U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 1-12687
IFS INTERNATIONAL HOLDINGS, INC.
(Name of small business issuer in its charter)
Delaware 13-3393646
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Rensselaer Technology Park, 300 Jordan Rd., Troy, NY 12180
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (518)283-7900
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.001 per share Boston Stock Exchange
Redeemable Stock Purchase Warrants Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Title of each class Common Stock, par value $.001 per share Redeemable Stock
Purchase Warrants
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____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $13,006,270
The aggregate market value of the Common Stock held by non-affiliates on July
21, 2000 was approximately $6,803,492.
As of July 21, 2000 there were 4,066,491 shares of IFS International Holdings,
Inc. Common Stock outstanding.
<PAGE>
PART I
This report on Form 10-KSB 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 Plan of Operations."
ITEM 1. Business
Developments
IFS International Holdings, Inc., a Delaware corporation, is engaged in the
business of developing, marketing and supporting software products for
electronic funds transfer, retail, e-commerce and retail banking markets. These
markets are served primarily through the Company's two wholly owned
subsidiaries, IFS (IFS International Inc., a New York corporation)and NCI
(Network Controls International, Inc., a North Carolina corporation).
We were incorporated in Delaware in September 1986 under the name Wellsway
Ventures, Inc. Wellsway Ventures, Inc. subsequently changed its name to IFS
International, Inc. and has again changed its name to IFS International
Holdings, Inc. Our principal offices are located at Rensselaer Technology Park,
300 Jordan Road, Troy, New York 12180 and our telephone number is (518)
283-7900.
On January 30, 1998, we acquired NCI Holdings, Inc. NCI Holdings, Inc. owned
approximately 94% of the issued and outstanding shares of capital stock of
Network Controls International, Inc., which develops and markets software
products for bank automation. On June 1, 1998 Network Controls International,
Inc. was merged into NCI Holdings, Inc. and NCI Holdings, Inc. subsequently
changed its name to Network Controls International, Inc. In July 1998, we
acquired the remaining outstanding shares of capital stock of NCI for cash and
stock valued at approximately $35,000.
On December 6th 1999, IFS entered into a Stock Purchase Agreement to acquire all
of the outstanding shares of Global Insight Group LTD, a UK corporation and its
three operating subsidiaries. The consideration is payable entirely in shares of
our common stock. Global Insight Group principal's received three shares of our
common stock at closing, with substantially the entire consideration to be
determined based on the future financial performance of the companies acquired.
For the calendar year 2000, we are required to issue an additional number of
shares equal to 4 times net income or as defined in the agreement. For years
2001 and 2002 we are required to issue a number of shares having market value
equal to 50% of net income which is to be reduced to 30% if the value of the
consideration shares exceeds $1.2 million.
On March 16, 1999, our stockholders approved an amendment to the terms of the
Series A convertible preferred stock pursuant to which each share of preferred
stock was (i) convertible into 1.1 shares of common stock instead of one share
of common stock and (ii) automatically converted into such adjusted conversion
number of shares of common stock on April 1, 1999. Therefore, the then
outstanding shares of the Series A preferred stock became 1.1 shares of common
stock and each redeemable Series A convertible preferred stock purchase warrant
is now exercisable into 1.1 shares of common stock at a then exercise price of
$6.25 (or approximately $5.68 per share) until February 21, 2002.
We have concluded several private placements as referenced in item 6, liquidity
and capital resources.
Introduction to Business
TPII is IFS' family of open architecture software products for payment card
ATM/EFTPOS terminal management, payment card authorization, domestic and
international transaction switching and management information. The product
supports magnetic stripe, Chip and Stored Value Card reloads, and utilizes
Oracle's RDBMS technology to meet customers' business requirements.
TP-CMS is IFS' newest addition to our product portfolio. TP-CMS has been
installed at its first location and is being marketed worldwide. The product is
an open architecture payment card management solution for credit, debit,
electronic purse cards and biometric identification. Incorporating the latest
technologies available for information management, TP-CMS enables IFS to provide
a complete migration of a bank's payment card systems to state-of-the-art
solutions. Presently, there are several financial institutions that have
contracted to have TP-CMS implemented in conjunction with TPII.
An EFT (Electronic Funds Transfer) system of a bank or other financial
institution permits the processing of transactions involving credit cards and
debit cards (e.g., ATM cards). An EFT System typically consists of one or more
of the following facilities in various configurations: automatic teller machines
, point of sale terminals, a host computer of the financial institution and
regional, national and international networks, such as MasterCard/CIRRUS, NYCE,
MAC, EUROPAY or Visa/PLUS. TPII software products primarily route and authorize
the processing of transactions through an EFT System.
TPII software is offered in separate modules which perform different functions,
including (i) interfacing with ATMs (Automated Teller Machines), POS (Point of
Sale) terminals, a financial institution's host computer and financial networks,
(ii) updating credit and debit card information, (iii) providing stand-in
authorization for transactions when the financial institution's host computer is
not operating, (iv) computing fees for processed transactions (v) generating
reports, and (vi) processing smart card transactions. The TPII software products
are typically installed at the financial institution's main processing facility.
TPII software is also capable of managing EFT Systems that involve the "loading"
of value on smart cards. A smart card is a plastic card with an electronic chip
that acts as a small computer which can enable the holder to "load" a fixed
amount of purchasing power or cash equivalent on the card as authorized.
Additionally TPII has been designed to be totally extendible with regard to the
devices it can support. This has been accomplished by insulating the CORE
business logic from the device specific protocol. Examples of this include
introduction and support of home banking and personal ATM's.
IFS principally derives its revenues from the licensing of its family of
software products. A substantial portion of such revenues are generated by
licensing through or to computer manufacturers, which incorporate TPII and
TP-CMS software products into a turnkey system installed at a financial
institution. The preparation of functional specifications, customization and
installation of TPII and TP-CMS software products and the training by IFS of the
financial institution's personnel in the use of the 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. IFS generally receives payment of
a substantial portion of the license fee prior to the final acceptance by the
customer. IFS provides its customers with maintenance services for its software
products for a separate fee. IFS also offers other support services, such as
additional training of customer personnel, project management and consulting,
for additional consideration.
NCI provides bank platform automation and networking solutions to large
financial institutions worldwide. NCI released its newest product line, NCI
Business Centre (TM), in August 1999 with pilot implementations at two US banks.
NCI Business Centre (TM) is an all web and browser-based solution that provides
a single application and technology to automate business functions across any
business channel in a bank, namely CRM, teller, platform sales and service, call
center, and Internet banking. Cost of ownership, reusability of business
functions across multiple channels, and a single technology for both Intranet
and Internet based networks are just some of the advantages customers achieve
with NCI's innovative application solution, combined with the power of the
Microsoft Windows DNA-fs technologies (Distributed Internet Architecture for
Financial Services). Since the products initial release, NCI has developed a
comprehensive, customer relationship management business channel offering, that
is scheduled for production availability in November 2000.
NCI is headquartered in Charlotte, North Carolina.
NCI GmbH, a wholly owned subsidiary of NCI, based in Germany, was established in
1988 and operates primarily as a reseller of NCI products throughout Germany,
Switzerland, Italy, and Austria. NCI Ltd., a wholly owned subsidiary of NCI,
based in London, was established in January 1990. With a business focus on
systems integration, money brokering consulting, software product development,
and software product integration, NCI Ltd. provides solutions to customers
across Europe. NCI Ltd. recently expanded its business with its money brokering
customers to offer services in other major financial centers by opening an
operation in New York City called NCI America, Inc.
As a result of the acquisition of Global Insight Group, Ltd., we now provide a
business consulting division as well as a specialized training division offering
both in-house and external training courses to the financial industry.
BUSINESS OF THE COMPANY
Software / Hardware Products
TPII software products are EFT Systems managers, primarily acting to facilitate
the processing of debit card or credit card transactions or the "loading" of
value to smart cards. TPII products primarily route and authorize the processing
of transactions through an EFT system, thereby enabling the system to interface
or communicate with other systems and networks, as well as to provide other
functions. Such transactions involve several steps managed by an EFT system.
First, the bank customer or a retailer inserts the customer's debit, credit or
smart card issued by the bank into an ATM, POS terminal or smart card "load"
device thereby requiring authorization of a transaction. The request is routed
to a network or bank computer for authorization after performing several
pre-authorization checks typically deferred by the institution; the
authorization message is then returned to the terminal at which the transaction
was originated and the transaction is then completed. The whole process is
generally accomplished within thirty seconds or less. Most EFT systems operate
twenty-four hours a day, seven days a week.
TPII software products generally can be configured to (i) act as a front-end to
a financial institution's host computer, (ii) perform as a switch connected to
multiple financial institutions' host computers and networks or (iii) act as an
authorization-only system for financial transactions. As a front-end system,
TPII software products can intercept transactions from a financial institution's
terminals and route them to the institution's host computer. This eliminates
expenses that may be charged by data processing facilities or networks. As a
switch, TPII software products can route transactions between multiple host
computers of financial institutions for authorization of transactions. In this
environment, ATMs, POS terminals and smart card "loading" devices of a financial
institution are on-line to such financial institution's host computer and such
host computer is on-line to the TPII software. If such financial institution's
host computer receives a transaction request from an ATM, POS terminal or smart
card "load device" requiring an authorization from another financial institution
which is part of the network, then the request is transmitted to the network
utilizing TPII software and TPII software routes the request to the proper
financial institution's host computer for authorization, which then transmits
the authorization response back to the network. TPII software then routes the
authorization response to the original requesting financial institution. In this
environment, TPII software can also authorize the transaction if the financial
institution from which the authorization is requested is unavailable.
As an authorization-only system, TPII software products receive authorization
requests from various network switches. In this environment, TPII software is
installed at the financial institution's main office, but is not interfaced with
any of that institution's ATMs, POS terminals or smart card load devices.
Instead, it will authorize transactions initiated by credit cards, debit cards
and/or smart cards issued by the institution to its customers when the customers
utilize terminals and devices owned by other financial institutions. In this
environment, a transaction request originating at another financial
institution's ATM, POS terminal or smart card "loading" device by the customer
is transmitted to a network switch and the network switch will route the
transaction request to TPII software. TPII software will then route the
transaction to the host computer of the financial institution utilizing TPII
software for authorization. If such institution's host computer is unavailable,
then TPII software will authorize the transaction and transmit the response back
to the proper network switch.
TPII software products can be installed at the financial institution's main
office, a branch or at a data processing facility. TPII software products permit
7-day, 24-hour remote banking by storing customer balance files and
communicating with the customers' in-house computer(s) or data center(s) on a
continuous (real time) or batch (delayed) basis with no changes required to
existing host application software. TPII software products are capable of
sending or receiving messages from ATMs, POS terminals, networks and host
computers. Such products may authorize transactions without the necessity of
interfacing with the host computer and can periodically input the transactions
into the host computer.
TP-CMS is IFS' card management product. TP-CMS modules extend the existing
functionality of the TPII family of products to encompass all aspects of payment
card processing, including multi-function smart cards.
TP-CMS was created in response to demand from the banking industry to create a
user-friendly, card management platform that conforms to industry standard
components and follows the open systems and scalable technology approach of the
existing TPII transaction management system. The banking community is driving a
need for technological solutions which address simplified cardholder application
processing, card production, card management, account management, customer
service and transaction settlement and reporting. Conversely, there exists an
even more prevalent need to provide efficient merchant application processing,
merchant account management, merchant service, and settlement and reporting of
point of sale transactions. TP-CMS has been designed to specifically address all
of these needs.
As a software company involved in the implementation of smart card technologies
in association with VISA, Mastercard and Europay, we have specifically designed
TP-CMS with extensive capabilities for the management of multi-function smart
card management programs.
Like TPII, TP-CMS fully utilizes industry standard components as its fundamental
building blocks and is designed to provide a seamless addition to any IT
topology. TP-CMS utilizes the Oracle relational database to provide a graphical
user interface and extensive capabilities in the area of report generation.
Operating on the widest range of UNIX hardware platforms and supporting the
mainstream communication protocols, including TCP/IP and X.25, TP-CMS combines
7X24 availability with a simple operation interface. TP-CMS also supports both
multi-currency and multi-bank environments.
TP-CMS comprises two main components: TP-CMS issuer and TP-CMS acquirer. TP-CMS
issuer provides all the facilities and functions needed to deliver card services
to the most demanding of customers. The issuer modules provide support for all
types of card products, including Credit, Debit, Corporate, Purchase, Affinity
and Loyalty, and manages the application process, issues cards - magnetic stripe
or chip, and generates PIN in a secure manner using standard hardware security
modules. TP-CMS acquirer provides all the facilities and functions needed to
manage merchants - from application processing, opening of the merchant's
account through to the calculation of commissions and settlement. TP-CMS
acquirer has been designed as a multi-acquirer system and supports several
merchant levels to provide a comprehensive and flexible reporting capability.
NCI entered the application software market in 1989 with the NCI BANC-Mgr(TM)
product, a full featured bank teller and platform sales and support automation
system. The solution allows a bank to automate their branch in supporting
customers at teller lines and in new product sales and service with a powerful
PC based application solution. In 1993, NCI introduced NCI ClientServer Mgr(TM)
as an integral part of the configuration of current solutions. NCI ClientServer
Mgr(TM) is a middleware support solution designed to manage all of the computing
resources on a local area network in conjunction with an application solution.
The product is marketed and sold separately as an alternative for the IBM LANDP
middleware support product. NCI is marketing its new flagship product called NCI
Business Centre (TM), a browser-based enterprise retail delivery solution that
is designed to automate all delivery channels in an organization: customer
relationship management, platform, teller, call center, and virtual banking,
under a single technology.
NCI's Wizard(TM), XOVER(TM), ThinClient(TM) and BANC-Mgr(TM) solutions provide
tactical solutions to financial institutions by allowing for a low cost
migration strategy from the legacy IBM 4700 environment to a PC based
environment.
Licensing, Services and Training
IFS licenses its TPII and TP-CMS software products pursuant to a non-exclusive
perpetual licensing agreement. Under these agreements, the customer receives the
non-exclusive right to use one copy of the software product on designated
equipment upon payment of a one-time fixed license fee. IFS trains the financial
institution's personnel in the use of the software products as part of the
license fee.
NCI licenses its software products pursuant to a end user licensing agreement.
Under these agreements, the customer receives the right to use the software
product on designated work stations or in designated locations upon payment of
agreed upon fees. Depending upon the type of license purchased, the software
product may be installed at several different locations or it may be limited to
specified number of work stations. NCI will train the financial institution's
personnel in the use of its software products upon request, for an additional
fee .
The TPII and TP-CMS software products generally involve customization to enable
the software to interface with a customer's unique host software and to meet the
particular needs of the customer. For example, each financial institution has
different software operating various ATMs or POS terminals, as well as bank and
Network computers, requiring modification to configure with the IFS' TPII and
TP-CMS software. Licenses for TPII and TP-CMS software products generally begin
at $180,000 and average approximately $300,000 per contract depending upon the
modules selected. When sold together, TPII and TP-CMS contracts have averaged
approximately $750,000. Payments under these types of contracts are usually made
in several stages commencing with signing of the license agreement and then as
certain milestones are completed.
IFS and NCI generally warrant their software products for 90 days. Subsequent to
the warranty period of the software products, they provide maintenance services
with respect to such software products. Yearly service fees are typically 15% of
the original software license fee, subject to annual increases based on changes
in the consumer price index in the United States, and are generally payable
annually in advance. During the period of service, the customer receives any new
program releases, which contain functional enhancements and documentation
updates that we deem necessary. Hardware products are generally warranted for
one year.
For an additional fee, IFS will provide additional training of customer
personnel. Depending on the complexity of the customer's system, training can
take from 2 days to 4 weeks.
Oracle Corporation has granted IFS, in exchange for the payment of royalties to
Oracle, a nonexclusive license to use, and grant sublicenses with the respect
to, the Oracle relational database software which is incorporated into the TPII
software products. NCI participates in Oracle Partner Program with the NCI
Business Centre (TM) product.
There is little customization involved with NCI's legacy software products.
Licenses for NCI software products can vary in price significantly dependent
upon the type of license purchased. An enterprise license can be for several
hundred thousands of dollars versus a significantly lesser amount for a single
user license.
Special Development Contracts
IFS has acquired a 42% stake in Electronic Transactions Network Ltd. (ETN) a
processing center in Bangladesh which has not begun operations. ETN has also
licensed IFS International's TPII software to manage its Automated Teller
Machines and Point of Sale devices and to act as a switch. We also hold two
seats on the ETN Board. ETN was formed to provide ATM and POS support to the
Bangladesh financial community and has the full support of the country's
authorities. ETN will process transactions for its member banks, which currently
include the Hong Kong and Shanghai Bank, and will also provide bill paying
services via ATMs for the Bangladesh Telephone Company and other utilities.
IFS performs specialized software modifications or enhancements to its software
products for its customers. IFS generally receives a fee for the modification
and has all proprietary rights to the software developed and may then include
the modification in its standard software products. IFS finds these contracts to
be beneficial because of the resulting enhancements to its base software
products.
NCI may perform specific development contracts for customers. NCI typically
retains ownership of the final product. The customer is billed on a time and
material or on a fixed fee basis.
Customers And Marketing
TPII software products have been installed in EFT Systems of banks and other
financial institutions located primarily in emerging countries and former
Eastern Bloc nations which operate, or are members of,
geographically-distributed EFT systems or networks servicing large volumes of
transactions.
In 1994, IFS entered into a strategic alliance with Compaq Computer Corporation,
formerly known as Digital Equipment International BV, pursuant to which Compaq
agreed to market on a nonexclusive basis TPII software products in connection
with Compaq's world-wide sale of its computers for EFT systems. In connection
with Compaq's sale of computers for EFT Systems, Compaq, rather than the
financial institutions, is generally the licensee of IFS' TPII software
products. For the fiscal years ended April 30, 2000 and 1999, approximately 11%
and 7%, respectively, of our total revenues were derived pursuant to this
relationship. We are not currently as dependent upon this relationship as we
were in prior years and would not be adversely affected by the loss of such
relationship.
IFS has recently entered into alliances with other computer manufacturers.
In May 2000, IFS has signed a independent application software provider
co-marketing agreement with Stratus Computer. IFS and Stratus have agreed to
leverage their respective global customer bases to effectively cross-market both
IFS' TPII and TP-CMS products and Stratus' mission critical computing platforms
to the worldwide financial services community. By aligning product marketing
efforts, the two companies bring a proven fault tolerant solution to financial
services organizations supporting round-the-clock, compute-intensive EFT
transactions.
We have also introduced the "e-chip" program specially designed to help Visa
member banks introduce chip products. The "e-chip" program offers Visa members
the ability to migrate to a chip based solution with minimum risk through the
implementation of open architecture products, TPII and TP-CMS. The IFS "e-chip"
solution has the ability to migrate to chip from initial planning and
consultancy through to implementation of solutions. IFS in conjunction with Visa
International, has devised the program in response to demand from Visa member
banks for a simplified and cost effective method of integrating chip products
into their payment card solutions. We have a range of product solutions for both
existing and new customers, including those wishing to migrate from an older
technology base. IFS' TPII product has been installed at Visa Processing Centers
in the UK, Japan and the USA providing the Visa Cash reload functionality for
Visa members throughout those regions. IFS has also delivered Visa Smart
Debit/Credit functionality to individual financial institutions.
IFS has further developed its worldwide alliance with Sun Microsystems, Inc by
working together in the development of leading edge solutions in the EFT, POS
and payments management arena. They will jointly offer the technologies and
experience to help banks, financial institutions and financial service customers
develop, deploy, manage and support their critical retail payments
infrastructure.
In September 1999, IFS entered into a software distribution agreement with ICL
to distribute our TPII and TP-CMS software products. ICL is a global IT services
company. It designs, builds and operates information systems and services for
customers in the retail, finance, government, telecoms, utilities and travel
markets. The company has operations in over 40 countries and employs over 22,500
people. IFS has recently worked together with ICL in securing a major contract
at a financial institution in Zimbabwe. ICL and IFS have also worked together in
Europe and the USA, and recently co-operated on major sales involving
ICL/Fujitsu Automatic Teller Machines (ATMs) and Point of Sale (POS) devices.
ICL has now signed a re-licensing agreement with IFS for the TPII and TP-CMS
products. Pursuant to this agreement, ICL, will market IFS' products to existing
and new customers. For the fiscal year ended April 30, 2000, approximately 2% of
our revenues were derived pursuant to this relationship.
In 1998, IFS entered into a re-licensing agreement with Banking Production
Center, which is located in the Russian Federation. IFS has agreed to allow
Banking Production Center to market our TPII products in the Russian Federation,
Commonwealth of Independent States and the "Stans" including Kazhakstan. In
1999, IFS entered into a separate re-licensing agreement, also with Banking
Production Center. This agreement allows Banking Production Center to market our
TP-CMS product in the Russian Federation. For the fiscal year ended April 30,
2000, approximately 5% of our total revenues were derived pursuant to these
relationships. IFS expects revenues, as a result of the relationships to
continue to grow in the future and therefore, the loss of these relationships
could have an adverse effect on IFS.
IFS has also entered into a number of other distributor and alliance
relationships within international and regional organizations. IFS expects
revenue to be generated from these sources in the future.
IFS' software product information is disseminated by its partners through
in-house newsletters and other promotional tools. Products are also advertised,
to a limited extent, in user publications and at various trade shows.
IFS markets our products directly through a sales team directed by Gary Larkin,
our Senior Vice President of Sales and Business Development. IFS also markets
its products through a growing number of sales agents and distributors.
Presently, the sales and marketing staff comprises 16% of IFS' total staff, as
compared to 17% at April 30, 1999 Mr. Larkin is located in California. Simon J.
Theobald directed our marketing and sales efforts through April 30, 2000.
James Ling, who was formerly NCI's regional sales manager for Asia/Pacific now
dedicates 100% of his time to market IFS products in the same region. In August
1999, IFS completed the registration process in order to do business in
Australia and now has a branch office there.
NCI markets its products primarily through Per Olof Ezelius, its President and
CEO together with Ken Russell, NCI Vice President of North American Operations,
Drew Lamparello, Vice President of Product Management and Marketing, Garry
Benson, Managing Director of NCI Ltd., and Hartmuth Nitze, Managing Director of
NCI GmbH. Mr. Ezelius, Mr. Russell, and Mr. Lamparello are located at NCI's
headquarters in Charlotte, NC.,
NCI also markets its products through several regional re-sellers worldwide.
Backlog and Deferred Maintenance Service Revenues
Backlog
As of April 30, 2000 and 1999, we had backlog of approximately $1,741,000 and
$1,499,000 respectively, in software installation contract fees and hardware
orders. Backlog was approximately $1,288,000 and $453,000 for IFS and NCI
respectively at April 30, 2000. The increase in backlog is primarily a result of
an increase in NCI orders at April 30, 2000. We include in our backlog all
license and service fees pursuant to executed orders or license agreements not
included as revenues under the percentage of completion method to the extent
that we contemplate recognition of the related revenues within one year. There
can be no assurance that the contracts included in backlog will actually
generate the specified revenues or that the actual revenues will be generated
within the one year period.
Deferred Maintenance Service Revenues
Deferred maintenance service revenues decreased by approximately $53,000 as of
April 30, 2000 compared to April 30, 1999. We had deferred maintenance service
revenues of approximately $648,000 and $701,000 at April 30, 2000 and April 30,
1999, respectively. Deferred maintenance was approximately $448,000 and $200,000
for IFS and NCI respectively at April 30, 2000 and approximately $567,000 and
$134,000 for IFS and NCI respectively at April 30, 1999. The decrease in
deferred revenue related to maintenance services is primarily a result of some
customers being billed in quarterly installments, rather than making annual
payments as they did in previous years.
There are several systems which are not yet installed, therefore have not yet
begun maintenance. These customers are expected to begin maintenance in the
foreseeable future. Therefore as more IFS software products are installed and
NCI software licenses are sold, maintenance revenues are expected to increase.
Competition
The development and marketing of software for financial institutions is highly
competitive. Many of our competitors have greater financial resources than we
do. In addition, many of the larger financial institutions have developed their
own systems internally. However, we believe our current software products will
continue to be competitive based on cost and technology.
IFS software products face strong competition from proprietary (legacy) and
UNIX-based software. In the international EFT market, well established worldwide
competition includes Transaction Systems Architects, Inc., Deluxe Data Systems,
Inc., SDM International, Inc., S2 Systems, Inc., a subsidiary of Stratus, SLM
Software, Inc., Consolidated Software, Mosaic's Position and Oasis Systems,
whose products run on Tandem or Stratus fault-tolerant computers with
proprietary operating systems or on IBM host or industry standard computers with
UNIX operating systems.
We are aware of only a limited number of companies primarily marketing
UNIX-based products for EFT Systems. We are also aware that S2 Systems, Inc. has
developed its own UNIX-based transaction processing package and Transaction
Systems Architects, Inc. has begun to market a UNIX-based product, TRANS 24.
There are numerous companies that offer EFT outsourcing services. These third
party providers primarily drive ATMs belonging to financial institutions. A
significant portion of all of ATM transactions in the USA are processed by these
third party providers. The principal companies in this area are: Electronic Data
Systems (EDS), Deluxe Data Corporation, Affiliated Computer Services, Inc.,
Fiserv, Inc., Money Access Services (MAC), Information Services and First Data
Corporation.
The retail POS market is rapidly growing and numerous participants are
positioning themselves to capture various segments of the market. Most of these
companies are well established, have greater financial resources than us and an
established customer base. There can be no assurance that we can make any
inroads in this highly competitive marketplace or that its efforts will be
successful.
In the smart card market, other financial institutions and companies, including
certain institutions and companies which have greater resources than ours, have
developed and are developing their own smart card technology. We are unable to
predict which technology, if any, will become the industry standard.
NCI has limited direct competition with most of its IBM 4700 migration products
as we are unaware of any equivalent products that are offered by industry
suppliers. There are several competitors for NCI's 3270 Coax solution and IBM's
LANDP product is a competitor for NCI's middleware product NCI ClientServer-Mgr.
The NCI Business Centre (TM) enterprise retail delivery solution competes with
the major branch automation solution providers, such as IBM with it's CT
product, ARGO Data, Siebel with its CRM solutions, NCR with it's SellStation
product and Broadway and Seymour with it's TouchPoint product. NCI also
experiences competition with core banking solutions that include a branch and
teller system integrated with their product, like Alltel, OSI, FISERV, Jack
Henry and Associates, and Unisys. Most of its competition comes from competitors
with substantial financial resources who possess greater abilities to market
their products and withstand general economic and sales volatility.
Although all of the competitors of the NCI Business Centre (TM) Product offer
similar business functions, NCI does not believe that competitors have an
enterprise wide, browser-based solution that allows customers to re-use common
business objects across multiple delivery channels through the use of the same
technology platform. NCI provides seamless financial device integration and
legacy host system access as part of our core product offering. Competitors do
not traditionally provide this complete end-to-end solution and require
additional vendor products to provide a fully integrated application solution.
Software Development And Future Products
Competition, technological advances, changes in customer requirements,
deregulation and other regulatory changes affecting financial institutions
necessitate an ongoing enhancement and development effort to meet the
comprehensive processing needs of banks and other financial institutions. As a
result, we will continue ongoing expenditures for enhancement of our existing
software products that take advantage of technological advances and respond to
the increasingly sophisticated requirements of our customers. Enhancements to
existing customers are delivered as add-ons to the licensing agreements for
additional license fees or as new license agreements.
IFS will have several research and development projects in progress during the
next fiscal year. This includes the next release of TP-CMS, as well as full
common electronic purse support. This will include funds pool management. IFS
also plans to release a new product called PosPay.
IFS has formed a global development and marketing partnership with Australian
E-commerce payment gateway company, DCS (Data Card Systems Limited). IFS, in
conjunction with DCS, will develop a fully secure, end-to-end Internet payment
solution system called PosPay, which will be available to clients around the
world. PosPay is being developed by IFS and DCS for use in electronic payments
to the banking system via the Internet. PosPay is being developed to handle high
volume e-commerce transactions and also to provide banking standard security via
the Internet.
We believe that our software products can be adapted for Internet/home banking.
We are currently testing a home banking system utilizing the NCI Business Centre
(TM) product and TPII software.
IFS will also attempt to market additional services to the EFT industry. New
products may be developed internally or obtained through acquisitions.
Research and development expenses for the fiscal year ended April 30, 2000 were
approximately $1,325,000 as compared to approximately $1,945,000 for the fiscal
year ended April 30, 1999. Research and development expenses for the fiscal year
ended April 30, 2000 were approximately $771,000 and $554,000 for IFS and NCI
respectively.
Proprietary Rights
We do not own any patents or registered copyrights. We rely on a combination of
trade secret and copyright laws, nondisclosure and other contractual provisions
and technical measures to protect our proprietary rights. We distribute our
software products under software license agreements which typically grant
customers nonexclusive licenses to use the products. Use of the software
products is usually restricted to designated computers at specified locations
and is subject to terms and conditions prohibiting unauthorized reproduction or
transfer of the software products. We also seek to protect the source code of
our software products as a trade secret. We also obtain confidentiality
agreements from our employees, customers and others who have access to our
software products. Despite these precautions, there can be no assurance that
misappropriation of our software products and technology will not occur.
IFS has its name and logo registered with the U.S. Patent and Trademark Office.
IFS also has two registrations pending at the Trademark Office. One for each of
its products, TPII and TP-CMS.
Although we believe that our intellectual property rights do not infringe upon
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against us. Further, there can be no
assurance that intellectual property protection will be available for our
products in certain foreign countries.
Regulations
Our applications are utilized primarily by financial institutions. Such
institutions are subject to state, federal or foreign regulation. Hence, it is
possible that banking regulations may have a material effect on our operations.
In addition, the software products are subject to export regulations, including
regulations relating to encrypted software, which require prior approval of the
licensing of the software to customers located in foreign countries. To date,
however, we have not experienced problems complying with these regulations.
Employees
As of April 30, 2000, we had ninety-five employees, eighty-eight of whom were
full time. Ten employees comprise the direct sales force; fifty-eight employees
are involved in product development, technical support and services and
twenty-seven employees are involved in office administration. We intend to hire
additional sales staff in the next fiscal year. Additionally, we engage various
consultants from time to time to assist with product development and
enhancements to existing products.
We believe we can continue to attract skilled personnel for all areas and have
been able to keep turnover to a minimum. However, the competition to employ
skillful professionals is intense. None of the employees are covered by a
collective bargaining agreement and there have been no work stoppages.
Management believes that relations with its employees are good.
ITEM 2. Properties
In March 1997, IFS purchased a ground lease expiring in May 2083 and a building
with approximately 35,000 square feet of space located at 300 Jordan Road,
Rensselaer Technology Park, Troy, New York. The Ground lease is subject to a
mortgage in the amount of $2,081,442.
The Town of North Greenbush Industrial Development Agency passed a resolution on
March 25, 1997 authorizing the IDA to provide certain financial assistance to
IFS upon the completion of certain events, including financing of the property
and its renovation. Such Financial Assistance was in the form of (i) a New York
State sales tax abatement, (ii) a mortgage recording tax exemption and (iii)
graduated payments by IFS in lieu of real property taxes with respect to such
property.
Our European office is leased and is located at Salamander Quay (West), Park
Lane, Harefield, Uxbridge, Middlesex, UB9 6NZ, England. This office consists of
approximately 890 square feet. The term of this lease expires in June 2005. The
annual base rental amount is approximately $28,000.
NCI's headquarters, which consist of approximately 13,500 square feet of leased
office space, is located at Nine Woodlawn Green, Suite 120, Charlotte, N.C.
28217. The term of this lease expires on February 28, 2004. The Company has the
option to renew the lease at a mutually agreeable rental. The current annual
base rental amount is approximately $175,000. NCI subsidiaries also lease space
on a short term basis.
ITEM 3. Legal Proceedings
On June 29, 2000 MDB Capital Group LLC filed a statement of claim through the
American Arbitration Association against us. MDB has claimed that it has been
damaged by our failure to timely file a registration statement covering their
shares underlying a warrant to purchase 300,000 shares of our common stock. They
have claimed damages in the amount of $2,193,000 based on the highest price of
our common stock subsequent to the time MDB believes a registration statement
would have been effective plus attorneys' fees and costs. We believe that the
registration statement has been delayed because of legal issues relative to MDB.
In addition, we may assert claims against MDB for their failure to perform under
the advisory agreement entered into contemporaneously and as partial
consideration for the warrant issued.
We have also received a claim on behalf of purchasers which acquired their
shares in a private placement in July 1999. The purchasers claim that they are
entitled to liquidated damages in the minimum amount of $175,000 because of
alleged delays in completing registration of their securities. They also claim
that we violated the agreement by filing additional registration statements for
other parties. We believe the claim is without merit as the delay in registering
the underlying common shares was caused by unresolved questions concerning these
security holders and their inability to timely provide information to us in
connection with the registration statement.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Prior to April 1, 1999, our common stock had been quoted on the Nasdaq SmallCap
Market under the symbol "MNYC". Commencing on April 1, 1999, the common stock
has been quoted on The Nasdaq SmallCap Market under the symbol "IFSH." We also
changed the symbol for the redeemable stock purchase warrants from "MNYCW" to
"IFSHW" at the same time. Prior to April 1, 1999, our Series A convertible
preferred stock had been quoted on the Nasdaq SmallCap Market under the symbol
"MNYCP". On March 16, 1999, our shareholders approved an amendment to the terms
of the preferred stock pursuant to which each share of preferred stock was (i)
convertible into 1.1 shares of common stock instead of one share of common stock
and (ii) automatically converted into such adjusted conversion number of shares
of common stock on April 1, 1999. Therefore, the then outstanding shares of
preferred stock became 1.1 shares of common stock and each warrant became
exercisable into 1.1 shares of common stock at an exercise price of $6.25 per
1.1 shares (or approximately $5.68 per share) until February 21, 2002. As a
result of provisions in the warrant agreement, each warrant now entitles the
registered holder to purchase one and thirty three hundredths (1.33) shares of
common stock at a price of $6.25 per warrant (or $4.71 per share).
The following table sets forth the range of the high and low sales prices of the
common stock on The Nasdaq SmallCap Market for the periods indicated. The
following table also sets forth the range of the high and low bid quotations of
the Series A preferred stock "MNYCP" (which was delisted from The Nasdaq
SmallCap Market on the close of business March 31, 1999 pursuant to the
mandatory conversion) and the warrants "IFSHW" on The Nasdaq Small Cap Market
commencing on February 21, 1997.
SERIES A
COMMON STOCK PREFERRED STOCK WARRANTS
Quarter Ended High* Low* High* Low* High* Low*
---------------- ------- ------- ------- ------- ------- -------
April 30, 2000 $9.81 $3.16 - - $4.41 $0.38
January 31, 2000 $4.38 $1.00 - - $0.81 $0.19
October 31, 1999 $3.19 $0.91 - - $0.72 $0.28
July 31, 1999 $3.31 $2.06 - - $1.00 $0.47
April 30, 1999 $4.25 $2.00 $3.38 $2.25 $1.50 $0.63
January 31, 1999 $3.50 $2.00 $3.38 $2.13 $1.50 $0.63
October 31, 1998 $3.25 $1.25 $3.00 $1.13 $1.50 $0.25
July 31, 1998 $3.00 $1.38 $2.50 $1.06 $1.06 $0.19
April 30, 1998 $5.63 $2.75 $10.25 $1.88 $3.75 $0.56
January 31, 1998 $6.88 $4.50 $9.88 $6.50 $4.00 $2.13
October 31, 1997 $7.75 $5.50 $12.00 $9.00 $4.00 $2.63
July 31, 1997 $9.00 $4.25 $11.50 $6.00 $6.25 $2.75
* The sources of such quotations are Nasdaq and IDC.
The above quotations reflect inter-dealer prices, without mark-up, mark-down or
commission, and may not represent actual transactions.
As of April 30, 2000 there were approximately 123 recordholders and 2,177
beneficial owners of common stock.
As of April 30, 2000 there were approximately 21 recordholders and 502
beneficial owners of the warrants.
We have not paid a dividend on our outstanding securities. We plan to retain any
future earnings for use in our business and, accordingly, we do not anticipate
paying dividends on our common stock. The payment of any dividends on the common
stock will be at the discretion of the our board of directors and will be
dependent upon our results of operations, financial condition, capital
requirements, contractual restrictions and other factors deemed relevant by the
board of directors.
Issuance of Securities
We issued the following securities which were unregistered under the securities
act of 1933 during the fiscal year ended April 30, 2000 exclusive of securities
pursuant to employee benefits plan:
(a) a total of 1,051,716 shares of our common stock were issued to one of our
directors pursuant to a plan and merger agreement entered into in 1998.
Additional shares may be issued in the future pursuant to the acquired
company's financial performance. The issuance was exempt from the
registration requirements of the securities act pursuant to section 4 (2)
thereof.
(b) a total of 3 shares of our common stock were issued to 3 individuals as
part of an acquisition agreement. Additional shares may be issued in the
future pursuant to the acquired company's financial performance. The
issuance was exempt from the registration requirements of the securities
act pursuant to section 4 (2) thereof.
(c) a total of 90,000 shares of our common stock have been issued to warrant
holders as a result of the exercise of such warrants. These warrant holders
provided us with bridge financing in September 1996. The issuance was
exempt from the registration requirements of the securities act pursuant to
section 4 (2) thereof.
(d) a total of 200,000 shares of our Series B preferred stock have been issued
to an investor. These securities are convertible into common stock using
the following formula; Each share of the preferred stock is convertible
into shares of common stock calculated by dividing ten dollars ($10.00), by
the lower of $5.44 or 90% of the then market value through March 23, 2000
and 82% of market thereafter. We also issued warrants to purchase 200,000
shares of our common stock at $5.44 per share. Warrants to purchase a total
of 100,000 shares of our common stock have been issued to J.P. Turner and
Company as partial consideration for a finders fee in connection with this
transaction. The issuance was exempt from the registration requirements of
the securities act pursuant to section 4 (2) thereof.
(e) Warrants to purchase a total of 200,000 shares of our common stock have
been issued to Continental Capital who is a firm that provides us with
financial public relations services. Each warrant is for 50,000 shares at
the following per share prices; $8.50, $10.00, $12.50, and $15.00. We have
also agreed to issue Continental Capital additional options on the one year
anniversary date of the execution of the contract to purchase 200,000
shares at various exercise prices. Each option is for 50,000 shares at
prices of 125%, 150% 175%, and 200% of the closing bid on the one year
anniversary date of the execution of the contract. The issuance was exempt
from the registration requirements of the securities act pursuant to
section 4 (2) thereof.
(f) Warrants to purchase a total of 850,000 shares of our common stock have
been issued to Commonwealth Associates, L.P. who is a firm that provides us
with strategic advisory services related to corporate finance and other
financial service matters. The warrants are pursuant to an advisory
agreement with Commonwealth The term of the agreement is for an initial
term of four months commencing on January 25, 2000 renewable at the mutual
discretion of us and Commonwealth. Commonwealth received $10,000 as an
advance against expenses and receives a monthly retainer. There are
provisions in the advisory agreement in which Commonwealth will receive
additional compensation in the event of any financing obtained by us
through Commonwealth. The warrants are at exercise prices ranging from
$2.00 per share to $3.50 per share. The issuance was exempt from the
registration requirements of the securities act pursuant to section 4 (2)
thereof.
(g) Convertible notes in the aggregate amount of $1,075,000 have been issued to
a group of investors. The notes may be converted to common stock by the
holders at the lower of $3.00 per share or 90% of the market value, as
defined in the agreement. At April 30, 2000 the notes were convertible into
approximately 350,000 shares of our common stock. We also issued them
warrants to purchase a total of 200,000 shares of our common stock at an
exercise price of $3.07.
ITEM 6. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Introduction
We are engaged in the business of developing, marketing, automating and
supporting software for the EFT market. Our revenues have resulted from the
licensing of our family of TPII and TP-CMS software products and from 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 the 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
generally pays 30% to 50% of the project costs including 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. Fees from licenses are recognized as revenue upon delivery of core
software, provided fees are fixed or determinable and collection is probable.
Fees from licenses sold together with consulting services are generally
recognized upon shipment provided that payment of the license fees is not
dependent upon the performance of the consulting services. In instances where
the aforementioned criteria have not been met, both the license and consulting
fees are recognized under the percentage of completion method of contract
accounting. Several of our license fee arrangements allow for extended payment
terms (generally one to two years). 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. We also derive recurrent revenues from furnishing
certain maintenance services to our customers for our products. We may also
receive additional revenues for additional training of customer personnel and
consulting services. With respect to revenues for maintenance services, we
generally receive annual payments at the beginning of the contract. Such
payments are initially reflected as deferred revenues and are recognized ratably
during the year.
Results Of Operations
Fiscal Year Ended April 30, 2000 Compared With Fiscal Year Ended April 30, 1999
Total revenues of $13,006,270 for the fiscal year ended April 30, 2000 represent
an increase of $2,841,652, or 28%, over total revenues of $10,164,618 for the
fiscal year ended April 30, 1999. The increase primarily resulted from an
increase in software license and installation contract fees.
Software license and installation contract fees for the fiscal year ended April
30, 2000 increased by $2,815,018 or 59.2%, over software license and
installation contract fees for the fiscal year ended April 30, 1999. The
increase in software license and installation contract fees is primarily a
result of an increase in IFS sales during fiscal year 2000. Software license and
installation contract fees for IFS for the fiscal year ended April 30, 2000 were
$5,708,392 as compared to $3,036,156 for the fiscal year ended April 30, 1999.
The increase in IFS' software license and installation contract fees is
primarily due to sales from our new product, TP-CMS.
Service and maintenance revenues for the fiscal year ended April 30, 2000
increased by $374,649, or 10.5% over service and maintenance revenues for the
fiscal year ended April 30, 1999. The increase in service and maintenance
revenues is primarily a result of an increase in service and maintenance
revenues from NCI. Service and maintenance revenues of NCI for the fiscal year
ended April 30, 2000 were $2,605,977 as compared to $2,300,014 for the fiscal
year ended April 30, 1999. As of April 30, 2000, we had approximately $648,000
in deferred maintenance service revenue.
Revenues from licensing of software products and hardware sales in countries
outside the United States accounted for 81.1% of total revenues for the fiscal
year ended April 30, 2000 as compared to 82.4% for the fiscal year ended April
30, 1999. We expect total revenues from foreign countries to continue to be a
significant portion of our revenue in the future.
Gross profit, as expressed as a percentage of total revenues, decreased to 72.4%
for the fiscal year ended April 30, 2000, as compared to 76.7% for the fiscal
year ended April 30, 1999. This decrease is primarily a result of the initial
development costs of TP-CMS. The initial development costs for TP-CMS were
charged to cost of software license and installation contract fees and
approximated $700,000 for the fiscal year ended April 30, 2000. We expect to
incur further development costs for subsequent versions of TP-CMS, which
therefore may continue to effect gross profit from TP-CMS contracts.
Operating expenses of $9,016,580 for the fiscal year ended April 30, 2000
represent an increase of $625,353 or 7.5%, from operating expenses of $8,391,227
for the fiscal year ended April 30, 1999. This increase in operating expenses
resulted primarily from the increase in salary expenses. IFS' salaries for the
fiscal year ended April 30, 2000 were $2,442,119 as compared to $1,865,935 for
the fiscal year ended April 30, 1999. This increase in IFS' salaries expense
resulted primarily from an increase in staff for sales and marketing. Although
the percentage of employees in this area did not change at April 30, 2000 as
compared to April 30, 1999, the salaries expenses increased because this was the
first full year of an increase in the sales & marketing staff.
Capitalized software costs for the fiscal year ended April 30, 2000 were
$867,305, as compared to $686,118 for the fiscal year ended April 30, 1999. This
increase in capitalized software costs resulted primarily from costs incurred
with respect to NCI Business Centre (TM) software technology. Such capitalized
costs are being amortized on a straight line basis over the estimated five year
marketing life of the software.
Net income was $36,176 for the fiscal year ended April 30, 2000, as compared to
a net loss of $703,907 for the fiscal year ended April 30, 1999.
The Company has net operating loss carryforwards of approximately $4,450,000 as
of April 30, 2000. The use of such net operating loss carryforwards as an offset
against future taxable income in any particular year may be limited.
Liquidity And Capital Resources
The Company's working capital increased from $1,666,451 at April 30, 1999 to
$3,967,413 at April 30, 2000. The increase was primarily as a result of an
increase in cash, accounts receivable and cost and estimated earnings in excess
of billings. Cash increased as a result of proceeds received from the Shaar Fund
private placement. Accounts receivable and cost and estimated earnings in excess
of billings increased as a result of new sales which include both TPII and
TP-CMS products.
We believe that anticipated cash flow from operations, proceeds from recent and
proposed private placement financings and the availability of a $600,000 line of
credit will be sufficient to finance our working capital requirements for the
foreseeable future. However, since a portion of our software contracts are not
paid until acceptance by the customer and, as a result, we are 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 us, or at all.
The above statements and certain other statements contained in this annual
report on Form 10-KSB 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 development of the capacity to accommodate additional and larger
contracts, (iv) establishing the ability of our software products to process
transactions for larger EFT systems, and/or (v) acceptance of TPII software
products by a significant number of new customers (vi) our continued
relationship with distributors (vii) acceptance of NCI Business Centre a by a
significant number of new customers and (viii) the integration and success of
any acquisitions.
Pursuant to a securities purchase agreement, the Shaar Fund purchased 200,000
shares of our newly created Series B preferred stock, and warrants to purchase
200,000 shares of our common stock at an exercise price of $5.44 per share. We
received gross proceeds of $2,000,000 in connection with this purchase. Each
share of the preferred stock is convertible into shares of common stock
calculated by dividing ten dollars ($10.00), by the lower of $5.44 or 90% of the
then market value through March 23, 2000 (82% thereafter). The preferred stock
is automatically converted into shares of common stock on March 24, 2003.
On July 6, 1999, we entered into a note and warrant purchase Agreement with
several purchasers. Pursuant to the agreement, we sold an aggregate of
$1,000,000 principal amount of notes to the purchasers. Each purchaser received
warrants described below to purchase 10,000 shares of our common stock for each
$100,000 principal amount of notes purchased or a total of warrants to purchase
100,000 shares. In connection with the transaction, we paid to one of the
purchasers, $25,000. We also issued an aggregate of $100,000 in notes and
100,000 warrants similar to the notes and warrants sold to the investors.
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. We 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 of the financial institution's personnel in the use of our 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, our 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
We have not experienced any meaningful impact on its sales or costs as the
result of inflation.
ITEM 7. Financial Statements
The consolidated financial statements required to be filed herein are set forth
at the pages indicated at item 13.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons of the
Registrant
Our directors and executive officers are as follows:
Name Age Position
------------------- ----- ----------------------------------------------------
John P. Singleton.....63 Chairman of the Board and Director
David L. Hodge........61 President, CEO and Director
Frank A. Pascuito.....44 Director
Simon J. Theobald ....37 Executive Vice President, Director,
President & CEO of IFS
Carmen A. Pascuito....39 Controller, Secretary and CFO
DuWayne J. Peterson...68 Director
Per Olof Ezelius......50 Director, President & CEO of NCI
C. Rex Welton.........60 Director
John P. Singleton is currently Chairman of the Board and has been a director of
ours since April 1997. In July 1997 he was appointed Chairman of our Executive
Committee. From 1992-1996, Mr. Singleton had been General Manager, Business
Development of IBM/Integrated Systems Solution Corporation. Between 1982-1992,
he held several positions with Security Pacific Corporation ranging from Senior
Vice President Central Information Group to Vice Chairman and Chief Operating
Officer and member of the Office of the Chairman. Mr. Singleton is a graduate of
Arizona State University with a B.S. degree in Business Management.
David L. Hodge has been our President and CEO of since February 1998. Mr. Hodge
has been a director of the Company since September 1997. Mr. Hodge is a graduate
of West Point, and has over 30 years experience in software development. His
last position was vice president in charge of product development for CBIS (the
Cable and Broad band Solutions Group of Cincinnati Bell Information Systems).
Prior to CBIS, Mr. Hodge held various senior management positions at Ernst &
Young, CBS/Newtrend, Anacomp and Great Western Bank. Notable projects completed
by Mr. Hodge include the development and delivery for production of the
client/server-based Precedent 2000 system currently used to provide customer
care and billing services to a large segment of the Telecommunications personal
communication systems market, a client/server based Centrex provisioning system
for British Telecom in the United Kingdom and several products for the banking
industry for advanced imaging and document management. In addition to his
technical management responsibilities at CBIS, Mr. Hodge led initial CBIS
efforts to attain ISO 9000 compliance. This initiative led to the ISO 9000
certification of a major international data system serving British Telecom.
Frank A. Pascuito is currently a director. Prior to this, Mr. Pascuito was an
Executive Vice President and director. Mr. Pascuito was our Chief Executive
Officer and Chairman of the Board of from 1989 to 1998. Mr. Pascuito co-founded
our IFS subsidiary, formerly named, Avant-Garde Computer Systems, Inc., a New
York corporation engaged in the development and marketing of software, in 1981
and served as its President until November 1987 and as its Vice President of
Product Planning until 1989. Prior to 1981, he was employed by NCR Corporation's
ATM software development team. As a consultant to NCR in 1979, he assisted in
the development and performed the installation of the first on-line/off-line ATM
system for NCR in the United States. Mr. Pascuito has over twenty years of
operating and marketing experience in EFT system design, sales and service. Mr.
Pascuito is a graduate of the State University of New York at Potsdam with a
B.S. degree in Computer Science. He is active in several area professional
organizations dealing with technology, software, and world trade.
Simon J. Theobald is currently an Executive Vice President of and a member of
the Board. Mr. Theobald has been a director of the Company since December 1994
and was the Director of Sales and Marketing of our IFS subsidiary's European
Division based in London between 1992 and 1997. From 1986 to April 1992, he was
employed by Applied Communications Inc., a subsidiary of Transaction Systems
Architects, Inc. Mr. Theobald has more than nineteen years experience in the
electronic funds transfer industry. Mr. Theobald is a graduate of De-Havilland
College with qualifications in computer studies and technology.
Carmen A. Pascuito has been our CFO since May 1999 and Secretary since December
1996 and our Controller since 1989. Mr. Pascuito joined our IFS subsidiary in
1985 as a staff accountant and became its controller in 1988. Mr. Pascuito is a
graduate of Siena College with a B.A. degree in Accounting.
DuWayne J. Peterson has been a director of ours since July 1997. Mr. Peterson is
also the Chairman of our Compensation Committee. Mr. Peterson is President of
DuWayne Peterson Associates, a consulting firm specializing in the effective
management of information technology. Prior to forming his firm in 1991, he held
the position of Executive Vice President, Operations, Systems and
Telecommunications at Merrill Lynch. Mr. Peterson holds a B.S. degree from
M.I.T. and an MBA from UCLA.
Per Olof Ezelius has been a director of ours since May 1998. Mr. Ezelius has
held the office of President and CEO of NCI since October 1992. Since starting
with NCI in 1986 where he launched the European sales operation, Mr. Ezelius has
also held positions of Vice President of Worldwide sales and Chief Operating
Officer. Prior to NCI, Mr. Ezelius held the position of Vice President of
Marketing and Project Management for Inter Innovation AB in Stockholm, Sweden.
Mr. Ezelius started his career in 1971 with systems design and application
software development for the first generation of programmable branch automation
systems.
C. Rex Welton has been a director of ours since October 1998. Mr. Welton is also
a principal of Carolina Income Management Group, LLC. Prior to this endeavor,
Mr. Welton served as president of Parnell-Martin Companies, LLC for 26 years.
Mr. Welton is a graduate of the University of North Carolina at Chapel Hill with
a B.S. degree in Business Administration.
Frank A. Pascuito and Carmen A. Pascuito are brothers.
We have appointed an Audit Committee consisting of Directors Rex Welton, John P.
Singleton, and DuWayne J. Peterson. All members are independent directors.
We have also appointed an Executive Committee, a Compensation Committee, an
Acquisition Committee, a Strategic Planning Committee and a Sales and Marketing
Committee. The members of the Executive Committee are, Frank A. Pascuito, David
L. Hodge, DuWayne J. Peterson, and John P. Singleton. The members of the
Compensation Committee are David L. Hodge, DuWayne J. Peterson, and John P.
Singleton. The members of the Acquisition Committee are Frank A. Pascuito, John
P. Singleton, Simon J. Theobald, and Per Olof Ezelius. The members of the
Strategic Planning committee are Simon J. Theobald, John P. Singleton, Per Olof
Ezelius, and Frank A. Pascuito. The members of the Sales and Marketing Committee
are Simon J. Theobald, Per Olof Ezelius and C. Rex Welton.
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") requires
our officers and directors, and persons who own more than 10% of our common
stock, to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Officers, directors and greater than 10% stockholders
are required by regulations promulgated under the Exchange Act to furnish the
Company with copies of all Section 16(a) forms they file.
<PAGE>
ITEM 10. Executive Compensation
The following table sets forth information concerning compensation paid or
accrued by us or any of our subsidiaries for services rendered during the fiscal
years ended April 30, 2000, 1999 and 1998 by our Chief Executive Officer and
each of its executive officers whose compensation exceeded $100,000 during its
fiscal year ended April 30, 2000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
Other
Annual Securities
Name and Fiscal Compen- Underlying
Principal Position Year Salary Bonus sation Option(s)
----------------------- -------- --------- -------- --------- ------------
David Hodge.............. 2000 220,994 - 40,000(1) -
President and CEO 1999 200,769 - 27,500(2) 290,000
1998 41,538 - 10,500(3) 60,000
Frank Pascuito........... 2000 169,212 - 56,063(4) 15,183
Director 1999 130,038 - - 221,750
1998 114,810 50,000 - 18,722
Simon Theobald........... 2000 329,327 - - -
President and CEO / IFS 1999 265,029 - - 175,000
1998 206,408 - - 15,000
Per Olof Ezelius......... 2000 151,400 - 16,195(4) -
President and CEO/NCI 1999 151,500 - 27,960(5) 25,000
1998 55,767 100,000 50,000(6) 18,000
John Singleton 2000 - - 170,150(7) -
--------
(1) Represents contributions to an annuity which have been accrued, but not yet
paid.
(2) Represents 10,000 shares of the Company's common stock at market value of
$2.75 at May 26, 1999.
(3) Amount in Other Annual Compensation represents amounts paid for board
member fees prior to appointment of President and CEO.
(4) Accrued unused vacation time.
(5) Reimbursement of real estate fees paid to Mr. Per Olof Ezelius in
connection with the sale of property.
(6) 25,000 shares issued to Mr. Per Olof Ezelius pursuant to extension
agreement. Market Value $2.00 per share.
(7) Payments made to Mr. Singleton pursuant to a consulting agreement and an
agreement for services.
<PAGE>
Set forth below with respect to the executive officers named in the Summary
Compensation is further information concerning options to purchase common stock
under the Company's stock option plans, and employment agreements.
Option Grants in Fiscal Year Ended April 30, 2000
Number of
Shares % of Total
of Common Stock Options
Underlying Granted to
Options Employees in Per Share Expiration
Name Granted Fiscal Year Exercise Price Date
------- --------------- ------------ -------------- ----------
Frank A. Pascuito.....14,683 4.8 % $2.45 05/01/09
Frank A. Pascuito..... ..500 0.2 % $2.00 10/01/09
<TABLE>
Fiscal Year - End Option Values
Number of Securities Value of Unexercised
Number of Shares Underlying Unexercised In-the-Money
of Common Stock Options as of April 30, 2000 Options as of April 30, 2000(1)
Acquired on
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
--------------------- ---------------- ----------------- ------------- --------------- ------------- -------------
David L. Hodge
<S> <C> <C> <C> <C> <C> <C>
President and CEO......... 0 $0 117,523 232,477 537,135 996,565
Frank Pascuito,
Executive Vice President.. 13,350 80,634 260,210 97,430 1,258,102 431,826
Simon Theobald,
Executive Vice President.. 64,708 340,826 48,938 121,354 210,857 495,817
Per Olof Ezelius,
President and CEO/NCI..... 0 $0 29,911 13,089 144,807 61,963
</TABLE>
--------
(1) Based on a market price of $6.70 per share at April 30, 2000.
<PAGE>
EXECUTIVE COMPENSATION AGREEMENTS
We have entered into employment agreements with each of Messrs. David Hodge and
Simon Theobald and consulting and services agreements with John Singleton.
The initial term of Mr. Hodge's employment agreement as amended extends from
February 15, 1998 to February 14, 2003, and is automatically renewed annually
thereafter. Under Mr. Hodge's employment agreement, Mr. Hodge will receive (i)
an annual base salary of $200,000, subject to an increase commencing on June 1,
1998 based on the increase in the consumer price index and periodic review after
May 31, 1999; (ii) an annual bonus (which shall not exceed 80% of the annual
base salary) based on the achievement of performance goals agreed to by the
executive and the board; (iii) stock options granted immediately under the 1998
Stock Plan for the purchase of 270,000 shares of our common stock vesting over a
period of five years, 54,000 shares on February 15, 1998 and 54,000 shares
thereafter on each February 15 through 2002; (iv) life insurance or death
benefits in the amount of $500,000; (v) an annuity of $40,000 per year for the
joint lives of the executive and his spouse.
The initial term of Mr. Theobald's employment agreement as amended extends from
February 24, 1998 to December 31, 2003, and is automatically renewed annually
thereafter. Mr. Theobald will receive: (i) an annual base salary composed of a
fixed portion totaling $130,000 per year; (ii) a commission (iii) an annual
performance bonus; (iv) stock options (previously granted) for the purchase of
55,000 shares of our common stock; (v) stock options under the 1998 stock plan
for the purchase of 150,000 shares of our common stock vesting over a period of
five years, 30,000 shares on each anniversary date of his employment agreement.
In March 1999 we entered into a consulting agreement and an agreement for
services with our chairman John P. Singleton. Both agreements are for a term of
3 years and contains a clause for automatic renewal. The consulting agreement
contains an annual fee of $120,000 per year. The agreement for services contains
an annual fee of $10,000 and additional fees for the attendance of board
meetings.
On March 9, 2000, pursuant to amendments to their respective employment and
consulting agreements we issued SARs (stock appreciation rights) based on one
hundred thousand shares (100,000) in the case of Mr. Hodge and fifty thousand
(50,000) shares of our common stock in the cases Messrs. Theobald and Singleton.
The agreements with respect to Messrs. Hodge and Theobald, call for the award of
additional SAR's on each anniversary of the execution of their agreements. All
SAR grants are subject to board and shareholder approval. These grants shall be
governed by a separate stock appreciations rights agreement which shall set
forth all material terms and conditions of the SARs. Upon exercise of the SARs,
the executive shall receive from us an amount equal to the excess of the fair
market value of the SAR shares exercised over the fair market value of the SAR
shares as of the date of the grant. Such amount shall be paid to the executive
and grossed up to cover the payment of any and all taxes, of any kind or nature,
that are incurred by the executive as a result of his exercise of the SARs.
Each of the three agreements provides automobile allowances and allowances for
club membership. In addition, each of the agreements as amended provides for
that upon change of control, The succeeding company shall pay to the executive,
in a lump sum and without discount to present value, the executive's annual
bonus as set forth in section 4(b) calculated for the balance of the term of the
agreement, which shall be computed as 40% and 80% for Messrs. Hodge and Theobald
respectively, of the executive's annual salary earned during the twelve (12)
month period immediately preceding the executive's termination. The amendment
also calls for the rights of executive in the event of a change of control as
defined in paragraph 1c of the May 12 agreement. The executive shall have the
right at his sole discretion to accelerate his employment contract and receive
the consideration, monies, benefits and compensation as described in paragraph
13 a, b (as modified by this amendment), and c - j. The payments to executive
shall be calculated for the balance of the term of the May 12, 1998 agreement,
but in no case will the term used for such calculation be less than two calendar
years (24 months).
The employment agreement for Mr. Theobald, provides upon termination for death
or disability, the executive shall receive: his annual fixed salary accrued and
other benefits and compensation, but no less than 6 months fixed salary.
Additionally, all unvested stock options which have been or are scheduled to be
granted pursuant to the agreement shall immediately vest. Where a termination is
due to a change in control," without cause or by the executive for good reason
as defined in the agreement provides that we will pay compensation and certain
allowances and benefits to the executive through the end of the then-applicable
term.
The employment agreement of Mr. Hodge, provides that if the termination of the
agreement is due to death, disability or by us for cause, the executive shall
receive: 6 months of his annual salary, accrued compensation and benefits to
date plus other allowances. Where a termination is due to a "change in control",
or without cause, or by the executive for good reason, as defined in the
agreement provides that we will pay compensation and certain allowances and
benefits to the executive through the end of the then applicable term.
Additionally, all unvested stock options which have been or are scheduled to be
granted pursuant to the agreement shall immediately vest.
Under the employment agreements a change in control includes (i) an acquisition
whereby immediately after such acquisition, a person holds beneficial ownership
of more than 50% of the total combined voting power of our then outstanding
voting securities; (ii) if in any period of three consecutive years after the
date of the employment agreements, the then incumbent board, ceases to
constitute a majority of the board for reasons other than voluntary resignation,
refusal by one or more board members to stand for election, or removal of one or
more board member for good cause; or (iii) the board of directors or the
stockholders of ours approve (A) a merger, consolidation or reorganization; (B)
a complete liquidation or dissolution by us; or (C) the agreement for the sale
or other disposition of all or substantially all of the assets of ours.
On January 30, 1998, Mr. Per Olof Ezelius entered into an employment agreement
with Network Controls International, Inc. to serve as its President and Chief
Executive Officer for an initial term of three years and three months,
commencing January 30, 1998, and ending April 30, 2001. On May 12, 1998, we
entered into an extension agreement with Mr. Ezelius which provides that the
term of the covenant not to compete (as referred to in the riginal employment
agreement) is extended from a period of one-year to two-years commencing from
the expiration of the original employment agreement. Such extension agreement
further provides we grant to Mr. Ezelius: (i) 25,000 shares of common stock;
(ii) 25,000 options to purchase our common stock (such exercise price being
equal to the fair market value of such common stock on May 12, 1998); and (iii)
a cash bonus equal to $100,000.
The original employment agreement provides for Mr. Ezelius to receive an annual
base salary comprised of a fixed portion totaling $150,000 per year and an
annual performance bonus.
The foregoing summaries are intended as general descriptions of the terms of the
employment agreements and the extension agreement, and are limited in their
entirety by the actual language of the employment agreements and the extension
agreement, which are included as Exhibits to this report.
STOCK OPTION PLANS
We have two option plans: the 1998 Stock Plan and the 1988 Stock Option Plan
The purpose of all the option plans is to provide us with a vehicle to attract,
compensate and motivate selected eligible persons, and to appropriately
compensate them for their efforts, by creating a broad-based stock plan which
will enable us, in our sole discretion and from time to time, to offer to or
provide such eligible persons with incentives or inducements in the form of
awards as such term is defined below, thereby affording such persons an
opportunity to share in potential capital appreciation of our common stock.
The 1998 Plan was approved by the board of directors on May 12, 1998, and by the
shareholders on March 16, 1999. A total of 1,800,000 shares of common stock are
available for issuance under the 1998 plan.
Under the 1998 plan, an eligible person is any person who, at the applicable
time of the grant or award under the plan, is an employee, a director and/or a
consultant or advisor of ours, or of any parent or subsidiary. An award can
consist of: (i) an outright grant of shares of common stock or (ii) the grant of
options to purchase shares of Common Stock.
As of April 30, 2000, there were commitments to issue 1,582,663 shares of common
stock under the 1998 plan. Of these shares, 948,292 shares are subject to
options granted to officers and directors andthe balance of shares are subject
to options granted to non officer employees. The exercise prices range from
$1.31 to $4.90, under the 1998 Plan and expire in various years between 2007 -
2010.
The above description of the 1998 plan is qualified in its entirety by reference
to the full text of the plan, as well as the terms and conditions of any award
agreement governing the grant of an award under the 1998 plan. A copy of the
full text of the plan has been attached as Appendix 1 to our proxy statement
dated February 1, 1999.
The 1998 plan provides for the granting of options which are intended to qualify
either as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 or as options which are not intended to meet the
requirements of such section (nonstatutory stock options"). The exercise price
of all incentive stock options must be at least equal to the fair market value
of such shares on the date of the grant or, in the case of incentive stock
options granted to the holder of more than 10% of our common stock, at least
110% of the fair market value of such shares on the date of the grant. The
maximum exercise period for which incentive stock options may be granted is ten
years from the date of grant (five years in the case of an individual owning
more than 10% of our common stock). The aggregate fair market value (determined
at the date of the option grant) of shares with respect to which incentive stock
options are exercisable for the first time by the holder of the option during
any calendar year shall not exceed $100,000.
The 1998 plan provides for its administration by the board of directors or a
committee chosen by the board of directors, which has discretionary authority,
subject to certain restrictions, to determine the number of shares issued
pursuant to incentive stock options and nonstatutory stock options and the
individuals to whom, the times at which and the exercise price for which options
will be granted.
The 1988 Plan provides for the issuance of options to purchase common stock to
key employees, officers, directors and consultants. As of April 30, 2000, there
were options outstanding to purchase 142,970 shares of common stock under the
1988 Plan. All options are exercisable at prices ranging from $1.00 to $3.50 per
share and expire in various years between 2001 - 2009. As of April 30, 2000,
there were no options available for grant to purchase shares of common stock
under the 1988 Plan.
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the common stock as of June 30, 2000 by (i) each stockholder known
by us to be the beneficial owner of more than 5% of the outstanding common
stock, (ii) each director of ours, (iii) each named officer, (iv) and all
directors and executive officers as a group. Except as otherwise indicated, we
believe that the beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
The following table does reflect common stock issuable pursuant to stock options
exercisable within sixty days.
Name and Address of Number Of Shares Percentage
Beneficial Owner Beneficially Owned of Class
----------------------------------------- -------------------- -----------
Frank Pascuito............................ 446,644(1) 10.1%
Rensselaer Technology Park
300 Jordan Road
Troy, NY 12180
Simon J. Theobald......................... 125,494(2) 3.0%
Little Elms, 12 Green Lane,
Croxley Green, Rickmansworth,
Hertfordshire, WD3 3HR England
John P. Singleton......................... 147,442(3) 3.5%
4331 Rosecliff Drive
Charlotte, NC 28277
DuWayne J. Peterson....................... 56,864(4) 1.4%
225 South Lake Ave.
Pasadena, Ca. 91101
David L. Hodge............................ 164,707(5) 3.9%
300 Jordan Road
Troy, NY 12180
Per Olof Ezelius.......................... 1,034,261(6) 24.9%
Nine Woodlawn Green
Charlotte, NC 28217
C. Rex Welton............................. 66,454(7) 1.6%
2323 Hopedale Avenue
Charlotte, NC 28207
All directors and executive officers as a group
(7 persons) .............................. 2,041,866(8) 44.8%
--------
(1) Includes 281,563 shares issuable upon exercise of stock options.
(2) Includes 60,766 shares issuable upon exercise of stock options.
(3) Includes 85,342 shares issuable upon exercise of stock options.
(4) Includes 24,164 shares issuable upon exercise of stock options.
(5) Includes 144,707 shares issuable upon exercise of stock options.
(6) Includes 34,742 shares issuable upon exercise of stock options.
(7) Includes 7,954 shares issuable upon exercise of stock options.
(8) Includes 639,238 shares issuable upon exercise of stock options.
ITEM 12. Certain Relationships and Related Transactions
In April 2000, we entered into an agreement with a corporation controlled by Mr.
Frank Pascuito, a director of the Company. This corporation will receive a
non-exclusive license from us to utilize our technology in connection with the
operation of a regional internet processing center for financial institutions.
The agreement provides for the issuance to us of 30% of the stock of this
corporation upon the initial capitalization of the entity. We have permitted
this entity to utilize our premises and will and have advanced amounts to this
entity. The entity is required to repay us from operations for these advances
and for the use of our premises. Mr. Pascuito has agreed to terminate his
employment agreement with us.
On September 1, 1998, Mr. Charles J. Caserta, co-founder of IFS International,
Inc., resigned from the Company as Director of Business Development and a
Director. At that time, Mr. Caserta and the Company entered into a termination,
severance and release agreement (the "Termination Agreement"). As part of the
Termination Agreement, the Company was obligated to pay Mr. Caserta an aggregate
of $502,660 of which $361,446 ($2.00 per share) represented consideration for
his shares ("Caserta Shares") , $21,214 for the surrender of his options and
$120,000 representing other termination benefits. We sold the Caserta Shares to
several individuals for $382,660 or approximately $2.12 per share simultaneously
with the purchase of the shares from Mr. Caserta. Of the Caserta Shares sold
Messrs. John Singleton and DuWayne Peterson, directors of the Company, purchased
50,000 and 25,000 shares respectively. Messr. C. Rex Welton also purchased
50,000 of the Caserta Shares prior to his appointment as a director of the
Company.
In April, 1998, IFS issued a purchase order for $259,600 to ETI (Euro-Tech
International) to obtain ISO 9000 registration. ETI is an Arizona based
corporation that specializes in guiding companies through the ISO 9000
certification process. ISO 9000 is an established international business
standard. ISO 9000 requires that the core processes of company's business is
documented, understood and followed by company personnel. ISO 9000 is becoming a
standard for companies in the global market. ETI is also a subsidiary of
Intellimet, Inc., formerly, Tech Metrics International, Inc. of which Mr. David
L. Hodge, President and CEO of IFS International Holdings, Inc. is a director.
On January 30, 1998 the Company acquired all of the outstanding shares of
capital stock of NCI Holdings, Inc.. Pursuant to the terms of the Merger
Agreement, Per Olof Ezelius, the sole beneficial owner of Holdings' capital
stock, received 87,094 shares of preferred stock valued at $620,545. We are
obligated to register all of these shares of preferred stock under the
Securities Act of 1933.
Mr. Ezelius may receive additional shares of common stock 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.
The merger agreement required NCI Holdings, Inc. to satisfy indebtedness to
former stockholders of NCI Holdings, Inc. and NCI arising pursuant to agreements
for the purchase of shares entered into in 1993 and 1995. Immediately prior to
the merger, we advanced $840,000 to NCI Holdings, Inc. which was utilized to
satisfy existing indebtedness as required by the merger agreement. Pursuant to
the terms of the merger agreement, Mr. Ezelius entered into a separate
employment agreement with NCI to serve as its Chief Executive Officer for a
period of 39 months, commencing January 30, 1998, at a base salary of $150,000
per year. Mr. Ezelius also was granted options to purchase 18,000 shares of our
Common Stock at $5.00 per share. Pursuant to the merger agreement, additional
shares may be issued to Mr. Ezelius 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. Mr.
Ezelius received approximately 1,052,000 shares for the fiscal year ended April
30, 1999 and is likely to receive approximately 425,000 shares for the fiscal
year ended April 30, 2000.
<PAGE>
ITEM 13. Financial Statements, Exhibits and Reports on Form 8-K
(1) Consolidated Financial Statements and Auditor's Report
See Index to Consolidated Financial Statements on Page F-1.
(2) Exhibits
3.1 Certificate of Incorporation and amendments thereto of the Company (1)
3.2 By-laws, as amended, of the Company (1)
4.1 Certificate of Designation of the Series A Convertible Preferred Stock (2)
4.1b Certificate of Amendment of Certificate of Designation of the Series A
Convertible Preferred Stock (5)
4.2 Form of certificate evidencing shares of Preferred Stock (1)
4.3 Form of certificate evidencing Warrants (1)
4.4 Form of certificate evidencing shares of Common Stock (1)
4.5 Warrant Agreement between the Company and the Underwriter (2)
4.6 Form of Warrant Agreement between the Company and American Stock Transfer
and Trust Company, as Warrant agent (1)
4.7 Debenture Investment Agreement, dated July 6, 1989, between the Company and
New York State Science and Technology Foundation, and amendments thereto
(1)
4.8 Loan Agreement, dated January 11, 1989, between the Company and North
Greenbush Industrial Development Agency and amendments thereto (1)
4.9 Warrant Agreement, dated November 6, 1998, between the Company and MDB
Capital Group LLC. (7)
4.10 Investment Banking Agreement, dated November 6, 1998, between the Company
and MDB Capital Group LLC. (7)
4.11 Form of Convertible Promissory Note Agreements, dated July 6, 1999, between
the Company and Gilston Corporation, Ltd., Manchester Asset Management,
Ltd., Headwaters Capital, and Colbrooke Capital. (7)
4.12 Form of Warrant Agreements, dated July 6, 1999, between the Company and
Gilston Corporation, Ltd., Manchester Asset Management, Ltd., Assanzon
Development Corporation, and Colbrooke Capital. (7)
4.13 Registration Rights Agreement, dated July 2, 1999, between the Company and
Gilston Corporation, Ltd., Manchester Asset Management, Ltd., and Assanzon
Development Corporation. (7)
4.14 Note And Warrant Purchase Agreement, dated July 2, 1999, between the
Company and Gilston Corporation, Ltd., Manchester Asset Management, Ltd.,
and Assanzon Development Corporation. (7)
4.15 Market Access Program Marketing Agreement, dated as of April 29, 1999,
between the Company and Continental Capital & Equity Corporation. (7) 4.16
Warrant to purchase common stock dated as of February, 2000 between IFS
International Holdings, Inc. and Commonwealth Associates, L.P.
4.17 Warrant to purchase common stock dated as of February, 2000 between IFS
International Holdings, Inc. and Commonwealth Associates, L.P.
4.18 Warrant to purchase common stock dated as of February, 2000 between IFS
International Holdings, Inc. and Commonwealth Associates, L.P.
4.19 Securities Purchase Agreement dated March 23, 2000 between IFS
International Holdings, Inc. and the Shaar Fund.
4.20 Warrant Agreement dated March 23, 2000 between IFS International Holdings,
Inc. and the Shaar Fund.
4.21 Registration Rights Agreement dated March 23, 2000 between IFS
International Holdings, Inc. and the Shaar Fund.
10.1 * 1998 Stock Plan (5)
10.2 * 1996 Stock Option Plan (1)
10.3 * 1988 Stock Option Plan (1)
10.4 Lease Agreement, dated October 1, 1986 between the Company and Rensselaer
Polytechnic Institute and amendments thereto (the "Lease Agreement") (1)
10.5 Addendum A to the Lease Agreement, dated January 7, 1997. (1)
10.6 Digital Prime Contracting Agreement, dated June 6, 1994, between the
Company and Digital Equipment International BV (1)
10.7 Software Development and License Agreement, dated July 8, 1996, between the
Company and Visa International Service Association (1)
10.8 * Employment Agreement, dated as of May 12, 1998 between the Company and
David L. Hodge. (6)
10.8b* Amendment to Employment Agreement, dated as of January 22, 1999 between
the Company and David L. Hodge. (7)
10.8c* Second amendment to Employment Agreement, dated as of January 31, 2000
between IFS International, Inc. and David L. Hodge.
10.8d* Third amendment to Employment Agreement, dated as of March 9, 2000
between IFS International, Inc. and David L. Hodge.
10.9 * Employment Agreement, dated as of May 12, 1998, between the Company and
Frank A. Pascuito. (6)
10.9b* Amendment to Employment Agreement, dated as of January 22, 1999, between
the Company and Frank A. Pascuito. (7)
10.10* Employment Agreement, dated as of May 12, 1998, between the Company and
Simon J. Theobald. (2)
10.10b * Amendment to Employment Agreement, dated as of January 22, 1999,
between the Company and Simon J. Theobald. (7)
10.10c * Second amendment to Employment Agreement, dated as of January 31, 2000
between IFS International, Inc. and Simon J. Theobald.
10.10d * Third amendment to Employment Agreement, dated as of March 9, 2000
between IFS International, Inc. and Simon J. Theobald.
10.11* Extension Agreement, dated as of May 12, 1998 between the Company and
Per Olof Ezelius. (6)
10.12Purchase and Sale Agreement, dated as of December 17, 1996, between the
Company and Trustco Bank, National Association. (1)
10.13Form of Consulting and Investment Banking Agreement between the Company
and the Underwriter. (1)
10.14Promissory Note, dated March 14, 1997, between the Company and Key Bank of
New York. (3)
10.15* Consulting agreement, dated April 9, 1997, between the Company and
Jerald Tishkoff. (6)
10.16Plan and Merger Agreement, dated as of January 30, 1998, between the
Company and NCI Holdings, Inc. (4)
10.17Amended and Restated Note, dated as of April 15, 1999, between the Company
and Hudson River Bank and Trust Company. (7)
10.18Amended and Restated Note, dated as of April 15, 1999, between the Company
and Hudson River Bank and Trust Company. (7)
10.19Note And Mortgage Consolidation, Modification, Spreader, Extension And
Security Agreement, dated as of April 15, 1999, between the Company, the
Town of North Greenbush Industrial Development Agency and New York Business
Development Corporation. (7)
10.20Note And Mortgage Consolidation, Modification, Spreader, Extension And
Security Agreement, dated as of April 15, 1999, between the Company, the
Town of North Greenbush Industrial Development Agency and New York Business
Development Corporation. (7)
10.21Mortgage And Security Agreement, dated as of April 15, 1999, between the
Company, the Town of North Greenbush Industrial Development Agency and New
York Business Development Corporation. (7)
10.22Mortgage Note, dated as of April 15, 1999, between the Company and New
York Business Development Corporation. (7)
10.23Amended And Restated Mortgage Note, dated as of April 15, 1999, between
the Company New York Business Development Corporation. (7)
10.24General Security Agreement, dated as of April 15, 1999, between the
Company and Hudson River Bank and Trust Company. (7)
10.25Stock Purchase Agreement dated as of December 6, 1999 between IFS
International, Inc. and Global Insight Group, Ltd.
10.26Advisory Agreement dated as of January 25,2000 between IFS International
Holdings, Inc. and Commonwealth Associates, L.P.
10.27Agreement dated as of April 4, 2000 between IFS International Holdings,
Inc. and Frank Pascuito.
10.28* Consulting Agreement dated as of March 1, 1999 between IFS International
Holdings, Inc. and John P. Singleton.
10.29* Agreement for Services dated as of March 1, 1999 between IFS
International Holdings, Inc. and John P. Singleton.
10.29b * Amendment to Services Agreement dated as of January 31, 2000 between
IFS International Holdings, Inc. and John P. Singleton.
10.29c * Second amendment to Services Agreement dated as of March 9, 2000
between IFS International Holdings, Inc. and John P. Singleton
21.1 Subsidiaries of the Company
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
1 Denotes document filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-11653) and incorporated herein by
reference.
2 Denotes document filed as an exhibit to the Company's Quarterly Report
on Form 10- QSB for the quarter ended January 31, 1997 and
incorporated herein by reference.
3 Denotes document filed as an exhibit to the Company's Current Report,
dated, March 14, 1997 and incorporated herein by reference.
4 Denotes document filed as an exhibit to the Company's Current Report,
dated, January 30, 1998 and incorporated herein by reference.
5 Denotes document filed as an exhibit to the Company's Proxy Statement,
dated, February 1, 1999 and incorporated herein by reference.
6 Denotes document filed as an exhibit to the Company's Annual Report,
dated , April 30, 1998 and incorporated herein by reference.
7 Denotes document filed as an exhibit to the Company's Annual Report,
dated, April 30, 1999 and incorporated herein by reference.
(3) Reports on Form 8-K filed during the three months ended April 30, 2000:
-----------------------------------------------------------------------
None
<PAGE>
IFS International Holdings, Inc.
Index to Consolidated Financial Statements
--------------------------------------------------------------------------------
Independent Auditor's Report.................................................F-2
Consolidated Financial Statements
Balance sheet...........................................................F-3
Statements of operations................................................F-4
Statements of shareholders' equity......................................F-5
Statements of cash flows................................................F-6
Notes to consolidated financial statements.......................F-7 - F-20
F-1
<PAGE>
Independent Auditor's Report
To the Board of Directors and Shareholders
IFS International Holdings, Inc.
We have audited the accompanying consolidated balance sheet of IFS International
Holdings, Inc. and subsidiaries as of April 30, 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended April 30, 2000. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IFS International
Holdings, Inc. and subsidiaries as of April 30, 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
April 30, 2000, in conformity with generally accepted accounting principles.
URBACH KAHN & WERLIN PC
Albany, New York
June 30, 2000
F-2
<PAGE>
IFS International Holdings, Inc.
Consolidated Balance Sheet
April 30, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,382,279
Trade accounts receivable, net 2,523,753
Costs and estimated earnings in excess
of billings on uncompleted contracts 961,792
License fees receivable 642,246
Other current assets 606,468
Inventory 84,334
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Total current assets 7,200,872
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 2,423,796
--------------------------------------------------------------------------------
OTHER ASSETS
Capitalized software and
product enhancement costs, net 1,627,607
Excess of cost over fair value of net
assets of business acquired, net 1,191,830
License fees receivable 632,672
Other 367,639
--------------------------------------------------------------------------------
Total other assets 3,819,748
--------------------------------------------------------------------------------
$ 13,444,416
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 387,735
Accounts payable 674,961
Accrued compensation and related liabilities 525,860
Other accrued expenses 885,972
Billings in excess of costs and estimated
earnings on uncompleted contracts 48,457
Deferred revenue and customer deposits 710,474
--------------------------------------------------------------------------------
Total current liabilities 3,233,459
--------------------------------------------------------------------------------
LONG-TERM DEBT, less current maturities 2,976,164
--------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value;
25,000,000 shares authorized, 200,000 shares
Series B issued and outstanding, liquidation
preference $11.50 per share 200
Common stock, $.001 par value; 50,000,000
shares authorized, 4,048,451 shares
issued and outstanding 4,047
Additional paid-in capital 11,859,424
Accumulated deficit (4,547,665)
Accumulated other comprehensive (loss) (81,213)
--------------------------------------------------------------------------------
Total shareholders' equity 7,234,793
--------------------------------------------------------------------------------
$ 13,444,416
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
IFS International Holdings, Inc.
Consolidated Statements of Operations
Years Ended April 30, 2000 and 1999
2000 1999
--------------------------------------------------------------------------------
Revenues:
Software license and installation contract fees $ 7,572,906 $4,757,888
Hardware sales 1,482,932 1,830,947
Service and maintenance revenue 3,950,432 3,575,783
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
13,006,270 10,164,618
--------------------------------------------------------------------------------
Cost of revenues:
Software license and installation contract fees 1,878,471 896,777
Hardware sales 351,471 462,842
Service and maintenance revenue 1,363,410 1,004,117
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,593,352 2,363,736
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Gross profit 9,412,918 7,800,882
--------------------------------------------------------------------------------
Operating expenses:
Research and development 1,324,578 1,944,903
Salaries 3,630,372 2,942,466
Selling, general and administrative 2,955,055 2,498,565
Rent and occupancy 619,463 578,277
Other 487,112 427,016
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
9,016,580 8,391,227
--------------------------------------------------------------------------------
Income (loss) from operations 396,338 (590,345)
Other income (expense):
Interest expense (321,780) (145,793)
Interest income 58,019 148,034
Other income (expense) 100,499 (93,003)
--------------------------------------------------------------------------------
Income (loss) before income taxes 233,076 (681,107)
Provision for income taxes (196,900) (22,800)
--------------------------------------------------------------------------------
Net income (loss) $ 36,176 $ (703,907)
Basic and diluted net income (loss)
per common share $ 0.01 $ (0.53)
Weighted average common shares outstanding 3,382,000 1,325,300
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
IFS International Holdings, Inc.
Consolidated Statements of Shareholders' Equity
Years Ended April 30, 2000 and 1999
------------------------------------------------------------------------------------------------------------------------------------
[-Preferred Stock-] [-Common Stock-] Accumulated
Additional Other
Shares Par Shares Par Paid-in Accumulated Comprehensive Comprehensive
Outstanding Value Outstanding Value Capital Deficit Income (Loss) Total Income (Loss)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
April 30, 1998 1,396,638 $ 1,397 1,137,353 $ 1,137 $ 8,241,451 $ (3,879,934) $ 3,452 $ 4,367,503
Issuance of common stock - - 42,996 43 81,614 - - 81,657
Sale of warrants - - - - 30,000 - - 30,000
Issuance of additional
preferred stock for
acquisition of Network
Controls International,
Inc. 62,456 62 - - 62,394 - - 62,456
Other conversions of
preferred stock (148,675) (149) 148,675 149 - - - -
Mandatory conversions of
preferred stock to
common stock (1,310,419) (1,310) 1,441,461 1,441 (131) - - -
Foreign currency
translation adjustment - - - - - - (10,108) (10,108) $ (10,108)
Net loss - - - - - (703,907) - (703,907) (703,907)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
April 30, 1999 - - 2,770,485 2,770 8,415,328 (4,583,841) (6,656) 3,827,601 $ (714,015)
Issuance of common stock - - 136,247 136 209,581 - - 209,717
Issuance of preferred
stock 200,000 200 - - 1,869,800 - - 1,870,000
Exercise of warrants - - 90,000 90 224,910 - - 225,000
Issuance of additional
common stock for
acquisition of
Network Controls
International, Inc. - - 1,051,716 1,051 1,008,598 - - 1,009,649
Other - - 3 - 7 - - 7
Warrants issued with
convertible debt - - - - 131,200 - - 131,200
Foreign currency
translation adjustment - - - - - - (74,557) (74,557) $ (74,557)
Net income - - - - - 36,176 - 36,176 36,176
------------------------------------------------------------------------------------------------------------------------------------
Balances at
April 30, 2000 200,000 $ 200 4,048,451 $ 4,047 $ 11,859,424 $ (4,547,665) $ (81,213)$ 7,234,793 $ (38,381)
------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-5
</TABLE>
<PAGE>
<TABLE>
IFS International Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended April 30, 2000 and 1999
2000 1999
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 36,176 $ (703,907)
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Depreciation and amortization 965,266 769,640
Other 27,507 -
Changes in operating assets and liabilities:
Inventory 49,365 (61,400)
Trade accounts receivable, net (298,088) (697,800)
License fees receivable (1,274,918) -
Costs, estimated earnings and billings on uncompleted
contracts (398,808) (406,535)
Other (291,349) 12,736
Accounts payable (7,714) 143,729
Accrued expenses 235,799 191,064
Deferred revenue and customer deposits (63,672) (92,357)
-------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,020,436) (844,830)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Facilities acquisition expenditures and equipment purchases (166,165) (171,110)
Other - (21,479)
Capitalized software and product enhancement costs (867,305) (686,118)
Acquisition of minority interest - (34,540)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,033,470) (913,247)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (65,967) (1,201,013)
Proceeds from notes payable 934,300 2,081,442
Proceeds from issuance of common stock and warrants 445,700 111,657
Proceeds from issuance of preferred stock 1,870,000 -
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,184,033 992,086
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (74,556) (10,108)
-------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,055,571 (776,099)
Cash and cash equivalents:
Beginning of year 1,326,708 2,102,807
-------------------------------------------------------------------------------------------------------------------
End of year $2,382,279 $1,326,708
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash paid during the year
for:
Interest $ 321,781 $ 145,793
Income taxes $ 115,928 $ 30,385
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Accrued commissions exchanged for common stock $ 92,717 $ -
Common stock issued as compensation $ 27,500 $ -
PURCHASE OF NETWORK CONTROLS INTERNATIONAL, INC.
Fair value of assets acquired $1,009,649 $ 62,456
Capital stock issued (1,009,649) (62,456)
-------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ - $ -
See Notes to Consolidated Financial Statements.
F-6
</TABLE>
<PAGE>
IFS International Holdings, Inc.
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Description of Business
The consolidated financial statements include the accounts of IFS
International Holdings, Inc. (Holdings) (a Delaware corporation)
and its wholly-owned subsidiaries, IFS International, Inc. (IFS),
Network Controls International, Inc. (NCI), and Global Insight
Group, Ltd. (GIG) (all collectively referred to as the Company).
All significant intercompany accounts and transactions have been
eliminated.
The Company is engaged in the design and development of computer
software for use with automatic teller machines (ATMs), electronic
fund transfers (EFTs), and point of sale (POS) systems used by
financial institutions and retailers. The Company is also engaged
in the sale of computer equipment and software to the financial
services industry and provides its customers with support and
maintenance services for such systems.
A significant portion of the Company's sales and revenues are
derived from financial institutions and other customers located
outside of the United States (see Notes 13 and 14). The Company
extends credit to its customers and generally requires deposits
upon execution of software development contracts. With respect to
foreign customers, collection may be more difficult upon default.
Summary of Significant Accounting Policies
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and reported amounts of revenue and expenses during the reporting
period, as well as amounts disclosed for contingencies. Among the
more significant estimates included in the financial statements
are the estimated costs to complete software installation
contracts, amortization of capitalized software and product
enhancement costs and the valuation allowance reducing the
Company's deferred tax asset. Actual results could differ from
those estimates.
Revenue recognition:
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued SOP No. 97-2, "Software Revenue
Recognition." SOP No. 97-2, as amended, was adopted by the
Company in the fiscal year beginning May 1, 1999. SOP No. 97-2
provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. Based
on the Company's interpretation of the requirements of SOP No.
97-2, as amended, application of this statement has not
materially impacted the Company's revenues, results of operations
or financial position.
The Company generates several types of revenue, including the
following:
Software License and Installation Contract Fees. The Company's
standard license agreement for the Company's products provides
for an initial fee to use the product in perpetuity at
designated, or up to, a maximum number of sites. Fees from
licenses are recognized as revenue upon delivery of core
software, provided fees are fixed or determinable and collection
is probable. Fees from licenses sold together with consulting
F-7
<PAGE>
IFS International Holdings, Inc.
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Summary of Significant Accounting Policies, Continued
Revenue recognition, continued:
services are generally recognized upon shipment provided that the
above criteria have been met and payment of the license fees is
not dependent upon the performance of the consulting services. In
instances where the aforementioned criteria have not been met,
both the license and consulting fees are recognized under the
percentage of completion method of contract accounting. Several
of the Company's license fee arrangements allow for extended
payment terms (generally one to two years).
Revenue, other than the portion attributable to license fees
discussed above, from software installation contracts is
recognized on the percentage-of-completion method, measured by
the ratio of costs incurred to date to management's estimates of
total anticipated costs. This method is used because management
considers costs incurred to be the best available measure of
progress on software installation contracts. Because of the
inherent uncertainties in estimating contracts, it is at least
reasonably possible that the Company's estimates of costs and
revenues will change in the near term. Uncertainty inherent in
initial estimates is reduced progressively as work on the
contract nears completion.
The Company also receives sublicense fees from value-added
resellers based on the sublicenses granted by the reseller.
Sublicense fees typically are based on a percentage of the
Company's list price and are generally recognized as they are
reported by the reseller.
Hardware Sales: Revenues from sales of hardware are generally
recognized on shipment of product.
Service and Maintenance Revenue. Support agreements generally
call for the Company to provide technical support and software
updates to customers. Revenue on technical support and software
update rights is recognized ratably over the term of the support
agreement.
The Company also provides consulting and training services to its
customers. Revenue from such services is generally recognized
over the period during which the applicable service is performed.
Deposits received in advance for hardware sales are deferred and
recognized as revenue upon installation and acceptance of the
system. Amounts received on service contracts are initially
deferred and recognized ratably over the life of the contract,
generally one year. With the exception of revenues earned through
foreign subsidiaries, all revenues derived outside of the United
States are denominated in U.S. dollars.
Cash and cash equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash
equivalents consist of money market funds which focus on high
quality, short-term money market instruments of all types.
F-8
<PAGE>
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Summary of Significant Accounting Policies, Continued
Allowance for doubtful accounts:
Trade accounts receivable are stated net of an allowance for
doubtful accounts. Bad debts are provided for on the allowance
method based upon historical experience and management's
estimation of collection losses on outstanding accounts
receivable.
Inventories:
Inventories are stated at the lower of identified cost, or
market, and consist principally of hardware products for resale.
Property, plant and equipment:
Property, plant and equipment are stated at cost, with related
depreciation provided by the declining-balance and straight-line
methods over the estimated useful lives of the related assets,
ranging from three to forty years.
Capitalized software and product enhancement costs:
The cost of adding new functions and features (i.e.,
enhancements) to existing systems and the cost of development of
new systems, for which technological feasibility has been
established and which are not covered by outside funding, are
capitalized. Research and development costs incurred in the
establishment of technological feasibility of new systems are
expensed as incurred.
Capitalized amounts are reported at the lower of unamortized cost
or net realizable value. Amortization is recorded over the
estimated marketing lives of the software and enhancements which
range from two to five years, and is computed on the greater of
the percent-of-revenue method, based on the total estimated
future revenues expected to be derived from sales of the
software, or the straight-line method. Adjustments are made to
accelerate amortization when, in management's estimation, the
unamortized capitalized costs exceed the net realizable value for
specific products.
Income taxes:
Current or deferred taxes are recognized for the tax consequences
of all events recognized in the financial statements. Deferred
taxes are computed on the differences between the financial
reporting and the tax reporting basis of assets and liabilities.
The Company has not recognized the benefit of any net operating
loss carryforwards due to the uncertainty of the realizability of
such carryforwards. The Company files a consolidated Federal
income tax return with its domestic subsidiaries.
Accounting for stock-based compensation:
The Company records compensation expense for employee stock
options and warrants only if the current market price of the
underlying stock exceeds the exercise price on the date of the
grant in accordance with Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees ("APB 25"). On May 1,
1996, the Company
F-9
<PAGE>
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Summary of Significant Accounting Policies, Continued
Accounting for stock-based compensation, continued:
adopted the disclosure provisions of Financial Accounting
Standard No. 123, Accounting for Stock-Based Compensation. The
Company has elected not to implement the fair value based
accounting method for employee and directors' stock options and
warrants, but has elected to disclose the pro forma net income
(loss) and pro forma basic and diluted net income (loss) per
share to account for employee and directors' stock option and
warrant grants, as if such method had been used to account for
such stock-based compensation.
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 loss but are
accumulated in a separate component of shareholders' equity.
Foreign currency transaction gains and losses, which are
generally not material, are included in other expense (income) in
the statement of operations when incurred.
Basic and diluted net income (loss) per share:
Basic and diluted net income (loss) per share is computed using
the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed using
the weighted average number of common and potential common shares
outstanding during the period. Potential common shares consist of
the incremental common shares issuable upon the exercise of stock
options and warrants (using the treasury stock method). Potential
common shares are excluded from the computation if their effect
is anti-dilutive, as was the case for the year ended April 30,
1999.
Comprehensive income (loss):
The Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS No. 130") during
the fiscal year ended April 30, 1999. Comprehensive income (loss)
of the Company includes net income (loss), adjusted for the
change in foreign currency translation adjustments. The net
effect of income taxes on comprehensive income (loss) is
immaterial.
Asset impairment assessments:
The Company reviews long-lived assets for impairment whenever
events or circumstances indicate that the carrying value of such
assets may not be fully recoverable. An impairment is recognized
to the extent that the sum of undiscounted estimated future cash
flows expected to result from the use of assets is less than the
carrying value. No impairment has been recognized through April
30, 2000.
Reclassification:
Certain items have been reclassified in the 1999 financial
statements to conform to the current year's presentation.
F-10
<PAGE>
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Summary of Significant Accounting Policies, Continued
Recent accounting pronouncements:
In June 1998, FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was issued, which establishes new
standards for recording derivatives in interim and annual
financial statements. This statement requires recording all
derivative instruments as assets or liabilities, measured at fair
value. Statement No. 133, as amended, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
Management does not anticipate the adoption of the new statement
will have a significant impact on the consolidated results of
operations or financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition in Financial Statements, which provides guidance on
the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies.
SAB 101, as amended, is effective for the Company's fiscal
quarter beginning May 1, 2000. While the Company is currently
evaluating the impact, if any, of SAB 101, management does not
presently believe that it will have a material impact on the
consolidated results of operations or financial position of the
Company.
NOTE 2. ACQUISITIONS
Network Controls International, Inc.
In January 1998, the Company acquired Network Controls
International, Inc. (NCI). NCI is engaged primarily in the sale of
computer equipment and software to financial institutions. NCI also
sells related services including installation, training, consulting
and programming. NCI has three wholly-owned subsidiaries which
provide marketing and sales support to customers in European
markets. The subsidiaries are as follows:
Network Controls GmbH (Germany)
Network Controls International Ltd. (London)
Network Controls International Espana, S.A. (Spain) (Inactive)
The Company acquired all of the outstanding shares of capital stock
of NCI initially 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. 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.
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.
During 1999, the Company waived the equity deficiency clause of the
acquisition agreement. Accordingly, the allowance was reversed and
an additional 62,456 shares of preferred stock were issued and
recorded as additional purchase costs.
F-11
<PAGE>
NOTE 2. ACQUISITIONS, CONTINUED
Pursuant to the acquisition agreement, additional shares are
issuable if the consolidated pre-tax profits of NCI exceed 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, as
contingent consideration. These issuances are treated as additional
purchase costs.
During 2000, approximately 1,050,000 shares of common stock were
issued pursuant to the agreement for the financial performance of
NCI for the year ended April 30, 1999 (see Note 11).
The excess of the cost of acquiring NCI over the fair value of net
assets acquired, including the fair value of contingent shares
issued in 2000, approximates $1,046,000. Such costs are being
amortized over eight years. Amortization approximated $142,000 and
$49,000 for the years ended April 30, 2000 and 1999, respectively.
Global Insight Group, Ltd.
In December 1999, the Company acquired Global Insight Group, Ltd.
(GIG), a corporation organized and existing under the laws of the
United Kingdom. GIG provides computer system support, maintenance
and consulting services. The Company acquired all of the
outstanding shares of capital stock of GIG in exchange for three
shares of the Company's common stock.
The acquisition of GIG was also accounted for as a purchase and the
operating results of GIG were included in the consolidated
financial statements commencing December 1999. The accounts and
operations of GIG were not material.
The GIG acquisition agreement also provides for the issuance of
additional shares based upon the net earnings of GIG (as defined)
for each of the calendar years of 2000, 2001 and 2002. Any
additional shares issued pursuant to the financial performance of
GIG will be recorded as purchase costs.
NOTE 3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts are
summarized as follows:
-------------------------------------------------------------------
Expenditures on uncompleted contracts $ 1,270,693
Estimated earnings thereon 353,460
-------------------------------------------------------------------
1,624,153
Less billings to date 710,818
-------------------------------------------------------------------
$ 913,335
These costs and estimated earnings are included in the
accompanying balance sheet under the following captions:
-------------------------------------------------------------------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 961,792
Billings in excess of costs and estimated
earnings on uncompleted contracts 48,457
-------------------------------------------------------------------
$ 913,335
F-12
<PAGE>
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
-------------------------------------------------------------------
Building $ 1,917,731
Machinery and equipment 1,957,042
Furniture and fixtures 541,178
Leasehold improvements 47,247
-------------------------------------------------------------------
4,463,198
Less accumulated depreciation 2,039,402
-------------------------------------------------------------------
Property, equipment and improvements, net $ 2,423,796
Depreciation related to property, equipment, and improvements
approximated $314,000 and $360,000 for the years ended April 30,
2000 and 1999, respectively.
The land underlying the Company's New York facility is subject to a
long-term ground lease arrangement with no annual rental
requirements.
NOTE 5. CAPITALIZED SOFTWARE AND PRODUCT ENHANCEMENT COSTS
Capitalized software and product enhancement costs consist of the
following:
-----------------------------------------------------------------
Capitalized software and product
enhancement costs $ 2,669,948
Less accumulated amortization 1,042,341
-----------------------------------------------------------------
Capitalized software costs, net $ 1,627,607
Amortization expense approximated $509,000 and $415,000 for the
years ended April 30, 2000 and 1999, respectively.
NOTE 6. LINE OF CREDIT
The Company has available a $600,000 bank line of credit subject to
annual review. Borrowings under the line of credit accrue interest
at prime plus 3/4% and are secured by inventory, receivables,
property and equipment. No amounts were outstanding under the line
as of April 30, 2000.
F-13
<PAGE>
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following at April 30, 2000:
<TABLE>
----------------------------------------------------------------------------------
<S> <C>
Two mortgage notes payable, bank, monthly payments of $3,582 and
$4,863, including interest at 6% and 8% respectively, with the
entire unpaid principal and accrued interest due April 2009. The
notes are secured by a mortgage on the Company's New York
operating facility. Interest on the first note is fixed for two
years at which time the note will be increased to 8%. Interest on
both notes will be adjusted after five years to the weekly
average yield to an investor of United States Treasury
Securities, adjusted to a constant maturity of five years, plus
3%. $1,059,864
Mortgage note payable, public benefit corporation, monthly
payments of $8,433, including interest at 8.11%, with the entire
unpaid principal and accrued interest due April 2009. The note is
also secured by a mortgage on the Company's New York operating
facility. 982,339
Convertible notes payable, $1,075,000 original principal balance.
The convertible notes require interest generally at 10% and are
due in July 2001. The notes may be redeemed by the Company at
prices ranging from 107% to 119% of the outstanding principal
balance. The notes may be converted to common stock by the
holders at the lower of $3.00 per share or 90% of the market
value, as defined. The convertible notes were recorded net of
discounts approximating $241,200. 934,300
Restructured convertible subordinated debentures payable to a
governmental agency due in 2000. Interest is payable quarterly at
7.5%. The debentures are convertible into shares of common stock
at $4.50 per share through April 2000. At April 30, 2000,
approximately 59,700 shares of common stock were issuable under
this conversion feature. 250,000
Restructured note payable, government agency, principal and
interest payments of $3,804 per month, including interest at
7.5%, due April 2002. This note is unsecured and subordinated to
all other debt.
Other long-term debt 15,111
----------------------------------------------------------------------------------
3,363,899
Less current portion 387,735
----------------------------------------------------------------------------------
$ 2,976,164
</TABLE>
Certain of the Company's long-term debt obligations require
compliance with financial and non-financial covenants.
Aggregate maturities of long-term debt are as follows:
-------------------------------------------------------------------
Year Ending April 30
-------------------------------------------------------------------
2001 $ 387,735
2002 1,034,291
2003 54,778
2004 59,356
Thereafter 1,827,739
-------------------------------------------------------------------
$3,363,899
NOTE 8. INCOME TAXES
The provision for income taxes consists primarily of state
franchise and current foreign taxes in 2000, and current foreign
taxes, net of domestic refunds, in 1999. Deferred tax account
balances at April 30, 2000 and 1999 were not material.
F-14
<PAGE>
NOTE 8. INCOME TAXES, CONTINUED
The provision (benefit) for income taxes for the years ended April
30, 2000 and 1999 differs from the amount obtained by applying the
U.S. federal income tax rate to pretax income (loss) due to the
following:
<TABLE>
-------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal income tax (benefit) at statutory rates $ 79,000 $ (232,000)
State income tax (benefit), net of federal benefits 92,000 (40,000)
Franchise taxes 45,800 -
Foreign taxes 59,500 80,900
Change in valuation allowance for net operating losses (79,400) 213,900
-------------------------------------------------------------------------------------------------------
Provision for income taxes $ 196,900 $ 22,800
</TABLE>
<TABLE>
Deferred tax assets (liabilities) at April 30, 2000 are comprised as follows:
-------------------------------------------------------------------------------------------------------
<S> <C>
Net operating loss carryforwards $1,513,000
Net capitalized software and product enhancement costs (553,000)
-------------------------------------------------------------------------------------------------------
960,000
Valuation allowance (960,000)
-------------------------------------------------------------------------------------------------------
$ -
</TABLE>
At April 30, 2000, the Company has net operating loss carryforwards
of approximately $4,450,000 which begin to expire in 2004 to offset
future federal taxable income. 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.
NOTE 9. STOCK OPTION PLANS
The Company has stock option plans (the 1988 Plan and the 1998
Plan) which provide for the granting of either options intended to
qualify as "incentive stock options" under the Internal Revenue
Code or "supplemental stock options" not intended to qualify. Under
these plans, the Board of Directors determines the exercise and
expiration dates of the options which may not be later than 10
years from the date of the grant. The purchase prices of the shares
under incentive stock options must be at least equal to the fair
market value of the common stock at the date of the grant.
The following tables summarize option activity during 2000 and 1999
under stock option plans:
<TABLE>
-------------------------------------------------------------------------------------------------------
Shares Under Option
[---------------- Year Ended April 30 ---------------]
Weighted Weighted
Average Average
Exercise Exercise
1988 Stock Option Plan 2000 Price 1999 Price
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding beginning of year 216,140 $ 1.45 227,136 $ 1.94
Granted 15,183 2.44 61,750 1.57
Exercised (73,350) 1.28 (10,996) 0.88
Canceled (15,183) 2.36 (61,750) 2.42
-------------------------------------------------------------------------------------------------------
Outstanding end of year 142,790 $ 1.51 216,140 $ 1.45
-------------------------------------------------------------------------------------------------------
Exercisable 142,790 $ 1.51 214,112 $ 1.43
-------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
NOTE 9. STOCK OPTION PLANS, CONTINUED
Options outstanding at April 30, 2000 under the 1988 Plan, may be
exercised at prices ranging from $1.00 to $3.50 per share. At April
30, 2000, no options were available for future issuance under this
Plan. An aggregate of 332,779 shares of common stock were
originally reserved in connection with the 1988 Plan.
The weighted-average remaining contractual life of outstanding
options under the 1988 Plan is 6.22 years.
<TABLE>
-------------------------------------------------------------------------------------------------------
Shares Under Option
[-------------- Year Ended April 30 ---------------]
Weighted Weighted
Average Average
Exercise Exercise
1998 Stock Option Plan 2000 Price 1999 Price
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding beginning of year 1,396,295 $ 2.18 - $ -
Granted 303,550 2.15 1,406,745 2.17
Exercised (52,897) 2.07 - -
Canceled (64,285) 2.30 (10,450) 1.31
-------------------------------------------------------------------------------------------------------
Outstanding end of year 1,582,663 $ 2.93 1,396,295 $ 2.18
-------------------------------------------------------------------------------------------------------
Exercisable 614,083 $ 2.01 251,725 $ 1.64
-------------------------------------------------------------------------------------------------------
</TABLE>
An aggregate of 1,800,000 shares of common stock has been reserved
in connection with the 1998 Plan. The weighted-average remaining
contractual life of outstanding options under the 1998 Plan is 8.56
years. Options outstanding under the 1998 Plan may be exercised at
prices ranging from $1.31 to $4.90 per share. At April 30, 2000,
164,440 options were available for future issuance.
In accordance with APB 25, no employee compensation cost has been
recognized in accounting for the stock option plans in 2000 or
1999. Had compensation costs and fair values been determined
pursuant to FAS 123, net income for 2000 would have decreased by
approximately $628,000 and net loss for 1999 would have increased
by approximately $2,925,000. Basic and diluted net loss per common
share would have approximated $0.18 and $2.74 in 2000 and 1999,
respectively, under FAS 123. The weighted average fair value of
options granted during 2000 and 1999, for the purpose of FAS 123,
is $2.06 and $2.22 per share, respectively.
In accordance with FAS 123, the fair value of each option for 2000
was estimated on the grant date using the Black-Scholes Single
Option Model, assuming no dividend yield, and with the following
assumptions: risk-free interest rates ranging from 6.22% to 6.76%;
and volatility factors of the expected market price of the
Company's common stock of 112%.
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company has adopted qualified profit sharing plans with 401(k)
deferred compensation provisions. Substantially all employees are
eligible to participate in either of the plans. The plans provide
for contributions by the Company at the Board of Director's
discretion and on a matched basis. Contributions under the plans
approximated $99,600 during the year ended April 30, 2000 ($79,400
in 1999).
F-16
<PAGE>
NOTE 11. COMMITMENTS AND CONTINGENCIES
Leasing Arrangements
The Company leases office space and certain equipment under
operating leases. The lease arrangements generally contain renewal
options at various terms. Future minimum lease payments under
noncancellable operating leases with an initial or remaining term
of one year or more are as follows:
-------------------------------------------------------------
Year Ending April 30
-------------------------------------------------------------
2001 $ 223,821
2002 222,464
2003 215,884
2004 187,850
Thereafter 23,436
-------------------------------------------------------------
$ 873,455
Issuance of Contingent Consideration - NCI and GIG
In accordance with the acquisition of NCI (Note 2), the Company is
contingently obligated to issue shares of common stock based upon
pre-tax profits, as defined, of NCI for the year ended April 30,
2000. Approximately 400,000 shares of common stock are issuable in
this connection as of April 30, 2000. Additional purchase costs
will be recognized upon the issuance of the contingent shares.
The Company may also be contingently liable to issue shares of
common stock based upon the net earnings, as defined, of GIG for
the year ending December 31, 2000.
Marketing Agreement
In May 2000, the Company extended its marketing agreement with a
public relations firm for an additional two years. Pursuant to the
renewed agreement, the Company is obligated to pay the firm
$108,000 and has issued 200,000 common stock purchase warrants
redeemable at exercise prices ranging from $8.50 to $15.00 per
share. The Company has also agreed to issue the public relations
firm additional warrants on the anniversary date of the execution
of the contract to purchase 200,000 shares at various exercise
prices. Each warrant is for 50,000 shares at prices of 125%, 150%,
175% and 200% of the closing bid on the anniversary date of the
execution of the contract. The fair value of the warrants is not
material.
Litigation and Claims
The Company is a party to a claim asserting damages of
approximately $2,200,000 for failure to file a timely registration
statement with respect to shares underlying a warrant to purchase
300,000 shares of common stock. The Company has been served with a
demand for arbitration with respect to the claim. In addition,
certain purchases of common stock issued in a private placement in
July 1999 have also filed a claim against the Company for damages
in the amount of $175,000. This claim also alleges delays in
completing registration of the common stock. Management and legal
counsel are of the belief that both claims are without merit. No
liabilities have been accrued relating to these contingencies.
F-17
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS
Certain officers/directors receive commissions based upon a
percentage of software license fees generated by their respective
sales efforts. Approximately $193,000 and $234,600 were earned
under the commission agreements during 2000 and 1999, respectively.
The Company entered into a consulting agreement with a director in
1999 to provide consulting services through February 2002. The
agreement provides for an annual fee of $120,000 plus reasonable
and necessary business expenses. Consulting fees pursuant to this
agreement were $120,000 for both the years ended April 30, 2000 and
1999.
Accounts payable and accrued expenses include approximately
$119,000 and $298,000 as of April 30, 2000 and 1999, respectively,
due to these officers/directors.
The Company is a party to a consulting arrangement with an entity
affiliated with an organization in which an officer/director of IFS
serves as a director. This arrangement required that consulting
fees of approximately $260,000 be paid to this entity in connection
with "ISO 9000" certification assistance. Consulting fees under
this arrangement were $117,200 and $64,900 for the years ended
April 30, 2000 and 1999, respectively.
In April 2000, the Company acquired a 30% interest in an entity
controlled by a former officer in the Company in exchange for the
right to use the Company's software products. No value was ascribed
to the transaction. In connection with the exchange, the entity
agreed to pay the Company approximately $160,000 representing the
agreed to value of services provided to the entity prior to
formation. The amount due from the related entity is included in
other assets at April 30, 2000 and is also included in other income
for the year ended April 30, 2000.
NOTE 13. EXPORT REVENUES AND CERTAIN CONCENTRATIONS
Total revenues considered export revenues, including sales of NCI's
foreign subsidiaries, approximated $10,552,000 and $8,376,000, or
81% and 82% of total revenues, for the years ended April 30, 2000
and 1999, respectively. Such revenues were derived primarily from
customers located in Europe, Eastern Europe, and the Far East.
Approximately 11% and 7% of the Company's total revenues for the
years ended April 30, 2000 and 1999, respectively, were derived
pursuant to a relationship with one computer manufacturer and
approximately 5% and 10%, respectively, were derived pursuant to a
reseller agreement.
F-18
<PAGE>
NOTE 14. FOREIGN AND DOMESTIC OPERATIONS
<TABLE>
-------------------------------------------------------------------------------------------------------
April 30, 2000 April 30, 1999
--------------------------------------- ---------------------------------------
NCI NCI
Foreign Foreign
IFS NCI Subsidiaries IFS NCI Subsidiaries
-------------------------------------------------------------------------------------------------------
Net revenues from unaffiliated
customers:
<S> <C> <C> <C> <C> <C> <C>
United States $ 1,903,000 $ 551,000 $ - $ 289,000 $ 1,499,000 $ -
Foreign 5,152,000 1,925,000 3,475,000 4,020,000 598,000 3,759,000
-------------------------------------------------------------------------------------------------------
$ 7,055,000 $ 2,476,000 $ 3,475,000 $ 4,309,000 $ 2,097,000 $ 3,759,000
-------------------------------------------------------------------------------------------------------
Operating earnings (loss):
United States $ (953,000)$ 1,327,000 $ - $(2,096,000)$ 1,201,000 $ -
Foreign (231,000) - 253,000 - - 305,000
-------------------------------------------------------------------------------------------------------
$ (1,184,000$ 1,327,000 $ 253,000 $(2,096,000)$ 1,201,000 $ 305,000
-------------------------------------------------------------------------------------------------------
Identifiable assets:
United States $ 8,468,000 $ 3,693,000 $ - $ 6,332,000 $ 1,348,000 $ -
Foreign 226,000 - 1,057,000 - - 1,606,000
-------------------------------------------------------------------------------------------------------
$ 8,694,000 $ 3,693,000 $ 1,057,000 $ 6,332,000 $ 1,348,000 $ 1,606,000
-------------------------------------------------------------------------------------------------------
</TABLE>
In determining operating earnings (loss) for each geographic area,
revenues and costs of revenues between areas have been accounted
for on the basis of internal transfer prices set by the Company.
NOTE 15. SHAREHOLDERS' EQUITY
Public Offering
In February 1997, the Company sold 1,380,000 shares of preferred
stock and 1,955,000 warrants to purchase preferred stock in a
public offering. Proceeds of the offering approximated $5,700,000
after deducting underwriting discounts and expenses. Proceeds of
the public offering were used to retire long-term debt, facilities
construction and renovation, and for working capital purposes.
The preferred stock was convertible, at the option of the holder,
into one share of the Company's common stock, subject to
adjustment, until February 2002 or earlier upon the occurrence of
certain events. Each warrant entitled the holder to purchase one
share of preferred stock at a price of $6.25 per share, subject to
adjustment, for a three year period beginning in February 1999, or
earlier upon the occurrence of certain events.
Other Warrant Issuances
In connection with the public offering discussed above, the Company
sold to the underwriter warrants to purchase 120,000 shares of
preferred stock at $6.25 per share and 170,000 warrants to purchase
an equivalent number of preferred shares at an exercise price of
$1.6875 per warrant, exercisable over a period of four years
commencing in February 1998.
In September 1996, also in connection with the public offering, the
Company obtained bridge financing and issued warrants to purchase
100,000 shares of common stock. The warrants were exercisable at
$2.50 per share, subject to adjustment, through September 2001. All
warrants were exercised during 1999 and 2000.
In November 1998, the Company sold warrants to purchase up to
300,000 shares of common stock at an exercise price of $2.50 per
share. Proceeds from the sale of the warrants were $30,000.
F-19
<PAGE>
NOTE 15. SHAREHOLDERS' EQUITY, CONTINUED
Other Warrant Issuances, Continued
In connection with the issuance of $1,075,000 convertible notes in
1999, the Company issued warrants to purchase up to 200,000 shares
of common stock at an exercise price of $3.07.
Conversion of Preferred Shares
During fiscal year 1999, shareholders of the Company approved the
conversion of all of the issued and outstanding shares of preferred
stock into common shares. Each share of preferred stock was
converted into 1.1 shares of common stock. Holders of warrants and
options to purchase preferred shares prior to the conversion may
now exercise their rights for conversion into common shares at a
ratio of 1.1 to 1.
Issuance of Series B Preferred Shares and Warrants
In March 2000, the Company issued 200,000 shares of Series B
preferred stock, and warrants to purchase up to 200,000 shares of
common stock at an exercise price of $5.44. Proceeds from the sale
of the preferred stock and warrants were $1,870,000, net of
expenses incurred. Each share of preferred stock is convertible
into common stock of the Company through March 2003, at which time
the preferred stock is automatically converted into common stock.
Holders of preferred stock are entitled to annual dividends of $.50
per share payable quarterly, beginning in fiscal year 2001. In
connection with the sale, the Company issued a warrant to purchase
100,000 shares of common stock to a third party who facilitated the
transaction.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments, consisting
principally of cash equivalents and long-term debt, has been
estimated to approximate their carrying amounts, based on current
interest rates.
NOTE 17. INVESTMENTS
The Company has a 42% equity interest in a foreign joint venture
arrangement at April 30, 2000. The joint venture is involved in
establishing a EFT network in an Asian country and is currently in
its start-up phase. The Company's total investment in the joint
venture approximated $108,000 at April 30, 2000, and is classified
as an other asset.
F-20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
IFS INTERNATIONAL, INC.
--- -------------- ----
(Registrant)
Date: _August 7, 2000____ By: \s\ David L. Hodge
-----------------------
David L. Hodge, President and
Chief Executive Officer, Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: _August 7, 2000____ By: \s\ David L. Hodge
------------------------
David L. Hodge, President and
Chief Executive Officer, Director
Date: _ August 7, 2000____ By: \s\ John P. Singleton
--------------------------
John P. Singleton
Chairman of the Board, Director
Date: _ August 7, 2000____ By: \s\ Frank A. Pascuito
--------------------------
Frank A. Pascuito
Executive Vice President, Director
Date: _ August 7, 2000____ By: \s\ Simon Theobald
-------------------------
Simon Theobald
Executive Vice President, Director
Date: _ August 7, 2000____ By: \s\ Carmen A. Pascuito
---------------------------
Carmen A. Pascuito,
CFO, Controller and Secretary
Date: _ August 7, 2000____ By: \s\ DuWayne J. Peterson
-------------------------------
DuWayne J. Peterson, Director
Date: _ August 7, 2000____ By: \s\ Per Olof Ezlius
----------------------------
Per Olof Ezelius, Director
Date: _ August 7, 2000____ By: \s\ C. Rex Welton
----------------------------------
C. Rex Welton, Director
