================================================================================
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 July 31, 1998
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, 1,211,724 shares outstanding as of
August 24, 1998
Series A Convertible Preferred Stock, $.001 par value, 1,360,719 shares
outstanding as of August 24, 1998
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
July 31, 1998 (unaudited) and April 30,1998..................................2-3
Consolidated Statements of Operations,
three months ended July 31, 1998 and 1997 (unaudited)..........................4
Consolidated Statements of Cash Flows,
three months ended July 31, 1998 and 1997 (unaudited)..........................5
Notes to Consolidated Financial Statements (unaudited).......................6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................8-10
Part II. Other Information
Item 1. Legal Proceedings....................................................11
Item 2. Changes in Securities................................................11
Item 3. Defaults Under Senior Securities ....................................11
Item 4. Submission of Matters to a Vote of Security Holders..................11
Item 5. Other Information....................................................11
Item 6. Exhibits and Reports on Form 8-K.....................................11
<PAGE>
Part I. Financial Information
Item 1. Consolidated Unaudited Financial Statements
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, April 30,
1998 1998
(unaudited)
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,261,249 $2,102,807
Trade accounts receivable, net 1,407,256 1,527,865
Costs and estimated earnings
in excess of billings
on uncompleted contracts 307,753 216,280
Other current assets 514,781 566,333
Inventory 110,782 72,299
----------------- -----------------
Total current assets 4,601,821 4,485,584
----------------- -----------------
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net 2,703,937 2,715,003
----------------- -----------------
OTHER ASSETS
Capitalized software costs, net 1,019,616 989,732
Excess of cost over fair value of net
assets of business acquired, net 308,841 319,541
Other intangibles 107,719 109,803
----------------- -----------------
Total other assets 1,436,176 1,419,076
================= =================
$8,741,934 $8,619,663
================= =================
See notes to consolidated financial statements.
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, April 30,
1998 1998
(unaudited)
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long term debt $251,929 250,059
Accounts payable 382,026 538,946
Accrued salary, commissions,
and other expenses 949,479 1,077,686
Billings in excess of costs and estimated
earnings on uncompleted contracts 153,794 108,288
Deferred revenue and customer deposits 770,040 866,503
-------------------- -------------
Total current liabilities 2,507,268 2,841,482
-------------------- -------------
-------------------- -------------
LONG-TERM DEBT, less current maturities 1,342,964 1,365,078
-------------------- -------------
COMMITMENTS AND CONTINGENCIES
-------------------- -------------
MINORITY INTEREST - 45,600
-------------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value;
25,000,000 shares authorized,
1,367,719 and 1,396,638 shares
issued and outstanding 1,306 1,397
Common Stock $.001 par value;
50,000,000 shares authorized,
1,203,728 and 1,137,353 shares
issued and outstanding 1,228 1,137
Additional paid-in capital 8,252,512 8,241,451
Accumulated deficit (3,365,228) (3,879,934)
Foreign currency translation adjustment 1,884 3,452
-------------------- -------------
Total shareholders' equity 4,891,702 4,367,503
==================== =============
$8,741,934 $8,619,663
==================== =============
See notes to consolidated financial statements.
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Three
Months Months
Ended Ended
July 31, 1998 July 31, 1997
--------------- -------------
Revenues:
Software license and installation contract fees $1,957,932 $570,746
Service and maintenance revenue 931,986 464,641
Hardware sales 191,586 -
--------------- -------------
3,081,504 1,035,387
--------------- -------------
Cost of Revenues:
Software license and installation contract fees 228,459 147,837
Service and maintenance revenue 249,665 123,454
Hardware sales 50,852 -
--------------- -------------
Gross profit 2,552,528 764,096
--------------- -------------
Operating expenses:
Research and development 383,615 200,128
Salaries 733,074 260,793
Other 88,423 13,262
Rent 87,959 30,233
Selling, general and administrative 730,358 313,164
--------------- -------------
2,023,429 817,580
--------------- -------------
Income (loss) from operations 529,099 (53,484)
Other income (expense):
Interest expense (37,460) (3,940)
Interest income 22,728 66,367
Other income 341 53,536
--------------- ------------
Income before income taxes 514,708 62,479
Provision for income taxes - -
=============== =============
Net income $514,708 $62,479
=============== =============
--------------- -------------
Basic income per common share .45 .06
--------------- -------------
--------------- -------------
Weighted average common shares outstanding 1,151,900 1,083,151
--------------- -------------
--------------- -------------
Diluted income per common share .19 .02
--------------- -------------
--------------- -------------
Weighted average common and
common equivalent shares outstanding 2,675,333 2,834,440
--------------- -------------
See notes to consolidated financial statements.
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Three Months
Ended Ended
July 31, 1998 July 31, 1997
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $514,708 $62,479
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 152,258 60,384
Changes in assets and liabilities:
Inventory (38,483) -
Trade accounts receivable, net 120,609 (182,217)
Costs, estimated earnings and billings
on uncompleted contracts (45,967) (175,562)
Other current assets 51,552 (103,299)
Accounts payable (156,920) 66,606
Accrued expenses (128,209) (75,629)
Deferred revenue and customer deposits (96,463) 105,387
------------------ ----------------
Net cash provided by (used in)
operating activities 373,085 (241,851)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Facilities acquisition expenditures
and equipment purchases (37,616) (538,459)
Acquisition of minority interest (34,540) -
Capitalized software costs (120,675) (36,855)
----------------- ----------------
Net cash used in investing activities (192,831) (575,314)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt (20,244) -
Principal payments on short term debt - (7,852)
Proceeds from issuance of stock - 14,142
------------------ ----------------
Net cash provided by (used in)
financing activities (20,244) 6,290
------------------ ----------------
Effect of exchange rate changes on cash (1,568) -
------------------ ----------------
Increase (decrease) in cash and
cash equivalents 158,442 (810,875)
Cash and cash equivalents:
Beginning of year 2,102,807 5,161,410
================== ================
End of period $2,261,249 $4,350,535
================== ================
See notes to consolidated financial statements.
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
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 (the "Company"), and its
wholly-owned subsidiaries, IFS International, Inc., a New York Corporation
("IFS"), and Network Controls International ("NCI"), a North Carolina
Corporation. All significant intercompany accounts and transactions have been
eliminated. The consolidated balance sheet as of July 31, 1998, the consolidated
statements of operations for the three months ended July 31, 1998 and 1997 and
the consolidated statements of cash flows for the three months ended July 31,
1998 and 1997 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 July 31, 1998 and for all periods presented have been made.
Effective May 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income" (SFAS 130), which was
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. Other
than net income, the Company's source of comprehensive income is from foreign
currency translation adjustments which is disclosed separately in the
Shareholders' Equity section of the Consolidated Balance Sheets. Total
comprehensive income (the sum of net income and the change in foreign currency
translation adjustment amounts) was $513,140 and $62,479 for the three months
ended July 31, 1998 and 1997, respectively.
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.131, "Disclosures about Segments of an
Enterprise and Related Information." The Company is required to adopt this new
standard for periods beginning after fiscal 1998, but it is not required to be
reported in the interim financial statements in the first year of application.
This statement establishes standards for the way companies are to report
information about operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company is currently evaluating the impact of this standard on disclosures
required in its financial statements.
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, 1998. The results of operations for
the period ended July 31, 1998 are not necessarily indicative of the operating
results for the full year.
Note 2
Acquisition
On January 30, 1998, the merger of a wholly owned subsidiary of IFS with and
into NCI Holdings, Inc. ("Holdings") was consummated pursuant to a Plan and
Merger Agreement, dated January 30, 1998 (the "Merger Agreement"). Holdings
owned approximately 94% of the issued and outstanding shares of capital stock of
NCI, which develops and markets software products for bank automation. On June
1, 1998 NCI was merged into Holdings and Holdings subsequently changed its name
to Network Controls International, Inc.
The Company acquired all of the outstanding shares of capital stock of Holdings
in exchange for $1.11 million, consisting of $840,000 in cash and $176,000
representing the fair value of 24,638 shares of preferred stock. Costs incurred
in connection with the acquisition approximated $102,000. In accordance with
provisions of the acquisition agreement, the Company recorded the issuance of
preferred shares at an amount which considered an allowance for equity
deficiencies of NCI. Pursuant to the acquisition agreement, additional preferred
shares may be issued if the consolidated pre-tax profits of NCI exceeds certain
levels during each of the three years ending April 30, 1999, 2000 and 2001 and
during the three year period ending April 30, 2001. These issuances, if any will
be treated as additional purchase costs. The acquisition was accounted for as a
purchase and the operating results of NCI were included in the consolidated
financial statements commencing February 1, 1998.
In July 1998, the Company acquired the remaining outstanding shares of capital
stock of NCI for cash and stock valued at approximately $35,000.
In August 1998, the Board of Directors voted in favor of waiving the equity
deficiencies clause in the Merger Agreement.
Note 3
Earnings Per Share
Effective April 30, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings Per Share ("EPS"). SFAS 128 establishes
standards for computing and presenting EPS. The statement replaced the
presentation of Primary EPS with a presentation of Basic EPS, and Fully Diluted
EPS with Diluted EPS. Primary EPS for July 31, 1997 has been restated in this
Form 10-QSB, using the new calculations for Basic EPS as established in SFAS
128. The calculation of Diluted EPS using SFAS 128 had no effect on the
Company's prior presentation of Fully Diluted EPS.
<PAGE>
This report on Form 10-QSB contains herewith forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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 commerce market. The Company's revenues have
resulted from the licensing of its family of TPII software products and from
three months of revenue from NCI. The preparation of functional specifications,
customization and installation of TPII software products and the training by IFS
of the financial institution's personnel in the use of TPII software products
takes an average of six to twelve months, depending upon the timing of
installation and final acceptance of the EFT System by the customer. Completion
of an NCI license agreement typically takes an average of two to six months.
IFS' customers pays 30% to 50% of the licensing fees upon execution of the
licensing agreement and also make progress payments prior to acceptance. NCI
customers typically pay the license fees upon installation of the product. IFS
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.
NCI recognizes software license revenue upon installation and hardware revenues
upon shipment. The Company also derives recurrent revenues from furnishing
certain maintenance services to its customers for its products. The Company may
also receive additional revenues for additional training of customer personnel
and consulting services. 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.
Results of Operations
Total revenues of $3,081,504 for the quarter ended July 31, 1998 represent an
increase of $2,046,117, or 197.6%, over total revenues of $1,035,387 for the
quarter ended July 31,1997. This increase in total revenues resulted primarily
from revenues generated by NCI for the three months ended July 31, 1998 of
$1,731,952. NCI was acquired in a purchase transaction in January, 1998. Its
revenues were only reflected in the Company's operations since that date.
Consequently, revenue for the three months ended July 31, 1997, consisted of IFS
revenue only. Revenues from IFS for the three months ended July 31, 1998
increased $314,164 or 30.3% from total revenue of $1,035,387 for the three
months ended July 31, 1997. The increase in IFS' revenue is principally due to
an increase in software license and installation contract fees. Software license
and installation contract fees increased by $354,546 or 62.1%, to $925,292
during the three months ended July 31, 1998 as compared to $570,746 for the
three months ended July 31, 1997.
Service and maintenance revenues for the three months ended July 31, 1998
increased by $467,345 or 100.6%, over service and maintenance revenues for the
three months ended July 31, 1997. Service and maintenance revenue increased
primarily as a result of service and maintenance revenue generated by NCI.
Service and maintenance revenues of NCI for the three months ended July 31, 1998
were $502,509. Service and maintenance revenues of IFS for the three months
ended July 31, 1998 were $429,477 as compared to $464,641 for the three months
ended July 31, 1997. The decrease in IFS' service revenue is attributable to a
decrease in services provided to smart card customers. There were more smart
card systems in progress during the three months ended July 31, 1997 as compared
to July 31, 1998, which resulted in more services being provided to customers,
such as training, consulting, and project management. However, maintenance
revenue for IFS of $154,833 for the three months ended July 31, 1998 represents
an increase of $7,118 or 4.8%, as compared to $147,715 for the three months
ended July 31, 1997. As of July 31, 1998, the Company had approximately $682,000
of deferred maintenance service revenues. Service and maintenance revenue growth
is expected to continue as long as the number of licenses for software products
increases and the customers continue to utilize such software products.
Hardware revenues increased for the three months ended July 31, 1998 primarily
as a result of revenues generated by NCI.
Revenues from licensing of software products and hardware sales in countries
outside the United States accounted for57.3% of total revenues for the quarter
ended July 31, 1998 as compared to 69.9% for the quarter ended July 31, 1997.
The decrease as a percentage of total revenues resulted primarily from an
increase in domestic revenue. However, the Company expects total revenues from
foreign countries to be a significant portion of its revenues in the future.
Gross profit, as expressed as a percentage of total revenues, increased to 82.8%
for the quarter ended July 31, 1998, as compared to 73.8% for the quarter ended
July 31, 1997. Gross profit increased primarily as a result of the increase in
software license fees and service and maintenance revenues, both of which
typically have a higher gross profit margin.
Operating expenses of $2,023,429 for the quarter ended July 31, 1998 represent
an increase of $1,205,849, or 147.5%, from operating expenses of $817,580 for
the quarter ended July 31, 1997. The increase in operating expenses resulted
primarily from the inclusion of NCI's operations in the Company's consolidated
statement of operations for the three months ended July 31, 1998. NCI's
operating expenses for the three months ended July 31, 1998 were $794,955. IFS'
operating expenses for the three months ended July 31, 1998 increased $400,194
or 49.0% from operating expenses of $817,580 for the three months ended July 31,
1997. The increase in IFS' operating expenses resulted primarily from an
increase in personnel necessary to create the development and management
infrastructure needed to service anticipated growth in revenue. Additionally,
$85,000 was accrued for executive, management, and employee bonuses for the
Company during the three months ended July 31, 1998. The Company has implemented
several cost reduction measures in July 1998, which may have an impact on
operating expenses in future periods.
Software costs capitalized for the quarter ended July 31, 1998 were $120,675, as
compared to $36,855 for the quarter ended July 31, 1997. This increase in
capitalized software costs resulted primarily from costs incurred with respect
to TPII smart card software technology. Such capitalized costs are being
amortized on a straight line basis over the estimated five year marketing lives
of the software.
Net income was $514,708 for the quarter ended July 31, 1998, as compared to net
income of $62,479 for the quarter ended July 31, 1997. The increase resulted
primarily from the increase in software license fees and service and maintenance
revenues.
The Company has net operating loss carryforwards of approximately $3,200,000 as
of April 30, 1998. Pursuant to the Tax Reform Act of 1986 and subsequent
legislation, utilization of these carryforwards may be limited due to the
ownership change provisions as enacted by the Tax Reform Act of 1986 and
subsequent legislation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $1,644,102 at April 30, 1998 to
$2,094,553 at July 31, 1998. The Company's cash and cash equivalents also
increased by $158,442 for the three months ended July 31, 1998. This increase
was primarily a result of cash flows provided by operating activities of
$373,085 offset by cash flows used for equipment purchases, capitalized software
costs, repayment of long term debt, and the acquisition of the minority interest
in NCI.
The Company believes that anticipated cash flow from operations along with the
remaining proceeds from the public offering in 1997 will be sufficient to
finance the Company's working capital requirements for the foreseeable future.
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.
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, (vi) continued acceptance of the Company's software products by a
significant number of new customers, (vii) the Company's continued relationship
with computer manufacturers, (viii) acceptance of NCI Business Centre (TM) by a
significant number of new customers.
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.
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 Proceedings
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: September 11, 1998 IFS International, Inc.
By:
\s\ David L. Hodge
- -----------------------------
David L. Hodge
President and Chief Executive Officer
\s\ Frank A. Pascuito
- -----------------------------
Frank Pascuito
Chairman of the Board
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-1-1998
<PERIOD-END> JUL-31-1998
<CASH> 2,261,249
<SECURITIES> 0
<RECEIVABLES> 1,452,266
<ALLOWANCES> 45,010
<INVENTORY> 110,782
<CURRENT-ASSETS> 4,601,821
<PP&E> 4,142,530
<DEPRECIATION> 1,438,593
<TOTAL-ASSETS> 8,741,934
<CURRENT-LIABILITIES> 2,507,268
<BONDS> 0
0
1,306
<COMMON> 1,228
<OTHER-SE> 4,889,168
<TOTAL-LIABILITY-AND-EQUITY> 8,741,934
<SALES> 3,081,504
<TOTAL-REVENUES> 3,067,113
<CGS> 528,976
<TOTAL-COSTS> 2,552,405
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,460
<INCOME-PRETAX> 514,708
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 514,708
<EPS-PRIMARY> .45
<EPS-DILUTED> .19
</TABLE>
