<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 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.
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(Exact name of registrant as specified in its charter.)
Nevada 84-1131608
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(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)
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 - 33,897,884 shares as of July 31, 2000.
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TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and March 31, 2000 ................................................ 3
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2000 and 1999................................ 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2000 and 1999................................ 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 14
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 15
Item 2. Changes in Securities and Use of Proceeds............................ 15
Item 5. Other Information.................................................... 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
(in thousands, except share amounts)
(unaudited)
<CAPTION>
June 30, 2000 March 31, 2000
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,216 $ 4,838
Accounts receivable, net 7,715 9,954
Other receivables 354 303
Inventories 158 272
Deferred income tax asset 3,631 3,905
Prepaid expenses and other current assets 767 747
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Total current assets 14,841 20,019
Note receivable 14,367 14,092
Property and equipment, net 1,553 1,529
Purchased and capitalized software, net 30,932 30,597
Goodwill, net 21,891 22,545
Employment and non-compete agreements, net 4,821 5,224
Other assets 44 77
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Total assets $ 88,449 $ 94,083
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,648 $ 1,242
Accrued expenses 2,745 3,642
Deferred revenue 1,702 6,324
Line of credit 3,384 2,268
Current portion of term loans 3,892 3,892
Due to stockholders 1,215 1,632
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Total current liabilities 14,586 19,000
Term loans refinanced in July 2000 10,858 13,150
Deferred rent 134 135
Deferred income tax liability 8,169 8,301
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Total liabilities 33,747 40,586
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Stockholders' Equity:
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, $.0001 par value; 50,000,000 shares authorized;
33,855,884 and 33,567,884 shares issued and outstanding 3 3
Additional paid-in capital 54,068 53,454
Treasury stock, at cost; shares- 444,641 (4,306) (4,306)
Retained earnings 6,377 5,831
Accumulated other comprehensive loss (1,440) (1,485)
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Total stockholders' equity 54,702 53,497
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Total liabilities and stockholders' equity $ 88,449 $ 94,083
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The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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SVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended June 30,
2000 1999
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Net sales $ 11,000 $ 11,767
Cost of sales 2,686 2,445
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Gross profit 8,314 9,322
Expenses:
Product development 1,572 615
Depreciation and amortization 2,146 1,786
Selling, general and administrative 3,397 4,921
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Total expenses 7,115 7,322
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Income from operations 1,199 2,000
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Other income (expense):
Interest income 326 395
Other income 40 163
Interest expense (530) (130)
Loss on foreign currency transactions (4) (94)
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Total other income (expense) (168) 334
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Income before provision for income taxes 1,031 2,334
Provision for income taxes 485 953
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Net income $ 546 $ 1,381
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Earnings per share:
Basic $ 0.02 $ 0.04
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Diluted $ 0.02 $ 0.04
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Weighted-average common shares outstanding:
Basic 33,762 31,781
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Diluted 35,771 34,963
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
<CAPTION>
Three Months Ended June 30,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 546 $ 1,381
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 2,146 1,786
Loss on foreign currency transactions 4 94
Changes in deferred taxes 142 42
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables 1,913 (3,353)
Inventories 114 27
Prepaid expenses and other current assets 1 (183)
Accounts payable and accrued expenses (492) (2,509)
Deferred revenue (4,622) 71
Income tax payable - (591)
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Net cash used for operating activities (248) (3,235)
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Cash flows from investing activities:
Acquisitions, net of cash acquired - (33,657)
Purchase of furniture and equipment (207) (145)
Increase in note receivable - (267)
Capitalized software development costs (1,323) (239)
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Net cash used for investing activities (1,530) (34,308)
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Cash flows from financing activities:
Proceeds from issuance of common stock 615 4,926
Increase (decrease) in amount due to stockholders, net (417) 1,417
Proceeds from line of credit 1,116 811
Proceeds from term loans - 19,191
Payments on term loans (2,292) -
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Net cash provided by (used for) financing activities (978) 26,345
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Effect of exchange rate changes on cash 134 (176)
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Net decrease in cash and cash equivalents (2,622) (11,374)
Cash and cash equivalents, beginning of period 4,838 13,006
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Cash and cash equivalents, end of period $ 2,216 $ 1,632
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 483 $ 115
Income taxes paid $ 231 $ 1,602
Supplemental schedule of non-cash investing and financing activities:
Received 95,000 treasury shares in connection with the sale of
IBIS Systems Limited $ - $ (1,140)
Issued 55,000 shares of common stock as additional
consideration for an acquisition $ - $ 402
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
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SVI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at June 30, 2000 and for all the
periods presented have been made.
Certain amounts in the prior period have been reclassified to conform to the
presentation for the three months ended June 30, 2000. 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-K for the year ended March 31, 2000.
The results of operations for the three months ended June 30, 2000 and 1999 are
not necessarily indicative of the results to be expected for the full year.
Note B - TERM LOANS
In June 1999, the Company obtained two loans from Union Bank of California, N.A.
(the "Bank") in the aggregate amount of $18.5 million as partial funding for the
acquisition of Island Pacific Systems Corporation. One loan was in the amount of
$3.5 million and was fully amortizing over two years at an interest rate of 0.5%
over the Bank's prime rate. The other loan was in the amount of $15 million and
required interest-only payments at 0.25% over the Bank's prime rate with all
principal due at December 3, 1999. The entire amount owed to the Bank was
secured by all of the stock and assets of the Company's U.S. retail software
subsidiaries, and 65% of the stock of the Company's foreign retail software
subsidiary.
The bank agreed in December 1999 to extend the maturity date of the $15 million
loan to March 3, 2000. The bank subsequently orally agreed to extend the
maturity date to June 1, 2000. The Company made a $2 million principal payment
on this loan in May 2000 using proceeds from the sale of common stock in a
private placement. In May and June 2000, the Company agreed to consolidate the
approximately $14.75 million balance of the two loans into a single loan and to
extend the maturity date to August 1, 2000, subject to an earlier required $10
million principal reduction. In July 2000, Softline Limited ("Softline"), the
Company's majority shareholder, loaned the Company $10 million for the purpose
of making this $10 million payment. The Softline loan is due August 1, 2001. The
loan is subordinated to the bank obligations and bears interest at 10% per annum
payable monthly.
In July 2000, the Company refinanced the $4.75 million balance due on the bank
loan. Under the amended loan agreement, the Company is required beginning August
1, 2000 to pay $200,000 per month toward reduction of principal plus interest on
the outstanding balance at the rate of 5% over the bank's prime rate, increasing
to 6.25% over the bank's prime rate after December 31, 2000. The Company is also
required to pay to the bank as a reduction of principal one half of amounts
received from the $1.75 million receivable from a one-time sale of certain
technology rights, any amounts the Company receives from the sale of the shares
of common stock of Integrity Software, Inc. which secure the related note
receivable for $14.4 million, and any amounts the Company receives from the
issuance of debt or equity securities other than stock options exercises. The
Company also maintains a $3 million line of credit with this bank, and the line
is subject to the provisions and restrictions of the amended loan agreement. The
entire remaining balance of the consolidated bank loan and the lines of credit,
if any, will be due and payable April 1, 2001. The loans are subject to certain
financial covenants and contain limitations on acquisitions, investments and
other borrowings. At June 30, 2000, the Company is in compliance with such
covenants.
As a result of the refinancing, $10.9 million of the bank term loans have been
classified as long-term obligations at June 30, 2000.
6
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Note C - 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. As of June
30, 2000, the Company holds in treasury 444,641 shares of its common stock.
Note D - 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. As required by SFAS 130, the Company
displays the accumulated balance of other comprehensive loss separately in the
equity section of the consolidated balance sheets. Total comprehensive income,
which is comprised of net income and other comprehensive income, amounted to
approximately $591,000 and $1.5 million for the quarters ended June 30, 2000 and
1999, respectively. Other comprehensive income consisted of foreign currency
translation effect of approximately $45,000 and $166,000 for the quarters ended
June 30, 2000 and 1999, respectively.
Note E - EARNINGS PER SHARE
Basic earnings per common share are calculated by dividing net income by the
weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common shares ("diluted EPS") reflect the potential
dilutive effect, determined by the treasury method, of additional common shares
that are issuable upon exercise of outstanding stock options. Additional common
shares that are issuable upon exercise of outstanding stock options are
2,009,573 and 3,182,372 for the quarters ended June 30, 2000 and 1999,
respectively.
Options outstanding during the quarter ended June 30, 2000 to purchase 10,000
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 F - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company provides global enterprise software solutions for the retail
industry. In accordance with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information," the
Company considers its business to consist of one reportable operating segment.
The Company operates in three countries, the United States, Australia and United
Kingdom. The following is a summary of local operations by geographic area (in
thousands):
Quarters Ended June 30,
2000 1999
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Revenues:
United States $ 8,396 $ 7,966
Australia 2,247 1,939
United Kingdom 357 1,335
South Africa - 527
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Total revenues $ 11,000 $ 11,767
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7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS ABOUT SVI HOLDINGS, INC. ("WE"
OR "US"). THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS THE WORDS MAY, WILL, SHOULD, EXPECT, PLAN, ANTICIPATE,
BELIEVE, ESTIMATE, PREDICT, POTENTIAL OR CONTINUE, OR THE NEGATIVES OF SUCH
WORDS OR OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS.
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IMPORTANT FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS ARE
DESCRIBED IN THE SECTION ENTITLED "RISK FACTORS" IN ITEM 1 IN OUR FORM 10-K FOR
THE FISCAL YEAR ENDED MARCH 31, 2000, AND OTHER RISKS IDENTIFIED FROM TIME TO
TIME IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, PRESS RELEASES
AND OTHER COMMUNICATIONS.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO OBLIGATION TO UPDATE ANY
OF THE FORWARD-LOOKING STATEMENTS AFTER THE FILING OF THIS REPORT TO CONFORM
SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
OVERVIEW
We are a leading provider of end-to-end solutions for enterprise retailers and
retail chains. Our products link retail management information, including
merchandising, planning and financial analysis, with point-of-sale information,
automating the full operations of a retailer and providing centralized access to
information throughout a chain of retail stores. We also provide consulting,
project management, application training, technical support and other services
to our retail industry customers. Our training products division develops and
distributes computer courseware and computer skills testing products.
Our recent growth has primarily been through acquisitions. The largest and most
important of these acquisitions have been:
o Applied Retail Solutions, Inc. (ARS) in July 1998 for aggregate
consideration of $7.9 million in cash and stock paid to the former
stockholders; and
o Island Pacific Systems Corporation in April 1999 for $35 million cash.
ARS is a leading provider of store software systems that now form the core of
our SVI-POST point-of-sale solutions. Island Pacific is a leading provider of
retail management systems that now form the core of our SVI-HOST retail
management solutions.
We accounted for both the ARS and Island Pacific acquisitions using purchase
accounting, which has resulted in the addition of significant goodwill and
capitalized software assets on our balance sheet. We are amortizing capitalized
software and goodwill from both of these acquisitions over ten years, which has
and will continue to impact reported net income and earnings per share.
During the quarter ended June 30, 2000, we consolidated ARS and Island Pacific
into SVI Retail, Inc. We are promoting the full suite of retail software
solutions created by the combination of the ARS and Island Pacific products with
some of our other retail software products under the brand name "The Total Point
of Business". We have commenced an active campaign to cross-sell solutions to
those retailers who utilize less than our full suite of products. During the
last fiscal year, we commenced an active product development program to more
fully integrate of our SVI-POST and SVI-HOST products, to develop versions of
our products in other programming languages, to eliminate dependency on
client/server architecture, and to develop new components and applications of
our end-to-end solution. We plan to continue our product development program
through fiscal 2001, subject to the availability of operating or outside
capital.
8
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We currently derive the majority of our revenues from the sale of software
licenses and the provision of related consulting and support services. Software
license fees are for the most part dependent upon the number of locations in
which the customer plans to install and utilize the software. As the customer
adds additional locations, we charge additional license fees. We typically
charge for support, maintenance and software updates on an annual basis pursuant
to renewable service contracts. We typically charge for consulting,
implementation and project management services on an hourly basis. Our sales
cycles typically run four to twelve months, which causes our revenues to
fluctuate significantly from period to period.
Our operations are conducted principally in the United States, the United
Kingdom and Australia. Prior to our sale in October 1999 of our Triple-S
Computers subsidiary to Softline Limited, our majority stockholder subsidiary,
we had operations in South Africa.
RECENT DEVELOPMENTS
In May 2000, we announced that we are in discussions with Softline Limited
concerning a possible business combination between Softline and SVI. Softline is
a global software and services group focused on the development, implementation
and support of business and accounting software applications. Softline currently
beneficially owns approximately 56% of SVI's common shares. Softline operates in
37 countries with products available in eight languages, and targets mainly
small to medium size enterprises. It is listed on the Johannesburg Stock
Exchange under the symbol SFT. SVI and Softline have no binding agreement and
have not yet established terms of a potential transaction. Any such transaction
will be subject to governmental approvals by United States and South African
authorities. Any transaction may also be subject to approval of the stockholders
of SVI and/or Softline. Any business combination between SVI and Softline will
have a material impact on our operations and future prospects.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
<TABLE>
<CAPTION>
Quarters ended June 30,
-----------------------------------------------------
2000 1999
Amount Percentage Amount Percentage
------------- ---------- ------------- ----------
(in thousands, except for percentages)
<S> <C> <C> <C> <C>
Net sales $ 11,000 100% $ 11,767 100%
Cost of sales 2,686 24% 2,445 21%
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Gross profit 8,314 76% 9,322 79%
Expenses:
Product development 1,572 14% 615 5%
Depreciation and amortization 2,146 20% 1,786 15%
Selling, general and administrative 3,397 31% 4,921 42%
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Total expenses 7,115 65% 7,322 62%
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Income from operations 1,199 11% 2,000 17%
Other income (expense), net (168) -2% 334 3%
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Income before income taxes 1,031 9% 2,334 20%
Provision for income taxes 485 4% 953 8%
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Net income $ 546 5% $ 1,381 12%
======================= =======================
</TABLE>
Net Sales
Net sales decreased by $0.8 million, or 7%, to $11 million in the three months
ended June 30, 2000 from $11.8 million in the three months ended June 30, 1999.
The following factors contributed to the net decrease:
o Decrease of $2.3 million in net sales from our U.S. based subsidiary,
SVI Retail, Inc.
o Inclusion of $0.5 million in net sales from our former South African
subsidiary in the 1999 period.
o Inclusion of $1.8 million in revenue from a one-time sale of certain
technology rights during fiscal 2000 received and recognized in the
quarter ended June 30, 2000.
o Increase of $0.3 million in net sales from our Australian subsidiary
resulting from new contracts.
We experienced a decline in demand for software licenses during the last nine
months of fiscal year 2000. We believe this was due to deferred purchasing
decisions related to the millennium change and anticipation of new products to
be announced at industry trade shows in early calendar year 2000. This decline
in demand continued to negatively affect sales of software licenses during the
quarter ended June 30, 2000, as our sales cycles tend to range from four to
twelve months. Indications are that our sales cycles have resumed during the
past two quarters, and, as of the end of July 2000, we had a significant
increase in the number of sales prospects in our pipeline over the same time
last year. We are therefore predicting quarter-on-quarter growth in software
license sales for the remainder of this fiscal year. Such growth will however
depend on a number of factors, including our ability to consummate sales in the
pipeline, continued economic strength in the retail industry and continued
perceived advantages of our products over the products of our competitors. We
cannot therefore guarantee that we will achieve our predicted revenue targets.
10
<PAGE>
Approximately $1.75 million remains due from the one-time sale of certain
technology rights during fiscal 2000. We expect receipt of this amount during
the second or third quarter of fiscal year 2001, and revenues will be recognized
upon receipt. This one-time sale is not expected to otherwise impact future
results of operations.
Cost of Sales/Gross Profit
Cost of sales increased by $0.3 million, or 10%, to $2.7 million in the quarter
ended June 30, 2000 from $2.4 million in the quarter ended June 30, 1999. Gross
profit as a percentage of net sales decreased to 75% in the quarter ended June
30, 2000 from 79% in the prior comparative period. The increase in cost of sales
and the decrease in gross profit as a percentage of net sales were due to a
shift in the sales mix from software licenses to software modification services.
The software modification services have a higher cost component than software
licenses. The shift was offset in part by the recognition of $1.8 million in
revenue from the sale of certain technology rights, which had an insignificant
cost component.
Product Development Expenses
Product development expenses increased by $1 million, or 156%, to $1.6 million
in the quarter ended June 30, 2000 from $0.6 million in the quarter ended June
30, 1999. In conjunction with the acquisition of Island Pacific, we commenced an
active integration and product development program to further compatibility of
our point-of-sale (SVI-POST) and retail management (SVI-HOST) products.
Additionally, we continue to develop e-commerce enhancements and other additions
of features and functionality to our SVI-POST and SVI-HOST products. We intend
to continue or increase the present level of spending on product development for
the remainder of the 2001 fiscal year as we continue to integrate, develop and
enhance our products to address the evolving needs of the retail industry.
Depreciation and Amortization
Depreciation and amortization increased by $0.3 million, or 20%, to $2.1 million
in the quarter ended June 30, 2000 from $1.8 million in the quarter ended June
30, 1999. This increase was primarily due to the amortization of additional
goodwill related to the acquisition of Island Pacific recorded after June 30,
1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $1.5 million, or 30%,
to $3.4 million in the three months ended June 30, 2000 from $4.9 million in the
three months ended June 30, 1999. This decrease was primarily related to
reassignment of existing personnel to product development duties.
Other Income (Expense)
Other income (expense) decreased by $0.5 million, or 150%, to ($0.2) million in
the quarter ended June 30, 2000 from $0.3 million in the quarter ended June 30,
1999. This decrease is due primarily to an increase of $0.4 million in interest
expense resulting from the $20.8 million notes payable obtained in June 1999 to
acquire Island Pacific.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended June 30, 2000, we financed our operations using
internally generated cash, proceeds from the exercise of options and lines of
credit. At June 30, 2000, we had cash of $2.2 million, a decrease of
$2.6 million from $4.8 million of cash at March 31, 2000.
Operating activities used cash of $0.2 million in the three months ended June
30, 2000 and $3.2 million in the three months ended June 30, 1999. Cash used for
operating activities in the three months ended June 30, 2000 resulted from a
$4.6 million decrease in deferred revenue and a $0.5 million decrease in
accounts payable and accrued expenses; offset in part by $2.1 million of
non-cash depreciation and amortization, $0.5 million of net income and a $1.9
million decrease in accounts receivable and other receivables.
11
<PAGE>
Investing activities used cash of $1.5 million in the three months ended June
30, 2000 and $34.3 million in the three months ended June 30, 1999. Cash used
for investing activities in the current quarter was primarily due to a $1.3
million increase in capitalized software development costs.
Financing activities used cash of $1 million in the three months ended June 30,
2000 and provided cash of $26.3 million in the three months ended June 30, 1999.
The 2000 financing activities included $2.3 million of principal payments on our
bank term loans and a $0.4 million decrease in amounts due to stockholders;
offset by $1.1 million of net proceeds from lines of credit and $0.6 million of
proceeds from issuance of common stock.
Changes in the currency exchange rates of our foreign operations had the effect
of increasing cash by $0.1 million in the three months ended June 30, 2000 and
reducing cash by $0.2 million in the three months ended June 30, 1999.
Accounts receivable decreased to $7.7 million at June 30, 2000 from $10.0
million at March 31, 2000 primarily due to payment of the first $1.8 million due
from a $3.55 million one-time sale of certain technology rights.
We purchased all of the outstanding stock of Island Pacific in June 1999 for $35
million cash. We paid the purchase price using cash on hand, cash acquired from
the sale of our IBIS Systems Limited subsidiary, cash acquired from the exercise
of options by Softline, two bank loans totaling $18.5 million and $2.3 million
in other loans, including $1.5 million from a major stockholder.
The bank loans are secured by all of our stock in and all of the assets of our
U.S. retail software subsidiaries, and 65% of our stock in our Australian retail
software subsidiary. One loan was in the amount of $3.5 million and was fully
amortizing over two years. The other loan required interest-only payments until
maturity at December 3, 1999. We expected to retire the $15 million loan on or
before maturity using proceeds from the note receivable obtained in connection
with the sale of IBIS; however, our agreement with the bank permitted us to
convert the $15 million loan to a two-year fully amortizing term loan subject to
certain terms and conditions. Because the note receivable was not paid on its
original due date, we were not able to retire the $15 million bank loan as
anticipated. Rather than convert the loan, we negotiated extensions of the due
date of the $15 million obligation while we searched for a replacement source of
capital to retire the loan. We made a $2 million principal payment on this loan
in May 2000 using proceeds from the sale of common stock in a private placement.
In May and June 2000, we agreed to consolidate the approximately $14.75 million
balance of the two loans into a single loan and to terminate the conversion
option. In July 2000, Softline Limited loaned us $10 million for the purpose of
making a $10 million principal payment on this loan.
In July 2000, we refinanced the $4.75 million balance due on the bank loan.
Under the amended loan agreement, we are required beginning August 1, 2000 to
pay $200,000 per month toward reduction of principal plus interest on the
outstanding balance at the rate of 5% over the bank's prime rate, increasing to
6.25% over the bank's prime rate after December 31, 2000. We are also required
to pay to the bank as a reduction of principal one half of amounts received from
the remaining $1.75 million contract receivable from the one-time technology
sale, any amounts we receive from the sale of the shares of common stock of
Integrity Software, Inc. which secure the related note receivable for $14.4
million, and any amounts we receive from the issuance of debt or equity
securities other than stock option exercises. We also maintain a $3 million line
of credit with this bank, and the line is subject to the provisions and
restrictions of the amended loan agreement. The entire remaining balance of the
consolidated bank loan and the lines of credit, if any, will be due and payable
April 1, 2001. If we make no principal prepayments on the consolidated loan
amount other than the required monthly payments, the balance at the maturity
date would be $3.15 million plus the amount outstanding on our credit lines. The
loans are subject to certain financial covenants and contain limitations on
acquisitions, investments and other borrowings. We plan to obtain replacement
financing for the entire amount owed to the bank prior to the maturity date.
However, there can be no guarantee that replacement financing will be available
on acceptable terms and conditions, or at all.
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The $10 million loan from Softline obtained to reduce the bank indebtedness is
due August 1, 2001. The loan is subordinated to the bank obligations and bears
interest at 10% per annum payable monthly. We intend to use proceeds we might
receive from payment of the $14.4 million note receivable or from sale of the
shares of the common stock of Integrity Software, Inc. (into which such note is
convertible and which secure such note) to repay the loan from Softline. We
cannot guarantee that we will be able to resell sufficient Integrity shares to
repay this loan. We may have to use any proceeds from the sale of these shares
first to satisfy the remaining bank obligation. If we are not able to repay some
or all of the Softline loan through these means, we will likely be required to
seek outside debt or equity financing. We currently have no commitments for such
financing, and we cannot guarantee that such financing will be available on
acceptable terms and conditions, or at all.
In connection with our acquisition of Island Pacific, we also borrowed $2.3
million with no stated maturity date from three entities. $1.5 million of such
amount was borrowed from a major stockholder. The balance due on these loans at
June 30, 2000 was $1.2 million. The loans bear interest at the prime rate.
We have been using operating income, cash received from the sale of common stock
and cash received from the exercise of options to discharge the payments due on
the bank term loans and lines of credit. As discussed above, we used $10 million
borrowed from Softline to pay $10 million due on the bank loan in July 2000. We
intend to continue to use operating income to make required principal and
interest payments due on the bank loans through maturity or earlier prepayment.
We have $3.65 million of credit lines to support working capital requirements.
$3.0 million of this amount is subject to the amended loan agreement concerning
the consolidated term loan described above, and the then outstanding balance
will be due and payable on April 1, 2001, if not sooner retired. As of June 30,
2000, the outstanding balance on all of our lines was $3.4 million.
We believe we have sufficient cash and will generate sufficient revenues from
operations to meet our cash needs through fiscal 2001. We may however be
required to reduce expenditures on certain product development activities if
normal sales cycles, impacted by the millennium change and other factors, do not
resume as expected. While such reductions would impact our long-term strategy of
enhancing and integrating our existing products and developing new products, we
do not believe they would impact short-term results of operations. We may
require outside sources of debt or equity financing to discharge the then
outstanding bank indebtedness due April 1, 2001 and the note payable to Softline
due August 1, 2001. We are considering various alternatives for equity financing
to retire some or all of our outstanding indebtedness and to pursue further
product development initiatives. At this time, we have no firm commitments for
such outside financing, and there is no guarantee that such financing will be
available on acceptable terms and conditions, or at all.
We expect to continue our strategy of seeking acquisition opportunities within
our target profile of companies with advanced technologies and market leadership
in the enterprise retail solutions sector. We cannot guarantee that any such
acquisition opportunities will be available on acceptable terms, or that any
such acquisitions will ultimately be consummated. To the extent that the terms
of any such acquisitions call for payment in cash, we will likely need to seek
an outside source of capital. We have not identified any sources for such
capital, and there can be no guarantee that such capital will be available on
acceptable terms and conditions, or at all.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133, as amended by statement of
Financial Accounting Standards No. 137, requires companies to recognize all
derivatives as either assets or liabilities with the instruments measured at
fair value and is effective for fiscal years beginning after June 15, 2000. The
accounting for changes in fair value gains and losses depends on the intended
use of the derivative and its resulting designation. We have not yet completed
the process of evaluating the impact that will result from the adoption of SFAS
No. 133; however, on a preliminary basis, we do not believe the eventual
adoption of SFAS 133 will have a significant impact on our financial position or
results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements". SAB 101 provides the SEC staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues, including software revenue recognition. We will be required
to adopt SAB 101 in the fourth quarter of the 2001 fiscal year. We do not expect
the adoption of SAB 101 will have a material effect on our financial position or
results of operations.
EURO CURRENCY
In January 1999, participating European Economic and Monetary Union (EMU)
countries introduced the ECU or "Euro" as a new currency. During 2002, all
participating EMU countries are expected to convert to the Euro as their single
currency. During the next two years, participating EMU countries will conduct
business in both the existing national currency and the Euro. Companies
operating in or conducting business in these EMU member countries will need to
ensure that their financial and other software systems are capable of processing
transactions and properly handling these currencies, including the Euro. We
believe that all of our internal financial and software systems can accommodate
the dual currency system and the full conversion to the Euro. Our retail
software products are designed to operate in any foreign currency, including the
Euro. We cannot guarantee however that our products will operate without
modification through full conversion to the Euro or meet all of the Euro
currency requirements. If our software products do not meet all the Euro
currency requirements, our business, operating results and financial condition
could be materially adversely affected. We have not had and do not expect a
material impact on our results of operations from foreign currency gains or
losses as a result of the transition to the Euro as the functional currency for
our operations in EMU countries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risks, which include changes in interest rates, changes in foreign
currency exchange rate as measured against the U.S. dollar and changes in the
value of stock of a publicly traded company which secures a promissory note we
hold.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates to our
revolving credit borrowings and variable rate term loans, which totaled $9.4
million at July 31, 2000. Based on this balance, a change in one percent in the
interest rate would cause a change in interest expense of approximately $94,000
or $0.01 per basic and diluted share, on an annual basis.
These instruments were not entered into for trading purposes and carry interest
at a pre-agreed upon percentage point spread from the bank's prime interest
rate. Our objective in maintaining these variable rate borrowings is the
flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
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FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe and
Australia. Sales are typically denominated in the local foreign currency, which
creates exposures to changes in exchange rates. These changes in the foreign
currency exchange rates as measured against the U.S. dollar may positively or
negatively affect our sales, gross margins and retained earnings. We attempt to
minimize currency exposure risk through decentralized sales, development,
marketing and support operations, in which substantially all costs are
local-currency based. There can be no assurance that such an approach will be
successful, especially in the event of a significant and sudden decline in the
value of the foreign currency. We do not hedge against foreign currency risk.
Approximately 24% and 32% of our total net sales were denominated in currencies
other than the U.S. dollar for the quarters ended June 30, 2000 and 1999,
respectively.
EQUITY PRICE RISK
We have no direct equity investments. However, we have a note receivable in the
amount of $14.4 million which is secured by shares of the common stock of
Integrity Software, Inc., a publicly traded company with shares quoted on the
National Quotation Bureau Pink Sheets. We also have the right to convert the
note into common stock of Integrity at a fixed price. We are therefore exposed
to indirect equity price risk. We have not taken steps to mitigate this risk,
and a decline in the trading price of Integrity common stock may impair the
value of and our ability to collect the $14.4 million receivable.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any material pending legal proceedings, other than
ordinary routine litigation incidental to our business.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended June 30, 2000, we issued an aggregate of 205,000 shares
of common stock to non-employees upon exercise of options at exercise prices of
$0.75 and $1.75 per share for an aggregate exercise price of $353,750.
The foregoing securities were offered and sold without registration under the
Securities Act of 1933 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 such Act and Regulation D
thereunder.
Item 5. Other Information
We have scheduled our annual meeting of stockholders for September 21, 2000. The
deadline for submitting stockholder proposals for inclusion in the Company's
proxy statement and form of proxy pursuant to SEC Rule 14a-8 was April 10, 2000.
Unless we had notice before June 22, 2000 of a matter which a stockholder wishes
to bring before the stockholders at the meeting, management will have
discretionary authority to vote all shares for which it has proxies in
opposition to such matter.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
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3.1 Amended and Restated Bylaws of SVI Holdings, Inc. (the
"Company"), incorporated by reference to exhibit 3.2 to the
Company's Form 10-K for the fiscal year ended March 31, 2000.
10.1 Amendment No. 1 to Term Loan Agreement between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.24 to the Company's Form 10-K for the fiscal year
ended March 31, 2000.
10.2 Revolving Note between the Company and Union Bank of California,
N.A., incorporated by reference to exhibit 10.25 to the Company's
Form 10-K for the fiscal year ended March 31, 2000.
10.3 Amendment No. 2 to Term Loan Agreement between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.26 to the Company's Form 10-K for the fiscal year
ended March 31, 2000.
10.4 Term Loan Note of the Company in favor of Union Bank of
California, N.A., incorporated by reference to exhibit 10.27 to
the Company's Form 10-K for the fiscal year ended March 31, 2000.
10.5 Software Sale and Use Agreement dated September 16, 1999 between
Divergent Technologies (Pty) Limited and Resource Control
Management Limited (UK), as amended, incorporated by reference to
exhibit 10.31 to the Company's Form 10-K for the fiscal year
ended March 31, 2000.
10.6 Promissory Note of the Company in favor of Softline Limited,
incorporated by reference to exhibit 10.32 to the Company's Form
10-K for the fiscal year ended March 31, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SVI Holdings, Inc.
Registrant
/S/ David L. Reese
-------------------------------
Date: August 7, 2000 David L. Reese
Chief Financial Officer
Signing on behalf of the registrant
and as principal accounting officer.
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