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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, 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, 1,331,424 shares outstanding as of
December 14, 1998
Series A Convertible Preferred Stock, $.001 par value, 1,276,019 shares
outstanding as of December 14, 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
October 31, 1998 (unaudited) and April 30,1998...............................2-3
Consolidated Statements of Operations,
three months and six months ended October 31, 1998 and 1997 (unaudited)........4
Consolidated Statements of Cash Flows,
six months ended October 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...............................8-11
Part II. Other Information
Item 1. Legal Proceedings....................................................12
Item 2. Changes in Securities................................................12
Item 3. Defaults Under Senior Securities ....................................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
Item 5. Other Information....................................................12
Item 6. Exhibits and Reports on Form 8-K.....................................12
<PAGE>
Part I. Financial Information
Item 1. Consolidated Unaudited Financial Statements
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, April 30,
1998 1998
(unaudited)
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,941,645 $2,102,807
Trade accounts receivable, net 1,495,127 1,527,865
Costs and estimated earnings in excess
of billings on uncompleted contracts 175,980 216,280
Other current assets 785,764 566,333
Inventory 135,387 72,299
----------------- -----------------
Total current assets 4,533,903 4,485,584
----------------- -----------------
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net 2,635,575 2,715,003
----------------- -----------------
OTHER ASSETS
Capitalized software costs, net 1,138,341 989,732
Excess of cost over fair value of
net assets of business acquired, net 358,597 319,541
Other 106,435 109,803
----------------- -----------------
Total other assets 1,603,373 1,419,076
================= =================
$8,772,851 $8,619,663
================= =================
See notes to consolidated financial statements.
2
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, April 30,
1998 1998
(unaudited)
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long term debt $256,693 250,059
Accounts payable 444,242 538,946
Accrued salary, commissions,
and other expenses 873,674 1,077,686
Billings in excess of costs and estimated
earnings on uncompleted contracts 52,448 108,288
Deferred revenue and customer deposits 724,782 866,503
----------------- -----------------
Total current liabilities 2,351,839 2,841,482
----------------- -----------------
----------------- -----------------
LONG-TERM DEBT, less current maturities 1,320,624 1,365,078
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
----------------- -----------------
MINORITY INTEREST - 45,600
----------------- -----------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value;
25,000,000 shares authorized,
1,280,019 and 1,396,638 shares
issued and outstanding 1,280 1,397
Common Stock $.001 par value;
50,000,000 shares authorized,
1,327,424 and 1,137,353 shares
issued and outstanding 1,327 1,137
Additional paid-in capital 8,322,430 8,241,451
Accumulated deficit (3,230,506) (3,879,934)
Foreign currency translation adjustment 5,857 3,452
----------------- -----------------
Total shareholders' equity 5,100,388 4,367,503
================= =================
$8,772,851 $8,619,663
================= =================
See notes to consolidated financial statements.
3
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
Six Six Three Three
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1998 1997 1998 1997
--------------- ---------------- --------------- ----------------
Revenues:
<S> <C> <C> <C> <C>
Software license and installation contract fees $2,948,493 $1,328,623 $990,561 $757,877
Service and maintenance revenue 1,793,199 1,059,308 861,213 594,667
Hardware sales 632,255 - 440,669 -
--------------- ---------------- --------------- ----------------
5,373,947 2,387,931 2,292,444 1,352,544
--------------- ---------------- --------------- ----------------
Cost of Revenues:
Software license and installation contract fees 310,069 230,155 81,610 82,318
Service and maintenance revenue 436,467 266,380 186,802 142,926
Hardware sales 113,723 - 62,870 -
--------------- ---------------- --------------- ----------------
Gross profit 4,513,688 1,891,396 1,961,161 1,127,300
--------------- ---------------- --------------- ----------------
Operating expenses:
Research and development 827,068 364,718 443,453 164,590
Salaries 1,368,238 599,451 635,164 338,658
Rent 176,211 53,279 88,252 23,046
Selling, general and administrative 1,281,555 758,889 551,197 445,725
Other 212,581 34,054 124,159 20,792
--------------- ---------------- --------------- ----------------
3,865,653 1,810,391 1,842,224 992,811
--------------- ---------------- --------------- ----------------
Income from operations 648,034 81,005 118,937 134,489
Other income (expense):
Interest expense (74,237) (14,688) (36,777) (10,748)
Interest income 54,529 119,678 31,801 53,311
Other income 21,103 57,286 20,762 3,750
--------------- ---------------- --------------- ----------------
Income before income taxes 649,429 243,281 134,723 180,802
Provision for income taxes - - - -
=============== ================ =============== ================
Net income $649,429 $243,281 $134,723 $180,802
=============== ================ =============== ================
--------------- ---------------- --------------- ----------------
Basic income per common share .55 .22 .11 .17
--------------- ---------------- --------------- ----------------
Weighted average common shares outstanding 1,177,800 1,088,200 1,249,400 1,093,300
--------------- ---------------- --------------- ----------------
Diluted income per common share .25 .08 .05 .06
--------------- ---------------- --------------- ----------------
Weighted average common and common equivalent
shares outstanding 2,646,000 2,899,800 2,655,200 2,906,600
--------------- ---------------- --------------- ----------------
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
IFS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
Six Months Ended Six Months Ended
October 31, 1998 October 31, 1997
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income 649,429 $243,281
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 381,998 128,834
Changes in assets and liabilities:
Inventory (63,088) -
Trade accounts receivable, net 32,738 (618,137)
Costs, estimated earnings and billings
on uncompleted contracts (15,540) (377,941)
Other current assets (219,431) (152,809)
Accounts payable (94,704) (13,138)
Accrued expenses (204,012) (501)
Deferred revenue and customer deposits (141,720) 34,257
-------------------- -------------------
Net cash provided by (used in) operating activities 325,670 (756,154)
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment purchases (89,614) (1,114,629)
Acquisition of minority interest (36,661) -
Capitalized software and license costs (333,987) (128,453)
-------------------- -------------------
Net cash used in investing activities (461,074) (1,243,082)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt (37,820) (13,169)
Proceeds from notes payable - 208,375
Proceeds from issuance of stock 9,657 14,142
-------------------- -------------------
Net cash provided by (used in) financing activities (28,163) 209,348
-------------------- -------------------
Effect of exchange rate changes on cash 2,405 -
-------------------- -------------------
Decrease in cash and cash equivalents (161,162) (1,789,888)
Cash and cash equivalents:
Beginning of year 2,102,807 5,161,410
==================== ===================
End of period $1,941,645 $3,371,522
==================== ===================
See notes to consolidated financial statements.
</TABLE>
5
<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 operating 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 October 31, 1998, the
consolidated statements of operations for the three months and the six months
ended October 31, 1998 and 1997 and the consolidated statements of cash flows
for the six months ended October 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 October 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 $651,834 and $243,281for the six months
ended October 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 October 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.
6
<PAGE>
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 approximately
$238,000 representing the fair market value of 87,094 shares of preferred stock.
Costs incurred in connection with the acquisition approximated $102,000. In
accordance with provisions of the acquisition agreement, the Company initially
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 and allowances for preferred shares
were reversed.
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 October 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.
7
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements below 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.
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 software products. The preparation
of functional specifications, customization and installation of software
products and the training by the Company of the customer's personnel in the use
of software products can take anywhere from two to twelve months, depending upon
the timing of installation, final acceptance of the system by the customer, and
the type of product which is being sold. Depending on the type of product being
installed, the Company receives 30% to 100% of the licensing fees upon execution
of the licensing agreement with progress payments prior to acceptance, or
customers pay the license fees in full upon installation of the product. The
Company recognizes 100% of license revenue when the agreement between the
Company and the customer is signed. The service revenue portion of the agreement
is recognized either under the percentage of completion method for software
installation contracts or on a time and materials basis. The percentage of
completion method is measured by estimates of the progress towards completion as
determined by costs incurred. For projects in which the duration is reasonably
short, the Company recognizes software license revenue upon installation. The
Company recognizes hardware revenues upon shipment. The Company also derives
recurring 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 $2,292,444 for the quarter ended October 31, 1998 represent an
increase of $939,900 or 69.5%, over total revenues of $1,352,544 for the quarter
ended October 31, 1997. Total revenues of $5,373,947 for the six months ended
October 31, 1998 represent an increase of $2,986,016 or 125.0%, over total
revenues of $2,387,931 for the six months ended October 31, 1997. This increase
in total revenues resulted primarily from revenues generated by NCI for the
three and six months ended October 31, 1998 of $1,376,234 and $3,108,186
respectively. 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 and six months ended October 31, 1997,
consisted of IFS revenue only. Revenues from IFS for the three months ended
October 31, 1998 decreased by $436,334 to $916,210 or 32.3% from total revenues
of $1,352,544 for the three months ended October 31, 1997. Revenues from IFS for
the six months ended October 31, 1998 decreased by $122,170 to $2,265,761 or
5.1% from total revenues of $2,387,931 for the six months ended October 31,
1997. The decrease in IFS' revenue is principally due to a decrease in service
revenue.
Service and maintenance revenue decreased by $316,816 to $277,851 or 53.3%
during the three months ended October 31, 1998 as compared to $594,667 for the
three months ended October 31, 1997. Service and maintenance revenue increased
by $733,891 or 69.3% to $1,059,308 during the six months ended October 31, 1998
as compared to $594,667 for the three months ended October 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
and six months ended October 31, 1998 were $583,362 and $1,085,871 respectively.
Service and maintenance revenues of IFS for the three and six months ended
October 31, 1998 were $277,851 and $707,328 respectively as compared to $594,667
and 1,059,308 for the three and six months ended October 31, 1997 respectively.
The decrease in IFS' service revenue is attributable to a decrease in services
provided to smart card customers. This is a result of the successful completion
of two major smart card projects prior to this reporting period. While the
Company experienced a decrease in service revenue from smart card services in
the current reporting period, it is anticipated that revenues from smart card
projects will grow based on the successful completion of this work. The Company
currently has two smart card projects in process. There were more smart card
systems in progress during the three months ended October 31, 1997 as compared
to October 31, 1998, which resulted in more services being provided to
customers, such as training, consulting, and project management.
8
<PAGE>
Maintenance revenue for IFS of $190,547 for the three months ended October 31,
1998 represents an increase of $19,790 or 11.6%, as compared to $170,757 for the
three months ended October 31, 1997. As of October 31, 1998, the Company had
approximately $610,853 of deferred maintenance service revenues. 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 and six months ended October 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 for 80.3% of total revenues for the three
months ended October 31, 1998 as compared to 72.9% for the three months ended
October 31, 1997. Revenues from licensing of software products and hardware
sales in countries outside the United States accounted for 67.1% of total
revenues for the six months ended October 31, 1998 as compared to 71.8% for the
six months ended October 31, 1997. The decrease as a percentage of total
revenues resulted primarily from the inclusion of NCI's revenues into the
Company's consolidated statements of operations. Revenues from licensing of NCI
software products and hardware sales in countries outside the United States
accounted for 57.2% of NCI's total revenues for the six months ended October 31,
1998. 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 85.5%
for the quarter ended October 31, 1998, as compared to 83.3% for the quarter
ended October 31, 1997. Gross profit, as expressed as a percentage of total
revenues, increased to 84.0% for the six months ended October 31, 1998, as
compared to 79.2% for the six months ended October 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 $1,842,224 for the quarter ended October 31, 1998
represent an increase of $849,413 or 85.6% from operating expenses of $992,811
for the quarter ended October 31, 1997. Operating expenses of $3,865,653 for the
six months ended October 31, 1998 represent an increase of $2,055,262 or 113.5%
from operating expenses of $1,810,391 for the quarter ended October 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 and six months ended October 31, 1998. NCI's operating expenses for the
three and six months ended October 31, 1998 were $752,216 and $1,547,171
respectively. IFS' operating expenses for the three months ended October 31,
1998 increased $84,497 or 8.5% from operating expenses of $992,811 for the three
months ended October 31, 1997. The slight increase in operating expenses
reflects the cost savings measure taken by management during the three months
ended October 31, 1998. IFS' operating expenses for the six months ended October
31, 1998 increased $484,691 or 26.8% from operating expenses of $1,810,391 for
the six months ended October 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.
Software costs capitalized for the quarter ended October 31, 1998 were $221,521,
as compared to $91,599 for the quarter ended October 31, 1997. Software costs
capitalized for the six months ended October 31, 1998 were $333,986, as compared
to $128,453 for the six months ended October 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 $134,723 for the quarter ended October 31, 1998, as compared to
net income of $180,802 for the quarter ended October 31, 1997. Net income was
$649,429 for the six months ended October 31, 1998, as compared to net income of
$243,281 for the six months ended October 31, 1997. The increase resulted
primarily from the increase in software license fees and service and maintenance
revenues from NCI.
9
<PAGE>
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
$2,182,064 at October 31, 1998. The Company's cash and cash equivalents
decreased by $161,162 for the six months ended October 31, 1998. This decrease
was primarily a result of working capital used to fund investing activities of
$461,074 for equipment purchases, the acquisition of minority interest in NCI,
and capitalized software and license costs.
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.
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.
YEAR 2000
State of Readiness
The Company has assigned project teams dedicated to prepare the Company's
computer systems, applications, current installed customers and future products
for the year 2000. As of October 31, 1998, the Company believes it has
successfully completed system modifications to its products to be year 2000 and
beyond ("Y2K") ready. The Company has either negotiated or is under negotiations
with its installed customer base for a complete system upgrade to be Y2K ready.
Those customers who do not contract for a system upgrade will receive Y2K
patches for their system. The Company will receive additional consideration for
work performed for most system patches. Systems currently in production will be
tested for Y2K readiness prior to installation.
During the next several months, the Company's Y2K state of readiness will be
evaluated by an independent firm. The Company anticipates that the independent
firm will be selected by January 31, 1999. The Company also anticipates that it
will enter into an agreement with the firm in February.
10
<PAGE>
Costs
Management expects to incur internal costs to prepare its computer systems,
applications and customers for Y2K. These costs are being expensed and are not
expected to have a material impact on the future results of operations. As of
October 31, 1998 the Company has incurred approximately $47,000 of internal
costs, primarily in the form of employee compensation, associated with Y2K
readiness.
Risks
There could be a material adverse effect on the results of operations if the
system enhancements and modifications for Y2K prove not to be effective. In this
event, installed customers would have non-working systems and could possibly
seek out other Y2K ready systems. This would eliminate future maintenance
revenues from these customers. A system that is not Y2K ready would impact new
sales until such time that a Y2K ready system is completed. There are also many
external environments that are associated with the Company's systems in which
the Company may be unaware of being Y2K ready. The operations of installed
systems are dependent upon software and infrastructure provided by third
parties, such as networks, host systems, phone lines, hardware and other
software. The Company has no responsibility to make the third party software and
infrastructure Y2K ready. However, failure by the customer to make sure that
these are Y2K ready may effect the operations of the Company's products and the
customer. This has been conveyed to the Company's customers.
Contingency Plans
If the system enhancements, modifications or patches for Y2K prove not to be
effective, the Company is prepared to correct the situation via dial up
communications to the customer location. If this were to occur, the Company
currently believes that it would not be significant enough to cause an adverse
effect on operations.
11
<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
In August, 1998, the Company issued 996 shares of Common Stock to an employee of
a subsidiary of the Company pursuant to the 1988 Stock Option Plan.
In September, 1998, the Company issued 25,000 shares of Common Stock to a CEO of
a subsidiary and a Director of the Company pursuant to an extension agreement.
In September, 1998, the Company issued 10,000 shares of Common Stock to a former
employee of a subsidiary of the Company pursuant to the 1988 Stock Option Plan.
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
12
<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 15, 1998 IFS International, Inc.
By:
\s\ David L. Hodge
-----------------------------
David L. Hodge
President and Chief Executive Officer
\s\ John Singleton
-----------------------------
John Singleton
Chairman
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-1-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,941,645
<SECURITIES> 0
<RECEIVABLES> 1,540,137
<ALLOWANCES> 45,010
<INVENTORY> 135,387
<CURRENT-ASSETS> 4,533,904
<PP&E> 3,329,802
<DEPRECIATION> 694,227
<TOTAL-ASSETS> 8,772,852
<CURRENT-LIABILITIES> 2,351,839
<BONDS> 0
0
1,280
<COMMON> 1,327
<OTHER-SE> 5,097,781
<TOTAL-LIABILITY-AND-EQUITY> 8,772,852
<SALES> 5,373,947
<TOTAL-REVENUES> 5,375,342
<CGS> 860,259
<TOTAL-COSTS> 4,725,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,237
<INCOME-PRETAX> 649,429
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 649,429
<EPS-PRIMARY> .55
<EPS-DILUTED> .25
</TABLE>
