<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1 to Form 10-QSB)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission file Number 0-23049
SVI Holdings, Inc.
--------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Nevada 84-1131608
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12707 High Bluff Drive, Suite 335, San Diego, CA 92030
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(Address of principal executive offices) (Zip Code)
(858) 481-4404
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(Registrant's telephone number, including area code)
7979 Ivanhoe Avenue, Suite 500, La Jolla, CA 92037
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $0.0001 Par Value - 32,502,045 shares as of July 30, 1999.
<PAGE>
EXPLANATORY NOTE
This quarterly report on Form 10-Q/A is an amendment to the Form 10-QSB filed by
the Company on August 10, 1999 for the quarter ended June 30, 1999. The
amendment is provided on Form 10-Q, consistent with the Company's decision to
voluntarily exit the small business reporting system for fiscal year 2000.
This quarterly report on Form 10-Q/A is being filed to reflect the restatement
of the Registrant's Condensed Consolidated Financial Statements (the
"Restatement"). The Restatement reflects (1) the change in amortization periods
for goodwill related to certain acquisitions, (2) the classification of a
receivable for shares of the Company's common stock as a contra-equity account
in stockholders' equity, and (3) the classification of certain cost of sales
expenses as selling, general and administrative expenses.
This report does not otherwise attempt to update the information included herein
beyond the original filing date.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999
(as restated) and March 31, 1999................................... 4
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 1999 (as restated) and 1998.................. 5
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 1999 (as restated) and 1998.................. 6
Notes to Condensed Consolidated Financial Statements....-............ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 15
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 15
Item 2. Changes in Securities and Use of Proceeds............................ 15
Item 6. Exhibits and Reports on Form 8-K..................................... 16
Signatures .................................................................. 16
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30,1999 March 31, 1999
------------- --------------
(As restated -
see Note H)
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 1,478,356 852,836
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 27,015,052 31,199,071
Property and equipment, net 1,518,274 734,386
Capitalized software, net 35,581,221 14,053,186
Goodwill, net 14,345,604 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
------------- -------------
Total assets $ 82,849,866 $ 53,136,884
============= =============
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
------------- -------------
Total liabilities 30,433,037 7,866,840
------------- -------------
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
Shares receivable (1,152,000) (2,142,000)
Treasury stock, at cost; shares-225,400 and 127,400 (2,133,404) (951,404)
Retained earnings 11,266,606 9,885,138
Accumulated other comprehensive income (794,878) (960,598)
------------- -------------
Total stockholders' equity 52,416,829 45,270,044
------------- -------------
Total liabilities and stockholders' equity $ 82,849,866 $ 53,136,884
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended June 30,
1999 1998
------------- -------------
(As restated -
see Note H)
<S> <C> <C>
Net sales $ 11,767,259 $ 4,245,315
Cost of sales 2,445,128 1,303,157
------------- -------------
Gross profit 9,322,131 2,942,158
Research and development expenses 615,467 -
Depreciation and amortization 1,786,419 433,047
Selling, general and administrative expenses 4,920,417 1,790,808
------------- -------------
Income from operations 1,999,828 718,303
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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 334,470 208,795
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Income before provision for income taxes 2,334,298 927,098
Provision for income taxes 952,830 411,802
------------- -------------
Income from continuing operations 1,381,468 515,296
Discontinued operations:
Income from operations of IBIS Systems Ltd., net of
applicable income taxes of $239,500 in 1998 - 1,600,288
------------- -------------
Net income $ 1,381,468 $ 2,115,584
============= =============
Basic earnings per share:
Continuing operations $ 0.04 $ 0.02
Discontinued operations - 0.06
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Net income $ 0.04 $ 0.08
============= =============
Diluted earnings per share:
Continuing operations $ 0.04 $ 0.02
Discontinued operations - 0.05
------------- -------------
Net income $ 0.04 $ 0.07
============= =============
Weighted-average common shares outstanding:
Basic 31,780,869 28,189,640
============= =============
Diluted 34,963,241 31,459,807
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended June 30,
1999 1998
------------- -------------
(As restated -
see Note H)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,381,468 $ 2,115,584
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 1,786,419 630,750
Compensation expense for stock options granted - 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 net of effects from acquisitions:
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) -
------------- -------------
Net cash used for operating activities (3,235,373) (802,768)
------------- -------------
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 software development costs (239,013) (104,616)
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Net cash used for investing activities (34,308,654) (763,265)
------------- -------------
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 -
------------- -------------
Net cash provided by financing activities 26,345,190 172,975
------------- -------------
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
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
6
<PAGE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Organization and Basis of Preparation
The accompanying condensed consolidated financial statements have been prepared
from the unaudited records of SVI Holdings, Inc. (the "Company") and its
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 amounts in the prior periods have been reclassified to conform to the
presentation for the three months ended June 30, 1999. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. 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 required 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
Company is amortizing estimated goodwill acquired in the acquisition on a
straight-line basis over an estimated life of ten years.
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 $ 7,955,000
Net loss $ (659,000)
Basic and diluted loss per share $ (0.02)
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, receipt of SVI's
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 reported as
discontinued operations.
7
<PAGE>
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 hold in treasury 225,400 shares of its common stock.
Note E - Reporting Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") establishes standards for reporting and displaying
comprehensive income and its components. 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
------------- -------------
<S> <C> <C>
Net income $ 1,381,468 $ 2,115,584
Other comprehensive income (loss):
Translation adjustment 165,720 (184,185)
------------- -------------
Comprehensive income $ 1,547,188 $ 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
------------- -------------
<S> <C> <C>
NET INCOME PER SHARE - BASIC
Net income $ 1,381,468 $ 2,115,584
============= =============
Weighted average number of common shares 31,780,869 28,189,640
============= =============
Net income per share $ 0.04 $ 0.08
============= =============
NET INCOME PER SHARE - DILUTED
Net income $ 1,381,468 $ 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
------------- -------------
Total 34,963,241 31,459,807
============= =============
Net income per share $ 0.04 $ 0.07
============= =============
</TABLE>
Options outstanding during the quarter ended June 30, 1998 to purchase 100,000
shares of common stock were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
prices of the common stock during the period and, therefore, the effect would
be anti-dilutive.
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.
8
<PAGE>
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 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
------------- -------------
<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 -
------------- -------------
Total revenues $ 11,767,259 $ 8,495,437
============= =============
</TABLE>
Note H - Restatement
Subsequent to the issuance of the Company's condensed consolidated financial
statements for the three-month period ended June 30, 1999 on August 10, 1999,
the Company's management determined that (1) amortization periods for
goodwill related to the Divergent Technologies Pty. Ltd., Chapman Computers
Pty. Ltd., Applied Retail Solutions, Inc. and Island Pacific Systems
Corporation acquisitions should be revised to ten years from twenty years
effective April 1, 1999, (2) a receivable for shares of the Company's common
stock should be classified as a contra-equity account in stockholders'
equity, and (3) certain cost of sales should be classified as selling,
general and administrative expenses. As a result, the condensed
consolidated financial statements for the three-month period ended June 30,
1999 have been restated from amounts previously reported. A summary of the
significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
As Previously As
Reported Restated
------------- ------------
<S> <C> <C>
At June 30, 1999:
Goodwill, net $ 14,578,955 $ 14,345,604
Other receivables 2,630,356 1,478,356
Total assets 84,235,217 82,849,866
Total stockholders' equity 53,802,180 52,416,829
For three months ended June 30, 1999:
Cost of sales $ 3,549,258 $ 2,445,128
Depreciation and amortization 1,553,068 1,786,419
Selling, general and administrative expenses 3,816,287 4,920,417
Net income 1,614,819 1,381,468
EPS - basic and diluted 0.05 0.04
</TABLE>
9
<PAGE>
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 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 required
until maturity in December 1999, convertible thereafter to a fully-amortizing
two-year loan subject to certain terms and conditions. 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.
Discontinued Operations
Effective January 1, 1999, the Company sold its United Kingdom operations, IBIS
Systems Ltd., for cash proceeds of $2,250,000, receipt 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 reported 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.
10
<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,
-----------------------------------------------------
1999 1998
Amount Percentage Amount Percentage
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales $ 11,767,000 100% $ 4,245,000 100%
Cost of sales 2,445,000 21% 1,303,000 31%
----------------------- -----------------------
Gross profit 9,322,000 79% 2,942,000 69%
Research and development expenses 615,000 5% - - %
Selling, general and administrative
expenses 4,920,000 42% 1,791,000 42%
Other income 464,000 3% 228,000 5%
----------------------- -----------------------
Income before interest expense, income taxes,
depreciation and amortization 4,251,000 36% 1,379,000 32%
Interest expense 130,000 1% 19,000 -%
Depreciation and amortization 1,787,000 15% 433,000 10%
----------------------- -----------------------
Income before provision for
income taxes 2,334,000 20% 927,000 22%
Provision for income taxes 953,000 8% 411,000 10%
----------------------- -----------------------
Income from continuing operations 1,381,000 12% 516,000 12%
Discontinued operations:
Income from operations of IBIS Systems
Ltd., net of applicable income taxes
of $240,000 in 1998 - 1,600,000
------------- -------------
Net income $ 1,381,000 $ 2,116,000
============= =============
Basic earnings per share:
Continuing operations $ 0.04 $ 0.02
Discontinued operations - 0.06
------------- -------------
Net income $ 0.04 $ 0.08
============= =============
Diluted earnings per share:
Continuing operations $ 0.04 $ 0.02
Discontinued operations - 0.05
------------- -------------
Net income $ 0.04 $ 0.07
============= =============
</TABLE>
RESTATEMENT OF QUARTERLY INFORMATION
As discussed in the notes to the condensed consolidated financial statements,
the Company restated its June 30, 1999 financial statements to (1) revise
the amortization periods for goodwill related to certain acquisitions to ten
years from twenty years effective April 1, 1999, (2) classify a receivable
for shares of the Company's common stock to a contra-equity account in
stockholders' equity, and (3) classify certain cost of sales as selling,
general and administrative expenses. The above changes had no impact on the
net cash flows from operations.
11
<PAGE>
NET INCOME
The Company reports consolidated net income of $1,381,000 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 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 $2,445,000 and
$1,303,000, respectively. The increase of $1,142,000 or 88% resulted from
increases in related net sales.
GROSS PROFIT
Gross profit from operations increased from $2,942,000 at June 30, 1998 to
$9,322,000 at June 30, 1999. Gross profit as a percentage of net sales increased
from 69% in the prior comparative period to 79% at June 30, 1999. The increase
in gross profit is primarily due to a higher profit margin contributed from
Island Pacific, which was acquired in April 1999 and made up about 62% of the
Company's total net sales. Island Pacific enjoys a higher gross profit margin
than other subsidiaries, because its sales mix favors higher margin software
license sales rather than lower profit margin hardware sales.
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 research and development expenses
in the comparative period. 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 $4,920,000 compared to $1,791,000 for the same period ended June 30,
1998. This increase of $3,129,000 or 175% 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, as a percentage of net sales, remains
unchanged for the three month periods ended June 30, 1999 and 1998.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense, increased from $433,000 for the quarter
ended June 30, 1998 to $1,787,000 for the quarter ended June 30, 1999. This
increase of $1,354,000 or 312% 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.
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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 was from stock options exercised by the majority
stockholder.
Accounts receivable increased from $3,310,000 at March 31, 1999 to $9,173,000 at
June 30, 1999 due primarily to the acquisition of accounts receivable from
Island Pacific.
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 cannot distinguish 21st
century dates from 20th century dates. As a result, software and computer
systems, including machines controlled by microprocessors, may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements.
In general, the Company's operating subsidiaries develop and sell software
developed internally. The Company believes that no significant Year 2000 issues
exist with 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.
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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. 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 phases by November 12, 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. If any significant vendor does
not reply or indicates its products are not Year 2000 compliant, the Company
will seek an alternate vendor.
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.
The Company has developed a contingency plan to respond to Year 2000 problems
which might occur.
o The Company will maintain three rapid response teams on call 24 hours per
day from December 31, 1999 through January 5, 2000. If needed, a team will
travel to a customer's location to assess and repair any Year 2000 problems
created by the Company's software.
o The Company's onsite technical support staff will be present through the
same period to provide support by phone and direct computer communication
as needed.
o The Company has identified alternate vendors for all of its significant
components and raw materials should any vendor, despite its representations
of Year 2000 compliance, experience a Year 2000 problem.
In the event that any of the Company's significant suppliers or customers do not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be adversely affected. 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risks, which include changes in interest rates and
changes in foreign currency exchange rate as measured against the U.S. dollar.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates to
its revolving credit borrowings and variable rate term loans, which total
$21,612,511 at June 30, 1999. Based on this balance and an interest rate of 8%
which approximates the Company's average borrowing during the period, a change
in one percent in the interest rate would cause a change in interest expense of
approximately $216,000 or $0.01 per basic and diluted share, on an annual basis.
These instruments are not entered into for trading purposes and carry interest
at a pre-agreed upon percentage point spread from the bank's prime interest
rate. The Company's objective in maintaining these variable rate borrowings is
the flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rated borrowings.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company conducts business in various foreign currencies, primarily in
Australia, Europe and South Africa. Sales are typically denominated in the local
foreign currency, thereby creating exposures to changes in exchange rates. The
changes in the foreign currency exchange rates as measured against the U.S.
dollar may positively or negatively affect the Company's sales, gross margins,
and retained earnings. The Company attempts to minimize currency exposure risk
through decentralized sales, development, marketing and support operations, in
which substantially all costs are local-currency based. There can be no
assurance that such an approach will mitigate the risk, especially in the event
of a significant and sudden decline in the value of the foreign currency. The
Company does not hedge against foreign currency risk. Approximately 32% and 97%
of our total net sales were denominated in currencies other than the U.S. dollar
for the three months ended June 30, 1999 and 1998, respectively.
EQUITY PRICE RISK
At June 30, 1999, the Company had no direct equity investments.
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 and Use of Proceeds
During the quarter ended June 30, 1999, the Company issued the following
Securities without registration under the Securities Act of 1933 (the
"Securities Act"):
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.
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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.
The foregoing securities were offered and sold without registration under the
Securities Act to sophisticated investors who had access to all information
which would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and Regulation D
thereunder.
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
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27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 14, 1999 disclosing in Item 2 the
disposition of IBIS Systems Ltd. The report included in Item 7 pro forma
financial statements. The Company also filed a Form 8-K on June 18, 1999
disclosing in Item 2 the acquisition of Island Pacific Systems Corporation.
SIGNATURES
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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: July 11, 2000 David L. Reese
Chief Financial Officer
Signing on behalf of the registrant and as
principal accounting officer.
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