statement
of the terms of such Note, and supersedes all negotiations, stipulations,
understandings, Notes, representations and warranties, if any, with respect to
such subject matter, which precede or accompany the execution of this Note.
19. WAIVER. Any waiver of a default under this Note must be in writing
and shall not be a waiver of any other default concerning the same or any other
provision of this Note. No delay or omission in the exercise of any right or
remedy shall impair such right or remedy or be construed as a waiver. A consent
to or approval of any act shall not be deemed to waive or render unnecessary
consent to or approval of any other or subsequent act.
20. DRAFTING AMBIGUITIES. Each party to this Note and its legal counsel
have reviewed and revised this Note. The rule of construction that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Note or of any amendments or exhibits to this
Note.
<PAGE> 25
21. SURVIVAL. The covenants, conditions, representations and warranties
of this Note shall survive the execution of this Note and the repayment of
indebtedness evidenced by this Note.
SOFTLINE LIMITED, a South African corporation,
Maker
By: /s/ Steven Cohen
------------------------------
Its:
------------------------------
<PAGE> 26
Exhibit 10.2
PLEDGE AGREEMENT
This Agreement is executed effective October 13, 1998 between SVI HOLDINGS,
INC., a Nevada corporation, having an address for notices at 7979 Ivanhoe
Avenue, Suite 500, La Jolla, CA 92037 ("SVI" or "Pledgee") and SOFTLINE LIMITED,
a South African corporation, having an address for notices at 16 Commerce
Crescent, Eastgate Extension 13, Sandton 2144, South Africa ("Pledgor"), who
agree as follows:
1. RECITAL. This Agreement is made with reference to the following
recital of essential facts:
1.a. Pledgor has executed a Promissory Note dated October 13,
1998 in the amount of $5,215,500.00 (the "Note") in favor of Pledgee.
1.b. In order to secure Pledgor's payment obligations under the
Note, Pledgor has agreed to pledge to Pledgee one million (1,000,000) shares of
common stock (the "Shares") held by Pledgor in SVI.
2. GRANT OF SECURITY INTEREST. To secure Pledgor's payment obligations
to Pledgee under the Note, Pledgor pledges, assigns and grants to Pledgee a
security interest in (a) the Shares and (b) all stock or cash dividends,
substitutions, and shares issued pursuant to any merger or reorganization, or
any other proceeds of such Shares as defined in Section 9306 of the California
Uniform Commercial Code.
3. DELIVERY OF SHARES. Upon Pledgor's execution of this Pledge
Agreement, Pledgor shall concurrently validly endorse the share certificate(s)
evidencing the Shares in blank and deliver such certificate(s) to Norman L.
Smith, Esq., of Solomon Ward Seidenwurm & Smith (the "Pledgeholder").
Pledgeholder shall retain such certificate(s) to secure Pledgor's obligations to
Pledgee under this Agreement.
4. TERMS OF PLEDGE. The Shares shall be held by Pledgeholder in pledge
subject to the terms and conditions of this Agreement. As long as no default
exists as described in Paragraph 8 below, Pledgor shall have the right at all
times to vote such Shares on any and all matters. Pledgor and Pledgee shall
indemnify Pledgeholder and hold him harmless from any loss, expense or damage he
may incur by virtue of his role as Pledgeholder, except for any breach of duty
or negligence of Pledgeholder.
5. PLEDGOR'S REPRESENTATIONS AND WARRANTIES. The Pledgor represents and
warrants that the following are true and accurate:
5.1. LEGAL POWER, RIGHT AND AUTHORITY. As of the date of this
Agreement, Pledgor has the legal power, right and authority to enter into this
Agreement.
5.2. ACTION. As of the date of this Agreement, all requisite
corporate actions have been taken by Pledgor in connection with entering into
this Agreement and the consummation of the transactions contemplated by this
Agreement.
<PAGE> 27
5.3. INDIVIDUAL EXECUTING. The individual executing this
Agreement on behalf of Pledgor has the legal power, right, and actual authority
to bind Pledgor to the terms and conditions of this Agreement.
5.4. GOVERNMENTAL APPROVAL. Pledgor has obtained all permits,
approvals, licenses and other governmental consent necessary or desirable in
connection with the loan evidenced by the Note and the repayment of all
indebtedness evidenced by this Note. Such representation and warranty regarding
permits, approvals, licenses and governmental consent is intended to include,
without limitation, all necessary approval by the South African Exchange Control
to repay the principal and accrued interest on the Note on or before December
29, 1998.
5.5. NO CONFLICT. The loan evidenced by the Note does not
violate or breach any agreement, license, permit, judgment, decree, order,
statute, ordinance, rule or regulation to which maker, or any of its assets are
subject or bound. Maker is not subject to any agreement, license, permit,
judgment, decree, order, statute, ordinance, rule or regulation that would
impair the power of Maker to enter into and carry out the undertakings required
under the Note. The Note does not violate, conflict with, result in the breach
of, or constitute a default under any Applicable Laws. The term "Applicable
Laws" means all applicable constitutional, legislative, judicial and
administrative provisions, statutes, regulations, decisions, rulings, orders,
ordinances and other laws of the State of California, the United States of
America, and South Africa.
6. NEGATIVE COVENANTS. Until all obligations secured by this Pledge
Agreement shall have been fully and finally performed, Pledgor shall not without
the prior written consent of Pledgee: (a) create or suffer to exist any further
security interest in the Shares; or (b) sell or otherwise dispose of the Shares.
7. AFFIRMATIVE COVENANTS. Until all obligations secured by this
Agreement shall have been fully and finally performed, Pledgor shall pay when
due all taxes, assessments, and liens, if any, upon the Shares. Pledgor may
withhold any such payment or may elect to contest any lien if Pledgor is in good
faith conducting appropriate proceedings to contest the obligation to pay, so
long as Pledgee's interest in the Shares is not jeopardized. In any such
contest, Pledgor shall represent itself and Pledgee and shall satisfy any final
adverse judgment before enforcement against the Shares. Pledgor shall name
Pledgee as an additional obligee under any surety bond furnished in the contest
proceedings.
8. EVENTS OF DEFAULT. Pledgor shall be in default under this Agreement
upon the occurrence of any of the following events:
8.a. Pledgor's breach of this Agreement, which breach is not
cured within 5 days of written notice to Pledgor of such breach.
8.b. Any amount due under the Note is not received by Pledgee on
its due date.
8.c. Any actual or attempted disposition of the Shares in
violation of this Agreement.
<PAGE> 28
8.d. The making by Pledgor of any general arrangement or
assignment for the benefit of creditors; Pledgor becoming bankrupt, insolvent or
a "debtor" as defined in 11 U.S.C. Section 101, or any successor statute or
similar statute or law in South Africa (unless, in the case of a petition filed
against Pledgor, such petition is dismissed within 30 days after its original
filing); the appointing of a trustee or receiver to take possession of
substantially all of Pledgor's assets (unless possession is restored to Pledgor
within 30 days after such taking); or the attachment, execution or judicial
seizure of substantially all of Pledgor's assets (unless such attachment,
execution or judicial seizure is discharged within 30 days after such
attachment, execution or judicial seizure).
9. RIGHTS OF PLEDGEE UPON DEFAULT. Should a default occur under
Paragraph 8 above (a "Default"), Pledgee shall give Pledgeholder written notice
and full details of such Default. Immediately following the receipt of such
written notice of Default, Pledgeholder may exercise any of the following
remedies with regard to the Shares on behalf of Pledgee:
9.a. Vote, grant proxies, attend shareholder meetings, nominate
and elect directors, receive dividends and other distributions to shareholders,
and otherwise exercise any rights attributable to the Shares.
9.b. Cause the Shares to be transferred to Pledgee on the books
of Pledgor, in accordance with the stock transfer form executed by Pledgor in
connection with the delivery of the Shares.
9.c. Cause the Shares to be sold at public or private sale (a
"Sale"). Proceeds from such Sale, net of reasonable expenses of sale including
attorney's fees and legal expenses incurred by the Pledgeholder, sufficient to
cure the Default, shall be forwarded to Pledgee. Any proceeds in excess of the
amount sufficient to cure the Default shall be immediately forwarded to Pledgor.
If Pledgee instructs Pledgeholder to sell the Shares and if the net proceeds of
such Sale are insufficient to cure the Default, Pledgee may exercise any other
rights and remedies afforded to secured parties under the California Uniform
Commercial Code, or otherwise in law or equity. All such rights and remedies
shall be cumulative and may be exercised singularly or concurrently.
Notwithstanding the foregoing, Pledgee acknowledges that in
the event of a non-monetary default described in Paragraph 8.1 above, Pledgee
must liquidate its damages by a judicial determination before the Sale shall
occur. Notwithstanding the foregoing, if Pledgor cures any Default prior to the
Sale, Pledgeholder shall cause the Sale not to occur.
10. CONFLICTING DEMANDS. If conflicting demands are made upon
Pledgeholder, he shall have the right (a) to file an action in interpleader with
a court of competent jurisdiction, and (b) to be reimbursed by Pledgor and/or
Pledgee for any and all costs, expenses and attorneys' fees reasonably incurred
in connection with such action as determined by such court, except to the extent
of any breach of duty or negligence of Pledgeholder.
11. RETURN OF SHARES/NOTE. Upon Pledgor's performance of all of its
obligations under this Agreement and the Note, Pledgeholder shall return the
Shares to Pledgor and the Note marked "PAID."
12. REPRESENTATIONS AND WARRANTIES OF PLEDGOR. Pledgor represents and
warrants to Pledgee that except for the security interest created by this
Agreement, no person or entity has any right, title, interest, or claim in or to
the Shares or any part of the Shares.
<PAGE> 29
13. GOVERNING LAW. This Agreement is governed by and construed in
accordance with the laws of the State of California, irrespective of
California's choice-of-law principles.
14. FURTHER ASSURANCES. Each party to this Agreement shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Agreement.
15. VENUE AND JURISDICTION. All actions and proceedings arising in
connection with this Agreement must be tried and litigated exclusively in the
State and Federal courts located in the County of San Diego, State of
California, which courts have personal jurisdiction and venue over each of the
parties to this Agreement for the purpose of adjudicating all matters arising
out of or related to this Agreement. Each party authorizes and accepts service
of process sufficient for personal jurisdiction in any action against it as
contemplated by this paragraph by registered or certified mail, return receipt
requested, postage prepaid, to its address for the giving of notices set forth
in this Agreement.
16. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which is deemed an original
and all of which together constitute one document.
17. TIME OF ESSENCE. Time and strict and punctual performance are of
the essence with respect to each provision of this Agreement.
18. ATTORNEY'S FEES. The prevailing party(ies) in any litigation,
arbitration, mediation, bankruptcy, insolvency or other proceeding
("Proceeding") relating to the enforcement or interpretation of this Agreement
may recover from the unsuccessful party(ies) all costs, expenses, and actual
attorney's fees (including expert witness and other consultants' fees and costs)
relating to or arising out of (a) the Proceeding (whether or not the Proceeding
proceeds to judgment), and (b) any post-judgment or post-award proceeding
including, without limitation, one to enforce or collect any judgment or award
resulting from the Proceeding. All such judgments and awards shall contain a
specific provision for the recovery of all such subsequently incurred costs,
expenses, and actual attorney's fees.
19. MODIFICATION. This Agreement may be modified only by a contract in
writing executed by the party to this Agreement against whom enforcement of the
modification is sought.
20. HEADINGS. The paragraph headings in this Agreement: (a) are
included only for convenience, (b) do not in any manner modify or limit any of
the provisions of this Agreement, and (c) may not be used in the interpretation
of this Agreement.
21. PRIOR UNDERSTANDINGS. This Agreement and all documents specifically
referred to and executed in connection with this Agreement: (a) contain the
entire and final agreement of the parties to this Agreement with respect to the
subject matter of this Agreement, and (b) supersede all negotiations,
stipulations, understandings, agreements, representations and warranties, if
any, with respect to such subject matter, which precede or accompany the
execution of this Agreement.
<PAGE> 30
22. INTERPRETATION. Whenever the context so requires in this Agreement,
all words used in the singular may include the plural (and vice versa) and the
word "person" includes a natural person, a corporation, a firm, a partnership, a
joint venture, a trust, an estate or any other entity. The terms "includes" and
"including" do not imply any limitation. For purposes of this Agreement, the
term "day" means any calendar day and the term "business day" means any calendar
day other than a Saturday, Sunday or any other day designated as a holiday under
California Government Code Sections 6700-6701. Any act permitted or required to
be performed under this Agreement upon a particular day which is not a business
day may be performed on the next business day with the same effect as if it had
been performed upon the day appointed. No remedy or election under this
Agreement is exclusive, but rather, to the extent permitted by applicable law,
each such remedy and election is cumulative with all other remedies at law or in
equity.
23. PARTIAL INVALIDITY. Each provision of this Agreement is valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement (or the application of such provision to any person or circumstance)
is or becomes invalid or unenforceable, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, are not affected by such invalidity
or unenforceability unless such provision or the application of such provision
is essential to this Agreement.
24. SUCCESSORS-IN-INTEREST AND ASSIGNS. Pledgor may not voluntarily or
by operation of law assign, hypothecate, delegate or otherwise transfer or
encumber all or any part of its rights, duties or other interests in this
Agreement without the prior written consent of Pledgee, which consent may be
withheld in Pledgee's sole and absolute discretion. Any such transfer in
violation of this paragraph is void. Subject to the foregoing and any other
restrictions on transferability contained in this Agreement, this Agreement is
binding upon and inures to the benefit of the successors-in-interest and assigns
of each party to this Agreement.
25. NOTICES. All notices or other communications required or permitted
to be given to a party to this Agreement shall be in writing and shall be
personally delivered, sent by certified mail, postage prepaid, return receipt
requested, or sent by an overnight express courier service that provides written
confirmation of delivery, to such party at its address as set forth above in the
introductory Paragraph of this Agreement. Each such notice or other
communication shall be deemed given, delivered and received upon its actual
receipt, except that if it is sent by mail in accordance with this Paragraph,
then it shall be deemed given, delivered and received three days after the date
such notice or other communication is deposited with the United States Postal
Service in accordance with this Paragraph. Any party to this Agreement may give
a notice of a change of its address to the other party(ies) to this Agreement.
Notice to Pledgeholder shall be to Norman L. Smith, Esq., Solomon Ward
Seidenwurm & Smith, 401 B Street, Suite 1200, San Diego, CA 92101.
26. WAIVER. Any waiver of a default or provision under this Agreement
must be in writing. No such waiver constitutes a waiver of any other default or
provision concerning the same or any other provision of this Agreement. No delay
or omission by a party in the exercise of any of its rights or remedies
constitutes a waiver of (or otherwise impairs) such right or remedy. A consent
to or approval of an act does not waive or render unnecessary the consent to or
approval of any other or subsequent act.
<PAGE> 31
27. DRAFTING AMBIGUITIES. Each party to this Agreement and its legal
counsel have reviewed and revised this Agreement. The rule of construction that
ambiguities are to be resolved against the drafting party or in favor of the
party receiving a particular benefit under an agreement may not be employed in
the interpretation of this Agreement or any amendment to this Agreement.
28. SURVIVAL. The covenants, conditions, representations and warranties
of this Agreement shall
survive the execution of this Agreement.
SVI HOLDINGS, INC., a Nevada corporation
By: /s Barry M. Schechter
--------------------------------
SOFTLINE LIMITED, a South African corporation
By: /s/ Steven Cohen
--------------------------------
I ACCEPT THE OBLIGATIONS IMPOSED UPON ME UNDER THIS PLEDGE
AGREEMENT:
-----------------------------------------
Norman L. Smith, Esq., Pledgeholder
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 5,156
<SECURITIES> 0
<RECEIVABLES> 7,261
<ALLOWANCES> 505
<INVENTORY> 211
<CURRENT-ASSETS> 13,964
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0
0
<COMMON> 3
<OTHER-SE> 43,760
<TOTAL-LIABILITY-AND-EQUITY> 51,884
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<TOTAL-REVENUES> 25,490
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