<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 SEPTEMBER 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.
--------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Nevada 84-1131608
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12707 High Bluff Drive, Suite 335, San Diego, CA 92130
------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(858) 481-4404
--------------------------------------------------
(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 34,340,648 shares as of October 31, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and March 31, 2000 ................................................ 3
Condensed Consolidated Statements of Operations for the Three
And Six Months Ended September 30, 2000 and 1999................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 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............................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 18
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 19
Item 2. Changes in Securities and Use of Proceeds............................ 19
Item 6. Exhibits and Reports on Form 8-K..................................... 20
Signatures .................................................................. 20
<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>
September 30, March 31,
2000 2000
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 605 $ 4,838
Accounts receivable, net 8,235 9,954
Other receivables 306 303
Inventories 168 272
Deferred income tax asset 4,028 3,905
Prepaid expenses and other current assets 714 747
------------- -------------
Total current assets 14,056 20,019
Note receivable, net 13,147 14,092
Property and equipment, net 1,554 1,529
Purchased and capitalized software, net 30,575 30,597
Goodwill, net 21,236 22,545
Employment and non-compete agreements, net 4,419 5,224
Other assets 305 77
------------- -------------
Total assets $ 85,292 $ 94,083
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,130 $ 1,242
Accrued expenses 2,854 3,529
Deferred revenue 3,059 6,324
Lines of credit 3,388 2,268
Current portion of term loans 4,150 3,892
Due to stockholders 11,695 1,745
Income tax payable 134 -
------------- -------------
Total current liabilities 27,410 19,000
Term loans - 13,150
Deferred rent 132 135
Deferred income tax liability 7,984 8,301
------------- -------------
Total liabilities 35,526 40,586
------------- -------------
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;
33,955,605 and 33,567,884 shares issued and outstanding 3 3
Additional paid-in capital 53,988 53,454
Treasury stock, at cost; shares- 444,641 (4,306) (4,306)
Retained earnings 1,636 5,831
Accumulated other comprehensive loss (1,555) (1,485)
------------- -------------
Total stockholders' equity 49,766 53,497
------------- -------------
Total liabilities and stockholders' equity $ 85,292 $ 94,083
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 7,993 $ 10,067 $ 18,993 $ 21,834
Cost of sales 3,989 2,876 6,675 5,321
---------- ---------- ---------- ----------
Gross profit 4,004 7,191 12,318 16,513
Expenses:
Product development 1,204 1,212 2,776 1,827
Depreciation and amortization 2,176 2,031 4,322 3,817
Selling, general and administrative 3,855 3,960 7,252 8,881
Impairment of note receivable received
in connection with the sale of IBIS
Systems Limited 1,500 - 1,500 -
---------- ---------- ---------- ----------
Total expenses 8,735 7,203 15,850 14,525
---------- ---------- ---------- ----------
Income (loss) from operations (4,731) (12) (3,532) 1,988
---------- ---------- ---------- ----------
Other income (expense):
Interest income 283 149 609 544
Other income (expense) (104) 24 (64) 187
Interest expense (677) (426) (1,207) (556)
Gain (loss) on foreign currency transaction 3 (5) (1) (99)
---------- ---------- ---------- ----------
Total other income (expense) (495) (258) (663) 76
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes (5,226) (270) (4,195) 2,064
Provision for income taxes (benefit) (485) (61) - 892
---------- ---------- ---------- ----------
Net income (loss) $ (4,741) $ (209) $ (4,195) $ 1,172
========== ========== ========== ==========
Earnings (loss) per share:
Basic $ (0.14) $ (0.01) $ (0.12) $ 0.04
========== ========== ========== ==========
Diluted $ (0.14) $ (0.01) $ (0.12) $ 0.03
========== ========== ========== ==========
Weighted-average common shares outstanding:
Basic 33,897 32,440 33,831 31,903
========== ========== ========== ==========
Diluted 33,897 32,440 33,831 35,285
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
<CAPTION>
Six Months Ended September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,195) $ 1,172
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 4,322 3,817
Impairment of note receivable received in connection
with the sale of IBIS Systems Limited 1,500 -
Loss on foreign currency transactions 1 99
Loss on sale of furniture and equipment 15
Deferred tax provision (benefit) (439) 98
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables 1,716 (8,753)
Interest receivable on note receivable (555) (356)
Inventories 104 68
Prepaid expenses and other current assets (223) (245)
Accounts payable and accrued expenses (30) (1,901)
Accrued interest on stockholders' loans 363 -
Deferred revenue (3,265) 3,523
Income tax payable 134 (995)
------------- ------------
Net cash used for operating activities (567) (3,458)
------------- ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired - (33,673)
Purchase of furniture and equipment (398) (261)
Proceeds from sale of furniture and equipment - 1
Capitalized software development costs (1,807) (876)
------------- ------------
Net cash used for investing activities (2,205) (34,809)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 775 4,835
Increase (decrease) in amount due to stockholders, net 9,586 1,890
Proceeds from line of credit 1,120 1,108
Proceeds from term loans - 18,882
Payments on term loans (12,892) (583)
------------- ------------
Net cash provided by (used for) financing activities (1,411) 26,132
------------- ------------
Effect of exchange rate changes on cash (50) (156)
------------- ------------
Net decrease in cash and cash equivalents (4,233) (12,291)
Cash and cash equivalents, beginning of period 4,838 13,006
------------- ------------
Cash and cash equivalents, end of period $ 605 $ 715
============= ============
Supplemental disclosure of cash flow information:
Interest paid $ 784 $ 516
Income taxes paid $ 445 $ 1,846
Supplemental schedule of non-cash investing and financing activities:
Received 191,000 treasury shares in connection with the sale of
IBIS Systems Limited $ - $ (2,292)
Issued 165,000 shares of common stock in connection with the
acquisition of Applied Retail Solutions, Inc. $ - $ 2,000
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
<PAGE>
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 September 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 and six months ended September 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 and six months ended September
30, 2000 and 1999 are not necessarily indicative of the results to be expected
for the full year.
Note B - LIQUIDITY
The Company has experienced net losses and negative cash flows from operations
and has negative working capital of $13.4 million as of September 30, 2000. The
Company is currently seeking to extend the payment terms of its obligations to
creditors, including $10 million owed to Softline, its majority shareholder, and
the loan from Union Bank of California (Note C). The Company is also seeking
outside sources of debt or equity financing to discharge the Union Bank and
Softline loans. However, there can be no guarantees that management will be
successful in its efforts.
Note C - 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 currently bears interest at
14% per annum, payable monthly.
6
<PAGE>
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 $14.6 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 September 30, 2000, the Company is in compliance with such
covenants.
Interest expense included interest due to Softline in the amount of $294,000 for
the three months and six months ended September 30, 2000. The $10 million loan
from Softline was acquired in July 2000.
Interest expense for the three months ended September 30, 2000 and 1999 also
included interest due to other stockholders in the amount of $46,000 and
$25,000, respectively. Interest expense for the six months ended September 30,
2999 and 1999 included interest due to other stockholders in the amount of
$69,000 and $41,000, respectively.
Note D - NOTE RECEIVABLE AND VALUATION ALLOWANCE
In connection with the sale of its United Kingdom subsidiary, IBIS Systems
Limited ("IBIS") to Kielduff Investments Limited, ("Kielduff"), the Company
recorded a note receivable (the "Note") of $13.6 million. The Note bears
interest at 2% over the base prime rate for United States dollar deposits quoted
by the Hong Kong Shanghai British Columbia Bank plc (5.75% at March 31, 2000),
and principal and interest were originally due October 1, 1999. The Note was
secured by 100% of the issued and outstanding shares of IBIS. In September 1999,
the Note was extended to February 15, 2000 to allow Kielduff sufficient time to
complete a combination of several companies under a common name and register
this newly formed entity for trading on a United States exchange. The Note was
further extended to November 15, 2000 to accommodate the registration and
underwriting process related to the newly formed entity. In connection with the
aforementioned series of events, effective November 1, 1999, the Company and
Kielduff entered into various agreements whereby Kielduff pledged to the Company
100% of the shares it received from the newly formed entity Integrity Software,
Inc. ("Integrity") as replacement collateral for the shares of IBIS which
previously secured the Note. Under the November 1999 agreements, the Company has
the right to convert all sums due from Kielduff into shares of Integrity at its
option. The Company has not exercised its option to convert any amount of the
Note into shares of Integrity. Kielduff did not pay the Note on the November 15,
2000 due date and it will pay the Note. Given the Company's lack of ability to
enforce collection on past and present due dates management has classified the
Note as long-term. The Company has engaged Business Valuation Services, Inc. to
perform an analysis of the fair value of the Note's underlying collateral at
September 30, 2000. After consideration of the independent valuation and other
relevant data, management concluded that the fair value of the collateral
underlying the Note is less than the recorded investment in the Note. In
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 114, the Company recognized an impairment of $1.5 million by
creating a valuation allowance with a corresponding charge to an expense for the
three months and six months ended September 30, 2000.
7
<PAGE>
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. 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.
For the three months and six months ended September 30, 2000 and 1999,
comprehensive income (loss) consisted of (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ (4,741) $ (209) $ (4,195) $ 1,172
Other comprehensive income (loss):
Translation adjustment (115) (27) (70) 139
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (4,856) $ (236) $ (4,265) $ 1,311
========== ========== ========== ==========
</TABLE>
Note F - 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 stock method, of additional common
shares that are issuable upon exercise of outstanding stock options.
Earnings per share is calculated as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ (4,741) $ (209) $ (4,195) $ 1,172
========== ========== ========== ==========
Shares Basic earnings per share 33,897 32,440 33,831 31,903
Dilutive effect of common stock equivalents - - - 3,382
---------- ---------- ---------- ----------
Shares Diluted earnings per share 33,897 32,440 33,831 35,285
========== ========== ========== ==========
Basic earnings (loss) per share $ (0.14) $ (0.01) $ (0.12) $ 0.04
========== ========== ========== ==========
Diluted earnings (loss) per share $ (0.14) $ (0.01) $ (0.12) $ 0.03
========== ========== ========== ==========
</TABLE>
8
<PAGE>
Note G - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company provides global enterprise software solutions for the retail
industry. In accordance with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information," the
Company considers its business to consist of one reportable operating segment.
The Company operates in three countries, the United States, Australia and United
Kingdom. The following is a summary of revenues by geographic area (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
United States $ 6,406 $ 5,404 $ 14,802 $ 13,369
Australia 905 3,186 3,152 5,125
United Kingdom 682 913 1,039 2,249
South Africa - 564 - 1,091
---------- ---------- ---------- ----------
Total revenues $ 7,993 $ 10,067 $ 18,993 $ 21,834
========== ========== ========== ==========
</TABLE>
For the three months ended September 30, 2000, sales to one customer, Toys "R"
Us, accounted for 29% of total consolidated revenue.
For the six months ended September 30, 2000 and 1999, sales to Toys "R" Us
accounted for 27% and 14% of total consolidated revenue, respectively.
Note H - 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. The Company not yet
completed the process of evaluating the impact that will result from the
adoption of SFAS No. 133; however, on a preliminary basis, the Company does not
believe the eventual adoption of SFAS 133 will have a significant impact on its
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. The Company will be
required to adopt SAB 101 in the fourth quarter of the 2001 fiscal year. The
Company does not expect the adoption of SAB 101 will have a material effect on
its financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation. FIN 44 clarifies certain issues in the application of
Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock
Issued to Employees. Among other issues, FIN 44 clarifies (a) the definition of
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. The adoption of FIN 44 has not had a material impact on the
Company in the quarter ended September 30, 2000.
9
<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 OUR FORM S-3/A FILED WITH
THE SEC ON OCTOBER 20, 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 an independent 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 was one of the leading providers of store software systems, and its software
now forms the core of our SVI-POST point-of-sale solutions. Island Pacific was
one of the leading providers of retail management systems, and its software now
forms 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.
During the quarter ended June 30, 2000, we merged 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. 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 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.
10
<PAGE>
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,
we had operations in South Africa.
RECENT DEVELOPMENTS
In May 2000, we announced that we were in discussions with Softline Limited
concerning a possible business combination between Softline and SVI. In
October 2000, we and Softline determined that a business combination between
the two companies was not compatible with the current strategic directions of
each company. We have therefore terminated further talks on the matter.
On October 24, 2000, the SEC declared effective a registration statement
registering up to 700,000 shares of our common stock for resale by AMRO
International, S.A. AMRO purchased 344,948 shares in March 2000 for $3 million,
and under the terms of the purchase agreement, was entitled to receive
additional shares of our common stock if the average of the closing price our
stock for the five days preceding the effective date of the registration
statement was less than $10.34. Pursuant to the repricing formula, we issued to
AMRO 375,043 additional shares of common stock on October 30, 2000. We have
further agreed to file a post-effective amendment to the registration statement
registering the 19,991 shares issued to AMRO which are in excess of the 700,000
shares currently registered. We are also obligated to pay to AMRO a penalty for
late effectiveness of the registration statement in the amount of $286,000 which
has been substantially accrued for at September 30, 2000.
11
<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>
Three months ended September 30,
-----------------------------------------------------
2000 1999
Amount Percentage Amount Percentage
------------- ---------- ------------- ----------
(in thousands, except for percentages)
<S> <C> <C> <C> <C>
Net sales $ 7,993 100% $ 10,067 100%
Cost of sales 3,989 50% 2,876 29%
----------------------- -----------------------
Gross profit 4,004 50% 7,191 71%
Expenses:
Product development 1,204 15% 1,212 12%
Depreciation and amortization 2,176 27% 2,031 20%
Selling, general and administrative 3,855 48% 3,960 39%
Impairment of note receivable received
in connection with the sale of IBIS
Systems Limited 1,500 18% - 0%
----------------------- -----------------------
Total expenses 8,735 109% 7,203 71%
----------------------- -----------------------
Loss from operations (4,731) -59% (12) -0%
Other expense, net (495) -6% (258) -3%
----------------------- -----------------------
Loss before income tax benefit (5,226) -65% (270) -3%
Income tax benefit (485) -6% (61) -1%
----------------------- -----------------------
Net loss $ (4,741) -59% $ (209) -2%
======================= =======================
Six months ended September 30,
-----------------------------------------------------
2000 1999
Amount Percentage Amount Percentage
------------- ---------- ------------- ----------
(in thousands, except for percentages)
<S> <C> <C> <C> <C>
Net sales $ 18,993 100% $ 21,834 100%
Cost of sales 6,675 35% 5,321 24%
----------------------- -----------------------
Gross profit 12,318 65% 16,513 76%
Expenses:
Product development 2,776 15% 1,827 9%
Depreciation and amortization 4,322 23% 3,817 17%
Selling, general and administrative 7,252 38% 8,881 41%
Impairment of note receivable received
in connection with the sale of IBIS
Systems Limited 1,500 8% - 0%
----------------------- -----------------------
Total expenses 15,850 84% 14,525 67%
----------------------- -----------------------
Income (loss) from operations (3,532) -19% 1,988 9%
Other income (expense), net (663) -3% 76 0%
----------------------- -----------------------
Income (loss) before income taxes (4,195) -22% 2,064 9%
Provision for income taxes - 0% 892 4%
----------------------- -----------------------
Net income (loss) $ (4,195) -22% $ 1,172 5%
======================= =======================
</TABLE>
12
<PAGE>
Comparison of Fiscal Quarters ended September 30, 2000 and 1999
Net Sales
Net sales were $8 million in fiscal quarter ended September 30, 2000 compared to
$10 million in fiscal quarter ended September 30, 1999, a decrease of $2 million
or 20%. The following factors contributed to the net decrease:
o Decrease of $2.3 million in net sales from our Australian subsidiary.
Australian retailers were required to implement a new Goods and
Services Tax in July 2000, and as a result, were generally not pursuing
complete technology upgrades during the quarter.
o Inclusion of $0.5 million in net sales from our former South African
subsidiary in the 1999 period.
o Increase of $0.7 million in net sales from our US-based retail
subsidiary.
While our sales pipeline has continued to grow, retailers have deferred buying
decision while evaluating new technologies not previously available. This trend
began in the quarter ended September 30, 1999, and was associated with concerns
over the millennium change. Our sales cycles did not substantially resume until
June 2000, after our potential customers determined the extent of their internal
year 2000 problems and after we introduced new products at industry trade shows
in early calendar year 2000. Due to the length of our sales cycles and because
of deferred purchasing decisions by some of the customers in our sales pipeline,
sales have been negatively affected during the quarter ended September 30, 2000,
particularly in Australia. Future sales growth will depend on a number of
factors, including our ability to consummate sales in the pipeline when
expected, economic conditions in the retail industry and the competitiveness of
our products against the products of our competitors. We cannot therefore
guarantee that we will achieve our predicted revenue targets.
Cost of Sales/Gross Profit
Cost of sales were $4 million in the fiscal quarter end September 30, 2000 as
compared to $2.9 million in the fiscal quarter ended September 30, 1999, an
increase of $1.1 million or 38%. Gross profit as a percentage of net sales
decreased to 50% in the second fiscal quarter from 71% in the comparable prior
quarter. The increase in cost of sales and decrease in gross profit as a
percentage of sales were due to a shift in sales mix from software licenses to
software modification services. The software modification services have a higher
cost component than software licenses.
Product Development Expenses
Product development expenses were $1.2 million in the fiscal quarter ended
September 30, 2000, unchanged as compared to the fiscal quarter ended September
30, 1999.
Depreciation and Amortization
Depreciation and amortization were $2.2 million in fiscal quarter ended
September 30, 2000 as compared to $2 million in fiscal quarter ended September
30, 1999, an increase of $0.2 million or 10%. The increase was primarily due to
the amortization of software purchased in connection the acquisition of
MarketPlace Systems Corporation in March 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.9 million in fiscal quarter
ended September 30, 2000 as compared to $4 million in fiscal quarter ended
September 30, 1999, a decrease of $0.1 million or 3%. These results reflect the
elimination of expenses from our former South African subsidiary in the current
period, offset by an increase in corporate level expenses due principally to
increases in professional fees associated with public reporting and investor
relations.
Impairment of Note Receivable Received In Connection With the Sale of IBIS
Systems Limited
After consideration of the independent valuation and other relevant data, we
concluded that the fair value at September 30, 2000 of the collateral underlying
the note receivable is less than the recorded investment in the note receivable.
Accordingly, we recognized an impairment of $1.5 million by creating a valuation
allowance with a corresponding expense for the quarter ended September 30, 2000.
13
<PAGE>
Other Expenses
Other expenses were $0.5 million in fiscal quarter ended September 30, 2000 as
compared to $0.3 million in fiscal quarter ended September 30, 1999, an increase
of $0.2 million or 67%. The increase is primarily due to an increase of $0.3
million in interest expense. The average interest rate on our indebtedness
increased to 14% in the current fiscal quarter from 8% in the comparable prior
quarter.
Comparison of Six Months Ended September 30, 2000 and 1999
Net Sales
Net sales were $19 million in six months ended September 30, 2000 as compared
to $21.8 million in six months ended September 30, 1999, a decrease of $2.8
million or 13%. The decrease was due to the following factors:
o Decrease of $2 million in net sales from our Australian subsidiary.
o Decrease of $1.9 million in net sales from our US-based retail
subsidiary.
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
fiscal quarter ended June 30, 2000.
Approximately $1.8 million remains due from the one-time sale of certain
technology rights during fiscal 2000. We expect receipt of this amount during
the third or fourth quarter of fiscal year 2001, and revenues will 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 were $6.7 million in six months ended September 30, 2000 as
compared to $5.3 million in six months ended September 30, 1999, an increase of
$1.4 million or 26%. Gross profit as a percentage of net sales decreased to 65%
in the first half of fiscal year 2001 from 76% in the prior comparative period.
The increase in cost of sales and the decrease in gross profit as a percentage
of sales were due to a shift in the sales mix from software licenses to software
modifications services. The software modification services have 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 were $2.8 million in the six months ended September
30, 2000 as compared to $1.8 million in six months ended September 30, 1999, an
increase of $1 million or 56%.
Depreciation and Amortization
Depreciation and amortization were $4.3 million in six months ended September
30, 2000 as compared to $3.8 million in six months ended September 30, 1999, an
increase of $0.5 million or 13%. The increase is due to amortization of software
acquired in connection with the acquisition of MarketPlace Systems Corporation
in March 2000 and 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 were $7.3 million in six months
ended September 30, 2000 as compared to $8.9 million in six months ended
September 30, 1999, a decrease of $1.6 million or 18%. The decrease is primarily
related to reassignment of existing personnel to product development projects
and the elimination of expenses from our former South African subsidiary in the
current period.
Impairment of Note Receivable Received in Connection With the Sale of IBIS
Systems Limited
After consideration of the independent valuation and other relevant data, we
concluded that the fair value at September 30, 2000 of the collateral underlying
the note receivable is less than the recorded investment in the note receivable.
Accordingly, we recognized an impairment of $1.5 million by creating a valuation
allowance with a corresponding expense for the six months ended September 30,
2000.
14
<PAGE>
Other Income (Expense)
Other income (expense) was ($0.7) million in six months ended September 30, 2000
as compared to $0.1 million in six months ended September 30, 1999, a decrease
of $0.8 million or 800%. The decrease is primarily due to an increase of $0.7
million in interest expense resulting from the $20.8 million in indebtedness
obtained in June 1999 to acquire Island Pacific, and the subsequent increase in
average interest rate on this indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the six months ended September 30, 2000, we financed our operations using
cash on hand, internally generated cash, proceeds from the exercise of options
and lines of credit. At September 30, 2000, we had cash of $0.6 million, a
decrease of $4.2 million from $4.8 million of cash at March 31, 2000.
Operating activities used cash of $0.6 million in the six months ended September
30, 2000 and $3.5 million in the six months ended September 30, 1999. Cash used
for operating activities in the six months ended September 30, 2000 resulted
from $4.2 million of net loss, a $3.3 million decrease in deferred revenue and a
$0.6 million increase in interest receivable; offset by $4.3 million in non-cash
depreciation and amortization, $1.5 million in non-cash impairment of note
receivable and a $1.7 million increase in accounts receivable and other
receivables.
Investing activities used cash of $2.2 million in the six months ended September
30, 2000 and $34.8 million in the six months ended September 30, 1999. Cash used
for investing activities in the first half of fiscal year 2001 was primarily due
to a $1.8 million increase in capitalized software development costs.
Financing activities used cash of $1.4 million in the six months ended September
30, 2000 and provided cash of $26.1 million in the six months ended September
30, 1999. The financing activities in the first half of fiscal year 2001
included $12.9 million of principal payments on our bank term loan and a $0.4
million decrease in amounts due to stockholders; offset by $10 million loaned to
us by Softline, $1.1 million of net proceeds from lines of credit and $0.8
million of proceeds from issuance of common stock.
Changes in the currency exchange rates of our foreign operations had the effect
of decreasing cash by $0.1 million in the six months ended September 30, 2000
and $0.2 million in the six months ended September 30, 1999.
Accounts receivable decreased to $8.2 million at September 30, 2000 from $10.0
million at March 31, 2000 primarily due to payment of the first $1.8 million due
from a $3.6 million one-time sale of certain technology rights.
Indebtedness
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.
15
<PAGE>
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 the consolidated 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 $1.8 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 $13.1
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 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. As of November 16, 2000, we are in compliance
with these covenants. 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.
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
originally bore interest at 10% per annum, payable monthly. On October 26, 2000,
we agreed to an increased interest rate of 14% per annum retroactive to August
1, 2000. We agreed to this after Softline advised us that the higher rate was
required under the conditions attached to South African Reserve Bank approval
for the loan. All interest payments due on this note have accrued through
October 31, 2000. We will be required to seek outside debt or equity financing
to bring interest current and pay the principal balance when due on the Softline
note. We currently have no commitments for financing allocated to this purpose,
and we cannot guarantee that such financing will be available on acceptable
terms and conditions, or at all.
Our note receivable originally obtained in connection with the sale of our IBIS
Systems Limited subsidiary came due November 15, 2000. The note was not paid
when due, and we do not anticipate the borrower will be able to perform under
the note. The note is secured by approximately 11% of the outstanding shares of
Integrity Software, Inc., a publicly held company whose shares are quoted on the
National Quotation Bureau Pink Sheets. We engaged Business Valuation Services,
Inc. to perform an analysis of the fair value of the shares securing the note at
September 30, 2000. After consideration of this valuation and other relevant
data, we concluded that the fair value of the Integrity shares securing the note
was $13.1 million at September 30, 2000, and we recognized an impairment of $1.5
million for the quarter ended September 30, 2000. Although we have limited
registration rights associated with the Integrity shares, our ability to sell
such shares to realize liquidity from the note will be limited by securities
laws and market conditions. We therefore do not know when or if we will achieve
liquidity from this note.
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
September 30, 2000 was $1.4 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.
16
<PAGE>
Cash Position and Need for Capital
As a result of our indebtedness and slower than expected sales of software
licenses, we are currently experiencing strains on our cash resources.
We are actively seeking private equity financing to improve our cash position.
We are considering several proposals from institutional investors, but we have
no binding commitments for funding. Financing may not be available on terms and
conditions acceptable to us, or at all. We anticipate that we will generate
sufficient cash from operations to pay all of our operating expenses and vendor
obligations (as renegotiated) through February 2001 even if we are not able to
close on immediate financing. If our cash resources become further strained, we
plan to immediately reduce our product development and certain other
administrative expenses through personnel reductions. These reductions would
impact our long-term strategy of enhancing and integrating our existing products
and developing new products, but we do not believe they would adversely affect
our short-term results of operations. We believe targeted personnel reductions
and careful cash management will be sufficient to permit us to meet our cash
needs through the end of the fiscal year. However, the fragility of our cash
position makes us especially vulnerable to unanticipated changes in revenues or
expenses, which have in the past and could in the future occur.
We will require outside sources of debt or equity financing to discharge the
outstanding bank indebtedness due April 1, 2001 and the note payable to Softline
due August 1, 2001. At this time, we have no commitments for such outside
financing, and there is no guarantee that such financing will be available on
acceptable terms and conditions, or at all. If we are not able to raise
financing, we will seek to restructure our indebtedness. There can be no
guarantee that we would be successful in these efforts.
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 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.
17
<PAGE>
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.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation. FIN 44 clarifies certain issues in the application of
Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock
Issued to Employees. Among other issues, FIN 44 clarifies (a) the definition of
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. The adoption of FIN 44 did not have a material impact on our
financial position or results of operations in the quarter ended September 30,
2000.
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 $8.9
million at September 30, 2000. Based on this balance, a change in one percent in
the interest rate would cause a change in interest expense of approximately
$89,000 or $0.01 per basic and diluted share, on an annual basis.
18
<PAGE>
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.
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 22% and 39% of our total net sales were denominated in currencies
other than the U.S. dollar for the six months ended September 30, 2000 and 1999,
respectively.
EQUITY PRICE RISK
We have no direct equity investments. However, we have a note receivable in the
amount of $13.1 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 achieve liquidity from the $13.1 million receivable.
We recognized an impairment of $1.5 million during the quarter ended September
30, 2000, with a corresponding charge to an expense for the same period. If we
experience further impairment in the value of the note receivable on the
Integrity shares, our assets will decline and we will incur an expense in the
quarter in which the impairment occurs equal to the amount of the impairment.
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 September 30, 2000, we issued an aggregate of 61,421
shares of common stock to non-employees upon exercise of options at exercise
prices of $2.00 and $2.75 per share for an aggregate exercise price of $57,175.
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.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
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. 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.
10.2 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.
10.3 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.
23.1 Consent of Business Valuation Services, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
We filed a Form 8-K on September 19, 2000 disclosing in Item 5 the rescheduled
annual meeting date and certain other information relating to the annual
meeting.
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/ Barry M. Schechter
-------------------------------
Date: November 20, 2000 Barry M. Schechter
Chief Executive Officer
Signing on behalf of the registrant
/S/ David L. Reese
-------------------------------
Date: November 20, 2000 David L. Reese
Chief Financial Officer
Signing as principal accounting officer.
20
