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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,
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2000 1999 1998 1997 1996 1995
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(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
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