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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 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 92130
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(Address of principal executive Zip Code
offices)
Registrant's telephone number including area code (858) 481-4404
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Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.0001 par value American Stock Exchange
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Securities registered under Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.____
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates* as of June 12, 2000 was approximately $88.3 million, based on
the closing sale price on the American Stock Exchange on that date.
The number of shares outstanding of the registrant's Common Stock was 33,855,884
on June 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement for the annual meeting to
be held in 2000, to be filed with the Securities Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the registrant's
fiscal year, are incorporated by reference under Part III of this Form 10-K.
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* Excludes the Common Stock beneficially held by executive officers, directors
and stockholders whose beneficial ownership exceeds 10% of the Common Stock
outstanding at June 30, 2000.
PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS
RELATE TO FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE OF THE REGISTRANT, SVI
HOLDINGS, INC. ("WE" OR "US"). 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
THIS REPORT, 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.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
We are a leading provider of system software for enterprise retailers
and retail chains. Our products represent a full suite of products providing
retailers with a complete end-to-end business solution that we call "The Total
Point of Business."
Our solutions consist of the following components:
E-HOST electronic commerce products. Our electronic commerce products
are integrated with our Total Point of Business solution. The products
include:
o E-STORE electronic commerce store front;
o E-CRM customer relationship management; and
o SVI-DIRECT integrated fulfillment.
SVI-POST store systems. SVI-POST is a full business to consumer (B2C)
software infrastructure encompassing a range of integrated store system
products. The SVI-POST system controls all point-of-sale (POS) and in
store systems for traditional "brick and mortar" retailers. Its major
features include:
o operation of a network consisting of the POS
terminals and the corporate head office;
o ability to function on and interconnect with a wide
variety of hardware and software platforms and
generations; and
o user-customizable to the retailer's method of doing
business.
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The solution can incorporate a retail customer relationship management
system and a complete performance measurement system with loss prevention
features.
SVI-HOST retail enterprise management solutions. SVI-HOST integrates
the retail head office function by providing a retailing methodology
for retail chains which integrates:
o management planning and forecasting;
o financial functions;
o purchasing;
o warehousing;
o distribution;
o planning;
o ticketing;
o sales auditing and evaluation; and
o multi-channel integrated fulfillment.
Our SVI-HOST solution includes comprehensive
business-to-business (B2B) functions.
PROFESSIONAL SERVICES, including retail business consulting,
project management, application training, technical services and
documentation services.
We sell our solutions through an experienced professional direct sales
force with offices in the United States, United Kingdom and Australia. We
believe our knowledge of the complete needs of multi-store retailers enables us
to help our customers identify the optimal systems for their particular
businesses. The customer relationships we develop build recurring help desk,
maintenance and field service revenues and position us to recommend changes and
upgrades to systems.
We also develop and distribute retail system training products and
general computer courseware and computer skills testing products.
Our executive offices are located at 12707 High Bluff Drive, Suite 335,
San Diego, California 92130, telephone number (858) 481-4404.
RECENT DEVELOPMENTS
Effective April 1999, we acquired Island Pacific Systems Corporation of
Irvine, California, a leading provider of retail enterprise management software
products. The Island Pacific products are now an important component of our
SVI-HOST solution. Island Pacific was founded in 1977.
In October 1999, we sold our Triple-S Computers subsidiary to Softline
Limited, our majority stockholder. Triple-S developed and installed retail
systems throughout southern Africa. Softline paid a purchase price, through
surrender of SVI common shares, equal to our historical book basis in Triple-S.
On April 1, 2000, we reorganized our U.S.-based, wholly-owned, retail
software subsidiaries under a single wholly-owned subsidiary, SVI Retail, Inc.
In March 2000, we acquired the assets of MarketPlace Systems
Corporation of Austin, Texas. MarketPlace Systems was formerly privately held,
and developed software and performed consulting services. MarketPlace Systems
offers three comprehensive software packages: MarketPlace DIRECT, a direct
marketing management system for catalog and mail order marketers, MarketPlace
MERCHANT, a
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merchandising system for chain or department store retailers and MarketPlace Web
Direct, an Internet shopping application. We have incorporated the MarketPlace
software packages into our Total Point of Business solution to provide
integrated multi-channel, multi-format retail fulfillment to our customers.
MarketPlace's technical staff also complements our technical resources.
In May 2000, we announced that we are in discussions with Softline
concerning a possible business combination between Softline and SVI. Softline
currently beneficially owns approximately 56% of our common shares. Softline is
one of the largest accounting software vendors in the world. 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 approvals by United States and South African governmental
authorities. Any transaction may also be subject to approval of the stockholders
of SVI and/or Softline.
INDUSTRY OVERVIEW - RETAIL SOFTWARE SYSTEMS
The rapid development of the retail software market has increasingly
allowed the retail industry to track, analyze and implement sales information on
a real-time basis. Software systems provide for the input of sales information
as a sale occurs and simultaneously provide that information to the enterprise's
retail management software. Such information is available both to local
management and to company headquarters for purposes of inventory tracking and
sales analysis. These systems have become increasingly important for
multi-location retail enterprises that need to disseminate sales information
throughout the enterprise to better manage inventory, costs, pricing and
manufacturing. Multi-location retailers require sophisticated, integrated
point-of-sale retail management systems that can reliably and efficiently
capture and manage large numbers of individual transactions generated from
diversified points of sale.
Retail software systems were initially custom designed to satisfy
individual business needs of a retailer. These initial systems were proprietary
with software and support services developed internally or provided by a single
vendor. Due to the custom nature of the applications, little opportunity existed
for vendors to leverage their niche success into market-wide success.
The retail software systems industry has developed from proprietary,
customized, single platform systems to open architecture systems in which a
variety of hardware and software products from different manufacturers can be
combined to obtain the mix of features desired by the retailer. With the advent
of hardware and software systems using industry standard open system
architecture, retailers are no longer captive to the single solution vendors
which created their retail software systems. As a result, the market for retail
systems has grown substantially to include smaller retailers as well as large
chains, and a number of new suppliers have entered the retail software systems
business.
The retail industry we serve is currently experiencing significant
structural changes. These changes are driven by a variety of factors including
evolving consumer preferences, technological advances, globalization and
competition. The rapid growth of the Internet as a means of commerce is
transforming the retail business. The Internet is a business-to-consumer (B2C)
sales channel and a means of creating and managing customer relationships. The
Internet is also transforming business-to-business (B2B) supply chain
communications and management. These changes have forced traditional "brick and
mortar" retailers to rethink their business models and develop e-commerce
strategies in order to remain competitive. We believe the industry changes and
trends include:
o NEW COMPETITIVE MODELS. Brick and mortar retailers face
competition from national and international online retailers
which require no local presence. In addition, manufacturers
can now directly market their products more efficiently and
compete with the retailers who were formerly their partners.
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o LOWER PROFIT MARGINS. The wide availability of competitive
price quotes on the Internet puts price pressure on both
online retailers and brick and mortar retailers, forcing lower
profit margins.
o CENTRALIZED FULFILLMENT. The emergence of online retailing has
created significantly higher demand for centralized order
fulfillment solutions.
o NEED FOR TECHNOLOGY POLICIES. Traditional retailers have
historically been relatively slow to introduce new
technologies. Retailers must now develop aggressive technology
policies to compete effectively.
o ONLINE SERVICE. Customer service is moving from a primarily
local store-based model to an integrated online model.
o WIDER ASSORTMENTS OF GOODS. Customers accustomed to large
online goods selections expect similar selections in local
retail outlets.
All of these changes are leading to new approaches to retail systems
architecture. These approaches include movement away from the PC-based
point-of-sale model and toward centralized control environments with limited
capability data terminals also known as "thin clients". The thin clients include
cash registers, kiosks and wireless handheld devices.
We believe these changes have accelerated the pre-existing trend away
from internally-developed retail software. The increasingly competitive and
technologically evolving environment has made it very difficult for companies
which use internal, proprietary software to keep up with the rapidly improving
products which are available from outside vendors. At the same time, these
changes have put pressure on outside vendors such as us to upgrade existing
products and develop new products on a more rapid timetable.
STRATEGY
Our strategy is to become the leading global provider of enterprise
retail solutions. To that end, our mission is to provide our new and existing
customers the tools and infrastructure necessary to compete in the global
marketplace. Key elements of our strategy include:
o LEVERAGING OUR RETAIL EXPERIENCE AND CUSTOMER BASE. Over 500
retailers use our solutions. Our management, sales and
technical teams have an in-depth understanding of the retail
industry through having delivered widely accepted products for
as long as 26 years. We believe our experience and contacts in
the retail industry give us a significant competitive
advantage in marketing new and enhanced products to the
industry. Many of our customers began using one or more of our
products before the provider was a part of the SVI group.
Therefore, a number of our customers do not use our full Total
Point of Business solution. We intend to aggressively
cross-sell our existing and new products to those customers
who use only part of our end-to-end solution. Our training
products subsidiary also plans to focus development and
marketing efforts on producing training products for the
retail marketplace.
o EXPANDING AND ENHANCING OUR PRODUCT LINE. We are engaged in an
aggressive product development effort to expand and enhance
our product line. We are also continuing our strategy of
acquiring new products complementary to our suite through
acquisitions and strategic partnering. Our enhancement program
is designed to anticipate trends in the retail industry
through constant consultation with our customers and strategic
partners. Our goal is to introduce timely new products and
enhancements which will be attractive to our existing
customers and allow us to better compete for new customers.
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o EMPHASIZING E-COMMERCE SOLUTIONS. An important part of our
product enhancement program is the integration of electronic
commerce solutions. In January 2000 we introduced the E-STORE
online storefront product through an alliance with IBM. We
recently acquired MarketPlace Systems Corporation and through
that acquisition we now offer e-commerce (as well as catalog
and mail order) fulfillment as a module of our SVI-HOST
solution. In addition, we offer a unique Internet-based
customer relationship management product.
o GROWING RECURRING SERVICE REVENUES. We currently receive
recurring revenues from our maintenance and support agreements
and software customization services. We believe that an
expansion in this revenue base can create a more stable
revenue and cash flow base, reducing our reliance on software
license sales, which tend to fluctuate over time.
o BETTER SERVING THE SMALLER RETAILER. Many of our U.S.
customers are very large Tier 1 and Tier 2 multi-outlet
retailers. We recently introduced a new standard store product
based on our large retailer product. We can supply this
product with little or no modification to smaller Tier 2 and
Tier 3 retailers at a competitive price point. We intend to
market more aggressively to smaller retailers as part of our
strategy to expand our revenue base and reduce our dependence
on large software license sales.
o INCREASING INTERNATIONAL SALES. International sales have
historically been a major component of our revenues. We intend
to increase our international sales efforts, focusing on Asia
Pacific and European countries. Toward that end, we recently
completed an international version of our proven SVI-POST
technology, originally developed by Applied Retail Solutions
for the U.S. market. We believe this product offers
significant advantages not previously widely available in the
international market.
o MAKING STRATEGIC ACQUISITIONS. We have expanded our business
through numerous strategic acquisitions. We intend to continue
our strategy of seeking appropriate acquisition candidates
within our target profile of companies with products and
services that complement our Total Point of Business solution.
o EXPANDING STRATEGIC RELATIONSHIPS. We will continue to
establish strategic relationships for the development and
marketing of products that complement our Total Point of
Business solution. We maintain strategic relationships with
IBM, NCR, ICL Fujitsu, and Retail Expert, Inc., among others.
We intend to continue to exploit these relationships for
improving our Total Point of Business solution and expanding
our markets.
o INCREASING OPERATIONAL EFFICIENCY. We built our Total Point of
Business solution principally through acquisitions of
previously independent companies. We have attempted to reduce
duplicative efforts and increase efficiencies of these
operations, and we intend to continue this program in the
current fiscal year.
PRODUCTS AND SERVICES
We have three major operating subsidiaries: SVI Retail, Inc., SVI
Retail Pty. Ltd. (Australia) and SVI Training Products, Inc. SVI Retail, Inc.
and SVI Retail Pty. Ltd. (Australia) together constitute our SVI Retail
division.
SVI RETAIL DIVISION
OVERVIEW
Our SVI Retail division is a leading provider of system solutions for
enterprise retail chains in specialty goods, mass merchants and department store
markets. Our products represent a full suite of products providing retailers
with a complete end-to-end business solution that we call "The Total Point of
Business".
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We have three primary product categories: eBusiness, store systems and
retail enterprise management. We also offer comprehensive consulting and
professional services. The following table summarizes our products and services:
RETAIL ENTERPRISE
eBUSINESS (E-HOST) STORE SYSTEMS (SVI-POST) MANAGEMENT (SVI-HOST) PROFESSIONAL SERVICES
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Online storefront with Touch screen interactive Management planning Retail business consulting
shopping cart graphical user interface (GUI)
Web site integration Transaction processing Forecasting Project management
Order tracking Payment/credit processing Purchase order management Application training
E-mail notifications Cash reconciliation Merchandise receiving Technical services
Integration with SVI-POST Training Allocations Documentation
and SVI-HOST systems
Customer relationship Store policy reference Stock transfers and Managed on-site services
management (CRM), including replenishment
comprehensive customized
e-mailing
Customer relationship management Inventory Warehouse logistics
Employee information Price management consulting
Inventory management Stock ledger
Custom development tools Data warehousing
Activity audit Financial accounting
Merchandise recording Physical warehousing
Performance measurement Sales audit
Loss prevention Ticketing
Events and promotions
Fulfillment
Our products and services provide the following benefits to our
customers:
INTEGRATED SOFTWARE SOLUTIONS. Our solutions are fully integrated
software products which address the complete information and management
requirements of the retail enterprise. All of our products are open systems,
allowing integration with third-party applications of retailers.
CUSTOMIZABILITY. We are able to customize our solutions to the unique
needs of particular retailers and chains. In addition, our standard software
products contain a number of tools and features which allow our customers to
tailor their systems continuously to their changing needs.
INTEGRATED BUSINESS-TO-CONSUMER INFRASTRUCTURE. Our solutions integrate
the various store fronts of retailers, from point-of-sale terminals to Internet
store fronts to mail order catalogs. Integral to our solution is a customer
relationship management system which permits retailers to collect from various
store fronts and use critical customer information.
INTEGRATED BUSINESS-TO-BUSINESS INFRASTRUCTURE. Retailers can use our
SVI-HOST solution as a method to provide electronic document flow for supply
chain management.
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MARKETS AND CUSTOMERS
We currently have approximately 500 retailers using our solutions. Our
products are used by the full spectrum of retailers including specialty goods
sellers, mass merchants and department stores. Most of our U.S. customers are in
the Tier 1 to Tier 3 retail market sectors.
- --------------------------- ------------------------------ ---------------------
U.S. TIER LEVELS NO. OF STORES OR REVENUE
- --------------------------- ------------------------------ ---------------------
Tier 1 600 Stores $1 Bil +
- --------------------------- ------------------------------ ---------------------
Tier 2 400 - 700 $500 Mil - $1 Bil
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Tier 3 200 - 500 $200 Mil - $500 Mil
- --------------------------- ------------------------------ ---------------------
Tier 4 1 -250 Up to $200 Mil
- --------------------------- ------------------------------ ---------------------
Our international customers range in size but are typically smaller
than our U.S. customers.
Some of our customers are listed below:
Aaron Brothers Art Marts Fossey's Pacific Sunwear of California
Adidas Friedman's Inc. Phillips-Van Heusen
Aeropostale Godiva Chocolatier, Inc. Polo Ralph Lauren
ASDA Stores, Ltd. (England) Habitat UK, Ltd. Rack Room Shoes
Athlete's Foot Hibbett Sporting Goods Samsonite Company Stores
Bally Retail, Inc. Home Depot Signet Group plc
BBQ Galore J.C. Penney, Inc. Smith & Hawken
Benneton Lane Bryant Thorn Europe
Big 5 Sporting Goods Laura Ashley Timberland
Brookstone Company, Inc. Lerner New York Toys "R" Us
Bugle Boy, Inc. Limited Stores Trans World Entertainment Corp.
Chanel Limited Too United States Postal Service
Charming Shoppes Lingerie for Less Urban Outfitters
Chico's FAS, Inc. Marriott International Vans, Inc.
Coles-Myer Micro Center Victoria's Secret Stores
Crate & Barrel Modell's Sporting Goods Vodaphone
Discovery Channel Musicland VOX Retail
Disney Nature Company Walking Company
DIY Home Warehouse Officemax Whirlpool
Dollar General Corporation Officeworks Wilson's, The Leather Experts
Elder Beerman P.T. Matahari Putra Prima Woolworth's
Sales to one customer, Toys "R" Us, comprised 15% of net sales for the
fiscal year ended March 31, 2000.
SALES AND MARKETING
We sell our retail solutions primarily through a direct sales force
which operates internationally with offices in the United States, United Kingdom
and Australia. Sales efforts involve comprehensive consultations with potential
customers. We believe our sales force's knowledge of the complete needs of
multi-store retailers enables us to help our customers identify the optimal
systems for their particular businesses.
We attend trade shows and advertise in industry publications. We also
maintain a comprehensive web site describing our products. We regularly engage
in cooperative marketing programs with our strategic partners.
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Sales of retail software products typically decrease in the fourth
quarter of each calendar year (our third fiscal quarter). Retailers express a
reluctance to implement new systems or upgrade additional systems while
preparing for the holiday shopping season.
DESCRIPTION OF PRODUCTS AND SERVICES
We have carefully assembled our Total Point of Business products so
that the modules work together as a single solution. Our customers can mix and
match the modules to create a solution tailored to their businesses. We classify
our products into three broad categories, eBusiness, store systems and retail
enterprise management, although many of the products span more than one
category. We also offer comprehensive consulting and professional services.
eBUSINESS
We are aggressively developing and marketing e-commerce aspects of our
solutions to provide retailers with the tools they need to compete in the
multi-channel marketplace. Our e-commerce solutions include:
E-HOST STORE FRONT. We have a cooperative marketing agreement with IBM
through which we market the IBM product Websphere Commerce Suite 4.1 integrated
with the SVI-HOST retail enterprise management and SVI-DIRECT fulfillment
solutions. The Websphere Commerce Suite is a scalable platform which integrates
with existing web sites and provides a shopping cart application, shipment
tracking, credit card processing, taxation compliance, e-mail notifications and
rewards and vouchers.
E-CRM. Through our e-CRM application, we offer customer relationship
management and marketing integrated with data provided by our in store and
online CRM system. Linking online CRM with traditional CRM provides retailers
with a powerful means for targeted customer communication, loyalty rewards,
cross-selling, up-selling and buying pattern analysis.
INTEGRATED FULFILLMENT. Through our acquisition of MarketPlace Systems
in March 2000, we acquired a fulfillment application that we are marketing under
the name SVI-DIRECT. This product provides inventory control, single order pick,
pack and ship, customer service and customer relationship management for
Internet retailing. Used in combination with our SVI-HOST product, SVI-DIRECT
provides a system to fully integrate the fulfillment functions of multiple
distribution channels, including local outlets, e-commerce and catalog and mail
order.
STORE SYSTEMS (SVI-POST)
SVI-POST is a full business-to-consumer (B2C) software infrastructure
encompassing a range of integrated store system products.
TERMINAL APPLICATION. The POS terminal application is offered on a
variety of hardware configurations, and is able to run on many different
operating system platforms. The application employs a graphical user interface
and touch screen input. The application also provides an on-demand reference
source for employees, including store policies, an on-screen calculator,
instructions for forms usage, package pricing, frequent shopper information,
gift cards, training mode, auditing features and e-mail. The application is
fully customizable, either by the customer using included tools, or by our
technical team as part of our implementation and support services.
IN STORE PROCESSING APPLICATION (ISP). The In Store Processing
application provides a reliable, high-performing management platform to
administer store applications. The architecture is designed to maintain data
integrity while allowing full integration with our SVI-HOST software or the
customer's third-party head office software.
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PERFORMANCE MEASUREMENT/LOSS PREVENTION. We have a co-marketing
agreement with Retail Expert, Inc. through which we are the exclusive
third-party reseller of NaviStor, a leading performance monitoring and loss
prevention product. NaviStor provides a system of performance measurement which
includes approximately 850 key indicators to evaluate performance and motivate
management action.
RETAIL ENTERPRISE MANAGEMENT (SVI-HOST)
SVI-HOST provides a retailing methodology for retail chains which
integrates the flow of data from the planning phase, through budgeting, to
purchasing, allocation and distribution. The application then takes retail sales
data for evaluation and feedback to the sales audit and planning phase.
We offer two different versions of this product. In the United States
and Europe, we primarily market the IBM AS/400 version of this product which was
formerly the Island Pacific I3 suite of products. In Australia and other Asia
Pacific regions, we primarily market the Windows NT and UNIX version of this
product which was formerly the Chapman Retail Management System.
The following description applies to the U.S. and European AS/400
version of SVI-HOST, although the Asia Pacific version has similar features.
MERCHANDISING. The Merchandising module is the core of the Total Point
of Business solution. This extensive module includes management planning and
open to buy, forecasting, purchase order management, merchandise receiving,
allocations, transfers, basic stock replenishment, physical inventory, price
management and merchandise stock ledger. Merchandising has multiple language and
currency capabilities for international operations.
Merchandising is offered as a single version product. Most
modifications we perform on the product are incorporated into future releases of
the system base. This methodology reduces implementation risks for our
customers, shortens the implementation cycle and reduces software bugs. It also
reduces training requirements. Moreover, customers who maintain the product are
able to take advantage of improvements requested by other retailers.
DATA WAREHOUSING (THE EYE). The Eye complements the Merchandising
product by offering user-definable data warehousing and retrieval. The Eye uses
innovative storage techniques which provide quick access to data and graphical
drag-and-drop movement of elements and data. The Eye can also be used for data
generated by applications outside the Total Point of Business solution.
FINANCIALS. Financials includes accounts payable with automatic invoice
matching, general ledger and fixed assets functions.
WAREHOUSE. Warehouse is a user-definable locator system for controlling
the physical flow of merchandise. Warehouse employs a number of special features
designed for retailers. Warehouse also includes radio frequency (RF) technology
to allow for access to the application from the warehouse floor using a range of
wireless devices.
EVENTS. The Events module analyzes the performance of events and
promotions. The module is linked to the Eye data warehousing application to
provide sophisticated and customizable implementation of an event or promotion
and analysis and reports of its success.
SVI-HOST also includes sales audit and merchandise ticketing features.
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PROFESSIONAL SERVICES
We offer a variety of consulting, implementation and upgrade services
to our customers. We perform services on an as needed basis and as part of
project plans. We typically render services at the customer's site to provide
the best overall understanding of the customer's environment and business.
However, for a number of our customers, we maintain at our offices fully
operational terminals linked to the customer's network. Using these terminals we
can perform services nearly as efficiently as going to the customer's site,
without the time and expense of travel.
RETAIL BUSINESS CONSULTING. We employ a staff of highly qualified,
experienced retailers who provide a variety of business consulting services. Our
consulting staff members have an average of over ten years experience in the
retail industry as buyers, allocators, distributors, merchandise planners, store
managers, IT managers, and retail business owners. They combine their retail
experience with their knowledge of the SVI Total Point of Business solutions to
offer advice on how best to integrate our solutions into the latest retail
practices for a cost-effective, smooth implementation of change within an
organization.
Our retail consultants assist with:
o requirements definitions; o business process review;
o work process re-engineering; o understanding of business benefits; and
o organizational change management; o job definition and staffing requirements.
PROJECT MANAGEMENT. Our experienced project management teams assist with:
o work product definition; o coordination of vendors;
o business and technical coordination; o project assessment documentation;
o application testing and conference room pilots; o system integration; and
o overall implementation planning; o project timelines.
o cost management;
APPLICATION TRAINING. We train the customer's internal trainer and we
offer training for the customer's end users. Through our training products
subsidiary, we also offer software training modules for our solutions.
TECHNICAL SERVICES. Our technical experts provide technical consulting
and programming services. Technical services include:
o interface and conversion o design, modification and o programming; and
between systems; customization;
o testing; o problem resolution; o system management.
o software installation; o upgrade planning, testing
and implementation;
DOCUMENTATION SERVICES. We provide customized system documentation for
all parts of the Total Point of Business Solution.
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SVI TRAINING PRODUCTS DIVISION
Our training subsidiary develops and distributes PC courseware and
skills assessment products. The courseware is designed for use in an
instructor-led training environment. We license courseware either as individual
manuals and instructor guides, or on a limited site license basis. We have
developed more than 200 training courses.
Site licensing allows a customer to print an unlimited number of course
manuals for a fixed annual fee, and renewals provide us with a recurring annual
revenue stream. Over 80% of the training site licenses are renewed. We provide
the site licensed courseware on CD-ROM, allowing customization of the
instructor-led course materials.
We use a network of specialized sub-contractors to develop products. We
hire sub-contractors on a project basis, which allows for the fast, simultaneous
development of multiple courses and gives us access to diverse skills without
fixed overhead commitments.
We market training products through a direct sales force. We also
advertise and sell the training product range through the Internet, direct mail
and trade shows. Training uses both in-house and independent representatives,
and has representation in California, Texas, Indiana, Arizona, the United
Kingdom and South Africa. Customers include universities, large corporations,
government agencies and training schools.
Our training subsidiary is also a reseller for Computer Based Training
(CBT) products, which are multimedia self-training materials for computer
software applications. The CBT products are sold over the Internet.
We also market the "compAssess" computer skills testing program. The
compAssess product enables employers to evaluate the computer skills of their
employees and provides assistance in selecting the appropriate course modules
for trainees. We market this package to personnel agencies, universities,
schools and training companies.
We entered into a strategic agreement with Electric Paper of the United
Kingdom to develop a customized version of the compAssess skills assessment
product for the international market. We completed the product in February 2000
and Electric Paper is marketing the product under the name AutoTest through its
distributors world-wide. AutoTest has been approved as an electronic testing
product for the ECDL and ICDL software certification program in Europe, the
United Kingdom and Canada.
Our training subsidiary also provides courseware for some of our Total
Point of Business retail software solutions. The courseware is designed to
provide in store training to all levels of store personnel from management to
POS data entry clerks. We are developing further training products to support
additional SVI Retail products.
PRODUCT DEVELOPMENT
The retail software industry was until recently characterized by long
product lives due to the high costs of such products, the dependence on such
products to manage all aspects of retail operations and very high technology
turnover costs, including the requirement for new hardware, data migration and
retraining at multiple locations. Recent structural changes in the retail
industry have shortened product lives and accelerated new product introductions.
We are responding by implementing an aggressive product development program to
improve our existing products and develop new products. We believe that the core
coding of many of our products will continue to serve many of the important
retailing functions, but that additional functionality and flexibility will be
required in the new competitive environment.
Our future performance will depend in large part on our ability to
enhance our current products and develop new products. In order to achieve
market acceptance, these new products must anticipate and respond to the latest
trends in business-to-consumer and business-to-business communications, and must
be compatible with existing and emerging channels of commerce. Our products must
also incorporate state of the art technology and offer clearly perceived
advantages over the products of our competitors.
11
As of March 31, 2000, we had 123 employees engaged in product
development located primarily in southern California and Sydney, Australia.
Product development expense for the fiscal years ended March 31, 2000 was $4.9
million, or 14% of net sales. We recorded no product development expenses for
the prior three fiscal years.
Our current product development projects include:
o The redevelopment of the SVI-HOST infra-structure and
architecture using the Java programming language. A Java-based
SVI-HOST application will be able to operate on virtually any
hardware platform, and will allow for greater centralization
of the control system environment. We have completed the
redevelopment of the Eye portion of SVI-HOST in Java. We are
continuing to redevelop other portions and modules of the
solution in Java as new features and enhancements are
introduced.
o The continued improvement of our single version store system
product offered to smaller retailers. We established a San
Diego-based development team made up of developers from the
U.S., Australia and South Africa for this project. We
introduced this product in the fourth quarter of fiscal 2000,
and we are continuing to enhance its features and functions.
o The development of a Java-based point-of-sale product designed
for larger retailers looking to take advantage of "thin
client" hardware, including wireless and hand-held POS
devices. This product is expected to be released in fiscal
year 2001.
We also enhanced our Total Point of Business solution through a number
of strategic acquisitions and alliances, including:
o acquisition of MarketPlace Systems, through which we launched
our SVI-DIRECT integrated fulfillment solution; and
o strategic alliance with Retail Expert, through which we are
the exclusive third-party reseller of the NaviStor performance
monitoring and loss prevention product.
COMPETITION
The markets for our software products are highly competitive, subject
to rapid change and sensitive to new product introductions or enhancements and
marketing efforts by industry participants. We expect competition to increase in
the future as open systems architecture becomes more common and as more
companies compete in the emerging electronic commerce market.
The largest of our competitors offering end-to-end retail solutions is
JDA Software Group, Inc. Other vendors offer one or more of the components of
our solution. For retail enterprise management, our competitors include Retek
Inc., SAP AG, STS Systems and I2 Technologies (which acquired IBM's Makoro and
Inforem product lines). For store systems, our competitors include Datavantage,
Inc., Applied Digital Solutions, Inc., Triversity, Inc., Gemmar Systems
International, Inc., and CRS Retail Systems, Inc. Our catalog and mail order
systems compete with Smith Gardner & Associates, Inc., and CommercialWare, Inc.
Our NaviStor loss prevention product competes with Datavantage's XBR. Our
professional services compete with major systems integrators such as Andersen
Consulting, KPMG and PricewaterhouseCoopers, as well as locally based service
providers in many of the territories in which we do business. Our strategic
partners, including IBM, Retail Expert, NCR and ICL Fujitsu, represent potential
competitors.
We believe the principal competitive factors in the retail solutions
industry are price, product features and performance, e-commerce compatibility,
open system compatibility, retail system expertise, quality and reliability,
brand awareness and reputation, timely introduction of new products, effective
distribution networks, customer service, and quality of user interface.
12
We believe we currently compete favorably with respect to these
factors. In particular, we believe that our competitive advantages include:
o state of the art technology, including powerful tool sets;
o single version products reducing implementation costs and
risks;
o long operating histories and loyal customers;
o the breadth of our product line;
o open system architecture; and
o aggressive technology development and acquisition program.
Many of our current and potential competitors are more established,
benefit from greater name recognition, have significantly greater financial,
technical, production and/or marketing resources, and have larger distribution
networks, any or all of which advantages could give them a significant
competitive advantage over us. We cannot guarantee that we will be able to
compete successfully in this environment.
Our training products subsidiary competes with a large number of
companies offering similar products. The market for courseware and skills
assessment products is characterized by low barriers to entry. Many existing and
potential competitors have greater financial, technical, production and/or
marketing resources than we have. Our training subsidiary competes on the basis
of its existing breadth of products, timely introduction of new products and
value pricing. We believe that these factors give us an advantage over many of
our competitors. We further believe that larger competitors will find it
difficult to compete with us on the basis of price due to their higher
development costs and larger overhead structures.
PROPRIETARY RIGHTS
Our success and ability to compete depend in part on our ability to
develop and maintain the proprietary aspects of our technologies. We rely on a
combination of copyright, trade secret and trademark laws, and nondisclosure and
other contractual provisions, to protect our various proprietary products and
technologies. We seek to protect our source code, documentation and other
written materials under copyright and trade secret laws. We license our software
under license agreements which impose restrictions on the ability of the
customer to use and copy the software. These safeguards may not prevent
competitors from imitating our products and services or from independently
developing competing products and services, especially in foreign countries
where legal protections of intellectual property may not be as strong or
consistent as in the United States.
We hold no patents. Consequently, others may develop, market and sell
products substantially equivalent to our products, or utilize technologies
similar to those used by us, so long as they do not directly copy our products
or otherwise infringe our intellectual property rights.
We license and integrate technology from third parties in certain of
our software products. For example, we license IBM OS/400 for SVI-HOST and
SVI-DIRECT, Microsoft Windows for our point of sale products, Lansa Inc.'s LANSA
for our SVI-DIRECT product and IBM's Websphere Commerce Suite for our E-STORE
product. These third-party licenses generally require us to pay royalties and
fulfill confidentiality obligations. Any termination of, or significant
disruption in, our ability to license these products could cause delays in the
releases of our software until equivalent technology can be obtained and
integrated into our software products. These delays, if they occur, could have a
material adverse effect on our business, operating results and financial
condition.
13
Intellectual property rights are often the subject of large-scale
litigation in the software and Internet industries. We may find it necessary to
bring claims or litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. These actions would likely
be costly and divert management resources. These actions could also result in
counterclaims challenging the validity of our proprietary rights or alleging
infringement on our part. We cannot guarantee the success of any litigation we
might bring to protect our proprietary rights.
Although we believe that our products do not infringe on any
third-party's patents or proprietary rights, we cannot be certain that we will
not become involved in litigation involving patents or proprietary rights.
Patent and proprietary rights litigation entails substantial legal and other
costs, and we do not know if we will have the necessary financial resources to
defend or prosecute our rights in connection with any such litigation.
Responding to, defending or bringing claims related to our intellectual property
rights may require our management to redirect our human and monetary resources
to address these claims. In addition, these actions could cause product shipment
delays or require us to enter into royalty or license agreements. Royalty or
license agreements, if required, may not be available on terms acceptable to us,
if they are available at all. Any or all of these outcomes could have a material
adverse effect on our business, operating results and financial condition.
EMPLOYEES
At March 31, 2000, we had a total of 297 employees, 198 of which were
based in the United States and 99 of which were based in the United Kingdom,
Australia, South Africa and other countries. Of the total, 33 were engaged in
sales and marketing, 123 were engaged in product development, 104 were engaged
in professional services, and 37 were in administration and finance. We believe
our relations with our employees are good. We have never had a work stoppage and
none of our employees are subject to a collective bargaining agreement.
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL
OTHER INFORMATION CONTAINED IN THIS REPORT ON FORM 10-K. INVESTING IN OUR COMMON
STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THOSE DESCRIBED BELOW,
RISKS AND UNCERTAINTIES THAT ARE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY
BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS OCCUR, OUR BUSINESS COULD BE HARMED, THE PRICE OF OUR COMMON
STOCK COULD DECLINE AND OUR INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
SEE THE NOTE REGARDING FORWARD-LOOKING STATEMENTS INCLUDED AT THE BEGINNING OF
THIS REPORT.
WE INCURRED A LOSS IN FISCAL YEAR 2000 AND WE CANNOT ASSURE YOU THAT WE WILL
ACHIEVE PROFITABILITY.
We incurred a loss of $4.1 million in the fiscal year ended March 31,
2000. We earned profits in each of our prior four fiscal years ending March 31,
1999, March 31, 1998 (six months), September 30, 1997 and September 30, 1996 of
$5.6 million, $5.8 million, $4.8 million and $0.1 million, respectively. The
loss in fiscal 2000 was due principally to increased depreciation, amortization
and interest expenses associated with the acquisition of Island Pacific Systems
Corporation effective April 1, 1999, and product development expenses incurred
to integrate our existing products, migrate our existing products to other
programming languages and develop new products. The increases in our net sales
were not sufficient to offset these increased expenses. We do not expect these
expenses to decrease significantly in the foreseeable future, so we will need to
generate substantial additional revenue to achieve profitability. We cannot
guarantee that we will generate such additional revenues and achieve
profitability in the current or any future fiscal year.
14
WE DO NOT EXPECT TO MAINTAIN OUR HISTORICAL RATE OF GROWTH.
We have experienced very rapid growth and expansion. Our net sales from
continuing operations increased 106% in the fiscal year ended March 31, 2000.
This rapid growth and expansion has been primarily due to acquisitions. We do
not believe that our net sales from continuing operations will continue to grow
at the rate at which they have grown in the past unless we engage in further
significant acquisitions.
OUR BUSINESS WILL NOT OPERATE EFFICIENTLY AND OUR RESULTS OF OPERATIONS WILL BE
NEGATIVELY AFFECTED IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY.
Our recent growth resulted in substantial expansion in our number of
employees, the scope of our operating systems and the geographic distribution of
our operations and customers during the fiscal years ended March 31, 2000 and
1999. The rapid growth placed a significant strain on our management and
operations. Our ability to compete effectively and to manage future growth, if
any, will depend on our ability to continue to implement and improve
operational, financial and management information systems on a timely basis. It
will also depend on our ability to expand, train, motivate, manage and retain
our work force, in particular our direct sales force. We must also continue to
deal effectively with third-party systems integrators and consultants. Two of
our executives in charge of retail operations subsidiaries retired during the
fiscal year ended March 31, 2000. Their replacements have served in their
current capacities for only a short time. Our future growth and success depend
in large part upon the ability of our executive management team to effectively
manage expansion of our operations. We cannot guarantee that we will be able to
manage our recent or any future growth, and our failure to do so would
negatively affect our business, operating results and financial condition.
WE EXPECT OUR QUARTERLY RESULTS TO FLUCTUATE. IF WE FAIL TO MEET EARNINGS
ESTIMATES, OUR STOCK PRICE COULD DECLINE.
Our quarterly operating results have varied significantly and are
expected to continue to fluctuate significantly in the future. Many factors may
cause these fluctuations, including:
o the size and timing of individual orders, particularly with
respect to our larger customers;
o changes in our strategies;
o general health of the retail industry and the overall economy;
o technological changes in platforms supporting our software
products;
o lengthy sales and implementation cycles;
o changes in the mix of software products licensed;
o changes in the mix of software license revenues compared to
consulting, maintenance and other service revenues;
o non-recurring sales of assets and technologies;
o competition and pricing in the retail software industry;
o customer order deferrals in anticipation of new products;
o the timing of new software product introductions and
enhancements to our software products and those of our
competitors;
o market acceptance of new software products;
o employee hiring and retention, particularly with respect to
sales and consulting personnel;
o changes in our operating expenses; and
o changes in the mix of domestic and international revenues and
foreign currency exchange rate fluctuations.
We usually ship our software products when contracts are signed.
Consequently, order backlog at the beginning of any quarter usually represents
only a small portion of that quarter's expected revenues. As a result, software
license revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter, and this makes it difficult for us to predict revenues.
15
DEMAND FOR OUR RETAIL SOFTWARE SYSTEMS DECLINED IN FISCAL 2000, AND WE CANNOT
GUARANTEE THAT THIS TREND WILL REVERSE.
During the last six months of calendar year 1999 we experienced a
decline in overall demand for our retail software systems. We believe this
decline in demand 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 in the quarter ended March 31,
2000. Because our sales cycles tend to range from four to twelve months, we
remain cautious about our expectations for sales of software licenses in near
term future periods due to the interruption in sales cycles. We cannot assure
you that the decline in demand was not due to other factors, such as structural
changes in the retail industry reducing overall demand for retail software
solutions, marketing issues, longer sales cycles, lack of desired features or
functionality of our products and/or perceived advantages of the products of our
competitors.
IMPLEMENTATION OF OUR PRODUCTS IS A LENGTHY PROCESS.
Our software products are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Consequently, implementation
of our software is a complex, lengthy process and the commitment of resources by
our customers is subject to a number of significant risks over which we have
little or no control. We believe the purchase of our products is often
discretionary and involves a significant commitment of capital and human
resources by our customers. Our sales cycles are generally lengthy, typically
ranging from four to twelve months. Consequently, it is difficult to predict and
budget for quarterly and annual revenue.
Our sales and implementation cycles vary substantially from customer to
customer. We have experienced, and we expect to continue to experience, quarters
or periods where individual software license or service orders are significantly
larger than our typical software license or service orders. If we receive any
significant cancellation or deferral of customer orders, or we are unable to
conclude negotiations by the end of the fiscal quarter, our operating results
may be lower than anticipated. In addition, any weakening or uncertainty in
international economies may make it more difficult for us to predict quarterly
results in the future, and could negatively impact our business, operating
results and financial condition for an indefinite period of time.
We base our expense levels in large part on expectations of future
revenues, and expenses are relatively fixed in the near term. Because of this,
our net income may be lower than expected if we experience an unanticipated
decline in revenue for a particular quarter. We also expect expense levels to
increase in the near term as we attempt to expand our operations and develop new
products. Moreover, the retail software industry is generally dependent on
system roll-outs with fixed time horizons. Our operating results may vary
significantly if we fail to obtain major projects, if major projects are
cancelled or delayed or if we fail to replace projects that have been completed
or are nearing completion. In addition, we may also experience relatively weaker
demand for our products from October through December as a result of reduced
sales activities during those months.
As a result of the above factors, revenues and earnings for any quarter
may vary significantly and we do not believe that period-to-period comparisons
of our financial performance are necessarily meaningful. You should not rely on
them as an indication of our future performance. Fluctuations in our operating
results may also result in volatility in the price of our common stock. It is
likely that in some future quarter our net sales or operating results will be
below the expectations of public market analysts or investors. If that happens,
the price of our common stock may decline.
16
WE SOLD OUR IBIS SUBSIDIARY IN 1999 IN PART FOR A PROMISSORY NOTE, AND
COLLECTION OF THE BALANCE OF THE NOTE DEPENDS ON THE VALUE OF A THINLY TRADED
STOCK. DELAYS IN PAYMENT OF THIS NOTE HAVE FORCED US TO SEEK OTHER SOURCES OF
CAPITAL.
We sold our IBIS Systems Limited subsidiary effective January 1, 1999.
The purchaser was a company affiliated with IBIS's management team. The
purchaser paid $13.6 million of the purchase price in the form of a promissory
note originally due October 1, 1999. To secure the note, we obtained a security
interest in the stock of IBIS. The purchaser did not repay the note on the
original due date because it had not yet completed a reorganization that was
intended to serve as the source of funds to repay the note. The due date of the
note has been extended to November 15, 2000.
We permitted the purchaser to proceed with its reorganization with a
wholly-owned subsidiary of Integrity Software, Inc., a publicly traded company
with prices quoted on the National Quotation Bureau Pink Sheets under the symbol
"INTY". The purchaser exchanged all of the outstanding IBIS stock for 1,536,000
common shares of Integrity, representing approximately 11% of Integrity's
outstanding shares at March 20, 2000. We agreed to substitute our security
interest in the IBIS shares for a security interest in the purchaser's Integrity
shares. We also obtained the right to convert all or any portion of the unpaid
indebtedness under the note to Integrity shares valued at $12.50 per share and
limited rights to require Integrity to register such shares for resale under the
Securities Act of 1933. Integrity bid quotations have ranged from $7.00 to
$22.00 per share from January 10, 2000 to June 23, 2000, but the market for
Integrity shares has been limited. These quotations may not represent actual
transactions. Three of our directors, Barry M. Schechter, our Chairman and CEO,
Ivan M. Epstein and Donald S. Radcliffe now serve on Integrity's board.
We cannot guarantee the purchaser will pay the note when due, if at
all. To our knowledge, the purchaser's only asset is the Integrity shares it
holds. The purchaser's ability to pay is therefore entirely dependent on its
ability to sell the Integrity shares. The purchaser is an affiliate of
Integrity, and its ability to sell the Integrity shares will be limited by law
and by market conditions. A recent third-party valuation of the Integrity shares
securing the note supports the carrying value of the note receivable at March
31, 2000. However, we do not know when or if the purchaser of IBIS or we will be
able to realize liquidity from the Integrity shares, as the legal and practical
ability of both the purchaser and us to resell such shares is limited by
applicable securities laws and market conditions. We cannot guarantee that the
value of the Integrity shares will remain high enough to support the carrying
value of the note receivable, and we may be required to impair the value of the
note receivable should the value of the Integrity shares decline. Any such
impairment would adversely affect our results of operations during the period or
periods in which it or they occur.
We have reclassified this note receivable as a long-term asset due to
the uncertainty of the marketability of the Integrity shares and the dependence
on such marketability for collection. The amount of the receivable including
accrued interest was $14.1 million at March 31, 2000. We have also implemented
plans to meet our short-term liquidity needs without reliance on this note
receivable. We cannot guarantee that we will be able to meet these short-term
liquidity needs on satisfactory terms and conditions, or at all.
WE HAVE SUBSTANTIAL DEBT OBLIGATIONS ASSOCIATED WITH OUR ACQUISITION OF ISLAND
PACIFIC. WE NEED ADDITIONAL CAPITAL AND WE HAVE NO COMMITMENTS FOR CAPITAL. WE
HAVE RELIED ON CAPITAL CONTRIBUTED BY RELATED PARTIES, AND SUCH CAPITAL MAY NOT
BE AVAILABLE IN THE FUTURE.
In connection with our acquisition of Island Pacific, we obtained two
bank loans totaling $18.5 million. The bank took a security interest in 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
17
from the $13.6 million 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 $13.6 million 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 such 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
a certain $1.75 million contract receivable from a one-time 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 $14.1 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, 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
owing 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 interest payments on the bank loans have adversely affected our
results of operations and will continue to do so until the indebtedness is
repaid.
The $10 million loan from Softline 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 $14.1
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 $1.6 million. The loans bear interest at the prime
rate.
During the year ended March 31, 2000, Softline exercised options to
purchase shares of SVI common stock for net proceeds of $4.8 million. Softline's
ability to continue to finance our liquidity needs is limited by Softline's cash
resources and by South African currency exchange laws. We cannot assure you that
Softline or other stockholders or related parties will be willing or able to
continue to provide cash to meet our future liquidity needs.
18
WE HAVE IN THE PAST AND MAY IN THE FUTURE MAKE ACQUISITIONS WHICH WILL INVOLVE
NUMEROUS RISKS. THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO ADDRESS THESE
RISKS SUCCESSFULLY WITHOUT SUBSTANTIAL EXPENSE, DELAY OR OTHER OPERATIONAL OR
FINANCIAL PROBLEMS.
We have previously acquired a number of companies, including Divergent
Technologies Pty. Ltd., Chapman Computers Pty. Ltd., Applied Retail Solutions,
Inc., Island Pacific Systems Corporation and MarketPlace Systems Corporation. We
also acquired and then disposed of a number of companies, including IBIS Systems
Limited and Triple-S Computers. Acquisitions involve numerous risks. For
example:
o It is often difficult to assimilate the operations and
personnel of an acquired business into our own business,
particularly if they are geographically diverse.
o Management information and accounting systems of an acquired
business must be integrated into our current systems.
o Our management personnel must devote its attention to
assimilating the acquired business, which diverts their
attention from our other business concerns.
o We might enter markets in which we have limited prior
experience.
o We might lose key employees of an acquired business.
The companies we acquired have self-contained management information
and accounting systems, and we have not yet created an information management
and accounting system which integrates them into our overall enterprise.
Further, some of the companies we acquired operate in markets where we had no
direct prior experience. We have devoted substantial time and resources to
integrate these recently acquired businesses, and we will be required to devote
substantial time and resources to integrate any other business we may acquire in
the future. Achieving the benefits of an acquisition will depend, in part, upon
whether integration occurs in a timely and efficient manner.
We intend to continue to evaluate potential acquisitions of companies
which we believe will complement or enhance our existing business. If we acquire
other companies in the future, it may result in the issuance of equity
securities that could dilute your stock ownership. We may also incur additional
debt and amortize expenses related to goodwill and other intangible assets if we
acquire another company, and this could negatively impact our results of
operations. We cannot guarantee that we will be able to identify or complete any
acquisition in the future.
WE ARE IN DISCUSSIONS WITH OUR MAJORITY STOCKHOLDER CONCERNING A POTENTIAL
ACQUISITION WHICH COULD SUBSTANTIALLY ALTER OUR BUSINESS AND OUR MANAGEMENT AND
DILUTE YOUR STOCK.
We are currently engaged in preliminary discussions with Softline
Limited, which owns approximately 56% of our outstanding common stock,
concerning a business combination. Softline is a South Africa based company
traded on the Johannesburg Stock Exchange under the symbol "SFT". Softline is
one of the largest accounting software vendors in the world. Softline operates
in 37 countries with products available in eight languages, and targets mainly
small to medium size enterprises.
The discussions are in a preliminary stage. Any transaction to which
SVI and Softline might agree will be subject to governmental approvals under
United States and South African law. There can be no guarantee that we will
obtain all required approvals. Also, SVI and Softline may not reach agreement on
the terms of a business combination. SVI or Softline may not obtain stockholder
approvals required or sought voluntarily. The parties could also abandon the
transaction before or after stockholder approvals upon mutual agreement or upon
failure of terms and conditions contained in the operative documents.
19
It is likely that any business combination between SVI and Softline
will have a material impact on our operations and future prospects. Any business
combination would likely cause significant dilution of your percentage in the
combined enterprise. The transaction, if consummated, will be subject to all of
the risks inherent in any business combination. The transaction would
significantly increase our international operations and thereby increase the
risks associated with such operations. The transaction, if consummated, will
introduce to our business all of the risks associated with Softline's business.
We have not yet evaluated all of these potential risk factors. In addition, a
transaction with Softline could result in a change in management structure or
personnel, which could in turn adversely affect future operations.
Because Softline owns a majority of our outstanding common stock and
four of our eight directors are also directors of Softline, any business
combination between SVI and Softline will involve inherent conflicts of
interest. We have not yet determined how we will address and manage these
conflicts of interest. There can be no guarantee that our procedures for
addressing and managing the conflicts of interest will give you the same
protections you would have in an arms' length business combination. The rules of
the American Stock Exchange will likely require us to obtain the approval of our
stockholders for a business combination with Softline. Based on its current
holdings of our common stock, Softline would control the outcome of that vote,
so you may not have a meaningful right to vote on a proposed business
combination. We have not yet determined whether we will seek the approval of a
majority of our disinterested stockholders, and if so, which stockholders other
than Softline might be considered interested.
IF WE CANNOT MANAGE THE ADDITIONAL CHALLENGES PRESENTED BY OUR INTERNATIONAL
OPERATIONS, OUR REVENUES AND PROFITABILITY MAY SUFFER.
Approximately 37% of our net sales were outside North America,
principally in Australia and the United Kingdom, in the year ended March 31,
2000. Part of our growth strategy depends on increasing international sales. If
we cannot increase our international sales, we may not be able to achieve our
business objectives. We currently have sales or support staff located in
Australia and the United Kingdom. We have already devoted significant resources
to, and expect to continue to devote resources to, our expansion into foreign
countries, particularly to expand our sales force. To increase international
sales in the future, we must establish additional foreign operations, hire
additional personnel and further exploit strategic relationships. We cannot
guarantee that the countries in which we operate will have a sufficient pool of
qualified personnel from which to hire or that we will be successful at hiring,
training or retraining personnel. There are many risks inherent in our
international business activities. For example:
o we are subject to many foreign regulatory requirements which
may change without notice;
o our expenses related to sales and marketing and product
development may increase;
o localizing products for foreign countries involves costs and
risks of non-acceptance;
o we are subject to various export restrictions, and export
licenses may not always be available;
o we are subject to foreign tariffs and other trade barriers;
o we may become subject to higher tax rates or taxation in more
than one jurisdiction;
o some of the foreign countries that we deal with suffer from
political and economic instability;
o we may have less protection for our intellectual property
rights;
o some of the foreign currencies that we deal with fluctuate
significantly;
o consulting, maintenance and service revenues may have lower
margins in foreign countries;
o we may not be able to move earnings back to the United States;
o it can be more difficult to staff and manage our foreign
operations; and
o we may have difficulty collecting accounts receivable.
Any of these factors could negatively affect our financial performance
and results of operations. In addition, some of our customer purchase agreements
are governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, we may be limited in our ability to enforce our rights under such
agreements and to collect amounts owed to us should any foreign customer refuse
to pay us. We are also subject to the Foreign Corrupt Practices Act, which may
place us at a competitive disadvantage to foreign companies that are not subject
to that law.
20
In addition, we cannot guarantee that we will be able to maintain or
increase international market demand for our products or services. Almost all of
our international sales are denominated in local currencies. When accounts
receivable and accounts payable arising from international sales and services
are converted to U.S. dollars, the resulting gain or loss could contribute to
fluctuations in our operating results. We do not currently utilize foreign
currency hedging instruments, and we cannot assure you that fluctuations in
foreign currency rates will not impact our financial performance in the future.
OUR CUSTOMERS ARE CONCENTRATED, SO THE LOSS OF ONE OR MORE KEY CUSTOMERS COULD
SIGNIFICANTLY REDUCE OUR REVENUES AND PROFITS.
We have derived, and believe that we may continue to derive, a
significant portion of our revenues from a limited number of large customers.
During the fiscal year ended March 31, 2000, one customer accounted for 15% of
net sales. Our customers may buy less of our products or services depending on
their own technological developments and internal budget cycles. A major
customer in one year may not purchase any of our products or services in another
year, which may negatively affect our financial performance.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY EXECUTIVE
PERSONNEL, SOFTWARE ENGINEERS, SALES AND MARKETING PERSONNEL AND OUR ABILITY TO
IDENTIFY, HIRE AND RETAIN ADDITIONAL PERSONNEL.
Our success is dependent, in part, upon certain key executive officers
remaining employed with us, including Barry M. Schechter, our Chairman and CEO.
Our current employment agreement with Mr. Schechter expires September 30, 2000.
We carry key man life insurance on Mr. Schechter. Two of our executives in
charge of retail operations subsidiaries retired during the fiscal year ended
March 31, 2000. Their replacements have served in their current capacities for
only a short time. We also believe our future success will depend largely upon
our ability to attract and retain highly-skilled software programmers, managers,
and sales and marketing personnel. Competition for personnel is intense,
particularly in international markets. The software industry is characterized by
a high level of employee mobility and aggressive recruiting of skilled
personnel. We compete against numerous companies, including larger, more
established companies, for our personnel. We do not know if we will be
successful in attracting or retaining skilled technical and managerial
personnel. Further, the loss of certain key employees or our inability to
attract and retain other qualified employees could negatively affect our
financial performance.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY DECLINE, OUR REVENUES MAY DECLINE.
As a result of our acquisitions of Applied Retail Solutions and Island
Pacific and our sale of IBIS Systems Limited, we now derive the substantial
majority of our revenues from the licensing of software products and the
performance of related services to the retail industry. Our future growth is
critically dependent on increased sales to the retail industry. The success of
our customers is directly linked to economic conditions in the retail industry,
which in turn are subject to intense competitive pressures and are affected by
overall economic conditions. In addition, the licensing of our software products
generally involves a large capital expenditure, which is often accompanied by
large-scale hardware purchases or commitments. As a result, demand for our
products and services could decline in the event of instability or downturns in
the retail industry. Such downturns may cause customers to exit the industry or
delay, cancel or reduce any planned expenditure for information management
systems and software products.
21
The retail industry may be consolidating. The industry is from time to
time subject to increased competition and weakening economic conditions which
could negatively impact the industry, or our customers' ability to pay for our
products and services. These issues have in the past, and could in the future,
lead to an increased number of bankruptcy filings. Consolidation and weakening
economic conditions would likely reduce our revenues, reduce the demand for our
products and negatively impact our business, operating results and financial
condition.
INTERNET RETAILING AND SUPPLY CHAIN MANAGEMENT IS HAVING A MAJOR IMPACT ON THE
RETAIL INDUSTRY, AND WE MUST EXPAND OUR PRODUCT BASE AND MARKET PENETRATION TO
THE INTERNET IN ORDER TO GROW.
E-commerce on the Internet is dramatically impacting the retail
industry. The traditional "brick and mortar" retailers that we have historically
served now face substantial competition from Internet-based retailers which may
negatively impact their ability to purchase our products and services.
The market for these e-commerce products is new and quickly evolving.
Our competitors are aggressively pursing this sector. We expect significant
growth in e-commerce over the Internet; however, we are unable to predict the
full impact this emerging form of commerce will have on the traditional "brick
and mortar" retail operations we have historically served. If the market for our
web-enabled products fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if our e-commerce products are not
accepted in the marketplace, our business, operating results and financial
condition could be negatively impacted.
OUR GROWTH IS DEPENDENT ON DEVELOPING OUR DIRECT SALES OR EXPANDING INTO OTHER
DISTRIBUTION CHANNELS.
We presently market our retail software products exclusively through
direct sales to end users. As we develop our product base and begin to market
some of our specialty modules to non-core customers, we may need to rely on
other distribution channels such as resellers. If we begin to use resellers,
they may compete to a certain extent with our direct sales. We cannot guarantee
you that we will be able to attract resellers that will be able to market our
products effectively and that will be qualified to provide timely and
cost-effective customer support and service. We also cannot assure you that we
will be able to manage conflicts among resellers. Even if we are able to attract
resellers, most reseller agreements can be terminated by either party without
cause. If we cannot expand our distribution channels, develop our international
distribution channels, or manage any potential channel conflicts, our growth may
be adversely affected.
WE RELY ON THIRD-PARTY SUPPLIERS, AND A DISRUPTION IN SUPPLY WOULD NEGATIVELY
IMPACT OUR ABILITY TO MEET CUSTOMER DEMANDS.
We rely on technology licensed from third parties, including Microsoft
for the Windows operating system, IBM for the OS/400 operating system and the
Websphere Commerce Suite, and Lansa Inc. for integrated AS/400 software
development tools. Our licenses from each of these providers are non-exclusive.
Any termination of, or significant disruption in, our ability to license these
products would adversely affect our business and revenues. In addition, any
technical problems or errors with current or future versions of these licensed
products could cause errors or technical problems in our products, which could
result in loss of sales, delays in or elimination of market acceptance, damage
to our brand or to our reputation, product returns, increased costs, and
diversion of development resources, product redesigns and increased warranty and
servicing costs.
IF WE CANNOT EXPAND INTO CERTAIN MARKET SECTORS, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS.
In order to grow our business, we need to expand our customer base and
the types of retailers we serve. We need to expand our product line and our
sales efforts to retailers selling all or a substantial amount of their products
online. We currently serve only the specialty goods, mass merchants and
department store markets. In order to increase revenues, we may need to expand
to other retail sectors. We cannot guarantee that our products and services will
gain acceptance in or meet these sectors' expectations and needs.
22
THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND PRICE EROSION.
The market for our software products and support services is highly
competitive. It is also subject to rapid change and sensitive to new product
introductions or enhancements and marketing efforts by industry participants. We
expect to continue to experience significant and increasing levels of
competition in the future. The principal elements of competition related to our
products include:
o price;
o product features and performance;
o e-commerce compatibility, both in the business-to-consumer
(B2C) and business-to-business (B2B) sectors;
o compatibility with open systems;
o retail system expertise;
o quality and reliability;
o brand awareness and reputation;
o timely introduction of new products;
o effective distribution networks;
o customer service; and
o quality of graphical interface.
Most of our competitors are very large companies with an international
presence. We must also compete with smaller companies which have been able to
develop strong local or regional customer bases. Many of our competitors and
potential competitors are more established, benefit from greater name
recognition and have significantly greater resources than us. We cannot assure
you that we will be able to compete effectively with these competitors or that
our existing competitors, or new competitors, will not develop competitive
products and services at lower prices or more attractive terms than we offer.
In order to effectively compete, we need to continue to grow our
business and increase our revenues so that we have the resources to timely
develop new products and services in response to evolving technology and
customer demands and to sell products and services through broad distribution
channels. Our competitors may be able to respond more quickly than we can to new
or emerging technologies and changes in customer requirements. We cannot assure
you that we will be able to grow sufficiently to compete effectively in this
marketplace.
Our current and potential competitors may:
o introduce new technologies that render our existing or future
products obsolete, unmarketable or less competitive;
o make strategic acquisitions or establish cooperative
relationships among themselves or with other solution
providers, which would increase the ability of their products
to address the needs of our customers; and
o establish or strengthen cooperative relationships with our
current or future strategic partners, which would limit our
ability to sell products through these channels.
We could be forced to reduce prices and suffer reduced margins and
market share due to increased competition from providers of products similar to,
or competitive with, our products, or from service providers that provide
services similar to our services. Competition could also render our technology
obsolete.
23
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
The retail software industry is characterized by evolving technology
and industry standards. We must cost-effectively develop and introduce new
products that keep pace with technological developments to compete. If we do not
gain market acceptance for our existing or new products or if we fail to
introduce progressive new products in a timely or cost-effective manner, our
financial performance will be negatively affected. The life cycles of our
products are difficult to estimate. This is particularly true in the electronic
commerce market because that market is new and emerging and is characterized by
rapid technological change and changing customer needs. We cannot guarantee you
that our new products, even if successfully developed, will ever achieve market
acceptance. Moreover, if our competitors introduce new technology or new
industry standards emerge, our existing products could be rendered obsolete and
unmarketable.
To develop and manufacture new competitive products and enhance our
existing products, we must continue to make significant investments in product
development. The success of product enhancements and new products depends on a
variety of factors, including product selection and specification, timely and
efficient completion of product design, and effective sales and marketing
efforts. In developing new products and services, we may:
o fail to respond to technological changes in a timely or
cost-effective manner;
o encounter products, capabilities or technologies developed by
others that render our products and services obsolete or
non-competitive or that shorten the life cycles of our
existing products and services;
o experience difficulties that could delay or prevent the
successful development, introduction and marketing of these
new products and services; or
o fail to achieve market acceptance of our products and
services.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP PRODUCTS SUBSTANTIALLY SIMILAR TO OUR PRODUCTS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS.
Our success and competitive position is dependent in part upon our
ability to develop and maintain the proprietary aspects of our technology. We
rely on a combination of trademark, trade secret, copyright law and contractual
restrictions to protect the proprietary aspects of our technology. We seek to
protect the source code to our software, documentation and other written
materials under trade secret and copyright laws. Effective copyright and trade
secret protection may be unavailable or limited in some foreign countries. We
license our software products under license agreements which impose restrictions
on the customer's ability to utilize the software.
We hold no patents. Consequently, others may develop, market and sell
products substantially equivalent to our products, or utilize technologies
similar to those used by us, so long as they do not directly copy our products
or otherwise infringe our intellectual property rights.
Intellectual property rights are often the subject of large-scale
litigation in the software and Internet industries. We may find it necessary to
bring claims or litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. These actions would likely
be costly and divert management resources. These actions could also result in
counterclaims challenging the validity of our proprietary rights or alleging
infringement on our part. We cannot guarantee the success of any litigation we
might bring to protect our proprietary rights.
24
OUR PRODUCTS AND OTHER PROPRIETARY RIGHTS MAY INFRINGE ON THE PROPRIETARY RIGHTS
OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
Although we believe that our products do not infringe on any
third party's patents, we cannot be certain that we will not become involved in
litigation involving patents or proprietary rights. Patent and proprietary
rights litigation entails substantial legal and other costs, and we do not know
if we will have the necessary financial resources to defend or prosecute our
rights in connection with any such litigation. Responding to, defending or
bringing claims related to our intellectual property rights may require our
management to redirect our human and monetary resources to address these claims.
In addition, these actions could cause product shipment delays or
require us to enter into royalty or license agreements. Royalty or license
agreements, if required, may not be available on terms acceptable to us, if they
are available at all. Any or all of these outcomes could have a material adverse
effect on our business, operating results and financial condition.
IF OUR PRODUCTS ARE NOT COMPATIBLE WITH HARDWARE OR SOFTWARE, OUR SALES COULD
SUFFER.
We produce open system software for the retail industry, but we do not
develop hardware or operating systems. Consequently, we are dependent upon
third-party providers to develop the hardware platforms and operating systems
that run our software. As in other sectors of the computer industry, software
sales can often be driven by advances in hardware or operating system
technology. Accordingly, if providers do not, or are unable to, continue to
provide state-of-the-art POS and head office hardware which runs our software,
our financial performance may suffer. We are currently engaged in a major
development effort to redevelop certain systems to the Java platform which can
run in most hardware and operating system environments. If we do not timely
complete this redevelopment, or if Java ceases to be an industry standard, our
sales could be materially adversely affected.
We cannot guarantee that our software will be compatible with all
available hardware or operating systems. Further, we cannot assure you that we
will have the technical personnel necessary to evaluate and fix any software
compatibility problems that may exist in the future. If we do not have technical
personnel available to address and fix compatibility problems, our sales could
decline.
OUR STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND MAY NOT DELIVER THE INTENDED
BENEFITS.
We have from time to time established, or attempted to establish,
formal and informal relationships with other companies, including IBM, NCR, ICL
Fujitsu and Retail Expert, Inc., to collaborate in areas such as product
development, marketing and distribution. The maintenance of these relationships
and the development of other similar relationships is a meaningful part of our
business strategy. While some of these relationships are governed by contracts,
most are non-exclusive and all may be terminated on short notice by either
party. We cannot assure you that our current strategic relationships will be
beneficial to us, that such relationships can be maintained, or that we will be
able to enter into successful new strategic relationships in the future.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
Though we do have back-up systems, substantially all of our primary
computer and telecommunications systems are located in two geographic areas.
These systems are vulnerable to damage or interruption from fire, earthquake,
water damage, sabotage, flood, power loss, technical or telecommunications
failure or break-ins. While we have business interruption insurance, this
coverage may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
25
services to our customers. Although we have implemented network security
measures, our systems, like all systems, are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. These disruptions
could lead to interruptions, delays, loss of data or the inability to service
our customers. Any of these occurrences could impair our ability to serve our
customers and harm our business.
WE ARE SUBJECT TO RISKS RELATED TO PRODUCT DEFECTS.
Our software products are highly complex and sophisticated. As a
result, they may occasionally contain design defects or software errors that
could be difficult to detect and correct. In addition, implementation of our
products may involve customer-specific customization by us or third parties, and
may involve integration with systems developed by third parties. Problems in our
systems are more common upon first release. Problems in the initial release may
be discovered only after the product has been implemented and used over time
with different computer systems and in a variety of applications and
environments. Despite product testing prior to sale, our products have in the
past contained errors that were discovered after they were sold. Our customers
have also occasionally experienced difficulties integrating our products with
other hardware or software in their enterprise. Errors or integration problems
may also be discovered in the future. Such defects, errors or difficulties could
result in loss of sales, delays in or elimination of market acceptance, damage
to our brand or to our reputation, product returns, increased costs and
diversion of development resources, product redesigns and increased warranty and
servicing costs. In addition, third-party products, upon which our products are
dependent, may contain defects which could reduce or undermine entirely the
performance of our products.
Our customers typically use our products to perform mission-critical
functions. As a result, the defects and problems discussed above could result in
financial or other damage to our customers. Although our sales agreements with
our customers typically contain provisions designed to limit our exposure to
potential product liability claims, we do not know if these limitations of
liability are enforceable or would otherwise protect us from liability for
damages to a customer resulting from a defect in one of our products or the
performance of our services. Although we maintain product liability insurance
covering certain damages arising from implementation and use of our products, we
do not know if this insurance would cover any claims brought against us. Any
product liability or other claims brought against us, if successful and of
sufficient magnitude, could negatively impact our financial performance.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE. WE ARE AT RISK OF SECURITIES CLASS
ACTION LITIGATION DUE TO OUR STOCK PRICE VOLATILITY.
The market price of our common stock has been, and is likely to
continue to be, volatile. When we or our competitors announce new customer
orders or services, change pricing policies, experience quarterly fluctuations
in operating results, announce strategic relationships or acquisitions, change
earnings estimates, experience government regulatory actions or suffer from
generally adverse economic conditions, our stock price could be affected. Some
of the volatility in our stock price appears unrelated to our performance.
Recently, companies similar to ours have experienced extreme price fluctuations,
often for reasons unrelated to their performance.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. This litigation has been especially prevalent with respect to
technology companies. We may therefore become the target of securities class
action litigation. Such litigation would likely result in substantial costs,
harm our financial condition and divert management's attention and resources.
26
SOFTLINE LIMITED OWNS A MAJORITY OF OUR COMMON STOCK, SO WE ARE CONTROLLED BY
SOFTLINE AND OUR OTHER STOCKHOLDERS ARE UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING.
Softline Limited owns approximately 56% of our outstanding common
stock. Four of our eight directors are also directors of Softline. You will not
be able to affect the outcome of any stockholder vote so long as Softline owns a
majority of our common stock. As a result, Softline will control all matters
affecting us, including:
o the election of all of our directors;
o the allocation of business opportunities that may be suitable
for Softline and us;
o any determinations with respect to mergers or other business
combinations involving us;
o the acquisition or disposition of assets or businesses by us;
o debt and equity financing, including future issuance of our
common stock or other securities;
o amendments to our charter documents;
o the payment of dividends on our common stock; and
o determinations with respect to our tax returns.
Moreover, even if Softline's ownership of our common stock declines
below a majority, current management controls or has the right to acquire
approximately 19% of our common stock. It is therefore unlikely that you will
have any effective voting control over actions which are approved by both
Softline and current management.
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK AND WE DO NOT INTEND TO PAY
DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common
stock. We anticipate that we will use our earnings and cash flow for repayment
of indebtedness and future growth, and we do not have any plans to pay dividends
in the foreseeable future. Future equity financings may restrict our ability to
pay dividends.
WE MAY ISSUE PREFERRED STOCK IN THE FUTURE. NEVADA LAW AND SOME PROVISIONS OF
OUR CHARTER AND BYLAWS MAY AFFECT THE PRICE OF YOUR STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock.
We may issue the preferred stock in one or more series. Our Board of Directors
may determine the terms of the preferred stock without further action by our
stockholders. These terms may include voting rights, preferences as to dividends
and liquidation, conversion and redemption rights, and sinking fund provisions.
If we do issue preferred stock, it could affect your rights or even reduce the
value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. Further, special meetings of our
stockholders may be called only by the Chairman of the Board, the Chief
Executive Officer or the Board of Directors. Stockholders have no right to call
a meeting. These provisions of our charter documents, as well as certain
provisions of Nevada law, could delay or make more difficult certain types of
transactions involving a change in control of the company or our management. As
a result, the price of our common stock may be adversely affected.
WE MAY REINCORPORATE IN DELAWARE AT ANY TIME, AND SOME PROVISIONS OF OUR NEW
CHARTER OR BYLAWS MAY AFFECT YOUR STOCK PRICE.
Our stockholders approved a change in the state of our incorporation
from Nevada to Delaware at our last annual meeting. We have not yet completed
the reincorporation, but we may do so at any time. Our stockholders also
approved in connection with the reincorporation an increase in the number of
authorized shares of common stock from 50,000,000 to 100,000,000. Finally, our
stockholders approved a reduction of the required quorum at meetings of
stockholders from a majority of the outstanding shares to one-third of the
outstanding shares. We have not yet implemented these changes to our charter
documents, but we may do so at any time. The increase in the number of
authorized shares will allow us to issue additional shares of common stock
without further stockholder approval, which could substantially dilute your
interest and reduce the value of your common stock. The reduction in the quorum
requirement will allow us to obtain stockholder approval for matters with a
minority of the shares present at the meeting. This will make it more likely
that a minority of the outstanding voting power could adopt resolutions which
would affect all of our stockholders. These resolutions could adversely affect
the value of your common stock.
27
ITEM 2. DESCRIPTION OF PROPERTY
Our principal corporate headquarters consists of 19,621 square feet in
a building located at 12707 High Bluff Drive, Suite 335, San Diego, California.
The facility is occupied under a lease which expires on August 31, 2004. The
current base monthly rent is $29,288.
SVI Retail Pty. Ltd. (Australia) has its principal offices at Level 1,
35 Spring Street, Bondi Junction, Sydney, NSW 2022, Australia. This 14,393
square foot facility is leased through October 31, 2006. The current base
monthly rent is $15,200. The Australian subsidiary also leases small regional
offices in Brisbane, Adelaide and Melbourne.
Our Island Pacific subsidiary maintains an office at 19800 MacArthur
Blvd., 12th Floor, Irvine, California. This is a 26,521 square foot facility.
The current lease expires on June 30, 2005. Monthly base rent is $50,992. Island
Pacific also occupies premises in the United Kingdom located at The Old
Building, Mill House Lane, Wendens Ambo, Essex, England. The lease for this
three story office building expires August 31, 2003. Annual rent is $48,804
(payable quarterly) plus common area maintenance charges and real estate taxes.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings, other than
ordinary routine litigation proceedings incidental to our business, none of
which are expected to have a material adverse effect on our financial position
or results of operations. However, litigation is subject to inherent
uncertainties, and an adverse result in existing or other matters may arise from
time to time which may harm our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange under the
symbol "SVI" and has traded on that exchange since July 8, 1998. The following
table indicates the high and low sales prices for our shares for each quarterly
period for each of our two most recent fiscal years.
YEAR ENDED MARCH 31, 2000 HIGH LOW
First Quarter $14.750 $11.500
Second Quarter $13.188 $12.813
Third Quarter $14.875 $ 7.250
Fourth Quarter $14.375 $ 9.000
YEAR ENDED MARCH 31, 1999 HIGH LOW
First Quarter $ 5.063* $ 3.906*
Second Quarter $ 8.500 $ 4.688*
Third Quarter $ 7.875 $ 6.000
Fourth Quarter $15.375 $ 7.375
* High and low bid information as reported on the OTC Bulletin Board.
We have never declared any dividends. We currently intend to retain any
future earnings to discharge indebtedness and finance the growth and development
of the business. We therefore we do not anticipate paying any cash dividends in
the foreseeable future. Any future determination to pay cash dividends will be
at the discretion of the board of directors and will be dependent upon the
future financial condition, results of operations, capital requirements, general
business conditions and other factors that the board of directors may deem
relevant.
As of June 30, 2000, there were 33,855,884 shares of our common stock
outstanding, which were held by approximately 1800 stockholders of record.
During the quarter ended March 31, 2000, we issued the following
securities without registration under the Securities Act of 1933:
o an aggregate of 115,000 shares of common stock to
non-employees upon exercise of outstanding options for an
aggregate exercise price of $211,500;
o 56,718 shares of common stock to Softline Limited, our
majority stockholder, upon exercise of outstanding options for
an aggregate exercise price of $113,436;
o 46,774 shares of common stock to Softline, valued at $213,406,
as reimbursement for a portion of the purchase price for
Triple-S Computers pursuant to our agreement with Softline as
of May 27, 1998;
o 93,023 shares of common stock to the former stockholder of
MarketPlace Systems Corporation, valued at an aggregate of
$1,000,000, as partial consideration for the acquisition of
the assets of that company; and
o an aggregate of 344,948 shares of common stock sold to Amro
International, S.A., for gross proceeds of $3,000,000. 7,500
of such shares were issued to the purchaser in lieu of a
commission.
The foregoing securities were offered and sold without registration
under the Securities Act to sophisticated investors who had access to all
information which would have been in a registration statement, in reliance upon
the exemption provided by Section 4(2) under the Securities Act and Regulation D
thereunder, and an appropriate legend was placed on the shares.
29
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with our consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The selected consolidated financial data presented below under the
captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of
the end of, each of our last six fiscal years (including the six months ended
March 31, 1998) are derived from the consolidated financial statements of SVI
Holdings, Inc. The consolidated financial statements as of March 31, 2000, March
31, 1999, March 31, 1998 and September 30, 1997 and the independent auditors'
reports thereon, are included elsewhere in this report.
Six Months
Ended
Year Ended March 31, March 31, Year Ended September 30,
----------------------- ----------- ----------------------------------
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales $ 36,114 $ 17,487 $ 11,198 $ 10,434 $ 673 $ 580
Cost of sales 10,970 5,347 3,869 3,037 100 100
----------- ----------- ----------- ----------- ----------- ----------
Gross profit 25,144 12,140 7,329 7,397 573 480
----------- ----------- ----------- ----------- ----------- ----------
Expenses:
Product development 4,877 - - - - -
Depreciation and amortization 7,942 2,395 939 1,178 54 53
Selling, general, and administrative 18,235 7,603 4,611 4,706 1,035 718
----------- ----------- ----------- ----------- ----------- ----------
Total expenses 31,054 9,998 5,550 5,884 1,089 771
----------- ----------- ----------- ----------- ----------- ----------
Income (loss) from operations (5,910) 2,142 1,779 1,513 (516) (291)
Other income (expense) (556) 1,227 359 464 647 (170)
Gain on disposals of Softline Limited
shares - - 4,388 3,974 - -
----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before provision for
income taxes (6,466) 3,369 6,526 5,951 131 (461)
Provision (benefit) for income taxes (2,412) 1,671 1,849 1,103 - -
----------- ----------- ----------- ----------- ----------- ----------
Income (loss) from continuing
operations (4,054) 1,698 4,677 4,848 131 (461)
Income (loss) from discontinued operations - 3,887 1,142 - 16 (271)
----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) $ (4,054) $ 5,585 $ 5,819 $ 4,848 $ 147 $ (732)
=========== =========== =========== =========== =========== ==========
Basic earnings (loss) per share:
Income (loss) from continuing
operations $ (0.12) $ 0.06 $ 0.17 $ 0.35 $ 0.01 $ (0.04)
Income (loss) from discontinued
operations - 0.14 0.04 - - (0.03)
----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) $ (0.12) $ 0.20 $ 0.21 $ 0.35 $ 0.01 $ (0.07)
=========== =========== =========== =========== =========== ==========
30
Diluted earnings (loss) per share:
Income (loss) from continuing
operations $ (0.12) $ 0.05 $ 0.15 $ 0.31 $ 0.01 $ (0.04)
Income from discontinued operations - 0.12 0.04 - 0.00 (0.03)
----------- ----------- -------------- ----------- ----------- ----------
Net income (loss) $ (0.12) $ 0.17 $ 0.19 $ 0.31 $ 0.01 $ (0.07)
=========== =========== ============== =========== =========== ==========
Weighted average common shares:
Basic 32,459 28,600 27,768 13,971 11,902 10,320
Diluted 32,459 33,071 31,046 15,618 13,470 10,320
BALANCE SHEET DATA:
Working capital $ 10,019 $ 26,138 $ 9,763 $ 596 $ (1,844) $ (3,159)
Total assets $ 94,083 $ 52,374 $ 46,481 $ 19,230 $ 5,006 $ 2,266
Long-term obligations $ 21,586 $ 2,043 $ 771 $ 545 $ 1,947 $ -
Stockholders' equity (deficit) $ 53,497 $ 45,270 $ 37,075 $ 10,885 $ 347 $ (1,757)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. 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 THIS REPORT, 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:
31
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 solutions, Island Pacific is a leading provider of retail
management systems that now form the core of our SVI-HOST 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.
Subsequent to fiscal year end, we consolidated ARS and Island Pacific
into SVI Retail, Inc. During the fiscal year we began 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 fiscal 2000, we also 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 and beyond, subject to the availability
of operating or outside capital.
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.
We typically recognize software license revenues as products are
shipped. If the sale involves significant production, modification or
customization, we recognize the license revenues ratably based on percentage of
completion. We generally recognize revenues for service contracts over the life
of the contract, and for consulting, implementation and project management
services as the services are provided.
We sold our IBIS Systems Limited subsidiary effective January 1, 1999
to Kielduff Investments Limited, a company affiliated with IBIS's management
team. The consideration was $2.25 million cash, SVI common stock valued at $2.1
million and a promissory note representing a net obligation to us of $13.6
million. IBIS (which subsequent to disposition was acquired by a subsidiary of
Integrity Software, Inc.) provided financial and business software applications
for the building, leasing and general financial industries, primarily in the
United Kingdom. We originally acquired IBIS in October 1997 as part of an
integrated transaction through which Softline Limited became our majority
stockholder. The operations of IBIS are shown in our financial statements as
discontinued operations for the fiscal year ended March 31, 1999 and the
transitional fiscal year ended March 31, 1998.
Our operations are conducted principally in the United States, the
United Kingdom and Australia. Prior to our sale of Triple-S in October 1999, we
had operations in South Africa.
32
We offer similar products in each geographical region and we evaluate
local operations primarily based on total revenues and operating income. We also
manage long-lived assets by geographic region. The geographic distribution of
our revenues and long-lived assets for the fiscal years ended March 31, 2000,
March 31, 1999, March 31, 1998 (six months) and September 30, 1997 is as follows
(in thousands):
YEAR ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998 SEPT. 30, 1997
-------------- -------------- -------------- --------------
(IN THOUSANDS)
Net Sales:
United States $22,819 $ 5,010 $ 414 $ 801
Australia 8,372 10,706 10,784 9,633
South Africa 1,091 1,770 - -
United Kingdom 3,832 - - -
United Kingdom (discontinued
operations) - 12,403 5,156 -
-------- -------- -------- --------
Total net sales $36,114 $29,889 $16,354 $10,434
======== ======== ======== ========
Long-lived assets:
United States $62,518 $10,773 $ 3,703 $ 108
Australia 11,471 11,152 10,309 5,264
South Africa - - - 1,779
United Kingdom 75 13 - -
United Kingdom (discontinued
operations) - - 14,070 3,683
-------- -------- -------- --------
Total long-lived assets $74,064 $21,938 $28,082 $10,834
======== ======== ======== ========
We classify operations into two divisions, retail software solutions
and training products. As revenues, earnings and assets related to the training
division are below the threshold established for segment reporting, we consider
our business to consist of one reportable operating segment.
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 is the largest accounting and payroll software vendor in South Africa
and one of the largest in Australia, and also markets accounting software
applications in the United States, United Kingdom and other jurisdictions. 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.
During the second quarter of fiscal 2000, we sold certain technology
rights to an unrelated third party for $3.5 million. We initially recorded this
transaction as revenue during the second quarter, but we subsequently determined
that the revenue from the sale should have been deferred until the time of
payment. We received payment of the first $1.8 million during the first quarter
of fiscal 2001 and expect to receive the balance during the second quarter of
fiscal 2001. This revenue will increase earnings for the periods in which the
payments are received, but is of a non-recurring nature. The sale of these
rights is not expected to otherwise impact results of operations.
33
RESULTS OF OPERATIONS
PRESENTATION OF RESULTS OF OPERATIONS
Following the close of our fiscal year ended September 30, 1997, we
changed our fiscal year end to March 31, commencing with the fiscal year ended
March 31, 1998.
Our Consolidated Statements of Operations, Stockholders' Equity and
Cash Flows included in this report show results for the following periods:
o the fiscal year ended March 31, 2000;
o the fiscal year ended March 31, 1999;
o the twelve months ended March 31, 1998 (unaudited);
o the six months ended March 31, 1998; and
o the fiscal year ended September 30, 1997.
The six month period ended March 31, 1998 and the twelve month period
ended September 30, 1997 are not comparable to the fiscal years ended March 31,
2000 and 1999. Accordingly, the discussion and analysis below compares fiscal
2000 to fiscal 1999, and fiscal 1999 to the comparable unaudited twelve month
period ended March 31, 1998, which includes the results for the transitional six
month fiscal year ended March 31, 1998 plus the last two quarters of the fiscal
year ended September 30, 1997.
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales.
34
-------------------------------------------------------------------------------
TWELVE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
2000 1999 1998
(UNAUDITED)
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
------ ---------- ------ ---------- ------ ----------
(in thousands except for percentages)
Net sales $ 36,114 100% $ 17,487 100% $ 17,702 100%
Cost of Sales 10,970 30% 5,347 31% 5,753 32%
------------------------- ------------------------- -------------------------
Gross Profit 25,144 70% 12,140 69% 11,949 68%
------------------------- ------------------------- -------------------------
Expenses:
Product development 4,877 14% - 0% - 0%
Depreciation and amortization 7,942 22% 2,395 14% 1,947 11%
Selling, general and administrative 18,235 50% 7,603 43% 7,108 40%
------------------------- ------------------------- -------------------------
Total expenses 31,054 86% 9,998 57% 9,055 51%
------------------------- ------------------------- -------------------------
Income (loss) from operations (5,910) -16% 2,142 12% 2,894 17%
Other income (expense) (556) -2% 1,227 7% 532 3%
Gain on disposals of Softline Limited shares - 0% - 0% 8,209 46%
------------------------- ------------------------- -------------------------
Income before provision (benefit) for income
taxes (6,466) -18% 3,369 19% 11,636 66%
Provision (benefit) for income taxes (2,412) -7% 1,671 10% 2,674 15%
------------------------- ------------------------- -------------------------
Income (loss) from continuing operations (4,054) -11% 1,698 10% 8,962 51%
Discontinued operations
Income from discontinued operations, net of
taxes - 3,613 1,142
Gain on disposal of discontinued operations,
net of applicable taxes - 274 -
------------- ------------- -------------
Income from discontinued operations - 3,887 1,142
------------- ------------- -------------
NET INCOME (LOSS) $ (4,054) $ 5,585 $ 10,104
============= ============= =============
35
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
NET SALES
Net sales increased by $18.6 million, or 106%, to $36.1 million in the
fiscal year ended March 31, 2000 from $17.5 million in the fiscal year ended
March 31, 1999. The increase in net sales was primarily due to the following:
o Inclusion of $19.0 million in sales from Island Pacific, which
was acquired at the beginning of fiscal year 2000.
o Increase of $2.4 million in sales from ARS. ARS was acquired
in July 1998; therefore, the results in the fiscal year ended
March 31, 1999 included only nine months of operations.
o Offset in part by a decrease of $3.0 million in sales from
Australian operations due to a downturn in demand for software
licenses and related consulting and support services in
Australia.
We experienced a decline in demand for software licenses during the
last six months of calendar year 1999. 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 our fourth quarter. Because our sales cycles tend to range from four to
twelve months, we remain cautious about our expectations for sales of software
licenses and related services in near term future periods due to the
interruption in sales cycles. We are not able to predict whether the decreased
demand we have experienced will continue to affect sales in the longer term.
COST OF SALES
Cost of sales increased by $5.7 million, or 108%, to $11.0 million in
the fiscal year ended March 31, 2000 from $5.3 million in the fiscal year ended
March 31, 1999. This increase was primarily due the inclusion of cost of sales
from Island Pacific.
GROSS PROFIT
Gross profit increased by $13.0 million, or 106%, to $25.1 million in
the fiscal year ended March 31, 2000 from $12.2 million in the fiscal year ended
March 31, 1999. Gross profit, as a percentage of total revenues, increased to
70% in fiscal year 2000 from 69% in fiscal year 1999. This increase was
primarily due to the inclusion of high profit margin sales from Island Pacific.
Island Pacific's sales generally do not involve lower margin hardware sales.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses for the fiscal year ended March 31, 2000
were $4.9 million or 14% of net sales. There were no product development
expenses in the comparative period. In conjunction with the acquisition of
Island Pacific, we commenced an active integration and product development
program to ensure compatibility between our point-of-sale (SVI-POST) and retail
management (SVI-HOST) products. Additionally, we are developing versions of our
products in other program languages to reduce hardware dependencies. We expect
to continue or increase the present level of spending on product development for
the foreseeable future as we continue to integrate, develop and enhance our
products to address the evolving needs of the retail industry.
36
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $10.6
million, or 139%, to $18.2 million in the fiscal year ended March 31, 2000 from
$7.6 million in the fiscal year ended March 31, 1999. The increase was due to
the following:
o Inclusion of selling, general and administrative expenses of
$8.8 million from Island Pacific, which was acquired at the
beginning of the fiscal year 2000.
o Increase of $0.6 million in selling, general and
administrative expenses from ARS.
o Increase of $1.2 million in selling, general and
administrative expenses to expand marketing and investor
relations activities.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $5.5 million, or 229%, to
$7.9 million in the fiscal year ended March 31, 2000 from $2.4 million in the
fiscal year ended March 31, 1999. The increase was primarily due to the
acquisition of $42.6 million in intangible assets in the acquisition of Island
Pacific. These intangible assets are being amortized over estimated lives not
exceeding ten years.
OTHER INCOME (EXPENSE)
Other income (expense) decreased by $1.8 million, or 150%, to $(0.6)
million in the fiscal year ended March 31, 2000 from $1.2 million in the fiscal
year ended March 31, 1999. The decrease was primarily due to an increase of $1.4
million in interest expense in fiscal year 2000 and life insurance proceeds of
$0.5 million received in the prior fiscal year. The increase in interest expense
was due to the $20.8 million in notes payable obtained in fiscal year 2000 to
acquire Island Pacific.
DISCONTINUED OPERATIONS
Effective January 1, 1999, we sold our IBIS Systems Limited subsidiary
for $18 million. We recorded a gain of $0.3 million, net of applicable income
taxes of $0.8 million. Accordingly, the results of operations of IBIS for fiscal
1999 are shown as discontinued operations.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO TWELVE MONTHS ENDED MARCH 31, 1998
NET SALES
Net sales decreased by $0.2 million, or 1%, to $17.5 million in the
fiscal year ended March 31, 1999 from $17.7 million in the comparable period
ended March 31, 1998. The decrease in net sales was due to a decrease of $4.4
million in sales from Australian operations. This decrease resulted from the
completion in March 1998 of several large contracts with a major retail group in
Australia, which included significant hardware sales. The decrease in net sales
was offset by the inclusion of $3.6 million in revenues from ARS, which was
acquired in July 1998, and an increase of $0.5 million in sales from our
training products division.
37
COST OF SALES
Cost of sales decreased by $0.5 million, or 9%, to $5.3 million in the
fiscal year ended March 31, 1999 from $5.8 million in the twelve months ended
March 31, 1998. The decrease was primarily due to a decrease of $1.7 million in
cost of sales from Australian operations, offset by the inclusion of $1.2
million in cost of sales from ARS.
GROSS PROFIT
Gross profit increased by $0.3 million, or 3%, to $12.2 million in the
fiscal year ended March 31, 1999 from $11.9 million in the twelve months ended
March 31, 1998. Gross profit, as a percentage of total revenues, increased to
69% in the fiscal year ended March 31, 1999 from 68% in the comparable 1998
period. The increase was due to a change in the sales mix away from lower margin
hardware sales toward higher margin software licenses and related services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $0.5 million,
or 7%, to $7.6 million in the fiscal year ended March 31, 1999 from $7.1 million
in the twelve months ended March 31, 1998. Increase in selling, general and
administrative expenses was due to the inclusion of $1.6 million in selling,
general and administrative expenses from ARS, which was acquired in July 1998,
and an increase of $0.4 million in corporate-level general expenses. This
increase was offset by a decrease of $1.7 million in selling, general and
administrative expenses from the decrease in sales from Australia.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $0.5 million, or 26%, to
$2.4 million in the fiscal year ended March 31, 1999 from $1.9 million in the
twelve months ended March 31, 1998. Increase in depreciation and amortization
was primarily due to $0.4 million of depreciation and amortization from
intangible assets recorded in the acquisition of ARS, which was acquired in July
1998.
OTHER INCOME
Other income increased by $0.7 million, or 140%, to $1.2 million in the
fiscal year ended March 31, 1999 from $0.5 million in the twelve months ended
March 31, 1998. This increase was primarily due to life insurance proceeds of
$0.5 million received in the fiscal year 1999.
GAIN ON SALE OF SOFTLINE LIMITED SHARES
During the twelve months ended March 31, 1998, we reported a gain of
$8.2 million on the sale of Softline Limited shares yielding net proceeds of
$12.0 million. We have no further equity holdings in Softline Limited.
DISCONTINUED OPERATIONS
Income from discontinued operations consisted of income from IBIS,
which we acquired effective October 1, 1997 and which we sold effective January
1, 1999. Income from discontinued operations increased by $2.5 million, or 227%,
to $3.6 million in the fiscal year ended March 31, 1999 from $1.1 million in the
twelve months ended March 31, 1998. The increase was due to the inclusion of
IBIS results in discontinued operations for three quarters of fiscal 1999
compared to two quarters of the comparable 1998 period, and to a shift within
IBIS from lower margin hardware sales to higher margin software sales.
38
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 2000, we financed our operations
through internally generated cash, proceeds from bank and other loans, a loan
from a related party, proceeds from the sale of common stock and the exercise of
options, and a bank line of credit. During the fiscal year ended March 31, 1999,
we financed our operations primarily through internally generated cash and
proceeds from the exercise of options. During the transitional fiscal year ended
March 31, 1998 and the fiscal year ended September 30, 1997, we financed our
operations primarily through internally generated cash, proceeds from the sale
of common stock and proceeds from the sale of shares of Softline Limited common
stock. Cash and cash equivalents at March 31, 2000 were $4.8 million, a decrease
of $8.2 million from $13.0 million at March 31, 1999.
We continue to hold a $14.1 million (including accrued interest at
March 31, 2000) note receivable obtained in connection with our sale of IBIS
Systems Limited. To secure this receivable, we obtained a security interest in
the stock of IBIS. The purchaser did not repay the note on the original due date
of October 1, 1999 because it had not yet completed a reorganization that was
intended to serve as the source of funds to repay the note. The due date of the
note has been extended to November 15, 2000. We permitted the purchaser to
proceed with its reorganization with a wholly-owned subsidiary of Integrity
Software, Inc., a publicly traded company with prices quoted on the National
Quotation Bureau Pink Sheets under the symbol "INTY". The purchaser exchanged
all of the outstanding IBIS stock for 1,536,000 common shares of Integrity,
representing approximately 11% of Integrity's outstanding shares at March 20,
2000. We agreed to substitute our security interest in the IBIS shares for a
security interest in the purchaser's Integrity shares. We also obtained the
right to convert all or any portion of the unpaid indebtedness under the note to
Integrity shares valued at $12.50 per share and limited rights to require
Integrity to register such shares for resale under the Securities Act. Integrity
bid quotations have ranged from $7.00 to $22.00 per share from January 10, 2000
to June 23, 2000, but the market for Integrity shares has been limited. These
quotations may not represent actual transactions.
To our knowledge, the purchaser's only asset is the Integrity shares it
holds. The purchaser's ability to pay is therefore entirely dependent on its
ability to sell the Integrity shares. The purchaser is an affiliate of
Integrity, and its ability to sell the Integrity shares will be limited by law
and by market conditions. A recent third-party valuation of the Integrity shares
securing the note supports the carrying value of the note receivable on our
balance sheet at March 31, 2000. However, we do not know when or if the
purchaser of IBIS or we will be able to realize liquidity from the Integrity
shares, as the legal and practical ability of both the purchaser and us to
resell such shares is limited by applicable securities laws and market
conditions. We cannot guarantee that the value of the Integrity shares will
remain high enough to support the carrying value of the note receivable, and we
may be required to impair the value of the note receivable should the value of
the Integrity shares decline. Any such impairment would adversely affect our
results of operations during the period or periods in which it occurs.
We have reclassified this note receivable as a long-term asset due to
the uncertainty of the marketability of the Integrity shares and the dependence
on such marketability for collection.
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 $13.6 million 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 $13.6 million
note receivable was not paid on its original due date, we were not able to
retire the
39
$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
a certain $1.75 million contract receivable from a one-time 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 $14.1 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, 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
owing 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 bears interest at 10% per annum payable monthly. We intend to
use proceeds we might receive from payment of the $14.1 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 $1.6 million. The loans bear interest at the prime
rate.
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 loan obtained to acquire Island Pacific
described above, and the then outstanding balance is due and payable on April 1,
2001, if not sooner retired. As of June 30, 2000, the outstanding balance on all
of our lines is $3.1 million.
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 loans and lines of credit. We used $10 million borrowed
from Softline to pay $10 million due on the bank loan in July 2000.
During the year ended March 31, 2000, Softline exercised options to
purchase shares of SVI common stock for net proceeds of $4.8 million. The
proceeds were used to pay a portion of the Island Pacific purchase price, the
deferred portion of the purchase price for our Triple-S subsidiary (which was
sold to Softline in October 1999) and for working capital.
40
In March 2000, we sold common stock to one investor in a private
placement for net proceeds of $2.9 million. We agreed to register the resale of
such shares under the Securities Act. We also granted the investor a repricing
right through which the investor may receive additional shares of common stock.
The number of additional shares to be issued will be determined based on the
following formula:
Number of additional shares = (($8.89-P) x 337,448)/P, where P = 0.86 x
the average of the closing price of our stock on the American Stock
Exchange for the five days preceding the effective date of a
registration statement registering the resale of such share under the
Securities Act.
We have not yet filed a registration statement for the resale of such shares.
Other than cash and cash equivalents and the unused portion of the line
of credit, we have no material unused sources of liquid assets.
Cash provided by (used for) operating activities in the periods ended
March 31, 2000, 1999 and 1998 were $(2.3) million, $2.0 million and $8.5
million, respectively. Cash used for operating activities during fiscal year
2000 primarily resulted from a $4.1 million net loss, a $4.6 million increase in
accounts receivable and other receivables, a $0.6 million decrease in accounts
payable and accrued expenses, a $0.8 million increase in interest receivable, a
$2.6 million decrease in income tax payable, and a $2.6 million increase in
deferred income taxes liability; offset in part by $7.9 million of non-cash
depreciation and amortization expense and a $5.0 million increase in deferred
revenue. Cash provided by operating activities in fiscal year 1999 resulted from
$5.6 million in net income, $2.9 million of depreciation and amortization, and a
$1.7 million increase in income taxes payable; offset in part by a $4.6 million
increase in accounts receivable and other receivables, a $2.6 million decrease
in accounts payable and accrued expenses and a $1.0 million gain on disposal of
Softline Limited shares. Cash provided by operating activities in the twelve
months ended March 31, 1998 resulted from $10.1 million in net income, $2.8
million of depreciation and amortization, $0.8 million of non-cash compensation
expense, a $2.6 million increase in accounts payable and accrued expenses, and a
$2.4 million increase in income taxes payable, offset in part by an $8.2 million
gain on disposal of Softline Limited shares and a $1.6 million decrease in
accounts receivable.
Accounts receivable increased during fiscal year 2000 primarily due to
inclusion of Island Pacific accounts receivable of $4.0 million at March 31,
2000 and a $3.3 million receivable associated with the non-recurring sale of
technology rights by our Australian subsidiary. Revenue recognition from this
sale was deferred until payment expected in fiscal year 2001. Accounts
receivable increased during fiscal year 1999 primarily due to inclusion of ARS
accounts receivable of $0.8 million and an increase in receivables from our
Australian subsidiary. Accounts receivable balances fluctuate significantly due
to a number of factors including acquisitions and dispositions, seasonality,
shifts in customer buying patterns, contractual payment terms, the underlying
mix of products and services sold, and geographic concentration of revenues.
Cash provided by (used for) investing activities in the periods ended
March 31, 2000, 1999 and 1998 were $(36.5) million, $(3.3) million and $4.4
million, respectively. Investing activities during fiscal year 2000 included a
$33.8 million net cash payment for the acquisition of Island Pacific, $1.8
million in purchase of software and capitalized software development costs and
$0.8 million in capital expenditures. Investing activities in fiscal year 1999
included $1.4 million in net cash payments for the acquisition of ARS, $0.8
million in net cash payments for other acquisitions related to our former IBIS
subsidiary and $3.3 million in capital expenditures, offset by $2.2 million in
net proceeds from the sale of IBIS. Investing activities in the twelve months
ended March 31, 1998 included $12.0 million in net proceeds from sale of
Softline Limited shares, $0.7 million in proceeds from maturity of certificates
of deposit, and $0.5 million net cash acquired from the acquisition of Divergent
Technologies Pty. Ltd., offset in part by a $6.5 million net cash payment for
the acquisition of assets related to our former IBIS subsidiary, $2.1 million in
purchases of software and capitalized software development costs and $0.5
million in capital expenditures.
41
Cash provided by (used for) financing activities in the periods ended
March 31, 2000, 1999 and 1998 were $30.9 million, $(0.02) million and $1.6
million, respectively. Financing activities during fiscal year 2000 included
$20.5 million in proceeds from loans obtained to acquire Island Pacific, $9.2
million in proceeds from the exercise of options and private sale of common
stock and $2.3 million in proceeds from lines of credit, offset in part by $1.5
million in loan payments. Financing activities in fiscal year 1999 included $1.0
million in cash payments to repurchase common stock, offset in part by $0.7
million proceeds from the exercise of options. Financing activities in the
twelve months ended March 31, 1998 included $9.3 million in proceeds from
issuance of common stock and $1.1 million in proceeds from an affiliate, offset
by a $4.5 million decrease in amounts due to stockholders and $4.3 million in
payments on lines of credit.
Changes in the currency exchange rates of our foreign operations had
the effect of reducing cash by $0.3 million, $0.4 million and $0.03 million in
the fiscal years ended March 31, 2000, 1999 and 1998, respectively. We did not
enter into any hedging transactions to manage foreign currency risk during any
of the reported periods.
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.
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 consolidated
financial statements.
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.
42
YEAR 2000
As of July 3, 2000, our products, computing and communications
infrastructure systems have operated without Year 2000 related problems and
appear to be Year 2000 ready. We are not aware that any of our major customers
or third-party suppliers have experienced significant Year 2000 related
problems. We believe all our critical systems are Year 2000 ready. However,
there is no guarantee that we have discovered all possible failure points. We
will address any Year 2000 problems experienced by our customers through normal
maintenance and warranty procedures. Year 2000 compliance costs were not
material in any prior period and were funded from working capital. As discussed
above, we believe that concern over potential Year 2000 problems impacted sales
and the normal commencement of sales cycles for our software licenses during the
second half of calendar year 1999. These effects may continue to adversely
affect our revenues until normal sales cycles resume.
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 7A. 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
$20.9 million at March 31, 2000. Based on this balance, a change in one percent
in the interest rate would cause a change in interest expense of approximately
$0.2 million 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.
43
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 37%, 83% and 97% of our total net sales were denominated in
currencies other than the U.S. dollar for the periods ended March 31, 2000, 1999
and 1998, respectively.
EQUITY PRICE RISK
We have no direct equity investments. However, we have a note
receivable in the amount of $14.1 million which is secured by shares of the
common stock of Integrity Software, Inc. ("Integrity"), 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 $14.1
million receivable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements at March 31, 2000, March 31,
1999, March 31, 1998 and September 30, 1997 and the reports of Deloitte & Touche
LLP and Singer Lewak Greenbaum & Goldstein LLP, independent accountants, are
included in this report on pages beginning F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the information under the captions "Elections of Directors" and "Compliance with
Section 16(a) of the Exchange Act" of our definitive proxy statement and notice
of annual meeting of stockholders which we will file with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" of our definitive
proxy statement and notice of annual meeting of stockholders which we will file
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" of our definitive proxy statement and notice of annual
meeting of stockholders which we will file with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
report.
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Certain Relationships and Related
Transactions" of our definitive proxy statement and notice of annual meeting of
stockholders which we will file with the Securities and Exchange Commission
within 120 days after the end of the fiscal year covered by this report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules
Independent Auditors' Report of Deloitte & Touche LLP............. F-1
Report of Independent Certified Public Accountants
of Singer Lewak Greenbaum & Goldstein LLP......................... F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999......... F-3
Consolidated Statements of Operations for the Periods ended
March 31, 2000, March 31, 1999, March 31, 1998
(twelve months unaudited), March 31, 1998 (six months)
and September 30, 1997............................................ F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 2000, March 31, 1999 and March 31, 1998
(six months) .....................................................F-5-6
Consolidated Statements of Cash Flows for the Periods Ended
March 31, 2000, March 31, 1999, March 31, 1998
(twelve months unaudited), March 31, 1998 (six months)
and September 30, 1997............................................F-7-8
Notes to Consolidated Financial Statements.......................F-9-30
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not considered necessary and therefore have been
omitted.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2000, we did not file any reports on
Form 8-K.
45
(c) Exhibits
Exhibit Description
- ------- -----------
2.1 Share Purchase Agreement dated November 4, 1996 as amended
among SVI Holdings, Inc. (the "Company") and Hookmond Pty.,
Ltd. and Landreef Pty. Ltd., incorporated by reference to
exhibit 10.4 to the Company's Form 10-KSB for the fiscal year
ended September 30, 1996.
2.2 Technology Purchase Agreement dated November 4, 1996 as
amended between the Company and New Hope Trading Limited,
incorporated by reference to exhibit 10.5 to the Company's
Form 10-KSB for the fiscal year ended September 30, 1996.
2.3 Asset Purchase Agreement dated as of April 28, 1997, among the
Company, Divergent Technologies Pty. Ltd., Colin Bruce
Chapman, Chapman Computers Pty. Ltd. and The Chapman Computers
Unit Trust, incorporated by reference to exhibit 2.1 to the
Company's Form 8-K filed on August 11, 1997.
2.4 Sale of Shares Agreement between Softline Limited and the
Company for the acquisition of IBIS Systems Pty. Ltd.,
incorporated by reference to exhibit 1 to the Company's Form
8-K filed on December 19, 1997.
2.5 Share Swap Agreement between the Company and Softline Limited,
incorporated by reference to exhibit 2 to the Company's Form
8-K filed on December 19, 1997.
2.6 Renunciation Agreement among the Company, Hosken Consolidated
Investments Limited and Softline Limited, incorporated by
reference to exhibit 3 to the Company's Form 8-K filed on
December 19, 1997.
2.7 Agreement among the Company, Hosken Consolidated Investments
Limited and Softline Limited, incorporated by reference to
exhibit 5 to the Company's Form 8-K filed on December 19,
1997.
2.8 Agreement between Multisoft Financial Systems Limited and the
Sage Group Plc., and IBIS Systems Limited, incorporated by
reference to exhibit 10.21 to the Company's Form 8-K filed on
March 24, 1998.
2.9 Amendment Agreement between Multisoft Financial Systems
Limited and The Sage Group Plc., and IBIS Systems Pty. Ltd.,
incorporated by reference to exhibit 10.22 to the Company's
Form 8-K filed on March 24, 1998.
2.10 Agreement of Merger and Plan of Reorganization dated as of
July 1, 1998 among the Company and its wholly-owned
subsidiary; Applied Retail Solutions, Inc.; and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's Form 8-K filed on
September 16, 1998.
2.11 First Amendment to the Agreement and Plan of Reorganization
dated January 28, 1999 among the Company and its wholly-owned
subsidiary; Applied Retail Solutions, Inc.; and the
shareholders of Applied Retail Solutions, Inc., incorporated
by reference to exhibit 2.1 to the Company's Form 10-QSB for
the quarter ended December 31, 1998.
46
2.12 Second Amendment to the Agreement and Plan of Reorganization
dated May 24, 1999 among the Company and its wholly-owned
subsidiary; Applied Retail Solutions, Inc.; and the
shareholders of Applied Retail Solutions Inc., incorporated by
reference to exhibit 2.12 to the Company's Form 10-KSB for the
fiscal year ended March 31, 1999.
2.13 Share Sale Agreement effective December 31, 1998 between
Kielduff Investments Limited and the Company, incorporated by
reference to exhibit 10.2 to the Company's Form 8-K filed on
May 14, 1999.
2.14 Stock Purchase Agreement dated June 1, 1999 among the Company,
Island Pacific Systems Corporation, and the shareholders of
Island Pacific Systems Corporation, incorporated by reference
to exhibit 2.1 to the Company's Form 8-K filed on June 18,
1999.
2.15 Asset Purchase Agreement dated March 16, 2000 among the
Company, MarketPlace Systems Corporation and Jay Fisher
(included herewith).
3.1 Articles of Incorporation, incorporated by reference to
exhibit 3.1 to the Company's Form 10-KSB for the fiscal year
ended December 31, 1993.
3.2 Amended and Restated Bylaws (included herewith).
4.1 Form of Stock Certificate (included herewith).
10.1 Incentive Stock Option Plan, as amended April 1, 1998,
incorporated by reference to exhibit 10.1 to the Company's
Form 10-QSB for the quarter ended September 30, 1998.
10.2 Employment Agreement of Barry M. Schechter dated effective
October 1, 1997, incorporated by reference to exhibit 10.15 to
the Company's 10-KSB for the fiscal year ended September 30,
1997.
10.3 Assignment and Assumption of Acquisition Agreement dated April
1, 1998 among Softline Limited, Softline Holdings (Pty)
Limited, Triple-S Computers (Pty) Limited, Divergent S.A.
(Pty) Limited and the shareholders of Triple-S Computers (Pty)
Limited, incorporated by reference to exhibit 10.2 to the
Company's Form 10-QSB for the quarter ended June 30, 1998.
10.4 Description of Agreement between Softline Limited and SVI
Holdings, Inc. regarding sale of Triple-S Computers (Pty)
Limited (included herewith).
10.5 1998 Incentive Stock Plan, incorporated by reference to
exhibit 10.2 to the Company's Form 10-QSB for the quarter
ended September 30, 1998.
10.6 Employment Agreement of Sam Pickard dated as of August 27,
1998, incorporated by reference to exhibit 2.3 to the
Company's Form 8-K filed on September 16, 1998.
10.7 Employment Agreement of Larry Lahodny dated as of August 27,
1998, incorporated by reference to exhibit 2.4 to the
Company's Form 8-K filed on September 16, 1998.
10.8 Promissory Note dated October 13, 1998 between the Company and
Softline Limited, incorporated by reference to exhibit 10.1 to
the Company's Form 10-QSB for the quarter ended December 31,
1998.
47
10.9 Pledge Agreement dated October 13, 1998 between the Company
and Softline Limited, incorporated by reference to exhibit
10.2 to the Company's Form 10-QSB for the quarter ended
December 31, 1998.
10.10 Promissory Note dated December 31, 1998 executed by Kielduff
Investments Limited in favor of the Company, incorporated by
reference to exhibit 10.3 to the Company's Form 8-K filed on
May 14, 1999.
10.11 Pledge Agreement effective December 31, 1998 between Kielduff
Investments Limited and the Company, incorporated by reference
to exhibit 10.4 to the Company's Form 8-K filed on May 14,
1999.
10.12 Settlement and Release Agreement effective December 31, 1998
among Kielduff Investments Limited, the Company, Softline
Limited, Systems for Business Incorporated and IBIS Systems
Limited, incorporated by reference to exhibit 10.5 to the
Company's Form 8-K filed on May 14, 1999.
10.13 Amendment to Note between the Company and Kielduff Investments
Limited, incorporated by reference to exhibit 2.1 to the
Company's Form 8-K filed November 1, 1999.
10.14 Agreement and Amendment to Note, Pledge Agreement and
Settlement and Release Agreement among the Company, Softline
Limited, Kielduff Investments Limited, Systems For Business,
Inc., IBIS Systems Limited and Jyris Group, incorporated by
reference to exhibit 10.24 to the Company's Form 10-Q/A filed
July 11, 2000 for the quarter ended December 31, 1999.
10.15 Registration Rights Agreement between the Company and
Integrity Holdings, Ltd., incorporated by reference to exhibit
10.25 to the Company's Form 10-Q filed February 14, 2000.
10.16 Term Loan Agreement dated June 3, 1999 between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.1 to the Company's Form 8-K filed on June 18, 1999.
10.17 Term Loan A Note dated June 3, 1999 between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.2 to the Company's Form 8-K filed on June 18, 1999.
10.18 Term Loan B Note dated June 3, 1999 between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.3 to the Company's Form 8-K filed on June 18, 1999.
10.19 Pledge Agreement dated June 3, 1999 between the Company and
Union Bank of California, N.A., incorporated by reference to
exhibit 10.4 to the Company's Form 8-K filed on June 18, 1999.
10.20 Security Agreement by the Company in favor of Union Bank of
California, N.A., incorporated by reference to exhibit 10.5 to
the Company's Form 8-K filed on June 18, 1999.
10.21 Security Agreement by Applied Retail Solutions, Inc. in favor
of Union Bank of California, N.A., incorporated by reference
to exhibit 10.6 to the Company's Form 8-K filed on June 18,
1999.
10.22 Security Agreement by Island Pacific Systems Corporation in
favor of Union Bank of California, N.A., incorporated by
reference to exhibit 10.7 to the Company's Form 8-K filed on
June 18, 1999.
48
10.23 Letter Agreement between the Company and Union Bank of
California, N.A., incorporated by reference to exhibit 10.26
to the Company's Form 10-Q/A filed on July 11, 2000.
10.24 Amendment No. 1 to Term Loan Agreement between the Company and
Union Bank of California, N.A. (included herewith).
10.25 Revolving Note between the Company and Union Bank of
California, N.A. (included herewith).
10.26 Amendment No. 2 to Term Loan Agreement between the Company and
Union Bank of California, N.A. (included herewith).
10.27 Term Loan Note of the Company in favor of Union Bank of
California, N.A. (included herewith).
10.28 Common Stock Purchase Agreement between the Company and AMRO
International S.A. dated March 13, 2000 (included herewith).
10.29 Registration Rights Agreement between the Company and AMRO
International S.A. dated March 13, 2000 (included herewith).
10.30 Common Stock Option Agreement dated May 24, 2000 between the
Company and Softline Limited (included herewith).
10.31 Software Sale and Use Agreement dated September 16, 1999
between Divergent Technologies (Pty) Limited and Resource
Control Management Limited (UK), as amended (included
herewith).
10.32 Promissory Note of the Company in favor of Softline Limited
(included herewith).
21 List of Subsidiaries (included herewith).
23.1 Consent of Deloitte & Touche LLP (included herewith).
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP (included
herewith).
27 Financial Data Schedule.
49
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SVI HOLDINGS, INC., A NEVADA CORPORATION
By: /s/ Barry M. Schechter
-----------------------------------
Barry M. Schechter, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 2000
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signatures Capacity Date
---------- -------- ----
/s/ Barry M. Schechter Chairman of the Board, Chief July 14, 2000
- ------------------------ Executive Officer and Director
Barry M. Schechter
/s/ David L. Reese Chief Financial Officer, Secretary July 14, 2000
- ------------------------ and Director
David L. Reese
/s/ Arthur S. Klitofsky
- ------------------------ Vice President and Director July 14, 2000
Arthur S. Klitofsky
/s/ Donald S. Radcliffe Director July 14, 2000
- ------------------------
Donald S. Radcliffe
/s/ Ivan M. Epstein Director July 14, 2000
- ------------------------
Ivan M. Epstein
/s/ Gerald Rubenstein Director July 14, 2000
- ------------------------
Gerald Rubenstein
/s/ Ian Bonner Director July 14, 2000
- ------------------------
Ian Bonner
/s/ Steven Cohen Director July 14, 2000
- ------------------------
Steven Cohen
50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SVI Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of SVI Holdings,
Inc. and subsidiaries as of March 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of SVI Holdings, Inc. and subsidiaries
as of March 31, 2000 and 1999, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
July 13, 2000
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
SVI Holdings, Inc.:
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of SVI Holdings, Inc. and subsidiaries for the six months ended
March 31, 1998 and the year ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
SVI Holdings, Inc. and subsidiaries for the six months ended March 31, 1998 and
the year ended September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 20, 1998
F-2
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
2000 1999
---------------------------
ASSETS (in thousands, except share amounts)
Current assets:
Cash and cash equivalents $ 4,838 $ 13,006
Accounts receivable, net of allowance for doubtful
accounts of $1,283 and $375, respectively 9,954 3,310
Other receivables 303 853
Note receivable - 13,608
Inventories 272 238
Deferred income tax asset 3,905 -
Prepaid expenses and other current assets 747 184
------------ ------------
Total current assets 20,019 31,199
Note receivable 14,092 -
Property and equipment, net 1,529 734
Purchased and capitalized software, net 30,597 14,053
Goodwill, net 22,545 4,535
Non-compete agreements, net 5,224 1,677
Other assets 77 176
------------ ------------
Total assets $ 94,083 $ 52,374
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,242 $ 345
Accrued expenses 3,642 1,611
Deferred revenue 6,324 297
Current portion of term loans (Note 8) 3,892 -
Line of credit 2,268 232
Due to stockholders 1,632 -
Income taxes payable - 2,576
------------ ------------
Total current liabilities 19,000 5,061
Term loans refinanced in July 2000 (Note 8) 13,150 -
Other long-term liabilities 135 2,000
Deferred income tax liability 8,301 43
------------ ------------
Total liabilities 40,586 7,104
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.0001 par value; 50,000,000 shares authorized;
33,567,884 and 29,741,278 shares issued and outstanding 3 3
Additional paid-in capital 53,454 39,436
Treasury stock, at cost; shares - 444,641 in 2000 and 127,400 in 1999 (4,306) (951)
Shares receivable - (2,142)
Retained earnings 5,831 9,885
Accumulated other comprehensive loss (1,485) (961)
------------ ------------
Total stockholders' equity 53,497 45,270
------------ ------------
Total liabilities and stockholders' equity $ 94,083 $ 52,374
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
------------------------------------- MARCH 31, SEPTEMBER 30,
2000 1999 1998 1998 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
(in thousands, except per share data)
Net sales $ 36,114 $ 17,487 $ 17,702 $ 11,198 $ 10,434
Cost of sales 10,970 5,347 5,753 3,869 3,037
--------- --------- --------- --------- ---------
Gross profits 25,144 12,140 11,949 7,329 7,397
--------- --------- --------- --------- ---------
Expenses:
Product development 4,877 - - - -
Depreciation and amortization 7,942 2,395 1,947 939 1,178
Selling, general and administrative 18,235 7,603 7,108 4,611 4,706
--------- --------- --------- --------- ---------
Total expenses 31,054 9,998 9,055 5,550 5,884
--------- --------- --------- --------- ---------
Income (loss) from operations (5,910) 2,142 2,894 1,779 1,513
Other income (expense):
Interest income 1,081 646 382 351 60
Other income (94) 817 15 35 -
Interest expense (1,531) (90) (42) (13) (103)
Loss on foreign currency transaction (12) (146) (102) (14) (120)
Equity in earnings of Softline Limited - - 279 - 627
Gain on disposal of Softline Limited shares - - 8,210 4,388 3,974
--------- --------- --------- --------- ---------
Total other income (expense) (556) 1,227 8,742 4,747 4,438
--------- --------- --------- --------- ---------
Income before provision (benefit) for income taxes (6,466) 3,369 11,636 6,526 5,951
Provision (benefit) for income taxes (2,412) 1,671 2,674 1,849 1,103
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (4,054) 1,698 8,962 4,677 4,848
Discontinued operations:
Income from operations of IBIS Systems Limited,
net of applicable income taxes of $1,337 and
$463 in 1999 and 1998, respectively - 3,613 1,142 1,142 -
Gain on disposal of IBIS Systems Limited, net of
applicable income taxes of $753 in 1999 - 274 - - -
--------- --------- --------- --------- ---------
Income from discontinued operations - 3,887 1,142 1,142 -
--------- --------- --------- --------- ---------
Net income (loss) $ (4,054) $ 5,585 $ 10,104 $ 5,819 $ 4,848
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Continuing operations $ (0.12) $ 0.06 $ 0.43 $ 0.17 $ 0.35
Discontinued operations - 0.14 0.05 0.04 -
--------- --------- --------- --------- ---------
Net income (loss) $ (0.12) $ 0.20 $ 0.48 $ 0.21 $ 0.35
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Continuing operations $ (0.12) $ 0.05 $ 0.38 $ 0.15 $ 0.31
Discontinued operations - 0.12 0.05 0.04 -
--------- --------- --------- --------- ---------
Net income (loss) $ (0.12) $ 0.17 $ 0.43 $ 0.19 $ 0.31
========= ========= ========= ========= =========
Weighted average common shares outstanding:
Basic 32,459 28,600 21,251 27,768 13,971
========= ========= ========= ========= =========
Diluted 32,459 33,071 23,379 31,046 15,618
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN TREASURY SHARES
SHARES AMOUNT CAPITAL STOCK RECEIVABLE
------------ ------------ ------------ ------------ ------------
(in thousands, except share amounts)
Balance, October 1, 1996 12,422,800 $ 2 $ 6,712
Issuance of common stock in connection with the
purchase of technology rights 1,620,000 3,890
Sale of common stock 196,484 369
Exercise of stock options 805,000 1,004
Compensation expense for stock options granted 203
Increase in equity in Softline Limited as a result
of going public 487
Comprehensive income:
Net income Other comprehensive income:
Translation adjustment
Comprehensive income
------------ ------------ ------------
Balance, September 30, 1997 15,044,284 2 12,665
Issuance of common stock in connection with the
purchase of technology rights and subsidiaries 5,200,000 8,200
Sale of common stock 7,536,000 1 11,303
Exercise of stock options 267,400 369
Issuance of common stock for compensation 85,000 234
Issuance of common stock for services rendered 14,000 49
Compensation expense for stock options granted 318
Comprehensive income:
Net income
Other comprehensive income:
Translation adjustment
Comprehensive income
------------ ------------ ------------
Balance, March 31, 1998 28,146,684 3 33,138
Issuance of common stock in connection with the
purchase of technology rights and subsidiaries 1,199,994 4,955
Exercise of stock options 522,000 719
Income tax benefit on stock options exercised 224
Compensation expense for stock options granted 400
Repurchase of common stock (127,400) $ (951)
Shares receivable from stockholder in connection
with the sale of IBIS Systems Limited $ (2,142)
Comprehensive income:
Net income
Other comprehensive income:
Translation adjustment
Comprehensive income
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1999 29,741,278 3 39,436 (951) (2,142)
(CONTINUED BELOW)
RETAINED ACCUMULATED
EARNINGS COMPREHENSIVE OTHER
(ACCUMULATED INCOME COMPREHENSIVE
DEFICIT) (LOSS) LOSS TOTAL
------------ ------------- ------------- ------------
Balance, October 1, 1996 $ (6,367) $ 347
Issuance of common stock in connection with the
purchase of technology rights 3,890
Sale of common stock 369
Exercise of stock options 1,004
Compensation expense for stock options granted 203
Increase in equity in Softline Limited as a result
of going public 487
Comprehensive income: 4,848 $ 4,848 4,848
Net income Other comprehensive income:
Translation adjustment (263) $ (263) (263)
-------------
Comprehensive income 4,585
------------ ============= ------------- ------------
Balance, September 30, 1997 (1,519) (263) 10,885
Issuance of common stock in connection with the
purchase of technology rights and subsidiaries 8,200
Sale of common stock 11,304
Exercise of stock options 369
Issuance of common stock for compensation 234
Issuance of common stock for services rendered 49
Compensation expense for stock options granted 318
Comprehensive income:
Net income 5,819 5,819 5,819
Other comprehensive income:
Translation adjustment (103) (103) (103)
-------------
Comprehensive income 5,716
------------ ============= ------------- ------------
Balance, March 31, 1998 4,300 (366) 37,075
Issuance of common stock in connection with the
purchase of technology rights and subsidiaries 4,955
Exercise of stock options 719
Income tax benefit on stock options exercised 224
Compensation expense for stock options granted 400
Repurchase of common stock (951)
Shares receivable from stockholder in connection
with the sale of IBIS Systems Limited (2,142)
Comprehensive income:
Net income 5,585 5,585 5,585
Other comprehensive income:
Translation adjustment (595) (595) (595)
-------------
4,990
------------ ============= ------------- ------------
Comprehensive income
Balance, March 31, 1999 9,885 (961) 45,270
F-5
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN TREASURY SHARES
SHARES AMOUNT CAPITAL STOCK RECEIVABLE
------------ ------------ ------------ ------------ ------------
(in thousands, except share amounts)
Balance, March 31, 1999 29,741,278 3 39,436 (951) (2,142)
Issuance of common stock in connection with the
purchase of technology rights and subsidiaries 359,797 3,654
Exercise of stock options 3,437,263 6,992
Income tax benefit on stock options exercised 424
Compensation expense for stock options 55
Repurchase of common stock (138,741) (1,213)
Shares received from stockholder in connection
with the sale of IBIS Systems Limited (178,500) (2,142) 2,142
Issuance of common stock for services 1,839 20
Private placement of common stock 344,948 2,873
Comprehensive loss:
Net loss
Other comprehensive loss:
Translation adjustment
Comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 33,567,884 $ 3 $ 53,454 $ (4,306) $ -
============ ============ ============ ============ ============
(CONTINUED BELOW)
RETAINED ACCUMULATED
EARNINGS COMPREHENSIVE OTHER
(ACCUMULATED INCOME COMPREHENSIVE
DEFICIT) (LOSS) LOSS TOTAL
------------ ------------- ------------- ------------
Balance, March 31, 1999 9,885 (961) 45,270
Issuance of common stock in connection with the
purchase of technology rights and subsidiaries 3,654
Exercise of stock options 6,992
Income tax benefit on stock options exercised 424
Compensation expense for stock options 55
Repurchase of common stock (1,213)
Shares received from stockholder in connection
with the sale of IBIS
Issuance of common stock for services 20
Private placement of common stock 2,873
Comprehensive loss:
Net loss (4,054) (4,054) (4,054)
Other comprehensive loss:
Translation adjustment (524) (524) (524)
-------------
Comprehensive loss $ (4,578)
------------ ============= ------------- ------------
Balance, March 31, 2000 $ 5,831 $ (1,485) $ 53,497
============ ============= ============
(Concluded)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED
YEAR ENDED MARCH 31, ENDED SEPT-
--------------------------------- MARCH 31, EMBER 30,
2000 1999 1998 1998 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
(in thousands)
Cash flows from operating activities:
Net income (loss) $ (4,054) $ 5,585 $ 10,104 $ 5,819 $ 4,848
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 7,942 2,935 2,038 1,030 1,178
Loss on foreign currency transactions 12 146 102 14 120
Equity in earnings in Softline Limited - - (279) - (628)
Gain on sale of Softline Limited shares - - (8,209) (4,388) (3,974)
Compensation expense for stock options 55 400 803 601 203
Deferred income tax provision (2,614) (258) 481 597 (116)
Loss on sale of assets 177 31 - - -
Gain on disposal of IBIS Systems Limited - (1,027) - - -
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable and other receivables (4,586) (4,636) (1,606) (797) (948)
Interest receivable (840) - - - -
Inventories (34) 35 112 887 (843)
Prepaid expenses and other current assets (197) (337) 15 164 (235)
Accounts payable and accrued expenses (576) (1,374) 2,562 (1,952) 4,492
Deferred revenue 5,023 (1,264) - - -
Income taxes payable (2,576) 1,740 2,406 1,380 1,026
--------- --------- --------- --------- ---------
Net cash provided by (used for) operating activities (2,268) 1,976 8,529 3,355 5,123
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (33,898) (2,115) (5,698) (5,936) (3,840)
Maturity of certificates of deposit - - 700 350 350
Net proceeds from sale of Softline Limited shares - - 12,032 6,167 6,165
Purchase of furniture and equipment (849) (821) (527) (268) (495)
Proceeds from sale of assets 83 102 - - -
Proceeds from sale of IBIS Systems Limited, net - 2,218 - - -
Purchase of software and capitalized software development costs (1,831) (2,679) (2,084) (4,442) (892)
--------- --------- --------- --------- ---------
Net cash provided by (used for) investing activities (36,495) (3,295) 4,423 (4,129) 1,288
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 9,615 942 9,263 11,433 1,373
Increase in amount due to stockholders, net 1,982 (15) (4,548) (382) (3,598)
Repurchase of common stock - (951) - - -
Proceeds from lines of credit 2,281 232 - - -
Proceeds from note payable 18,500 - 173 - 26
Payments on line of credit - - (4,276) (340) (359)
Payments on note payable (1,458) - (50) (50) -
Due from affiliate - - 1,078 - 1,078
--------- --------- --------- --------- ---------
Net cash provided by (used for) financing activities 30,920 208 1,640 10,661 (1,480)
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash (325) (352) (339) (103) (263)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (8,168) (1,463) 14,253 9,784 4,668
Cash and cash equivalents, beginning of period 13,006 14,469 216 4,685 17
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 4,838 $ 13,006 $ 14,469 $ 14,469 $ 4,685
========= ========= ========= ========= =========
(Continued)
F-7
SVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS YEAR ENDED
YEAR ENDED MARCH 31, ENDED SEPT-
--------------------- MARCH 31, EMBER 30,
2000 1999 1998 1997
--------- --------- --------- ---------
Supplemental disclosure of non-cash information:
Interest paid $ 1,417 $ 90 $ 17 $ 103
Income taxes paid $ 2,163 $ 2,005 $ 336 $ 233
Supplemental disclosure of non-cash investing and financing activities:
Note receivable and shares receivable acquired as partial
payment from sale of IBIS Systems Limited $ 15,750
Issued 1,000,000 shares of common stock in connection
with the acquisition of Applied Retail Solutions, Inc. $ 4,000
Issued 114,809 shares of common stock in connection
with the acquisition of Triple S from Softline Limited $ 213 $ 270
Issued 28,125 shares of common stock in connection
with the purchase of software from Softline Limited $ 206
Issued 52,000 shares of common stock in connection
with the acquisition of Todds of Lincoln Limited $ 203
Issued 1,620,000 shares of common stock in
connection with purchase of software from Softline
Limited $ 3,890
Issued 5,000,000 shares of common stock in connection
with the acquisition of IBIS Systems Limited $ 7,500
Issued 200,000 shares of common stock in connection
with the acquisition of Chapman Computers (Pty)
Limited $ 700
Received 178,500 treasury shares as settlement
for a receivable $ (2,142)
Issued 55,000 shares of common stock in connection
with the acquisition of Todds of Lincoln Limited $ 402
Issued 165,000 shares of common stock as payment
for earn-out provision in connection with acquistion
of Applied Retail Solutions, Inc. $ 2,000
Received 78,241 shares from Softline for
Triple-S $ (665)
Issued 93,023 shares of common stock in connection
with acquisition of MarketPlace Systems Corporation $ 1,000
(Concluded)
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
SVI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BUSINESS CONDITIONS - SVI Holdings, Inc. (the
"Company") is a holding company, which through its subsidiaries, is a
leading provider of system software for enterprise retailers and retail
chains and computer training courses.
The Company experienced significant growth in operations during the fiscal
year ended March 31, 2000. For the first time in recent history, the
Company reported operating and net losses, and experienced negative cash
flow from operations during this fiscal year.
The Company's near and long term operating strategies include a focus on
aggressively leveraging the Company's experience and customer base to both
cross sell to existing customers and provide tailored solutions to specific
targets and other new customers. In addition, management is currently
pursuing initiatives to improve operational and financial systems so that
costs are effectively managed. Finally, during July 2000, the Company
refinanced certain short term bank debt with obligations whose maturity
dates extend beyond March 31, 2001 (Note 8).
Management believes that its fiscal year 2001 cash flows will be sufficient
to satisfy its obligations in the normal course of business.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION - The
consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
The Company changed its fiscal year end from September 30 to March 31
effective March 31, 1998. The unaudited financial statements for the twelve
months ended March 31, 1998 are included for comparative purposes. In
addition, certain amounts in the prior periods have been reclassified to
conform to the presentation for the fiscal year ended March 31, 2000.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
highly liquid investments with original maturities of not more than three
months.
The fair value of short-term financial instruments, including cash and cash
equivalents, notes receivable, trade accounts receivable and payable,
accrued expenses and lines of credit approximate their carrying amounts in
the financial statements due to the short maturity of and/or the variable
nature of interest rates associated with such instruments.
INVENTORIES - Inventories consist of finished goods and are stated at the
lower of cost or market, on a first-in, first-out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful-lives of the assets generally ranging from 4 to 10 years.
Leasehold improvements are amortized using the straight-line method, over
the shorter of the life of the improvement or lease term. Expenditures for
maintenance and repairs are charged to operations as incurred while
renewals and betterments are capitalized.
F-9
GOODWILL - Goodwill, the excess of cost over the fair value of net assets
acquired, is being amortized using the straight-line method over various
periods not exceeding 10 years. The Company periodically reviews goodwill
to evaluate whether changes have occurred that would suggest that goodwill
may be impaired based on the estimated undiscounted cash flows of the
assets acquired over the remaining amortization period. If this review
indicates that the remaining estimated useful life of goodwill requires
revision or that the goodwill is not recoverable, the carrying amount of
the goodwill is reduced to its fair value, generally using the estimated
shortfall of cash flows on a discounted basis. As described in Note 6 to
the consolidated financial statements, effective April 1, 1999, the Company
revised its estimate of the useful life of goodwill from twenty years to
ten years.
PURCHASED AND CAPITALIZED SOFTWARE COSTS - Pursuant to the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," the
Company capitalizes internally developed software and software purchased
from third parties, if the related software product under development has
reached technological feasibility or if there are alternative future uses
for the purchased software. These costs are amortized on a product by
product basis typically over three to ten years using the greater of the
ratio that current gross revenue for a product bears to the total of
current and anticipated future gross revenue for that product, or the
straight-line method over the remaining estimated economic life of the
product. At each balance sheet date the Company evaluates on a
product-by-product basis the unamortized capitalized cost of computer
software compared to the net realizable value of that product. The amount
by which the unamortized capitalized costs of a computer software product
exceed its net realizable value are written off. The Company did not record
any material write-offs of purchased and capitalized software costs in
2000.
EMPLOYMENT AND NON-COMPETE AGREEMENTS - Employment and non-compete
agreements represent agreements to retain key employees of acquired
subsidiaries for a certain period of time and prohibit those employees from
competing with the Company within a stated period of time after terminating
employment with the Company. The amounts incurred are capitalized and
amortized over the life of the agreements, generally ranging from two to
six years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF -
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
REVENUE RECOGNITION -The Company recognizes revenues in accordance with the
provisions of the American Institute of Certified Public Accountants
Statement of Position 97-2, "Software Revenue Recognition." The Company
licenses its software products under nonexclusive, nontransferable license
agreements. For software arrangements that require significant production,
modification or customization, the entire arrangement is accounted for in
conformity with Accounting Research Bulletin No. 45, "Long-term
Construction-Type Contracts", using the relevant guidance Statement of
Position 81-1, "Accounting for Performance of Construction-Type Contracts
and Certain Production-Type Contracts". For those arrangements that do not
require significant production, modification or customization, revenue is
recognized when a license agreement has been signed, delivery of the
software product has occurred, the related fee is fixed or determinable and
collectibility is probable. The Company also licenses non-software training
products under nonexclusive, nontransferable licenses. Revenue related to
such license agreements is recognized ratably over the license agreement,
or at such time that no further obligation to the customer exists.
F-10
In December 1999, SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements" was issued. 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 fiscal year ending March 31, 2001. Management does not expect
the adoption of SAB 101 will have a material effect on the Company's
financial position or results of operations.
NET INCOME PER SHARE - As required by Statement of Financial Accounting
Standards No. 128, "Earnings per Share," the Company has presented basic
and diluted earnings per share amounts. Basic earnings per share is
calculated based on the weighted-average number of shares outstanding
during the year, while diluted earnings per share also gives the effect to
all potential dilutive common shares outstanding during the year such as
stock options, warrants and contingently issuable shares.
INCOME TAXES - The Company utilizes Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for income taxes represents the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
TRANSLATION OF FOREIGN CURRENCY - The financial position and results of
operations of the Company's foreign subsidiaries are measured using local
currency as the functional currency. Revenues and expenses of such
subsidiaries have been translated into U.S. dollars at average exchange
rates prevailing during the period. Assets and liabilities have been
translated at the rates of exchange at the balance sheet date. Transaction
gains and losses are deferred as a separate component of stockholders'
equity, unless there is a sale or complete liquidation of the underlying
foreign investments. Aggregate foreign currency transaction gains and
losses are included in determining net earnings.
STOCK-BASED COMPENSATION - As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for costs of stock based compensation
in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and accordingly,
discloses the pro forma effect on net income (loss) and related per share
amounts using the fair-value method defined in SFAS No. 123.
CONCENTRATION OF RISK - The Company maintains cash balances and short-term
investments at several financial institutions. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation up to $100,000. As
of March 31, 2000, the uninsured portion of these balances held at
financial institutions aggregated to $3.9 million. The Company also had
funds totaling $292,000 in non-United States financial institutions. The
Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash and cash equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 133 as amended, Accounting for Derivative Instruments and Hedging
Activities, which is effective for fiscal years beginning after June 15,
2000. The Company has not completed the process of evaluating the impact
that will result from the adoption of SFAS No. 133; however, on a
preliminary basis, management does not believe that eventual adoption will
have a significant impact on the Company's financial statements.
F-11
2. ACQUISITIONS
During the period from October 1, 1996 through March 31, 2000, the Company
made the acquisitions set forth below, each of which has been accounted for
as a purchase. The value of contingent consideration for each transaction,
if any, is recorded as purchase consideration at such time as the
contingent amount is known and resolved. The consolidated financial
statements include the operating results of each business from the date of
the acquisition. Pro forma results of operations have been presented,
except for those acquisitions for which the effects were not considered
significant.
ISLAND PACIFIC SYSTEMS CORPORATION - Effective April 1, 1999, the Company
acquired all of the issued and outstanding shares of Island Pacific Systems
Corporation ("Island Pacific") for a purchase price of $35 million in cash.
As part of the purchase price, the Company entered into a two-year
non-compete agreement with one of the four principals of Island Pacific and
two-year employment and four-year non-compete agreements with the other
three principals of Island Pacific. Island Pacific, based in Irvine, is a
leading provider of retail management software products primarily in the
United States and the United Kingdom.
The acquisition was funded from cash resources of the Company and two bank
loans. (See Note 8.)
This acquisition has been accounted for as a purchase. The results of the
operations of Island Pacific have been included in the consolidated
financial statements since the date of the acquisition. The excess of
purchase price over the fair values of net assets acquired was
approximately $20.4 million and has been recorded as goodwill, which is
being amortized on a straight-line basis over ten years. In connection with
the aforementioned acquisition, the Company recognized a deferred tax
liability of $7.0 million related to the income tax consequences from
differences between the assigned values of software acquired and its tax
basis.
The fair value of assets acquired and liabilities assumed were as follows
(in thousands):
Assets acquired, including goodwill $ 45,757
Liabilities assumed (11,980)
---------
Net cash paid for acquisition $ 33,777
=========
The following unaudited pro forma consolidated results of continuing
operations for the twelve months ended March 31, 1999 assume the Island
Pacific acquisition occurred as of April 1, 1998. The pro forma results are
not necessarily indicative of the actual results that would have occurred
had the acquisition been completed as of the beginning of the period
presented, nor are they necessarily indicative of future consolidated
results (in thousands, except per share data):
TWELVE MONTHS
ENDED MARCH 31,
1999
---------
Total revenues $ 32,986
Net loss $ (4,900)
Basic and diluted loss per share $ (0.17)
MARKETPLACE SYSTEM CORPORATION - Effective March 16, 2000, Island Pacific
acquired certain assets and liabilities of Marketplace System Corporation
("Marketplace"), a privately-held software development and consulting firm
headquartered in Austin, Texas. The purchase price for the acquisition was
$750,000 in cash and 93,023 shares of the Company's common stock with the
fair value of $1 million at the date of acquisition. The acquisition has
been accounted for as a purchase.
F-12
The fair value of assets acquired and liabilities assumed were as follows
(in thousands):
Assets acquired, including goodwill $ 1,621
Liabilities assumed -
Common stock issued (1,000)
Liability for purchase consideration (500)
---------
Net cash paid for acquisition $ 121
=========
APPLIED RETAIL SOLUTIONS, INC. - Effective July 1, 1998, the Company
acquired 100% of the issued and outstanding shares of Applied Retail
Solutions, Inc. ("ARS"), a San Diego based company specializing in
point-of-sale software systems. The acquisition was accomplished via a
merger with a newly-formed, wholly-owned subsidiary of the Company. The
Company issued a total of 1,000,000 shares of common stock at $4.00 per
share, which represents the fair value of the Company's common stock at the
date of acquisition, to the former owners of ARS as merger consideration.
In addition, the Company paid a total of $1.9 million to the two principals
of ARS for entering into two-year employment and four-year non-compete
agreements (Note 1). According to the purchase agreement, the earn-out
provision for the acquisition provided that up to additional $2 million
would be paid in the form of Company common stock upon ARS's achievement of
certain revenue targets. On May 26, 1999, the Company and the former ARS
shareholders agreed that the Company would issue 165,000 shares of its
common stock to such shareholders in full satisfaction of the earn-out
provision. The Company recorded $1.5 million in goodwill, which is being
amortized on a straight-line basis over ten years.
The fair value of assets acquired and liabilities assumed were as follows
(in thousands, except per share data):
Assets acquired, including goodwill $ 8,007
Liabilities assumed (587)
Common stock issued (4,000)
Common stock to be issued (2,000)
---------
Net cash paid for acquisition $ 1,420
=========
The following unaudited pro forma consolidated results of continuing
operations for the six months ended March 31, 1998 assume the ARS
acquisition occurred as of October 1, 1997. The pro forma results are not
necessarily indicative of the actual results that would have occurred had
the acquisition been completed as of the beginning of each of the periods
presented, nor are they necessarily indicative of future consolidated
results (in thousands, except per share data):
SIX MONTHS
ENDED MARCH 31,
1998
---------
Total revenues $ 12,614
Net income $ 4,384
Basic earnings per share $ 0.16
Diluted earnings per share $ 0.14
F-13
QUEST SOFTWARE LIMITED - Effective July 1, 1998, IBIS Systems Limited
("IBIS") acquired certain assets of Quest Software Limited ("Quest") for a
cash payment of $293,000. In connection with the acquisition, the Company
granted the former owner of Quest options to purchase 205,000 shares of the
Company's common stock at $5.00 per share as consideration for entering
into a three-year employment agreement. The Company recorded compensation
expense equal to the fair value of the first 105,000 options that are
exercisable. The remaining 100,000 options were exercisable only to the
extent pre-tax profits of Quest for the twelve months ending July 31, 1999
exceeded certain targets. As discussed in Note 12, the Company sold IBIS
(and Quest) during the fourth quarter of fiscal year 1999. As a result of
the disposal of IBIS, these options will become vested upon the payment of
the note receivable due from the buyer of IBIS. The Company recorded
$179,000 in goodwill, which was being amortized on a straight-line basis
over twenty years.
The fair value of assets acquired were as follows (in thousands):
Assets acquired, including goodwill $ 293
Liabilities assumed -
---------
Net cash paid for acquisition $ 293
=========
OPEN SUPPORT LIMITED - Effective July 1, 1998, IBIS also acquired certain
assets and liabilities of Open Support Limited ("Open") for a cash payment
of $149,000. In connection with the acquisition, the Company granted the
former owner of Open options to purchase up to 200,000 shares of the
Company's common stock at $5.00 per share which was approximately the fair
value of the Company common stock at the date of grant as consideration for
entering into a three-year employment agreement. The options would have
been exercisable only to the extent pre-tax profits of Open for the twelve
months ending July 31, 1999 exceeded certain targets. As discussed in Note
12, the Company sold IBIS (and Open) during the fourth quarter of fiscal
year 1999. As a result of the disposal of IBIS, these options were
canceled.
The Company recorded $347,000 in goodwill, which was being amortized on a
straight-line basis over twenty years.
The fair value of assets acquired and liabilities assumed were as follows
(in thousands):
Assets acquired, including goodwill $ 347
Liabilities assumed (198)
---------
Net cash paid for acquisition $ 149
=========
TRIPLE-S COMPUTERS (PTY) LIMITED - Effective April 1, 1998, Divergent
Technologies Pty. Ltd. ("Divergent"), a wholly-owned subsidiary located in
Australia, acquired certain assets and liabilities of Triple-S Computers
(Pty) Limited ("Triple-S") of Cape Town, South Africa, by assignment from
the Company's majority stockholder, for consideration of $597,000. The
Company recorded $327,000 in goodwill, which was being amortized on a
straight-line basis over ten years. As discussed in Note 14, the Company
sold Triple-S effective October 1, 1999.
F-14
The fair value of assets acquired and liabilities assumed were as follows
(in thousands):
Assets acquired, including goodwill $ 1,244
Liabilities assumed (647)
Common stock issued for acquisition (483)
---------
Net cash paid for acquisition $ 114
=========
TODDS OF LINCOLN LIMITED - Effective April 1, 1998, IBIS acquired the
service division of Todds of Lincoln Limited ("Todds") for the purchase
consideration of $253,000 and 52,000 shares of the Company's common stock.
Under the terms of the purchase agreement, Todds was entitled to additional
consideration based on pre-tax net income for the acquired assets for the
fiscal year ended March 31, 1999. Prior to the sale of IBIS (and Todds),
the Company agreed the earn-out provision had been achieved. As a result,
the Company agreed to issue 55,000 shares of common stock as payment for
the deferred consideration. The Company recorded $773,000 in goodwill,
which was being amortized on a straight-line basis over twenty years.
The fair value of assets acquired and liabilities assumed were as follows
(in thousands):
Assets acquired, including goodwill $ 864
Common stock issued (203)
Liability for additional consideration (408)
---------
Net cash paid for acquisition $ 253
=========
MULTISOFT FINANCIAL SYSTEMS LIMITED - Effective March 2, 1998, IBIS
acquired certain assets of Multisoft Financial Systems Limited
("Multisoft"), a wholly-owned subsidiary of The Sage Group Plc. The
purchase price for the assets acquired was $6.5 million. The Company
recorded $6.3 million in goodwill, which was being amortized on a
straight-line basis over twenty years. As discussed in Note 12, the Company
sold IBIS (and Multisoft) during the fourth quarter of fiscal year 1999.
The fair value of assets acquired and liabilities assumed were as follows
(in thousands):
Assets acquired, including goodwill $ 6,478
Liabilities assumed -
---------
Net cash paid for acquisition $ 6,478
=========
The following is a summary of unaudited pro forma results of discontinued
operations for the six months ended March 31, 1998 and year ended September
30, 1997, assuming that the acquisition of Multisoft occurred as of October
1, 1996 (in thousands, except per share data):
SIX MONTHS YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1998 1997
---------- ----------
Net sales $ 6,865 $ 6,395
Net income $ 1,753 $ 950
Basic earnings per share $ 0.06 $ 0.07
Diluted earnings per share $ 0.06 $ 0.06
F-15
IBIS AND ANNISTON - Effective October 1, 1997, the Company entered into an
agreement with Softline Limited ("Softline") to issue 5,000,000 shares of
the Company's common stock in exchange for 100% of the common stock of IBIS
Systems Limited and Anniston Ventures Ltd. ("IBIS and Anniston"). The
Company recorded $5.2 million in excess of cost over fair value of net
assets acquired which was being amortized on a straight-line basis over
twenty years. As discussed in Note 12, the Company sold IBIS (and Anniston)
during the fourth quarter of fiscal 1999.
The fair value of assets acquired and liabilities assumed were as follows
(in thousands):
Assets acquired, including goodwill $ 8,628
Liabilities assumed (1,671)
Common stock issued for acquisition (7,500)
---------
Net cash acquired from acquisition $ (543)
=========
The following unaudited pro forma consolidated results of discontinued
operations for year ended September 30, 1997 assume the IBIS acquisition
occurred as of October 1, 1996, including all acquisitions made by IBIS
during the year ended March 31, 1998 (in thousands, except per share data):
YEAR
ENDED
SEPTEMBER 30,
1997
---------
Total revenues $ 6,395
Net income $ 950
Basic earnings per share $ 0.07
Diluted earnings per share $ 0.06
DIVERGENT TECHNOLOGIES PTY. LTD. - Effective October 1, 1996, the Company
entered into a Share Purchase Agreement and a Technology Purchase Agreement
to acquire 100% of the issued and outstanding shares of Divergent
Technologies Pty. Ltd. ("Divergent"), an Australian software company. The
purchase price was $4.2 million plus 1,300,000 shares of the Company's
common stock and options to purchase 1,600,000 shares of the Company's
common stock at a price of $1.75 for two years. As part of the acquisition,
the Company also agreed to issue options to purchase 120,000 shares at
$2.00 per share, and to forgive the exercise price of these options if
Divergent earned at least $1.1 million profits for the period October 1,
1996 to June 30, 1997. Divergent exceeded the net profits target and the
120,000 shares were issued in December 1997. The $240,000 exercise price,
which was forgiven, was treated as additional acquisition expense. This
acquisition was accounted for using the purchase method of accounting. The
Company recorded $2.5 million in excess of cost over fair value of net
assets acquired which is being amortized on a straight-line basis over ten
years. The results of operations for Divergent have been included in the
consolidated results of the Company since October 1, 1996.
CHAPMAN COMPUTERS PTY. LTD. - Effective April 28, 1997, Divergent entered
into an agreement to acquire Chapman Computers Pty. Ltd. ("Chapman"), an
Australian software company. The purchase price was $1.4 million which
consisted of cash of $784,000 and common stock valued at $600,000. Under
the terms of the acquisition agreement, the Company issued an additional
200,000 shares of the Company's common stock in March 1998 in satisfaction
of an earn-out provision. This acquisition was accounted for using the
F-16
purchase method of accounting. The purchase price was allocated principally
to capitalized software that is being amortized on a straight-line basis
over ten years. The results of operations for Chapman have been included in
the consolidated results of the Company since April 28, 1997. Pro forma
results for the year ended September 30, 1997, as if the acquisition had
taken place as of the beginning of the 1997 fiscal year, are not presented
because the effect on operations would be immaterial.
3. NOTE RECEIVABLE
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 has been 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 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. In June 2000, the Company was
informed by Integrity that it had suspended the registration process due to
generally unfavorable conditions present in the market. Given the change in
circumstances which includes uncertainty surrounding Integrity's
registration process and issues concerning the liquidity of the Company's
demand collateral which presently trades over-the-counter, the Company
engaged independent consultants to perform an analysis of the fair value of
the Note's underlying collateral. After consideration of the independent
valuation and other relevant data, management concluded that the fair value
of the Note as evidenced by the underlying shares of Integrity approximates
its carrying value at March 31, 2000 and therefore an impairment write-down
was not deemed necessary. However, given the present uncertainty and the
Company's lack of control related to collection of the Note, management has
classified the Note as long-term.
4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2000 and 1999 consisted of the
following (in thousands):
2000 1999
--------- ---------
Automobiles $ 41 $ 72
Computer equipment 3,143 1,693
Furniture and fixtures 471 153
Leasehold improvements 293 36
--------- ---------
3,948 1,954
Less accumulated depreciation and amortization 2,419 1,220
--------- ---------
Total $ 1,529 $ 734
========= =========
F-17
The depreciation expense for the twelve months ended March 31, 2000 and
1999, six-month transition period ended March 31, 1998 and twelve months
ended September 31, 1997 was $650,000, $650,000, $184,000 and $195,000,
respectively.
5. CAPITALIZED SOFTWARE
Capitalized software at March 31, 2000 and 1999 consisted of the following
(in thousands):
2000 1999
--------- ---------
Software $ 36,257 $ 16,493
Less accumulated amortization (5,660) (2,440)
--------- ---------
Total $ 30,597 $ 14,053
========= =========
The amortization expense for the twelve months ended March 31, 2000 and
1999, six-month transition period ended March 31, 1998 and twelve months
ended September 30, 1997 was $3.3 million, $1.4 million, $663,000 and
$673,000, respectively.
6. GOODWILL
In evaluating the economic benefit and useful lives of goodwill obtained in
connection with the Company's acquisition of Divergent Technologies Pty.
Ltd., Chapman Computers Pty. Ltd., Applied Retail Solutions, Inc. and
Island Pacific Systems Corporation, management determined that the period
of amortization should be revised from twenty years to ten years effective
April 1, 1999. Accordingly, the unamortized cost of such assets at April 1,
1999 have been allocated to the reduced number of remaining periods in the
revised useful life.
Goodwill at March 31, 2000 and 1999 consisted of the following (in
thousands):
2000 1999
--------- ---------
Cost $ 25,325 $ 4,871
Less accumulated amortization 2,780 336
--------- ---------
Total $ 22,545 $ 4,535
========= =========
The amortization expense for the twelve months ended March 31, 2000 and
1999, six-month transition period ended March 31, 1998 and twelve months
ended September 30, 1997 was $2.4 million, $633,000, $190,000 and $123,000,
respectively.
F-18
7. EMPLOYMENT AND NON-COMPETE AGREEMENTS
Employment and non-compete agreements as of March 31, 2000 and 1999 are as
follows (in thousands):
2000 1999
--------- ---------
Cost $ 6,986 $ 1,926
Less accumulated amortization 1,762 249
--------- ---------
Total $ 5,224 $ 1,677
========= =========
The amortization expense for the twelve months ended March 31, 2000 and
1999 was $1.5 million and $249,000, respectively.
8. TERM LOANS
The Company's term loans at March 31, 2000 and 1999 consist of the
following (in thousands):
2000 1999
--------- ---------
Term loans payable to bank $ 17,042 $ -
Less term loans payable to bank classified
as long-term as discussed below 13,150 -
--------- ---------
Current portion of term loans $ 3,892 $ -
========= =========
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 subsidiaries.
The Bank agreed in December 1999 to extend the maturity date of the $15
million loan to March 3, 2000. During May 2000, the Bank orally agreed to
extend the maturity date of the $15 million loan to June 1, 2000, and the
Company paid $2 million against the outstanding principal balance. In May
2000, the Company and the Bank consolidated into the Loan Agreement the
revolving lines of credit maintained by two of the Company's subsidiaries.
These lines had an aggregate commitment of $3.25 million and an outstanding
balance at that time of approximately $2.0 million. The Company and the
Bank further agreed to increase the interest rate under all loans due to
the Bank to 1.25% over the Bank's prime rate. The resulting amendment to
the Loan Agreement also reflected formally the extended June 1, 2000
maturity date for the $15 million loan, and provided for a July 3, 2000
maturity date for the outstanding balance on the revolving line of credit.
F-19
Subsequent to March 31, 2000 and prior to the issuance of these financial
statements, the Company refinanced $14.75 million of the amounts due to the
Bank. $10 million of the bank obligation was repaid on July 12, 2000 and
was replaced by a $10 million unsecured term loan from Softline Limited,
the Company's majority shareholder. The Softline loan is subordinated to
the remaining amounts due the bank, bears interest at 10% per annum, and is
due August 1, 2001. There are no financial covenants or restrictions
related to the Softline loan. In conjunction with receipt of the $10
million payment, the Company and the Bank entered into a new agreement
whereby the remaining $4.75 million due to the Bank was converted to a term
loan. The Company agreed to make monthly payments to the Bank of $200,000
principal plus accrued interest from August 1, 2000 through March 1, 2001,
with remaining principal and interest due on April 1, 2001. The amended
note bears interest at the Bank's prime rate plus 5% through December 31,
1999 and 6.25% from January 1, 2001 through maturity. The term loan
provides for certain financial covenants and subjects the Company to
limitations on acquisitions, investments and other borrowings.
As a result of the refinancing, $13 million of the Bank term loans have
been classified as long-term obligations at March 31, 2000.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases office space and various automobiles
under non-cancelable operating leases that expire at various dates through
the year 2006. Certain of the leases contain renewal options. Future annual
minimum lease payments for non-cancelable operating leases at March 31,
2000 are summarized as follows (in thousands):
YEAR ENDING MARCH 31:
2001 $ 1,433
2002 1,434
2003 1,419
2004 1,408
2005 1,086
Thereafter 168
---------
$ 6,948
=========
Rent expense was $1.3 million, $681,000, $167,000 and $192,000 for the
years ended March 31, 2000 and 1999, six months ended March 31, 1998 and
year ended September 30, 1997, respectively.
EMPLOYEE BENEFIT PLAN - Effective January 1, 1999, the Company adopted a
defined contribution plan under Section 401(k) of the Internal Revenue Code
covering all eligible employees employed in United States ("401(k) Plan").
Eligible participants may contribute up to $10,000 or 20% of their total
compensation, whichever is lower. The Company matches 50% of the employee's
contributions, up to 3% of the employee's total compensation, and may make
discretionary contributions to the plan. Participants will be immediately
vested in their personal contributions and over a six year graded schedule
for amounts contributed by the Company. The Company made matching
contributions to the 401(k) Plan of $192,000 and $37,000 in the years ended
March 31, 2000 and 1999, respectively.
LINE OF CREDIT - The Company's subsidiaries maintain revolving lines of
credit of $3.9 million to support working capital requirements. The lines
of credit are secured by the assets of the subsidiaries and bear interest
rates at prime plus 2.75% on U.S. accounts and 9% on foreign accounts. As
of March 31, 2000 and 1999, the outstanding balance under these lines of
credit was $2.3 million and $232,000, respectively.
F-20
LITIGATION - The Company is not involved in any material pending legal
proceedings, other than ordinary routine litigation incidental to its
business.
10. COMMON STOCK, TREASURY STOCK, STOCK OPTIONS, AND WARRANTS
PRIVATE PLACEMENT - In March 2000, the Company received $2.9 million from
the sale of common stock to an investor. The Company has agreed to register
the shares with the Securities and Exchange Commission. The shares carry a
"repricing right" which entitles the investor to receive additional shares
upon the occurrence of certain events.
TREASURY STOCK - In November 1998, the Board of Directors authorized the
Company to purchase up to 1,000,000 shares of the Company's common stock.
As of March 31, 2000, the Company had repurchased 444,641 shares of its
common stock at a cost of $4.3 million. Purchased shares are available for
general corporate purposes.
STOCK OPTION PLAN - The Company adopted an incentive stock option plan (the
"1989 Plan"). Options under this plan may be granted to employees and
officers of the Company. There were initially 1,000,000 shares of common
stock reserved for issuance under this plan. Effective April 1, 1998, the
board of directors approved an amendment to the 1989 Plan increasing the
number of shares of common stock authorized under the 1989 Plan to
1,500,000. The exercise price of the options is determined by the board of
directors, but the exercise price may not be less than the fair market
value of the common stock on the date of grant. Options vest immediately
and expire between three to ten years. The 1989 Plan terminated in October
1999.
On October 5, 1998, the board of directors and stockholders approved a new
plan entitled the 1998 Incentive Stock Plan (the "1998 Plan"). The 1998
Plan authorizes 3,500,000 shares to be issued pursuant to incentive stock
options, non-statutory options, stock bonuses, stock appreciation rights or
stock purchases agreements. The options may be granted at a price not less
than the fair market value of the common stock at the date of grant. The
options generally become exercisable over periods ranging from zero to five
years, commencing at the date of grant, and expire in one to ten years. The
1998 Plan terminates in October 2008.
F-21
The following summarizes the Company's stock option transactions under the
stock option plans:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
---------- ---------
Options outstanding, October 1, 1996 412,310 $ 0.54
Exercised (5,000) $ 0.75
Granted 226,000 $ 1.75
Expired/canceled (22,000) $ 1.75
----------
Options outstanding, September 30, 1997 611,310 $ 0.94
Granted 161,300 $ 2.80
----------
Options outstanding, March 31, 1998 772,610 $ 1.33
Exercised (374,000) $ 1.36
Granted 987,675 $ 5.15
Expired/canceled (17,000) $ 3.44
----------
Options outstanding, March 31, 1999 1,369,285 $ 4.05
Exercised (190,075) $ 3.63
Granted 730,150 $ 7.87
Expired/canceled (119,100) $ 7.28
----------
Options outstanding, March 31, 2000 1,790,260 $ 5.44
==========
Exercisable, September 30, 1997 611,310 $ 0.94
==========
Exercisable, March 31, 1998 772,610 $ 1.33
==========
Exercisable, March 31, 1999 934,285 $ 2.88
==========
Exercisable, March 31, 2000 1,169,160 $ 4.37
==========
F-22
In addition to options issued pursuant to the stock option plans described
above, the Company issued additional options outside the plans to
employees, consultants, and third parties. The following summarizes the
Company's other stock option transactions:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
---------- ---------
Options outstanding, October 1, 1996 1,050,000 $ 0.71
Exercised (800,000) $ 1.25
Granted 2,470,000 $ 1.93
----------
Options outstanding, September 30, 1997 2,720,000 $ 1.66
Exercised (307,400) $ 1.38
Granted 3,039,100 $ 2.01
----------
Options outstanding, March 31, 1998 5,451,700 $ 1.87
Exercised (148,000) $ 1.37
Granted 125,000 $ 5.00
Expired/canceled (40,000) $ 2.50
----------
Options outstanding, March 31, 1999 5,388,700 $ 1.95
Exercised (3,247,188) $ 1.92
Granted 15,000 $ 9.50
----------
Options outstanding, March 31, 2000 2,156,512 $ 2.02
==========
Exercisable, September 30, 1997 2,620,000 $ 1.44
==========
Exercisable, March 31, 1998 5,336,700 $ 1.89
==========
Exercisable, March 31, 1999 5,273,700 $ 1.98
==========
Exercisable, March 31, 2000 2,156,512 $ 2.02
==========
During the year ended March 31, 2000, the Company recognized compensation
expense of $55,000 for stock options granted to a non-employee consultant
for services provided to the Company in fiscal year 2000.
During the year ended March 31, 1999, the Company granted options for
347,000 shares to employees under the 1989 Plan at exercise prices less
than fair market values at the date of grant. As a result, the Company
recognized compensation expense of $400,000 from the options granted during
the year.
F-23
The following table summarizes information as of March 31, 2000 concerning
currently outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- ----------- ----------- -----------
(years)
$0.30 - 2.75 2,254,622 6.5 $ 1.54 2,254,622 $ 1.54
$3.00 - 11.75 1,692,150 8.7 $ 6.27 1,071,050 $ 5.59
----------- ----------- ----------- ----------- -----------
3,946,772 7.5 $ 3.57 3,325,672 $ 2.85
=========== =========== =========== =========== ===========
The Company has adopted the disclosure-only provision of SFAS No. 123. The
following pro forma information presents net income and basic and diluted
earnings per share as if compensation expense had been recognized for stock
options granted in the years ended March 31, 2000 and 1999, six months
ended March 31, 1998 and year ended September 30, 1997 as determined under
the fair value method prescribed by SFAS No. 123 (in thousands, except per
share amounts):
YEAR ENDED YEAR ENDED SIX MONTHS YEAR ENDED
MARCH 31, MARCH 31, ENDED MARCH 31, SEPTEMBER 30,
2000 1999 1998 1997
---- ---- ---- ----
Net income (loss):
As reported $ (4,054) $ 5,585 $ 5,819 $ 4,848
Pro forma $ (5,305) $ 4,468 $ 5,675 $ 4,628
Basic earnings (loss) per share:
As reported $ (0.12) $ 0.20 $ 0.21 $ 0.35
Pro forma $ (0.16) $ 0.16 $ 0.20 $ 0.33
Diluted earnings (loss) per share:
As reported $ (0.12) $ 0.17 $ 0.19 $ 0.31
Pro forma $ (0.16) $ 0.14 $ 0.18 $ 0.30
Weighted average assumptions:
Dividend yield None None None None
Volatility 49 % 65 % 83 % 100 %
Risk free interest rate 5.8 % 5.0 % 5.5 % 5.7 %
Expected life of options 1-4 years 1 year 1-2.5 years 2 years
WARRANTS - At March 31, 2000 and 1999, the Company has 25,000 warrants
outstanding to purchase one share of common stock at an exercise price of
$7.00 per share outstanding. The warrants expire two years from the
effective date of a post-effective amendment to the Company's registration
statement that has yet to be filed.
F-24
11. INCOME TAXES
The provision (benefit) for income taxes consisted of the following
components (in thousands):
YEAR ENDED YEAR ENDED SIX MONTHS YEAR ENDED
MARCH 31, MARCH 31, ENDED MARCH 31, SEPTEMBER 30,
2000 1999 1998 1997
---- ---- ---- ----
Current:
Federal $ 681 $ - $ 150 $ 100
State 103 - 127 90
Foreign 1,048 835 975 1,030
--------- --------- --------- ---------
Total 1,832 835 1,252 1,220
--------- --------- --------- ---------
Deferred:
Federal (3,325) - 458 -
State 261 - 152 -
Foreign (1,180) 836 (13) (117)
--------- --------- --------- ---------
Total (4,244) 836 597 (117)
--------- --------- --------- ---------
Provision (benefit)
for income taxes $ (2,412) $ 1,671 $ 1,849 $ 1,103
========= ========= ========= =========
F-25
Significant components of the Company's deferred tax assets and liabilities
at March 31, 2000 and 1999 are as follows (in thousands):
MARCH 31,
---------------------
2000 1999
--------- ---------
Current deferred tax assets/(liabilities):
Deferred revenue $ 1,414 $ -
Research and expenditure credits 463 -
Excess capital loss over gain 24 -
Net operating loss 1,607 -
State taxes 77 -
Accrued expenses 227 -
Allowance for bad debts 93 -
--------- ---------
Net current deferred tax assets 3,905 -
--------- ---------
Non-current deferred tax assets/(liabilities):
Fixed assets 11 74
State taxes - 165
Stock options - 172
Other credits - 93
Deferred rent 54 -
Foreign tax credit and other 309 259
--------- ---------
Total non-current deferred tax assets 374 763
Intangible assets (7,872) (100)
Accumulated capitalized research and
development costs (803) (706)
--------- ---------
Total non-current deferred tax liability (8,675) (806)
--------- ---------
Net non-current deferred tax liabilities (8,301) (43)
--------- ---------
Net deferred tax liability $ (4,396) $ (43)
========= =========
F-26
The difference between the actual provision (benefit) and the amount
computed at the statutory United States federal income tax rate of 34% for
the years ended March 31, 2000 and 1999, six months ended March 31, 1998
and year ended September 30, 1997, is attributable to the following:
YEAR ENDED YEAR ENDED SIX MONTHS YEAR ENDED
MARCH 31, MARCH 31, ENDED MARCH 31, SEPTEMBER 30,
2000 1999 1998 1997
---- ---- ---- ----
Provision (benefit) computed at
statutory rate (34.0)% 34.0% 34.0% 34.0%
Changes not deductible or
recognizable for tax purposes - - 3.8 -
Nondeductible goodwill 12.8 - - -
Decrease in valuation allowance - - (8.0) (32.3)
Foreign income taxed at different
rates (4.7) 7.4 (3.7) 15.3
State income tax, net of federal
tax benefit (4.3) - 2.9 1.5
Other (7.1) 8.2 (0.6) -
--------- --------- --------- ---------
Total provision (benefit) for
income taxes (37.3)% 49.6% 28.4% 18.5%
========= ========= ========= =========
At March 31, 2000, the Company had Federal and California tax net operating
loss carryforwards of approximately $4 million and $4.4 million,
respectively. The Federal and California tax net operating loss
carryforwards will begin expiring after 2008 and 2001, respectively.
The Company also has Federal and California research and development tax
credit carryforwards of approximately $347,000 and $176,000, respectively.
The Federal credits will begin expiring after 2008. The California credits
may be carried forward indefinitely.
The Company also has Federal foreign tax credit carryforwards of
approximately $309,000. These credits are available to offset federal taxes
attributable to foreign source income. These credits will begin expiring
after 2005.
F-27
12. DISCONTINUED OPERATIONS
In the fourth quarter of fiscal 1999, the Company sold its United Kingdom
operations, IBIS Systems Limited ("IBIS") for cash proceeds of $2.3
million, receipt of common stock of the Company valued at $2.1 million,
which is included in shares receivable as of March 31, 1999, and a note
receivable of $13.6 million. The sale resulted in a gain of $274,000, net
of applicable income taxes of $753,000. Accordingly, the operating results
of IBIS are shown as discontinued operations with prior period results
restated. The operating results reflected in earnings from discontinued
operations are summarized as follows (in thousands, except per share data):
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
--------- ---------
Net sales $ 12,403 $ 5,156
Income before taxes $ 4,950 $ 1,605
Taxes on income $ 1,337 $ 463
Net income $ 3,613 $ 1,142
Net income per share of common stock:
Basic $ 0.14 $ 0.04
Diluted $ 0.12 $ 0.04
13. EARNINGS PER SHARE
Earnings per share for the years ended March 31, 2000 and 1999, six months
ended March 31, 1998 and year ended September 30, 1997 are as follows (in
thousands, except share amounts and per share data):
YEAR ENDED MARCH 31, 2000
---------------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -------------
Basic and diluted EPS:
Loss available to common stockholders $ (4,054) 32,458,902 $ (0.12)
============= ============= =============
YEAR ENDED MARCH 31, 1999
---------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -------------
Basic EPS:
Income available to common stockholders $ 5,585 28,599,597 $ 0.20
Effect of dilutive securities options 4,471,690 =============
------------- -------------
Diluted EPS:
Income available to common stockholders plus
assumed conversions $ 5,585 33,071,287 $ 0.17
============= ============= =============
SIX MONTHS ENDED MARCH 31, 1998
---------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -------------
Basic EPS:
Income available to common stockholders $ 5,819 27,768,239 $ 0.21
Effect of dilutive securities options 3,277,647 =============
------------- -------------
Diluted EPS:
Income available to common stockholders plus
assumed conversions $ 5,819 31,045,886 $ 0.19
============= ============= =============
YEAR ENDED SEPTEMBER 30, 1997
---------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -------------
Basic EPS:
Income available to common stockholders $ 4,848 13,971,238 $ 0.35
Effect of dilutive securities options 1,646,427
------------- ------------- =============
Diluted EPS:
Income available to common stockholders plus
assumed conversions $ 4,848 15,617,665 $ 0.31
============= ============= =============
F-28
Options outstanding at March 31, 2000 to purchase 3,210,910 shares of
common stock were not included in the computation of diluted loss per share
because the effect of such inclusion would be anti-dilutive.
Options outstanding during the year ended March 31, 1999, six-month
transition period ended March 31, 1998 and year ended September 30, 1997 to
purchase approximately 0, 100,000 and 200,000 shares of common stock,
respectively, 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.
14. RELATED PARTIES
Included in other receivables at March 31, 2000 and 1999 are amounts due
from officers and employees of the Company in the amount of $41,000 and
$238,000, respectively.
The office space for the Company's Sydney office is leased from a former
officer of the Company. During the years ended March 31, 2000 and 1999, the
Company paid $163,000 and $154,000, respectively, in rent to this related
party.
The loans due to stockholders is $1.6 million as of March 31, 2000. The
original loan amount of $2.3 million was used to fund the acquisition of
Island Pacific Systems Corporation on April 1, 1999. Interest is calculated
monthly at the current prime rate with no stated maturity date. Interest
expense under this loan for the year ended March 31, 2000 was $114,000.
Effective October 1, 1999, the Company sold its Triple-S Computers (Pty)
Limited subsidiary ("Triple-S") to Softline Limited ("Softline"), the
Company's majority shareholder. Triple-S developed and installed retail
point of sale systems throughout Southern Africa. Softline agreed to
transfer 78,241 shares of the Company's common stock valued at the October
1, 1999 closing price of $8.50 per share as consideration for the
acquisition. The transfer of Triple-S was recorded at the Company's
historical book basis and was not material to the operations of the
Company.
In the fourth quarter of fiscal 1999, the Company sold its United Kingdom
operations, IBIS Systems Limited ("IBIS") to the former managing director
of IBIS.
During the third quarter of the fiscal year 1999, the Company loaned $5.2
million to Softline, to facilitate the payment by Softline of an earn-out
due to an officer of the Company by Softline. The loan was paid off during
the fourth quarter of the fiscal year 1999. Interest income received under
this loan was $163,000 for the year ended March 31, 1999.
Effective October 1, 1997, the Company entered into a series of
transactions with Softline and Hosken Consolidated Investments Limited
("Hosken"). Both Softline and Hosken are South African public companies
traded on the Johannesburg Stock Exchange. The closing of these agreements
resulted in Softline acquiring a 60% interest in the Company. Softline
obtained this interest by acquiring 5,000,000 shares of the Company in
exchange for 100% of the common stock of IBIS and Anniston Ventures Ltd.
(both owned by Softline and 7,536,000 shares of the Company's common stock
in exchange for cash and the worldwide technology rights outside of Africa
for Softline's "Brilliant" range of software products. The shares of common
stock issued pursuant to these agreements resulted in the issuance of
12,536,000 new shares of common stock of the Company. The value of the
common stock issued was based on a discount from the market price of the
Company's common stock on the effective date of the transaction. The
Company also issued 2,438,000 options to Softline. These options are
exercisable at $2.00 per share. In addition to the shares acquired by
Softline from the Company, Softline also acquired 4,000,000 shares of the
Company's common stock from the Company's former majority stockholder and
other current stockholders. The Company also sold its remaining interest in
Softline comprising 19,876,000 shares to Hosken for cash and recognized a
gain of $4.4 million on the sale of the shares.
During the six months ended March 31, 1998, the Company granted an option
to purchase 2,438,000 shares of its common stock at $2.00 per share for two
years to Softline Limited, its majority stockholder. The purpose of this
option was to allow Softline to maintain its control position at an
estimated level of 60% of the outstanding shares.
F-29
15. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company classifies its operations into two divisions, retail point of
sale software and training products. As revenues, reported profit/(loss)
and assets related to the Company's training division are below the
threshold established for segment reporting, the Company considers its
business to consist of one reportable operating segment.
The Company operates in four countries, the United States, Australia, South
Africa and United Kingdom. The following is a summary of local operations
by geographic area (in thousands):
YEAR ENDED YEAR ENDED SIX MONTHS YEAR ENDED
MARCH 31, MARCH 31, ENDED MARCH 31, SEPTEMBER 30,
2000 1999 1998 1997
---- ---- ---- ----
Net sales:
United States $ 22,819 $ 5,010 $ 414 $ 801
Australia 8,372 10,706 10,784 9,633
South Africa 1,091 1,770 - -
United Kingdom 3,832 - - -
United Kingdom (discontinued
operations) - 12,403 5,156 -
--------- --------- --------- ---------
Total net sales $ 36,114 $ 29,889 $ 16,354 $ 10,434
========= ========= ========= =========
Long-lived assets:
United States $ 62,518 $ 10,773 $ 3,703 $ 108
Australia 11,471 11,152 10,309 5,264
South Africa - - - 1,779
United Kingdom 75 13 - -
United Kingdom (discontinued
operations) - - 14,070 3,683
--------- --------- --------- ---------
Total long-lived assets $ 74,064 $ 21,938 $ 28,082 $ 10,834
========= ========= ========= =========
For the fiscal year ended March 31, 2000, sales to one customer, Toys "R"
Us, accounted for 15% of total consolidated revenues.
F-30