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United States
Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period ended October 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 1-12687
IFS International, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3393646
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Rensselaer Technology Park, 300 Jordan Road
Troy, NY 12180
(Address of principal executive offices)
(518) 283-7900
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ___
State the number of shares outstanding of each of the issuer's classes of common
equities as of the latest practicable date.
Common Stock, $.001 par value, 1,093,358 shares outstanding as of
December 5, 1997
Series A Convertible Preferred Stock, $.001 par value, 1,380,000 shares
outstanding as of December 5, 1997
Transitional Small Business Disclosure Format: Yes___ NO (X)
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<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Consolidated Unaudited Financial Statements
Consolidated Balance Sheets
October 31, 1997 (unaudited) and April 30,1997...............................2-3
Consolidated Statements of Operations,
three months and six months ended October 31, 1997 and 1996 (unaudited)........4
Consolidated Statements of Cash Flows,
six months ended October 31, 1997 and 1996(unaudited)..........................5
Notes to Consolidated Financial Statements (unaudited).........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................7-9
Part II. Other Information
Item 1. Legal Proceedings....................................................10
Item 2. Changes in Securities................................................10
Item 3. Defaults Under Senior Securities.....................................10
Item 4. Submission of Matters to a Vote of Security Holders..................10
Item 5. Other Information....................................................10
Item 6. Exhibits and Reports on Form 8-K.....................................10
<PAGE>
Part I. Financial Information
Item 1. Consolidated Unaudited Financial Statements
IFS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 31, April 30,
1997 1997
(unaudited)
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,371,522 $ 5,161,410
Trade accounts receivable, net 1,350,309 732,172
Costs and estimated earnings
in excess of billings on
uncompleted contracts 568,209 247,743
Other current assets 267,865 115,056
----------- -----------
Total current assets 5,557,905 6,256,381
----------- -----------
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net 2,398,267 1,335,367
----------- -----------
OTHER ASSETS
Capitalized software costs, net 510,359 457,056
Other 13,666 15,620
----------- -----------
Total other assets 524,025 472,676
=========== ===========
$8,480,197 $8,064,424
=========== ===========
See notes to consolidated financial statements.
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 31, April 30,
1997 1997
(unaudited)
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long term debt $119,133 $115,112
Note payable, bank 1,190,000 981,624
Accounts payable 346,418 359,556
Accrued expenses 493,110 493,611
Billings in excess of costs and estimated
earnings on uncompleted contracts 82,186 139,661
Deferred revenue and customer deposits 321,617 287,360
----------- -----------
Total current liabilities 2,552,464 2,376,924
----------- -----------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 310,130 327,320
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 25,000,000 shares
authorized, 1,380,000 shares issued and outstanding 1,380 1,380
Common Stock $.001 par value; 50,000,000 shares
authorized, 1,093,358 and 1,072,945 issued
and outstanding 1,093 1,073
Additional paid-in capital 7,990,310 7,976,188
Accumulated deficit (2,375,180) (2,618,461)
----------- -----------
Total shareholders' equity 5,617,603 5,360,180
=========== ===========
$8,480,197 $8,064,424
=========== ===========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
IFS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Six Three Three
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1997 1996 1997 1996
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation contract fees $1,328,623 1,259,815 $757,877 $770,084
Service and maintenance revenue 1,059,308 327,170 594,667 207,649
--------------- --------------- -------------- --------------
2,387,931 1,586,985 1,352,544 977,733
--------------- --------------- -------------- --------------
Cost of software license and installation contract fees 230,155 277,237 82,318 220,530
Cost of service and maintenance revenue 266,380 110,482 142,926 40,564
--------------- --------------- -------------- --------------
Gross profit 1,891,396 1,199,266 1,127,300 716,639
--------------- --------------- -------------- --------------
Operating expenses:
Research & development 364,718 241,134 164,590 97,940
Salaries 599,451 358,226 338,658 221,201
Other 34,054 12,227 20,792 6,114
Rent 53,279 62,435 23,046 31,085
Selling, general & administrative 758,889 346,801 445,725 212,872
--------------- --------------- -------------- --------------
1,810,391 1,020,823 992,811 569,212
--------------- --------------- -------------- --------------
Income from operations 81,005 178,443 134,489 147,427
Other income (expense):
Litigation settlement costs - (100,000) - (100,000)
Interest expense (14,688) (30,953) (10,748) (18,292)
Interest income 119,678 1,686 53,311 1,673
Other income 57,286 2,875 3,750 1,151
--------------- --------------- -------------- --------------
Income before income taxes $243,281 $52,051 $180,802 $31,959
Provision for income taxes - - - -
=============== =============== ============== ==============
Net income $243,281 $52,051 $180,802 $31,959
=============== =============== ============== ==============
--------------- --------------- -------------- --------------
Net income per common share .08 .04 .08 .03
--------------- --------------- -------------- --------------
See notes to consolidated financial statements.
</TABLE>
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Six Months
Ended Ended
October 31, October 31,
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $243,281 $52,051
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 128,834 134,302
Changes in:
Trade accounts receivable, net (618,137) (235,372)
Costs, estimated earnings and billings
on uncompleted contracts (377,941) 453,277
Other current assets (152,809) (44,893)
Accounts payable (13,138) (322,032)
Accrued expenses (501) 120,721
Deferred revenue and customer deposits 34,257 55,739
----------- -----------
Net cash provided by (used in)
operating activities (756,154) 213,793
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Facilities acquisition expenditures and
equipment purchases (1,114,629) (72,655)
Capitalized software costs (128,453) (153,983)
----------- -----------
Net cash used in investing activities (1,243,082) (226,638)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations - (2,733)
Principal payments onlong term debt (13,169) (5,395)
Proceeds from notes payable 208,375 500,000
Deferred offering costs - (62,021)
Proceeds from issuance of stock 14,142 37,036
Proceeds from issuance of warrants - 5,000
----------- -----------
Net cash provided by financing activities 209,348 471,887
Increase (decrease) in cash and cash equivalents (1,789,888) 459,042
Cash and cash equivalents:
Beginning of year 5,161,410 137,462
=========== ===========
End of period $3,371,522 $596,504
=========== ===========
See notes to consolidated financial statements.
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated
Financial Statements (Unaudited)
Note 1
Presentation of Interim Financial Statements
The accompanying consolidated financial statements include the accounts of IFS
International, Inc., a Delaware corporation, and its wholly-owned subsidiary IFS
International, Inc., a New York Corporation (collectively the "Company"). All
significant intercompany accounts and transactions have been eliminated. The
consolidated balance sheet as of October 31, 1997, the consolidated statements
of operations for the three and six months ended October 31, 1997 and 1996 and
the consolidated statements of cash flows for the six months ended October 31,
1997 and 1996 have been prepared by the Company, without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial condition, results of operations and
cash flows at October 31, 1997 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-KSB for the fiscal year ended April 30, 1997. The results of operations for
the period ended October 31, 1997 are not necessarily indicative of the
operating results for the full year.
Note 2
Public Offering
In February 1997, the Company sold 1,380,000 shares of Series A Convertible
Preferred Stock and 1,955,000 Series A Convertible Preferred Stock Purchase
Warrants in a Public Offering (the "Public Offering"). Proceeds of the offering
approximated $5,700,000 after deducting underwriting discounts and expenses and
have been used to retire long-term debt, for facilities construction and
renovation, and for working capital purposes.
Note 3
Real Estate
In March 1997, the Company purchased a ground lease expiring on May 25, 2083 and
a building with approximately 35,000 square feet of space located at 300 Jordan
Road, Rensselaer Technology Park, Troy, New York. The purchase price of such
facility was $995,000 of which $50,000 was paid in cash and the balance of the
purchase price was funded through a promissory note entered into by the
Company with a financial institution. The promissory note is secured with a
portion of the cash and cash equivalents of the Company. Interest on the
promissory note is payable monthly until permanent financing is obtained.
The Company has received a commitment from the holder of the promissory note
to convert the note into a permanent loan with a term of 5 years. The permanent
loan will be collateralized by the building and the ground lease and will
contain several financial covenants. Interest on the permanent loan will be
determined when such loan is made. The Company also received approximately
$200,000 in additional bank financing on August 1, 1997. The Company estimates
that approximately $715,000 will be necessary for the renovation of such
facility and has incurred approximately $637,000 of renovation costs through
October 31, 1997. The Company moved its principal operations to its new
facility on August 25, 1997 and has terminated its lease on its former premises
without any further obligations by the Company.
The Town of North Greenbush Industrial Development Agency ("IDA") passed a
resolution in March 1997 authorizing the IDA to provide certain Financial
Assistance ("Financial Assistance") to the Company upon the completion of
certain events, including financing of the property located at 300 Jordan Road,
Rensselaer Technology Park, Troy, New York and its renovation. Such Financial
Assistance would be in the form of (i) a New York State sales tax abatement,
(ii) a mortgage recording tax exemption and (iii) graduated payments by the
Company in lieu of real property taxes with respect to such property. Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
The Company is engaged in the business of developing, marketing, and supporting
software for the Electronic Funds Transfer ("EFT") market. Substantially all of
the Company's revenues have resulted from the licensing of its family ofTPII
software products. The preparation of functional specifications, customization
and installation of TPII software products and the training by the Company of
the financial institution's personnel in the use of the TPII software products
take an average of six to twelve months, depending upon the timing of
installation and final acceptance of the EFT System by the customer. The
customer pays 30% to 50% of the licensing fees upon execution of the licensing
agreement and also makes progress payments prior to acceptance. The Company
recognizes revenue under the percentage of completion method for software
installation contracts. The percentage of completion method is measured by
estimates of the progress towards completion as determined by costs incurred.
The Company also derives recurrent revenues from furnishing certain maintenance
services to its customers for the TPII software and may also receive additional
revenues for additional training of customer personnel and consulting services
(collectively "service revenues"). With respect to revenues for maintenance
services, the Company generally receives annual payments at the beginning of the
contract year. Such payments are reflected as deferred revenues and are
recognized ratably during such year.
The Company entered into an agreement with Visa in July 1996 for the licensing
and installation of its TPII smart card software in connection with the
operation of up to seven pilot programs. The license for each pilot program is
for a term of 24 months commencing on the date such pilot program goes on-line.
As of April 30, 1997, Visa has selected financial institutions in various
countries to conduct the pilot programs. Revenues from the licensing of the TPII
smart card software, except for base license fees for pilot programs, will be
recognized in the same manner as revenues from the licensing of the other TPII
software products.
Occasionally, the Company resells hardware to its customers in conjunction with
its TPII software installation contracts. Since such sales are isolated and
random the Company is unable to predict the amount of any future hardware
revenues. Revenues from these occasional hardware sales are recognized when
invoiced to the customer.
The above statements and certain other statements contained in this quarterly
report on Form 10-QSB are based on current expectations. Such statements are
forward looking statements that involve a number of risks and uncertainties.
Factors that could cause actual results to differ materially include the
following (i) general economic conditions, (ii) competitive market influences,
(iii) the success of the Visa pilot programs, (iv) the development of the
capacity to accommodate additional and larger contracts, (v) establishing the
ability of TPII software products to process transactions for larger EFT
systems, and/or (vi) acceptance of TPII software products by a significant
number of new customers and the Company's continued relationship with computer
manufacturers.
Results of Operations
Total revenues of $1,352,544 for the quarter ended October 31, 1997 represent an
increase of $374,811, or 38.3%, over total revenues of $977,733 for the quarter
ended October 31, 1996. Total revenues of $2,387,931 for the six months ended
October 31, 1997 represent an increase of $800,946 or 50.5% over total revenues
of $1,586,985 for the six months ended October 31, 1996. This increase in total
revenues resulted from a substantial increase in service and maintenance
revenues. Total service and maintenance revenues of $594,667 for the quarter
ended October 31, 1997 represent an increase of $387,018, or 186.4%, over total
service and maintenance revenues for the quarter ended October 31, 1996. Total
service and maintenance revenues of $1,059,308 for the six months ended October
31, 1997 represent an increase of $732,138 or 223.8% over total service and
maintenance revenues for the six months ended October 31, 1996. This increase is
primarily a result of the increased services provided in association with the
Visa pilot programs. The increase in service and maintenance revenues for the
quarter ended October 31, 1997 were offset by a slight decrease in software
license and installation contract fees. Revenues from software license and
installation contract fees of $757,877 for the quarter ended October 31, 1997
represent a slight decrease of $12,207 or 1.6% over total software license and
installation contract fees of $770,084 for the quarter ended October 31, 1996.
Revenues from software license and installation contract fees of $1,328,623 for
the six months ended October 31, 1997 represent an increase of $68,808 or 5.5%
over total software license and installation contract fees of $1,259,815 for the
six months ended October 31, 1996. As of October 31, 1997, the Company had
approximately $299,000 of deferred maintenance service revenues. Service revenue
growth is expected to continue as long as the number of licenses for TPII
software products increases and the customers continue to utilize such software
products.
Revenues from licensing of TPII software products in countries outside the
United States accounted for 72.9% of total revenues for the quarter ended
October 31, 1997 as compared to 46.3% for the quarter ended October 31, 1996.
Revenues from licensing of TPII software products in countries outside the
United States accounted for 71.8% of total revenues for the six months ended
October 31, 1997, as compared to 49.5% for the six months ended October 31,
1996. The increase as a percentage of total revenues resulted primarily from an
increase in international TPII software installation contracts. Domestic
revenues for the quarter ended October 31, 1997 were $367,150 as compared to
$524,698 for the quarter ended October 31, 1996. Domestic revenues for the six
months ended October 31, 1997 were $673,315 as compared to $802,050 for the six
months ended October 31, 1996. The domestic revenues for the six months ended
October 31, 1996 include a portion of the one time license fees associated with
the smart card pilot programs. The domestic revenues for the six months ended
October 31, 1997 include subsequent custom software and services provided in
association with the smart card pilot programs. The Company recognized the one
time base license fees for the seven pilot programs previously mentioned during
the fiscal year ended April 30, 1997. The Company expects total revenues from
foreign countries to continue to be a significant portion of its revenues in the
future.
Gross profit, as expressed as a percentage of total revenues, increased to 83.3%
for the quarter ended October 31, 1997, as compared to 73.3% for the quarter
ended October 31, 1996. Gross profit, as expressed as a percentage of total
revenues, increased to 79.2% for the six months ended October 31, 1997 as
compared to 75.6% for the six months ended October 31, 1996. Gross profit has
increased as a result of an increase in service and maintenance revenues which
typically has a higher gross profit margin.
Operating expenses of $992,811 for the quarter ended October 31, 1997 represent
an increase of $423,599, or 74.4%, from operating expenses of $569,212 for the
quarter ended October 31, 1996. Operating expenses of $1,810,391 for the six
months ended October 31, 1997 represent an increase of $789,568, or 77.3%, from
operating expenses of $1,020,823 for the six months ended October 31, 1996. This
increase in operating expenses resulted primarily from an increase in personnel.
The Company expects that operating expenses will continue to increase as a
result of the planned addition of new personnel in anticipation of new business
relating to the licensing of TPII software products, including the TPII smart
card software.
Software costs capitalized for the quarter ended October 31, 1997 were $91,599,
as compared to $85,420 for the quarter ended October 31, 1996. Software costs
capitalized for the six months ended October 31, 1997 were $128,453, as compared
to $153,983 for the six months ended October 31, 1996. Such capitalized costs
are being amortized on a straight line basis over the estimated five year
marketing lives of the software.
Net income was $180,802 for the quarter ended October 31, 1997, as compared to
net income of $31,959 for the quarter ended October 31, 1996. Net income was
$243,281 for the six months ended October 31, 1997 as compared to a net income
of $52,051 for the six months ended October 31, 1996. This increase is primarily
a result of a substantial increase in service and maintenance revenues and
interest income earned from the investment of the proceeds from the Public
Offering and other income.
The Company has net operating loss carryforwards of approximately $1,900,000 as
of April 30, 1997. Pursuant to the Tax Reform Act of 1986 and subsequent
legislation, utilization of these carryforwards may be limited due to the change
in ownership of the Company's securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $3,879,457 at April 30, 1997 to
$3,005,441 at October 31, 1997. The decrease was principally due to the use of
working capital to fund the facilities acquisition in excess of the net income
and depreciation and amortization for the quarter.
The Company's cash and cash equivalents decreased by $1,789,888 for the six
months ended October 31, 1997. This decrease was primarily a result of cash
flows used in operating activities of $756,154 and cash flows used in investing
activities of $1,243,082.
The Company has incurred approximately $637,000 in renovation costs for it's new
facility and approximately $400,000 for the purchases of office and computer
equipment through the six months ended October 31, 1997 and the Company expects
to incur approximately $128,000 in additional costs prior to April 30, 1998. The
Company has used and will continue to use operating revenues, proceeds from the
Public Offering, and approximately $200,000 in additional bank financing on
August 1, 1997 to fund such capital expenditures.
The Company believes that the proceeds from the Public Offering, together with
anticipated cash flow from operations, will be sufficient to finance the
Company's working capital requirements for a period of 24 months from the
receipt of the proceeds. However, since a portion of the license fee for TPII
software products is not paid until acceptance by the customer and, as a result,
the Company is required to fund a portion of the costs of configuration and
installation of such products from available capital, any substantial increase
in the number of installations or delay in payment could create a need for
additional financing. In such event, there can be no assurance that additional
financing will be available on terms acceptable to the Company, or at all. The
consent of the underwriter of the Public Offering (the "Underwriter") is
required before the Company may complete certain types of financing. The
obligation to obtain such consent may limit the Company's ability to complete
such financing.
QUARTER TO QUARTER SALES AND EARNING VOLATILITY
Quarterly revenues and operating results have fluctuated and will fluctuate as a
result of a variety of factors. The Company can experience long delays (i.e.,
between three to twelve months) before a customer executes a software licensing
agreement. These delays are primarily due to extended periods of software
evaluation, contract review and the selection of the computer system. In
addition following execution of the agreement, the preparation of functional
specifications, customization and installation of software products and the
training by the Company of the financial institution's personnel in the use of
the TPII software products take an average of six to twelve months, depending
upon the timing of installation and final acceptance of the EFT System by the
customer. Accordingly, the Company's revenues may fluctuate dramatically from
one quarter to another, making quarterly comparisons extremely difficult and not
necessarily indicative of any trend or pattern for the year as a whole.
Additional factors effecting quarterly results include the timing of revenue
recognition of advance payments of license fees, the timing of the hiring or
loss of personnel, capital expenditures, operating expenses and other costs
relating to the expansion of operations, general economic conditions and
acceptance and use of EFT. For example, for the quarter ended October 31, 1997,
the Company hired additional personnel in anticipation of increased business in
subsequent quarters.
INFLATION
The Company has not experienced any meaningful impact on its sales or costs as
the result of inflation.
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARY
Part II - Other Information
Item 1 - Legal Proceeding
The Company is not a party to any pending material legal proceedings.
Item 2 - Changes in Securities
None
Item 3 - Defaults Under Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
Signature
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 5, 1997 IFS International, Inc.
By:
\s\ Frank Pascuito
- -----------------------------
Frank Pascuito
Chairman of the Board
(Principal Executive and Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-1-1997
<PERIOD-END> OCT-31-1997
<CASH> 3,371,522
<SECURITIES> 0
<RECEIVABLES> 1,358,209
<ALLOWANCES> 7,900
<INVENTORY> 0
<CURRENT-ASSETS> 5,557,905
<PP&E> 2,916,196
<DEPRECIATION> 517,929
<TOTAL-ASSETS> 8,480,197
<CURRENT-LIABILITIES> 2,552,464
<BONDS> 0
0
1,380
<COMMON> 1,093
<OTHER-SE> 5,615,130
<TOTAL-LIABILITY-AND-EQUITY> 8,480,197
<SALES> 2,387,931
<TOTAL-REVENUES> 2,445,217
<CGS> 496,535
<TOTAL-COSTS> 2,306,926
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,688
<INCOME-PRETAX> 243,281
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243,281
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
