<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
MARK ONE [1]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............. to ...............
Commission File Number 0-8345
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4FRONT SOFTWARE INTERNATIONAL, INC.
(Exact name of registrant specified in its charter)
COLORADO 84-0675510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5650 Greenwood Plaza Blvd., Suite 107
Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 721-7341
----------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
Six and Three Month Periods Ended July 31, 1996
TABLE OF CONTENTS
Page
Number
------
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 1996
and July 31, 1996 (unaudited) 1
Condensed Consolidated Statements of Operations for the six and
three month periods ended July 31, 1995 and 1996
(unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the six months ended July 31, 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six and
three month periods ended July 31, 1995 and 1996 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
SUPPLEMENTARY INFORMATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Other Information 15
Signatures 16
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
January 31, July 31,
1996 1996
----------- -----------
(unaudited)
CURRENT ASSETS:
Cash $ 1,391,644 $11,198,970
Accounts receivable, net of allowance
for doubtful accounts of $79,000 and
$151,000 respectively 7,533,188 8,044,793
Deposits 37,250 29,970
Inventories 3,339,998 4,098,100
Prepaid expenses 396,623 429,673
Deferred offering costs 338,595 --
Income taxes receivable 160,166 165,053
Other current assets 266,582 274,802
----------- -----------
Total current assets 13,464,046 24,241,361
PROPERTY AND EQUIPMENT, net 905,976 1,065,111
INVESTMENT IN AND ADVANCES
TO EQUITY INVESTEE 248,048 339,421
RECEIVABLE, RELATED PARTY 644,356 644,356
INTANGIBLE ASSETS, net 2,074,400 1,950,660
OTHER ASSETS 606,594 616,528
----------- -----------
TOTAL ASSETS $17,943,420 $28,857,437
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- 1 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, July 31,
1996 1996
------------ ------------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 6,644,065 $ 4,697,120
Accrued liabilities 1,559,673 1,058,506
Stockholder advances 391,842 391,842
Lines of credit-bank 1,482,763 --
Notes payable (including amounts with related
party of $980,000 and $0 respectively) 1,695,403 --
Capital lease obligations, current portion 54,888 77,013
Income taxes payable 374,688 271,203
Deferred revenue 2,546,604 2,393,320
------------ ------------
Total current liabilities 14,749,926 8,889,004
CAPITAL LEASE OBLIGATIONS, less current
portion 92,718 101,091
------------ ------------
TOTAL LIABILITIES 14,842,644 8,990,095
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, no par value 30,000,000
shares authorized 3,005,108 and 6,508,747
shares issued and outstanding, respectively 6,972,674 23,164,689
Accumulated (deficit) (3,878,599) (3,367,177)
Cumulative foreign currency translation
adjustment 6,701 69,830
------------ ------------
Total stockholders' equity 3,100,776 19,867,342
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 17,943,420 $ 28,857,437
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
July 31, 1995 July 31, 1996 July 31, 1995 July 31, 1996
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 8,594,002 $ 10,060,425 $ 13,288,104 $ 20,610,663
Cost of revenues 5,433,016 6,655,556 8,241,828 13,934,697
------------ ------------ ------------ ------------
GROSS PROFIT 3,160,986 3,404,869 5,046,276 6,675,966
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses 2,593,407 2,832,116 4,133,794 5,544,194
Depreciation 96,346 73,437 150,542 154,396
Amortization 50,922 61,870 78,905 123,740
------------ ------------ ------------ ------------
Total operating expenses 2,740,675 2,967,423 4,363,241 5,822,330
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST EXPENSE,
INCOME TAXES, AND SHARE OF
RESULTS IN EQUITY INVESTEE: 420,311 437,446 683,035 853,636
INTEREST INCOME (EXPENSE)
Interest income -- 77,747 -- 81,588
Interest expense (76,058) (25,322) (186,398) (128,936)
------------ ------------ ------------ ------------
Total interest income (expense) (76,058) 52,425 (186,398) (47,348)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
SHARE OF RESULTS IN EQUITY
INVESTEE: 344,253 489,871 496,637 806,288
SHARE OF OPERATING (LOSS) OF
EQUITY INVESTEE (72,947) (72,219) (72,947) (124,392)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 271,306 417,652 423,690 681,896
INCOME TAXES 81,392 104,413 119,489 170,474
------------ ------------ ------------ ------------
NET INCOME $ 189,914 $ 313,239 $ 304,201 $ 511,422
------------ ------------ ------------ ------------
NET INCOME PER COMMON SHARE
(NOTE 4) $ 0.07 $ 0.06 $ 0.12 $ 0.12
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Common Stock Currency
--------------------------- Accumulated Translation
Shares Amount (Deficit) Adjustment Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1996 3,005,108 $ 6,972,674 $ (3,878,599) $ 6,701 $ 3,100,776
Exercise of stock options 53,639 536 -- -- 536
Net income for
period (unaudited) -- -- 198,183 -- 198,183
Foreign currency
translation adjustment -- -- -- (36,985) (36,985)
------------ ------------ ------------ ------------ ------------
Balance, April 30, 1996
(unaudited) 3,058,747 6,973,210 (3,680,416) (30,284) 3,262,510
------------ ------------ ------------ ------------ ------------
Net income for
period (unaudited) -- -- 313,239 -- 313,239
Foreign currency
translation adjustment -- -- -- 100,114 100,114
Stock issued in offering
net of offering costs 3,450,000 16,191,479 -- -- 16,191,479
------------ ------------ ------------ ------------ ------------
Balance, July 31, 1996
(unaudited) 6,508,747 $ 23,164,689 $ (3,367,177) $ 69,830 $ 19,867,342
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
July 31, 1995 July 31, 1996 July 31, 1995 July 31, 1996
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (TO)OPERATING
ACTIVITIES:
Net income $ 189,914 $ 313,239 $ 304,201 $ 511,422
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 96,346 73,437 150,542 154,396
Amortization 50,922 61,870 78,905 123,740
Share of operating (loss) of equity investee 72,947 72,219 72,947 124,392
Loss (gain) loss on disposal of fixed assets -- (17,234) 6,448 (36,682)
Decrease (increase) in accounts receivable 416,508 (123,669) 626,221 (511,605)
Decrease in deposits 18,710 4,194 20,048 7,280
(Increase) in inventories (584,922) (259,159) (965,092) (758,102)
(Increase) in prepaid expenses (100,921) (114,570) (164,433) (33,050)
Increase (decrease) in income taxes 84,161 (161,839) 117,367 (108,372)
Decrease (increase) in other current assets 33,570 12,204 (120,024) (8,220)
(Increase) in account receivable related party (6,396) -- (5,197) --
Increase (decrease) in accounts payable and
accrued liabilities 616,329 (2,677,858) 977,163 (2,448,113)
Increase (decrease) in deferred revenue 607,335 273,825 738,411 (153,284)
------------ ------------ ------------ ------------
Net cash provided (used) by operating activities 1,494,503 (2,543,341) 1,837,507 (3,136,198)
------------ ------------ ------------ ------------
CASH FLOWS (TO) INVESTING ACTIVITIES:
Purchase of equipment (29,667) (193,553) (65,403) (295,315)
Proceeds from disposal of equipment 8,400 82,920 20,645 111,814
Acquisition of subsidiaries (1,152,574) -- (1,229,309) --
Investment in and advances to equity investee (38,165) (172,514) (147,382) (215,764)
Software development costs (114,111) -- (211,841) --
(Increase) decrease in other assets (99,804) (40,148) (99,388) (9,934)
------------ ------------ ------------ ------------
Net Cash (Used) by Investing Activities (1,425,921) (323,295) (1,732,678) (409,199)
------------ ------------ ------------ ------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
(Decrease) in lines of credit-bank (312,130) (2,017,991) (674,814) (1,482,763)
Repayment of notes payable (464,095) (1,301,234) (881,119) (1,695,403)
Issuance of notes payable 611,496 -- 611,496 --
Repayment of stockholders'advances (230,456) -- (227,756) --
Decrease in deferred offering costs 187,554 571,119 19,396 338,595
Payments of capital lease obligations (58,603) (39,291) (87,181) (62,850)
Decrease in amounts due to related party (2,000) -- (7,000) --
Net proceeds from exercise of share options -- -- -- 536
Net proceeds from issuance of common stock 242,171 16,191,479 396,931 16,191,479
------------ ------------ ------------ ------------
Net Cash provided (used) by Financing Activities (26,063) 13,404,082 (850,047) 13,289,594
------------ ------------ ------------ ------------
Effect of exchange rate changes on cash 45,645 100,114 32,008 63,129
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 88,164 10,637,560 (713,210) 9,807,326
Cash at beginning of period 440,875 561,410 1,242,249 1,391,644
------------ ------------ ------------ ------------
Cash at end of period $ 529,039 $ 11,198,970 $ 529,039 $ 11,198,970
============ ============ ============ ============
Cash paid for interest expense $ 73,683 $ 25,322 $ 163,806 $ 128,936
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- 5 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
4Front Software International, Inc. and subsidiaries (the "Company" or "4Front")
is a UK based specialized computer services company. The Company provides key
elements of distributed computing, including systems development and
integration, storage and client-server solutions and products, as well as
hardware and software support and help desk services.
NOTE 2 - BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements contain all material adjustments consisting
only of normal recurring adjustments necessary to present fairly the financial
condition, the results of operations, the changes in stockholders' equity and
cash flows of 4Front Software International Inc. for the interim periods
presented.
The results of the six months ended July 31, 1996 are not necessarily indicative
of the results of operations for the full year. These interim unaudited
condensed consolidated financial statements and related footnotes should be read
in conjunction with the financial statements and footnotes thereto included in
the Company's Form 10-K and its Annual Report to Shareholders for the year ended
January 31, 1996.
NOTE 3 - ADOPTION OF NEW STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, accounting for Stock-Based Compensation.
The Statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Statement defines a fair value
based method of accounting for stock option plans whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. Under the new Statement, companies may continue to
measure compensation cost of stock-based plans using the current accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
issued to Employees. Companies electing to remain with the accounting in Opinion
No. 25 must make pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting defined if the Statement were
applied. The Statement is effective in 1996 and the Company has adopted its
provisions as of February 1, 1996. The Company has adopted the alternative
accounting treatment allowed by the Standard and measures compensation cost in
accordance with the provisions in Opinion No. 25. The adoption of the Statement
has no effect on the Company's results of Operations, financial position or cash
flow.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Statement
establishes accounting standards for the determination of impairment of
long-lived assets, certain identifiable intangibles and goodwill. The Statement
requires the long-lived assets and certain intangibles be reviewed for
impairment using an estimate of future undiscounted cash flows compared to the
carrying amount of the assets. If impaired, an impairment loss shall be
recognized for the amount which the carrying amount exceeds the fair value of
the assets. The Statement is effective in 1996 and the Company has adopted its
provisions as of February 1, 1996. The adoption of the Statement has no material
impact on the results of operations, financial position or cash flows of the
Company.
- 6 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - EARNINGS PER SHARE
The computation of earnings per share is calculated based on the Treasury Stock
Method.
For the three and six month periods ended July 31, 1995 the effect of Stock
Options and Warrants was anti-dilutive. For the three and six month periods
to July 31, 1996 the Treasury Stock Method of calculating earnings per share
was utilized to reflect the dilutive effects of Stock Options and Warrants.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
July 31, 1995 July 31, 1996 July 31, 1995 July 31, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 2,723,783 4,535,920 2,637,717 3,785,867
Net income per common share $ 0.07 $ 0.06 $ 0.12 $ 0.12
</TABLE>
NOTE 5 - INVENTORIES
Inventories consist of the following: January 31, 1996 July 31, 1996
---------------- -------------
(unaudited)
Computer hardware $2,823,753 $3,565,923
Computer software 374,341 434,765
Work in progress 141,904 97,412
---------- ----------
$3,339,998 $4,098,100
========== ==========
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<PAGE>
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
January 31, 1996 July 31, 1996
---------------- -------------
(unaudited)
Vehicles $ 337,282 $ 290,197
Furniture, fixtures and equipment 349,309 606,184
Computer equipment 1,416,779 1,342,206
----------- -----------
2,103,370 2,238,587
Less accumulated depreciation (1,197,394) (1,173,476)
----------- -----------
$ 905,976 $ 1,065,111
=========== ===========
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
January 31, 1996 July 31, 1996
---------------- -------------
(unaudited)
Investment in ActionTrac Inc., at cost $ 500,000 $ 500,000
Other 106,594 116,528
----------- -----------
$ 606,594 $ 616,528
=========== ===========
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities are as follows:
January 31, 1996 July 31, 1996
---------------- -------------
(unaudited)
Value Added Tax (VAT) liability $ 1,011,989 $ 730,340
Payroll taxes 523,811 302,218
Other 23,873 25,948
----------- -----------
$ 1,559,673 $ 1,058,506
=========== ===========
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<PAGE>
NOTE 9 - INCOME TAXES
The Company files a separate U.S. federal income tax return for its domestic
operations and a UK income tax return for its foreign operations. The United
Kingdom subsidiaries compute taxes at rates in effect in that country and become
payable when assessed by the Inland Revenue. Deferred federal income taxes are
not provided on the undistributed earnings of its foreign subsidiaries to the
extent the Company intends to permanently reinvest such earnings in the United
Kingdom.
The Company has provided income tax for the six months ended July 31, 1996 of
$170,474 on the profits of its operations, and for the six months to July 31,
1995 of $104,413.
NOTE 10 - SUBSEQUENT EVENTS
On August 21, 1996 the Company acquired all of the issued and outstanding stock
of Hammer Distribution Limited ("Hammer") based in the United Kingdom. The total
purchase price was (pound)1.85 million cash ($2.9 million).
On September 5, 1996 the Company filed Form 8-K, current report pursuant to
Section 13 or 15(d) of the Securities Exchange Account of 1934, in relation to
this acquisition.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company is a UK based specialized computer services company which
provides a wide range of high-end information technology solutions and services,
principally to Financial Times UK Top 500 companies and government authorities.
The Company provides key elements of distributed computing, including systems
development and integration, storage and client-server solutions and products,
as well as extensive hardware and software support services. In addition, in
1995 the Company began providing corporate Internet access, website development
and related services, and commenced offering global help desk outsourcing for
desktop software through a partnership named ActionTrac, International (the
"ActionTrac Joint Venture"). The Company believes it has a competitive advantage
as a single-source, multivendor, multiple service solution provider to a broad
range of corporate computing needs.
The Company's main operating subsidiaries were acquired in 1994 K2
Systems Plc ("K2"), Xanadu Systems LTD ("Xanadu"), and CI Support Limited
("CI"), and 1995 Compass Computer Group ("Compass"). The K2, Xanadu, CI and
Compass acquisitions have been accounted for under the purchase method of
accounting and on a consolidated basis in the Company's financial statements
for periods ending after the effective date of such acquisitions. K2 and
Xanadu were acquired effective January 14, 1994. These acquisitions
accelerated the development of the Company's systems integration activities
and network computing activities, respectively. Effective November 1, 1994,
the Company acquired all of the assets of CI. This acquisition allowed the
Company to directly provide hardware maintenance services which had
previously been contracted out by the Company to third parties. The CI
acquisition also expanded the Company's support services. In February 1996
CI had its name changed to 4Front Services Limited, ("4Front Services").
Effective April 6, 1995, the Company completed its most significant
acquisition, Compass. Compass is a supplier of high-end information storage
solutions. The acquisition of Compass has enabled the Company to become one of
the leading suppliers within the UK of high capacity storage solutions and
multi-processor servers to corporate and government users. The Compass
acquisition also expanded the Company's systems integration and support business
and provided the basis for the Company's corporate Internet services.
Effective August 15, 1996 the Company acquired Hammer Distribution Limited.
Hammer is a United Kingdom supplier of storage solutions and computer
sub-systems. The Company believes that the acquisition of Hammer will allow the
Company to expand on the market for storage solutions and sub-systems and to
help the Company to secure a significant percentage of the United Kingdom
market.
The Company's gross margin has historically been, and is anticipated to be,
affected by several factors, including the Company's mix of products and
services and the stage in the life cycle of the Company's products. Prices of
new products tend to be higher and, thus have a higher gross margin, than older
products which tend to sell for lower prices. A variety of other factors may
also lead to significant fluctuations in the Company's gross margin, such as the
timing of new product or service offerings, seasonality of demand and general
economic conditions. In general, the Company obtains the highest gross margin
from hardware maintenance. The next most profitable categories measured by gross
margin are systems integration, followed by network computing and information
storage systems. However, the Company believes that the acquisition of Compass'
lower margin information storage systems business, by substantially increasing
its revenue base, as well as its range of product and service offerings, has
enhanced the Company's long-term prospects.
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<PAGE>
RESULTS OF OPERATIONS
Three months ended July 31, 1996 compared with the three months ended July 31,
1995
Revenues
Revenues for the three months ended July 31, 1996 were $ 10.1 million, an
increase of $1.5 million, or approximately 17.1% compared to $8.6 million for
the three months ended July 31, 1995. This increase resulted from the expansion
of the Company's business particularly in the areas of information storage,
systems development and hardware support. The overall expansion was achieved
notwithstanding the discontinuation of an important product in the network
computing business which held back revenues in that area.
Gross Profit
Gross profit for the three months ended July 31, 1996 was $3.4 million, an
increase of $244,000, or 7.7% compared to $3.2 million for the three months
ended July 31, 1995. Gross margin decreased from 36.8% for the three months
ended July 31, 1995 to 33.8% for the three months ended July 31, 1996. This
decrease in gross margin arose primarily from the expansion of the Company's
information storage business.
Selling, General and Administrative
Selling, general and administrative expenses were $2.8 million, an
increase of $239,000, or 9.2% compared to $2.6 million for the three months
ended July 31, 1995. As a percentage of revenues, selling, general and
administrative expenses decreased to 28.2% from 30.2% in the three months
ended July 31, 1995. Selling expenses increased from $1.6 million to $1.7
million primarily as a result of increased expenses relating to new product
launches. The Company also increased marketing activity for its expanded
maintenance business following the merger of Compass's maintenance business
with 4Front Services and in established product lines. General and
administrative expenses increased from $1.0 million to $1.1 million primarily
as a result of a growth in infrastructure necessary to support the expansion
of the Company's businesses.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended July 31,
1996 was $135,000, a decrease of $12,000, or 8.1% compared to $147,000 for the
three months ended July 31, 1995. Depreciation was $73,000, a decrease of
$23,000 or 24%, from $96,000 for the prior period. Amortization of goodwill from
acquisitions was $62,000, an increase of $11,000, or 21.5%, from $51,000 for the
prior period. An amortization period of ten years is utilized with respect to
acquisitions.
Income Before Interest Expense, Income Taxes and Share of Results in Equity
Investee
Income before interest expense, income taxes and share of results in equity
investee ("IBITI") for the three months ended July 31, 1996 was $437,000, an
increase of $17,000, or 4.1%, as compared to $420,000 for the three months ended
July 31, 1995. As a percentage of revenues, IBITI decreased to 4.35% in the
three months ended July 31, 1996 as compared to 4.89% for the three months ended
July 31, 1995.
Net Income
Net income for the three months ended July 31, 1996 was $313,000 an
increase of $124,000 or 65% as compared to $190,000 for the three months
ended July 31, 1995. As a percentage of revenue net income increased to
3.11% in the three months ended July 31, 1996 as compared to 2.19% for the
three months ended July 31, 1995.
Equity Investee Loss
Equity investee loss was $72,000 for the three months ended July 31, 1996
reflecting the Company's proportion attributable to the ActionTrac Joint Venture
as compared to a loss during the three months ended July 31, 1995 of $73,000.
Interest
Interest expense for the three months ended July 31, 1996 was $25,000 a
decrease of $51,000 or 66.7% compared to $76,000 for the three months ended July
31, 1995. This decrease arose principally as a result of reduction in
outstanding bank debt. See "-Liquidity and Capital Resources".
-11-
<PAGE>
Six months ended July 31, 1996 compared with the six months ended July 31,
1995.
Revenues
Revenues for the six months ended July 31, 1996 were $20.6 million, an
increase of $7.3 million, or approximately 55.1% compared to $13.3 million for
the six months ended July 31, 1995. This increase resulted from the expansion of
the Company's business particularly in the areas of information storage, systems
development and hardware support. The six months period ended July 31, 1995 also
included only approximately 4 months contribution from the Compass storage
business which was acquired effective April 6, 1995. Compass business is
included for all six months to July 31, 1996.
Gross Profit
Gross profit for the six months ended July 31, 1996 was $6.7 million, an
increase of $1.7 million, or 32.3% compared to $5.0 million for the six months
ended July 31, 1995. Gross margin decreased from 37.9% for the six months ended
July 31, 1995 to 32.4% for the six months ended July 31, 1996. This decrease in
gross margin arose primarily from the expansion of the Company's storage
business.
Selling, General and Administrative
Selling, general and administrative expenses were $5.5 million, an increase
of $1.4 million, or 34.1% compared to $4.1 million for the six months ended July
31, 1995. As a percentage of revenues, selling, general and administrative
expenses decreased to 26.9% from 31.1% in the six months ended July 31, 1995.
Selling expenses increased from $2.6 million to $3.4 million primarily as a
result of increased expenses relating to new product launches. The Company also
increased marketing activity for its expanded maintenance business and its
established product lines. General and administrative expenses increased from
$1.5 million to $2.1 million primarily as a result of a growth in infrastructure
necessary to support the expansion of the Company's businesses.
Depreciation and Amortization
Depreciation and amortization expense for the six months ended July 31,
1996 was $278,000, an increase of $49,000, or 21.2% compared to $229,000 for the
six months ended July 31, 1995. This increase arose principally from the
amortization of goodwill from acquisitions. Depreciation was $154,000, an
increase of $3,000 or 2.6%, from $151,000 for the prior period. Amortization of
goodwill from acquisitions was $124,000, an increase of $45,000, or 56.8%, from
$79,000 for the prior period. An amortization period of ten years is utilized
with respect to goodwill arising from acquisitions.
Income (Loss) Before Interest Expense, Income Taxes and Share of Results in
Equity Investee
Income (loss) before interest expense, income taxes and share of results in
equity investee ("IBITI") for the six months ended July 31, 1996 was $854,000,
an increase of $171,000, or 25.0%, as compared to $683,000 for the six months
ended July 31, 1995. As a percentage of revenues, IBITI decreased to 4.14% in
the six months ended July 31, 1996 as compared to 5.14% for the six months ended
July 31, 1995.
Net Income
Net income for the six months ended July 31, 1996 was $511,000 an
increase of $207,000 or 68%, as compared to $304,000 for the six months ended
July 31, 1996. As a percentage of revenues net income increased to 2.47% for
the six months ended July 31, 1996 as compared to 2.28% for the six months
ended July 31, 1995.
Equity Investee Loss
Equity investee loss was $124,000 for the six months ended July 31, 1996
reflecting the Company's proportion attributable to the ActionTrac Joint Venture
as compared to a loss during the six months ended July 31, 1995 of $73,000.
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<PAGE>
Interest
Interest expense for the six months ended July 31, 1996 was $47,000 a
decrease of $139,000 or 74.6% compared to $186,000 for the six months ended July
31, 1995. This decrease arose principally as a result of reduction in
outstanding bank debt. See "-Liquidity and Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
Until June 1996, the Company's principal sources of capital have been
cash flow generated from operations, private placements of equity and notes
payable (bridge loans), primarily from its controlling stockholders and
related parties, and borrowings from banks. On June 19, 1996, the Company
completed a public offering (the "Offering") of 3,000,000 shares of the
Company's Common Stock at a price of $5.75 per share. On July 9, 1996 the
Company completed the sale of a further 450,000 shares, pursuant to the
underwriters' over-allotment option. In consequence of this offering the
Company raised net proceeds of $16.2 million.
Following the offering, the Company has repaid all outstanding borrowings.
The Company maintains unutilised credit facilities with commercial lending
institutions.
As of July 31, 1996, the Company had a line of credit with a commercial
lending institution in the amount of (pound)650,000 ($1 million), with no
balance outstanding as of July 31, 1996. In October 1994, a pre-existing
line of credit in the amount of (pound)180,000 ($272,000) was converted into
a two year term loan, requiring repayment of principal at (pound)8,075
($12,800) per month. This term loan was repaid in full in the period to July
31, 1996. The outstanding credit facilities are secured by the assets of the
Company and are periodically reviewed by the issuing institutions. Management
expects to be able to maintain these credit arrangements for the foreseeable
future, although no assurances may be given.
During the six months to July 31, 1996 cash generated by operations has
been sufficient to satisfy the Company's internal working capital needs.
Management believes that the Company will continue to generate cash in amounts
sufficient to both conduct operations at their current level and to fund
internal growth. However, the proceeds of the Offering, after repayment of debt,
are available to fund further additional expansion and growth by acquisition.
The Company's Compass subsidiary has a (pound)997,000 ($1.55 million)
line of credit (overdraft protection) with a UK bank of which no balance was
outstanding as of July 31, 1996. Advances are collateralized by all the
assets of Compass. This facility bears interest at 2.5% above the banks' base
rate. This line of credit is subject to periodic review.
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The $880,000 cash portion of the Compass acquisition was funded primarily
from the proceeds of a $790,000 bridge loan which was completed in January, 1995
and a private placement completed in May, 1995 in which gross proceeds of
approximately $630,000 were raised. This bridge loan, plus interest, was
initially due on May 31, 1995. $145,000 of this bridge loan was repaid and
$115,000 was converted into equity as offered in the private placement and the
remaining $530,000 was exchanged for new bridge notes as part of a $1.0 million
bridge loan which was completed by the Company in June, 1995 The proceeds of
this June, 1995 bridge loan were used to fund acquisition costs and to provide
additional working capital for the Company. This bridge loan, plus interest, was
originally due on December 14, 1995. $50,000 of this amount was repaid, the
remaining balance was repaid in July, 1996 from proceeds of the offering.
Outstanding advances from stockholders are shown on the Company's balance
sheet as stockholder advances. Outstanding advances as of July 31, 1996 were
$392,000. These outstanding advances do not bear interest, and are payable on
demand.
The Company's working capital deficit decreased from $1.3 million at
January 31, 1996 to a working capital surplus of $15.4 million at July 31, 1996.
Net cash used by operating activities during the six months ended July 31,
1996 was $3.1 million, which reflected the net effect of a decrease in accounts
payable, deferred revenues, accrued liabilities, and an increase in inventories
and accounts receivable, combined with depreciation and amortization. Net cash
used by investing activities was $409,000, for the six months ended July 31,
1996, primarily reflecting cash used for the investment in the ActionTrac Joint
Venture, and the purchase of equipment. Net cash provided by financing
activities was $13.3 million for the six months ended July 31, 1996, resulting
primarily from repayment of bank lines of credit and payments of outstanding
obligations and the net proceeds from the issuance of common stock.
The Company monitors exchange rate fluctuations between the British pound
(in which form approximately 90% of the Company's revenues are received) and
U.S. dollars (which are used for approximately 30% - 40% of the Company's
purchases) and will seek to minimize the risk of such fluctuations by entering
into hedge transactions in which dollars are bought forward to match obligations
as they come due.
The Company believes that the proceeds from the sale by the Company of
the Common Stock in the Offering, together with cash flow from operations and
borrowing availability under its credit facilities, will satisfy the
Company's anticipated working capital requirements through at least the next
twelve months. To the extent the Company raises additional capital by
issuing equity or convertible debt securities, ownership dilution to the
Company's shareholders will result. In the event that adequate funds are not
available, the Company's business may be adversely affected.
Inflation
Inflation has not had a material effect upon the Company's results of
operations to date. In the event the rate of inflation should accelerate in the
future, it is expected that costs in connection with the provision by the
Company of its services and products will increase, and, to the extent such
increased costs are not offset by increased revenues, the operations of the
Company may be adversely affected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Change In Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
1. Share Sale Agreement dated August 21, 1996
(b) Reports on Form 8-K
Report on Form 8-k filed 9/5/96 describing the acquisition of the
Hammer subsidiary.
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
September 11, 1996 4FRONT SOFTWARE
INTERNATIONAL, INC.
By: /s/ Anil J. Doshi
-----------------------
Anil J. Doshi Chairman and CEO
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DATED 21ST AUGUST 1996
-----------------------------
STEVEN EASTERBROOK & ORS
- and -
4FRONT SOFTWARE INTERNATIONAL INC
______________________________________
SHARE SALE AGREEMENT
RELATING TO PART OF THE
ISSUED SHARE CAPITAL OF
HAMMER DISTRIBUTION LIMITED
______________________________________
Evans Dodd
5 Balfour Place
Mount Street
London W1Y 5RG
Tel: 0171-491-4729
Fax: 0171-499-2297
Our Ref: IS/tmm140D/F113-9
<PAGE>
CONTENTS
--------
1. INTERPRETATION 3
2. AGREEMENT FOR SALE 8
3. PURCHASE CONSIDERATION 8
4. COMPLETION 9
5. PREPARATION OF THE 1997 ACCOUNTS 11
6. WARRANTIES BY THE VENDORS 14
7. CONDUCT OF BUSINESS UNTIL 31ST JANUARY 1997 24
8. EARLY PAYMENT 29
9. SEVERABILITY 30
10. ENTIRE AGREEMENT 30
11. COUNTERPARTS 30
12. NOTICES 30
13. PROPER LAW 31
14. WARRANTY BY PURCHASER 31
15. INDEMNITY 33
SCHEDULE 1
VENDORS HOLDINGS AND CONSIDERATION 34
SCHEDULE 2
DETAILS OF THE COMPANY 35
SCHEDULE 3
WARRANTIES 36
SCHEDULE 4
TAX DEED 47
SCHEDULE 5
DEED OF RESTRICTIVE COVENANTS 48
SCHEDULE 6
SHORT PARTICULARS OF THE PROPERTIES 49
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THIS AGREEMENT is made the 21st day of August 1996
B E T W E E N :
(I) THE PERSONS whose names and addresses are set out in column (1) of
schedule 1 ("Vendors")
(II) 4FRONT SOFTWARE INTERNATIONAL INC a company incorporated in the State
of Colorado, United States of America and whose registered office is
situate at 5650 Greenwood Plaza Boulevard, Suite 107, Englewood,
Colorado, 80111,USA ("Purchaser")
IT IS HEREBY AGREED as follows:-
1. INTERPRETATION
1.1 In this Agreement the following words and expressions shall have the
following meanings:-
"1997 Accounts" means the management accounts including
the balance sheet as at 31st January 1997
and the profit and loss account of the
Company for the year from 1st February
1996 to 31st January 1997 prepared in
accordance with clause 5 hereof
"Additional Instalment" means that part of the Consideration as is
defined in clause 3.1.2
"Associated Company" means the relationship between one company
and another whereby one is to be treated
as the associated company of
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the other if the first or any Subsidiary
of it holds shares conferring the right to
10% or more of the nominal value of the
equity share capital of the other and
controls the composition of that other's
board of directors
"Business" means the business of distributing and
assembly of data storage and associated
products
"Bryce" Michael Bryce the holder of 625 shares in
the capital in the Company
"CA" means The Companies Act 1985
"Certification" means certification by the Chief Financial
Officer for the time being of the
Purchaser on the one hand and the Vendors'
Representative on the other hand or
certification following the dispute
resolution procedure all as described in
clause 5
"Companies Acts" means CA and the former Companies Acts
(within the meaning of CA s.735(1)) and
the Companies Act 1989
"Company" means Hammer Distribution Limited a
company registered under No. 2640532
whose registered office is at Worthy
House, 14 Winchester Road, Basingstoke,
Hampshire RG12 1UQ
"Completion" means actual completion of the sale and
purchase of the Shares as described in
clause 4
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"Completion Date" means 21st August 1996
"Consideration" means the aggregate of the monies received
from time to time by the Vendors pursuant
to clause 3
"Deed of Restrictive means the deed of restrictive covenants in
Covenant" the form set out in Schedule 5
"Disclosure Letter" means the disclosure letter of the same
date as this agreement from the Vendors to
the Purchaser
"FA" means the Finance Act
"ICTA" means the Income and Corporation Taxes Act
1988
"Initial Instalment" means that part of the Consideration as is
defined in clause 3.1.1
"Last Accounts" means the audited balance sheet as at the
Last Accounts Date and audited profit and
loss account for the year ended on the
Last Accounts Date of the Company and the
directors' and auditors reports and notes
"Last Accounts Date" means 31st January 1996 (being the date to
which the Last Accounts have been
prepared)
"Management Accounts" means the balance sheet as at 31st January
1997 and the profit and loss account for
the year from 1st February 1996 to 31st
January 1997 of the Company
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<PAGE>
"1997 Profits" means the consolidated pre-tax profits
before interest which includes Kellock
Limited discount fees of the Company for
the year ending on 31st January 1997 as
shown by the 1997 Accounts
"Property" means the property of the Company shortly
described in Schedule 6
"Purchaser's Accountants" means KPMG Peat Marwick of Aquis Court, 31
Fishpool Street, St Albans, Herts AL3 4RF
"Purchaser's Solicitors" means Evans Dodd of 5 Balfour Place, Mount
Street, London W1Y 5RG
"Purchaser's Group" means the Purchaser and any Subsidiary or
Associated Company of the Purchaser
"Relevant Period" means the period 15th August 1996 to
31st January 1997
"Service Agreements" means the service agreements in the Agreed
Form to be entered into in accordance with
the provisions of clause 4.7 hereof
"Shares" means 11,250 issued ordinary shares of L1
each of the Company
"Subsidiary" means a subsidiary as defined in CA s.736
"Tax Deed" means a deed of tax covenants in the form
set out in Schedule 4
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<PAGE>
"Taxation" means all forms of taxation duties imposts
and levies whatsoever and wherever or
whenever imposed
"Vendors' Accountants" means Haines Watts of Worthy House,14
Winchester Road, Basingstoke, Hampshire
"Vendors
Representative" means Steven Easterbrook or failing him
Stephen Sawkins or Paul Sangster or
failing them their personal
representatives
"Vendors' Solicitors" means Fladgate Fielder of Walgate House,
25 Church Street , Basingstoke, Hampshire
"Warranties" means the warranties and representations
by the Vendors in clause 6 and schedule 3
1.2 All references in this agreement to a statutory provision shall be
construed as including references to:-
1.2.1 any statutory modification consolidation or re- enactment
(whether before or after the date of this agreement) for the
time being in force;
1.2.2 all statutory instruments or orders made pursuant to a
statutory provision; and
1.2.3 any statutory provisions of which a statutory provision is a
consolidation re-enactment or modification.
1.3 Any reference in this agreement to the "Vendors" includes their
respective personal representatives.
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<PAGE>
1.4 A reference in this agreement to FRS shall be a reference to a
financial reporting standard adopted by The Accounting Standards Board
Limited and a reference in this agreement to SSAP shall be a reference
to a Statement of Standard Accounting Practice as issued by CCAB
Limited.
1.5 Clause headings in this agreement are for ease of reference only and
do not affect the construction of any provision.
1.6 Any document referred to as being in "Agreed Form" constitutes a form
agreed between the parties thereto and initialled by the Vendors'
Solicitors and the Purchaser's Solicitors on or prior to the execution
of this agreement.
2. AGREEMENT FOR SALE
Subject to the terms and conditions of this agreement the Vendors shall sell and
the Purchaser shall purchase the Shares free from all liens charges and
encumbrances and with all rights attaching to them and the parties hereto agree
that, save as provided for in clause 6, for all effective purposes this
agreement shall be effective from 15 August 1996.
3. PURCHASE CONSIDERATION
3.1 The purchase consideration for the Shares shall (subject to adjustment
in accordance with clause 3.2) be L1,792,105.26 being the aggregate of
the following:-
3.1.1 L1,042,105.26 in cash to be paid on Completion;
3.1.2 subject to adjustment as described in clause 3.2 and subject
to clause 8 L750,000 in cash to be paid within 5 business
days (or such longer period as the Vendors may request) of
Certification in respect of the 1997 Profits;
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<PAGE>
3.2 If the 1997 Profits are less than L425,000 but more than L240,000 then
the cash to be paid to the Vendors pursuant to clause 3.1.2 shall be
adjusted downwards to become such lower figure as represents the same
percentage of the figure set out in clause 3.1.2 as the percentage
represented by the figure by which the 1997 Profits exceeds L240,000
bears to L185,000. If the 1997 Profits are L240,000 or less then no
Additional Instalment will arise and if the 1997 Profits are L425,000
or more then the Additional Instalment shall be paid to the Vendors in
full without adjustment.
3.3 The Vendors shall be entitled to the Consideration as set out in
columns 3 and 4 of schedule 1 save as, in the case of column 4, such
lower figures or nil figures if adjustment is to be made pursuant to
the provisions of clause 3.2.
3.4 For the avoidance of doubt the Purchasers obligations under this
clause shall remain enforceable against the Purchaser notwithstanding
that the Shares are held by a member of the Purchaser's Group and not
by the Purchaser directly.
4. COMPLETION
4.1 Completion of the purchase of the Shares shall take place at the
offices of the Purchasers' Solicitors on Wednesday 21 August 1996 or
as maybe agreed between the parties hereto.
4.2 On Completion the Vendors shall deliver to the Purchaser:-
4.2.1 duly completed and signed transfers in favour of the
Purchaser or as it may direct of the Shares together with
the relative share certificates;
4.2.2 the Tax Deed duly executed by the Vendors;
4.2.3 the Deed of Restrictive Covenant duly executed by the
Vendors;
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<PAGE>
4.2.4 resignation of the auditors;
4.2.5 letter from Kellock Limited releasing the Company from the
fixed and floating charge together with confirmation that
the said charge has not crystallised;
4.2.6 the Disclosure Letter.
4.3 On Completion there shall be delivered or made available to the
Purchaser:-
4.3.1 the seal and certificate of incorporation of the Company;
4.3.2 the statutory books, books of account and documents of
record of the Company complete and up-to- date;
4.3.3 the original leases and other documents of title relating
to the Property;
4.3.4 the appropriate forms to amend the mandate given by the
Company to its bankers.
4.4 On Completion the Vendors shall repay all monies (if any ) then owing
by them to the Company whether due for payment or not.
4.5 On Completion board meetings of the Company shall be held at which:-
4.5.1 such one person as the Purchaser may nominate shall be
appointed an additional director and his alternate director
shall be named and approved by the relevant board;
4.5.2 the transfers referred to in clause 4.2.1 shall be approved
(subject to stamping);
4.5.3 the resignation referred to in clauses 4.2.4 shall be
submitted and accepted; and
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<PAGE>
4.5.4 the new bank mandate shall be signed by the Purchasers
director.
4.6 Upon Completion of the matters referred to in clauses 4.2 to 4.5 the
Purchaser shall pay directly to the Vendors the Initial Instalment by
bankers draft in such proportions as are set out in column 3 of
schedule 1.
4.7 On Completion the Purchaser shall procure that the Company will enter
into Service Agreements with Steven Easterbrook, Stephen Sawkins and
Paul Sangster in relation to their services to the Company to the
intent that the said service agreements shall be in substitution for
the existing service agreements of the said persons with the Company
and the said Steven Easterbrook, Stephen Sawkins and Paul Sangster
hereby agree and undertake to enter into such agreements as are
necessary to reflect these arrangements.
4.8 On Completion the Purchaser shall deliver to the Vendors:-
4.8.1 a receipted copy of the Disclosure Letter;
4.8.2 a signed copy of the Tax Deed; and
4.8.3 a signed copy of the Deed of Restrictive Covenant.
5. PREPARATION OF THE 1997 ACCOUNTS
5.1.1 The parties hereto shall procure that the 1997 Accounts are prepared
by the Company and delivered to the Purchaser's Chief Financial
Officer and the Vendor's Representative by 15th March 1997 or earlier
as agreed and if the Chief Financial Officer and the Vendor's
Representative agree with the accounts or agreement is reached
following adjustment to the said accounts they shall jointly certify
the accounts as complying with the provisions of this agreement within
seven business days after delivery to them of the 1997 Accounts.
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<PAGE>
5.1.2 In the event of disagreement between the Chief Financial Officer and
the Vendor's Representative not being resolved within seven business
days of the said accounts being delivered to them the relevant papers
and details concerning the disagreement shall be passed by the Company
to the Vendors' Accountants and the Purchaser's Accountants who shall
between them endeavour to resolve the disagreement and to issue agreed
1997 Accounts certified jointly by them as complying with the
provisions of this Agreement within 21 days of referral to them. In
the event of any disagreement not being resolved within 21 days of
referral to the Vendors' Accountants and the Purchaser's Accountants
the dispute shall be resolved according to the dispute resolution
procedure set out in sub-clause 5.5 and within seven business days of
completion of the dispute resolution procedure the Vendors'
Accountants and the Purchaser's Accountants shall issue a joint
certificate as provided in sub-clause 5.2.
5.2 Certification of the 1997 Accounts in accordance with the procedure
set out in clause 5.1 shall be conclusive and binding on the parties
hereto save for manifest error and at the same time as certifying the
1997 Accounts those issuing the certificate shall also produce a joint
certificate as to the amount (if any) of the Additional Instalment due
to the Vendors.
5.3 The 1997 Accounts shall be prepared on the following bases:-
5.3.1 save as otherwise provided in this clause 5.3 on the same
accounting principles and bases as the Last Accounts and
otherwise (if there are no such accounting principles and
bases) in accordance with generally accepted accounting
principles in the United Kingdom (GAAP);
5.3.2 after deducting from the income in the Relevant Period (or
providing against such income) all losses costs charges and
expenses borne or incurred by the Company in the Relevant
Period including (without prejudice to the generality of the
foregoing):-
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(a) directors' fees and remuneration including without
limitation commissions bonuses and all contributions
to life assurance, health and employee personal
pension schemes and other benefits at the rates and
amounts payable to or in respect of them at the date
hereof;
(b) all other expenses of working and management
including staff costs (including contributions to
life assurance, health, pension and other benefits)
and operating, financial and administrative
expenses;
(c) depreciation charged on a basis consistent with the
rates of depreciation adopted by the Company prior
to the date hereof and otherwise in accordance with
generally accepted accounting principles;
(d) bad and doubtful debts incurred in the normal course
of the Company's trading for which provisions should
properly be made and irrecoverable work in progress;
(e) expenditure in connection with leasing or hiring
commitments incurred;
(f) all rentals and other costs incurred in relation to
the Property;
5.3.3 after making appropriate adjustments in respect of prior or
subsequent items which ought (in accordance with the
accounting policies previously adopted by the Company, or if
none, in accordance with generally accepted accounting
principles) to be dealt with in calculating the profit
and/or loss for the Relevant Period but for the avoidance of
doubt no adjustment shall be made for any accounting period
prior to 1 February 1996;
5.3.4 after making appropriate adjustments so that the 1997
Profits are based on the Company's existing Business as at
31st January 1996;
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<PAGE>
5.3.5 before taking into account the effect of any exceptional or
extraordinary profits and/or losses or profits and/or losses
of a capital nature.
5.4 The Chief Financial Officer of the Purchaser, the Vendor's
Representative, the Purchaser's Accountants , the Vendors' Accountants
and the independent accountants as described in sub-clause 5.5 of this
clause (as the case may be) shall be entitled to the same access and
information relating to the Company as if they were the auditors
thereto including the ability to discuss with the Company's auditors
and review the Company's working papers for the purposes of checking
and agreeing the 1997 Accounts.
5.5 Any failure on the part of the Vendor's Accountants and the
Purchaser's Accountants respectively to certify the 1997 Accounts or
to agree any matter relating to the preparation of the same shall be
referred for final settlement within 28 days or such shorter period as
may be agreed to an independent firm of chartered accountants
nominated jointly by the Vendors' Accountants and the Purchaser's
Accountants or (failing such nomination within 14 days after either
such accountants request to the other) nominated at the request of
either the Vendors' Accountants or the Purchaser's Accountants by the
President for the time being of the Institute of Chartered Accountants
in England and Wales and such firm shall be deemed to act as experts
and not as arbitrators and their written decision shall (in the
absence of manifest error) be final and binding on the parties hereto
and their fees accruing shall be borne and paid by the Vendors and the
Purchaser in equal proportions and if either the Vendors or the
Purchaser shall pay the whole of such fees they or it (as the case may
be) shall be entitled to immediate reimbursement of the appropriate
proportion by the other.
6. WARRANTIES BY THE VENDORS
6.1 The Vendors each jointly and severally warrant to the Purchaser that
as at the date of this agreement they each have the unencumbered
right to dispose of those of the Shares hereby disposed of by them and
the Vendors hereby severally warrant to the Purchaser
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<PAGE>
that as at the date of this agreement and save as stated in the
Disclosure Letter the Warranties set out in Schedule 3 are true and
accurate in all respects and that the contents of the Disclosure
Letter and of all accompanying documents fairly, clearly and
accurately disclose every matter to which they relate.
6.2 Each of the Warranties is without prejudice to any other Warranty and
except where expressly stated no clause contained in this agreement
governs or limits the extent or application of any other clause.
Each of the Vendors undertakes in relation to any Warranty which
refers to the knowledge information or belief of the Vendors that he
has made all reasonable enquiry into the subject matter of that
Warranty.
6.3 Subject to the provisions of this clause 6 the rights and remedies of
the Purchaser in respect of any breach of the Warranties shall not be
affected by Completion of the purchase of the Shares by any
investigation made by or on behalf of the Purchaser into the affairs
of the Company by any failure to exercise or delay in exercising any
right or remedy or by any other event or matter whatsoever except by a
specific and duly authorised written waiver or release.
6.4 The Vendors respectively acknowledge that the Purchaser is entering
into this Agreement in reliance upon the Warranties.
6.5 The Warranties are qualified only by and to the extent of matters
fairly disclosed in the Disclosure Letter in respect of them.
6.6 The Vendors agree with the Purchaser to waive any of their rights in
respect of any inaccuracy or omission in or from any information or
advice supplied or given by the Company and any employees of the
Company in connection with the Warranties, the Tax Deed, or the
Disclosure Letter or other sale documents.
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6.7 Each of the Warranties is separate and independent and (except as
otherwise expressly provided) is not limited or restricted by
reference to or influence from the terms of any other provision of
this agreement or the other sale documents or by the giving of any
time or other indulgence by the Purchaser to any person but shall only
be affected by a specific waiver or release by the Purchaser in
writing any such waiver or release shall be specific to the matter or
matters to which it relates and not prejudice or affect any other
rights of the Purchaser.
6.8 If any of the Warranties is breached, untrue or misleading the
Vendors shall subject to the provisions of clauses 6.9.1 and 6.9.2 pay
to the Purchaser:-
6.8.1 the amount necessary to put the Company, as at the date of
the demand, into the position which would have existed had
the warranty not been broken, untrue or misleading;
6.8.2 in respect of any breach of the Warranties relating to the
Property an amount equal to the difference between the value
of the Property had the Warranties been true or not broken
and the actual value of the Property at the date of demand
together with the amount of any other loss occasioned by
such breach; and
6.8.3 all reasonable costs and expenses incurred by the Purchaser
or any member of the Purchasers group of companies as a
result of the circumstances giving rise to the claim.
6.9 Notwithstanding the foregoing provisions of this clause or other
provisions of this agreement but subject to clause 15 no warranty
claim will lay:-
6.9.1 for any individual claim of L2,000 or less;
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<PAGE>
6.9.2 in respect of any individual claim exceeding L2,001 but not
exceeding L4,999 unless and until the aggregate liability of
the Vendors (but for this paragraph) in respect of all such
claims as aforesaid would exceed L25,000 but, in the event
such aggregate liability should exceed that sum, the Vendors
shall be liable for the full amount of such liability and
not just the excess over that amount.
6.10 The liability of the Vendors and each of them shall be limited in
accordance with the following provisions of this clause.
6.11 The liability of each of the Vendors under this clause 6 and the Tax
Deed shall be several and in any event the liability of any one Vendor
shall not exceed the amount equating to the maximum sum received by
that Vendor in respect of his shareholding as set out in Column 2 to
Schedule 1 increased by a multiple of 1.5 and the aggregate liability
of the Vendors shall not exceed L1,850,000 or such lesser sum as is
paid by the Purchaser to the Vendors.
6.12 In the event of any liability for breach of this agreement or of any
of the Warranties or under the Tax Deed being established the Vendors
shall be entitled to set off against the amount of any depletion in
or reduction in the value of the assets of the Company occasioned by
or the amount by which the value of the relevant shares may be reduced
by reason of such breach:-
6.12.1 the amount by which (after adjustments where appropriate for
taxation in respect of revenue items) the position of the
Company (taken as a whole) in respect of any other matter is
established to be better than as so warranted;
6.12.2 to the extent that the net assets determined in accordance
with the accounting standards used in preparation of the
Last Accounts exceed L400,000 at Completion;
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<PAGE>
6.12.3 the amount by which the current assets of the Company are
understated and/or any current liabilities of the Company
are overstated in the Last Accounts or the 1997 Accounts as
appropriate.
6.13 In this agreement references to a liability being established shall be
construed as including a liability admitted proven or adjudicated in
legal proceedings.
6.14 The Vendors shall not be liable for any breach of this agreement or of
any of the Warranties or for any claim pursuant to the Tax Deed to the
extent that the subject matter thereof is taken into account with
appropriate adjustment for taxation in determining net profits for
the 1997 Profits for the purposes of reducing the Additional
Instalment such adjustment not to include any benefit available to the
Company as a consequence of being part of the Purchaser's Group. For
the avoidance of doubt to the extent that such claim by the Purchaser
shall exceed the amount of the Additional Instalment under clause 3
hereof the Purchaser shall have a claim against the Vendors for the
excess.
6.15 If any of the Vendors pays to the Purchaser or the Company an amount
pursuant to a claim in respect of the Warranties and/or pursuant to
the Tax Deed and the Purchaser or the Company subsequently recovers
from a third party an amount which is referable to that claim the
Purchaser shall or shall procure that the Company shall immediately
repay to the Vendor so much of the amount paid by him as does not
exceed the amount recovered from the third party less all reasonable
costs charges and expenses incurred by the Purchaser or the Company in
obtaining that payment and in recovering that amount from the third
party and any applicable tax.
6.16 The Purchaser shall only be entitled to withhold release to the
Vendors and set against any liability of any of the Vendors in respect
of any breach of this agreement or of any of the Warranties or under
the Tax Deed such part of the Additional Instalment as equals the
amount of any such claim of which notice is given to the Vendors prior
to the due date for payment of such Additional Instalment such
withholding shall be pro rata to the
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<PAGE>
Vendors shareholding as set out in schedule 1 hereof. If the
Purchaser shall admit that such claim was without foundation or any
court of competent jurisdiction determines that such claim is
without foundation then and in those circumstances alone the Vendors
shall be entitled to interest on the amount withheld from the date
when the Additional Instalment should have been paid to the date of
actual payment at such rate as is set out in the Tax Deed.
6.17 The Vendors shall be entitled to settle any claim under this agreement
and the Warranties and undertakings contained in this agreement or for
indemnity pursuant to the Deed of Covenant by payment to the Company
or the Purchaser in cash.
6.18 Any payment made to the Purchaser by the Vendors pursuant to any
breach of this agreement or the Warranties and/or to the Company
pursuant to the Tax Deed shall constitute a reduction in the purchase
price of the Shares.
6.19 The Vendors shall not be liable in respect of any claim for breach of
the Warranties if and to the extent that the loss incurred is or has
been included in a claim under the Tax Deed which has been satisfied
in full nor shall the Vendors be liable in respect of a claim under
the Tax Deed if and to the extent that the loss incurred is or has
been included in a claim for breach of the Warranties which has been
settled in full.
6.20 6.20.1 The Purchaser shall procure that upon service of any notice
to the Vendors of any claim to which any of the Warranties
may relate the Company shall take such reasonable action as
the Vendors may reasonably request to avoid dispute resist
appeal compromise or defend a claim in relation to a third
party subject to the Company being indemnified and secured
to its reasonable satisfaction by the Vendors against all
losses costs damages and expenses thereby incurred.
6.20.2 In respect of any claim under the Warranties or the Tax Deed
the Purchaser shall allow the Vendors and their agents at
all reasonable times access to and to inspect
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and take copies of all necessary books and records of the
Company subject to such persons entering into a
confidentiality agreement in the terms acceptable to the
Purchaser.
6.20.3 The Purchaser will raise no objection to the personnel of
the Company providing statements and proofs of evidence and
to attending any trial or hearing to give evidence or
otherwise and providing similar reasonable assistance to
enable the Vendors to avoid dispute resist appeal compromise
or defend any such claim subject to the Company being
indemnified and secured to its reasonable satisfaction by
the Vendors against all losses costs damages and expenses
thereby incurred.
6.20.4 The Purchaser shall take or procure that the Company shall
take all reasonable steps necessary to mitigate any loss in
relation to any such action or claim.
6.21 Without prejudice to the duty of the Purchaser to mitigate any loss in
respect of any breach of the Warranties the liability of the Vendors
for any such breach shall be reduced pro tanto or extinguished to the
extent that the Company is entitled to claim under any policy of
insurance (or would have been so entitled had it maintained in force
its policies of insurance current at 1 February 1997) or policies
providing equivalent cover thereto entitling it to claim under such
policy or policies. The Purchaser shall procure that the Company
shall use it best endeavours to recover all such claims from the
insurers.
6.22 The Purchaser undertakes to the Vendors to refrain from doing and to
procure that the Company will refrain from doing any act or thing
other than in its ordinary course of business which would give rise to
a claim for breach of any of the Warranties.
6.23 The Warranties and the indemnity contained in the Tax Deed are given
subject to and shall be qualified by the following:
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6.23.1 any matters disclosed mentioned or referred to in the
Disclosure Letter;
6.23.2 any matter expressly provided for under the terms of this
agreement or arising from its implementation;
6.23.3 any matter or thing done or omitted to be done prior to
Completion by the Vendors or any of them or the Company at
the written request of the Purchaser such request to be
signed by two directors;
6.23.4 any matters which have been communicated in writing to the
Purchaser not less than 48 hours before Completion;
6.23.5 any matter of which the Purchaser had actual knowledge and
could have made a claim under the Warranties or Tax Deed at
Completion.
6.24 Claims for breach of Warranty or representation or indemnity shall be
reduced by the amount of any relief against Taxation obtained or which
may reasonably be obtained by the Company or the Purchaser or persons
deriving title under it in respect of any loss or losses on account of
matters not being as warranted or represented or the subject of
indemnify.
6.25 If the Vendors are liable to the Purchaser under the tax Warranties or
the Tax Deed by reason of any obligation of the Company to pay advance
corporation tax or any such is recoverable from the Company as if it
were advance corporation tax the liability of the Vendors shall be
reduced and the amount paid to the Purchaser in respect of such
liability shall be refunded when and to the extent that the Company
obtains the benefit of a reduction in liability to mainstream
corporation tax by reason of such payment and the Purchaser shall
procure that the Company makes all such claims and election as will
result in such benefit being obtained as soon as reasonably possible.
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6.26 If the Vendors are liable to the Purchaser under the tax Warranties or
the Tax Deed in respect of an obligation of the Company to pay tax
under the provisions of section 419 ICTA 1988 the liability of the
Vendors shall be reduced and any amounts paid to the Purchaser in
respect of such liability shall be refunded when and to the extent
that the Company is entitled to relief under sub-section (4) of that
section and the Purchaser shall procure that the Company makes all
necessary claims under that sub-section as soon as it is entitled to
do so.
6.27 For the purpose of enabling the Vendors to remedy a breach of Warranty
or to mitigate or otherwise determine any claim under the Tax Deed the
Purchaser and/or the Company shall notify the Vendors in writing
within fourteen days of the breach of the claim coming to the notice
of the Purchaser and/or the Company such notice shall give full
details of the event or circumstances giving rise to such breach or
claim its nature and estimated amount of liability.
6.28 The Vendors shall not be liable in respect of any claim for breach of
the tax Warranties or for indemnity pursuant to the Tax Deed if such
claim:-
6.28.1 occurs or arises wholly or partly out of or as a consequence
of sale and purchase of the Shares pursuant to this
agreement;
6.28.2 occurs or arises as a result of or is otherwise attributable
to an act or omission of the Purchaser or the Company or any
member of the Purchasers Group;
6.28.3 occurs or arises as a result of any change or changes in
legislation made after the date of this agreement or the
withdrawal of any extra statutory concession made by the
Inland Revenue;
6.28.4 occurs or arises as a result of or is otherwise attributable
to a voluntary act or omission of the Purchaser or the
Company or any member of the Purchaser's
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Group (other than pursuant to a legally binding commitment
created before Completion) and otherwise than in the
ordinary course of business of any such company which could
reasonably have been avoided;
6.28.5 arises as a result of any provision or reserve made in
respect of it in the Last Accounts or the 1997 Accounts
being insufficient by reason of any increase in the rates of
taxation made after the date of this agreement or arises as
a result of the retrospective imposition of taxation as a
consequence of a change in the law enacted after the date of
this agreement;
6.28.6 would not have arisen but for any claim election surrender
or disclaimer made or omitted to be made or notice or
consent given or omitted to be done by the Company or the
Purchaser or any member of the Purchaser's Group under the
provisions of the taxation statutes after Completion;
6.28.7 is the subject of any provision or reserve or note in the
Last Accounts or the 1997 Accounts;
6.28.8 occurs or arises wholly or partly out of as a result or in
connection with:-
6.28.8.1 any change in the nature of the business of the
Company or in the manner of conducting it after
the date of 1 February 1997;
6.28.8.2 any asset acquired by the Company after the date
of 1 February 1997;
6.28.9 for the purposes of this clause 6.28 the relevant date for
the Company shall be 1 February 1997 and for the Purchaser
and or any other member of the Purchasers Group (other than
the Company) Completion.
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<PAGE>
6.29 The liability of the Vendors and each of them under the Warranties to
this agreement shall cease on 21st August 1998 and under the Tax Deed
on 21st August 2002 except as regards any alleged specific breach of
this agreement and any of the Warranties or any specific claim under
the Tax Deed in respect of which notice in writing (containing details
of the event or circumstances giving rise to such breach or claim its
nature and the estimated amount of liability for it) has been served
on the Vendors prior to the relevant date.
6.30 The Vendors shall cease to be liable for any claim for breach of the
Warranties or pursuant to the Tax Deed which has been notified in
writing in accordance with clause 6.30 in respect of which proceedings
are not instituted ( that is to say issued and served) within 12
months of the notice in question (unless previously satisfied, settled
or withdrawn).
7. CONDUCT OF BUSINESS UNTIL 31ST JANUARY 1997
7.1 Subject to the remaining provisions of this clause and clause 8 the
Purchaser hereby undertakes and agrees that until 31st January 1997 it
will operate the Company in a manner which is in the ordinary course
of business consistent with past practices of the Company or with
future practices approved by the board of 4Front Group Plc (being the
ultimate UK holding company owned by the Purchaser) and the Vendor's
Representative under the provisions of this clause.
7.2 The Purchaser further undertakes with the Vendors that until 31st
January 1997 that in its relationships with any other member of the
Purchaser's Group the Company shall conduct its affairs on an arms
length basis.
7.3 The Purchaser or subsidiary of the Purchaser (as the case may be)
hereby agrees that it will not mortgage (unless the mortgagee has
first undertaken to the Vendors to be bound by the terms of this
clause in relation to the Shares) or sell or dispose or otherwise
permit
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<PAGE>
any other person or persons to have a beneficial interest in any of
the shares of the Company until after the 1997 Profits have been
determined and the Certification thereof has been concluded. Provided
always that the provisions of this sub-clause 7.3 shall not apply in
circumstances where the aforesaid other person or persons is a
subsidiary of the Purchaser subject to the subsidiary entering into a
deed of adherence to the terms of this clause 7.
7.4 Without prejudice to clauses 7.1 to 7.3 above until 31st January 1997
the Purchaser undertakes to procure that the Company does not without
the previous written consent (which consent shall not be unreasonably
withheld or delayed) of the Vendor's Representative:-
7.4.1 make any material change in the nature of its business as
carried on at Completion;
7.4.2 increase alter vary or reduce its authorised or issued share
capital or change its memorandum of articles of association
or pass any resolutions of its shareholders;
7.4.3 sell or dispose of all of its undertaking property all or
any substantial proportion of its assets (except in the
ordinary course of business) substantial being in relation
to the total undertaking property and assets of the Company
taken as a whole;
7.4.4 effect any borrowings otherwise than in ordinary course of
business consistent with past or current practices and
within its existing facilities or within the borrowing
limits imposed by its articles of association or pledge
mortgage or grant any security interest in or over any of
its assets to secure indebtedness;
7.4.5 commence any litigation other than in the ordinary course of
business;
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<PAGE>
7.4.6 acquire or agree to acquire any interest or participate or
agree to participate in any company partnership joint
venture or other business entity but this shall not prevent
the Company entering into joint arrangements in the normal
course of its business and which does not involve having any
interest in a company partnership or other legal person;
7.4.7 make any capital expenditures capital additions or capital
improvements which involve an amount (in the case of each
such expenditure addition or improvement) in excess of
L20,000 or (in the aggregate for all such expenditure
additions and improvements made after the date of this
agreement) in excess of L75,000 except in accordance with
commitments entered into on the date hereof;
7.4.8 purchase or sell take or let on lease or tenancy or
otherwise acquire or dispose of any fixed assets and any
real or leasehold property for any estate or interest;
7.4.9 pay any management or service charges to any member of the
Purchaser's Group unless clause 3 hereof is amended so as to
provide for a reduction in the 1997 Profits equal to the
value of the management or service charge;
7.4.10 procure the Company to enter into any transaction otherwise
than in the ordinary course of business;
7.4.11 procure the Company to change its name or any name under
which it carries on its business;
7.4.12 second any member of staff of the Purchaser or any member of
the Purchaser's Group to the Company;
7.4.13 employ any employee consultant or agent of the Company whose
total remuneration or fee is or is capable of being in
excess of L20,000 per annum;
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<PAGE>
7.4.14 engage in any business other than the businesses presently
carried on;
7.4.15 declare make or pay any dividend or other distribution;
7.4.16 change the accounting reference date of the Company from
31st January in each year;
7.4.17 amend or change any policy of insurance;
7.4.18 remove any of the Vendors as a director of the Company other
than for breach of fiduciary duty.
7.5 Subject to clause 8 the Vendors hereby undertake and agree that until
31st January 1997 they will not, without the previous written consent
of the Purchaser:-
7.5.1 make any material change in the nature of the business as
carried on at Completion;
7.5.2 sell or dispose of all of the Company's undertaking,
property, or all or any substantial proportion of its assets
(except in the ordinary course of business);
7.5.3 effect any borrowings otherwise than in the ordinary course
of business consistent with past or current practice or
pledge mortgage or grant security interest in or over any of
the Company's assets to secure indebtedness;
7.5.4 commence any litigation other than in the ordinary course of
business;
7.5.5 agree to participate in any partnership joint venture or
other business entity but this shall not prevent the Company
entering into joint arrangements in the normal course of its
business;
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<PAGE>
7.5.6 make any capital expenditure, capital additions or capital
improvements which involve any amount (in the case of each
such expenditure, addition or improvement) in excess of
L10,000 or (in the aggregate for all such expenditure,
additions and improvements made after the date of this
agreement) in excess of L50,000 except in accordance with
commitments entered into on the date hereof;
7.5.7 purchase or sell take or let on lease on tenancy or
otherwise acquire or dispose of any fixed assets and any
real or leasehold property for any estate or interest;
7.5.8 procure the Company to enter into any transaction otherwise
than in the ordinary course of business;
7.5.9 employ any employee consultant or agent in the Company whose
total remuneration or fee is or is capable of being in
excess of L20,000 per annum;
7.5.10 engage in any business other than the business presently
carried on;
7.5.11 change the accounting reference date of the Company from
31st January in each year;
7.5.12 amend alter or waive any term or conditions of the Vendor's
service agreement or procure that the Company pays to the
Vendors any remuneration in excess of that set out in the
Vendor's service agreements for the year ending 31st January
1997 or any period prior to the service agreements;
7.5.13 amend or change any policy of insurance;
7.5.14 remove the Purchasers director as a director of the Company
other than for breach of fiduciary duty when the Purchaser
shall be entitled to nominate and have appointed a new
director
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<PAGE>
7.6 The Purchaser shall be entitled without further formality to send a
representative to observe proceedings at any board meeting of the
Company and that such representative will have the same duty of
confidentiality as a director of the Company but subject to the
Purchaser keeping such information confidential shall in relation to
the business conducted at board meetings at which he was present be
permitted to inform the Purchaser.
7.7 The provisions of this Clause 7 shall cease to apply forthwith upon
notice in writing thereof being served by the Purchaser to the Company
which notice may be served only if and at any time after the following
circumstances prevail:-
7.7.1 the profits before interest and tax of the Company as
evidenced by the monthly management accounts (which shall be
prepared on a consistent basis with the Management Accounts)
for any three consecutive calendar months in the Relevant
Period show a loss in each such month provided that the
aggregate of those losses exceeds L25,000 or in any single
month trading losses exceed L70,000.
7.8 Subject to any notice being served by the Purchaser pursuant to clause
7.7 the provisions of this clause 7 shall apply only until 31st
January 1997 or (if earlier) the payment of the Additional Instalment
pursuant to clause 8 hereof.
8. EARLY PAYMENT
8.1 Notwithstanding the provisions of clause 3 the Purchaser may at any
time elect to satisfy the Additional Instalment by the payment of
L750,000 in such proportions as are set out in column 4 of Schedule 1.
Thereafter all the obligations of the Purchaser pursuant to clause 7
and in relation to the Additional Instalment and any obligations of
the Vendors pursuant to clause 7 shall cease to be of effect.
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<PAGE>
9. SEVERABILITY
If any provision of this agreement is or becomes invalid illegal or
unenforceable in respect of any law the validity legality and enforceability of
the remaining provisions shall not in any way be altered or impaired.
10. ENTIRE AGREEMENT
This agreement represents the entire agreement between the parties hereto and
supersedes any prior agreements or arrangements in respect of the subject
matters hereof.
11. COUNTERPARTS
This agreement may be executed in one or more counterparts each of which shall
be deemed an original but all of which together shall constitute one and the
same agreement.
12. NOTICES
12.1 Any notice to be served hereunder shall be deemed to have been
properly served if sent by prepaid first class letter post or by
courier to the address of the addressee set out herein or to such
other address details of which have been notified in writing by the
addressee to the addressor prior to service of such notice and such
notice shall be deemed to have been received upon delivery and receipt
of a recognisable authorised signature in the case of a courier and 72
hours after posting in the case of a letter and if sent by fax at the
time of transmission unless such transmission shall be after 5.00 p.m.
or any day on which clearing banks in the City of London are open for
business in which case receipt shall be deemed to have been at 9.00
a.m. on the next such day, subject to the sender having reasonable
proof of transmission and if sent on any other day at 9 a.m. on the
next day City of London clearing banks are open for business.
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12.2 The Purchaser hereby notifies the Vendors that as at the date hereof
and unless subsequently changed pursuant to Clause 12.1 the address
for any notice to be served on it hereunder shall be 4Front House, 4
Colonial Business Park, Colonial Way, Watford, WD2 4PR, England. Fax
No 01923-
816260 marked for the attention of the Chief Executive Officer.
13. PROPER LAW
This Agreement shall be governed by the laws of England to the non-exclusive
jurisdiction of whose Courts the parties hereby irrevocably submit.
14. WARRANTY BY PURCHASER
The Purchaser represents and warrants to the Vendors that:-
14.1 The Purchaser is a corporation duly organised, validly existing and in
good standing under the laws of the State of Colorado.
14.2 The execution and delivery of this agreement and the consummation of
the transactions contemplated hereby will not, and with notice or the
lapse of time or both would not, (i) result in the breach of any of
the terms or conditions of, or constitute a default under, the
certificate of incorporation or bye-laws of the Purchaser or any
mortgage, bond, indenture, agreement, franchise or the instrument or
obligation to which the Purchaser is a party or by which it or any of
its properties or assets may be bound; or (ii) violate any order,
writ, injunction or decree of any court, administrative agency or
governmental body. No consent, approval or authorisation of, or
declaration or filing on the part of the Purchaser with, any Federal,
state, local or governmental or regulatory authority has not been
obtained in connection with the valid execution and delivery of this
agreement or the performance by the Purchaser of any of the
transactions contemplated hereby.
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<PAGE>
14.3 The Purchaser has full corporate power and authority to execute and
deliver this Agreement and to perform the transactions contemplated
hereby. All corporate and other proceedings required to be taken by
or on behalf of the Purchaser including, without limitation, all
action required to be taken by its board of directors to authorise the
Purchaser to enter into and carry out this agreement and to perform
the transactions contemplated hereby have been duly executed and
delivered by the Purchaser and is valid and binding upon the Purchaser
in accordance with its terms.
14.4 No member of the Purchaser's Group shall compete with the business of
the Company until after 31st January 1997 on different terms from
those on which it currently competes.
14.5 The Purchaser has filed all forms, reports and documents required to
be filed with the Securities and Exchange Commission (the
"Commission") since August 1, 1993 (collectively the "SEC Reports").
The SEC Reports and any other forms, reports and other documents filed
by the Purchaser with the Commission (A) were or will be prepared in
accordance with the requirements of the Securities Act of 1933
(the "1933 Act") and the Securities Exchange Act of 1934 (the "1934"),
as the case may be, and the rules and regulations promulgated
thereunder, and (b) did not at the time they were filed, or will not
at the time they are filed, contain any untrue statement as a material
fact or omit a material fact required to be stated therein or
necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading. The
consolidated financial statements (including any notes thereto)
contained in the SEC Reports were prepared in accordance with
generally accepted accounting principles in the United States applied
on a consistent basis throughout the periods indicated (except as may
be indicated in the notes thereto) and each fairly presented the
consolidated financial position, results of operations and cash flows
of the Purchaser as at the representative dates thereof and for the
respective periods indicated therein (subject, in the case of
unaudited statements, to normal and recurring year-end
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adjustments which were not and are not expected, individually or in
the aggregate, to be material in amount).
14.6 The Vendors shall have no liability arising out of this agreement
solely by it being treated as effective from 15 August 1996
15. INDEMNITY
The Vendors agree to indemnify and hereby indemnify the Purchaser and agree to
hold the Purchaser harmless from all and any claims of whatsoever nature
including without prejudice to the generality of the foregoing claims to
interest and costs of Bryce against the Purchaser arising out of the Purchaser
entering into an agreement with Bryce of even date to purchase the shareholding
of Bryce in the Company on terms different from the terms contained in this
Agreement. For the purposes of this indemnity the limitation contained in
clause 6.9 shall not apply.
AS WITNESS the hands of the parties hereto or their duly authorised
representatives the day and year first above written.
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SCHEDULE 1
(VENDORS' HOLDINGS AND CONSIDERATION)
(1) (2) (3) (4)
Vendors' Names Holding of Initial Cash Maximum Cash
and Addresses Shares Consideration Payable under
L Additional
Instalment
L
- ---------------------------------------------------------------------------
STEVEN EASTERBROOK 3,750 347,368.42 250,000.00
18 The Fairway
Camberley
Surrey GU15 1EF
STEPHEN SAWKINS 3,750 347,368.42 250,000.00
Clover Lodge
Hook Road
Rotherwick
Hants RG27 8BY
PAUL SANGSTER 3,750 347,368.42 250,000.00
1 The Spinney
Ford Lane
East Hendred
Oxfordshire OX12 8LS
Total 11,250 1,042,105.26 750,000.00
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SCHEDULE 2
(THE COMPANY)
Company Name : HAMMER DISTRIBUTION LIMITED
Company Number : No. 2640532
Date of Incorporation : 23 August 1991
Share capital : 11,875
Registered Office : Worthy House, 14 Winchester Road, Basingstoke
Directors : Steven John Easterbrook, Paul Sangster
Stephen Sawkins
Secretary : Steven John Easterbrook
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SCHEDULE 3
(WARRANTIES)
1. CORPORATE MATTERS
1.1 The information relating to the Company contained in Schedule 2 is
true and complete in all respects.
1.2 The Shares together with 625 ordinary shares of L1 each in the
capital of the Company held by Michael Bryce constitute the whole of
the issued and allotted share capital of the Company.
1.3 There are no agreements or arrangements in force other than this
agreement which grant to any person the right to call for the issue
allotment or transfer of any share or loan capital of the Company.
1.4 The register of members and other statutory books of the Company have
been properly kept and contain an accurate and complete record of the
matters with which they should deal and no notice or allegation that
any of them is incorrect or should be rectified has been received.
1.5 All returns particulars resolutions and documents required by any
legislation to be filed with the Registrar of Companies in respect of
the Company have been duly filed and were correct when filed.
2. ACCOUNTING MATTERS
2.1 The Last Accounts have been prepared in accordance with the
historical cost convention and the bases and policies of accounting
adopted for the purpose of preparing the Last
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Accounts are the same as those adopted in preparing the audited
accounts of the Company in respect of the three last preceding
accounting periods.
2.2 The Last Accounts:-
2.2.1 give a true and fair view of the assets liabilities
(including contingent unquantified or disputed liabilities)
and commitments of the Company at the Last Accounts Date
and its profits for the financial period ended on that
date;
2.2.2 comply with the requirements of the Companies Acts and
other relevant statutes;
2.2.3 comply with all current FRSs applicable to a United Kingdom
company;
2.2.4 are not affected by any extraordinary exceptional or non-
recurring item;
2.2.5 give a true and fair view of the financial position of the
Company as at their date.
2.3 All the accounts books ledgers financial and other records of
whatsoever kind of the Company are in its possession and properly
reflect its financial position.
3. FINANCIAL MATTERS
3.1 The Company had no capital commitments outstanding at the Last
Accounts Date and the Company has not since then incurred or agreed
to incur any capital expenditure or commitments or disposed of any
capital assets.
3.2 Since the Last Accounts Date the Company has not paid or declared any
dividend or made any other payment which is or is treated as a
distribution for the purposes of ICTA Part VI Chapter II.
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<PAGE>
3.3 The Company has not since the Last Accounts Date repaid or become
liable to repay any indebtedness in advance of its stated maturity.
3.4 There are no liabilities (including contingent liabilities) which are
outstanding on the part of the Company other than those liabilities
disclosed in the Last Accounts or incurred in the ordinary and proper
course of trading since the Last Accounts Date.
3.5 Having regard to existing facilities full details of which are set
out in the Disclosure Letter so far as the Vendor is aware the
Company has sufficient working capital for the purposes of continuing
to carry on its business in its present form and at its present level
of turnover for a period until 31 January 1997.
3.6 None of the facilities available to the Company is dependent on the
guarantee or indemnity of or any security provided by a third party
other than the Vendors as set out in the Disclosure Letter.
3.7 The Vendors are not aware of any reason why the amounts now due from
debtors will not be recoverable in full in the ordinary course of
business and in any event not later than twelve weeks from the date
of this agreement.
3.8 No part of the amounts included in the Last Accounts as owing by any
debtors remains unpaid or has been released on terms that any debtor
pays less than the full book value of his debt.
3.9 The Company has since the Last Accounts Date paid its creditors in
accordance with their respective credit terms and there are no
amounts owing by the Company which have been due for more than six
weeks.
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<PAGE>
4. TAXATION MATTERS
4.1 The Last Accounts make full provision or reserve for all Taxation
(including deferred Taxation) which is liable to be or could be
assessed on the Company or for which it may be accountable in respect
of the period ended on the Last Accounts Date.
4.2 All returns computations and payments which should be or should have
been made by the Company for any Taxation purpose have been made
within the requisite periods and are up-to-date correct and on a
proper basis and none of them is or is likely to be the subject of
any dispute with the Inland Revenue or other Taxation authorities.
4.3 The Company has duly deducted and accounted for all amounts which it
has been obliged to deduct in respect of Taxation and in particular
has properly operated the PAYE system by deducting tax as required by
law from all payments made or treated as made to its employees or
former employees and accounting to the Inland Revenue for all tax so
deducted and for all tax chargeable on benefits provided for its
employees or former employees.
4.4 The Company is not nor will it become liable to pay or make
reimbursement or indemnity in respect of any Taxation (or amounts
corresponding thereto) in consequence of the failure by any other
person to discharge that Taxation within any specified period or
otherwise where such Taxation relates to a profit income or gain
transaction event omission or circumstance arising occurring or
deemed to arise or occur (whether wholly or partly) on or prior to
the date of this Agreement.
4.5 The Company has not since the Last Accounts Date incurred nor is or
has become liable to incur after that Date expenditure which will not
be wholly deductible in computing its taxable profits except for
expenditure on the acquisition of an asset to be held otherwise than
as stock- in-trade details of which are set out in the Disclosure
Letter.
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<PAGE>
4.6 The Company is a close company as defined in ICTA s.414 (Meaning of
close company).
4.7 The Company has not in the six years ending on the date of this
agreement carried out or been engaged in any transaction or
arrangement in respect of which there may be substituted for the
consideration given or received by the Company a different
consideration for Taxation purposes.
4.8 If each of the capital assets of the Company were disposed of for a
consideration equal to the book value of that asset in or adopted for
the purpose of the Last Accounts no liability to corporation tax on
chargeable gains or balancing charge under the Capital Allowances Act
1990 would arise.
4.9 The Company has duly registered and is a taxable person for the
purposes of value added tax and has not applied for treatment as a
member of a group.
5. TRADING MATTERS
5.1 Since the Last Accounts Date the business of the Company has been
continued in the ordinary and normal course and there has been no
material deterioration in its turnover or its financial or trading
position other than as is occasioned by normal seasonal trends.
5.2 No material changes have occurred since the Last Accounts Date in the
assets and liabilities shown in the Last Accounts nor will the net
asset position of the Company at Completion valued on the same basis
as used in the last accounts (including depreciation to Completion)
be less than L400,000.
5.3 The Company is not nor has it agreed to become a member of any joint
venture consortium partnership or other unincorporated association.
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<PAGE>
5.4 The Company is not engaged in any litigation or arbitration
proceedings as plaintiff or defendant there are no such proceedings
pending or threatened either by or against the Company and the
Vendors are not aware of any circumstances which are likely to give
rise to any litigation or arbitration.
5.5 There is no dispute with any revenue or other official department in
the United Kingdom or elsewhere in relation to the affairs of the
Company and so far as the Vendors are aware having made due and
diligent enquiry there are no facts which may give rise to any such
dispute.
5.6 So far as the Vendors are aware having made all reasonable enquiries
there are no claims pending or threatened or capable of arising
against the Company by an employee or workman or third party in
respect of any accident or injury which are not fully covered by
insurance.
5.7 So far as the Vendors are aware the Company has conducted and is
conducting its business in all respects in accordance with all
applicable laws and regulations of the United Kingdom.
5.8 No power of attorney given by the Company is in force.
5.9 There are no outstanding authorities (express or implied) by which
any person may enter into any contract or commitment to do anything
on behalf of the Company.
5.10 The Disclosure Letter contains accurate particulars of all material
contracts to which the Company is a party at the date of this
agreement. For the purpose of this clause a contract shall be
material if it is capable of affecting the Company's profits in an
amount greater than L20,000.
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<PAGE>
5.11 The Company is not nor will it so far as the Vendors are aware with
the lapse of time become in default in respect of any obligation or
restriction binding upon it.
5.12 So far as the Vendors are aware the Company has not manufactured sold
or supplied products which are or were in any material respect faulty
or defective or which do not comply in any material respect with any
warranties or representations expressly or impliedly made by it or
with all applicable regulations standards and requirements in respect
thereof.
5.13 The Company, to the best of the Vendors knowledge and belief, has no
obligation to service repair maintain or take back any goods that
have been or are hereafter delivered by it.
5.14 The Company is not a party to nor has its profits or financial
position during the three years prior to the date hereof been
affected by any contract or arrangement which is not of an entirely
arm's length nature.
6. PROPERTY MATTERS
6.1 The Company has good and marketable title to the Property which
comprises all the estate or interest of the Company in any land or
premises and the particulars of the title to the Property are set out
in Schedule 6.
6.2 The Company has in its possession or under its control all duly
stamped deeds and documents which are necessary to prove title to the
Property.
6.3 There is no option or agreement for sale mortgage (whether specific
or floating) charge lien lease agreement or lease overriding interest
condition restrictive covenant easement or other encumbrance in
respect of the Property.
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<PAGE>
6.4 The Property is not subject to the payment of any outgoings (except
rents service charge business and water rates).
6.5 The Company has duly and punctually paid the rents and other
payments due under the Lease and performed and observed all covenants
conditions agreements statutory requirements planning consents bye-laws
orders and regulations affecting the Property and no notice of
any breach of any such matter has been received and the Lease is
valid and in force so far as the Vendors are aware.
6.6 Save as far as the Vendors are aware the use of the Property is the
permitted use for the purposes of the Town and Country Planning Act
1990.
6.7 So far as the Vendors are aware there is no breach of covenant in any
Superior Lease relating to the Property.
6.8 So far as the Vendors are aware no obligation necessary to comply
with any notice or other requirement given by the Landlord under the
Lease is outstanding and unobserved or unperformed.
6.9 There are no compulsory purchase notices orders or resolutions
affecting the Property.
7. EMPLOYMENT MATTERS
7.1 Full particulars of the identities dates of commencement of
employment or appointment to office and terms and conditions of
employment of all the employees and officers of the Company including
without limitation profit sharing commission or discretionary bonus
arrangements are fully and accurately set out in the Disclosure
Letter.
7.2 Since the Last Accounts Date or (where employment or holding of
office commenced after that date) since the commencing date of such
employment or holding of office no
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<PAGE>
change has been made in the rate of remuneration or the emoluments or
pension benefits of any officer ex-officer or senior executive of the
Company (a senior executive being a person in respect of remuneration
in excess of L20,000 per annum).
7.3 The Company is not bound or accustomed to pay any monies other than
in respect of remuneration or emoluments of employment or pension
benefits to or for the benefit of any officer or employee of The
Company.
7.4 The Company does not operate a pension scheme and is under no legal
or moral liability or obligation nor a party to any ex-gratia
arrangement or promise to pay pensions gratuities superannuation
allowances or the like or otherwise to provide 'relevant benefits'
within the meaning of ICTA s.612 to or for any of its past or present
officers or employees or their dependants and there are no
retirement benefit or pension or death benefit or similar schemes or
arrangements in relation to or binding on the Company or to which the
Company contributes.
8. ASSET MATTERS
8.1 The Company owned at the Last Accounts Date and had good and
marketable title to and (except for current assets subsequently sold
or realised in the ordinary course of business) still owns and has
good and marketable title to all the assets included in the Last
Accounts and to all assets acquired since the Last Accounts Date.
8.2 The stock of raw materials packaging materials and finished goods now
held are not excessive and are adequate in relation to the current
trading requirements of the business and none of such stock is
obsolete slow moving unusable unmarketable or inappropriate or of
limited value in relation to the current business of the Company and
no contracts are outstanding which are likely to result in the
foregoing not being true.
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<PAGE>
8.3 The stock-in-trade of the Company is in good condition and is capable
of being sold by the Company in the ordinary course of its business
in accordance with its current price list without rebate or allowance
to a purchaser.
8.4 The plant machinery equipment vehicles and other equipment used in
connection with the Business:-
8.4.1 are in a good and safe state of repair and condition and
satisfactory working order and have been regularly and
properly maintained;
8.4.2 are the absolute property of the Company save for those
items the subject of the hire purchase leasing or rental
agreements listed in the Disclosure Letter or in respect of
which the outstanding payments do not exceed L1,000;
8.4.3 are not expected to require replacements or additions at a
cost in excess of L5,000 within six months from the date of
this Agreement;
8.4.4 are so far as the Vendors are aware all capable and
(subject to normal wear and tear) will remain capable
throughout the respective periods of time during which they
are each written down to a value of L10 in the accounts of
the Company (in accordance with the normal recognised
accountancy principles) of doing the work for which they
were designed or purchased.
8.5 All the stock-in-trade of the Company and those of its other assets
and undertakings which are of an insurable nature are and have at all
material times been insured in amounts representing their full
replacement or reinstatement value against fire and other risks
normally insured against by persons carrying on the same business as
that carried on by the Company. Details of insurance policies are
set out in the Disclosure Letter.
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<PAGE>
8.6 Subject to normal commercial considerations the Company is now and
has at all material times been adequately covered against accident
damage injury third party loss (including product liability) loss of
profits and other risks.
8.7 All insurances are currently in full force and effect and nothing has
been done or omitted to be done which could make any policy of
insurance void or voidable or which is likely to result in an
increase in premium.
8.8 No claim is outstanding nor, so far as the Vendors are aware may be
made under any of the insurance policies and so far as the Vendors
are aware no circumstances exist which are likely to give rise to a
claim.
9. GENERAL
9.1 All information given by any of the Vendors the Vendors' solicitors
or the Vendors' accountants to the Purchaser the Purchaser's
solicitors or the Purchaser's accountants relating to the business
activities affairs or assets or liabilities of the Company was when
given and, so far as the Vendors are aware, is now accurate and
comprehensive in all respects.
-46-
<PAGE>
SCHEDULE 4
(TAX DEED)
-47-
<PAGE>
SCHEDULE 5
(DEED OF RESTRICTIVE COVENANTS)
-48-
<PAGE>
SCHEDULE 6
(SHORT PARTICULARS OF THE PROPERTIES)
62 Tempus Business Centre
Kingsclere Road
Basingstoke
Hants
Date Document Parties Terms
- ---- -------- ------- -----
27/19/94 Underlease Riohurst Investments Limited (1) 5 years from
Hammer Distribution Limited (2) 9 September 1994
-49-
<PAGE>
SIGNED AND DELIVERED as a DEED by )
STEVEN EASTERBROOK in the presence of:- )
SIGNED AND DELIVERED as a DEED by )
STEPHEN SAWKINS in the presence of:- )
SIGNED AND DELIVERED as a DEED by )
PAUL SANGSTER in the presence of:- )
EXECUTED AND DELIVERED as a DEED by )
4FRONT SOFTWARE INTERNATIONAL INC )
acting by two officers )
-50-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 11,198,970
<SECURITIES> 0
<RECEIVABLES> 8,195,793
<ALLOWANCES> 151,000
<INVENTORY> 4,098,100
<CURRENT-ASSETS> 24,241,361
<PP&E> 2,238,587
<DEPRECIATION> 1,173,476
<TOTAL-ASSETS> 28,857,437
<CURRENT-LIABILITIES> 8,889,004
<BONDS> 0
0
0
<COMMON> 23,164,689
<OTHER-SE> (3,297,347)
<TOTAL-LIABILITY-AND-EQUITY> 28,857,437
<SALES> 10,060,425
<TOTAL-REVENUES> 10,060,425
<CGS> 6,655,556
<TOTAL-COSTS> 6,655,556
<OTHER-EXPENSES> 2,967,423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,322
<INCOME-PRETAX> 489,871
<INCOME-TAX> 104,413
<INCOME-CONTINUING> 313,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313,239
<EPS-PRIMARY> .07
<EPS-DILUTED> 0.06
</TABLE>
