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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 30, 1998
IFS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 1-12687 13-3393646
(State or Other (Commission File No.) (IRS Employer
jurisdiction of incorporation) Identification Number)
Rensselaer Technology Park, 300 Jordan Road, Troy, NY 12180
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 283-7900
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<PAGE>
Item 7. Financial Statements and Exhibits
(a) Consolidated Financial Statements of NCI Holdings Inc. as of May
31, 1997 and 1996 and for the years ended May 31, 1997 and 1996
(b) Consolidated Financial Statements of NCI Holdings Inc. as
of November 30, 1997 and for the six months ended November 30,
1997 and 1996 (unaudited)
(c) Pro Forma Consolidated Income Statements for the year ended
April 30, 1997 and the six months ended October 31, 1997
(unaudited)
(d) Exhibits
2.1 Plan and Agreement of Merger, dated January 30, 1998, by
and among IFS International Inc., NCI Holdings, Inc., NCI
Acquisition Corp. and Per Olof Ezelius *
- --------------
* Such exhibit was previously filed with this Form 8-K.
<PAGE>
NCI Holdings, Inc.
and Subsidiaries
Consolidated Financial Statements
May 31, 1997 and 1996
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholder of
NCI Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of NCI Holdings, Inc. and its subsidiaries at May 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Charlotte, North Carolina
April 6, 1998
<PAGE>
NCI Holdings, Inc.
Consolidated Balance Sheets
(Amounts in thousands except share data)
Assets
May 31,
1997 1996
Current assets:
Cash and cash equivalents $ 210 $ 1,512
Marketable securities 473 472
Accounts receivable, net of allowance
for doubtful accounts of $22 and $20
in 1997 and 1996, respectively 741 245
Inventories 201 221
Income taxes receivable 389 -
Deferred income taxes 40 52
Prepaid expenses and other current assets 218 144
-------- --------
Total current assets 2,272 2,646
Property and equipment, net 277 253
Internally developed software, net 153 722
Other assets 3 3
-------- --------
$ 2,705 $ 3,624
======== ========
Liabilities and Shareholders' Deficit
Current liabilities:
Short-term borrowings $ 618 $ -
Notes payable to former shareholders - current 3,137 286
Accounts payable 240 180
Accrued salaries and payroll taxes 101 80
Income taxes payable - 353
Accrued expenses and other current liabilities 367 229
-------- --------
Total current liabilities 4,463 1,128
Notes payable to former shareholders - 3,137
Deferred income taxes 125 259
-------- --------
Total liabilities 4,588 4,524
Minority interest in majority-owned subsidiary 90 85
-------- --------
Shareholders' deficit (Note 1):
Common stock, $.01 par value; 10,000,000
shares authorized, 4,400,000 shares issued,
1,257,143 shares outstanding - -
Capital in excess of par value - -
Accumulated deficit (1,924) (966)
Unrealized loss on marketable security (17) (18)
Foreign currency translation adjustment (32) (1)
-------- --------
Total shareholders' deficit (1,973) (985)
-------- --------
$ 2,705 $ 3,624
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NCI Holdings, Inc.
Consolidated Statements of Operations
(Amounts in thousands)
Year ended May 31,
1997 1996
Net sales $ 3,967 $ 7,301
------- -------
Costs and expenses:
Cost of products sold 1,286 2,011
Selling and marketing expenses 963 1,051
General and administrative expenses 3,113 2,571
------- -------
Total costs and expenses 5,362 5,633
------- -------
Income (loss) from operations (1,395) 1,668
Other income, net 53 118
Interest income 43 47
Interest expense (233) (194)
------- -------
Income (loss) before income taxes (1,532) 1,639
Provision for (benefit from) income tax (551) 735
------- -------
Income (loss) before minority interest (981) 904
Minority interest in (income) loss of
majority-owned subsidiary 23 (20)
------- -------
Net income (loss) $ (958) $ 884
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NCI Holdings, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year ended May 31,
1997 1996
Cash flows from operating activities:
Net income (loss) $ (958) $884
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 861 458
Deferred income taxes (109) 101
Compensation expense on stock grants by
majority-owned subsidiary 28 37
Minority interest in (income) loss of
majority-owned subsidiary (23) 20
(Increase) decrease in:
Accounts receivable (496) 302
Inventories 20 2
Income taxes receivable (369) 120
Prepaid expenses and other current assets (74) (13)
Increase (decrease) in:
Accounts payable 60 (121)
Accrued salaries and payroll taxes 21 (130)
Accrued expenses and other current liabilities 138 41
Income taxes payable (373) 148
------ ------
Net cash (used in) provided by operating activities (1,274) 1,849
------ ------
Cash flows from investing activities:
Capital expenditures (200) (156)
Internally developed software costs (116) (381)
Proceeds from sale of property and equipment - 2
Purchase of marketable securities - (500)
------ ------
Net cash used in investing activities (316) (1,035)
------ ------
Cash flows from financing activities:
Proceeds from short-term financing arrangements 618 -
Principal payments on notes to shareholders (286) (292)
------ ------
Net cash provided by (used in) financing activities 332 (292)
------ ------
Effect of exchange rate changes on cash (44) (10)
------ ------
Net (decrease) increase in cash and cash equivalents (1,302) 512
Cash and cash equivalents, beginning of year 1,512 1,000
------ ------
Cash and cash equivalents, end of year $ 210 $ 1,512
====== ======
Supplemental disclosures of cash flow information:
Interest paid $ 176 $ 178
Income taxes paid $ 142 $ 402
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NCI Holdings, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Amounts in thousands except share data)
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
Foreign Unrealized
currency loss on
Accumulated translation Marketable
Shares Amount Deficit adjustment Securities Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995 4,400,000 $ - $ (935) $ (13) $ - $ (948)
Net income - - 884 - - 884
Redemption of common
shares (Note 1) (3,142,857) - (915) - - (915)
Foreign currency trans-
lation adjustment - - - 12 - 12
Unrealized loss on marketable
securities, net of tax - - - - (18) (18)
- --------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1996 1,257,143 - (966) (1) (18) (985)
Net loss - - (958) - - (958)
Foreign currency trans-
lation adjustment - - - (31) - (31)
Unrealized gain on marketable
securities, net of tax - - - - 1 1
- --------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1997 1,257,143 $ - $ (1,924) $ (32) $ (17) $ (1,973)
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NCI Holdings, Inc.
Notes to Consolidated Financial Statements
May 31, 1997 and 1996
NOTE 1 - ORGANIZATION AND BUSINESS:
The accompanying financial statements include the accounts of NCI Holdings, Inc.
(the "Company") and its majority owned subsidiary, Network Controls
International, Inc. ("NCI, Inc.") The Company and its subsidiaries are engaged
primarily in the sale of computer equipment and software to the financial
services industry. The Company also sells related services including
installation, training, consulting and programming. NCI, Inc. has three
wholly-owned subsidiaries which provide marketing and sales support to customers
in European markets and are as follows:
Network Controls GmbH (Viersen, Germany)
Network Controls International Ltd. (London, England)
Network Controls International Espana, S.A. (Madrid, Spain); inactive
The Company was formed on April 12, 1993. On April 23, 1993, the Company
acquired 97% of the outstanding shares of NCI, Inc. which had been in operation
since 1983. The change in ownership occurred as a result of two former
shareholders of NCI, Inc. contributing their shares to the Company, and through
the concurrent purchase by the Company of substantially all the remaining
outstanding shares of NCI, Inc. These shares were acquired for $2,800,000,
comprised of three promissory notes of approximately $934,000 each payable over
10 years.
In October 1995, one existing shareholder of the Company gained 100% ownership
through the issuance by the Company of a $915,000 note payable in exchange for
shares of the Company held by one other shareholder. The $915,000 note is
payable over 10 years.
These notes bear interest at rates ranging from 5% to prime less 1% and are
secured by the pledge of the sellers' shares.
The acquisition by the Company of shares held by former shareholders through the
issuance of notes payable in the aggregate of $3,715,000 was recorded as a
reduction in shareholders' equity by first reducing paid-in capital to zero and
recording the balance as a deduction from retained earnings.
As of May 31, 1997, the principal balance due under the notes was $3,137,000 in
the aggregate. The Company made additional principal payments of approximately
$32,000 subsequent to May 31, 1997 and then settled the notes for an amount
equal to $840,000 in January 1998. The reduction of $2,265,000 in notes payable
was agreed to by the former shareholders pursuant to an agreement executed in
January 1998. The Company paid these notes with proceeds from a loan made by the
acquiror of the company as further discussed below.
In January 1998, all of the Company's outstanding common shares were acquired by
IFS International, Inc., a publicly-traded company. Prior to the closing of this
transaction, IFS International, Inc. made a loan of $840,000 to the Company the
proceeds of which were used to repay existing debt as discussed above. The
accompanying financial statements do not reflect any adjustments that may be
required as a result of such acquisition.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany transactions and accounts have been
eliminated.
<PAGE>
Cash equivalents:
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. At May 31, 1996 cash equivalents
included $207,000 invested in a money market account with a German bank by
Network Controls GmbH. Cash of $58,000 is restricted as to withdrawal for the
benefit of certain employees at May 31, 1997.
Marketable securities:
The Company's investment in available-for-sale securities is carried at fair
value with the related unrealized loss included in shareholders' equity net of
related deferred income tax benefits.
Recognition of revenue:
Revenues from the sales of hardware and software are recognized upon shipment of
product or upon satisfaction of material ongoing commitments, if any. Revenues
from the performance of services are recognized as the work is performed.
Statement of Position 97-2 (SOP 97-2) "Software Revenue Recognition" issued by
the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants supercedes the existing SOP 91-1 for fiscal years
beginning after December 15, 1997. The Company has not completed its analysis of
the impact, if any, that SOP 97-2 will have on the Company's revenue recognition
practices.
Concentration of credit risk:
The Company and its subsidiaries sell products and services principally to
regional banks, financial institutions and other businesses serving the
financial services industry. The Company's customers are located in a broad
geographical area, including principally the United States, Germany, Canada,
Sweden and the United Kingdom. During fiscal 1997, sales to 5 customers
accounted for approximately 40% of total revenue.
Inventories:
Inventories consist of computer equipment held for sale and are recorded at the
lower of cost or market, with cost determined using the average cost method.
Property and equipment:
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets for financial reporting purposes and accelerated
methods for income tax reporting purposes. Additions and major replacements or
improvements are capitalized, while maintenance and repair costs are charged to
expense as incurred. Gains or losses from the sale of property and equipment are
included in income.
Internally developed software:
The Company capitalizes costs of developing software to be sold which are
incurred after the establishment of technological feasibility and prior to the
availability of the software for general release, including costs of product
enhancements which improve the marketability of the original product or extend
its life.
Capitalized computer software costs are generally amortized on a straight-line
basis over the remaining estimated economic lives of the products. Such
estimated economic lives do not exceed 3 years. Adjustments are made to
accelerate amortization when management's analysis indicates that the
unamortized capitalized costs exceed the estimated net realizable value for
specific products.
<PAGE>
Income taxes:
The Company accounts for income taxes using the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities and for tax carryforwards. A
consolidated U.S. Federal income tax return is filed by the Company and its
majority-owned U.S. subsidiary.
Foreign currency translation:
All assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated at exchange rates in effect at the
balance sheet date, while the parent's investment is translated at historical
exchange rates. Revenues and expenses of such subsidiaries are translated at
average exchange rates for the period. Translation gains and losses are not
included in determining net income but are accumulated in a separate component
of shareholders' equity. Foreign currency transaction gains and losses are
included in other expense (income) in the statement of income when incurred.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period, as well as amounts disclosed for
contingencies. Significant estimates include allowances for doubtful accounts,
amortization of capitalized software costs and deferred income tax assets.
Actual results could differ from those estimates.
Stock based compensation:
In fiscal 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Issued to
Employees" (SFAS 123) with respect to stock options granted by NCI, Inc. for
shares of NCI, Inc. The disclosures include pro forma net income as if the fair
value based method of accounting had been used. Stock issued to non-employees is
accounted for in
accordance with SFAS 123.
Reclassifications:
Certain amounts reported in the prior year have been reclassified to conform to
the current year presentation.
NOTE 3 - PROPERTY AND EQUIPMENT:
The principal categories of property and equipment are as follows (in
thousands):
Estimated
useful life May 31,
(years) 1997 1996
Machinery and office equipment 3 $ 767 $ 639
Furniture and fixtures 7 150 134
Leasehold improvements 5 37 37
Computer software 3 73 61
----- -----
1,027 871
Less - Accumulated depreciation (750) (618)
----- -----
$ 277 $ 253
===== =====
<PAGE>
Depreciation expense was $176,000 and $105,000 in fiscal 1997 and 1996,
respectively.
NOTE 4 - INTERNALLY DEVELOPED SOFTWARE
Capitalized costs of internally developed software and related amortization are
as follows (in thousands):
Year ended May 31,
1997 1996
Costs capitalized $ 116 $ 381
Amortization expense $ 684 $ 353
Total costs incurred in the research and development efforts of the Company were
approximately $2,300,000 and $2,000,000 during the years ended May 31, 1997 and
1996, respectively, including the amounts capitalized as shown above.
Due to the fact that a previously capitalized project was terminated and will
not be available for general release, accelerated amortization expense of
approximately $124,000 was recorded in fiscal 1997 and is included in the table
above.
NOTE 5 - INVESTMENT IN MARKETABLE SECURITIES:
Investment in marketable securities consists of a 15-year corporate bond
maturing in March 2011 and bearing a 7% interest rate and is summarized as
follows as of May 31, 1997 (in thousands):
Cost $ 500
Gross unrealized loss (27)
--------------
$ 473
==============
The unrealized loss has been recognized as an adjustment to shareholders'
equity, net of related deferred tax benefits of $10,000.
NOTE 6 - SHORT-TERM BORROWINGS:
The Company has a $600,000 line of credit with a bank subject to annual review.
This line was renewed in September 1997. Borrowings under the line of credit
accrue interest at prime plus 3/4% and are secured by inventory, receivables,
property and equipment, and the personal guarantee of the Company's primary
shareholder. The Company had $298,000 outstanding under the line of credit at
May 31, 1997. The rate in effect at May 31, 1997 was 9.5%. No such borrowings
were outstanding at May 31, 1996.
In addition, the Company opened a new $325,000 line of credit with a bank in
January 1997. Borrowings under the line of credit accrue interest at 8.675% and
are secured by the corporate bond described in Note 5. The Company had $320,000
outstanding under the line of credit at May 31, 1997.
<PAGE>
NOTE 7 - LEASES:
The Company leases its office facilities and certain equipment under operating
leases. These lease agreements generally include renewal options at varying
terms. The following is a summary of future minimum lease payments under
noncancellable operating leases with an initial or remaining term of one year or
more as of May 31, 1997 (in thousands):
Year ending May 31,
1998 $ 209
1999 156
2000 11
2001 11
2002 5
Thereafter -
---------
Total $ 392
=========
Total rent expense for the years ended May 31, 1997 and 1996 was approximately
$272,000 and $263,000, respectively.
The Company subleases a portion of its office facility under an operating lease
expiring in April of 1998. The minimum future rentals associated with this
noncancellable operating lease are $24,000 in the year ending May 31, 1998.
NOTE 8 - INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows (in
thousands):
Year ended May 31,
1997 1996
Current:
Federal $ (442) $ 498
State - 98
Foreign - 38
---------- ----------
(442) 634
---------- ----------
Deferred (109) 101
---------- ----------
$ (551) $ 735
========== ==========
Deferred income taxes arise from income and expense items which are recognized
in different periods for financial reporting and income tax reporting purposes.
Such temporary differences relate primarily to capitalized costs of internally
developed software, certain accrued employee benefits and other accrued expenses
and allowances.
The fiscal 1997 and 1996 income tax provision differs from income tax computed
at the current federal statutory rate due primarily to state income taxes and
the inclusion of foreign income taxes provided at differing tax rates for the
income of the Company's subsidiaries. Income (loss) before taxes included
approximately $23,000 in 1997 and ($129,000) in 1996 from the Company's foreign
subsidiaries.
<PAGE>
NOTE 9 - SUBSIDIARY STOCK COMPENSATION:
NCI, Inc. maintains a stock option plan for all full time employees meeting
certain eligibility requirements (the "Plan"). The per share option purchase
price is equal to the fair market value of the stock, as determined by an
independent evaluation, which cannot be, based upon an agreement with the former
shareholders, less than $1.00 per share. The options granted vest to employees
at a rate of 25% per year beginning two years from the grant date. Activity
under this Plan is as follows:
Weighted
Average
Shares Price/Share
Outstanding June 1, 1995 108,000 $ 1.28
Granted 32,000 $ 1.00
Exercised - -
Canceled (17,000) $ 1.19
--------
Outstanding May 31, 1996 123,000 $ 1.22
Granted 34,000 $ 1.00
Exercised - -
Canceled (25,000) $ 1.29
--------
Outstanding May 31, 1997 132,000 $ 1.15
========
The options outstanding at May 31, 1997 were at prices ranging from $1.00 to
$1.81 per share. Options exercisable at May 31, 1997 and May 31, 1996 were
66,000 and 47,000, respectively. Had compensation cost for the Company's fiscal
1997 and 1996 grants for stock-based compensation been determined consistent
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), the Company's proforma net income or loss
would not have been materially different. The fair value of each option grant
was estimated on the date of grant using the fair value method with the
following assumptions; expected dividend yield - 0%; risk free interest rate -
5.5% - 6.5%; expected option term - 5 years. The effects of this proforma
disclosure are not indicative of future amounts. SFAS 123 does not apply to the
Company's awards prior to fiscal 1996, and additional awards in future years are
anticipated.
In June 1995, NCI, Inc. amended its Articles of Incorporation to increase the
total number of authorized shares of common stock from ten million shares to
twenty million shares. The amendment established ten million shares of Class A
voting stock and ten million shares of Class B non-voting stock. During fiscal
1997 and 1996, NCI, Inc. granted 75,000 and 115,000 shares, respectively, of
Class B non-voting stock to certain employees of NCI, Inc. Related compensation
expense of $28,000 and $37,000, respectively, was recorded during fiscal 1997
and 1996 based on fair value as determined by NCI, Inc.'s board of directors.
These shares were immediately vested upon receipt.
The shares of NCI, Inc. held by employees have been reflected as a minority
interest in the accompanying consolidated financial statements of the Company.
<PAGE>
NOTE 10 - PROFIT SHARING PLAN:
NCI, Inc. maintains a 401(k) profit sharing plan for all eligible U.S.
employees. Salary deferral contributions by employees are matched at a rate of
30% of up to 6% of the employees' compensation. Additional discretionary
contributions can be made by NCI, Inc. NCI, Inc.'s contributions vest 20% per
year such that full vesting occurs after 6 years. NCI Inc.'s contributions to
the plan totaled $25,000 and $24,000 for the years ended May 31, 1997 and 1996,
respectively.
NOTE 11 - RELATED PARTIES
During fiscal 1996, the Company paid $30,000 to one of its board members for
multiple years of service as a board member and for professional services
rendered to the Company. Refer to Note 1 for other related party transactions.
NOTE 12 - LITIGATION
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, the ultimate outcome of such matters
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company or its subsidiaries.
<PAGE>
NCI Holdings, Inc.
and Subsidiaries
Condensed Consolidated
Financial Statements (Unaudited)
November 30, 1997 and 1996
<PAGE>
NCI Holdings, Inc.
Consolidated Balance Sheets (Unaudited)
(Amounts in thousands)
Assets
November 30,
1997
Current assets:
Cash and cash equivalents $ 742
Marketable securities -
Accounts receivable 488
Inventories 206
Income taxes receivable 58
Deferred income taxes 64
Prepaid expenses and other current assets 73
---------
Total current assets 1,631
Property and equipment, net 251
Internally developed software, net 109
---------
$ 1,991
=========
Liabilities and Shareholders' Deficit
Current liabilities:
Notes payable to former shareholders - current $ 3,113
Accounts payable 281
Accrued salaries and payroll taxes 51
Income taxes payable 21
Accrued expenses and other current liabilities 266
---------
Total current liabilities 3,732
Notes payable to former shareholders -
Deferred income taxes 125
---------
Total liabilities 3,857
---------
Minority interest in majority-owned subsidiary 125
---------
Shareholders' deficit:
Common stock -
Accumulated deficit (1,955)
Foreign currency translation adjustment (36)
---------
Total shareholders' deficit (1,991)
---------
$ 1,991
=========
The accompanying note is an integral part of these
consolidated financial statements.
<PAGE>
NCI Holdings, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(Amounts in thousands)
Six months ended November 30,
1997 1996
Net sales $ 2,098 $ 2,243
-------- --------
Costs and expenses:
Cost of products sold 571 625
Selling and marketing expenses 373 255
General and administrative expenses 1,147 1,630
-------- --------
Total costs and expenses 2,091 2,510
-------- --------
Income (loss) from operations 7 (267)
Interest and other income (expense), net (101) (22)
-------- --------
Loss before income taxes (94) (289)
Income tax benefit (63) (55)
-------- --------
Net loss $ (31) $ (234)
======== ========
The accompanying note is an integral part of these
consolidated financial statements.
<PAGE>
NCI Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Six months ended November 30,
1997 1996
Cash flows from operating activities:
Net loss $ (31) $ (234)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 124 354
Deferred income (24) (82)
Compensation expense on stock grants by
majority-owned subsidiary 35 -
(Increase) decrease in:
Accounts receivable 253 (469)
Inventories (5) 25
Income taxes receivable 331 -
Prepaid expenses and other current assets 148 10
Increase (decrease) in:
Accounts payable 41 (48)
Accrued salaries and payroll taxes (50) (32)
Accrued expenses and other current liabilities (70) 130
Income taxes payable 21 (282)
Other (4) (31)
----- -----
Net cash (used in) operating activities 769 (659)
----- -----
Cash flows from investing activities:
Capital expenditures (54) (153)
Internally developed software costs - (60)
Proceeds from sale of marketable securities 490 -
----- -----
Net cash provided by (used in) investing activities 436 (213)
----- -----
Cash flows from financing activities:
Repayment of short-term borrowings (649) -
Principal payments on notes to shareholders (24) (152)
----- -----
Net cash used in financing activity (673) (152)
----- -----
Net increase (decrease) in cash and cash equivalents 532 (1,024)
Cash and cash equivalents, beginning of year 210 1,512
----- -----
Cash and cash equivalents, end of year $ 742 $ 488
===== =====
The accompanying note is an integral part of these
consolidated financial statements.
<PAGE>
NCI Holdings, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of NCI Holdings, Inc.
and its majority-owned subsidiary, Network Controls International, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
The information contained in the financial statements is unaudited. These
condensed statements have been prepared in accordance with general guidelines
for interim reporting and do not include all the information and footnotes
required by generally accepted accounting principles. These interim financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the years ended May 31, 1997 and
1996. The statements reflect all adjustments which, in the opinion of
management, are necessary for a fair statement of the results for the interim
periods. All such adjustments are of a normal, recurring nature.
<PAGE>
The following unaudited pro forma consolidated statements of operations for the
year ended April 30, 1997, and for the six months ended October 31, 1997,
reflect the consolidated results of operations of IFS International, Inc. and
subsidiary ("IFS") as if the acquisition of NCI Holdings, Inc. and subsidiaries
("Holdings") had occurred on May 1, 1996.
The unaudited pro forma consolidated statements of operations are presented for
informational purposes only and do not purport to be indicative of the results
of operations that would have resulted if the acquisition had occurred on May 1,
1996, or which may result from future operations. Further, the statements are
based upon certain assumptions and preliminary estimates which are subject to
change.
<PAGE>
<TABLE>
IFS International, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended April 30, 1997
PRO FORMA
IFS HOLDINGS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Revenues:
Software license and installation
contract fees $2,548,000 $ 1,431,000 - $ 3,979,000
Hardware revenue 229,000 913,000 - 1,142,000
Service and maintenance revenue 956,000 1,623,000 - 2,579,000
--------------------------------------------------------------------
3,733,000 3,967,000 - 7,700,000
Cost of service and installation
contract fees 532,000 769,000 - 1,301,000
Cost of hardware revenue 182,000 238,000 - 420,000
Cost of service and maintenance
revenue 193,000 279,000 - 472,000
--------------------------------------------------------------------
Gross profit 2,826,000 2,681,000 - 5,507,000
--------------------------------------------------------------------
Operating expenses:
Research and development 515,000 1,687,000 - 2,202,000
Salaries 967,000 940,000 - 1,907,000
Other 34,000 176,000 78,000 a 288,000
Rent 120,000 247,000 - 367,000
Selling, general and administrative 808,000 1,026,000 - 1,834,000
--------------------------------------------------------------------
2,444,000 4,076,000 78,000 6,598,000
--------------------------------------------------------------------
Income (loss) from operations 382,000 (1,395,000) (78,000) (1,091,000)
Other income (expense):
Interest expense (85,000) (233,000) 138,000 b (180,000)
Interest income 91,000 43,000 (42,000) c 92,000
Other income (expense) (100,000) 53,000 - (47,000)
--------------------------------------------------------------------
Income (loss) before income taxes 288,000 (1,532,000) 18,000 (1,226,000)
Income tax benefit - (551,000) - (551,000)
--------------------------------------------------------------------
Net income (loss) before minority interest 288,000 (981,000) 18,000 (675,000)
Minority interest in net loss of
majority-owned subsidiary - 23,000 - 23,000
--------------------------------------------------------------------
Net income (loss) $ 288,000 $ (958,000) $ 18,000 $ (652,000)
====================================================================
--------------------------------------------------------------------
Net income (loss) per common share $ 0.18 - - $ (.38)
--------------------------------------------------------------------
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
IFS International, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
For the Six months Ended October 31, 1997
PRO FORMA
IFS HOLDINGS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Revenues:
Software license and installation
contract fees $1,329,000 $383,000 - $1,712,000
Hardware revenue - 691,000 - 691,000
Service and maintenance revenue 1,059,000 1,024,000 - 2,083,000
------------------------------------------------------------------------
2,388,000 2,098,000 - 4,486,000
Cost of service and installation
contract fees 230,000 120,000 - 350,000
Cost of hardware revenue - 195,000 - 195,000
Cost of service and maintenance
revenue 267,000 256,000 - 523,000
------------------------------------------------------------------------
Gross profit 1,891,000 1,527,000 - 3,418,000
------------------------------------------------------------------------
Operating expenses:
Research and development 365,000 502,000 - 867,000
Salaries 599,000 451,000 - 1,050,000
Other 34,000 73,000 39,000 a 146,000
Rent 53,000 121,000 - 174,000
Selling, general and administrative 759,000 373,000 - 1,132,000
------------------------------------------------------------------------
1,810,000 1,520,000 39,000 3,369,000
------------------------------------------------------------------------
Income from operations 81,000 7,000 (39,000) 49,000
Other income (expense):
Interest expense (15,000) (117,000) 69,000 b (63,000)
Interest income 120,000 19,000 (21,000) c 118,000
Other income (expense) 57,000 (3,000) - 54,000
------------------------------------------------------------------------
Income (loss) before income taxes 243,000 (94,000) 9,000 158,000
Income tax benefit - (63,000) - (63,000)
------------------------------------------------------------------------
Net income (loss) $243,000 $(31,000) $9,000 $221,000
========================================================================
------------------------------------------------------------------------
Net income per common share $ 0.08 - - $.07
------------------------------------------------------------------------
The accompanying notes are an integral part of these pro forma
consolidated financial statements.
</TABLE>
<PAGE>
IFS International, Inc. and Subsidiaries
Notes to Pro Forma Consolidated Statements of Operations (Unaudited)
Note 1. Acquisition
On January 30, 1998, IFS International, Inc. ("IFS") acquired 100% of the common
stock of NCI Holdings, Inc. and subsidiaries ("Holdings") pursuant to a Plan and
Merger Agreement ("Merger Agreement"). Holdings owns approximately 94% of the
issued and outstanding shares of capital stock of Network Controls
International, Inc. ("NCI"). NCI develops and markets software products for bank
automation. Pursuant to the terms of the Merger Agreement, the outstanding
shares of capital stock of Holdings were converted into 87,094 shares of Series
A Convertible Preferred Stock of IFS valued at approximately $621,000 (the "Base
Consideration"). The Base Consideration may be reduced if the audited
stockholder's equity of Holdings is less than $1,250,000 as of January 30, 1998.
Additional shares of Preferred Stock may be issued if the consolidated pre-tax
profit of NCI exceeds certain levels during each of the years ending April 30,
1999, 2000 and 2001 and during the three years ending April 30, 2001.
Immediately prior to the merger, IFS advanced $840,000 to Holdings, which was
utilized to satisfy existing indebtedness of Holdings as required by the Merger
Agreement.
The total purchase cost for the acquisition approximated $1,600,000 including
direct acquisition costs. The excess of acquisition costs over the estimated
fair value of net assets acquired was approximately $620,000.
Assets and liabilities of Holdings have been accounted for at estimated fair
market value, which approximated carrying value, in accordance with the purchase
method of accounting. In allocating purchase price, the assets acquired and
liabilities assumed in connection with Holdings have been initially assigned and
recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available. As a result, the financial information included in the pro
forma financial statements is subject to adjustment as subsequent revisions in
estimates of fair value, if any, are necessary. The actual operating results of
Holdings will be included in IFS's results of operations beginning February 1,
1998.
Note 2. Pro Forma Adjustments
The following pro forma adjustments and management assumptions are reflected in
the pro forma statements of operations:
a) Adjustment to record amortization of intangible assets arising from
acquisition costs in excess of net assets acquired.
b) Reflects the reduction in interest expense assuming the settlement
of Holdings indebtedness had occurred on May 1, 1996 (see Note 1 to Holdings
Consolidated Financial Statements, May 31, 1997 and 1996).
c) Adjustment to reflect interest costs on $840,000 advanced to
Holdings immediately prior to the acquisition.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: April 10, 1998 IFS INTERNATIONAL INC.
(registrant)
By: ___/s/ David L. Hodge____________
David L. Hodge, Chief Executive Officer
