<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1996
REGISTRATION NO. 333-03594
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
4FRONT SOFTWARE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COLORADO 7373 84-0675510
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5650 GREENWOOD PLAZA BOULEVARD, SUITE 107
ENGLEWOOD, COLORADO 80111
(303) 721-7341
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
CRAIG KLEINMAN
SECRETARY
4FRONT SOFTWARE INTERNATIONAL, INC.
5650 GREENWOOD PLAZA BOULEVARD, SUITE 107
ENGLEWOOD, COLORADO 80111
(303) 721-7341
(Name, address, and telephone number of agent for service)
--------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
HOWARD J. UNTERBERGER, Esq. PAUL JACOBS, Esq.
Miller & Holguin Fulbright & Jaworski L.L.P.
1801 Century Park East, Seventh Floor 666 Fifth Avenue
Los Angeles, California 90067 New York, New York 10103
(310) 556-1990 (212) 318-3000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
--------------------------
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) PRICE (1)(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value..... 3,450,000 shares $5.75 $19,837,500 $6,840.52
</TABLE>
(1) Includes 450,000 shares of Common Stock which the Underwriters have the
option to purchase from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee.
(3) $3,806.89 has previously been paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC.
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY PART I OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM AND CAPTION PROSPECTUS CAPTIONS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Facing Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary, Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Inapplicable
8. Plan of Distribution................................. Outside and Inside Front Cover Pages of Prospectus;
Underwriting
9. Description of Securities to Be Registered........... Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Securities
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside and Inside Front Cover Pages of Prospectus;
Prospectus Summary; The Company; Risk Factors; Use
of Proceeds; Price Range of Common Stock and
Dividend Policy; Dilution; Capitalization; Selected
Consolidated Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management; Certain
Transactions; Principal Stockholders; Description of
Securities; Shares Eligible for Future Sale;
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Inapplicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 21, 1996
PROSPECTUS
[LOGO]
3,000,000 SHARES
4FRONT SOFTWARE INTERNATIONAL, INC.
COMMON STOCK
--------------------
The 3,000,000 shares of Common Stock, no par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by 4Front Software
International, Inc. The Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol "FFST." Application has been made to quote the Common Stock on
the Nasdaq National Market under the trading symbol "FFST." The closing bid
price of the Common Stock, as reported by the Nasdaq SmallCap Market on May 20,
1996, was $4.50 per share. See "Price Range of Common Stock and Dividend
Policy." It is currently anticipated that the public offering price will be
between $4.25 and $5.75 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the public offering price.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS (1) THE COMPANY (2)
<S> <C> <C> <C>
Per Share............................ $ $ $
Total (3)............................ $ $ $
</TABLE>
(1) Excludes the value of warrants to be issued to the representatives of the
Underwriters. Does not include a 2% non-accountable expense allowance
payable to the representatives of the Underwriters, of which $25,000 has
been paid to date. See "Underwriting" for indemnification arrangements with
the several Underwriters.
(2) Before deducting expenses payable by the Company estimated at $860,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock, solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock offered hereby are being offered by the
Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in part.
It is expected that certificates for the shares of Common Stock will be
available for delivery on or about , 1996 at the offices of
Kaufman Bros., L.P., New York, New York.
------------------------
KAUFMAN BROS., L.P. FIRST ALBANY CORPORATION
The date of this Prospectus is , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, THE
NASDAQ NATIONAL MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
SMALLCAP MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING RISK FACTORS AND CONSOLIDATED FINANCIAL STATEMENTS, AND
THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES IN THIS
PROSPECTUS TO A FISCAL YEAR OF THE COMPANY SHALL REFER TO THE TWELVE MONTH
PERIOD COMMENCING FEBRUARY 1 OF SUCH YEAR AND ENDING ON JANUARY 31 OF THE
FOLLOWING YEAR.
THE COMPANY
4Front Software International, Inc. (the "Company" or "4Front"), a United
Kingdom ("UK") based specialized computer services company, 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. The Company believes it has a
competitive advantage through its ability to provide a single-source solution to
a broad range of corporate computing needs.
Since 1992, 4Front's revenues have grown from approximately $895,000 to over
$32 million in the fiscal year ended January 31, 1996 principally through
strategic acquisitions that furthered the expansion of its existing operations.
The Company's customers include National Westminster Bank plc, British Aerospace
plc, Oracle Corporation UK Ltd., Royal Dutch/Shell Group plc, Orange plc,
British Telecom plc, Alcatel Data Networks Ltd., Sun Microsystems Corp.,
Cambridge University and the British Ministry of Defense.
The Company seeks to capitalize on technological change in the computer
services industry by providing a single source for specialized high-end
solutions to information systems problems that are beyond the expertise of most
in-house management information systems ("MIS") departments. The UK computer
services market, the fastest growing in Europe, is currently estimated at $12
billion annually, according to the 1995 Holway Report on Software and Computing
Services in Europe. This market grew by an estimated 16% in 1995 and is highly
fragmented, with no single company serving more than 5% of the UK.
The Company believes that the demand for its products and services will
continue to grow in the UK and Europe due to a number of factors that reflect
recent worldwide industry trends. Historically, corporations satisfied
information technology requirements through mainframe or stand-alone midrange
systems utilizing hardware and software provided by a single original equipment
manufacturer ("OEM"). Design and development as well as maintenance and support
of these systems could be provided directly by such single-source OEM's in
conjunction with a corporate in-house information technology staff. Accelerating
technological advancement, migration of organizations toward multivendor
distributed networks, and globalization of information technology needs have
contributed to a significant increase in the sophistication and interdependency
of corporate computing systems. The Company believes that, as a result of these
factors, the complexity of system development as well as the breadth of
corporate computing needs have surpassed the abilities and available time of
many in-house MIS departments, and have led to a greater acceptance of
outsourcing. The Company also believes that customers are reluctant to outsource
computer services directly to OEMs, which may be perceived by customers as
favoring the OEMs' own product line. Meanwhile, the increased corporate use of
information technology for operational as well as mission critical applications
have increased the use of complex, customized corporate computing systems that
are beyond the expertise of most horizontal integrators and value added
resellers ("VARs"). Furthermore, many OEMs now rely on independent service
organizations such as the Company to provide distribution, integration and
warranty/post warranty maintenance and support services.
The Company intends to continue providing a single source for a wide array
of corporate network and computing services through an operating and growth
strategy that consists of the following principal
3
<PAGE>
elements: (i) further penetration of the growing UK and European computer
services market; (ii) identification and acquisition of complementary businesses
in order to expand its product offerings and geographic reach; (iii) expansion
of its hardware maintenance and technology support capabilities; and (iv)
leverage of its existing infrastructure and customer relationships in order to
further develop new business lines.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........... 3,000,000 shares
Common Stock to be outstanding after
completion of this Offering.................. 6,058,747 shares (1)
Use of Proceeds............................... For general corporate purposes, including
working capital, and repayment of existing
debt obligations. See "Use of Proceeds."
Nasdaq SmallCap Market Symbol................. FFST
Proposed Nasdaq National Market Symbol........ FFST
</TABLE>
- ------------------------
(1) Excludes 3,388,753 shares of Common Stock consisting of 2,010,338 shares of
Common Stock issuable upon the exercise of stock options outstanding at a
weighted average exercise price of $4.37 per share and 1,378,415 shares of
Common Stock issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $4.42 per share. Also excludes 450,000
additional shares of Common Stock which may be sold pursuant to the
Underwriters' over-allotment option and warrants to be issued to the
representatives of the Underwriters to purchase 300,000 shares of Common
Stock. See "Shares Eligible for Future Sale" and "Underwriting."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE PREDECESSOR COMPANY (1) THE COMPANY (1)
------------------------------------------- --------------------------------------------------------
NINE MONTHS YEAR ENDED ONE MONTH YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS
ENDED DEC. 31, DEC. 31, ENDED JAN. JAN. 31, JAN. 31, JAN. 31, ENDED APRIL 30,
1991 1992 31, 1993 1994 1995 1996 1995
--------------- ----------- ------------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA (2):
Revenues.................... $ 1,078 $ 895 $ 10 $ 2,837 $ 11,240 $ 32,249 $ 4,645
Cost of revenues............ (565) (341) (3) (1,281) (6,814) (20,808) (2,799)
Write down of software
development costs.......... 0 0 0 0 0 (755) 0
------- ----------- ------------- ----------- ----------- ----------- -------
Gross profit................ 513 554 7 1,556 4,426 10,686 1,846
------- ----------- ------------- ----------- ----------- ----------- -------
Income (loss) before
interest expense, income
taxes and share of results
in equity investee......... (233) (536) (93) 376 645 559 262
Share of results in equity
investee (3)............... 0 0 0 0 0 (761) 0
Net income (loss)........... $ (263) $ (592) $ (98) $ 304 $ 355 $ (652) $ 114
------- ----------- ------------- ----------- ----------- ----------- -------
------- ----------- ------------- ----------- ----------- ----------- -------
Net income (loss) per share
(4)........................ $ (1.17) $ (1.92) $ (0.10) $ 0.25 $ 0.20 $ (0.24) $ 0.05
------- ----------- ------------- ----------- ----------- ----------- -------
------- ----------- ------------- ----------- ----------- ----------- -------
Weighted average number of
shares(4).................. 225 309 1,014 1,198 1,813 2,743 2,535
OTHER DATA:
Adjusted income (loss)
before interest expense,
income taxes and before
share of results in equity
investee and write down of
software development costs
(5)........................ $ (233) $ (536) $ (93) $ 376 $ 645 $ 1,314 $ 262
Adjusted net income (loss)
before write down of
software development costs
and write down of
investment in and advances
to equity investee (6)..... (263) (592) (98) 304 355 685 114
Adjusted net income (loss)
per share before write down
of software development
costs and write down of
investment in and advances
to equity investee......... $ (1.17) $ (1.92) $ (0.10) $ 0.25 $ 0.20 $ 0.25 $ 0.05
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
1996
---------------
<S> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA
Revenues.................... $ 10,550
Cost of revenues............ (7,279)
Write down of software
development costs.......... 0
---------------
Gross profit................ 3,271
---------------
Income (loss) before
interest expense, income
taxes and share of results
in equity investee......... 416
Share of results in equity
investee (3)............... (52)
Net income (loss)........... $ 198
---------------
---------------
Net income (loss) per share
(4)........................ $ 0.07
---------------
---------------
Weighted average number of
shares(4).................. 3,011
OTHER DATA:
Adjusted income (loss)
before interest expense,
income taxes and before
share of results in equity
investee and write down of
software development costs
(5)........................ $ 416
Adjusted net income (loss)
before write down of
software development costs
and write down of
investment in and advances
to equity investee (6)..... 198
Adjusted net income (loss)
per share before write down
of software development
costs and write down of
investment in and advances
to equity investee......... $ 0.07
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1996
(UNAUDITED)
-------------------------
ACTUAL AS ADJUSTED(7)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets...................................................................... $ 13,688 $ 23,360
Current liabilities................................................................. 14,737 11,619
Total assets........................................................................ 18,078 27,750
Capital lease obligations, less current portion..................................... 78 78
Stockholders' equity................................................................ 3,263 16,053
</TABLE>
- ------------------------
(1) The results of operations for the periods ended December 31, 1991, December
31, 1992 and January 31, 1993 represent the results of 4Front Group PLC and
its subsidiaries (the Predecessor Company), a United Kingdom company, which
was acquired by the Company in January 1993.
5
<PAGE>
(2) The Company has grown substantially through acquisitions, which materially
affect the comparability of the financial data reflected herein. The Summary
Consolidated Financial Information includes the results of operations of the
primary operating divisions of the Company which were acquired effective
January 1994, November 1994 and April 1995, and which were accounted for
under the purchase method of accounting. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Consists of the Company's share of operating loss in the equity investee
(the "ActionTrac Joint Venture") of $(179,000) in the fiscal year ended
January 31, 1996, and $(52,000) in the three months ended April 30, 1996,
and write down of the Company's investment in and advances to the ActionTrac
Joint Venture of $(582,000) in the fiscal year ended January 31, 1996. See
"Risk Factors -- Partnership with ActionTrac, Inc."
(4) The number of shares and the net income (loss) per share for the period
ended December 31, 1991, have been restated to reflect a 1 for 133.3
reverse-stock split effective November 1992.
(5) Income (loss) before interest expense, income taxes and share of results in
the ActionTrac Joint Venture, excluding the write down of software
development costs.
(6) Excludes the write downs of investment in and advances to the ActionTrac
Joint Venture $(582,000) and the write down of software development costs
$(755,000) in the fiscal year ended January 31, 1996. Includes the share of
operating loss of the ActionTrac Joint Venture of $(179,000) in the fiscal
year ended January 31, 1996, and $(52,000) in the three months ended April
30, 1996. See "Risk Factors -- Partnership with ActionTrac, Inc."
(7) Adjusted to reflect the sale of 3,000,000 shares of Common Stock by the
Company in the Offering at an assumed price of $5.00 per share (the
mid-point of the range at the estimated public offering price) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
UNLESS OTHERWISE NOTED, ALL FINANCIAL INFORMATION, SHARE AND PER SHARE DATA
IN THIS PROSPECTUS ASSUME NO EXERCISE OF (i) THE OVER-ALLOTMENT OPTION GRANTED
IN CONNECTION WITH THIS OFFERING OR (ii) OTHER OUTSTANDING WARRANTS AND OPTIONS.
ALTHOUGH THE FINANCIAL RESULTS OF ALL OF THE COMPANY'S SUBSIDIARIES WILL
CONTINUE TO BE REPORTED ON A CONSOLIDATED BASIS, THE COMPANY'S ORDINARY BUSINESS
OPERATIONS ARE DIVIDED AMONG ITS OPERATING SUBSIDIARIES. THE COMPANY'S OPERATING
SUBSIDIARIES CONDUCT THEIR OPERATIONS IN BRITISH POUNDS STERLING (L). FOR
FINANCIAL REPORTING PURPOSES, BRITISH POUNDS ARE CONVERTED INTO U.S. DOLLARS AT
THE PREVAILING RATE AS OF THE DATE OR AT THE WEIGHTED AVERAGE FOR THE PERIOD
COVERED. UNLESS SPECIFICALLY STATED OTHERWISE HEREIN, ALL CONVERSIONS OF BRITISH
POUNDS INTO U.S. DOLLARS REFERENCED IN THIS PROSPECTUS HAVE BEEN CONVERTED USING
A CONVERSION RATE OF 1.5751 DOLLARS PER POUND IN RESPECT OF OPERATIONS DURING
THE YEAR ENDED JANUARY 31, 1996 AND AT A RATE OF 1.511 DOLLARS PER POUND IN
RESPECT OF THE JANUARY 31, 1996 BALANCE SHEET. FOR THE THREE MONTHS ENDED APRIL
30, 1995 AND 1996 THE BALANCE SHEET CONVERSION RATE WAS 1.580 AND 1.501,
RESPECTIVELY, AND THE STATEMENT OF OPERATIONS CONVERSION RATE WAS 1.567 AND
1.512, RESPECTIVELY.
6
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON
STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW:
FUTURE OPERATING RESULTS UNCERTAIN. Although the Company had net income of
$304,000 and $355,000 in the fiscal years ended January 31, 1994 and 1995,
respectively, the Company had a net loss of $652,000 in the fiscal year ended
January 31, 1996, primarily due to write-downs relating to capitalized software
development costs and the Company's investment in the ActionTrac International
partnership. As of January 31, 1996, and April 30, 1996, the Company had an
accumulated deficit of approximately $3.9 million and $3.7 million,
respectively. The revenue growth rates and profitability experienced by the
Company in recent periods may not be indicative of its future growth and
profitability and there can be no assurances that the Company will again become
or remain profitable. The Company plans to continue to expand its level of
operations, resulting in increased fixed costs and operating expenses. The
Company's operating results and net income will be adversely affected to the
extent that net sales and gross profits do not increase sufficiently to offset
such increased expenses, of which there can be no assurance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY AND ANNUAL OPERATING RESULTS. The Company's
quarterly and annual operating results have in the past varied and may in the
future vary significantly depending on factors such as the effect of Company
acquisitions, the size, timing and recognition of revenue from significant
orders, increased competition, the timing of new product releases by the Company
and its competitors, market acceptance of the Company's products, changes in the
Company's and its competitors' pricing policies, the mix of license and service
revenue, budgeting cycles of its customers, seasonality, changes in operating
expenses, changes in Company strategy, personnel changes, foreign currency
exchange rates, changes in the outlook for new products and services and general
economic factors. For the fiscal year ended January 31, 1996, approximately 80%
of the Company's growth in revenue was attributable to the Company's acquisition
of Compass. In addition, as the gross margins of the Company's operating
divisions will vary both among themselves and over time, changes in the revenue
mix from these operating divisions may affect quarterly operating results. The
Company therefore believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and that such comparisons should not
be relied upon as indications of future performance. Further, it is possible
that in some future quarter the Company's revenue or operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GROWTH STRATEGY; ACQUISITION OF COMPLEMENTARY BUSINESSES. A significant
component of the Company's growth strategy depends on the Company's ability to
acquire complementary businesses. Competition for the acquisition of computer
service companies is becoming increasingly competitive. Although the Company
has, since May 1994, been successful in acquiring computer services companies,
there can be no assurance that suitable additional acquisitions can be
identified, consummated or successfully integrated into the Company's
operations. The Company has used a combination of cash and Common Stock for
acquisitions. In the event that potential acquisition candidates are unwilling
to accept the Company's securities as consideration, the Company will be
required to use more cash resources to continue its acquisition program. In
addition, if sufficient financing is not available as needed on terms acceptable
to the Company, the Company's acquisition program could be adversely affected.
INTEGRATION OF NEW ACQUISITIONS; ABILITY TO MANAGE GROWTH. As a result of
both acquisitions and internal growth, the Company has recently experienced a
period of rapid growth and expansion. The Company's growth and expansion has
placed, and could continue to place, a significant strain on the Company's
personnel and other resources. The Company expects to continue to grow,
primarily by the
7
<PAGE>
acquisition of companies which offer services, products or both, which are
complementary to the Company's existing business operations. See "-- Growth
Strategy; Acquisition of Complementary Businesses." Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has limited or
no direct experience and the potential loss of key employees of the acquired
companies. There can be no assurance that any acquisition will result in
long-term benefits to the Company or that the Company's management will be able
to effectively manage the resulting businesses. In addition, the Company's
future success will depend in part on its ability to manage potentially rapid
growth as it increases its production capacity and broadens distribution of its
products. To accommodate this recent growth and to compete effectively and
manage future growth, if any, the Company will be required to continue to
implement and improve its operational, financial and management information
systems, procedures and controls on a timely basis and to expand, train,
motivate and manage its workforce. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations. The failure to implement and improve
the Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company's recent growth can be sustained. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Strategy."
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGE. The market for computer systems
and products is characterized by constant technological change, frequent new
product introductions and evolving industry standards. The Company's future
success is dependent upon the continuation of a number of trends in the computer
industry, including the migration by information technology end-users to
multivendor and multisystem computing environments, the overall increase in the
sophistication and interdependency of computing technology, and a focus by
information technology managers on cost-efficient management. The Company
believes these trends have resulted in a movement by both end-users and OEMs
toward outsourcing and an increased demand for product and support services
providers that have the ability to provide a broad range of multivendor product
and support services. There can be no assurance these trends will continue into
the future. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to achieve
these objectives.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company is dependent on its
executive officers, including Anil Doshi, its Chairman of the Board and Chief
Executive Officer, and Mark Ellis, its President and Chief Operating Officer.
See "Management." In addition, the success of the Company's business depends in
large part on its ability to attract and retain highly skilled personnel to
conduct the Company's business. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. Although the Company has entered into employment
agreements which include non-competition provisions with Messrs. Doshi and Ellis
and certain other key personnel, and has obtained key man insurance policies for
key executive officers, the loss of certain key employees or the Company's
inability to attract and retain other qualified employees could have a material
adverse effect on the Company.
PARTNERSHIP WITH ACTIONTRAC, INC. The Company is involved in a start-up
venture, ActionTrac International (the "ActionTrac Joint Venture"), with a U.S.
private company, ActionTrac, Inc., which provides software help desk outsourcing
in North America, to provide such services in the rest of the world. The
activities of the ActionTrac Joint Venture are centered on the computer
help-desk market, which is a relatively young and undeveloped market in the U.S.
and Europe. The Company's strategy for providing the ActionTrac Joint Venture's
help-desk service to customers requires that the Company enter into various
subcontracting agreements with others and depends upon the subsequent success of
these subcontractors in performing these services in an efficient and economic
manner. While the Company
8
<PAGE>
believes that such subcontractors will have an economic motivation to perform
their contractual obligations, there can be no assurances that such obligations
will always be discharged satisfactorily. The ActionTrac Joint Venture presently
has limited revenues, is not yet profitable, and there can be no assurances that
it will ever be profitable. Under generally accepted accounting principles, the
Company is required to recognize its share of the ActionTrac Joint Venture's
income or loss. As a result, the Company's share of the equity investee loss
with respect to the ActionTrac Joint Venture was approximately $179,000 for the
fiscal year ended January 31, 1996. In connection with the ActionTrac Joint
Venture, the Company made a direct investment in ActionTrac, Inc., which is
itself not currently profitable, and there can be no assurances that it will
ever be profitable.
COMPETITION; LIMITED BARRIERS TO ENTRY. The computer services industry is
intensely competitive and is composed of literally hundreds of companies, many
of which have capital, marketing expertise and personnel resources far superior
to that of the Company. There can be no assurance that the Company will be able
to compete successfully in the future or that competitive pressures will not
result in price reductions or other developments in the Company's market which
could have a material adverse effect on the Company. See "Competition." In
addition, barriers to entry in the markets in which the Company operates are
limited, and there can be no assurance that existing or new competitors will not
develop products or provide services that are superior to the Company's products
or services or achieve greater market acceptance.
POSSIBLE EXPANSION OF OPERATIONS WITHIN EUROPE. The Company will seek to
expand its geographic market beyond the UK by selling its products and services
in Europe. The Company's operations within Europe will be subject to additional
risks associated with international operations such as protection of
intellectual property and subjection to the rules and regulations of additional
jurisdictions. The Company will seek, where appropriate, to enter into
relationships with local partners as a way of mitigating the risks of operating
in these additional countries. There can be no assurance, however, of the
Company's ability to identify and enter into favorable arrangements with
prospective local partners or to otherwise overcome the risks associated with
geographic expansion.
FOREIGN EXCHANGE AND RELATED RISKS. The Company markets its products to
European and other foreign countries but conducts its business primarily in
British pounds. The purchase prices received by the Company for its products
will be affected by the foreign exchange rates for British pounds relative to
the foreign currency. Changes in the exchange rates between British pounds (in
which the Company's business is conducted) and U.S. dollars (in which the
Company's financial statements are presented) may significantly affect the
results of operations and other financial information concerning the Company as
presented in the Company's financial statements. 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. As the Company's
business expands into Europe, to the extent its sales are denominated in
currencies other than the British pound or U.S. dollar, the Company will be
required to adopt similar procedures to protect itself against risks of currency
fluctuations.
FOREIGN TAX RATES. The Company and/or its subsidiaries are subject to
taxation in a number of different jurisdictions, including the U.S. and the UK
and, if the Company is successful in expanding its market to Europe, it may
become subject to taxation in additional jurisdictions. See "-- Possible
Expansion of Operations within Europe." In addition, transactions among the
Company and its foreign subsidiaries may become subject to U.S. and foreign
withholding taxes. Applicable tax rates in foreign jurisdictions differ from
those of the U.S., and are subject to periodic change. The extent, if any, to
which the Company will receive credit in the U.S. for taxes paid in foreign
jurisdictions will depend upon the application of limitations set forth in the
Internal Revenue Code, as well as the provisions of any tax treaties which may
exist between the U.S. and such foreign jurisdictions.
INTELLECTUAL PROPERTY. Certain of the Company's operations are dependent in
part upon their software development methodology and other proprietary
intellectual property rights. See "Business --
9
<PAGE>
Product Development." The Company relies upon a combination of trade secret,
nondisclosure and other contractual arrangements, technical measures and
copyright and trademark laws to protect its proprietary rights. The Company
holds no patents or registered copyrights. The Company generally enters into
confidentiality agreements with its employees, consultants, clients and
potential clients and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights. In addition,
although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that such
a claim will not be asserted against the Company in the future.
COPYRIGHT ISSUES. In connection with the Company's performance of most
hardware maintenance, the computer system which is being serviced must be turned
on for the purpose of service or repair. When the computer is turned on, the
resident operating system software and, in some cases diagnostic software, is
transferred from a peripheral storage device or a hard disk drive into the
computer's random access memory. Within the past several years, several OEMs in
the U.S. have commenced litigation against independent service organizations in
which they have claimed such transfer constitutes the making of an unauthorized
"copy" of such software by the independent service organization which infringes
on the software copyrights held by the OEMs. Although the Company is not a party
in any such case, and is unaware of any such claims made in the UK to date,
litigation of this nature can be time consuming and expensive, and there can be
no assurance the Company will not be a party to similar litigation in the
future, or that such litigation would be resolved on terms that do not have a
material adverse effect on the Company.
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS. The Company currently has
no specific plan for a significant portion of the proceeds of this Offering. See
"Use of Proceeds." Accordingly, management will have broad discretion in the use
of such proceeds. In addition, the Company's intended uses of the net proceeds
of this Offering are estimates only and there could be significant variation in
the use of proceeds due to changes in business, technology or the economy.
CONCENTRATION OF SHARE OWNERSHIP. After the sale of the 3,000,000 shares of
Common Stock offered hereby, the executive officers and directors of the
Company, together with their affiliates, will own beneficially approximately 33%
of the outstanding Common Stock (31% assuming exercise in full of the
Underwriters' over-allotment option). As a result, management of the Company may
continue to maintain control of the Company's Board of Directors and thereby
control the Company's policies and operations. In addition, the Company will
have outstanding options and warrants to acquire an aggregate of 3,388,753
shares of Common Stock, of which 1,288,600 will be held by current executive
officers and directors and their affiliates. See "Management." To the extent
that some or all of the options and warrants are exercised, they will decrease
the percentage of ownership of the Company by the persons who purchase Common
Stock in the Offering. The holders of such options and warrants may be expected
to exercise such instruments at a time when the Company would be able to obtain
needed capital by a new offering of securities on terms more favorable than
those provided for by such options and warrants. The possibility of the sale of
all of the shares of Common Stock issuable upon exercise of the options and
warrants may adversely affect the market price of the Common Stock offered
hereby.
POSSIBLE VOLATILITY OF STOCK PRICE; POTENTIAL LIMITED TRADING MARKET. There
has been significant volatility in the market price of computer services
companies. Factors such as variations in the Company's quarterly operating
results, announcements regarding technological developments or new products by
the Company or others, developments affecting the Company or its competitors,
suppliers or customers or general economic or stock market conditions unrelated
to the Company's operating performance may have a significant impact on the
market price of the Common Stock. Although the Company's Common Stock has been
quoted on the Nasdaq SmallCap Market since January, 1996, and the Company has
applied to have its Common Stock quoted on the Nasdaq National Market, there can
be no assurances that an active public market for the Common Stock will be
sustained after the Offering.
10
<PAGE>
Historically, the Common Stock has been thinly traded. This low trading
volume may have had a significant effect on the market price of the Common
Stock, which may not be indicative of the market price in a more liquid market.
The share price on the Nasdaq SmallCap Market may be only one of the factors
considered by the Company and the representatives in determining the offering
price for the shares of Common Stock offered hereby. See "Underwriting."
DILUTION. This Offering will result in immediate, substantial dilution to
new investors. See "Dilution."
POSSIBLE ISSUANCE OF ADDITIONAL SHARES. The Company has authorized capital
of 30,000,000 shares of Common Stock. As of the date of this Prospectus, there
are 3,058,747 shares of Common Stock outstanding, an additional 2,010,338 shares
of Common Stock subject to issuance pursuant to outstanding stock options, and
an additional 1,378,415 shares of Common Stock subject to issuance pursuant to
outstanding warrants, leaving a balance of 23,552,500 shares of Common Stock
available for future issuance (including shares of Common Stock to be issued in
this Offering). The directors may issue Common Stock beyond that already issued
and that offered hereby, either for cash or for services or as employee
incentives. To the extent that additional common stock is issued either for
assets or for cash, or pursuant to an employee stock bonus program or other
stock plan, the percentage of the Company's issued and outstanding Common Stock
and the percentage represented by the various securities outstanding convertible
into Common Stock will be reduced and the issuance may cause additional dilution
in the book value per share of such outstanding shares. See "Management --
Equity Incentive Plan" and "Shares Eligible for Future Sale."
NO DIVIDENDS. The Company has never paid cash dividends on its Common Stock
and anticipates that for the foreseeable future, all earnings, if any, will be
retained for the operation and expansion of the Company's business.
11
<PAGE>
THE COMPANY
COMPANY HISTORY
4Front Software International, Inc., a UK based specialized computer
services company, 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 the
ActionTrac Joint Venture. The Company believes it has a competitive advantage
through its ability to provide a single-source solution to a broad range of
corporate computing needs.
The Company's principal corporate offices are located at 5650 Greenwood
Plaza Blvd., Suite 107, Englewood, Colorado 80111, and its phone number is (303)
721-7341. The Company's operational offices are located at 4Front House,
Colonial Business Park, Colonial Way, Watford, Hertfordshire, England, WD2 4PR,
telephone +44 (0) 1923-816266.
ACQUISITIONS AND PARTNERSHIP
K2 ACQUISITION
Effective January 14, 1994, the Company acquired K2 Group Plc ("K2") and its
Xanadu Systems Ltd subsidiary ("Xanadu") for aggregate consideration of
$923,000, of which $625,000 was paid through the issuance of 212,500 shares of
Common Stock, inclusive of contingent consideration of 112,500 shares of Common
Stock and $141,250 in cash. K2 was founded in 1988 and has formed the basis for
the Company's systems integration development activities, which had revenues of
approximately $5 million in the fiscal year ended January 31, 1996. Xanadu was
founded in 1990 and has formed the basis for the Company's network computing
activities, which had revenues of approximately $7.7 million in the fiscal year
ended January 31, 1996.
CI ACQUISITION
Effective November 1, 1994 the Company acquired all of the assets of CI
Support Limited ("CI") a provider of hardware maintenance and support services,
for $159,000. Revenues from the Company's hardware maintenance and support
services were approximately $2.8 million in the fiscal year ended January 31,
1996. The CI acquisition allowed the Company to directly provide maintenance
services to its customers which had been previously contracted out to third
parties. The CI acquisition also expanded the Company's support services.
COMPASS ACQUISITION
Effective April 6, 1995 the Company acquired Compass Computer Group
("Compass"), a supplier of computer hardware and software products founded in
1982, for consideration of $1,265,648, of which $385,648 was paid through the
issuance of 192,556 shares of Common Stock and options on 53,639 shares of
Common Stock, inclusive of contingent consideration of 108,836 shares of Common
Stock and options on 29,959 shares of Common Stock. The addition of Compass to
the Company's information storage systems operations 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.
Revenues from the Company's information storage systems operations were
approximately $17 million in the fiscal year ended January 31, 1996. The Compass
acquisition also expanded the Company's systems integration and support business
and provided the basis for the Company's corporate Internet services. The
Company was obligated to operate Compass on a stand alone basis until December
1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
12
<PAGE>
ACTIONTRAC JOINT VENTURE
The ActionTrac Joint Venture was formed in August, 1994, to commercialize
ActionTrac Inc.'s proprietary help-desk systems, services and software outside
the U.S., Canada and Mexico. The ActionTrac Joint Venture's two equal partners
are 4Front Holdings, Inc., a wholly owned subsidiary of the Company, and
ActionTrac Holdings, Inc., a wholly owned subsidiary of ActionTrac, Inc. The
Company contributed $500,000 to the working capital of the ActionTrac Joint
Venture and invested $500,000 in ActionTrac, Inc. The ActionTrac Joint Venture
currently has limited revenues. See "Risk Factors -- Partnership with
ActionTrac, Inc."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at an assumed offering price of $5.00 (the mid-point of the range
of the estimated public offering price) are estimated to be approximately
$12,790,000 ($14,792,500 if the over-allotment option is exercised in full),
after deducting estimated underwriting discounts, commissions and offering
expenses.
The Company plans to use approximately $1.1 million of the net proceeds from
this Offering to repay existing indebtedness under an outstanding bridge loan.
The bridge loan was originally part of a $790,000 bridge loan completed by the
Company in January 1995 and originally due in May 1995. In June 1995,
approximately $530,000 of this amount was extended as part of a new bridge loan
of approximately $1,030,000, which came due December 14, 1995. $50,000 of this
amount has been repaid, with the remaining principal balance of $980,000 bearing
interest at 10% and maturing on the first to occur of June 14, 1996, or the
completion of this Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company plans to use approximately $2,000,000 of the net proceeds from
this Offering to pay down the outstanding balance of a line of credit which the
Company has with a UK bank. This line of credit bears interest at 2.5% above the
bank's base rate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company plans to use approximately $750,000 of the net proceeds from
this Offering to fund the further development of its network communications
venture, which is designed to exploit the business opportunities of the Internet
by supplying support services related to Internet use. See "Business -- Products
and Services -- Network Communications." The Company also plans to use
approximately $500,000 of the net proceeds from this Offering for product
development purposes.
The Company intends to use the remainder of the net proceeds for working
capital, including expansion of its sales and marketing efforts, and other
general corporate purposes. The Company may also use a portion of the net
proceeds of this Offering to make one or more acquisitions of businesses which
can be integrated into the Company's existing operating structure. However, the
Company has no specific agreements or commitments, and is not currently engaged
in any negotiations, for any such acquisitions. Additional purposes of this
Offering are to increase the Company's capital, to create a broader public
market for the Company's Common Stock and to facilitate future access by the
Company to public equity markets.
Pending such uses, the net proceeds will be invested in government
securities and other short-term, investment grade, interest-bearing instruments
or used to further reduce existing indebtedness. The actual amount of net
proceeds expended for any purpose may vary significantly from the estimated or
budgeted amounts set forth above.
13
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since January 3, 1996, the Company's Common Stock has been quoted on the
Nasdaq SmallCap Market under the symbol "FFST." Between March 1995 and January
1996, the Company's Common Stock had been traded under the symbol "FFST" on the
over-the-counter Bulletin Board ("OTC"). Prior to March 1995, there had been no
active trading market for the Common Stock. Application has been made to have
the Common Stock quoted on the Nasdaq National Market under the trading symbol
"FFST" upon completion of this Offering.
The following table sets forth, for the periods indicated, the high and low
reported sales prices of shares of the Common Stock as reported by OTC prior to
January 3, 1996 and by the Nasdaq SmallCap Market thereafter.
<TABLE>
<CAPTION>
1995 HIGH LOW
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
First Quarter (from March 1995)............................. $ 5.88 $ 5.00
Second Quarter.............................................. 5.88 4.00
Third Quarter............................................... 5.00 3.50
Fourth Quarter.............................................. 6.88 3.50
<CAPTION>
1996 HIGH LOW
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
First Quarter............................................... $ 6.88 $ 4.38
Second Quarter (through May 20, 1996)....................... 5.25 4.25
</TABLE>
On May 20, 1996, the last reported sale price for the Common Stock was $5.25
per share.
The estimated number of beneficial owners of the Company's common stock is
2,250 and the number of stockholders of record on May 20, 1996, was 1,659.
Historically, the Common Stock has been thinly traded. This low trading
volume may have had a significant effect on the market price of the Common
Stock, which may not be indicative of the market price in a more liquid market.
The share price on the Nasdaq SmallCap Market may be only one of the factors
considered by the Company and the Representatives in determining the offering
price for the shares of Common Stock offered hereby. See "Underwriting."
The Company has never declared or paid any cash dividends on shares of its
capital stock. The Company currently intends to retain any future earnings for
use in its business and does not anticipate paying any cash dividends in the
future. Any future declaration of dividends will be subject to the discretion of
the Board of Directors of the Company, will be subject to applicable law and
will depend upon the Company's results of operations, earnings, financial
condition, contractual limitations, cash requirements, future prospects and
other factors deemed relevant by the Company's Board of Directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at April
30, 1996, and as adjusted to reflect the receipt by the Company of the net
proceeds from the sale of 3,000,000 shares of the Common Stock offered by the
Company hereby at an assumed offering price of $5.00 per share (the mid-point of
the range of the estimated public offering price).
<TABLE>
<CAPTION>
APRIL 30, 1996
(UNAUDITED)
------------------------
AS
HISTORICAL ADJUSTED (1)
---------- ------------
<S> <C> <C>
Line of credit -- bank............................ $2,017,991 $ 0
Notes payable..................................... 1,301,234 201,234
Capital lease obligations, current portion........ $ 54,897 $ 54,897
---------- ------------
---------- ------------
Capital lease obligations, less current portion... $ 78,150 $ 78,150
Stockholders' equity:
Common Stock, no par value, 30,000,000 shares
authorized, 3,058,747 shares issued and
outstanding, actual; 6,058,747 shares issued
and outstanding, as adjusted (2)............... 6,973,210 19,763,210
Accumulated (deficit)........................... (3,680,416) (3,680,416)
Cumulative foreign currency transaction
adjustment..................................... (30,284) (30,284)
---------- ------------
Total stockholders' equity.................... 3,262,510 16,052,510
---------- ------------
Total capitalization........................ $3,340,660 $16,130,660
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) Excludes 450,000 additional shares of Common Stock which may be sold
pursuant to the Underwriters' over-allotment option.
(2) Excludes 3,388,753 shares of Common Stock consisting of 2,010,338 shares of
Common Stock issuable upon the exercise of stock options outstanding at a
weighted average exercise price of $4.37 per share and 1,378,415 shares of
Common Stock issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $4.42 per share. Also excludes 450,000
additional shares of Common Stock which may be sold pursuant to the
Underwriters' over-allotment option and warrants to be issued to the
representatives of the Underwriters to purchase 300,000 shares of Common
Stock. See "Shares Eligible for Future Sale" and "Underwriting."
DILUTION
The net tangible book value of the Company at April 30, 1996 was $678,861,
or $0.22 per share. "Net tangible book value per share" represents the amount of
total tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding. Without taking into account any other changes in the
pro forma net tangible book value after April 30, 1996, other than to give
effect to the receipt of the net proceeds from the sale of the shares of Common
Stock offered by the Company hereby at an assumed offering price of $5.00 per
share (the mid-point of the range of the estimated offering price), the pro
forma net tangible book value of the Company at April 30, 1996 would have been
$14,039,980, or $2.32 per share. This represents an immediate increase of pro
forma net tangible book value of $2.10 per share to existing stockholders and an
immediate dilution of $2.68 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share.................. $ 5.00
Net tangible book value per share before
offering....................................... 0.22
Increase per share attributable to new
investors...................................... 2.10
------
Pro forma net tangible book value per share after
offering......................................... 2.32
------
Dilution per share to new investors............... $ 2.68
------
------
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data of the Company as of and
for the year ended January 31, 1996 are derived from the financial statements
that have been audited by KPMG. The following selected consolidated financial
data of the Company as of the nine months ended December 31, 1991, the year
ended December 31, 1992, the one month ended January 31, 1993 and the years
ended January 31, 1994 and January 31, 1995 are derived from the financial
statements of the Company that have been audited by AJ. Robbins, PC. The results
of operations set out below for the periods ended December 31, 1991, December
31, 1992 and January 31, 1993 represent the results of 4Front Group PLC and its
subsidiaries (the Predecessor Company), a United Kingdom company, which was
acquired by the Company in January 1993. The unaudited selected statements of
operations data for the three months ended April 30, 1995 and 1996 and the
balance sheet data at April 30, 1996 have been prepared on the same basis as the
audited financial statements of the Company included herein and, in the opinion
of the Company, include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the information set forth therein. The
results for the three months ended April 30, 1996 are not necessarily indicative
of the results to be achieved for the full fiscal year.
This data should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY
THE PREDECESSOR COMPANY -----------------------------------------------------
---------------------------------- THREE THREE
NINE MONTHS YEAR ONE MONTH YEAR YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, JAN. 31, JAN. 31, JAN. 31, JAN. 31, APRIL 30, APRIL 30,
1991 1992 1993 1994 1995 1996 1995 1996
----------- -------- --------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues............................... $1,078 $ 895 $ 10 $ 2,837 $11,240 $32,249 $ 4,645 $ 10,550
Cost of revenues....................... (565) (341) (3) (1,281) (6,814) (20,808 ) (2,799) (7,279)
Write down of software development
costs................................. 0 0 0 0 0 (755 ) 0 0
----------- -------- --------- -------- -------- -------- --------- ---------
Gross profit........................... 513 554 7 1,556 4,426 10,686 1,846 3,271
----------- -------- --------- -------- -------- -------- --------- ---------
Selling general and administrative... (714) (1,031) (97) (1,117) (3,565) (9,566 ) (1,502) (2,712)
Depreciation and amortization........ (32) (59) (3) (63) (216) (560 ) (82) (143)
Income (loss) before interest expense,
income taxes and share of results in
equity investee....................... (233) (536) (93) 376 645 559 262 416
Share of results in equity investee
(2)................................. 0 0 0 0 0 (761 ) 0 (52)
Net income (loss) (3).................. $ (263) $ (592) $ (98) $ 304 $ 355 $ (652 ) $ 114 $ 198
----------- -------- --------- -------- -------- -------- --------- ---------
----------- -------- --------- -------- -------- -------- --------- ---------
Net income (loss) per share (3)........ $(1.17) $ (1.92) $(0.10) $ 0.25 $ 0.20 $ (0.24 ) $ 0.05 $ 0.07
----------- -------- --------- -------- -------- -------- --------- ---------
----------- -------- --------- -------- -------- -------- --------- ---------
Weighted average number of shares
(3)................................... 225 309 1,014 1,198 1,813 2,743 2,535 3,011
OTHER DATA:
Adjusted income (loss) before interest
expense, income taxes and before share
of results in equity investee and
write down of software development
costs (4)............................. $ (233) $ (536) $ (93) $ 376 $ 645 $ 1,314 $ 262 $ 416
Adjusted net income (loss) before write
down of software development costs and
write down of investment in and
advances to equity investee (5)....... (263) (592) (98) 304 355 685 114 198
Adjusted net income (loss) per share
before write down of software
development costs and write down of
investment in and advances to equity
investee.............................. $(1.17) $ (1.92) $(0.10) $ 0.25 $ 0.20 $ 0.25 $ 0.05 $ 0.07
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
THE PREDECESSOR COMPANY THE COMPANY
------------------------------ ------------------------------------------
DEC. 31, DEC. 31, JAN. 31, JAN. 31, JAN. 31, JAN. 31, APR. 30,
1991 1992 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.................................. $ 0 $ 24 $ 744 $5,041 $6,588 $ 13,464 $13,688
Current liabilities............................. 42 76 1,485 5,892 7,008 14,750 14,737
Total assets.................................... 0 24 844 6,203 9,887 17,943 18,078
Long-term debt (including capital lease
obligations)................................... 0 0 350 403 74 93 78
Stockholders' equity (deficit).................. (1,105) (1,387) (992) (92) 2,805 3,101 3,263
</TABLE>
- ------------------------
(1) The Company has grown substantially through acquisitions, which materially
affect the comparability of the financial data reflected herein. The
Selected Consolidated Financial Information includes the results of
operations of the primary operating divisions of the Company which were
acquired effective January 1994, November 1994 and April 1995, and which
were accounted for under the purchase method of accounting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Consists of the Company's share of the operating loss of the equity investee
(the "ActionTrac Joint Venture") of $(179,000) in the fiscal year ended
January 31, 1996, and $(52,000) in the three months ended April 30, 1996 and
the write down of the Company's investment in and advances to the ActionTrac
Joint Venture of $(582,000) in the fiscal year ended January 31, 1996. See
"Risk Factors -- Partnership with ActionTrac, Inc."
(3) The number of shares and the net income (loss) per share for the period
ended December 31, 1991, have been restated to reflect a 1 for 133.3 reverse
stock split effective November 1992.
(4) Income (loss) before interest expense, income taxes and share of results in
the ActionTrac Joint Venture, excluding the write down of software
development costs.
(5) Excludes the write downs of investment in and advances to the equity
investee (the "ActionTrac Joint Venture") $(582,000) and the write down of
software development costs $(755,000) in the fiscal year ended January 31,
1996. Includes the share of operating loss of the ActionTrac Joint Venture
of $(179,000) in the fiscal year ended January 31, 1996, and $(52,000) in
the three months ended April 30, 1996. See "Risk Factors -- Partnership with
ActionTrac, Inc."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
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 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, Xanadu
and CI) and 1995 (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, which were acquired
effective January 14, 1994 for aggregate consideration of $923,000, of which
$625,000 was paid through the issuance of 212,500 shares of Common Stock,
inclusive of contingent consideration of 112,500 shares of Common Stock and
$141,250 in cash. 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 for $159,000. 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. See "The Company."
Effective April 6, 1995, the Company completed its most significant
acquisition, Compass, for consideration of $1,265,648, of which $385,648 was
paid through the issuance of 192,556 shares of Common Stock and options on
53,639 shares of Common Stock, inclusive of contingent consideration of 108,836
shares of Common Stock and options on 29,959 shares of Common Stock. 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. For the fiscal year ended March 31, 1995, Compass'
revenues were $18.9 million and Compass had a gross profit of $4.9 million, or
26%.
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.
18
<PAGE>
The Company was obligated to operate Compass as a stand alone entity until
satisfaction of the acquisition earn out in December 1995. See "Certain
Transactions -- Acquisitions." As a result, the Company has only recently
commenced activities related to the full integration of its and Compass'
operations, personnel and business. Among the integration related actions being
taken by the Company are the combination of Compass' support and maintenance
operations with the Company's existing hardware maintenance business and the
combination of Compass' software business with the Company's existing systems
integration business. However, the Company anticipates that the benefit of
resulting cost savings in personnel, inventory and facilities will not be fully
realized until later in the fiscal year ending January 31, 1997.
The Company, through a wholly-owned subsidiary, is a partner in a
partnership named ActionTrac International (the "ActionTrac Joint Venture"),
which holds the worldwide rights outside the U.S., Canada and Mexico to exploit
the proprietary help-desk systems, services and software of ActionTrac, Inc.
Under the terms of the ActionTrac International partnership agreement, the
agreement became effective when the Company made its required capital
contribution of $500,000 in August, 1994. The investment in the ActionTrac Joint
Venture has been accounted for using the equity method under which the Company's
results include a 50% share of the ActionTrac Joint Venture's operating profits
or losses. During the fiscal years ended January 31, 1995 and 1996, the Company
made further advances to the ActionTrac Joint Venture aggregating $18,432 and
$477,664, respectively. During the last quarter of the fiscal year ended January
31, 1996, due to the accelerated pace of technological change (including recent
advances in telecommunication systems and help desk software technology) and the
increasing diversity in the market for help desk services, the Company
re-evaluated the net realizable value of its investment in and advances to the
ActionTrac Joint Venture. As a result, the Company recorded a write down of
$581,770.
Consistent with generally accepted accounting principles, the Company
charges all costs of establishing the technical feasibility of its software
products to expense as incurred. Thereafter, the Company capitalizes software
development costs through the date of general commercial release of the
applicable product. The Company amortizes its capitalized software development
costs over a period of three years. During the fiscal years ended January 31,
1994, 1995 and 1996, the Company capitalized software development costs of
$140,207, $277,792 and $337,185, respectively, in relation to its "StreamZ"
communication software product. Capitalization ceased in November 1995, when
StreamZ became available for general commercial release. During the last quarter
of the fiscal year ended January 31, 1996, due to recent advances in
communication software technology and announcements by major software companies
of new products with enhanced security features, the Company re-evaluated the
net realizable value of its capitalized software development costs. As a result,
accelerated amortization of $755,184 was recorded to write down all previously
capitalized software development costs in the year ended January 31, 1996.
The Company experiences revenue growth from three principal sources:
expansion of its existing operations, the acquisition of contracts and
businesses of other service providers and expansion into new operating areas.
The acquisition of contracts and businesses has generally provided the Company
with an opportunity to realize economies of scale because the Company's increase
in costs related to facilities and personnel has not increased in the same
proportion as the increase in revenues resulting from the acquisition.
RESULTS OF OPERATIONS
Because of the effect upon the Company's results of operations for the years
ended January 31, 1994, 1995 and 1996 and for the three month periods ended
April 30, 1995 and 1996 of acquisitions made during those periods and writedowns
of certain asset carrying values, direct comparison of the Company's results of
operations for these periods will not, in the view of management of the Company,
prove meaningful. Instead, a summary of the elements which management of the
Company believes essential to an analysis of the results of operations for such
periods is presented below.
19
<PAGE>
The following table sets forth statement of operations data as a percentage
of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------- THREE MONTHS ENDED APRIL 30,
ADJUSTED --------------------------------
1994 1995 1996 1996 (1) 1995 1996
--------- --------- --------- ----------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... 100% 100% 100% 100% 100% 100%
Cost of revenues........................... (45.2) (60.6) (64.5) (64.5) (60.3) (68.9)
Write down of software development costs... 0 0 (2.3) 0 0 0
--------- --------- --------- ----- ----- -----
Gross profit................................... 54.8 39.4 33.2 35.5 39.7 31.1
--------- --------- --------- ----- ----- -----
Selling, general and administrative
expenses.................................. (39.4) (31.7) (29.7) (29.7) (32.3) (25.7)
Depreciation and amortization.............. (2.2) (1.9) (1.7) (1.7) (1.8) (1.4)
--------- --------- --------- ----- ----- -----
Total operating expense.................... (41.6) (33.6) (31.4) (31.4) (34.1) (27.1)
--------- --------- --------- ----- ----- -----
Income (loss) before interest expense, income
taxes and share of results in equity
investee...................................... 13.2 5.8 1.8 4.1 5.6 4.0
--------- --------- --------- ----- ----- -----
Write down of investment in and advances to
equity investee........................... 0 0 (1.8) 0 0 0
Share of operating (loss) of equity
investee.................................. 0 0 (0.6) (0.6) 0 (0.5)
Interest expense, net...................... (2.3) (1.3) (0.8) (0.8) (2.4) (1.0)
--------- --------- --------- ----- ----- -----
Net income (loss) before income taxes.......... 10.9 4.5 (1.4) 2.7 3.2 2.5
Income taxes............................... (0.2) (1.3) (0.6) (0.6) (0.7) (0.6)
--------- --------- --------- ----- ----- -----
Net income (loss).............................. 10.7 3.2 (2.0) 2.1 2.5 1.9
--------- --------- --------- ----- ----- -----
--------- --------- --------- ----- ----- -----
</TABLE>
- ------------------------
(1) Adjusted 1996 to show results of the Company excluding the write down of
software development costs and write down of investment in and advances to
the ActionTrac Joint Venture.
THREE MONTHS ENDED APRIL 30, 1996 COMPARED WITH THE THREE MONTHS ENDED APRIL 30,
1995.
REVENUES
Revenues for the three months ended April 30, 1996 were $10.6 million, an
increase of $6.0 million, or approximately 130.4% compared to $4.6 million for
the three months ended April 30, 1995. Approximately $5.0 million of this
increase resulted from the Company's acquisition of Compass effective April 6,
1995. In the three months ended April 30, 1995 only $1.4 million of revenues
resulting from the Compass acquisition were included in the Company's results.
The remaining $1.0 million of this increase came from the expansion of the
Company's existing business from $3.2 million for the three months ended April
30, 1995, to $4.2 million for the three months ended April 30, 1996,
representing an increase of 31.2%.
GROSS PROFIT
Gross profit for the three months ended April 30, 1996 was $3.3 million, an
increase of $1.5 million or 83.3% compared to $1.8 million for the three months
ended April 30, 1995. Gross margin decreased from 39.7% for the three months
ended April 30, 1995 to 31.1% for the three months ended April 30, 1996. This
decrease in gross margin arose primarily as a result of the inclusion for the
three months ended April 30, 1996 of Compass' information storage systems
business, which historically has had significantly lower gross margins than the
other areas of the Company's operations.
20
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $2.7 million, an increase
of $1.2 million, or 80.0% compared to $1.5 million for the three months ended
April 30, 1995. As a percentage of revenues, selling, general and administrative
expenses decreased to 25.7% from 32.3% in the three months ended April 30, 1995.
Selling expenses increased from $1.0 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
Compass acquisition and in established product lines. General and administrative
expenses increased from $0.5 million to $1.0 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 April 30,
1996 was $143,000, an increase of $61,000, or 74.4% compared to $82,000 for the
three months ended April 30, 1995. This increase arose principally from the
acquisition of Compass. Depreciation was $81,000, an increase of $12,000 or
17.4%, from $69,000 for the prior period. Amortization of goodwill from
acquisitions was $62,000, an increase of $48,000, or 342.9%, from $14,000 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 three months ended April 30, 1996 was
$416,000, an increase of $154,000, or 58.5%, as compared to $262,000 for the
three months ended April 30, 1995. As a percentage of revenues, IBITI decreased
to 3.9% in the three months ended April 30, 1996 as compared to 5.6% for the
three months ended April 30, 1995.
EQUITY INVESTEE LOSS
Equity investee loss was $52,173 for the three months ended April 30, 1996
reflecting the Company's proportion attributable to the ActionTrac Joint
Venture. There was no such loss during the three months ended April 30, 1995, as
the Joint Venture commenced operations in May 1995. In February 1996, the
Company entered into a franchise agreement with respect to Australia and New
Zealand pursuant to which it received $55,000 of which $13,750 was recognized in
this period.
INTEREST
Interest expense for the three months ended April 30, 1996 was $104,000, a
decrease of $5,000, or 4.8% compared to $109,000 for the three months ended
April 30, 1995. This decrease arose principally as a result of reduction in
outstanding bank debt. See "--Liquidity and Capital Resources."
FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED WITH FISCAL YEAR ENDED JANUARY 31,
1995
REVENUES
Revenues for the fiscal year ended January 31, 1996 were $32.2 million, an
increase of $21.0 million, or approximately 186.9% compared to $11.2 million for
the year ended January 31, 1995. Approximately $17.3 million of this increase
resulted from the Company's acquisition of Compass effective April 6, 1995, none
of which revenues were included in the Company's results for the fiscal year
ended January 31, 1995. The remaining $3.7 million of this increase came from
the expansion of the Company's existing business from $11.2 million for the
fiscal year ended January 31, 1995 to $14.9 million for the fiscal year ended
January 31, 1996, representing an increase of 33.1%.
GROSS PROFIT
Gross profit for the fiscal year ended January 31, 1996 was $10.7 million,
an increase of $6.3 million, or 143.2% compared to $4.4 million for the year
ended January 31, 1995. Gross margin decreased from 39.4% for the fiscal year
ended January 31, 1995 to 33.2% for the fiscal year ended January 31, 1996. This
decrease in gross margin arose primarily as a result of the inclusion for the
final ten months of the fiscal year ended January 31, 1996 of Compass'
information storage systems business, which generated 53.7% of the Company's
total revenues during the 1995 fiscal year, and which historically has had
significantly
21
<PAGE>
lower gross margins than the other areas of the Company's operations. In
addition, the Company was obligated to operate Compass as a stand alone entity
until December 1995, pursuant to the terms of the Compass acquisition, and could
not commence activities related to the full integration of its and Compass'
operations, personnel and business. The decrease also reflects a reduction of
2.3% as a result of the write down of software development costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $9.6 million, an increase
of $6.0 million, or 166.7% compared to $3.6 million for the year ended January
31, 1995. As a percentage of revenues, selling, general and administrative
expenses decreased to 29.7% from 31.7% in the fiscal year ended January 31,
1995. Selling expenses increased from $2.6 million to $5.9 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 Compass acquisition and in established product lines. General and
administrative expenses increased from $1.0 million to $3.7 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 fiscal year ended January 31,
1996 was $560,000, an increase of $344,000, or 159.9% compared to $216,000 for
the fiscal year ended January 31, 1995. This increase arose principally from the
acquisition of Compass. Depreciation was $356,000, an increase of $223,000 or
167.7%, from $133,000 for the prior period. Amortization of goodwill from
acquisitions was $204,000, an increase of $121,000, or 145.7%, from $83,000 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
IBITI for the fiscal year ended January 31, 1996 was $559,000, a decrease of
$86,000, or 13.3%, as compared to $645,000 for the fiscal year ended January 31,
1995. As a percentage of revenues, IBITI decreased to 1.8% in the fiscal year
ended January 31, 1996 as compared to 5.8% for the fiscal year ended January 31,
1995.
IBITI (excluding write-downs) for the fiscal year ended January 31, 1996 was
$1.3 million, an increase of $669,000, or 103.7%, as compared to $645,000 for
the fiscal year ended January 31, 1995. As a percentage of revenues, IBITI
decreased to 4.1% in the fiscal year ended January 31, 1996 as compared to 5.8%
for the fiscal year ended January 31, 1995.
WRITE DOWN OF SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs relate to the development of the
StreamZ product aimed at providing a cost-effective communication solution for
critical business applications. Due to recent advances in communication software
technology and announcements by major software companies of new products with
enhanced security features, the Company re-evaluated the net realizable value of
its capitalized software development costs. As a result, accelerated
amortization of $755,000 was recorded during 1996 to write down all previously
capitalized software development costs. Notwithstanding this accounting
re-evaluation, the Company is continuing to market the associated software.
WRITE DOWN OF INVESTMENT IN EQUITY INVESTEE AND EQUITY INVESTEE LOSS
Due to the accelerated pace of technological change (including recent
advances in telecommunications systems and help desk software technology) and
the increasing diversity in the market for help desk services the Company
re-evaluated the net realizable value of its investment in and advances to the
ActionTrac Joint Venture. As a consequence, during the fiscal year ended January
31, 1996, the Company recognized write downs of $582,000. Notwithstanding this
accounting re-evaluation, the Company, through the ActionTrac Joint Venture is
continuing to market the help desk services. Equity investee loss was $179,000
for the fiscal year ended January 31, 1996, reflecting the Company's proportion
attributable to the ActionTrac Joint Venture. There was no such loss during the
prior fiscal year, as the Joint Venture commenced operations in May 1995.
22
<PAGE>
INTEREST
Interest expense for the fiscal year ended January 31, 1996 was $258,000, an
increase of $104,000, or 67.5% compared to $154,000 for the fiscal year ended
January 31, 1995. This increase arose principally as a result of bridge
financing arrangements relating to the acquisition of Compass. See "-- Liquidity
and Capital Resources."
FISCAL YEAR ENDED JANUARY 31, 1995 COMPARED WITH FISCAL YEAR ENDED JANUARY 31,
1994
REVENUES
Revenues for the fiscal year ended January 31, 1995 were $11.2 million, an
increase of $8.4 million, or approximately 300.0% compared to $2.8 million for
the fiscal year ended January 31, 1994. This increase resulted primarily from
the inclusion for the first time for a full fiscal year of the revenues from the
systems integration development and network computing operations obtained by the
Company in its acquisition of K2 and Xanadu, respectively, as to which only two
weeks of revenues were included in the Company's results for the fiscal year
ended January 31, 1994. In addition, a smaller part of this increase was also
due to the inclusion, from November 1, 1994, of the hardware maintenance and
support revenues associated with the acquisition of CI.
GROSS PROFIT
Gross profit for the fiscal year ended January 31, 1995 was $4.4 million, an
increase of $2.8 million, or approximately 175.0% compared to $1.6 million for
the fiscal year ended January 31, 1994. Gross profit decreased as a percentage
of revenues from 54.8% for the fiscal year ended January 31, 1994 to 39.4% for
the fiscal year ended January 31, 1995. The decrease in gross margin was
primarily due to the increased proportion of specialized hardware product sales,
which historically have had lower margins, in the Company's overall sales mix.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the fiscal year ended
January 31, 1995 were $3.6 million, an increase of $2.5 million, or
approximately 227.3% compared to $1.1 million for the fiscal year ended January
31, 1994. As a percentage of revenues these expenses decreased to 31.7% from
39.4% in the fiscal year ended January 31, 1994. Selling expenses increased from
$826,000 to $2.6 million primarily as a result of increased expenses relating to
new product launches. General and administrative expenses increased from
$271,000 to $1.0 million primarily as a result of a growth in infrastructure
necessary to support the expansion of the Company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the fiscal year ended January 31,
1995 were $216,000, an increase of $153,000, or approximately 242.9% compared to
$63,000 for the fiscal year ended January 31, 1994. Depreciation of assets was
$133,000, an increase of $72,000 or 118.0% from $61,000 for the prior period.
Amortization of goodwill from acquisitions was $83,000, an increase of $81,000,
from $2,000 for the prior period.
INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME TAXES AND SHARE OF RESULTS IN
EQUITY INVESTEE
IBITI for the fiscal year ended January 31, 1995 was $645,000, an increase
of $270,000, or 72.0%, as compared to $375,000 for the fiscal year ended January
31, 1994. As a percentage of revenues, IBITI decreased to 5.8% in the fiscal
year ended January 31, 1995 as compared to 13.2% for the fiscal year ended
January 31, 1994.
INTEREST
Interest expense for the fiscal year ended January 31, 1995 was $154,000, an
increase of $88,000, or approximately 134.1% compared to $66,000 for the fiscal
year ended January 31, 1994. This increase arose principally as a result of
additional borrowings.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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. The Company does not believe that stockholder advances are currently
necessary in order to fund ongoing operations.
As of April 30, 1996, the Company had a line of credit with a commercial
lending institution in the amount of L450,000 ($680,000), of which $563,000 was
outstanding as of April 30, 1996, and $513,000 outstanding as of May 17, 1996.
Interest is charged at 1.5% above bank base rate on amounts less than L100,000
and at 3.0% above bank base rate on amounts greater than L100,000. In October
1994, a pre-existing line of credit in the amount of L180,000 ($272,000) was
converted into a two year term loan, requiring repayment of principal at L8,075
($12,800) per month, of which (giving effect to applicable exchange rates then
in effect) $70,000 in principal was outstanding as of April 30, 1996. The
outstanding credit facilities are secured by the assets of the Company and, in
the case of the term loan only, by a stockholder guarantee, 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. Additional borrowings by the Company are reflected in the form of
outstanding notes payable with an aggregate balance of $392,000 as of April 30,
1996. A majority of the outstanding balance is secured by assets of the Company.
The Company intends to use a portion of the net proceeds from this offering to
repay this indebtedness. See "Use of Proceeds."
Compass has a L997,000 ($1.5 million) line of credit (overdraft protection)
with a UK bank of which (giving effect to applicable exchange rates then in
effect) $1,385,000 was outstanding as of April 30, 1996, and $1,187,000 was
outstanding as of May 17, 1996. Advances are collateralized by all the assets of
Compass. This facility bears interest at 2.5% above the bank's base rate. This
line of credit is subject to periodic review. The Company intends to use a
portion of the net proceeds from this Offering to repay this indebtedness. See
"Use of Proceeds."
The Company has an arrangement with a UK factoring company pursuant to which
it can receive advance payments on eligible accounts receivable. The Company
pays the factoring company an administrative fee of 0.22% of the receivable
balance and interest at 2.25% above the bank's base rate. The Company retains
the risk of collection under this arrangement.
During the 1996 fiscal year and the three months ended April 30, 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, additional funding from outside
sources, such as the proceeds from the sale by the Company of the Common Stock
offered hereby, will be required in order to fund additional expansion and
growth by acquisition. Management believes that, with the completion of the
Compass acquisition, the Company's outstanding commercial debt is relatively
low, and anticipates that additional funding may become available through an
expansion of its credit lines although no assurance can be given that such
additional funding will in fact be available.
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 equity 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, with the
balance extended to the first to occur of June 14, 1996 or the completion of
this Offering. The Company plans to use a portion of the funds raised in this
Offering to repay the remaining outstanding balance of this bridge loan. See
"Use of Proceeds."
24
<PAGE>
In November 1995, the Company completed a private placement with a single
corporate investor in which gross proceeds of $450,000 were raised for working
capital purposes.
Outstanding advances from stockholders are shown on the Company's balance
sheet as stockholder advances. Outstanding advances as of April 30, 1996 were
$392,000. These outstanding advances do not bear interest, and are payable on
demand.
For the year ended January 31, 1996, the Company's working capital deficit
increased from $0.4 million to $1.3 million. The Company's working capital
deficit decreased from $1.3 million at January 31, 1996 to $1.05 million at
April 30, 1996.
Cash increased from $1.2 million at January 31, 1995 to $1.4 million at
January 31, 1996. Cash in hand during the period together with cash generated
through operations was used to maintain and develop current operations, to
retire or substantially reduce the Company's previous debt obligations, to fund
software development costs and to fund the Company's acquisition of Compass and
investment in the ActionTrac Joint Venture.
Net cash provided (used) by operating activities during the year ended
January 31, 1996 was $3.6 million and during the three months ended April 30,
1996 was $(593,000), which reflected the net effect of an increase in accounts
payable, deferred revenues, accrued liabilities, inventories and accounts
receivable, combined with depreciation and amortization and write-downs and
charges. Net cash used by investing activities was $2.7 million for the year
ended January 31, 1996 and was $86,000 for the three months ended April 30,
1996, primarily reflecting cash used for the acquisition of Compass, investment
in the ActionTrac Joint Venture, computer software development costs and the
purchase of equipment. Net cash used by financing activities was $522,000 for
the year ended January 31, 1996 and was $114,000 for the three months ended
April 30, 1996, resulting primarily from repayment of bank lines of credit and
payments of outstanding obligations, offset by the receipt of net proceeds from
the sale of common stock and from the issuance of notes payable.
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 offered hereby, 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. See "Use of Proceeds." Thereafter, if cash generated from operations is
insufficient to satisfy the Company's capital requirements, the Company may be
required to raise additional funds. There can be no assurance that additional
financing will be available on favorable terms or at all. 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.
25
<PAGE>
BUSINESS
4Front Software International, Inc., a UK based specialized computer
services company, 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 the
ActionTrac Joint Venture. Since 1992, 4Front's revenues have grown from
approximately $895,000 to over $32 million in the year ended January 31, 1996
principally through the expansion of its existing operations and through the
strategic acquisition of other UK computer service companies with established
sales channels. The Company's strategy is to be a single source of a wide range
of specialized information technology ("IT") products and services. The
Company's customers include National Westminster Bank plc, British Aerospace
plc, Oracle Corporation UK Ltd., Royal Dutch/Shell Group plc, Orange plc,
British Telecom plc, Alcatel Data Networks Ltd., Sun Microsystems Corp.,
Cambridge University and the British Ministry of Defense.
THE UK AND EUROPEAN INFORMATION TECHNOLOGY MARKET
According to the 1995 Holway Report on Software and Computing Services in
Europe, the UK computer services market, the fastest growing in Europe, is
currently estimated at $12 billion annually. This market grew by an estimated
16% in 1995 and is highly fragmented, with no single company serving more than
5% of the UK.
Historically, large European organizations satisfied IT requirements through
mainframe or stand-alone midrange systems utilizing hardware software produced
by a single OEM. Maintenance, support and development of these systems were
usually provided directly by the OEMs or, in certain instances, by an
organization's in-house technical support staff. However, a number of recent
developments have resulted in a movement by many organizations away from this
traditional reliance on OEMs and in-house technical support staff toward global
independent providers of multivendor computer hardware maintenance and
technology support services.
European computing environments have become increasingly complex as a result
of rapid worldwide changes in technology. The principal factor contributing to
the growing complexity has been the migration of large organizations from
centralized computing environments characterized by single vendor mainframe or
stand-alone systems to a decentralized, geographically diverse environment
characterized by multivendor and multisystem distributed networks. This has
resulted in greater expense and substantial inefficiencies for organizations in
developing and supporting their computer systems.
The Company believes that, as a result of these factors, the complexity of
system development as well as the breadth of corporate computing needs have
surpassed the abilities and the available time of many in-house MIS departments,
and have led to a greater acceptance of outsourcing. The Company also believes
that customers are reluctant to outsource computer services directly to OEMs,
which may be perceived by customers as favoring the OEMs' own product line.
Meanwhile, the increased corporate use of information technology for operational
as well as mission critical applications have increased the use of complex,
customized corporate computing systems that are beyond the expertise of most
horizontal integrators and VARs. Furthermore, many OEMs now rely on independent
service organizations such as the Company to provide distribution, integration
and warranty/post warranty maintenance and support services.
As a result, business and government organizations must increasingly look to
multiple third-party vendors employing skilled information technology
professionals to define, develop and install complex customized information
systems and to provide applications software and comprehensive solutions to
their information systems needs. These organizations are also turning to
third-party vendors to provide information technology services in order to
maximize the effectiveness of their in-house systems and personnel.
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<PAGE>
THE 4FRONT SOLUTION
The Company has positioned itself as a single source for a wide range of
specialized high-end information technology solutions and services which its
customers cannot readily obtain from their in-house MIS departments and which
are not ordinarily offered together by most value added resellers and horizontal
distributors. In addition, as an independent provider of solutions and services,
the Company is able to offer products from a range of OEMs and is therefore not
viewed by its customers as favoring one OEM's product over another, except on
the basis of quality. The Company combines strong technical expertise and "best
of breed" products in order to design and implement customized IT solutions and
to improve the productivity of its customers' existing IT assets.
The Company reviews its product offerings on a continuous basis in order to
ensure that it is able to provide the most advanced and cost-effective
solutions. The Company believes that the European and UK markets are highly
receptive to new technologies developed in the U.S. which the Company seeks to
offer. By providing advanced, high-end solutions to a broad base of customers,
the Company is able to offer cost-efficient integrated systems solutions
utilizing knowledge and expertise which the Company believes cannot be
effectively maintained by an in-house MIS department. The products and services
offered by the Company are designed primarily to enhance the effectiveness of,
rather than replace, in-house MIS departments, thereby creating a partnership
approach for the managers of such departments and an incentive to utilize the
products and services of the Company.
STRATEGY
The Company's strategy is to be a single source of a wide range of
specialized IT products and services. The key elements of the Company's business
strategy are to:
FURTHER PENETRATE THE GROWING UK AND EUROPEAN MARKETS
The Company intends to expand the market for its products and services by
expanding its sales and support staff and increasing its marketing efforts. In
addition, the Company intends to leverage its existing UK infrastructure and
customer base to penetrate the European market.
IDENTIFY AND ACQUIRE COMPLEMENTARY BUSINESSES TO EXPAND PRODUCT OFFERINGS
AND GEOGRAPHIC REACH
The Company intends to continue expanding its customer base as a single
source service provider by acquiring businesses that will enhance its suite of
specialized services. The Company believes it can continue to identify and
acquire complementary businesses in strategic operational and geographic areas.
EXPAND HARDWARE MAINTENANCE AND TECHNOLOGY SUPPORT CAPABILITIES
The Company intends to continue expanding the breadth of hardware products
which it services. By building on its proven ability to provide a single-source
solution to a wide array of customers' multivendor support needs in complex IT
environments, the Company believes it can distinguish itself from other computer
support providers that may not possess the resources to match the breadth of
vendors whose products are directly serviced by the Company. In addition, the
Company provides customers with a broad range of technology support services,
including software support, network support, management information services and
planning support. The Company plans to expand these capabilities through
internal development and acquisitions.
LEVERAGE EXISTING INFRASTRUCTURE AND CUSTOMER RELATIONSHIPS TO FURTHER
DEVELOP NEW BUSINESS LINES
The Company draws from its specific areas of expertise and existing customer
base to develop new service offerings. For example, in 1995 the Company began to
exploit the business opportunities of the Internet by supplying corporate
Internet access, website development and related services. The Company also
began to provide global help desk outsourcing for desktop software through the
ActionTrac Joint Venture in 1995.
27
<PAGE>
PRODUCTS AND SERVICES
The Company provides a comprehensive array of products and services to
customers across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, PCs and related peripherals. The
Company prices its products and services on either a fixed fee or per incident
basis. Pricing is based on the Company's cost and the existing competitive
environment. The Company customizes its contracts to the individual customer
based generally on the nature of the customer's requirements, the term of the
contract and the combination of services that are provided. Products and
services are also bundled to match the requirements of customers, and can
include hardware and software sales and support, user software support, network
support, management information services, services management, planning support,
training and ancillary support services.
In choosing the products which it offers, the Company uses the expertise of
its management to identify desirable new or technologically innovative products
which fit its business model and then seeks rights to market them throughout
Europe. The majority of these products originate in the U.S., and are almost
always sourced directly from the hardware manufacturer or software author. In
such circumstances the Company seeks the right to both market and support the
product within the territory it serves. These distribution agreements are
typically non-exclusive and of one year's duration and automatically renew at
the end of that term.
INFORMATION STORAGE SYSTEMS
The Company is a leading supplier within the UK of high capacity storage
solutions and multi-processor servers to corporate and government users. It
sells both direct to the corporate marketplace and through a well established
reseller channel. The storage operation offers products which range from the
straightforward supply of magnetic discs to high capacity subsystems, RAID
arrays, magnetic tape drives and autoloaders, optical storage devices including
high capacity drives and autochangers. All products are available with the
appropriate enabling software. The Company sells products from, among others,
Seagate, Raidtec, Fujitsu, ATG Cygnet, Sun and Silicon Graphics, and has a
reputation for offering top end products featuring the leading available
technology.
Other products supplied include high performance servers and local and wide
area networking components such as bridges, routers, gateways and ISDN
(Integrated Services Digital Networks), with the associated network software
protocols such as TCP/IP, NFS and IPX/SPX.
The Company began providing information storage systems, and corporate
Internet access services in 1995 with its acquisition of Compass Computer Group.
See "The Company" and "-- Network Communications."
NETWORK COMPUTING
The Company provides sophisticated enterprise wide network computing
solutions to its customers. For example, the Company provides high-end display
terminal systems used on brokerage trading desks. The Company is also a leading
supplier in the UK market for "network access terminals", which are used as an
alternative to desktop PC networks to link to a shared internal computing
system, or to an external network such as the Internet.
The product range of the Company also includes connectivity and
communication hardware and software, Internet access services, terminal
emulation software, electronic mail, workstations, super file and database
servers and, recently, the Multia multi-purpose display device from Digital
Equipment Corporation. The Company also supplies products from Hewlett Packard
and NCD, connectivity products from FTP and communications servers from U.S.
Robotics. The Company's product line is interrelated and compatible, and many of
the Company's customers will purchase the Company's entire product line.
As the market identification of the Company's brands has increased,
manufacturers have, in the last one or two years, been increasingly willing to
provide direct financial assistance to the Company in order
28
<PAGE>
to launch their products. Such assistance ranges from direct subsidy of sales
personnel to contribution of promotional expenditures. The Company currently has
five such marketing support arrangements. See "-- Sales and Marketing."
SYSTEMS INTEGRATION AND DEVELOPMENT
The Company offers open systems based development services for distinct
markets and applications, with particular expertise in the accounting,
distribution and work flow management areas. Using its technical expertise, the
Company analyzes systems integration problems faced by its customers, and
recommends and implements solutions to these problems. The solutions offered by
the Company combine the high value technical skills of the Company's personnel
with a wide range of specialized software and hardware products. These products
include both shrink-wrapped and custom application software together with file
servers, computer operating systems, network operating systems, display
stations, printers, local and wide area networking components, and storage and
archiving devices. The Company packages groups of products, including its own
proprietary software, in order to provide integrated turnkey systems for a
number of distinct markets and applications.
The Company creates custom software for use by the individual customer, if
required to meet the business need. By offering this service the Company is able
to attract customers for whom shrink-wrapped software is inadequate and, in the
course of developing such software, is able to create proprietary packages which
can be used to attract future customers seeking similar solutions. This also
strengthens the Company's ability to increase and retain a greater flow of
recurring support revenue.
HARDWARE MAINTENANCE AND SUPPORT
The Company provides full on-site maintenance and support services through a
team of field service engineers supported by technical repair specialists, all
tailored to the customers' requirements. Unlike most in-house information
technology departments, the Company can service mission critical installations
by providing guaranteed response times and up to 24 hour a day support, seven
days a week. The Company also provides a board-level repair service from its
test center and main offices. The Company's technical specialists also offer
consulting services to advise clients of the most effective ways to enhance the
performance of their systems, and to recommend appropriate upgrades and
additions where necessary.
The Company, which is ISO9002 certified, supports the majority of the
industry leading hardware platforms including IBM, Sun, DEC and Hewlett-Packard,
as well as associated peripherals such as printers and storage devices. The
Company typically provides maintenance and support under service contracts with
terms ranging from one month to three years. During the past year, these
contracts have had renewal rates of approximately 80%, giving the Company a
consistent level of recurring revenues in this area. The Company also repairs
and refurbishes computer parts and assemblies at its Newbury facility. These
services are provided not only for services customers but also OEMs,
distributors and other third-party maintenance companies on a limited basis.
The hardware maintenance and support services provided by the Company are
viewed as complementary to the Company's other operational areas, and the
Company believes they are an important element in attracting customers for its
other products and services. Prior to the acquisition of CI in 1994, the Company
had contracted to supply its customers with such services through unaffiliated
third parties.
SOFTWARE SUPPORT
The Company has, since 1995, provided a full range of software help desk
services in the UK and Europe through the ActionTrac Joint Venture. The
ActionTrac Joint Venture markets a comprehensive, advanced, telephone support
and problem solving service known as ActionCall, primarily to large corporate
entities paying a fixed fee per user. End-users designated by subscribers to the
ActionCall service can, by using a toll-free telephone line, obtain unlimited
multi-lingual help desk support. ActionCall is intended to offer a cost
efficient help desk alternative to the increasingly large body of computer end
users for whom comprehensive in-house or supplier support is uneconomical or
simply unavailable.
29
<PAGE>
ActionCall uses proprietary software to provide a help desk management
system that customizes support services to the end user and provides
productivity feedback to corporate MIS departments. ActionCall can thereby be
used as a management tool by its customers, both at the management and end user
levels, to anticipate and avoid problems before they arise, to deploy personnel
more efficiently and to reduce the hidden costs of computer management.
The ActionTrac Joint Venture utilizes subcontractors for the actual
international delivery of help desk services. The Company believes that there
are a number of large organizations that have underutilized internal software
support staff available for similar subcontracting agreements. By initially
limiting itself to acting as a marketing organization and by using
subcontractors as necessary for help desk staffing, the ActionTrac Joint Venture
is able to provide immediate and comprehensive multilingual help desk services
without the necessity of a substantial infrastructure investment. The Company
believes that the use of subcontractors will also allow for significant
potential cost-effective expansion of the ActionCall customer base. However, the
ActionTrac Joint Venture retains control over the marketing and international
development of the ActionCall service.
The ActionTrac Joint Venture's marketing efforts are currently focused on
the European market but the ActionTrac Joint Venture intends to franchise the
rights to market the ActionCall service in the rest of the world (excluding
North America, to which the Company's partner has exclusive rights). The first
franchise arrangement, for Australia and New Zealand, was concluded in February
1996.
NETWORK COMMUNICATIONS
The Company currently provides Internet access and develops Internet
websites for a corporate client base. The Company has contracted over 500
subscribers since its operational inception in 1995, following the Compass
acquisition. The Company plans to combine its networking and communications
expertise with emerging Internet applications to introduce a range of related
services. Among the services which the Company intends to offer are: remote data
warehousing and back-up services for proprietary customer-developed or globally
accessible stores of data; the guaranteed secure transmission and storage of
confidential information. The Company also intends to provide Intranet services
linking customers' employees to corporate resources using the Internet and other
specialized services.
The Company is a founder of the Internet Service Providers Association in
the UK and believes that its customer relationships as well as its technical
expertise provide it with a competitive advantage in providing Internet services
to corporate customers. The Company plans to utilize strategic alliances with
telephone companies and utilities to provide the Internet infrastructure and
access, with a view to developing a business-to-business online community of UK
corporations via the Internet. However, no such potential strategic alliances
have been identified and there is no assurance that the Company will be able to
identify or consummate any such strategic alliances.
The Company intends to remove Internet access barriers for customers, and to
establish completely open networks through the Company's access points. The
Company believes that its Internet services will attract new customers for its
broad array of network computing and communications products and services.
30
<PAGE>
CUSTOMERS
The Company's customers consist mainly of large and medium sized businesses,
divisions of larger corporations, and government authorities. The following is a
representative list of customers of the Company:
<TABLE>
<S> <C>
INFORMATION STORAGE SYSTEMS NETWORK COMPUTING
- ----------------------------------------- -----------------------------------
National Westminster Bank plc Royal Dutch/Shell Group plc
Baydel Limited Fujitsu Telecommunications Ltd.
British Ministry of Defense Oracle Corporation UK Ltd.
Sun Microsystems Corp. Nuclear Electric plc
Siemens AG. Orange plc
SYSTEMS INTEGRATION DEVELOPMENT HARDWARE MAINTENANCE AND SUPPORT
- ----------------------------------------- -----------------------------------
Alcatel Data Networks Ltd. British Aerospace plc
Bechtel Limited Cambridge University
UK Automobile Association Oracle Corporation UK Ltd.
Sir Norman Foster Architectural
Partnership British Telecom plc
UK Government Department of Employment Sedgewick, Noble, Lowndes Ltd.
SOFTWARE SUPPORT NETWORK COMMUNICATIONS
- ----------------------------------------- -----------------------------------
Dunlop plc Royal Commission for Historic
Navstar Corp. Monuments of England
Sumitomo Finance International plc Thames Water plc
Pilkington Glass Ltd. Japanese Embassy to UK
Wessex Water plc World Resource Association
</TABLE>
During the fiscal year ended January 31, 1996, the largest single customer
accounted for approximately 5% of the Company's total revenues.
SALES AND MARKETING
Using its technical expertise and access to new technology developed
primarily in the U.S., the Company identifies products and services which it
believes would be of interest to its customer base and markets these products
and services to current and prospective customers as part of a systems solution.
The Company emphasizes its ability to provide highly qualified locally based
personnel to implement cost-effective solutions which it supplies. The Company
also contrasts the specialized niche focus of its operations to the generalist
focus of the largest firms.
The Company sells its services through both direct and indirect sales
channels. The Company's direct sales force is primarily focused on large and
multinational corporate customers and is organized by operating groups based on
the Company's products and services. Direct sales channels include field sales,
telemarketing and direct mail. Indirect sales channels include sales through
subdistributors and VARs where the Company's products are constituent parts of
the VARs' overall solutions. Product support relationships also exist with OEMs
such as DEC, Hewlett-Packard, Novell, FTP and EMC(2).
The Company's sales representatives focus on providing technology solutions,
which include meeting the hardware maintenance, software support and network
component needs of customers, OEMs or software developers, and delivering
solutions to the broader IT requirements of the Company's customers.
PRODUCT DEVELOPMENT
The Company engages in development activities primarily in connection with
the creation of software products and applications and maintains a staff of
computer engineers for this purpose. The Company develops products on its own to
meet a perceived market need as well as on a custom basis for a particular
customer. For example, the Company developed "TaskForce in Government", a
software
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<PAGE>
product which manages job processing, specifically for local and central
government bodies. The Company will also create custom software for use by the
individual customer, if required to meet the business need. By offering this
service the Company is able to attract customers for whom shrink-wrapped
software is inadequate and, in the course of developing such software, is able
to create proprietary packages which can be used to attract future customers
seeking similar solutions. The Company is also able to provide recurring
revenues through support services for its proprietary products.
EMPLOYEES
As of April 30, 1996 the Company employed a total of 174 employees including
63 in sales and marketing, 34 in engineering, 31 in technical support and the
balance in logistics, management and administration in the UK and the U.S. The
staff numbers will expand in connection with the Company's growth on an as
needed basis. The Company's employees are not represented by a labor union, and
the Company has not had any work stoppages, strikes, or organization attempts.
The Company believes that its employee relations are good.
COMPETITION
The overall computer services industry is intensely competitive and is
composed of literally hundreds of companies, many of whom have capital,
marketing expertise and personnel resources far superior to that of the Company.
The Company competes primarily with a wide range of small and medium size
companies that operate both in the niche markets which the Company serves and in
the computer services industry generally. The Company also competes with larger
European computer service and consultancy firms such as Hoskyns, Andersen
Consulting and P & P. See "Risk Factors -- Competition."
The Company believes that the principal competitive factors in the industry
are breadth of service offerings, quality of products supplied, expertise in
niche markets, price and service. The Company believes that its ability to offer
single source solutions and to remain competitive in these markets will depend
largely upon its ability to recruit and retain highly skilled personnel. See
"Risk Factors -- Dependence on Management and Key Personnel."
The Company believes that it is able to successfully compete with large
European computer service and consultancy firms due to its focus and
concentration in specified niche markets and the Company's high level of
specialized skills and services. The Company also believes that it is able to
obtain a competitive advantage with respect to both larger and smaller
competitors in the niche markets which it serves through its proprietary systems
and customized software and its reputation in specialist markets.
FACILITIES
The Company does not own any real property. The Company leases office space
in Englewood, Colorado for its corporate headquarters and in England in Newbury,
Watford, Warrington and Aylesbury for its operations, as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
- ------------------------------------------------------- --------------- -------------------
<S> <C> <C>
Newbury................................................ 42,000 September, 2007
Watford................................................ 9,500 August, 2013
Warrington............................................. 3,500 December, 2012
Aylesbury.............................................. 3,000 June, 2000
Englewood.............................................. 500 month to month
</TABLE>
Current payments under these leases aggregate approximately $631,000 per
year. The Company believes that these facilities are adequate for both current
and foreseeable future needs.
LEGAL PROCEEDINGS
The Company is not party to any material pending legal proceedings.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are listed below,
together with brief summaries of their business experience and certain other
information.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------ --- ------------------------------------------------------------
<S> <C> <C>
Anil Doshi 51 Chairman of the Board, Chief Executive Officer, and Director
of the Company
Mark Ellis 42 President, Chief Operating Officer and Director of the
Company
Kenneth Newell 52 Chief Executive Officer of 4Front Group and Director of the
Company
Philip Mendonca 37 Chief Financial Officer of the Company
Craig Kleinman 38 Secretary and Director of the Company
Simon Andrews 38 General Manager, Software Support
Peter Bolton 41 General Manager, Network Computing
Terence Burt 39 Managing Director, Systems Integration Development
Joel William 46 Managing Director, Information Storage Systems
Jervis
Mark McVeigh 35 General Manager, Hardware Maintenance and Support
Brian V. Murray 48 Director of the Company
Arthur Keith Ross 44 Director of the Company
</TABLE>
ANIL DOSHI is Chairman of the Board of Directors, Chief Executive Officer
and a Director of the Company. Mr. Doshi co-founded Communic8 Software (the
Company's predecessor in interest) in January 1990 and served as its Chairman
from April 1992 to March 1993. Mr. Doshi is a Fellow of the Institute of
Chartered Accountants in England and Wales, and he is also an Associate of the
Institute of Taxation. From January 1990 until October 1990, Mr. Doshi served as
Deputy Chairman of PPI Enterprises, Inc., a New York based holding company. From
1986 to 1990, Mr. Doshi served as a consultant to Polly Peck International,
PPI's parent company.
MARK ELLIS is President, Chief Operating Officer and Director of the
Company. Mr. Ellis co-founded Communic8 Software and served as a director from
January 1992 until March 1993. From September 1988 to January 1991, Mr. Ellis
served as the President of PPI Enterprises, Inc., a New York based holding
company. As President of PPI Enterprises, he managed the Company's American
expansion program and negotiated a number of acquisitions in the U.S., including
the $875 million acquisition of Del Monte Tropical Fruit from RJR Nabisco. Mr.
Ellis attended St. John's College at Cambridge University in England and
received a B.A. in Law in 1975, an L.L.B. in 1976, and an M.A. in Law in 1978.
KENNETH NEWELL was a co-founder of K2 Group Plc (now 4Front Group Plc, the
Company's wholly-owned UK operating subsidiary) in 1988 and has been its Chief
Executive since 1990. Mr. Newell was appointed a Director of the Company in
April, 1996. Prior to establishing K2 he worked for four years at Star Computer
Group, a publicly listed UK Company and one of the early implementers of the
open systems computing concept in the UK, where he held a number of positions,
including Sales Director from 1985-1988. Mr. Newell is a Fellow of the Institute
of Chartered Secretaries and Administrators following study at the City of
London College.
PHILIP MENDONCA has been Chief Financial Officer of the Company since April
1996. From 1994 to 1995 Mr. Mendonca was Finance Director and Company Secretary
for NB Selection Ltd. a leading UK executive recruitment firm. Previously Mr.
Mendonca had, since 1989, been a management consultant with Ernst & Young
Management Consultants. Mr. Mendonca received a BA in Economics and Accountancy
from Lancaster University. Mr. Mendonca is a Fellow of the Institute of
Chartered Accountants in England and Wales, and qualified as an accountant with
KPMG.
33
<PAGE>
CRAIG KLEINMAN is Secretary and a Director of the Company. Mr. Kleinman had
served as Chief Financial Officer of the Company until the appointment of Mr.
Mendonca in April 1996. During the past five years, Mr. Kleinman has been a
shareholder in the certified public accounting firm Kleinman, Guerra & Company,
PC. Mr. Kleinman received a B.S. degree in accounting from the University of
Colorado in 1978 and is a member of the American Institute of Certified Public
Accountants and the Colorado Society of Certified Public Accountants.
SIMON ANDREWS is General Manager of the Company's software support
operations. Mr. Andrews was also a co-founder of K2 Group Plc in 1988. Mr.
Andrews had previously worked at Star Computer Group as customer services
director.
PETER BOLTON has been General Manager of the Company's network computing
division since 1996. Mr. Bolton has been employed by the Company since 1990 with
the exception of a brief period between 1994 and 1995 when he was employed by
Verity Software, a major provider of text software used widely on the Internet.
TERENCE BURT was a co-founder of K2 Group Plc (now 4Front Group Plc) in 1988
and has been Managing Director of the Company's systems integration division
since 1990. Mr. Burt joined Star Computer Group in 1982 where he was initially
Customer Services Director before moving into the acquisitions team which he
headed for two years prior to co-founding K2. Mr. Burt graduated from the
University of Hertfordshire where he qualified as an Associate of the
Association of Cost and Management Accountants.
JOEL WILLIAM JERVIS has been the Managing Director of the Company's
information storage systems division since 1994. Prior to joining Compass in
July 1994 Mr. Jervis was Executive Chairman of DCM Holdings Plc during which
time it grew from a L1.3 million business in 1989 to a L6 million business in
1992, at which time the business was sold to Kode International Plc. Mr. Jervis
served as a Director of Kode International Plc prior to joining Compass. Mr.
Jervis is an electronics engineer, starting his career with Burroughs in both
Australia and the UK.
MARK MCVEIGH has been the General Manager of the Company's hardware
maintenance and support division since 1994. Previously, Mr. McVeigh was
employed by the Company's then-owned DesignBase subsidiary, which was divested
in 1994. Mr. McVeigh received a BA degree in Business Studies from the
University of Lancashire in 1984.
BRIAN V. MURRAY has been a Director of the Company since April, 1996. Mr.
Murray is a Senior Managing Director with Bear, Stearns & Co. Inc. Mr. Murray
has been employed by Bear, Stearns & Co. Inc. since 1978, and has been involved
in the international banking division since 1985. Mr. Murray received a B.S. in
Economics from Villanova University in 1970 and an MBA with honors from the
University of Chicago in 1975. Mr. Murray has been a chartered financial analyst
since 1978.
ARTHUR KEITH ROSS has been a Director of the Company since February, 1996.
Mr. Ross is currently a private investor. From 1986 to 1994, Mr. Ross was a
partner in the London law firm Clifford Chance, which he joined in 1984. Mr.
Ross headed the Clifford Chance South East Asian office in Singapore from 1988
to 1991. Mr. Ross attended Christ's College at Cambridge University in England
and received a BA in Law in l973 and an MA in Law in 1976.
Directors of the Company hold office until the next annual meeting of
stockholders or until their successors are elected and qualified. There are no
family relationships between any directors or current officers of the Company.
Officers serve at the discretion of the Board of Directors.
The Board of Directors has three standing committees, the Audit Committee,
the Compensation Committee and the Executive Committee. The Board of Directors
does not have a nominating committee. Messrs. Doshi, Ross and Murray currently
serve on the Audit Committee. Messrs. Doshi, Ross, Murray and Ellis serve on the
Compensation Committee, the purpose of which is to establish salary and bonus
compensation levels for the Company's executive officers. The Executive
Committee, which consists of Mr. Doshi and Mr. Ellis, may act on behalf of the
full Board except in reference to amending the
34
<PAGE>
Company's Certificate of Incorporation or By-laws, adopting a plan of merger or
consolidation, recommending to the shareholders the sale, lease or other
disposition of all or substantially all of the property and assets of the
Company other than in the usual and regular course of business, recommending to
the shareholders a voluntary dissolution of the Company or a revocation thereof.
EXECUTIVE COMPENSATION
The tables and discussion below set forth information about the compensation
awarded to, earned by, or paid to the Company's chief executive officer and four
other most highly compensated executive officers during the fiscal years ended
January 31, 1996, 1995 and 1994. Except as noted below, no executive officer of
the Company or any of its then existing subsidiaries earned compensation in
excess of $100,000 during any of these periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- -------------------------
FISCAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR (1) SALARY BONUS OPTIONS COMPENSATION (2)
- ------------------------------------------------------------ ------ -------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Anil Doshi ................................................. 1995 $ 38,196 $ -0- 120,000 $ -0-
Chief Executive Officer(3) 1994 -0- -0- 150,000 -0-(4)
1993 -0- -0- -0- 7,200
Kenneth Newell ............................................. 1995 $107,107 $23,626 109,300 $29,580
Chief Executive -- 4Front Group 1994 90,993 -0- 90,700 28,064
1993(5) 2,950 -0- -0- 1,130
Terence Burt ............................................... 1995 $ 94,506 $39,378 98,050 $13,368
Managing Director -- Systems Integration Development 1994 84,920 11,503 66,950 13,053
1993(5) 2,950 -0- -0- 555
Peter Wellings (6) ......................................... 1995 $ 90,568 $31,502 -0- $17,137
Former Managing Director -- Network Computing 1994 92,000 33,600 34,800 14,880
1993(5) 3,375 -0- -0- 375
Mark McVeigh ............................................... 1995 $ 66,154 $47,253 20,000 $11,025
General Manager -- Hardware Maintenance and Support 1994 47,253 12,600 20,000 9,264
1993 45,000 -0- -0- 7,440
</TABLE>
- ------------------------
(1) Represents the period beginning February 1 of the year indicated and ending
January 31 of the following year.
(2) As to Mr. Doshi, represents contributions made by the Company to Mr. Doshi's
Executive Pension Plan. As to Messrs. Newell, Burt, Wellings and McVeigh,
represents the dollar value of car allowance, insurance benefits and
contributions to voluntary money purchase pensions plans.
(3) Mr. Doshi entered into an employment agreement with the Company in November
1995, which provides for an annual base salary of $150,000. See "--
Employment Agreements." Prior to this date, Mr. Doshi did not receive any
salary compensation for services to the Company.
(4) Does not include a consulting fee of $150,000 incurred by the Company to
Aliki Financial Corp., in which Mr. Doshi has a 65% interest. Such charge
has not yet been paid by the Company. See "Certain Transactions -- Advances
from Affiliates."
(5) Compensation received subsequent to January 14, 1994, the effective date of
the Company's acquisition of 4Front Group (formerly K2 Group).
(6) Mr. Wellings resigned from his position with the Company in February 1996.
35
<PAGE>
The following table sets forth certain summary information concerning
individual option grants of stock options made during the fiscal year ended
January 31, 1996, to each of the Company's executive officers named in the
Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE PRICE TERM (5)
OPTIONS TO EMPLOYEES IN PER SHARE EXPIRATION ------------------------
NAME GRANTED (1) FISCAL YEAR (2) ($/SH) (3) DATE (4) 5% 10%
- ------------------------- ----------- ----------------- ----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Anil Doshi............... 120,000 16.5% $ 5.00 7/31/00 $ 165,768 $ 366,306
Kenneth Newell........... 109,300 15.1% $ 5.00 7/31/00 $ 150,988 $ 333,644
Terence Burt............. 98,050 13.5% $ 5.00 7/31/00 $ 135,447 $ 299,303
Peter Wellings........... -0- -- -- -- -- --
Mark McVeigh............. 20,000 2.8% $ 5.00 7/31/00 $ 27,628 $ 61,051
</TABLE>
- ------------------------
(1) All options granted to the named officers were non-qualified options.
(2) Based on an aggregate of options to purchase 725,463 shares during the
fiscal year.
(3) All options were granted at market value at date of grant.
(4) All options have a fixed term of five years and are fully vested.
(5) Potential gains are reported net of the option exercise price, but before
taxes associated with exercise. These amounts represent certain assumed
rates of appreciation only. Actual gains on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in this table may not necessarily
be achieved.
The following table sets forth at January 31, 1996, the number of options
and the value of unexercised options held by each of the executive officers
named in the Summary Compensation Table who held options at January 31, 1996. No
options were exercised in the fiscal year ended January 31, 1996.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END (#)
---------------- ------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE (1)
- ------------------------------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Anil Doshi................................. 270,000 / 0 $ 420,000 / n/a
Kenneth Newell............................. 200,000 / 0 $ 290,700 / n/a
Terence Burt............................... 165,000 / 0 $ 231,950 / n/a
Peter Wellings............................. 34,000 / 0 $ 69,600 / n/a
Mark McVeigh............................... 40,000 / 0 $ 60,000 / n/a
</TABLE>
- ------------------------
(1) Based on the last sale price of $6.00 on the Nasdaq SmallCap Market at
fiscal year-end.
EMPLOYMENT ARRANGEMENTS
Messrs. Doshi and Ellis have entered into employment agreements with the
Company commencing November 1, 1995. These agreements are terminable at any time
after an initial term of three years on one years' notice. Under such
agreements, Messrs. Doshi and Ellis are entitled to base annual salaries of
$150,000 and $140,000, respectively, plus pension contributions not to exceed 7%
of such base salaries. Prior to the execution of such employment agreements,
neither Messrs. Doshi nor Ellis had received salary compensation for services
performed for the Company and its affiliates.
36
<PAGE>
As a condition to the K2 acquisition, each of Messrs. Newell, Burt and
Andrews entered into employment agreements with 4Front Group at salaries of
L60,000 ($91,000), L55,000 ($83,000) and L48,000 ($73,000), respectively.
Effective February 1, 1995 these annual salaries were adjusted upwards to
L68,000 ($103,000), L60,000 ($91,000) and L55,000 ($83,000), respectively. These
agreements are terminable upon one year's notice, which notice can be served no
earlier than the first anniversary of the effective date of the agreement. These
agreements are guaranteed by the Company, and are subject to buyout rights in
the event of a change in the control of 4Front Group.
As a condition to the Compass acquisition, each of Messrs. Richard Sharpe
and Joel Jervis entered into employment agreements with Compass at salaries of
L25,000 ($38,000) and L60,000 ($91,000), plus car allowance, respectively. The
agreements provided, as to Mr. Sharpe, for pension contributions of at least
L15,000 ($23,000) per annum, and as to Mr. Jervis, a bonus of up to L6,000
($9,000) per quarter dependent upon the achievement of certain profit goals and
pension contributions of not less than 5% of annual salary. In December, 1995,
Mr. Sharpe entered into a new employment agreement with the Company's 4Front
Group PLC subsidiary which replaced his prior agreement with Compass upon
substantially the same terms, except for an additional pension contribution of
L15,000 ($23,000) for the twelve month period commencing April 6, 1996 only. In
April 1996, Mr. Sharpe terminated his employment agreement with the Company and
entered into a consulting agreement with the Company on substantially similar
terms. Compensation under Mr. Jervis' agreement is subject to annual review and
increase, is terminable upon one year's notice, and is guaranteed by the
Company.
No other executive officer is currently party to an employment agreement
with the Company. As appropriate, other employment contracts may be entered into
with other key executives.
COMPENSATION OF DIRECTORS
Mr. Ross and Mr. Murray, two of the Company's non-employee directors,
receive compensation of $10,000 per year for services as a director. No other
director receives any compensation for services as a director.
STOCK OPTIONS AND BENEFIT PLANS
In September and November 1994 the Company issued a total of 1,260,875
options to management, employees and consultants, exercisable for five years at
an exercise price of $4.00 per share.
In August and November 1995 the Company issued a total of 725,463 options to
management, employees and consultants, exercisable for five years at an exercise
price of $5.00 per share. Of the options granted, 120,000, 120,000, 60,000,
20,000, 109,300, 98,050, 5,000 and 20,000 were granted to Messrs. Doshi, Ellis,
Kleinman, Ross, Newell, Burt, Andrews and McVeigh, respectively.
The Company, through its K2 subsidiary, operates contributory, non-defined
pension plans for the benefit of Messrs. Andrews, Burt, and Newell, to which it
makes periodic contributions of approximately L12,000 ($18,000) per annum.
1996 EQUITY INCENTIVE PLAN
On May 20, 1996 the Company's Board of Directors adopted the 4Front Software
International, Inc., 1996 Equity Incentive Plan (the "Plan") subject to approval
by the Company's stockholders. The Plan provides for grants of stock options
("Plan Options") to certain non-executive directors, officers, employees,
consultants, independent contractors and advisors of the Company or its
subsidiaries or affiliates. Subject to adjustment in certain circumstances as
discussed below, the Plan authorizes up to 200,000 shares of Common Stock for
issuance pursuant to the terms of the Plan. Of this total number, a maximum of
20,000 shares may be issued to participants who are directors of the Company. If
and to the extent Plan Options expire or are terminated for any reason without
being exercised, the shares of Common Stock subject to such Plan Options again
will be available for purposes of the Plan. Grants under the Plan may consist
of: (i) options intended to qualify as incentive stock options ("ISOs") within
the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), (ii)
so-called "non-qualified stock options" that are not intended to so qualify
("NQSOs"), or (iii) a combination thereof. As of May 21, 1996, approximately 169
employees were eligible to participate in the Plan. As of May 21, 1996, no Plan
Options have been granted. However, subject to stockholder approval, the Company
37
<PAGE>
intends to grant approximately 130,000 Plan Options at the public offering price
hereof. The Plan is administered by a Committee of the board (the "Committee"),
which may be the Compensation Committee. This Committee plans to grant Plan
Options either as ISOs or as NQSOs, and allows the Committee to establish, as to
any participant, the number of Plan Options, exercise price, exercise term
(subject to a maximum of ten years), and other terms and conditions. Subject to
the foregoing, the option exercise price for each share covered by a Plan Option
may not be less than 85% of the fair market value of a share of Common Stock on
the date of grant of such Plan Option; however, in the case of an ISO, the price
shall be no less than 100% of the fair market value of a share of Common Stock
at the time such option is granted; and in the case of an ISO granted to a ten
percent stockholder, the exercise price will be no less than 110% of the fair
market value of the Common Stock on the date of grant. The recipient may pay the
exercise price by (i) cancellation of indebtedness of the Company to the
participant, (ii) by surrender of shares of the Company's Common Stock that have
been owned by the participant for more than six months and have been paid for
within the meaning of SEC Rule 144, or were obtained by the participant in the
public market; and are clear of all liens, claims, encumbrances and security
interests; (iii) by waiver of compensation due to the participant for services
rendered; provided a public market exists for the Company's stock, through a
same day sale of the shares acquired upon exercise of an Option, subject to
applicable securities laws; and (iv) by any combination of the foregoing.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended January 31, 1996, no Compensation Committee or other
Board committee performing equivalent functions was in existence, and all
decisions of the Board concerning executive officer compensation were made by
the full Board at meetings of the Board of Directors at which all current
directors were present. Messrs. Doshi and Ellis were directors and executive
officers of the Company at such times and, as directors, participated in
deliberations regarding executive compensation. The Board has subsequently
established a Compensation Committee which currently consists of Messrs. Doshi,
Ellis, Ross and Murray.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company contain certain provisions permitted under the
Colorado Corporations Code relating to the liability of directors and officers.
The provisions eliminate a director's or officer's liability for monetary
damages for a breach of fiduciary duty as a director or officer, except for
liability in certain circumstances involving wrongful acts, such as the breach
of a director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. Further, the Company's Bylaws contain
provisions to indemnify the Company's directors and officers to the fullest
extent permitted by the Colorado Corporations Code, including payment in advance
of a final disposition of a director's or officer's expenses and attorneys' fees
incurred in defending any action, suit or proceeding. The Company believes that
these provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors and officers.
In 1987, the Company entered into an indemnification agreement with Craig
Kleinman in order to create a direct contractual obligation on the part of the
Company to reimburse Mr. Kleinman against any and all expenses and liabilities
incurred as a result of Mr. Kleinman's service as an officer and director of the
Company to the full extent provided by law and by the Company's Articles of
Incorporation and Bylaws (except in the case of fraud or the receipt by the
indemnified party of personal profit or advantage to which he was not legally
entitled).
38
<PAGE>
CERTAIN TRANSACTIONS
ACQUISITIONS
On November 23, 1992, an acquisition agreement was entered into between the
Company and Mortlake (then known as 4Front Group), pursuant to which the Company
acquired all of the outstanding shares of Mortlake in exchange for the issuance
of 785,000 shares of the Company's common stock. Messrs. Doshi, Ellis, Anthony
Malpas and Keith Shipton, who at that time held all of the outstanding stock of
Mortlake, received 408,200, 219,800, 78,500 and 78,500 newly issued shares of
the Company's common stock, respectively, in this transaction.
On February 1, 1993, immediately following the acquisition by the Company of
Mortlake, Messrs. Doshi and Ellis purchased all of the outstanding shares of
DesignBase from Messrs. Malpas, Forest-Moore and Shipton in exchange for a total
of 120,000 shares of the Company's common stock which were then held
individually by Messrs. Doshi and Ellis. The DesignBase shares were then
contributed to Mortlake by Messrs. Doshi and Ellis without payment and
DesignBase therefore became a wholly owned subsidiary of Mortlake. In September
1994 (effective February 1, 1994) the Company sold DesignBase, along with the
Company's CommsWare Limited subsidiary, to a company controlled by Anthony
Malpas in exchange for a one-year promissory note in the amount of $23,613
(representing the book value of the net assets of these companies) and the
assumption of $620,743 in payables owed by these companies to the Company.
Payment of these payables has been guaranteed by Mr. Doshi and Aliki Financial
Corp. ("Aliki"), in which Messrs. Doshi and Ellis have interests of 65% and 35%,
respectively.
Effective January 14, 1994, the Company purchased all of the outstanding
shares of K2 Group Plc (now 4Front Group) and Xanadu from the shareholders
thereof, including Messrs. Newell, Burt and Andrews, with whom the Company
executed employment agreements as a condition of such acquisition. See
"Management -- Executive Compensation -- Employment Agreements". The terms of
the acquisition required a payment of additional consideration if certain profit
goals were met by the acquired company. All such goals were met and during the
1995 fiscal year the Company paid, as additional consideration for the
acquisition, a total of $141,250 and issued 62,500 shares of Common Stock to the
selling shareholders. The Company also, as a part of this acquisition, entered
into an agreement with the selling shareholders whereby such shareholders were
given the right, commencing March 31, June 30 and October 31, 1995 and ending in
each case on November 30, 1995 to require the Company to purchase up to 10%, 10%
and 80%, respectively, of the shares of common stock of the Company issued by
the Company to such shareholders if, as of the referenced commencement date, the
Company's Common Stock was not admitted to trading on the Nasdaq SmallCap Market
or on any recognized stock exchange in North America or Europe. Effective
October 21, 1994, the Company entered into an agreement with such selling
shareholders whereby the Company issued a further 50,000 shares of Common Stock
to the selling shareholders in consideration of a waiver by such shareholders of
the foregoing repurchase rights.
As part of the acquisition by the Company of Compass in 1995, the Company
agreed to the conditional issuance of (i) a total of 108,836 additional shares
of common stock to Richard Sharpe, until April 1996 the Company's General
Manager of Network Communications and currently a Consultant to the Company, his
wife and two trusts of which the Sharpes are beneficiaries and (ii) options to
purchase an additional 29,959 shares of the Company's Common Stock at $0.01 per
share to Joel Jervis, all based on the post-acquisition earnings of Compass for
the period ending March 31, 1996. In December 1995, the Company entered into an
agreement with the prior shareholders of Compass and Mr. Jervis whereby the
conditions to the issuance of these additional shares were deemed satisfied,
resulting in the immediate issuance of these conditional shares and options.
Such options were exercised by Mr. Jervis in April, 1996.
ADVANCES FROM AFFILIATES
As of April 30, 1996, a total of $391,842 remained outstanding and owed to
Aliki and/or Messrs. Doshi and Ellis, primarily representing advances made to
fund the operations of the Company, but also including $150,000 owed to Aliki
for payment of consulting services rendered by Aliki to the Company in 1994 in
connection with fund raising and acquisitions. These payables are noninterest
39
<PAGE>
bearing and unsecured, due on demand. Repayment is subordinated to payment by
the purchaser of DesignBase and CommsWare of all payables to the Company assumed
in connection with the sale by the Company of DesignBase and CommsWare in 1994.
Payment of such assumed payables has been guaranteed by Mr. Doshi and Aliki.
In November, 1992, the Company issued a convertible debenture to Mr. Doshi
evidencing the Company's indebtedness to him in the amount of $350,000 with
interest at 12% per annum, convertible at any time into shares of the Company's
Common Stock at $5.00 per share at any time until April 30, 1993 and at $7.50
per share thereafter, and repayable on January 15, 1994. The debenture was
subsequently amended to change the maturity date until May 31, 1995, and to
change the conversion terms to provide for the issuance of 1.6 shares of Common
Stock and 1.6 share purchase warrants (of which 62.5% will be exercisable at
$2.00 per share and the balance will be exercisable at $7.50 per share) for
every $5.00 converted. This debenture was converted in full in July 1994,
resulting in the issuance to Mr. Doshi of 112,000 shares of Common Stock, 70,000
warrants exercisable at $2.00 and 42,000 warrants exercisable at $7.50.
OTHER TRANSACTIONS
In October 1994, the Company had a pre-existing line of credit in the amount
of L180,000 which was converted into a two year loan, requiring repayment of
principal at L7,500 per month, of which $107,607 principal was outstanding as of
January 31, 1996. This outstanding facility is secured by the assets of the
Company and by Mr. Doshi's guarantee. Additional borrowings by the Company with
an aggregate balance of $141,000 as of January 31, 1994 were secured, in part,
by personal assets of Mark Ellis. During the Company's 1995 fiscal year this
balance was paid in full via the surrender of L90,000 of such assets by Mr.
Ellis. None of the foregoing named guarantors has received consideration from
the Company for providing such security or guarantees.
In connection with a bridge financing completed in January 1995, the Company
issued a promissory note in the principal amount of $480,000 bearing interest at
10% per annum to Jayantilal V. Doshi, the father of Anil Doshi. As further
consideration for this loan, Mr. J. V. Doshi received 12,000 shares of Common
Stock and warrants to purchase an additional 120,000 shares at an exercise price
of $4.50 per share. This bridge loan, plus interest, was initially due on May
31, 1995. In June, 1995 the $480,000 principal amount of this loan, plus an
additional $500,000, was exchanged by Mr. J. V. Doshi for a promissory note in
the principal amount of $980,000, bearing interest at 10%, due on or before
December 14, 1995. In connection with this additional loan, Mr. J. V. Doshi was
issued 24,500 shares of Common Stock and warrants to purchase 245,000 additional
shares at an exercise price of $4.50 per share. Effective December 14, 1995,
this promissory note was amended to provide for a maturity date at the earlier
of (i) June 14, 1996 or (ii) the consummation of a public offering of the
Company's Common Stock.
Prior to his appointment as a non-executive director of the Company, Mr.
Ross purchased 15,000 shares of the Company's Common Stock and warrants to
purchase 15,000 shares for total consideration of $66,000 in the Company's May,
1995 private placement of securities. In June, 1995, Mr. Ross loaned $50,000 to
the Company, in consideration of which the Company issued to Mr. Ross 1,250
shares of Common Stock and warrants to purchase 12,500 shares. The $50,000 loan
has been repaid to Mr. Ross, with interest.
The Company believes that all transactions with related parties have been
upon terms at least as favorable to the Company as those which would have been
available to the Company from unrelated parties.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 20, 1996, and as adjusted to
reflect the sale of the shares offered hereby, assuming no exercise of the
Underwriter's over-allotment option, (i) by each of the Company's executive
officers and directors, (ii) by all officers and directors as a group and (iii)
by each person who is known by the Company to own beneficially more than 5% of
the Company's Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
------------------------
NUMBER OF SHARES BEFORE AFTER
BENEFICIAL OWNER -- NAME AND ADDRESS BENEFICIALLY OWNED (1) OFFERING OFFERING
- --------------------------------------------------------- ---------------------- ----------- -----------
<S> <C> <C> <C>
Anil Doshi (**) ......................................... 954,700(2) 27.6% 14.8%
Mark Ellis (**) ......................................... 542,300(3) 16.3% 8.6%
Kenneth Newell (**) ..................................... 262,578(4) 8.1% 4.2%
Philip Mendonca (**) .................................... -0- * *
Craig Kleinman (**) ..................................... 82,500(5) 2.6% 1.3%
Simon Andrews (**) ...................................... 85,044(6) 2.7% 1.4%
Peter Bolton (**) ....................................... 5,000(7) * *
Terence Burt (**) ....................................... 227,582(8) 7.1% 3.7%
Joel William Jervis (**) ................................ 53,639 1.8% 0.9%
Mark McVeigh (**) ....................................... 47,000(9) 1.5% 0.8%
Brian Murray (**) ....................................... 2,500 * *
Arthur Keith Ross (**) .................................. 185,950(10) 5.9% 3.0%
Richard Ian Sharpe (**) ................................. 192,556(11) 6.3% 3.2%
Sierra Overseas ......................................... 242,000(12) 7.4% 3.9%
One Maritime Plaza
Suite 700
San Francisco
California 94111
All Directors and Executive Officers as a Group (12 2,408,793(2)(3)(4) 55.4% 32.8%
persons)................................................ (5)(6)(7)(8)
(9)(10)(11)
</TABLE>
- ------------------------
* Less than 1%
** Address is 4 Colonial Business Park, Colonial Way, Watford, Herts WD2 4PR
England
(1)All shares are beneficially owned, such persons have sole investment and
voting power subject to applicable community property and similar laws,
unless otherwise indicated.
(2)Includes 20,000 shares and 20,000 warrants owned by Aliki Financial Corp.,
in which Mr. Doshi has a 65% interest. Also includes 270,000 shares
purchasable pursuant to immediately exercisable options and 112,000 shares
purchasable pursuant to immediately exercisable warrants.
(3)Includes 20,000 shares and 20,000 warrants owned by Aliki Financial Corp.,
in which Mr. Ellis has a 35% interest. Also includes 270,000 shares
purchasable pursuant to immediately exercisable options.
41
<PAGE>
(4)26,737 of such shares are held directly by Mr. Newell and 7,051 shares are
held directly by Mr. Newell's wife; Lex Nominees International holds 28,790
shares as nominee for a Jersey resident settlement established for the
benefit of Mr. Newell and his wife and children. Also includes 200,000
shares purchasable pursuant to immediately exercisable options.
(5)Includes 75,000 shares purchasable pursuant to immediately exercisable
options.
(6)5,875 of such shares are held directly by Mr. Andrews and 5,875 shares are
held directly by Mr. Andrews' wife; Lex Nominees International holds the
remaining 28,794 shares as nominee for a Jersey resident settlement
established for the benefit of Mr. Andrews and his wife and children. Also
includes 44,500 shares purchasable pursuant to immediately exercisable
options.
(7)Includes 5,000 shares purchasable pursuant to immediately exercisable
options.
(8)441 of such shares are held directly by Mr. Burt and 33,347 shares are held
directly by Mr. Burt's wife; Lex Nominees International holds the remaining
28,794 shares as nominee for a Jersey resident settlement established for
the benefit of Mr. Burt and his wife and children. Also includes 165,000
shares purchasable pursuant to immediately exercisable options.
(9)Includes 40,000 shares purchasable pursuant to immediately exercisable
options.
(10)Includes 87,100 shares purchasable pursuant to immediately exercisable
options and warrants.
(11)85,395 of such shares are held directly by Mr. Sharpe, 84,306 shares are
held directly by Mr. Sharpe's wife, 7,618 shares are held by Richard Ian
Sharpe, Patricia Mary Sharpe and Allied Dunbar Pensions Services Limited,
and 15,237 shares are held by Tangara Limited, Trustees of the R Sharpe Life
Interest Settlement.
(12)Includes 130,000 shares purchasable pursuant to immediately exercisable
warrants and 60,000 shares purchasable pursuant to immediately exercisable
options.
42
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 30,000,000 shares of Common Stock, no par
value.
COMMON STOCK
Holders of Common Stock are entitled to one vote, either in person or by
proxy, for each share held of record on all matters submitted to a vote of
shareholders. Except as otherwise provided by law, action can be taken by a
majority of shares entitled to vote at a meeting. Holders of Common Stock are
entitled to dividends when and as may be declared by the Board of Directors out
of funds legally available therefore, and, in the event of liquidation or
dissolution of the Company, are entitled to share ratably in the assets of the
Company remaining after payment of liabilities and payment in respect of any
preferred stock. Holders of Common Stock have no conversion, preemptive or other
subscription rights, and there are no redemption or sinking fund provisions with
respect to the Common Stock. The outstanding shares of Common Stock of the
Company are fully paid and nonassessable.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Securities
Transfer Incorporated. Its telephone number is (303) 234-5300.
LISTING
The Company's Common Stock is listed on the Nasdaq SmallCap Market under the
trading symbol FFST. Application has been made to quote the Common Stock on the
Nasdaq National Maket under the trading symbol FFST.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 6,058,747 shares of
Common Stock outstanding, assuming no exercise of warrants and options to
purchase approximately 3,388,753 shares of Common Stock outstanding as of the
date of this Prospectus. Of these shares, the 3,000,000 shares sold in the
offering will be freely tradeable without restriction or further registration
under the Securities Act, unless they are purchased by an "affiliate" of the
Company as that term is defined in Rule 144 under the Securities Act (which
sales would be subject to certain limitations and restrictions described below).
The remaining 3,058,747 shares of Common Stock held by existing shareholders
may be sold in the public market only if registered or pursuant to an exemption
from registration such as Rules 144 or 144(k) promulgated under the Securities
Act. Except for those shares sold in the Offering, 2,264,749 shares of the
Company's Common Stock outstanding after the Offering will be subject to
contractual lock-up agreements with the Company or the Underwriters.
Specifically, each of the Company's executive officers, directors and
shareholders holding 5% or more of the Company's Common Stock, who together hold
an aggregate of 1,364,749 shares of the Company's Common Stock, as well as
holders of approximately 900,000 additional shares of Common Stock, have
executed lock-up agreements providing that they will not offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of, or agree to
dispose of, any shares of Common Stock (other than as permitted in this
offering) until six months after the date of this Prospectus at which time an
aggregate of 220,000 of these shares will be released from the lock-up. The
remaining 2,044,749 shares held by these persons will be released from the
lock-up twelve months after the date of this Prospectus.
Taking into account these lock-up agreements and provisions, the number of
shares outstanding prior to the offering that will be available for sale in the
public market will be as follows: (a) approximately 75,000 previously registered
shares of Common Stock will be eligible for sale as of the effective date of
this offering; (b) approximately 220,000 shares of Common Stock will be eligible
for sale beginning six months after the effective date of this Prospectus; (c)
approximately 2,044,749, shares of Common Stock will be eligible for sale
beginning twelve months after the effective date of this Offering;
43
<PAGE>
and (d) approximately 718,998 remaining shares of Common Stock will be eligible
for sale from the effective date of this Offering through November 1997 upon
expiration of their respective two-year holding periods.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "brokers' transactions" or to market makers, within any
three-month period a number of shares that does not exceed the greater of (a)
one percent of the number of shares of Common Stock then outstanding
(approximately 60,587 shares immediately after this Offering) or (b) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are subject to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice filing provisions of
Rule 144. Unless otherwise restricted "144(k)" shares may therefore be sold
immediately upon the completion of this offering. In addition, Rule 144A would
permit the resale of restricted securities to qualified institutional buyers,
subject to compliance with conditions of the Rule.
The Company is unable to estimate the number of shares that may be sold
under Rule 144 or otherwise because this will depend on the market price for the
Common Stock of the Company, the individual circumstances of the sellers and
other factors. Future sales of shares of Common Stock, or the availability for
sale of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock and could impair the Company's future ability to raise capital through an
offering of its equity securities.
WARRANTS AND OPTIONS
SERIES A WARRANTS. A total of 487,000 Series A Warrants are outstanding as
of the date of this Prospectus. 225,000 Series A Warrants were issued to all
then existing shareholders of the Company in November 1992; 192,000 were issued
in connection with a private placement completed by the Company in 1993 (the
"1993 Placement"); and 70,000 were issued to Mr. Anil Doshi upon the conversion
in July 1994 of a convertible debenture previously issued to Mr. Doshi (the
"Doshi Debenture") (see "Certain Transactions -- Advances from Affiliates").
Each Class A Warrant entitles the holder to purchase one share of Common Stock
at any time prior to December 31, 1997 at a price of $2.00 per share. The
Company has the right to redeem each Class A Warrant for $0.01 if the Company's
common stock trades at $9 or more per share for 14 consecutive trading days
prior to December 31, 1997.
SERIES B WARRANTS. A total of 157,200 Series B Warrants are outstanding as
of the date of this Prospectus. 115,200 were issued in connection with the 1993
Placement and 42,000 were issued to Mr. Doshi upon the conversion of the Doshi
Debenture. The terms of the Series B Warrants are identical to those of the
Series A Warrants, except that the exercise price of the Series B Warrants is
$7.50 per share.
OTHER WARRANTS. In connection with a private placement completed in 1994,
the Company issued warrants exercisable at any time prior to August 9, 1997 into
15,425 shares of the Company's Common Stock at $4.00 per share. In connection
with a bridge financing completed by the Company in January 1995 the Company
issued warrants exercisable at any time prior to January 31, 2000 into 197,500
shares of the Company's Common Stock at $4.50 per share. In connection with an
additional bridge financing completed by the Company in May 1995 the Company
issued warrants exercisable between September 1996 and June 2000 into 257,500
shares of the Company's Common Stock at $4.50 per share. In connection with a
private placement completed in May 1995, the Company issued warrants exercisable
at any time prior to May 2000 into 143,957 shares of the Company's Common Stock
at $6.50 per share, along with additional warrants to persons assisting in the
offering exercisable for 6,500 shares of the Company's Common Stock upon
identical terms. In connection with a private placement completed in November
1995, the Company issued warrants exercisable at any time from October 1996 to
October
44
<PAGE>
2001 into 100,000 shares of the Company's Common Stock at $7.50 per share. Also
in November 1995, as payment for services rendered, the Company issued warrants
exercisable at any time from November 1996 to November 2001 into 13,333 shares
of the Company's Common Stock at $7.50 per share.
INCENTIVE OPTIONS. In November 1994 the Company issued options to purchase
a total of 1,260,875 shares of the Company's Common Stock to various employees
and consultants. These options are exercisable at the price of $4.00 per share,
and expire between September and November, 1999. In August and November 1995,
the Company issued additional options to purchase a total of 725,463 shares of
the Company's Common Stock to various employees and consultants, which options
are exercisable at the price of $5.00 per share, and expire August 1, 2000.
OTHER OPTIONS. In August, 1995 options to purchase 24,000 shares of the
Company's Common Stock at the price of $4.40 per share (expiring five years from
issuance) were issued to a consultant pursuant to a contractual obligation.
45
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Kaufman Bros., L.P. and First Albany
Corporation are acting as the Representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------ -----------
<S> <C>
Kaufman Bros., L.P............
First Albany Corporation......
-----------
Total..................... 3,000,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the several Underwriters are
obligated to purchase all of the 3,000,000 shares of Common Stock offered by the
Underwriters hereby (other than shares which may be purchased under the
over-allotment option), if any are purchased. The Representatives have advised
the Company that the Underwriters propose to offer the shares to the public
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share and that such dealers may reallow a concession of $ per
share to certain other dealers. After the public offering, the offering price
and the concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of the Underwriting Agreement, to
purchase up to 450,000 additional shares of Common Stock at the public offering
price less underwriting discounts and commissions, all as set forth on the cover
page of this Prospectus. The Underwriters may exercise the option only to cover
over-allotments, if any, in the sale of shares of Common Stock in this Offering.
To the extent that the Underwriters exercise the option, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them as shown in the foregoing table bears to the 3,000,000 shares of Common
Stock offered hereby.
The Company has agreed to pay to the Representatives, individually, and not
in their capacity as Representatives, a non-accountable expense allowance of two
percent of the gross proceeds of the Offering ($300,000 if the Underwriters'
over-allotment option is not exercised and $345,000 if the Underwriters'
over-allotment option is exercised in full), of which $25,000 has been paid to
date. If the Offering is not consummated, the Representatives will be entitled
to be reimbursed for actual out-of-pocket expenses, on an accountable basis
only, up to $50,000, inclusive of the amount paid to date. The Company has also
agreed to pay all expenses in connection with registering or qualifying the
Common Stock offered hereby for sale under the laws of the states in which the
Common Stock is sold by the Underwriters (including expenses of counsel retained
for such purposes by the Underwriters) as well as certain expenses associated
with information meetings.
The Company has agreed to sell to the Representatives, or their designees,
warrants (the "Underwriters' Warrants") to purchase 300,000 shares of the
Company's Common Stock at an aggregate
46
<PAGE>
purchase price of $300.00. The exercise price per Underwriters' Warrant, subject
to anti-dilution adjustment, is equal to 130% of the public offering price per
share of Common Stock offered hereby. The Underwriters' Warrants expire on the
fifth anniversary of the date hereof. The Underwriters' Warrants may not be
transferred or exercised for one year from the date of this Prospectus, except
for transfers to officers of the Representatives or members of the underwriting
or selling group and/or their officers or partners, if any. The Underwriters'
Warrants become exercisable during the four-year period commencing one year from
the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant
Exercise Term, the holders of the Underwriters' Warrants are given, at nominal
cost, the opportunity to profit from an increase in the market price of the
Company's Common Stock. The Company has granted the Representatives certain
registration rights with respect to the Underwriters' Warrants. All registration
rights will terminate seven years from the effective date of the Offering.
Except as set forth below, the Company, its officers and directors, and
stockholders who hold in excess of 5% of the Company's Common Stock, as well as
holders of approximately 900,000 additional shares of Common Stock, have agreed
that they will not, directly or indirectly, offer, sell, offer to sell, contract
to sell, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer or sale, contract of sale, grant of any option to
purchase or any other sale or disposition) any shares of Common Stock or other
capital stock of the Company or any securities convertible into, or exercisable
or exchangeable for, any shares of Common Stock or other capital stock of the
Company for a period of 365 days after the date of this Prospectus without the
prior written consent of Kaufman Bros., L.P., on behalf of the Underwriters.
Notwithstanding the foregoing, upon notice to the Kaufman Bros., L.P., 220,000
shares in the aggregate may be sold 180 days after the date of this Prospectus.
See "Shares Eligible for Future Sale."
The public offering price of the Common Stock offered hereby will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination will be the
prevailing market conditions, the Company's fiscal and operating history and
condition, the Company's prospects and the prospects of its industry, the
management of the Company, the market price of securities for companies in
businesses similar to that of the Company and the recent trading activity and
prices of shares of Common Stock on the Nasdaq SmallCap Market.
Kaufman Bros., L.P. became registered as a broker-dealer in July, 1995.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock offered hereby will be passed upon for the Company by Miller &
Holguin, Los Angeles, California. As of the date of this Prospectus, Miller &
Holguin beneficially own 32,083 shares of the Company's Common Stock and hold
options and warrants for the purchase of an additional 22,708 shares of the
Company's Common Stock. Certain legal matters will be passed upon for the
Underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The consolidated financial statements as of January 31, 1996 and for the
year ended January 31, 1996, included in this Prospectus and the Registration
Statement have been audited by KPMG, independent auditors, as stated in their
report thereon appearing elsewhere herein and in the Registration Statement and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting. The consolidated financial statements as
of January 31, 1995 and for each of the years in the two year period ended
January 31, 1995, included in this Prospectus and the Registration Statement
have been audited by AJ. Robbins, PC., independent auditors, as stated in their
report thereon appearing elsewhere herein and in the Registration Statement and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting.
47
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), with
respect to the Common Stock offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement
and to the schedules and exhibits filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the principal office of the Commission, 450 5th Street, N.W., Washington,
D.C. 20549, and copies of the material contained therein may be obtained from
the Commission upon payment of applicable copying charges.
The Company is subject to the reporting and other informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Commission.
Such reports and other information may be inspected and copied at the public
reference facilities maintained by the Commission at the offices of the
Commission at Room 1024, 450 5th Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at 7 World Trade Center, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained by written
request to the Public Reference Section of the Commission at 450 5th Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is quoted on
the Nasdaq SmallCap Market and copies of the aforementioned materials may be
inspected at the office of the National Association of Securities Dealers, Inc.,
at 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and make
available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
48
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report Covering the Consolidated Financial Statements as of and for the year ended
January 31, 1996.......................................................................................... F-2
Independent Auditors' Report Covering the Consolidated Financial Statements as of January 31, 1995 and for
each of the years in the two year period ended January 31, 1995........................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 31, 1995 and 1996 and April 30, 1996 (unaudited)............... F-4
Consolidated Statements of Operations for the Years Ended January 31, 1994, 1995 and 1996 and for the
three month periods ended April 30, 1995 and 1996 (unaudited)........................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended January 31, 1994, 1995 and
1996 and for the three month period ended April 30, 1996 (unaudited).................................... F-6
Consolidated Statements of Cash Flows for the Years Ended January 31, 1994, 1995 and 1996 and for the
three month periods ended April 30, 1995 and 1996 (unaudited)........................................... F-7
Notes to the Consolidated Financial Statements........................................................... F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
4Front Software International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of 4Front
Software International, Inc. and subsidiaries as of January 31, 1996 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 4Front
Software International, Inc. and Subsidiaries as of January 31, 1996 and the
results of their operations and their cash flows for the year then ended, in
conformity with United States generally accepted accounting principles.
KPMG
Chartered Accountants
Registered Auditors
London, England
April 9, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders
4Front Software International, Inc.
and Subsidiaries
We have audited the consolidated balance sheet of 4Front Software
International, Inc., and Subsidiaries as of January 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two year period ended January 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 4Front
Software International, Inc. and Subsidiaries as of January 31, 1995, and the
results of their operations and their cash flows for each of the years in the
two year period ended January 31, 1995, in conformity with generally accepted
accounting principles.
AJ. Robbins PC
Certified Public Accountants
and Consultants
Denver, Colorado
April 24, 1995
F-3
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30
1996
JANUARY 31 JANUARY 31 --------------
1995 1996
-------------- -------------- (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash........................................................... $ 1,242,249 $ 1,391,644 $ 561,410
Accounts receivable, net of allowance for doubtful accounts of
$33,000, $79,000 and $90,000 respectively..................... 3,371,138 7,533,188 7,921,124
Deposits....................................................... 61,783 37,250 34,164
Inventories.................................................... 1,286,094 3,339,998 3,838,941
Prepaid expenses............................................... 178,600 396,623 315,103
Deferred offering costs........................................ 260,253 338,595 571,119
Income taxes receivable........................................ -- 160,166 159,064
Other current assets........................................... 188,205 266,582 287,006
-------------- -------------- --------------
Total current assets......................................... 6,588,322 13,464,046 13,687,931
PROPERTY AND EQUIPMENT, net...................................... 433,584 905,976 917,333
INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE.................... 518,432 248,048 239,125
RECEIVABLE, RELATED PARTY........................................ 634,905 644,356 644,356
INTANGIBLE ASSETS, net........................................... 711,281 2,074,400 2,012,530
OTHER ASSETS..................................................... 1,000,575 606,594 576,380
-------------- -------------- --------------
TOTAL ASSETS..................................................... $ 9,887,099 $ 17,943,420 $ 18,077,655
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 2,339,528 $ 6,644,065 $ 7,026,679
Accrued liabilities............................................ 661,337 1,559,673 1,406,804
Stockholder advances........................................... 619,672 391,842 391,842
Lines of credit -- bank........................................ 607,090 1,482,763 2,017,991
Notes payable (including amounts with related party of
$480,000, $980,000 and $980,000, respectively)................ 1,779,147 1,695,403 1,301,234
Capital lease obligations, current portion..................... 60,913 54,888 45,897
Income taxes payable........................................... 179,341 374,688 427,053
Deferred revenue............................................... 760,834 2,546,604 2,119,495
-------------- -------------- --------------
Total current liabilities.................................... 7,007,862 14,749,926 14,736,995
CAPITAL LEASE OBLIGATIONS, less current portion.................. 74,306 92,718 78,150
-------------- -------------- --------------
TOTAL LIABILITIES................................................ 7,082,168 14,842,644 14,815,145
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, no par value, 30,000,000 shares authorized,
2,511,325, 3,005,108 and 3,058,747 shares issued and
outstanding, respectively..................................... 5,810,709 6,972,674 6,973,210
Accumulated (deficit).......................................... (3,226,648) (3,878,599) (3,680,416)
Cumulative foreign currency translation adjustment............. 220,870 6,701 (30,284)
-------------- -------------- --------------
Total stockholders' equity................................... 2,804,931 3,100,776 3,262,510
-------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $ 9,887,099 $ 17,943,420 $ 18,077,655
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------------------
1994 1995 1996
------------- -------------- -------------- FOR THE THREE MONTHS ENDED
APRIL 30,
-----------------------------
1995 1996
------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................. $ 2,836,539 $ 11,240,081 $ 32,248,697 $ 4,644,935 $ 10,550,238
------------- -------------- -------------- ------------- --------------
Cost of revenues......................... 1,281,453 6,814,383 20,807,858 2,798,776 7,279,141
Write down of software development
costs................................... -- -- 755,184 -- --
------------- -------------- -------------- ------------- --------------
GROSS PROFIT............................. 1,555,086 4,425,698 10,685,655 1,846,159 3,271,097
------------- -------------- -------------- ------------- --------------
OPERATING EXPENSES:
Selling, general and administrative
expenses.............................. 1,116,802 3,565,063 9,566,257 1,502,211 2,712,078
Depreciation........................... 61,212 132,743 356,379 68,551 80,959
Amortization........................... 1,696 82,870 203,938 13,628 61,870
------------- -------------- -------------- ------------- --------------
Total operating expenses............. 1,179,710 3,780,676 10,126,574 1,584,390 2,854,907
------------- -------------- -------------- ------------- --------------
INCOME BEFORE INTEREST EXPENSE, INCOME
TAXES AND SHARE OF RESULTS IN EQUITY
INVESTEE................................ 375,376 645,022 559,081 261,769 416,190
INTEREST INCOME (EXPENSE):
Interest income........................ -- 11,624 14,189 -- 3,841
Interest expense....................... (65,577) (153,518) (258,421) (109,386) (103,614)
------------- -------------- -------------- ------------- --------------
Total interest expense............... (65,577) (141,894) (244,232) (109,386) (99,773)
------------- -------------- -------------- ------------- --------------
INCOME BEFORE INCOME TAXES AND SHARE OF
RESULTS IN EQUITY INVESTEE.............. 309,799 503,128 314,849 152,383 316,417
SHARE OF RESULTS IN EQUITY INVESTEE:
Write down of investment in and
advances to equity investee........... -- -- (581,770) -- --
Share of operating (loss) of equity
investee.............................. -- -- (179,246) -- (52,173)
------------- -------------- -------------- ------------- --------------
Total share of results in equity
investee............................ -- -- (761,016) -- (52,173)
------------- -------------- -------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES........ 309,799 503,128 (446,167) 152,383 264,244
INCOME TAXES............................. 5,561 148,000 205,784 38,096 66,061
------------- -------------- -------------- ------------- --------------
NET INCOME (LOSS)........................ $ 304,238 $ 355,128 $ (651,951) $ 114,287 $ 198,183
------------- -------------- -------------- ------------- --------------
------------- -------------- -------------- ------------- --------------
NET INCOME (LOSS) PER COMMON SHARE....... $ 0.25 $ 0.20 $ (0.24) $ 0.05 $ 0.07
------------- -------------- -------------- ------------- --------------
------------- -------------- -------------- ------------- --------------
Weighted average number of common shares
outstanding............................. 1,198,202 1,812,853 2,742,614 2,534,580 3,011,068
------------- -------------- -------------- ------------- --------------
------------- -------------- -------------- ------------- --------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
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, 1993.......... 1,130,000 $ 2,708,719 $ (3,886,014) $ 185,444 $ (991,851)
Stock issued in private placement,
net of offering costs............. 72,000 205,753 -- -- 205,753
Additional stock issuable under
1993 private placement............ 115,200 -- -- -- --
Stock issued to acquire K2 Group... 100,000 400,000 -- -- 400,000
Net income for the year............ -- -- 304,238 -- 304,238
Foreign currency translation
adjustment........................ -- -- -- (10,486) (10,486)
------------ -------------- --------------- ------------- --------------
BALANCE, JANUARY 31, 1994.......... 1,417,200 3,314,472 (3,581,776) 174,958 (92,346)
Conversion of debenture............ 112,000 350,000 -- -- 350,000
Exercise of stock options.......... 57,500 38,352 -- -- 38,352
Stock issued in private placement,
net of offering costs............. 773,625 1,768,385 -- -- 1,768,385
Stock issued for services.......... 18,750 75,000 -- -- 75,000
Additional shares issued to acquire
K2 Group.......................... 112,500 225,000 -- -- 225,000
Stock issued to bridge loan
holders........................... 19,750 39,500 -- -- 39,500
Net income for the year............ -- -- 355,128 -- 355,128
Foreign currency translation
adjustment........................ -- -- -- 45,912 45,912
------------ -------------- --------------- ------------- --------------
BALANCE, JANUARY 31, 1995.......... 2,511,325 5,810,709 (3,226,648) 220,870 2,804,931
Stock issued to acquire Compass.... 192,556 385,112 -- -- 385,112
Stock issued to bridge loan
holders........................... 25,750 51,500 -- -- 51,500
Stock issued in private placement,
net of offering costs............. 262,144 665,353 -- -- 665,353
Stock issued for services.......... 13,333 60,000 -- -- 60,000
Net (loss) for the year............ -- -- (651,951) -- (651,951)
Foreign currency translation
adjustment........................ -- -- -- (214,169) (214,169)
------------ -------------- --------------- ------------- --------------
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
------------ -------------- --------------- ------------- --------------
------------ -------------- --------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, FOR THE THREE MONTHS ENDED
------------------------------------------- APRIL 30,
1994 1995 1996 ----------------------------
------------- ------------- ------------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING
ACTIVITIES:
Net income (loss)..................... $ 304,238 $ 355,128 $ (651,951) $ 114,287 $ 198,183
Adjustments to reconcile net income
(loss) to net cash
provided (used) by operating
activities
Depreciation........................ 61,212 132,743 356,379 68,551 80,959
Amortization........................ 1,696 82,870 203,938 13,628 61,870
Write down of software development
costs.............................. -- -- 755,184 -- --
Write down of investments in and
advances to equity
investee........................... -- -- 581,770 -- --
Share of operating (loss) of equity
investee........................... -- -- 179,246 -- 52,173
Stock issued for services........... -- 75,000 60,000 -- --
(Gain) loss on disposal of fixed
assets............................. -- -- (35,851) 6,448 (19,448)
(Increase) decrease in accounts
receivable......................... (570,717) (251,000) (525,404) 209,713 (387,936)
(Increase) decrease in deposits..... (221,262) 232,252 24,533 1,338 3,086
(Increase) decrease in
inventories........................ (104,606) 226,718 (347,923) (380,170) (498,943)
(Increase) decrease in prepaid
expenses........................... (60,891) 63,729 (71,492) (63,512) 81,520
Increase in income taxes............ 54,887 124,454 204,781 33,206 53,467
(Increase) in other current
assets............................. (37,500) (72,369) (78,377) (153,594) (20,424)
(Increase) decrease in receivable --
related party...................... (8,015) (626,890) (9,451) 3,199 --
Increase (decrease) in accounts
payable............................ 466,723 (597,205) 1,876,174 210,129 382,614
Increase (decrease) in accrued
liabilities........................ 171,268 (314,381) 542,589 148,705 (152,869)
Increase (decrease) in deferred
revenue............................ 5,083 88,572 515,312 131,076 (427,109)
------------- ------------- ------------- ------------- -------------
Net cash provided (used) by
operating activities............... 62,116 (480,379) 3,579,457 343,004 (592,857)
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, FOR THE THREE MONTHS ENDED
------------------------------------------- APRIL 30,
1994 1995 1996 ----------------------------
------------- ------------- ------------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (TO) INVESTING
ACTIVITIES:
Purchase of equipment................. (48,724) (248,445) (405,634) (35,736) (101,762)
Proceeds from disposal of equipment... -- 287,069 177,517 12,245 28,894
Acquisition of subsidiaries, including
related expenses..................... (11,442) (391,280) (1,614,111) (76,735) --
Investment in Actiontrac, Inc......... -- (500,000) -- -- --
Investment in and advances to equity
investee............................. (60,157) (410,173) (444,704) (109,217) (43,250)
Software development costs............ (140,207) (277,792) (383,112) (97,730) --
(Increase) decrease in other assets... -- 35,924 (24,018) 416 30,214
------------- ------------- ------------- ------------- -------------
Net cash (used) by investing
activities......................... (260,530) (1,504,697) (2,694,062) (306,757) (85,904)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM (TO) FINANCING
ACTIVITIES:
(Decrease) increase in lines of
credit-bank.......................... (2,082) 19,568 (653,463) (362,684) 535,228
Proceeds from notes payable........... -- 1,506,364 500,000 -- --
Repayment of notes payable............ (14,676) (459,039) (583,744) (417,024) (394,169)
(Repayment of) proceeds from
stockholders' advances............... (172,033) 412,526 (227,830) (2,300) --
(Increase) in deferred offering
costs................................ (219,088) (25,131) (78,342) (168,158) (232,524)
Payments of capital lease
obligations.......................... -- (82,657) (143,805) (28,578) (23,559)
Net proceeds from exercise of share
options.............................. -- 536
Net proceeds from issuance of common
stock................................ 205,753 1,806,737 665,353 154,760 --
------------- ------------- ------------- ------------- -------------
Net cash (used) provided by
financing activities............... (202,126) 3,178,368 (521,831) (823,984) (114,488)
------------- ------------- ------------- ------------- -------------
Effect of exchange rate changes on
cash................................. (3,153) 45,912 (214,169) (13,637) (36,985)
------------- ------------- ------------- ------------- -------------
Net (decrease) increase in cash....... (403,693) 1,239,204 149,395 (801,374) (830,234)
Cash at beginning of period........... 406,738 3,045 1,242,249 1,242,249 1,391,644
------------- ------------- ------------- ------------- -------------
Cash at end of period................. $ 3,045 $ 1,242,249 $ 1,391,644 $ 440,875 $ 561,410
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Supplemental disclosure of cash flow
information:
Cash paid for interest expense........ $ 65,577 $ 153,518 $ 258,421 $ 90,123 $ 103,614
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995 AND 1996 AND APRIL 30, 1996
(INFORMATION FOR THE THREE-MONTH PERIODS ENDED APRIL 30, 1995 AND 1996 IS
UNAUDITED)
1. NATURE OF BUSINESS
4Front Software International, Inc. and subsidiaries (the "Company" or "4
Front") is a UK based specialised 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.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries from the date of acquisition. All significant
intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
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 three months ended April 30, 1995 and 1996 are not
necessarily indicative of the results of operations for the full year.
The Company's wholly owned subsidiaries are as follows; all of the
subsidiaries, unless otherwise indicated, are registered in England:
<TABLE>
<S> <C>
ACTIVE SUBSIDIARIES
K2 SYSTEMS PLC 4FRONT GROUP PLC
XANADU SYSTEMS LIMITED CCG HOLDINGS LIMITED
4FRONT SERVICES LIMITED COMPASS COMPUTER GROUP LIMITED
(formerly CI Support Limited)
MORTLAKE SOFTWARE PLC 4FRONT HOLDINGS, INC. (A DELAWARE
CORPORATION)
INACTIVE SUBSIDIARIES
MITRE TECHNOLOGY LIMITED COMMUNIC8 LIMITED
COMMUNIC8 SOFTWARE EUROPE LIMITED K2 DESIGN LIMITED
Closed during fiscal 1995 Sold during fiscal 1995
DESIGN BASE PROPERTIES LIMITED COMMSWARE LIMITED
Sold during fiscal 1995 Sold during fiscal 1995
</TABLE>
F-9
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) REVENUE RECOGNITION
Revenue from the sale of computer hardware and software is generally
recognised when the product is shipped and in the case of software licenses only
after the license has been signed and further obligations are not significant.
Where fixed fee contracts involve significant obligations after shipment of the
product, revenue is recognised on the percentage-of-completion method of
accounting.
Revenues from engineering, implementation and training are recognised as the
services are performed. Revenues from maintenance agreements are recognised
ratably over the terms of the agreements.
In all such cases, the Company only recognizes revenue when collection of
the related receivable is probable.
b) DEPOSITS
Amounts paid by the Company as advances against future purchases of software
are recorded as deposits until such time as the software is received.
c) INVENTORIES
Inventories are stated at the lower of cost (first in, first out method) or
market value. Inventories consist primarily of computer hardware, software and
work in progress. Work in progress represents labour and material costs incurred
for customer software projects.
d) DEFERRED OFFERING COSTS
Deferred offering costs represent costs incurred for proposed offerings of
common stock. Costs are charged against the proceeds of the offering, if
successful, or to operations, if unsuccessful.
e) DEPRECIATION
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of minimum lease payments at the inception
of the lease. The Company provides for depreciation of equipment using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to five years. Equipment held under capital leases is
amortized using the straight-line method over the lease term.
f) INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE
The investment in the ActionTrac International partnership has been
accounted for using the equity method under which the Company's results include
its 50% share of the partnership's operating profits or losses in accordance
with the terms of the partnership agreement.
g) FOREIGN CURRENCY TRANSLATION
The Company considers the pound sterling to be the functional currency of
its UK operations. The reporting currency of the Company is the US dollar;
accordingly, all amounts included in the consolidated financial statements have
been translated into US dollars.
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31, THREE MONTHS ENDING
APRIL 30,
------------------------------- ----------------------------
EXCHANGE RATES 1994 1995 1996 1995 1996
- ------------------------ --------- --------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Average................. 1.50 1.544 1.575 1.567 1.512
Period end.............. 1.50 1.588 1.511 1.580 1.501
</TABLE>
F-10
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All assets and liabilities of the UK operations are translated into US
dollars using the exchange rates in effect on reporting dates for assets and
liabilities. Income and expenses are translated at averaged rates in effect for
the periods presented. The cumulative currency translation adjustment is reflect
as a separate component of stockholders' equity on the consolidated balance
sheet.
Foreign currency transaction gains and losses are included in the
consolidated results of operations for the periods presented. To date,
transaction gains and losses have not been significant.
h) INTANGIBLE ASSETS
In connection with acquisitions accounted for under the purchase method (see
note 4), the Company recorded goodwill based on the excess of the purchase price
paid (cost of the acquisition) over the estimated fair value of the identifiable
tangible assets and liabilities of the acquiree on the date of purchase.
Goodwill is reported at cost, net of accumulated amortization, and is being
amortized over its estimated useful life of ten years.
i) SOFTWARE DEVELOPMENT COSTS
The Company charges all costs of establishing technological feasibility of
software products to research and development expense as incurred. Thereafter,
software development costs are capitalized and reported at the lower of
unamortized cost or net realisable value. Capitalisation of software development
costs ceases and amortization over the estimated useful life (not to exceed
three years) of the product commences when the product is available for general
release to customers. Any write down resulting from the periodic testing of net
realizable value is recorded as accelerated amortization.
The total amounts of software development costs capitalized during the years
ended January 31, 1994, 1995 and 1996, all of which relate to the StreamZ
communication software product, were $140,207, $277,792, and $337,185
respectively, and $97,730 and $0 for the three month periods ending April 30,
1995 and 1996, respectively.
j) INCOME TAXES
The company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognised for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognised in income in the period that includes the
enactment date. Valuation allowances are recognized for deferred tax assets if
it is considered more likely than not that all or some portion of the deferred
tax assets will not be realized. Income tax expense is tax payable for the
current period and the change during the year in deferred tax assets and
liabilities.
k) DEFERRED REVENUE
Deferred revenue is comprised of maintenance and support fees to be earned
in the future on agreements existing and billed for at the balance sheet date.
l) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common stock and common stock
equivalents outstanding during the period. When common stock equivalents have an
anti-dilutive effect on earnings (loss) per share, they are excluded from the
calculation. Separate disclosure of primary and fully diluted net income (loss)
per common share is not presented as they are not materially different.
F-11
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
m) CONCENTRATION OF CREDIT RISK
At January 31, 1995 and 1996, cash includes L691,806 ($1,098,588) and
L919,278, ($1,389,030) respectively and at April 30, 1996 L374,106 ($561,384)
held in demand deposit accounts in United Kingdom banks where deposits are not
insured by the government. These balances are subject to foreign currency
fluctuations, which in the past have not been material.
n) COSTS RELATING TO THE ISSUANCE OF STOCK WARRANTS AND OPTIONS
The cost resulting from the issuance of warrants and options to employees
under a compensatory plan is based on their intrinsic value at the measurement
date, which is equivalent to the excess of the fair market value of the
Company's common stock over the exercise price of the related warrants or
options.
The cost resulting from the issuance of warrants and options to
non-employees as part of transactions involving the exchange of products or
services, or contracts to provide such, is based on their intrinsic value at the
date of grant.
o) RECLASSIFICATIONS
Certain amounts in the prior year consolidated financial statements have
been reclassified for comparative purposes to conform with the current year
presentation. These reclassifications had no effect on results of operations.
p) 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
flows.
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.
4. ACQUISITIONS AND DISPOSAL OF SUBSIDIARIES
In February 1993 CommsWare Limited ("CommsWare") was formed as a
wholly-owned subsidiary and the Company acquired 100% of DesignBase Properties
Limited ("DesignBase") through an internal
F-12
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS AND DISPOSAL OF SUBSIDIARIES (CONTINUED)
reorganisation of management shareholdings. During February 1994, the Company
sold its investment in CommsWare and DesignBase to a company controlled by a
stockholder for the net book value of the net assets of approximately $23,613
and the assumption of $620,743 of liabilities. The resulting receivable is
non-interest bearing, due in 1996, and is guaranteed by another stockholder (see
note 18).
Effective January 14, 1994, the Company purchased all of the outstanding
shares of K2 Group Plc and subsidiaries ("K2"), a United Kingdom Company, plus
the 25% minority interest in a 75% owned subsidiary (Xanadu Systems Limited) of
K2. Consideration for the K2 and Xanadu shares consisted of the issuance of
100,000 shares of the Company's common stock and the payment of $156,750
(L105,222) to the selling stockholders (including $15,550 (L10,445) used by K2
to retire all outstanding K2 stock options), plus an agreement to pay an
additional $141,250 (L94,778) to the selling stockholders and to deliver an
additional 62,500 shares of common stock in the event that certain profit
targets were achieved for the six month period ending April 1994 and the year
ending October 31, 1994. These profit targets were met and the Company
accordingly paid the additional amount and issued the additional shares. The
Company also issued a further 50,000 shares of common stock to selling
stockholders in consideration for a waiver by them of certain conditional rights
which might have required the Company to repurchase the shares of common stock
issued in the acquisition in specified circumstances.
K2, through its wholly owned subsidiaries which include K2 Systems Plc,
Mitre Technology Limited, K2 Design Limited, and Xanadu Systems Limited, is a
direct sales company in the United Kingdom that supplies computer solutions for
accounting, distribution and office automation, develops customized software,
provides hardware and software support, distributes X Terminals, workstations
and connectivity software and supplies, and document image processing software
and hardware.
During November 1994 the Company sold its investment in K2 Design Limited to
an unrelated entity for the net book value of the assets of $8,700.
Effective November 1, 1994 the Company purchased all of the outstanding
shares of CI Support Limited ("CI"), a specialist hardware maintenance company,
for $159,000 (L102,500) from a company controlled by the stockholders of the
Company. CI is a hardware and network maintenance company which was formed by
three stockholders of the Company ("NBH") to acquire an existing client base
from an affiliated company. CI was operated by NBH for approximately one month
prior to selling all of the outstanding stock in CI to the Company. The Company
has recorded its investment in CI at the historical cost of NBH. On April 1,
1996 CI changed its name to 4Front Services Limited.
Effective March 31, 1995, the K2 Group Plc became the principal holding
company of the UK operations and changed its name to 4Front Group Plc. At the
same time, 4Front Group Plc changed its name to Mortlake Software Limited.
Effective April 6, 1995, the Company acquired all the common stock of CCG
Holdings Limited ("CCG") for cash consideration of L550,000 ($880,000) together
with the issuance of 83,720 shares of common stock and an agreement to deliver
up to an additional 108,836 shares of common stock valued at $2 per share in the
event that certain profit targets were achieved. In addition, the Managing
Director of CCG received options on 23,680 shares of common stock exercisable at
$0.01 and was also entitled to receive additional options on up to 29,959 shares
of common stock exercisable at $0.01 upon similar terms as to the entitlement of
the CCG sellers to the performance related shares detailed above. On December
13, 1995 the board of directors of the Company deemed that all of the profit
targets had been achieved and additional shares and options were duly issued.
The business of CCG, carried out through its principal and wholly owned
subsidiary, Compass Computer Group Limited (Compass), is the supply of computer
hardware and software products for use
F-13
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS AND DISPOSAL OF SUBSIDIARIES (CONTINUED)
within the commercial, industrial, scientific and government market places. It
specialises in data storage systems, high end computers, networking products and
associated technical consultancy and support together with maintenance services,
all provided throughout the UK.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31
----------------------------- APRIL 30
1995 1996 1996
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Computer hardware.............................. $ 1,054,416 $ 2,823,753 $ 3,341,306
Computer software.............................. 96,698 374,341 403,097
Work in progress............................... 134,980 141,904 94,538
------------- -------------- --------------
$ 1,286,094 $ 3,339,998 $ 3,838,941
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31
---------------------------- APRIL 30
1995 1996 1996
------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles........................................ $ 264,097 $ 337,282 $ 224,901
Furniture, fixtures and equipment............... 173,943 349,309 305,911
Computer equipment.............................. 309,242 1,416,779 1,310,456
------------ -------------- --------------
747,282 2,103,370 1,841,268
Less accumulated depreciation................... (313,698) (1,197,394) (923,935)
------------ -------------- --------------
$ 433,584 $ 905,976 $ 917,333
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
7. INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE
On December 7, 1993, the Company and ActionTrac, Inc., a United States
corporation specialising in help desk products and services for the computer
software industry, formed a partnership named ActionTrac International
(ActionTrac) which is equally owned by the Company and ActionTrac, Inc.
ActionTrac holds the world rights outside the United States, Canada and Mexico
to the proprietary help desk systems, services and software of ActionTrac, Inc.
The purpose of the partnership is to expand ActionTrac, Inc.'s current North
American operations on a worldwide basis. On May 13, 1994 ActionTrac established
ActionTrac UK Limited as a wholly owned UK subsidiary.
Under the terms of the partnership agreement, the Company was required to
make a capital contribution of $500,000, which was used to establish ActionTrac
UK Limited and to develop the UK help desk operations, and ActionTrac, Inc.
contributed a ten year renewable license for the help desk software. During the
years ended January 31, 1995 and 1996, the Company made further advances to the
partnership amounting to $18,432 and $477,664, respectively. In conjunction with
its participation in the ActionTrac partnership the Company acquired 500,000
shares of restricted ActionTrac, Inc. common stock at $1 per share.
Development of the UK help desk was completed and ActionTrac UK Limited
commenced operations on May 1, 1995. The Company's share of the partnership's
operating loss for the period from May 1, 1995 to January 31, 1996 amounted to
$179,246.
F-14
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE (CONTINUED)
Due to the accelerated pace of technological change (including recent
advances in telecommunications systems and help desk software technology) and
the increasing diversity in the market for help desk services the Company
re-evaluated the net realisable value of its investment in and advances to the
ActionTrac International partnership. As a result the Company has recorded a
write down of $581,770 in the year to January 31, 1996. In the three months
ended April 30, 1996 the Company advanced $43,250 to the partnership and
accounted for $(52,173) as its 50% share of the loss of the partnership for the
three month period ended April 30, 1996.
8. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31
-------------------------- APRIL 30
1995 1996 1996
------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Investment in ActionTrac, Inc., at cost............ $ 500,000 $ 500,000 $ 500,000
Software development costs......................... 417,999 -- --
Other.............................................. 82,576 106,594 76,380
------------- ----------- ------------
$ 1,000,575 $ 606,594 $ 576,380
------------- ----------- ------------
------------- ----------- ------------
</TABLE>
Capitalized software development costs relate to the development of the
StreamZ product aimed at providing a cost-effective communication solution for
critical business applications. Due to recent advances in communication software
technology and current announcements by major software companies of new products
with enhanced security features, the Company re-evaluated the net realisable
value of its capitalized software development costs. As a result, accelerated
amortisation of $755,184 was recorded during 1996 to write off all previously
capitalized software development costs.
9. ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31
-------------------------- APRIL 30
1995 1996 1996
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Valued Added Tax................................... $ 390,472 $ 1,011,989 $ 1,029,929
Payroll taxes...................................... 266,415 523,811 350,927
Other.............................................. 4,450 23,873 25,948
----------- ------------- -------------
$ 661,337 $ 1,559,673 $ 1,406,804
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-15
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LINES OF CREDIT -- BANK
<TABLE>
<CAPTION>
JANUARY 31
-------------------------- APRIL 30
1995 1996 1996
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
The Company has a L450,000 (approximately $680,000) line of credit
(overdraft protection) with a United Kingdom bank. This facility is
due for review in May 1996. Interest is charged at 1.5% above bank
base rates on amounts under L100,000 ($150,000) and 3% above bank base
rates on amounts greater than L100,000. Bank base interest rate was 6%
at January 31, 1996. The facility was not utilised at January 31, 1996
and the Company had cash reserves within the facility. The line of
credit is collateralized by the assets of the Company................. $ 356,542 $ -- $ 562,899
The Company has a bank loan with a United Kingdom bank. The loan is
repaid at a rate of L8,075 (approximately $12,800) per month. Interest
is charged at 1.5% above the bank base rate of 6% at January 31, 1996.
The loan is collateralized by the assets of the Company and guaranteed
by a principal stockholder............................................ 250,548 107,607 70,395
The Company has a L997,000 (approximately $1,500,000) line of credit
(overdraft protection) with a United Kingdom bank which includes
L150,000 ($227,000 approximately) VAT and duty deferment on the import
of goods into the United Kingdom. Interest is charged at 2.5% above
bank base rate of 6% at January 31, 1996. The line of credit is
secured on all assets of Compass and a first charge on the life
assurance policy of a director of Compass in the sum of L750,000
($1,133,000 approximately)............................................ -- 1,375,156 1,384,697
----------- ------------- -------------
$ 607,090 $ 1,482,763 $ 2,017,991
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-16
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NOTES PAYABLE
Notes payable are as follows:
<TABLE>
<CAPTION>
JANUARY 31
---------------------------- APRIL 30
1995 1996 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a United Kingdom factoring company representing
advance payments on eligible trade receivables. The Company remains
liable for the advance payments in the event the receivables are not
collected. The Company pays the factoring company an administrative
fee of 0.22% of the receivable balance and interest at 2.25% above
bank base rates. Bank base rate was 6% at January 31, 1996.......... $ 989,147 $ 715,403 $ 321,234
Notes payable on bridge financing for the Company acquisition program
and working capital (see notes 17 and 18). The notes bear interest
at a rate of 10% per annum and are due on the first to occur of June
14, 1996 or the date of successful consummation of a public offering
of the Company's common stock....................................... 790,000 980,000 980,000
------------- ------------- -------------
$ 1,779,147 $ 1,695,403 $ 1,301,234
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
12. CONVERTIBLE DEBENTURE
In November 1992 the Company's majority stockholder converted $350,000 of
advances to a convertible debenture. The debenture was convertible into 1.6
shares of common stock and 1.6 purchase warrants (of which 62.5% will be
exercisable at $2 per share and the balance will be exercisable at $7.50 per
share) for every $5 converted. The debenture was non-interest bearing through
July 31, 1994 and was converted on July 31, 1994 into 112,000 shares and 112,000
warrants.
13. INCOME TAXES
The Company files a separate US federal income tax return for its domestic
operations and a UK income tax return for each of its foreign subsidiaries. The
United Kingdom subsidiaries compute taxes at rates in effect in that country.
Deferred federal income taxes are not provided on the undistributed earnings of
the Company's foreign subsidiaries to the extent the Company intends to
permanently reinvest such earnings in the United Kingdom.
At January 31, 1996 the Company has available for future use approximately
$380,000 of net operating loss carryforwards expiring from 2004 through 2011.
F-17
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Current:
US Federal.............................................. $ -- $ 30,000 $ --
State and local......................................... -- -- --
Foreign................................................. 5,561 148,000 205,784
--------- ----------- -----------
5,561 178,000 205,784
--------- ----------- -----------
Deferred:
US Federal.............................................. -- (30,000) --
State and local......................................... -- -- --
Foreign................................................. -- -- --
--------- ----------- -----------
-- (30,000) --
--------- ----------- -----------
Total provision for income taxes...................... $ 5,561 $ 148,000 $ 205,784
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
Income tax expense for the years ended January 31, 1994, 1995 and 1996
differed from the amounts computed by applying the UK statutory tax rate of 33%
to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Expected tax at UK rate of 33%.................................. $ 102,234 $ 166,032 $ (147,235)
Effect of write-downs of non-revenue items...................... -- -- 500,346
Use of net operating loss carryforwards......................... -- -- (156,000)
Other, net...................................................... (96,673) (18,032) 8,673
----------- ----------- ------------
Actual tax charge............................................... $ 5,561 $ 148,000 $ 205,784
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The tax effects of temporary differences and net operating loss
carryforwards that give rise to deferred tax assets and (liabilities) are as
follows at January 31:
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Net operating loss carryforwards............................................. $ 56,000 $ 144,000
Other deferred tax assets.................................................... -- 82,000
---------- ------------
Total deferred tax assets.................................................... 56,000 226,000
Valuation allowance.......................................................... (56,000) (226,000)
---------- ------------
Deferred tax assets, net..................................................... -- --
Total deferred tax (liabilities)............................................. $ -- $ --
---------- ------------
---------- ------------
</TABLE>
Due to the uncertainty surrounding the ability of the Company, primarily its
domestic operations, to generate taxable income in future periods, the Company
has recorded a valuation allowance against its otherwise recognisable deferred
tax assets.
At April 30, 1996 the Company has provided income tax of $66,061 on the
profits of its operations, (April 30, 1995 $38,096.)
F-18
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases vehicles under capital leases which expire over the next
two years. The gross amount of capital leases included in property and equipment
is as follows:
<TABLE>
<CAPTION>
JANUARY 31
------------------------ APRIL 30
1995 1996 1996
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles, gross...................................... $ 177,435 $ 214,154 $ 183,999
Less accumulated depreciation........................ (78,558) (58,678) (43,091)
----------- ----------- ------------
Net.................................................. $ 98,877 $ 155,476 $ 140,908
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
Future minimum lease payments under capital leases together with the present
value of net minimum lease payments at January 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $ 67,253
1998............................................................. 68,536
1999............................................................. 35,252
---------
Total minimum lease payments..................................... 171,041
Less amount representing interest................................ (23,435)
---------
Present value of net minimum lease payments...................... 147,606
---------
Less current portion............................................. 54,888
---------
$ 92,718
---------
---------
</TABLE>
The Company also has certain non-cancellable operating leases for premises
and various equipment and vehicles. Total rental expenses for operating leases
for the years ending January 31, 1994, 1995 and 1996 amounted to $59,000,
$347,836 and $961,455 respectively.
The principal lease commitments for premises are as follows:
-the Company's K2 subsidiary leases an office/warehouse facility in Watford,
England for $197,000 (L124,000) per year. The lease, on which there are
periodic reviews, expires August 2013.
-the Company's CI subsidiary occupies an office/warehouse facility in
Aylesbury, England for $22,000 (L14,600) expiring June 2000.
-the Company's Compass subsidiary leases an office/warehouse facility in
Newbury, England for L258,000 ($390,000) per year. The lease which expires
in September 2007 is subject to periodic reviews. The Compass subsidiary
also leases an office/warehouse in Warrington England for L12,550 ($22,000)
per year. The lease on which there are periodic reviews expires in December
2012.
F-19
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Obligations under operating leases are as follows for each of the years
ending January 31:
<TABLE>
<S> <C>
1997........................................................... $1,093,848
1998........................................................... 974,804
1999........................................................... 715,120
2000........................................................... 613,725
2001........................................................... 600,530
Thereafter..................................................... 5,736,657
----------
Total.......................................................... $9,734,684
----------
----------
</TABLE>
LITIGATION
The Company is involved in various claims and legal proceedings arising in
the ordinary course of business. In the opinion of management, the ultimate
settlement of these matters will not have a material adverse effect on the
Company's consolidated financial position or consolidated results of its
operations.
15. STOCKHOLDERS' EQUITY
RECENT STOCK TRANSACTIONS
During 1993 and 1994 the Company received $960,000 ($679,962 net of offering
costs) from the sale of 192,000 shares of common stock and 192,000 common stock
purchase warrants, in a private placement offering. Pursuant to the terms of
this offering, investors subsequently received an additional 115,200 shares of
common stock and 115,200 common stock purchase warrants without payment of
further consideration. The 192,000 common stock purchase warrants are
exercisable through December 31, 1997 at $2.00 per share. The 115,200 common
stock purchase warrants are exercisable through December 31, 1997 at $7.50 per
share. The warrants are redeemable by the Company on 30 days notice to the
warrant holders for $0.01 per warrant if the common stock closes at $9.00 per
share or more for 14 consecutive trading days.
On January 14, 1994 the Company acquired all of the outstanding shares of K2
and subsidiaries, a United Kingdom company, plus the 25% minority interest in a
75% owned subsidiary (Xanadu) of K2 in exchange for 100,000 shares of the
Company's common stock and cash consideration payable to the selling
stockholders.
On July 31, 1994 the Company's Chairman converted a $350,000 convertible
debenture into 112,000 shares and 112,000 warrants (see note 12). Of the common
stock purchase warrants, 70,000 are exercisable at $2.00 per share and 42,000
are exercisable at $7.50 per share and they all expire in December 1997.
On July 31, 1994 the current and former officers and directors of the
Company exercised 57,500 options to purchase common stock of the Company for
$38,352 (see note 16).
During 1994 the Company received $3,094,500 ($1,768,385 net of offering
costs) from the sale of 773,625 shares of common stock in a private placement
offering. In connection with this offering the Company agreed to issue 15,425
underwriter warrants, exercisable until August 1997 at $4 per share.
As of January 31, 1995 the Company's counsel, Miller & Holguin, converted
$75,000 of fees into 18,750 shares of the Company's common stock valued at $4.00
per share.
Following the acquisition of K2 Group Plc, the Company issued an additional
112,500 of the Company's common stock to the former owners of K2 Group Plc,
being partly the performance related
F-20
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCKHOLDERS' EQUITY (CONTINUED)
additional consideration payable in accordance with the terms of the acquisition
and partly consideration for the waiver of conditional repurchase rights
contained in the original acquisition agreement (see note 4).
On January 31, 1995 the Company issued 19,750 shares of common stock as part
of a bridge financing valued at $2.00 per share (see note 17). In connection
with the bridge financing the Company issued warrants convertible at any time
prior to January 31, 2000 into 197,500 shares of the common stock at $4.50 per
share.
Effective April 6, 1995 the Company acquired all of the outstanding shares
of CCG Holdings Limited (Compass) in exchange for 192,556 shares of the
Company's common stock and cash consideration payable to the selling
stockholders.
During May 1995 the Company issued 25,750 shares of common stock as part of
a bridge financing valued at $2.00 per share. In connection with this bridge
financing the Company issued warrants convertible at any time from September
1996 to June 2000 into 257,500 shares of common stock at $4.50 per share (see
note 17).
During 1995 the Company received $1,166,074 ($665,353 net of offering costs)
from the sale of 262,144 shares of common stock in private placement offerings.
In connection with these placements the Company issued warrants convertible at
any time prior to May 2000 into 150,457 shares of common stock at $6.50 per
share and futher warrants convertible between October 1996 and October 2001 into
100,000 shares of common stock at $7.50 a share.
In November 1995, the Company's Counsel, Miller & Holguin, converted $60,000
of fees into 13,333 shares of the Company's common stock valued at $4.50 per
share and were issued with warrants convertible at any time from November 1996
to November 2001 into 13,333 shares of common stock at $7.50 a share.
The number of warrants outstanding are summarised as follows at January 31:
<TABLE>
<CAPTION>
1995 1996
------------------ -----------------
NUMBER OF SHARES OF COMMON STOCK
DATE CONVERTIBLE CONVERSION PRICE TO BE ISSUED ON CONVERSION
<S> <C> <C> <C>
Prior to December 31, 1997................... $ 2.00 487,000 487,000
Prior to December 31, 1997................... 7.50 157,200 157,200
Prior to August 9, 1997...................... 4.00 15,425 15,425
Prior to January 31, 2000.................... 4.50 197,500 197,500
September 1996 to June 2000.................. 4.50 -- 257,500
Prior to May 2000............................ 6.50 -- 150,457
October 1996 to October 2001................. 7.50 -- 113,333
</TABLE>
16. STOCK OPTIONS
Pursuant to a non-qualified plan approved by the Board of Directors in 1989,
all employees of the Company may be granted options to purchase common stock of
the Company at a price not less than the fair market value on the date of grant.
The term of the option shall be no longer than five years from the date the
option is granted. The Company has reserved 75,000 of the authorised but
unissued shares of common stock for issuance upon exercise of the options.
Pursuant to the above plan 57,500 options were granted as of July 27, 1989 to
current and former officers and directors of the Company. The options were
exercised in July 1994 for $38,352.
F-21
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. STOCK OPTIONS (CONTINUED)
In September and November 1994 the Company, through another stock option
plan, has issued 1,260,875 options to management, employees and consultants to
purchase common stock at an exercise price of $4.00 per share. These options are
exercisable through periods ending September and November 1999.
In August and November 1995 the Company through another stock option plan
has issued 725,463 options to management, employees and consultants to purchase
common stock at an exercise price of $5.00 per share. These options are
exercisable through August and November 2000.
In August 1995, options to purchase 24,000 shares of common stock at a price
of $4.40 per share (expiring August 2000) were issued to a consultant pursuant
to a contractual obligation.
On May 20, 1996 the Company's Board of Directors approved The 1996 Equity
Incentive Plan which is subject to approval by the Company's stockholders. The
plan provides for grants of stock options to certain nonexecutive directors,
officers, employees, and independent consultants.
17. BRIDGE FINANCING
The 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 equity placement completed in May, 1995 in which gross proceeds of
approximately $630,000 were raised. This bridge loan, plus interest, fell due on
May 31, 1995. Some of the balance of the May, 1995 placement proceeds were
utilized to repay certain participants in the January, 1995 bridge loan, while
the other participants either converted their bridge loan into equity as offered
in the private equity placement or, in the case of the holders of approximately
$530,000 of the January, 1995 bridge loan amount, chose to extend their
participation into a new bridge loan of $1,030,000 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 general working capital for the
Company. This bridge loan, plus interest, was originally due on December 14,
1995. $50,000 of this amount was repaid, with the balance extended to the first
to occur of June 14, 1996 or the completion of a public offering of the
Company's Common Stock (see notes 11 and 15).
18. RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the
notes to the consolidated financial statements, the following related party
transactions have taken place.
CONTROL OF THE COMPANY
Principal ownership and control of the Company rests with the Chairman of
the Board and Chief Executive Officer.
RECEIVABLE-RELATED PARTY
As of January 31, 1995 and 1996 the Company is owed $634,905 and $644,356
respectively by a company controlled by a stockholder. The receivable is
non-interest bearing, due in 1996 and guaranteed by another stockholder (see
Note 4).
STOCKHOLDERS ADVANCES
As of January 31, 1995 and 1996 the Company's majority stockholders were
owed $619,672 and $391,842 respectively, in non-interest, unsecured advances,
due on demand, subordinated to the collection of a receivable from a company
controlled by a stockholder (see Note 4).
F-22
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RELATED PARTY TRANSACTIONS (CONTINUED)
ACCOUNTING SERVICES
During the periods ended January 31, 1994, 1995, 1996 the Company
compensated one of its officers/stockholders for services in the amount of
approximately $14,600, $19,472 and $29,818 respectively. At January 31, 1995 and
1996, $9,032 and $0 respectively, was owed to this related party.
OFFICE SPACE
The Company rents office space in Denver, Colorado provided by an
officer/stockholder of the Company at $500 per month. The lease is on a
month-to-month basis.
PRIVATE PLACEMENT COSTS
During the years ended January 31, 1995 and 1996 the Company's
Chairman/Chief Executive Officer paid offering costs and costs related to the
ActionTrac partnership on behalf of the Company of $180,000 and $0 respectively.
As of January 31, 1995 and 1996 these amounts have been included in stockholder
advances.
BRIDGE LOANS
A relative of the Company's Chairman participated in the bridge financing
arrangements described in note 17 and as of January 31, 1995 and 1996 was owed
$480,000 and $980,000, respectively. In addition, the relative received a total
of 36,500 shares of Common Stock and warrants representing 365,000 shares of
Common Stock in connection with the bridge loan arrangements of January and June
1995.
OTHER
Prior to his appointment as a non-executive director of the Company, Mr.
A.K. Ross purchased 15,000 shares of the Company's Common Stock and warrants to
purchase 15,000 shares for total consideration of $66,000 in the Company's May,
1995 private placement of securities. In June, 1995, Mr. Ross loaned $50,000 to
the Company, in consideration of which the Company issued to Mr. Ross 1,250
shares of Common Stock and warrants to purchase 12,500 shares. The $50,000 loan
has been repaid to Mr. Ross, with interest.
In April 1996 Mr. J. Jervis the Managing Director of Compass, exercised his
options to purchase 53,639 shares of Common Stock at the exercise price of $0.01
(see note 4).
19. PENSION PLAN
The Company sponsors, through its 4Front Group subsidiary, a money purchase
pension plan (voluntary) covering its Chairman/Chief Executive Officer and Chief
Operating Officer. The Company makes periodic contributions of approximately
$18,000 (L12,000) per year under the plan, although no contribution was made in
the year ended January 31, 1996. The Company through its Compass, K2 and CI
subsidiaries also sponsor money purchase pension plans (voluntary) covering
certain directors and employees. There are no accrued pension contributions at
January 31, 1995 and 1996 under any plan.
F-23
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. FOREIGN OPERATIONS
Included in the accompanying consolidated financial statements are the
following amounts for the United Kingdom operations at:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------- APRIL 30,
1995 1996 1996
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash.................................................... $ 1,099,477 $ 1,389,030 $ 561,384
Accounts receivable..................................... 3,371,138 7,533,188 7,921,124
Inventories............................................. 1,286,094 3,339,998 3,838,941
Deposits................................................ 61,783 37,250 34,164
Other current assets.................................... 327,305 620,469 549,056
Income taxes receivable................................. -- 160,166 159,064
Property and equipment, net............................. 433,584 905,976 917,333
Receivable, related party............................... 634,905 644,356 644,356
Other assets............................................ 500,575 106,594 76,380
------------- -------------- --------------
$ 7,714,861 $ 14,737,027 $ 14,701,802
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED JANUARY 31, APRIL 30
1994 1995 1996 -----------------------------
------------- -------------- -------------- 1995 1996
------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 2,836,539 $ 11,240,081 $ 32,248,697 $ 4,644,935 $ 10,550,238
Cost of revenues........ 1,281,453 6,814,383 20,807,858 2,798,776 7,279,141
Write down of software
development costs...... -- -- 755,184 -- --
Expenses................ 1,225,888 4,021,652 10,262,447 1,528,456 2,720,925
Income taxes............ 5,561 148,000 205,784 38,096 66,061
------------- -------------- -------------- ------------- --------------
Net income.............. $ 323,637 $ 256,046 $ 217,424 $ 279,607 $ 484,111
------------- -------------- -------------- ------------- --------------
------------- -------------- -------------- ------------- --------------
</TABLE>
During the year ended January 31, 1994, two customers accounted for 12% and
10% of total revenues.
During the year ended January 31, 1995 and 1996 no customers accounted for
10% or more of total revenues.
F-24
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------
1994 1995 1996
----------- ----------- ----------- THREE MONTHS
ENDED
APRIL 30
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Stock issued to acquire K2 Group............................ $ 400,000 $ 225,000 $ -- $ --
Debt issued to acquire K2 Group............................. 298,000 -- -- --
----------- ----------- ----------- ------------
Total consideration issued to acquire K2 Group.............. $ 698,000 $ 225,000 $ -- $ --
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Deferred offering costs financed by stockholder advances.... $ 14,136 $ -- $ -- $ --
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Convertible debenture exchanged for stock................... $ -- $ 350,000 $ -- $ --
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Stock issued to bridge financing holders.................... $ -- $ 39,500 $ 51,500 $ --
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Purchase of equipment financed with capital lease
obligations................................................ $ -- $ 120,154 $ 72,294 $ --
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Stock issued to acquire Compass............................. $ -- $ -- $ 385,112 $ --
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
The Company.................................... 12
Use of Proceeds................................ 13
Price Range of Common Stock and Dividend
Policy........................................ 14
Capitalization................................. 15
Dilution....................................... 15
Selected Consolidated Financial Information.... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 26
Management..................................... 33
Certain Transactions........................... 39
Principal Stockholders......................... 41
Description of Securities...................... 43
Shares Eligible for Future Sale................ 43
Underwriting................................... 46
Legal Matters.................................. 47
Experts........................................ 47
Available Information.......................... 48
Index to Financial Statements.................. F-1
</TABLE>
3,000,000 SHARES
COMMON STOCK
[LOGO]
4FRONT SOFTWARE
INTERNATIONAL, INC.
---------------------
PROSPECTUS
---------------------
KAUFMAN BROS., L.P.
FIRST ALBANY CORPORATION
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses in connection with the distribution
described in this Registration Statement will be as shown below. All expenses
incurred with respect to the distribution will be paid by the Company. See "Plan
of Distribution."
<TABLE>
<S> <C>
SEC registration fee............................................ $ 6,841
NASD filing fee................................................. 2,484
Nasdaq NMS listing fee.......................................... 28,294
Printing expenses............................................... 110,000*
Accounting fees and expenses.................................... 180,000*
Legal fees and expenses......................................... 150,000*
Underwriters' expenses.......................................... 300,000*
"Blue Sky" fees and expenses.................................... 20,000*
Transfer agent and registrar fees............................... 40,000*
Miscellaneous................................................... 22,381
----------
Total....................................................... $ 860,000*
----------
----------
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Colorado Business Corporation Act (the "CBCA") empowers a Colorado
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, and whether formal or
informal, by reason of the fact that such person is or was a director, officer,
employee or agent of such corporation. A corporation may, in advance of the
final disposition of any civil, criminal, administrative or investigative
action, suit or proceeding, pay the expenses (including attorneys' fees)
incurred by any officer, director, employee or agent in defending such action,
provided that the party to be indemnified undertake to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation. A corporation may indemnify such person against reasonable expenses
(including attorneys' fees), judgements, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
A Colorado corporation may indemnify officers, directors, employees and
agents in an action by or in the right of the corporation to procure a judgement
in its favor under the same conditions, except that no indemnification is
permitted without judicial approval if the party to be indemnified is adjudged
to be liable to the corporation. A Colorado corporation may not indemnify
officers, directors, employees and agents in connection with any other
proceeding charging that such person derived an improper personal benefit,
whether or not involving action in an official capacity, in which proceeding
such person was adjudged liable on the basis that such person derived an
improper personal benefit.
Where an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action to which such person was a party because
of such person's status as an officer, director, employee or agent, the
corporation must indemnify him against the reasonable expenses incurred by such
person in connection with such proceeding.
II-1
<PAGE>
The CBCA provides that no director or officer shall be personally liable for
any injury to person or property arising out of a tort committed by an employee
unless such director or officer was personally involved in the situation giving
rise to the litigation or unless such director or officer committed a criminal
offense in connection with such situation.
The CBCA provides that the Company may purchase and maintain insurance on
behalf of it directors, officers, employees, fiduciaries or agents against any
liabilities asserted against such persons arising out of such capacities.
Article XIV of the Company's Bylaws provide for mandatory indemnification of
directors, officers and those serving at the request of the Company as
directors, officers, employees, or agents of the Company to the maximum extent
permitted by the CBCA.
Article XIII of the Company's Bylaws provides that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) acts involving
unlawful distributions, or (iv) for any transaction from which the director
derived an improper personal benefit. However, the CBCA provides authority for
such provisions only if so provided in the Company's Articles of Incorporation,
and such provisions do not so appear in the Company's Articles of Incorporation.
In 1987, the Company entered into an indemnification agreement with Craig
Kleinman in order to create a direct contractual obligation on the part of the
Company to reimburse Mr. Kleinman against any and all expenses and liabilities
incurred as a result of Mr. Kleinman's service as an officer and director of the
Company to the full extent provided by law and by the Company's Articles of
Incorporation and Bylaws (except in the case of fraud or the receipt by the
indemnified party of personal profit or advantage to which he was not legally
entitled).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company believes that the sales of securities in the transactions
described below were all either exempt from, or not subject to, the registration
requirements of the Act:
<TABLE>
<CAPTION>
DATE TITLE AMOUNT CONSIDERATION PURCHASER(S)
- --------- ----------------------- ----------------------- ----------------------- -----------------------------
<C> <S> <C> <C> <C>
4/93 Common Stock and 307,200 and shares $960,000 Private Investors
Warrants to purchase 307,200 warrants(1)
Common Stock
3/94 Common Stock 162,500 shares(1) Shares of K2 Shareholders of K2, including
Kenneth Newell, Terence
Burt, Peter Wellings,
Christopher Hervey and Simon
Andrews
7/94 Common Stock 57,500 shares(1) $38,500 (exercise of Anil Doshi, Mark Ellis Craig
options) Kleinman, Ken Morrill,
Adrian Alexander
7/94 Common Stock and 112,000 shares and Conversion of debenture Anil Doshi
warrants to purchase 112,000 warrants(1)
Common Stock
8/94 Common Stock 773,625 shares(1) $3,094,500 Private Investors
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DATE TITLE AMOUNT CONSIDERATION PURCHASER(S)
- --------- ----------------------- ----------------------- ----------------------- -----------------------------
8/94 Warrants to purchase 15,425 warrants(1) Placement fee La Jolla Securities
Common Stock
<C> <S> <C> <C> <C>
9/94 Common Stock and 12,500 shares and 9,375 issuance in lieu of Miller & Holguin
options to purchase options(1) payment of accrued
Common Stock legal fees
9/94- Options to purchase 1,251,500 options(1) Services Directors, Employees and
11/94 Common Stock Consultants
10/94 Common Stock 50,000 shares(1) Waiver of Stock Shareholders of K2, including
repurchase rights Kenneth Newell, Terence
Burt, Peter Wellings,
Christopher Hervey and Simon
Andrews
1/95 Common Stock and 19,750 shares and credit Private Investors
Warrants to purchase 197,500 warrants(1)
Common Stock
3/95 Common Stock 6,250 shares(1) issuance in lieu of Miller & Holguin
payment of accrued
legal fees
5/95 Common Stock and 83,720 shares and Shares of Compass Shareholders of Compass
Options to purchase 23,680 options(2) Computer Group Computer Group, including
Common Stock Richard Ian Sharpe and Joel
Jervis
5/95 Common Stock and 22,657 shares and $102,000 Private Investors
Warrants to purchase 22,657 warrants(1)
Common Stock
5/95 Common Stock and 121,300 shares and $545,000 Private Investors
Warrants to purchase 121,300 warrants(2)
Common Stock
5/95 Warrants to purchase 6,500 warrants(1) Services Consultants
Common Stock
5/95 Common Stock and 25,750 shares and extension of credit and Private Investors
Warrants to purchase 257,500 warrants(1) modification of credit
Common Stock terms
8/95 Options to purchase 80,000 options(1) Services Directors, Employees and
Common Stock Consultants
8/95- Options to purchase 645,463 options(2) Services Directors, Employees and
11/95 Common Stock Consultants
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
DATE TITLE AMOUNT CONSIDERATION PURCHASER(S)
- --------- ----------------------- ----------------------- ----------------------- -----------------------------
9/95- Common Stock and 20,000 shares, 24,000 Services Consultants
11/95 options to purchase options(1)
Common Stock
<C> <S> <C> <C> <C>
11/95 Common Stock and 100,000 shares and $450,000 Private Investor
Warrants to purchase 100,000 warrants(1)
Common Stock
11/95 Common Stock and 13,333 shares and issuance in lieu of Miller & Holguin
warrants to purchase 13,333 warrants(1) payment of accrued
Common Stock legal fees
12/95 Common Stock and 108,836 shares and Shares of Compass Shareholders of Compass
Options to purchase 29,959 options(2) Computer Group Computer Group, including
Common Stock (additional earn- out Richard Ian Sharpe and Joel
consideration) Jervis
4/96 Common Stock 53,639 shares(2) $536 (exercise of Joel Jervis
options)
</TABLE>
- ------------------------
(1) The Company believes that the transactions in which these securities were
sold were exempt from registration under the Act by virtue of Section 4(2)
thereof as transactions not involving any public offerings. In each case,
the investor confirmed to the Company his investment intent, and the Company
had reason to believe that the investor qualified as an accredited investor
for purposes of the Act.
(2) The Company believes that the transactions in which these securities were
sold were not subject to the registration requirements of the Act by virtue
of Rule 903 of Regulation S promulgated under the Act. In each case, the
offers and sales were made in offshore transactions, without any directed
selling efforts, to investors which certified that they were not U.S.
persons.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following exhibits are filed or incorporated by reference as part of
this Registration Statement.
<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.(11)
3.1 -- Articles of Incorporation of the Company, as amended to date.(5)
3.2 -- Bylaws of the Company, as amended to date.(5)
3.3 -- Stock option plan dated July 27, 1989.(2)
4.1 -- Specimen Form of Stock Certificate for the Company's registered stock.(5)
4.2 -- Warrant Agreement by and between the Company and American Securities Transfer,
Inc. dated February 10, 1993, and Form of Warrant.(5)
4.4 -- 1995 Amendment to Warrant Agreement by and between the Company and American
Securities Transfer, Inc. dated February 10, 1993, and Form of Warrant.(6)
5.1 -- Opinion of Miller & Holguin as to certain securities law matters(12)
10.1 -- Indemnity Agreement between the Company and Craig Kleinman dated October 27,
1987.(1)
10.2 -- Schedule of Indemnity Agreements substantially identical to Exhibit 10.6.(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <C> <S>
10.3 -- Share Sale Agreement Relating to K-2 Group Plc dated March 7, 1994 by and among
Lex Nominees International Limited and ORS, Peter Leith Wellings and 4Front
Software International, Inc.(4)
10.4 -- Form of Securities Purchase Agreement dated as of March 7, 1994, between each
shareholder and 4Front Software International, Inc.(4)
10.5 -- Form of Option to Purchase Shares in 4Front Software International, Inc. dated
as of March 7, 1994 by and among 4Front Software International, Inc. and
shareholders of K-2 Group.(4)
10.6 -- Agreement of Partnership of ActionTrac International, a California general
partnership, dated as of December 7, 1993.(5)
10.7 -- Option Agreement dated as of December 8, 1993 between the Company and
ActionTrac, Inc., as amended.(5)
10.8 -- License and Security Agreement dated as of December 7, 1993 between ActionTrac
International and ActionTrac, Inc.(5)
10.9 -- Limited Territory License and Security Agreement dated as of December 7, 1993
between the Company and ActionTrac, Inc.(5)
10.10 -- Loan agreement with Midland Bank plc dated June 3, 1993.(5)
10.11 -- Form of Executive Pension Plan for the benefit of Anil Doshi.(5)
10.12 -- Form of Executive Pension Plan for the benefit of Mark Ellis.(5)
10.13 -- Form of Executive Officer Service Agreement (the Company).(5)
10.14 -- Agreement between the Company and La Jolla Securities Corporation dated
December 15, 1993.(5)
10.15 -- Midland Bank Loan Agreement with K2 dated February 11, 1994.(5)
10.16 -- Midland Bank Overdraft and Forward Exchange Agreement with K2, Xanadu and Mitre
dated February 14, 1994.(5)
10.17 -- Lease Agreement dated September 7, 1988 for lease by K2 of premises at Unit 4,
Colonial Business Park, Colonial Way, Watford England, as amended.(5)
10.18 -- Lease Agreement dated April 28, 1992 for lease by K2 of premises at Units 5 and
6, Colonial Business Park, Colonial Way, Watford England.(5)
10.19 -- Form of Executive Officer Service Agreement (K2).(5)
10.20 -- K2 Systems Group Pension Scheme effective March 6, 1991.(5)
10.21 -- Form of Executive Pension Plan for the benefit of Ken Newell.(5)
10.22 -- Form of Amendment dated October 21, 1994 to Option to Purchase Shares in 4Front
Software International, Inc. dated as of March 7, 1994 by and among 4Front
Software International, Inc. and shareholders of K-2 Group.(6)
10.23 -- Facility Letter dated October 3, 1994 from Midland Bank Plc to K2 Group Plc.(6)
10.24 -- Facility Letter dated April 10, 1995 from Midland Bank Plc to K2 Group Plc.(6)
10.25 -- Warrant dated August 10, 1994 in favor of La Jolla Securities Corporation.(6)
10.26 -- Form of November 1, 1994 Option Agreement for Employees and Consultants.(6)
10.27 -- Share Sale Agreement Relating to DesignBase Properties Limited effective
February 1, 1995 by and among 4Front Group Plc, Properties Holding Limited and
Anthony Malpas.(6)
10.28 -- Share Sale Agreement Relating to CommsWare Limited effective February 1, 1995
by and among 4Front Group Plc, Properties Holding Limited and Anthony
Malpas.(6)
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <C> <S>
10.29 -- Guarantee and Subordination Agreement dated April 24, 1995 between the Company,
Anil Doshi and Aliki Financial Corp.(6)
10.30 -- Share Sale Agreement Relating to CI Support Limited effective November 1, 1994
by and among Burnaby Investments Limited and K2 Group plc.(6)
10.31 -- Share Sale Agreement Relating to CCG Holdings Limited dated May 11, 1995 by and
among Richard Ian Sharpe & ORS and the Company.(6)
10.32 -- Option to Purchase Shares in 4Front Software International, Inc. dated as of
May 11, 1995 by and 4Front Software International, Inc. and Joel William
Jervis.(6)
10.33 -- Service Agreement dated May 11, 1995 between the Company, CCG Holdings Ltd and
Richard Ian Sharpe.(6)
10.34 -- Service Agreement dated May 11, 1995 between the Company, CCG Holdings Ltd and
Joel William Jervis.(6)
10.35 -- Lease Agreement dated September 11, 1992 for lease by Compass of premises at
Unit C, Kennetside Industrial Estate, Bone Lane, Newbury Berkshire England.(6)
10.36 -- Lease Agreement dated September 11, 1992 for lease by Compass of premises at
Unit C, Kennetside Industrial Estate, Bone Lane, Newbury Berkshire England.(6)
10.37 -- Facility Letter dated May 25, 1994 from Barclays Bank Plc to Compass Computer
Group Limited.(6)
10.38 -- Facility Letter dated April 12, 1995 from Barclays Bank Plc to Compass Computer
Group Limited.(6)
10.39 -- Form of Employment Agreement effective as of November 1, 1995 between the
Company and Anil Doshi.(7)
10.40 -- Form of Employment Agreement effective as of November 1, 1995 between the
Company and Mark Ellis.(7)
10.41 -- Form of August, 1995 Option Agreement for Employees and Consultants.(7)
10.42 -- Share Sale Amendment Agreement dated December 13, 1995 between Richard Ian
Sharpe & ORS, the Company, Joel Jervis, CCG Holdings Limited and 4Front Group
PLC.(7)
10.43 -- Put Option Agreement dated December 13, 1995 between Richard Ian Sharpe & ORS
and the Company.(7)
10.44 -- Service Agreement dated December 13, 1995 between Richard Ian Sharpe and 4Front
Group PLC.(7)
10.45 -- Amendment to Option Agreement dated December 13, 1995 between Joel Jervis and
the Company.(7)
10.46 -- Form of 1996 Equity Incentive Plan(11)
16.1 -- Letter from AJ. Robbins PC regarding change in certifying accountant.(8)
16.2 -- Letter from AJ. Robbins PC regarding change in certifying accountant.(9)
21.1 -- List of Subsidiaries.(10)
23.1 -- Consent of KPMG(11)
23.2 -- Consent of AJ. Robbins PC (11)
23.3 -- Consent of Miller & Holguin (included in Exhibit 5.1)
</TABLE>
- ------------------------
(1)Previously filed as Exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1987
II-6
<PAGE>
(2)Previously filed as Exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1989.
(3)Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1992.
(4)Previously filed as Exhibit to the Company's Report on Form 8-K dated March
7, 1994.
(5)Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1994.
(6)Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1995.
(7)Previously filed as Exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal period ended October 31, 1995.
(8)Previously filed as Exhibit to the Company's Report on Form 8-K dated
January 2, 1996.
(9)Previously filed as Exhibit to the Company's Report on Form 8-K dated
January 23, 1996.
(10)Previously filed as Exhibit to the Company's Registration Statement (file
no. 333-03594).
(11)Filed Herewith.
(12)To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Company's Consolidated Financial Statements or the
Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the provisions
described under Item 14 above, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on May 20, 1996.
4FRONT SOFTWARE INTERNATIONAL, INC.
<TABLE>
<S> <C> <C> <C>
By: /s/ ANIL DOSHI By: /s/ PHILIP MENDONCA
---------------------------------------- ----------------------------------------
Anil Doshi Philip Mendonca
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE CHIEF FINANCIAL OFFICER
OFFICER AND DIRECTOR
Date: May 20, 1996 Date: May 20, 1996
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
NAME POSITION DATE
- ------------------------------------------------------ -------------------------------- -----------------------
/s/ ANIL DOSHI
------------------------------------------- Chairman of the Board, Chief May 20, 1996
Anil Doshi Executive Officer and Director
/s/ MARK ELLIS
------------------------------------------- President, Chief Operating May 20, 1996
Mark Ellis Officer and Director
/s/ CRAIG KLEINMAN
------------------------------------------- Secretary and Director May 20, 1996
Craig Kleinman
/s/ KENNETH NEWELL
------------------------------------------- Director May 20, 1996
Kenneth Newell
/s/ ARTHUR KEITH ROSS
------------------------------------------- Director May 20, 1996
Arthur Keith Ross
/s/ BRIAN MURRAY
------------------------------------------- Director May 20, 1996
Brian Murray
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement.(11)
3.1 -- Articles of Incorporation of the Company, as amended to date.(5)
3.2 -- Bylaws of the Company, as amended to date.(5)
3.3 -- Stock option plan dated July 27, 1989.(2)
4.1 -- Specimen Form of Stock Certificate for the Company's registered stock.(5)
4.2 -- Warrant Agreement by and between the Company and American Securities Transfer, Inc. dated
February 10, 1993, and Form of Warrant.(5)
4.4 -- 1995 Amendment to Warrant Agreement by and between the Company and American Securities
Transfer, Inc. dated February 10, 1993, and Form of Warrant.(6)
5.1 -- Opinion of Miller & Holguin as to certain securities law matters(12)
10.1 -- Indemnity Agreement between the Company and Craig Kleinman dated October 27, 1987.(1)
10.2 -- Schedule of Indemnity Agreements substantially identical to Exhibit 10.6.(1)
10.3 -- Share Sale Agreement Relating to K-2 Group Plc dated March 7, 1994 by and among Lex
Nominees International Limited and ORS, Peter Leith Wellings and 4Front Software
International, Inc.(4)
10.4 -- Form of Securities Purchase Agreement dated as of March 7, 1994, between each shareholder
and 4Front Software International, Inc.(4)
10.5 -- Form of Option to Purchase Shares in 4Front Software International, Inc. dated as of March
7, 1994 by and among 4Front Software International, Inc. and shareholders of K-2 Group.(4)
10.6 -- Agreement of Partnership of ActionTrac International, a California general partnership,
dated as of December 7, 1993.(5)
10.7 -- Option Agreement dated as of December 8, 1993 between the Company and ActionTrac, Inc., as
amended.(5)
10.8 -- License and Security Agreement dated as of December 7, 1993 between ActionTrac
International and ActionTrac, Inc.(5)
10.9 -- Limited Territory License and Security Agreement dated as of December 7, 1993 between the
Company and ActionTrac, Inc.(5)
10.10 -- Loan agreement with Midland Bank plc dated June 3, 1993.(5)
10.11 -- Form of Executive Pension Plan for the benefit of Anil Doshi.(5)
10.12 -- Form of Executive Pension Plan for the benefit of Mark Ellis.(5)
10.13 -- Form of Executive Officer Service Agreement (the Company).(5)
10.14 -- Agreement between the Company and La Jolla Securities Corporation dated December 15,
1993.(5)
10.15 -- Midland Bank Loan Agreement with K2 dated February 11, 1994.(5)
10.16 -- Midland Bank Overdraft and Forward Exchange Agreement with K2, Xanadu and Mitre dated
February 14, 1994.(5)
10.17 -- Lease Agreement dated September 7, 1988 for lease by K2 of premises at Unit 4, Colonial
Business Park, Colonial Way, Watford England, as amended.(5)
10.18 -- Lease Agreement dated April 28, 1992 for lease by K2 of premises at Units 5 and 6, Colonial
Business Park, Colonial Way, Watford England.(5)
10.19 -- Form of Executive Officer Service Agreement (K2).(5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------- -----------
10.20 -- K2 Systems Group Pension Scheme effective March 6, 1991.(5)
<C> <C> <S> <C>
10.21 -- Form of Executive Pension Plan for the benefit of Ken Newell.(5)
10.22 -- Form of Amendment dated October 21, 1994 to Option to Purchase Shares in 4Front Software
International, Inc. dated as of March 7, 1994 by and among 4Front Software International,
Inc. and shareholders of K-2 Group.(6)
10.23 -- Facility Letter dated October 3, 1994 from Midland Bank Plc to K2 Group Plc.(6)
10.24 -- Facility Letter dated April 10, 1995 from Midland Bank Plc to K2 Group Plc.(6)
10.25 -- Warrant dated August 10, 1994 in favor of La Jolla Securities Corporation.(6)
10.26 -- Form of November 1, 1994 Option Agreement for Employees and Consultants.(6)
10.27 -- Share Sale Agreement Relating to DesignBase Properties Limited effective February 1, 1995
by and among 4Front Group Plc, Properties Holding Limited and Anthony Malpas.(6)
10.28 -- Share Sale Agreement Relating to CommsWare Limited effective February 1, 1995 by and among
4Front Group Plc, Properties Holding Limited and Anthony Malpas.(6)
10.29 -- Guarantee and Subordination Agreement dated April 24, 1995 between the Company, Anil Doshi
and Aliki Financial Corp.(6)
10.30 -- Share Sale Agreement Relating to CI Support Limited effective November 1, 1994 by and among
Burnaby Investments Limited and K2 Group plc.(6)
10.31 -- Share Sale Agreement Relating to CCG Holdings Limited dated May 11, 1995 by and among
Richard Ian Sharpe & ORS and the Company.(6)
10.32 -- Option to Purchase Shares in 4Front Software International, Inc. dated as of May 11, 1995
by and 4Front Software International, Inc. and Joel William Jervis.(6)
10.33 -- Service Agreement dated May 11, 1995 between the Company, CCG Holdings Ltd and Richard Ian
Sharpe.(6)
10.34 -- Service Agreement dated May 11, 1995 between the Company, CCG Holdings Ltd and Joel William
Jervis.(6)
10.35 -- Lease Agreement dated September 11, 1992 for lease by Compass of premises at Unit C,
Kennetside Industrial Estate, Bone Lane, Newbury Berkshire England.(6)
10.36 -- Lease Agreement dated September 11, 1992 for lease by Compass of premises at Unit C,
Kennetside Industrial Estate, Bone Lane, Newbury Berkshire England.(6)
10.37 -- Facility Letter dated May 25, 1994 from Barclays Bank Plc to Compass Computer Group
Limited.(6)
10.38 -- Facility Letter dated April 12, 1995 from Barclays Bank Plc to Compass Computer Group
Limited.(6)
10.39 -- Form of Employment Agreement effective as of November 1, 1995 between the Company and Anil
Doshi.(7)
10.40 -- Form of Employment Agreement effective as of November 1, 1995 between the Company and Mark
Ellis.(7)
10.41 -- Form of August, 1995 Option Agreement for Employees and Consultants.(7)
10.42 -- Share Sale Amendment Agreement dated December 13, 1995 between Richard Ian Sharpe & ORS,
the Company, Joel Jervis, CCG Holdings Limited and 4Front Group PLC.(7)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------- -----------
10.43 -- Put Option Agreement dated December 13, 1995 between Richard Ian Sharpe & ORS and the
Company.(7)
<C> <C> <S> <C>
10.44 -- Service Agreement dated December 13, 1995 between Richard Ian Sharpe and 4Front Group
PLC.(7)
10.45 -- Amendment to Option Agreement dated December 13, 1995 between Joel Jervis and the
Company.(7)
10.46 -- Form of 1996 Equity Incentive Plan (11)
16.1 -- Letter from AJ. Robbins PC regarding change in certifying accountant.(8)
16.2 -- Letter from AJ. Robbins PC regarding change in certifying accountant.(9)
21.1 -- List of Subsidiaries.(10)
23.1 -- Consent of KPMG(11)
23.2 -- Consent of AJ. Robbins PC (11)
23.3 -- Consent of Miller & Holguin (included in Exhibit 5.1)
</TABLE>
- ------------------------
(1)Previously filed as Exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1987
(2)Previously filed as Exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1989.
(3)Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1992.
(4)Previously filed as Exhibit to the Company's Report on Form 8-K dated March
7, 1994.
(5)Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1994.
(6)Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1995.
(7)Previously filed as Exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal period ended October 31, 1995.
(8)Previously filed as Exhibit to the Company's Report on Form 8-K dated
January 2, 1996.
(9)Previously filed as Exhibit to the Company's Report on Form 8-K dated
January 23, 1996.
(10)Previously filed as an Exhibit to the Company's Registration Statement (file
no. 333-03594).
(11)Filed herewith.
(12)To be filed by amendment.
<PAGE>
3,000,000 Shares
4Front Software International, Inc.
Common Stock
UNDERWRITING AGREEMENT
____________, 1996
KAUFMAN BROS., L.P.
FIRST ALBANY CORPORATION
As Representatives of the several Underwriters
c/o Kaufman Bros., L.P.
800 Third Avenue
New York, New York 10022
Ladies and Gentlemen:
4Front Software International, Inc., a Colorado corporation (the
"Company"), proposes to issue and sell 3,000,000 shares (the "Firm Shares") of
Common Stock of the Company, no par value (the "Common Stock"), to you and to
the several other Underwriters (as defined below). In addition, the Company has
agreed to grant to you and the other Underwriters an option (the "Option") to
purchase up to an additional 450,000 shares of Common Stock (the "Option
Shares") on the terms and for the purposes set forth in Section 1(b) below. The
Firm Shares and the Option Shares are referred to collectively herein as the
"Shares."
It is understood that, subject to the conditions hereinafter stated, the
Firm Shares will be sold to you and the several other Underwriters named in
Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as
representative (the "Representatives").
The Company confirms as follows its agreement with the Representatives and
the several other Underwriters as follows:
1. AGREEMENT TO SELL AND PURCHASE
A. On the basis of the representations, warranties and agreements herein
contained and subject to all the terms and conditions of this Agreement, (i) the
Company agrees to issue and sell the Firm Shares to the several Underwriters and
(ii) each of the Underwriters, severally and not jointly, agrees to purchase
from the Company the respective number of Firm Shares set forth opposite that
Underwriter's name in Schedule I hereto, at the purchase price of $_____ for
each Firm Share.
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* Plus an option to purchase up to an additional 450,000 shares to cover
over-allotments.
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b. Subject to all the terms and conditions of this Agreement, the Company
grants the Option to the several Underwriters to purchase, severally and not
jointly, up to the maximum number of Option Shares at the same price per share
as the Underwriters shall pay for the Firm Shares. The Option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the Underwriters
and may be exercised in whole or in part at any time (but not more than once) on
or before the 30th day after the date of this Agreement upon written or
telegraphic notice (the "Option Shares Notice") by the Representatives to the
Company no later than 12:00 noon, New York City time, at least two and no more
than three business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date"), setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company will sell to the Underwriters the number of
Option Shares set forth in the Option Shares Notice, and each Underwriter will
purchase such percentage of the Option Shares as is equal to the percentage of
the Firm Shares that such Underwriter is purchasing, as adjusted by the
Representatives in such manner as they deems advisable to avoid fractional
shares.
c. Subject to the terms and conditions herein set forth, on the Closing
Date (as defined below), the Company shall issue to Kaufman Bros., L.P. and
First Albany Corporation in their individual capacity and not as
Representatives of the several Underwriters, warrants in the form attached
hereto as Exhibit A to purchase 300,000 shares of Common Stock at an exercise
price equal to 130% of the per Firm Share.
2. DELIVERY AND PAYMENT
Delivery of the Firm Shares shall be made to the Representatives for the
accounts of the Underwriters against payment of the purchase price by certified
or official bank check payable in New York Clearing House (next-day) funds to
the order of the Company at the offices of Fulbright & Jaworski L.L.P., 666
Fifth Avenue, New York, New York 10103, at 10:00 a.m., New York Time, on the
third (or, if the Firm Shares are priced, as contemplated by Rule 15c6-1(c)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
after 4:30 p.m. New York Time), the fourth full business day following the
commencement of the offering contemplated by this Agreement, or at such time on
such other date, not later than five business days after the date of this
Agreement, as may be agreed upon by the Company and the Representatives (such
date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as the Representatives shall
request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the
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checking and packaging of certificates for the Shares, the Company agrees to
make such certificates available for inspection at least 24 hours prior to the
Closing Date or the Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Shares by the Company to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
federal and state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the original issuance or the sale
to such Underwriter of the Shares sold by such entity.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents, warrants and covenants to each Underwriter that:
a. A registration statement (Registration No. 333-03594) on Form S-1
relating to the Shares, including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A of the Rules and
Regulations included at any time as part of the registration statement. Copies
of such registration statement, amendments and exhibits thereto and of each
related preliminary prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If the registration statement has become
effective, a final prospectus containing information permitted to be omitted at
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the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed promptly by the Company with the Commission in accordance with Rule 424(b)
of the Rules and Regulations. The term "Registration Statement" means the
registration statement as amended at the time it becomes or became effective
(the "Effective Date"), including financial statements and all exhibits and any
information deemed to be included by Rule 430A. The term "Prospectus" means (i)
if the Company relies on Rule 434 of the Rules and Regulations, the Term Sheet
that is first filed pursuant to Rule 424(b)(7) under the Act, together with the
preliminary prospectus identified therein that such Term Sheet supplements, (ii)
if the Company does not rely on Rule 434 of the Rules and Regulations, the
prospectus first filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations; or (iii) if the Company does not rely on Rule 434 of the Rules
and Regulations and if no prospectus is required to be filed pursuant to Rule
424(b) of the Rules and Regulations, the prospectus included in the Registration
Statement. The term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 of the Rules and Regulations.
b. The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. When any Preliminary Prospectus was filed
with the Commission it complied in all material respects with the applicable
requirements of the Act and the Rules and Regulations and did not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. On the
Effective Date, the date the Term Sheet, if utilized, is first filed with the
Commission pursuant to Rule 424(b), the date the Prospectus is first filed with
the Commission pursuant to Rule 424(b) (if required), at all times subsequent to
and including the Closing Date and, if later, the Option Closing Date and when
any post-effective amendment to the Registration Statement becomes effective or
any amendment or supplement to the Prospectus is filed with the Commission, the
Registration Statement and the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment or supplement
thereto), including the financial statements included in the Prospectus, did and
will comply with all applicable provisions of the Act and the Rules and
Regulations and will contain all statements required to be stated therein in
accordance with the Act and the Rules and Regulations. On the Effective Date
and when any post-effective amendment to the Registration Statement becomes
effective, no part of the Registration Statement, the Prospectus or any such
amendment or supplement did or will contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading. At the Effective Date,
the date the Term Sheet, the Prospectus or any amendment or supplement to the
Prospectus is filed with the Commission and at the Closing Date and, if later,
the Option Closing Date, the Prospectus did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on and
in conformity with information relating to any Underwriter furnished in writing
to the Company by the
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Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges
that the statements set forth in the first two paragraphs under the heading
"Underwriting" in the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement.
c. The Company is, and each of K2 Group plc, Xanadu Systems Ltd, CI
Support Limited, Compass Computer Group and ActionTrac International
(collectively, the "Subsidiaries") are, and at the Closing Date and, if later,
the Option Closing Date will be, corporations (or, in the case of ActionTrac
International, a partnership) duly organized, validly existing and in good
standing under the laws of their jurisdiction of organization. The Company has,
and the Subsidiaries have and at the Closing Date and, if later, the Option
Closing Date will have, full power and authority to conduct all the activities
conducted by them, to own or lease all the assets owned by or leased by them and
to conduct their business as described in the Registration Statement and the
Prospectus. The Company is, and the Subsidiaries are, and at the Closing Date
and, if later, the Option Closing Date they will be, duly licensed or qualified
to do business and in good standing as a foreign corporations (or in the case of
ActionTrac International, a partnership) in all jurisdictions in which the
nature of the activities conducted by them or the character of the assets owned
or leased by them makes such license or qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not
materially and adversely affect the Company and its Subsidiaries, taken as a
whole, their business, properties, business prospects, condition (financial or
other) or results of operations. The Company and the Subsidiaries (i) do not
own, and at the Closing Date and, if later, the Option Closing Date will not
own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation (except for the Subsidiaries) or
have any equity interest in any corporation, firm, partnership, joint venture,
association or other entity and (ii) are not, and at the Closing Date and, if
later, the Option Closing Date will not be, engaged in any discussions or a
party to any agreement or understanding, written or oral, regarding the
acquisition of an interest in any corporation, firm, partnership, joint venture,
association or other entity where such discussions, agreements or understandings
would require amendment to the Registration Statement pursuant to applicable
securities laws. Complete and correct copies of the articles of incorporation,
the bylaws or other organizational documents of the Company and the Subsidiaries
and all amendments thereto have been delivered to the Representatives, and no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date or, if later, the Option Closing Date.
d. The Company has authorized, issued and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus. All of the
outstanding shares of capital stock of the Company [(including the Option
Shares)] have been duly authorized and validly issued, are fully paid and
nonassessable, were issued in compliance with all applicable state and federal
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or
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purchase securities, and conform to the description thereof contained in the
Prospectus; the Shares have been duly authorized and when issued and paid for as
contemplated herein will be validly issued, fully paid and nonassessable and the
Shares will conform to the description thereof contained in the Prospectus; the
shares of Common Stock issuable by the Company upon the exercise of the
Representatives Warrants have been duly authorized, and, when issued and paid
for in accordance with the terms of the Representatives Warrants, will be
validly issued, fully paid and nonassessable; and no preemptive rights or other
rights to subscribe for or purchase exist with respect to the issuance and sale
of the Shares or with respect to the Common Stock issuable upon the exercise of
the Representatives Warrants. The Company has reserved and will keep available
for the exercise of the Representatives Warrants such number of authorized but
unissued shares of Common Stock to permit the exercise in full of the
Representatives Warrants. The description of the capital stock of the Company
in the Registration Statement and the Prospectus is, and at the Closing Date
and, if later, the Option Closing Date will be, complete and accurate in all
respects. Except as set forth in the Prospectus, the Company does not have
outstanding, and at the Closing Date and, if later, the Option Closing Date will
not have outstanding, any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Common Stock, or any
such warrants, convertible securities or obligations. The description of the
Company's stock option and other stock plans or arrangements, and the options or
other rights granted or exercised thereunder, set forth in the Prospectus,
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights. No further approval or
authority of the shareholders or the Board of Directors of the Company will be
required for the issuance and sale of the Shares by the Company as contemplated
herein. The Company owns of record and beneficially, and there are no
preemptive rights with respect to, the capital stock or partnership interests of
the Subsidiaries and there are no other owners of any securities of any kind
issued by or related to the Subsidiaries except that ActionTrac Inc. owns a 50%
limited partnership interest in ActionTrac International.
e. The financial statements and schedules included in the Registration
Statement or the Prospectus present fairly the financial condition of the
Company and the Subsidiaries as of the respective dates thereof and the results
of operations, changes in shareholders' equity and cash flows of the Company for
the respective periods covered thereby, all in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
entire period involved. No other financial statements or schedules of the
Company are required by the Act or the Rules and Regulations to be included in
the Registration Statement or the Prospectus. Each of AJ. Robbins PC and KPMG,
who have reported on such financial statements and schedules, are independent
accountants with respect to the Company as required by the Act and the Rules and
Regulations. The summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the financial statements presented
therein.
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f. Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus and prior to the Closing Date and,
if later, the Option Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company (other than in
connection with the exercise of outstanding options to purchase the Company's
Common Stock granted pursuant to the Company's stock option plans from the
reserves as described in the Registration Statement, which shares received upon
exercise will be subject to the lock-up agreements described in Section 5(n)
below), or any material adverse change, or any development which the Company
reasonably believes could reasonably be expected to involve a prospective
material adverse change, in the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company and
the Subsidiaries, taken as a whole, arising for any reason whatsoever, (ii) the
Company and the Subsidiaries, taken as a whole, have not incurred nor will they
incur, except in the ordinary course of business as described in the Prospectus,
any material liabilities or obligations, direct or contingent, nor have they
entered into nor will they enter into, except in the ordinary course of business
as described in the Prospectus, any material transactions other than pursuant to
this Agreement and the transactions referred to herein, and (iii) the Company
has not and will not have paid or declared any dividends or other distributions
of any kind on any class of its capital stock.
g. The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
h. There are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company and the
Subsidiaries, taken as a whole, or any of their officers in their capacity as
such, nor any basis therefor, before or by any federal or state court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign, wherein an unfavorable ruling, decision or finding would
materially and adversely affect the Company and the Subsidiaries, taken as a
whole, or their business, properties, business prospects, condition (financial
or otherwise) or results of operations.
i. The Company and the Subsidiaries have, and at the Closing Date and, if
later, the Option Closing Date will have, performed all their obligations
required to be performed by them as of such date, and the Company and the
Subsidiaries, taken as a whole, are not, and at the Closing Date and, if later,
the Option Closing Date will not be, nor with the passage of time or the giving
of notice or both would be, in violation of any law, ordinance, administrative
or governmental rule or regulation applicable to the Company or the
Subsidiaries, or of any judgment, order or decree of any court or governmental
agency or body or of any arbitrator having jurisdiction over the Company or the
Subsidiaries, or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any mortgage, loan agreement,
note, bond, debenture, credit agreement or any other evidence of indebtedness to
which they are a party or by which their property is bound or affected, which
violation or default
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might materially and adversely affect the Company and the Subsidiaries, taken as
a whole, or their business, properties, business prospects, condition (financial
or other) or results of operations. To the Company's best knowledge, no other
party under any contract or other instrument to which the Company or its
Subsidiaries are a party is in default in any respect thereunder, which default
would materially and adversely affect the Company and the Subsidiaries, taken as
a whole, or their business, properties, business prospects, condition (financial
or other) or results of operations. The Company and the Subsidiaries are not,
and at the Closing Date and, if later, the Option Closing Date will not be, in
violation of any provision of their articles of incorporation, bylaws or other
organizational documents.
j. No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated herein
and in the Representatives Warrants, except such as have been obtained under
the Act or the Rules and Regulations and such as may be required under state
securities or Blue Sky laws or the bylaws and rules of the National Association
of Securities Dealers, Inc. (the "NASD") in connection with the purchase and
distribution by the Underwriters of the Shares.
k. The Company has full corporate power and authority to enter into this
Agreement and the Representatives Warrants. Each of this Agreement and the
Representatives Warrants has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms. The performance
of this Agreement and the Representatives Warrants and the consummation of the
transactions contemplated hereby and thereby will not, with or without notice,
the passage of time or both, result in the imposition of any lien, charge or
encumbrance upon any of the assets of the Company or the Subsidiaries pursuant
to the terms or provisions of, or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or give any party a right
to terminate any of its obligations under, or result in the acceleration of any
obligation under the articles of incorporation, bylaws or other organizational
documents of the Company and the Subsidiaries, any indenture, mortgage, deed of
trust, voting trust agreement, loan agreement, bond, debenture, note agreement
or other evidence of indebtedness, lease, contract or other agreement or
instrument to which the Company or the Subsidiaries is a party or by which the
Company or the Subsidiaries or any of their properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
business or properties of the Company and the Subsidiaries, taken as a whole,
presently in effect, a breach or violation of which, a default under which, a
termination of which, an acceleration under which, or a conflict with which
would materially and adversely affect the Company and the Subsidiaries, taken as
a whole, and their business, properties, business prospects, condition
(financial or other) or results of operations.
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l. The Company and the Subsidiaries have good and marketable title to all
properties and assets described in the Prospectus as owned by them, free and
clear of all liens, charges, encumbrances or restrictions, except such liens,
charges, encumbrances or restrictions as are described in the Prospectus and
those which, individually and in the aggregate, are not material in amount or
which, individually and in the aggregate, do not adversely affect the use made
or proposed to be made of such properties and assets by the Company and the
Subsidiaries. The Company and the Subsidiaries, as lessees, have valid,
subsisting and enforceable leases for the properties described in the Prospectus
as leased by them. The agreements to which the Company or the Subsidiaries are
a party described in the Prospectus are valid agreements, enforceable by the
Company or the Subsidiaries (as applicable), except as the enforcement thereof
may be limited by bankruptcy and laws relating to the rights and remedies of
creditors generally or by the availability of general equitable remedies. The
Company or the Subsidiaries own or lease all such properties as are necessary to
their operations as now conducted or as proposed to be conducted.
m. There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or the Subsidiaries are a
party have been duly authorized, executed and delivered by the Company or the
Subsidiary, constitute valid and binding agreements of the Company or the
Subsidiary and are enforceable against the Company or the Subsidiary and by the
Company or the Subsidiary against the other parties thereto in accordance with
the terms thereof, except as to (i) bankruptcy and laws relating to the rights
and remedies of creditors generally and (ii) the availability of equitable
remedies.
n. No statement, representation, warranty or covenant made by the Company
in this Agreement or made in any certificate or document required by Section 6
of this Agreement to be delivered to the Representatives was or will be, when
made, inaccurate, untrue or incorrect.
o. Neither the Company nor any of its directors, officers or controlling
persons has taken, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result, under the Act or otherwise, in, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
p. No holder of securities of the Company has rights to the registration
of any securities of the Company because of the filing of the Registration
Statement, which rights have not been waived by the holder or otherwise
satisfied as of the date hereof.
q. The Common Stock is listed and duly admitted to trading on the Nasdaq
National Market (the "Nasdaq/NMS"), and the Company has received notification
that
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the quotation by the Nasdaq/NMS of the Shares has been approved, subject to
official notice of issuance of the Shares.
r. (i) The Company and the Subsidiaries, taken as a whole, have all
trademarks, trade names, patent rights, copyrights, licenses, approvals and
governmental authorizations necessary to conduct their business as now
conducted, except where the failure to have any such right would not have a
material and adverse effect on the Company and the Subsidiaries, taken as a
whole, or their business, properties, business prospects, condition (financial
or otherwise) or results of operations; (ii) the Company and the Subsidiaries
are not infringing any copyrights, trade secrets or other similar rights,
trademarks, trade name rights or patent rights of others where such infringement
would have a material and adverse effect on the Company and the Subsidiaries,
taken as a whole, or their business, properties, business prospects, condition
(financial or otherwise) or results of operations; and (iii) no claim has been
made against the Company regarding trademark, trade name, patent, copyright,
license, trade secret or other infringement which would have a material and
adverse effect on the Company and the Subsidiaries, taken as a whole, or their
business, properties, business prospects, condition (financial or otherwise) or
results of operations.
s. The Company has filed all federal, state and foreign income tax
returns which have been required to be filed, which returns are complete and
correct in all material respects, and has paid all taxes and assessments
received by it to the extent that such taxes or assessments have become due.
The Company has no tax deficiency which has been or might be asserted or
threatened against the Company which could have a material and adverse effect on
the Company or its business, properties, business prospects, condition
(financial or otherwise) or results of operations. The Company has timely filed
all reports required by the Exchange Act to be filed by it and such reports do
not contain any untrue statements or fail to state a material fact necessary in
order to make the statements made, in light of the circumstances in which they
were made, not misleading.
t. The Company and its Subsidiaries own or possess all authorizations,
approvals, orders, licenses, registrations, certificates and permits of and
from, and have made all declarations and filings with, all governmental
regulatory officials and bodies necessary to conduct their business as
contemplated in the Prospectus, except where the failure to own or possess all
such authorizations, approvals, orders, licenses, registrations, certificates
and permits or make such declarations and filings would not materially and
adversely affect the Company and the Subsidiaries, taken as a whole, or their
business, properties, business prospects, condition (financial or otherwise) or
results of operations. There is no proceeding pending or, to the knowledge of
the Company, threatened, or any basis therefor known to the Company, which may
cause or allow any such authorization, approval, order, license, registration,
certificate or permit to be revoked, withdrawn, canceled, suspended or not
renewed or result in any material impairment of the rights thereunder; and the
Company and its Subsidiaries are conducting their business in compliance with
all laws, rules and regulations
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applicable thereto, except where any such failure to comply would not have a
material adverse effect on the Company and the Subsidiaries, taken as a whole,
or their business, properties, business prospects, condition (financial or
otherwise) or results of operations. Except as described in the Registration
Statement and the Prospectus, none of such authorizations, approvals, orders,
licenses, registrations, certificates or permits contains any restriction that
is materially burdensome to the Company and the Subsidiaries, taken as a whole.
u. The Company and the Subsidiaries maintain insurance of the types and
in the amounts generally deemed adequate for their business, including, but not
limited to, insurance covering real and personal property owned or leased by the
Company and the Subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. The Company and the Subsidiaries have
not been refused any insurance coverage sought or applied for; and the Company
has no reason to believe that it and the Subsidiaries will not be able to renew
their existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue their
business at a cost that would not have a material adverse effect on the Company
and the Subsidiaries, taken as a whole, or their business, properties, business
prospects, condition (financial or otherwise) or results of operations.
v. The Company and the Subsidiaries are (i) in compliance with any and
all applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental Laws"),
(ii) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their business and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company and
the Subsidiaries, taken as a whole, or their business, properties, business
prospects, condition (financial or otherwise) or results of operations.
w. In the ordinary course of its business, the Company and the
Subsidiaries, conduct a periodic review of the effect of Environmental Laws on
the business, operations and properties of the Company and the Subsidiaries in
the course of which it identifies and evaluates associated costs and liabilities
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties). On the basis of such review, the
Company has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a material adverse effect on the
Company and the Subsidiaries, taken as a whole, or their business, properties,
business prospects, condition (financial or otherwise) or results of operations.
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x. Neither the Company nor, to the Company's knowledge, any of its
employees or agents have at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
federal or state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
y. The Company has not distributed and, prior to the later to occur of
(i) the Closing Date or (ii) completion of the distribution of the Shares, will
not distribute without the prior written consent of the Representatives any
offering material in connection with the offering and sale of the Shares other
than the Registration Statement, any Preliminary Prospectus, the Prospectus or
other materials, if any, permitted by the Act and the Act Regulations. The
Company is not involved in any labor dispute and, to the knowledge of the
Company, no such dispute is threatened.
z. Neither the Company nor its officers, directors, employees or agents
have taken or will take, directly or indirectly, (i) any action designed to
cause or to result in, or that has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares, or (ii)
since the filing of the Registration Statement, except in connection with the
sale of the Shares, (A) sold, bid for, purchased, attempted to induce any person
to purchase, or paid anyone any compensation for soliciting purchase of, the
Shares or (B) paid or agreed to pay any person any compensation for soliciting
another to purchase any other securities of the Company.
aa. The Company has obtained from each of its directors, officers and
shareholders a written agreement, in form and substance satisfactory to counsel
for the Underwriters, that, for a period of 365 days (180 days with respect to
_____ shres) from the date of the Prospectus, he, she or it will not, without
Kaufman Bros., L.P. prior written consent, offer, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any security convertible into, or exchangeable or
exercisable for, shares of Common Stock or other securities of the Company.
ab. The Company has complied with all provisions of Florida Statutes,
Section 517,075, relating to issuers doing business with Cuba.
ac. The Company has no liability or obligation of any nature (absolute,
accrued, contingent or otherwise) which is not fully reflected or adequately
reserved against in the balance sheet at April 30, 1996, except (A) for
liabilities incurred in the ordinary course of business and not required under
generally accepted accounting procedures to be reflected on the balance sheet,
or (B) incurred since April 30, 1996 in the ordinary course of business and
consistent with past practice, or (C) described in the Prospectus. The Company
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in
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accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accounting for assets; (C) access to assets is permitted only in
accordance with management's general or specific authorization; (D) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences and
(E) reserves for obsolete inventory, bad debts and sales returns and allowances
are adequate.
Any certificate signed by an officer of the Company and delivered to the
Representatives or counsel for the Underwriters at a closing hereunder shall be
deemed a representation and warranty of the Company to each Underwriter as to
the matters covered thereby as of the date thereof.
4. AGREEMENTS OF THE COMPANY
The Company agrees with the several Underwriters as follows:
a. The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representatives within a
reasonable period of time prior to the filing thereof and the Representatives
shall not have objected thereto in good faith.
b. The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, (iv) of the happening of any event
during the period mentioned in the second sentence of Section 4(e) that makes
any statement made in the Registration Statement or the Prospectus untrue or
that requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading, and (v) of
receipt by the Company or any representative or attorney of the Company of any
other communication from the Commission relating to the Company, the
Registration Statement, any preliminary prospectus, the Term Sheet or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will use its best efforts to comply with the provisions
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of, and make all requisite filings with the Commission pursuant to, said Rule
430A and, if a Term Sheet is used, Rule 434 and to notify the Representatives
promptly of all such filings.
c. The Company will furnish to the Representatives, without charge, three
signed copies of the Registration Statement and of any post-effective amendment
thereto, including financial statements and schedules, and all exhibits thereto,
and will furnish to the Representatives, without charge, for transmittal to each
of the other Underwriters, a copy of the Registration Statement and any
post-effective amendment thereto, including financial statements and schedules,
but without exhibits.
d. The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
e. On the Effective Date, and thereafter from time to time, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents, subject to the provisions of the
following sentence, to the use of the Prospectus or any amendment or supplement
thereto by the several Underwriters and by all dealers to whom the Shares may be
sold, both in connection with the offering or sale of the Shares and for any
period of time thereafter during which the Prospectus is required by law to be
delivered in connection therewith. If during the nine month period referred to
in Section 10(a)(3) of the Act any event shall occur which in the judgment of
the Company or counsel to the Underwriters should be set forth in the Prospectus
in order to make any statement therein, in light of the circumstances under
which it was made, not misleading, or if it is necessary to supplement or amend
the Prospectus to comply with law, the Company will forthwith prepare and duly
file with the Commission an appropriate supplement or amendment thereto, and
will deliver to each of the Underwriters, without charge, such number of copies
of such supplement or amendment to the Prospectus as the Representatives may
reasonably request and, in case any Underwriter is required to deliver a
prospectus after such nine month period, the Company upon request, but at the
expense of such Underwriter, will promptly prepare such amendment or amendments
to the Registration Statement and Prospectus as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Act.
f. Prior to any public offering of the Shares, the Company will cooperate
with the Representatives and counsel to the Underwriters in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Representatives may
request; provided that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
g. During the period of five years commencing on the Effective Date, the
Company will furnish to the Representatives, and each other Underwriter who may
so
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request, copies of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally to the holders
of any class of its capital stock, and will furnish to the Representatives, and
each other Underwriter who may so request, a copy of each annual or other report
it shall be required to file with the Commission.
h. The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for the applicable 12-month period after the Effective
Date, satisfying the provisions of Section 11(a) of the Act (including Rule 158
of the Rules and Regulations).
i. Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or reimburse
if paid by the Representatives, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to (i) the preparation,
printing and filing by the Company of the Registration Statement and exhibits to
it, each preliminary prospectus, Term Sheet, Prospectus and any amendment or
supplement to the Registration Statement or Prospectus, (ii) the preparation and
delivery of certificates representing the Shares, (iii) the printing of this
Agreement, the Agreement among Underwriters, any Dealer Agreements and any
Underwriters' Questionnaires, (iv) furnishing (including costs of shipping and
mailing) such copies of the Registration Statement, the Prospectus, the Term
Sheet and any preliminary prospectus, and all amendments and supplements
thereto, as may be requested for use in connection with the offering and sale of
the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the
listing of the Shares on the Nasdaq/NMS, (vi) any filings required to be made by
the Underwriters with the NASD, and the fees, disbursements and other charges of
counsel for the Underwriters in connection therewith, (vii) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions designated pursuant to Section 4(f), including the
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (viii) fees, disbursements and other
charges to the Company (but not those of counsel for the Underwriters, except as
otherwise provided herein), (ix) the transfer agent for the Shares and (x) the
"tombstone" advertisement with respect to the Shares. In addition to the
Company's responsibility for payment of the foregoing expenses, the Company
shall pay to the Representatives a non-accountable expense allowance equal to
two percent (2%) of the gross proceeds of the offering ($25,000 of which has
been paid to date), including in such amount the proceeds from any sale of
the Option Shares. The non-accountable expense allowance due shall be paid
at the Closing Date and any Option Closing Date, as applicable. If the
offering is not consummated, the Representatives will be entitled to
reimbursement for actual out-of-pocket expenses, on an accountable basis
only, up to $50,000, inclusive of the amount paid to date.
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j. If this Agreement shall be terminated by the Company pursuant to any
of the provisions hereof (otherwise than pursuant to Section 8 hereof) or if for
any reason the Company shall be unable to perform its obligations hereunder, the
Company will reimburse the several Underwriters for all reasonable out-of-pocket
expenses (including the fees, disbursements and other charges of counsel to the
Underwriters) reasonably incurred by them in connection herewith.
k. The Company will not at any time, directly or indirectly, take any
action designed, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
l. The Company will apply the net proceeds from the offering and sale of
the Company Shares in the manner set forth in the Prospectus under "Use of
Proceeds," and shall file such reports with the Commission with respect to the
sale of the Company Shares and the application of the proceeds therefrom as may
be required in accordance with Rule 463 under the Act.
m. During the period of 365 days commencing at the Closing Date, without
the prior written consent of Kaufman Bros., L.P., which consent may be withheld
in Kaufman Bros., L.P. sole discretion and other than pursuant to the exercise
of outstanding warrants and stock options or otherwise pursuant to the Company's
stock option plan disclosed in the Prospectus, the Company will not issue,
offer, sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities or any other securities convertible into or
exchangeable with its Common Stock or other equity security. During a period of
365 days after the Closing Date, the Company will not file a registration
statement for the purpose of registering any securities of the Company without
the prior written consent of Kaufman Bros., L.P., which consent may be withheld
in its sole discretion. Except for the amendment of the Company's Stock Option
Plan to permit the granting of an additional 300,000 shares of Common Stock, the
Company will not, for a period of two years from the date hereof, without the
prior written approval of Kaufman Bros., L.P., propose or enter into any
arrangement not existing on the date hereof, for the granting or awarding of the
stock options.
n. The Company will cause each of its officers, directors, shareholders
and option holders to enter into lock-up agreements with the Representatives to
the effect that they will not, without the prior written consent of the
Representatives to sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares according to the terms set forth
in Exhibit B hereto.
5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS
The obligations of each Underwriter hereunder are subject to the following
conditions:
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a. Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424, Rule 430A and Rule 434 of the Rules and Regulations shall have been made.
b. (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for the purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the staff of the Commission or such authorities, and (iv)
after the date hereof no amendment or supplement to the Registration Statement
or the Prospectus shall have been filed unless a copy thereof was first
submitted to the Representatives and the Representatives does not object thereto
in good faith, and the Representatives shall have received certificates, dated
the Closing Date and the Option Closing Date and signed by the Chief Executive
Officer and the Chief Financial Officer of the Company (who may, as to
proceedings threatened, rely upon the best of their knowledge), to the effect of
clauses (i), (ii) and (iii) of this Section 5(b).
c. Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change, or any development involving a prospective material
adverse change, in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, in each case other than as described in or
contemplated by the Registration Statement and the Prospectus, and (ii) the
Company shall not have sustained any material loss or interference with its
business or properties from fire, explosion, flood, earthquake or other
casualty, whether or not covered by insurance, or from any labor dispute or any
court of legislative or other governmental action, order or decree, which is not
described in the Registration Statement and the Prospectus, if in the judgment
of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the public offering price.
d. Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted or threatened against the Company or any of its
officers or directors in their capacities as such, before or by any federal,
state or local court, commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding would materially and adversely affect
the business, properties, business
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prospects, condition (financial or otherwise) or results of operations of the
Company.
e. Each of the representations and warranties of the Company contained
herein shall be true and correct in all material respects at the Closing Date
and, with respect to the Option Shares, at the Option Closing Date, and all
covenants and agreements contained herein to be performed on the part of the
Company and all conditions contained herein to be fulfilled or complied with by
the Company at or prior to the Closing Date and, with respect to the Option
Shares, at or prior to the Option Closing Date, shall have been duly performed,
fulfilled or complied with.
f. The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, from Miller & Holguin, counsel to the Company, covering the
following matters:
(i) the Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Colorado, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification;
(ii) the Subsidiaries have been duly organized and are validly
existing as corporations (or, with respect to ActionTrac International, as a
partnership) in good standing under their jurisdiction of organization and are
qualified to transact business and are in good standing in each jurisdiction in
which the conduct of their business or their ownership or leasing of property
requires such qualification. Except for the Subsidiaries, the Company does not
have any subsidiaries or own or control any other corporation, association, or
other business entity;
(iii) the authorized capital stock of the Company conforms to the
description thereof contained in the Prospectus;
(iv) the authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus as
of the date therein; the shares of Common Stock outstanding prior to the
issuance of the Firm Shares (or, with respect to the opinion to be delivered on
the Option Closing Date, prior to the issuance of the Company Option Shares)
have been duly authorized and are validly issued, fully paid and nonassessable,
have been issued pursuant to exemptions from the registration and qualification
requirements of federal and applicable state securities laws, were not issued in
violation of or subject to any preemptive rights or, to the best of such
counsel's knowledge, other rights to subscribe for or purchase any securities,
and conform to the description thereof contained in the Prospectus;
(v) the specimen certificate evidencing the Company's Common
Stock filed as an exhibit to the Registration Statement is in due and proper
form under
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Colorado law, the Shares have been duly authorized and, when the certificates
evidencing the Shares have been issued and delivered in accordance with the
terms of this Agreement, the Shares will be validly issued, fully paid and
nonassessable, the issuance of such Shares is not subject to any preemptive
rights or, to the best of such counsel's knowledge, other rights to subscribe
for or purchase securities; and the Common Stock conforms in all material
respects to the description thereof contained in the Prospectus;
(vi) the Representatives Warrants have been duly authorized,
executed and delivered by the Company and the Company has all requisite
corporate power and authority to execute the Representatives Warrants; the
Representatives Warrants are enforceable against the Company in accordance with
their terms; the shares of Common Stock issuable upon the exercise of the
Representatives Warrants have been reserved for such issuance and, when issued
in accordance with the terms of the Representatives Warrants, will be duly
authorized validly issued, fully paid and nonassessable and free of preemptive
rights or, to the best of such counsel's knowledge, other rights to subscribe
for or purchase securities; and the Representatives Warrants conform in all
material respects to the description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the
Act, and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or preventing the use of the
Prospectus has been issued and no proceedings for that purpose have been
instituted or are pending or, to the best of such counsel's knowledge,
threatened by the Commission; any required filing of the Prospectus or of the
Term Sheet and any supplement thereto pursuant to Rule 424(b) or Rule 434 of the
Rules and Regulations has been made in the manner and within the time period
required by such Rule 424(b) and Rule 434;
(viii) the Registration Statement and the Prospectus and any
supplements or amendments thereto (except for financial statements, schedules
and financial information included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with the Act and
the Rules and Regulations.
(ix) this Agreement has been duly authorized, executed and
delivered by the Company, and the Company has all requisite corporate power and
authority to enter into this Agreement and consummate the transactions
contemplated hereby;
(x) this Agreement is a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except as
to (A) rights to indemnity and contribution thereunder which may be limited by
applicable law, (B) bankruptcy and laws relating to the rights and remedies of
creditors generally, and (C) the availability of equitable remedies; the
execution and delivery by the Company of, and the performance by the Company of
its obligations under, this Agreement and the Representatives Warrants does not
contravene any provision of applicable law, statute, rule or regulation or the
articles of incorporation, bylaws or other organizational documents of the
Company and the Subsidiaries or any agreement or other instrument
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binding upon the Company or the Subsidiaries that is material to the Company and
the Subsidiaries, taken as a whole, or, to the best of such counsel's knowledge,
any judgment or decree of any governmental body, agency or court having
jurisdiction over the Company or the Subsidiaries, presently in effect and a
breach or violation of which, a default under which, a termination of which, an
acceleration under which, or a conflict with which would materially and
adversely affect the Company and the Subsidiaries, taken as a whole, or their
business, properties, business prospects, financial condition or results of
operations, and no consent, approval or authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement and the
Representatives Warrants, except such as may have been obtained under the Act
and such as required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares by the Underwriters;
(xi) the statements in the Prospectus under the captions (A)
"Risk Factors--Dependence on Key Personnel," "--Foreign Tax Rates," "--
Concentration of Share Ownership"; and "--Possible Issuance of Additional
Shares"; (B) "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources"; (C) "Business--
Employees"; (D) "Management--Executive Compensation", "--Compensation of
Directors" and "--Stock Options and Benefit Plans"; (E) "Certain Transactions";
(F) "Description of Securities"; and (G) "Shares Eligible for Future Sale" and
in the Registration Statement in Item 14 and Item 15, insofar as such statements
constitute a summary of documents referred to therein or matters of law, fairly
summarize in all material respects the information called for with respect to
such documents and matters of law;
(xii) to such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company or the
Subsidiaries are a party or to which any of the properties of the Company is
subject that are required to be described in the Registration Statement or the
Prospectus and are not so described;
(xiii) to such counsel's knowledge, no holder of securities of the
Company has rights which have not been waived to require the Company to register
with the Commission shares of Common Stock or other securities as part of the
offering contemplated hereby;
(xiv) such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or Prospectus or any supplements or amendments
thereto which are required to be filed and are not so filed as required, and
each description of such contracts and documents as is contained in the
Registration Statement and Prospectus fairly presents in all material respects
the information required under the Act and the Rules and Regulations;
(xv) to such counsel's knowledge, all filings required by the
Exchange Act to have been made by the Company were timely made; and
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(xvi) as of the Effective Date, the Shares were duly authorized
for quotation on the Nasdaq/NMS upon official notice of issuance.
Such counsel shall also state that such counsel has participated in
conferences with representatives of the Underwriters, officers and
representatives of the Company and representatives of the independent certified
public accountants of the Company, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed and
that, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (except as set forth
in Section 6(f)(xi), on the basis of the foregoing, nothing has come to the
attention of such counsel that leads them to believe that (except for financial
statements, schedules and financial information, as to which such counsel need
not express any belief), the Registration Statement and the Prospectus, as
amended, included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading and the Prospectus, as amended or
supplemented, if applicable, as of the date it was filed pursuant to the Rules
and Regulations and as of the Closing Date, contained any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
In rendering the foregoing opinion, counsel may rely, to the extent they
deem such reliance proper, on the opinions (in form and substance reasonably
satisfactory to Underwriters' counsel) of other counsel reasonably acceptable to
Underwriters' counsel as to matters governed by the laws of jurisdictions other
than the United States and the State of California, and as to matters of fact,
upon certificates of officers of the Company and of government officials;
provided that such counsel shall state that the opinion of any other counsel is
in form satisfactory to such counsel and, in such counsel's opinion, such
counsel and the Representatives are justified in relying on such opinions of
other counsel. Copies of all such opinions and certificates shall be furnished
to counsel to the Underwriters on the Closing Date.
g. The Representatives shall have received from the Company the duly
executed Representatives Warrants.
h. The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date, from
Fulbright & Jaworski L.L.P., counsel to the Underwriters, with respect to the
Registration Statement, the Prospectus and this Agreement, which opinion shall
be satisfactory in all respects to the Representative.
i. The Representatives shall have received, on or prior to the date
hereof, agreements from all directors, officers, shareholders and option holders
of the Company in the form attached as Exhibit B hereto, stating that each of
such persons, without the
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prior written consent of the Representatives, will not offer to sell,
contract to sell, sell, distribute, grant any option to purchase, pledge,
hypothecate or otherwise dispose of, directly or indirectly, any Common
Stock, or any securities convertible into or exchangeable for Common Stock of
the Company (including, without limitation, Common Stock of the Company that
may be deemed to be beneficially owned by the undersigned in accordance with
the rules and regulations of the Commission and Common Stock that may be
issued upon exercise of a stock option or warrant), or rights to acquire such
Common Stock, from the date hereof through the dates specified in Exhibit B
and in such agreements.
j. At the Effective Date and concurrently with the execution and
delivery of this Agreement, each of KPMG and AJ. Robbins PC shall have
furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to
the Representatives, confirming that they are independent accountants with
respect to the Company as required by the Act and the Rules and Regulations
and with respect to certain financial and other statistical and numerical
information contained in the Registration Statement. At the Closing Date,
and, as to the Option Shares, the Option Closing Date, each of KPMG and AJ.
Robbins PC shall have furnished to the Representatives a letter, dated the
date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in the letter from each accountant,
that nothing has come to their attention during the period from the date of
each letter referred to in the prior sentence to a date (specified in each
letter) not more than five days prior to the Closing Date and the Option
Closing Date, as the case may be, which would require any change in their
letter dated the date hereof if it were required to be dated and delivered at
the Closing Date and the Option Closing Date.
k. The Representatives shall have received, on or prior to the Closing
Date, copies of a letter to the Company from KPMG stating that their review of
the Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the Company's
financial statements as of and at January 31, 1996, did not disclose any
weakness in internal controls that they considered to be material weaknesses.
l. Concurrently with the execution and delivery of this Agreement and at
the Closing Date and, with respect to the Option Shares, the Option Closing
Date, there shall be furnished to the Representatives a certificate, dated the
date of its delivery, signed by the Chief Executive Officer and the Chief
Financial Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, the Registration Statement and the Prospectus do not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading and (B) in the case of the certificate delivered at the Closing Date
and the Option Closing Date, since the
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Effective Date no event has occurred as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements therein not
untrue or misleading in any material respect.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the
Company herein on or prior to the date of such certificate has been duly, timely
and fully performed and each condition herein required to be satisfied or
fulfilled on or prior to the date of such certificate has been duly, timely and
fully satisfied or fulfilled.
m. The Shares shall be qualified for sale in such jurisdictions as the
Representatives may, pursuant to the provisions of Section 5(f), reasonably
request, and each such qualification shall be in effect and not subject to any
stop order or other proceeding on the Closing Date or the Option Closing Date.
n. Prior to the Closing Date, the Shares shall have been duly authorized
for listing on the Nasdaq/NMS upon official notice of issuance.
o. The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement
in the Registration Statement or the Prospectus, as to the accuracy at the
Closing Date and the Option Closing Date of the representations and
warranties of the Company herein, as to the performance by the Company of its
obligations hereunder, or as to the fulfillment of the conditions concurrent
and precedent to the obligations hereunder of the Representatives.
6. INDEMNIFICATION
a. The Company will indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls, within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, each Underwriter, from and against any and all losses,
claims, liabilities, expenses and damages (including any and all investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any
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<PAGE>
action, suit or proceeding or any claim asserted) to which they, or any of them,
may become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, liabilities, expenses or damages (i) arise out of or are based on any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus, or the
omission or alleged omission to state in such document a material fact required
to be stated in it or necessary to make the statements in it not misleading,
(ii) arise out of or are based on whole or in part on any inaccuracy in the
respective representations and warranties of the Company contained herein, or
(iii) arise out of or are based upon any failure of the Company to perform its
obligations hereunder or under law in connection with the transactions
contemplated hereby; provided that the Company will not be liable to the extent
that such loss, claim, liability, expense or damage arises from the sale of the
Shares in the public offering to any person by an Underwriter and is based on an
untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives, on behalf of any
Underwriter, expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus, or any amendment or supplement
thereto. The Company acknowledges that the statements set forth in the first
two paragraphs under the heading "Underwriting" in the preliminary prospectus
and the Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of the
Underwriters expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus. This indemnity will be in addition to
any liability that the Company might otherwise have.
b. Each Underwriter will indemnify and hold harmless the Company, and
each director of the Company and each officer of the Company who signs the
Registration Statement and each person, if any, who controls, within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, the Company, to the
same extent as the foregoing indemnity from the Company to each Underwriter, as
set forth in Section 6(a), but only insofar as losses, claims, liabilities,
expenses or damages arise out of or are based on any untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with information relating to any Underwriter furnished in writing to
the Company by the Representatives, on behalf of such Underwriter, expressly for
use in the Registration Statement, the preliminary prospectus or the Prospectus,
or any amendment or supplement thereto. The Company acknowledges that the
statements set forth in the first two paragraphs under the heading
"Underwriting" in the preliminary prospectus and the Prospectus constitute the
only information relating to any Underwriter furnished in writing to the Company
by the Representatives on behalf of the Underwriters expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus. This
indemnity will be in addition to any liability that each Underwriter might
otherwise have.
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<PAGE>
c. Any party that proposes to assert the right to be indemnified under
this Section 6 shall, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 6, notify each such
indemnifying party in writing of the commencement of such action, enclosing with
such notice a copy of all papers served, but the omission so to notify such
indemnifying party will not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 6 unless,
and only to the extent that, such omission results in the loss of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense, the indemnifying party will not be
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
there are legal defenses available to it or other indemnified parties that are
different from or in addition to those available to the indemnifying party,
(iii) the indemnified party has reasonably concluded that a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party), or (iv) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. Any indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld).
d. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms, but for
any reason is held to be unavailable from the Company or the Underwriters, the
indemnifying party will contribute to the total losses, claims, liabilities,
expenses and damages (including any investigative, legal
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<PAGE>
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted, but
after deducting any contribution received by the Company from persons other than
the Underwriters, such as persons who control the Company within the meaning of
the Act, officers of the Company who signed the Registration Statement and
directors of the Company, who also may be liable for contribution) to which the
Company and any one or more of the Underwriters may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and the Underwriters. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by the
Company and bears to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. If, but only if, the allocation provided by the foregoing
sentence is not permitted by applicable law, the allocation of contribution
shall be made in such proportion as is appropriate to reflect not only the
relative benefits referred to in the foregoing sentence, but also the relative
fault of the Company and the Underwriters with respect to the statements or
omissions which resulted in such loss, claim, liability, expense or damage, or
action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Representatives on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 6(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 6(d)
shall be deemed to include, for purpose of this Section 6(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts received by it and no person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 6(d) are several in proportion to their
respective underwriting obligations and not joint. For purposes of this Section
6(d), any person who controls a party to this Agreement within the meaning of
the Act will have the same rights to contribution as that party, and each
officer of the Company who signed the Registration Statement will have the same
rights to contribution as the Company, subject in each case to the provisions
hereof. Any party entitled to contribution, promptly after receipt of notice of
commencement of any action against any such party in respect of which a claim
for contribution may be made under this Section 6(d), will notify any such party
or parties
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<PAGE>
from whom contribution may be sought from any other obligation it or they may
have under this Section 6(d). No party will be liable for contribution with
respect to any action or claim settled without its written consent (which
consent will not be unreasonably withheld).
e. The indemnity and contribution agreements contained in this Section 6
and the representations and warranties of the Company contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any investigation made by or on behalf of the Underwriters, (ii) acceptance of
any of the Shares and payment therefor, or (iii) any termination of this
Agreement
7. REIMBURSEMENT OF CERTAIN EXPENSES
In addition to its other obligations under Section 6(a) of this Agreement,
the Company hereby agrees to reimburse on a quarterly basis the Underwriters for
all reasonable legal and other expenses incurred in connection with
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon in whole or part, (i) as described in
Section 6(a), any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or the omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it not misleading, (ii) any inaccuracy in the representations and warranties of
the Company contained herein, or (iii) any failure of the Company to perform its
obligations hereunder or under law in connection with the transactions
contemplated hereby, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the obligations under this Section 7 and
the possibility that such payment might later be held to be improper; provided,
however, that, to the extent any such payment is ultimately held to be improper,
the persons receiving such payments shall promptly refund them.
8. TERMINATION
The obligations of the several Underwriters under this Agreement may be
terminated at any time on or prior to the Closing Date (or, with respect to
the Option Shares, on or prior to the Option Closing Date), by notice to the
Company from the Representatives, without liability on the part of any
Underwriter to the Company if, prior to delivery and payment for the Firm
Shares or Option Shares, as the case may be, in the sole judgment of the
Representatives, (a) trading in any of the equity securities of the Company
shall have been suspended by the Commission or by the Nasdaq/NMS, (b) trading
in securities generally on the New York Stock Exchange or the Nasdaq/NMS
shall have been suspended or limited or minimum or maximum prices shall have
been generally established on such exchange, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchange or by
order of the Commission or any court or other governmental authority, (c) a
general banking
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<PAGE>
moratorium shall have been declared by either Federal or New York State
authorities, (d) any material adverse change in the financial or securities
markets in the United States, or in political, financial or economic
conditions in the United States or any outbreak or material escalation of
hostilities or other calamity or crises, shall have occurred, the effect of
which is such as to make it, in the sole judgment of the Representatives,
impracticable to market the Shares, (e) there has been a material adverse
change since the respective dates as of which information is given in the
Registration Statement and the Prospectus in the general affairs, business,
business prospects, properties, management, condition (financial or
otherwise) or results of operations of the Company, whether or not arising
from transactions in the ordinary course of business, in each case other than
as described in or contemplated by the Registration Statement and the
Prospectus, or (f) the Company has sustained any material loss or
interference with its business or properties from fire, explosion, flood,
earthquake or other casualty, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other government action,
order or decree, which is not described in the Registration Statement and the
Prospectus, if in the judgment of the Representatives any such development
makes it impracticable or inadvisable to consummate the sale and delivery of
the Shares by the Underwriters at the public offering price.
9. SUBSTITUTION OF UNDERWRITERS
If any one or more of the Underwriters shall fail or refuse to purchase the
Shares which it or they have agreed to purchase hereunder, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of Shares, the other Underwriters shall be obligated, severally, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Shares which they
have respectively agreed to purchase pursuant to Section 1 bears to the
aggregate number of Shares which all such nondefaulting Underwriters have so
agreed to purchase, or in such other proportions as the Representative may
specify, provided that in no event shall the maximum number of Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 9 by more than one-ninth of such number of Shares
without the prior written consent of such Underwriter. If any Underwriter or
Underwriters shall fail or refuse to purchase any Shares and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase exceeds one-tenth of the aggregate number of the
Shares and arrangements satisfactory to the Representatives and the Company for
the purchase of such Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any nondefaulting
Underwriter, the Selling Shareholders or the Company for the purchase or sale of
any Shares under this Agreement. In any such case either the Representative or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be
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<PAGE>
effected. Any action taken pursuant to this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. MISCELLANEOUS
Notice given pursuant to any of the provisions of this Agreement shall be
in writing and, unless otherwise specified, shall be mailed or delivered (a) if
to the Company, at the offices of the Company, 5650 Greenwood Plaza Blvd., Suite
107, Englewood, CO 80111, Attention: President, with a copy to Kaufman Bros.,
L.P., 800 Third Avenue, New York, New York 10022 and (b) if to the Underwriters,
to the Representative at the offices of Kaufman Bros., L.P., 800 Third Avenue,
New York, New York 10022, Attention: Corporate Finance Department, with a copy
to Paul Jacobs, Esq., Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York,
NY 10103. Any such notice shall be effective only upon receipt. Any notice
may be made by telex or telephone, but if so made shall be subsequently
confirmed in writing.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company and the controlling persons, directors and officers
referred to in Section 7, and their respective successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall
not include a purchaser, as such, of Shares from any of the several
Underwriters.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
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<PAGE>
Please confirm that the foregoing correctly sets forth the Agreement among
the Company and the several Underwriters.
Very truly yours,
4FRONT SOFTWARE INTERNATIONAL, INC.
By: ____________________________________________
Title:____________________________________________
FIRST ALBANY CORPORATION
c/d Kaufman Bros., L.P.
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
KAUFMAN BROS., L.P.
FIRST ALBANY CORPORATION
c/d Kaufman Bros., L.P.
As Representatives of the several
Underwriters listed on Schedule I
By: _______________________________
Title: _______________________________
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF
FIRM
SHARES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------
Kaufman Bros., L.P. . . . . . . . . . . . . . . .
First Albany Corporation
---------
Total . . . . . . . . . . . . . . . . . 3,000,000
---------
---------
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<PAGE>
EXHIBIT A
[REPRESENTATIVE'S WARRANT]
<PAGE>
WARRANT
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON [insert date of fifth
anniversary of closing] _______________, 2001, OR IF NOT A BUSINESS
DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT
FOLLOWING BUSINESS DAY.
WARRANT TO PURCHASE
[_________________]
SHARES OF COMMON STOCK
OF
4FRONT SOFTWARE INTERNATIONAL, INC.
No. W-___
This certifies that, for and in consideration of services rendered and
in connection with the initial public offering of Common Stock of the Company
named below (the "Offering") and other good and valuable consideration,
[ ]and its registered, permitted assigns (collectively, the
"Warrantholder"), is entitled to purchase from 4Front Software International,
Inc., a corporation incorporated under the laws of the State of Colorado (the
"Company"), subject to the terms and conditions hereof, at any time on or
after 9:00 a.m., New York time, on [insert date of closing] _____________,
1996 and before 5:00 p.m., New York time on
[insert date of fifth anniversary at closing] ______________, 2001 (or, if
such day is not a Business Day, at or before 5:00 p.m., New York time, on the
next following Business Day), up to 300,000 fully paid and nonassessable
shares of Common Stock of the Company at the Exercise Price (as defined
herein). The Exercise Price and the number of shares purchasable hereunder
are subject to adjustment from time to time as provided in Article 3 hereof.
A-1
<PAGE>
ARTICLE 1
DEFINITION OF TERMS
As used in this Warrant, the following capitalized terms shall have the
following respective meanings:
(a) BUSINESS DAY: A day other than a Saturday, Sunday or other day on
which banks in the State of New York are authorized by law to remain closed.
(b) COMMON STOCK: Common Stock, $.01 par value, of the Company.
(c) COMMON STOCK EQUIVALENTS: Securities that are convertible into or
exercisable for shares of Common Stock.
(d) DEMAND REGISTRATION: See Section 6.2.
(e) EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
(f) EXERCISE PRICE: $___ per Warrant Share, equal to 130% of the initial
price to public in the offering as set forth on the cover page of the
prospectus, dated _____, 1996, with respect to the initial public offering of
the Company's Common Stock, as such price may be adjusted from time to time
pursuant to Article 3 hereof.
(g) EXPIRATION DATE: 5:00 p.m., New York time, on [fifth anniversary of
closing] _____________, 2001, or if such day is not a Business Day, the next
succeeding day which is a Business Day.
(h) HOLDER: A Holder of Registrable Securities.
(i) NASD: National Association of Securities Dealers, Inc.
(j) NET ISSUANCE EXERCISE DATE: See Section 2.3.
(k) NET ISSUANCE RIGHT: See Section 2.3.
(l) NET ISSUANCE WARRANT SHARES: See Section 2.3.
(m) PERSON: An individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or agency
thereof.
(n) PIGGYBACK REGISTRATION: See Section 6.1.
(o) PROSPECTUS: Any prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement, or to which a Term Sheet
(as defined in Rule 434 under the Securities Act) relates, with respect to the
terms of the
A-2
<PAGE>
offering of any portion of the Registrable Securities covered by such
Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments and all materials incorporated
by reference in such Prospectus.
(p) PUBLIC OFFERING: A public offering of any of the Company's equity or
debt securities pursuant to Registration Statement under the Securities Act.
(q) REGISTRABLE SECURITIES: Any Warrant Shares issued to
[ ]and/or its designees or transferees and/or other securities
that may be or are issued by the Company upon exercise of the Warrants,
including those which may thereafter be issued by the Company in respect of
any such securities by means of any stock splits, stock dividends,
recapitalizations, reclassifications or the like, and as adjusted pursuant to
Article 3 hereof, provided, however, that as to any particular security
contained in Registrable Securities, such securities shall cease to be
Registrable Securities when (i) a Registration Statement with respect to the
sale of such securities shall have become effective under the Securities Act
and such securities shall have been disposed of in accordance with such
Registration Statement; or (ii) they shall have been sold to the public
pursuant to Rule 144 (or any successor provision) under the Securities Act.
(r) REGISTRATION EXPENSES: Any and all expenses incurred in connection
with any registration or action incident to performance of or compliance by the
Company with Article 6, including, without limitation, (i) all SEC, national
securities exchange and NASD registration and filing fees; all listing fees and
all transfer agent fees; (ii) all fees and expenses of complying with state
securities or blue sky laws (including the fees and disbursements of counsel of
the underwriters in connection with blue sky qualifications of the Registrable
Securities); (iii) all printing, mailing, messenger and delivery expenses; (iv)
all fees and disbursements of counsel for the Company and of its accountants,
including the expenses of any special audits and/or "cold comfort" letters
required by or incident to such performance and compliance; and (v) any
disbursements of underwriters customarily paid by issuers or sellers of
securities including the reasonable fees and expenses of any special experts
retained by the underwriters in connection with the requested registration, but
excluding underwriting discounts and commissions, brokerage fees and transfer
taxes, if any, and fees of counsel or accountants retained by the holders of
Registrable Securities to advise them in their capacity as Holders of
Registrable Securities.
(s) REGISTRATION STATEMENT: Any registration statement of the Company
filed or to be filed with the SEC which covers any of the Registrable Securities
pursuant to the provisions of this Agreement, including all amendments
(including post-effective amendments) and supplements thereto, all exhibits
thereto and all material incorporated therein by reference.
(t) SEC: The Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act and the Exchange Act.
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<PAGE>
(u) SECURITIES ACT: The Securities Act of 1933, as amended.
(v) 25% HOLDERS: At any time as to which a Demand Registration is
requested, the Holder and/or the holders of any other Warrants and/or the
holders of Warrant Shares who have the right to acquire or hold, as the case may
be, not less than 25% of the combined total of Warrant Shares issuable and
Warrant Shares outstanding (other than Warrant Shares which are no longer
Registrable Securities by reason of the proviso to the definition of the term
"Registrable Securities") at the time such Demand Registration is requested.
(w) WARRANT SHARES: Common Stock, Common Stock Equivalents and other
securities purchased or purchasable upon exercise or conversion of the Warrants.
(x) WARRANTHOLDER: The person(s) or entity(ies) to whom this Warrant is
originally issued, or any successor in interest thereto, or any assignee or
transferee thereof, in whose name this Warrant is registered upon the books to
be maintained by the Company for that purpose.
(y) WARRANTS: This Warrant, all other warrants issued on the date hereof
and all other warrants that may be issued in its or their place (together
evidencing the right to purchase an aggregate of up to 260,000 shares of Common
Stock), originally issued as set forth in the definition of Registrable
Securities.
ARTICLE 2
DURATION AND EXERCISE OF WARRANT
2.1 DURATION OF WARRANT
The Warrantholder may exercise this Warrant at any time and from time to
time after 9:00 a.m., New York time, on ____________, 1996 [date of closing] and
before 5:00 p.m., New York time, on the Expiration Date. If this Warrant is not
exercised on the Expiration Date, it shall become void, and all rights hereunder
shall thereupon cease.
2.2 METHOD OF EXERCISE
(a) The Warrantholder may exercise this Warrant, in whole or in part,
by presentation and surrender of this Warrant to the Company at its corporate
office at 5650 Greenwood Plaza Boulevard, Englewood, CO 80111, or at the office
of its stock transfer agent, if any, with the Exercise Form annexed hereto duly
executed and, in the event of an exercise for cash pursuant to Section 2.3(a),
accompanied by payment of the full Exercise Price for each Warrant Share to be
purchased.
(b) Upon receipt of this Warrant with the Exercise Form fully
executed and, in the event of an exercise for cash pursuant to Section 2.3(a),
accompanied by payment of the aggregate Exercise Price for the Warrant Shares
for which this Warrant
A-4
<PAGE>
is then being exercised, the Company shall cause to be issued certificates for
the total number of whole shares of Common Stock for which this Warrant is being
exercised (adjusted to reflect the effect of the anti-dilution provisions
contained in Article 3 hereof, if any, and as provided in Section 2.4 hereof) in
such denominations as are requested for delivery to the Warrantholder, and the
Company shall thereupon deliver such certificates to the Warrantholder. A net
issuance exercise pursuant to Section 2.3(b) shall be effective upon receipt by
the Company of this Warrant together with the aforesaid written statement, or on
such later date as is specified therein (the "Net Issuance Exercise Date"), and,
at the election of the Holder hereof, may be made contingent upon the closing of
the sale of the Warrant Shares in a Public Offering. The Warrantholder shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise as of the time of receipt of the Exercise Form and payment in
accordance with the preceding sentence, in the case of an exercise for cash
pursuant to Section 2.3(a), or as of the Net Issuance Exercise Date, in the case
of a net issuance exercise pursuant to Section 2.3(b), notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Warrantholder. If at the time this Warrant is exercised, a Registration
Statement is not in effect to register under the Securities Act the Warrant
Shares issuable upon exercise of this Warrant, the Company may, in the case of
an exercise for cash pursuant to Section 2.3(a) or in the case of a net issuance
exercise prior to the satisfaction of any holding period required by Rule 144
promulgated under the Securities Act, require the Warrantholder to make such
representations, and may place the legends on certificates representing the
Warrant Shares, as may be reasonably required in the opinion of counsel to the
Company to permit the Warrant Shares to be issued without such registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the Warrant Shares that may be purchased under this
Warrant, the Company shall execute as of the exercise date (or, if later, the
Net Issuance Exercise Date) a new warrant in the form of this Warrant for the
balance of such Warrant Shares and deliver such new warrant to the Warrantholder
within 10 days following the exercise date (or, if later, the Net Issuance
Exercise Date).
(d) The Company shall pay any and all stock transfer and similar
taxes which may be payable in respect of the issuance of any Warrant Shares.
2.3 EXERCISE OF WARRANT
(a) RIGHT TO EXERCISE FOR CASH. This Warrant may be exercised by the
Holder by delivery of payment to the Company, for the account of the Company, by
cash, by certified or bank cashier's check or by wire transfer, of the Exercise
Price for the number of Warrant Shares specified in the Exercise Form in lawful
money of the United States of America.
(b) RIGHT TO EXERCISE ON A NET ISSUANCE BASIS. In lieu of exercising
this Warrant for cash pursuant to Section 2.3(a), the Holder shall have the
right to exercise
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this Warrant or any portion thereof (the "Net Issuance Right") into shares of
Common Stock as provided in this Section 2.3(b) at any time or from time to time
during the period specified in Section 2.1 hereof by the surrender of this
Warrant to the Company with a duly executed and completed Exercise Form marked
to reflect net issuance exercise. Upon exercise of the Net Issuance Right with
respect to a particular number of shares subject to this Warrant and noted on
the Exercise Form (the "Net Issuance Warrant Shares"), the Company shall deliver
to the Holder (without payment by the Holder of any Exercise Price or any cash
or other consideration) (X) that number of shares of fully paid and
nonassessable Common Stock equal to the quotient obtained by dividing the value
of this Warrant (or the specified portion hereof) on the Net Issuance Exercise
Date, which value shall be determined by subtracting (A) the aggregate Exercise
Price of the Net Issuance Warrant Shares immediately prior to the exercise of
the Net Issuance Right from (B) the aggregate fair market value of the Net
Issuance Warrant Shares issuable upon exercise of this Warrant (or the specified
portion hereof) on the Net Issuance Exercise Date (as herein defined) by (Y) the
fair market value of one share of Common Stock on the Net Issuance Exercise Date
(as herein defined).
Expressed as a formula, such net issuance exercise shall be computed as
follows:
X = B-A
---
Y
Where: X = the number of shares of Common Stock that may be issued to the
Holder
Y = the fair market value ("FMV") of one share of Common Stock as of
the Net Issuance Exercise Date
A = the aggregate Exercise Price (I.E., the product determined by
multiplying the Net Issuance Warrant Shares by the Exercise
Price)
B = the aggregate FMV (I.E., the product determined by multiplying
the FMV by the Net Issuance Warrant Shares)
(c) DETERMINATION OF FAIR MARKET VALUE. For purposes of this Section
2.3, "fair market value" of a share of Common Stock as of the Net Issuance
Exercise Date shall mean:
(i) if the Net Issuance Right is exercised in connection with
and contingent upon a Public Offering, and if the Company's Registration
Statement
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relating to such Public Offering has been declared effective by the SEC, then
the initial "Price to Public" specified in the final Prospectus with respect to
such offering.
(ii) if the Net Issuance Right is not exercised in connection
with and contingent upon a Public Offering, then as follows:
(A) If traded on a securities exchange, the fair market value of the
Common Stock shall be deemed to be the average of the closing prices of the
Common Stock on such exchange over the 30-day period ending five business days
prior to the Net Issuance Exercise Date;
(B) If traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the fair market value of the Common Stock shall be deemed to be the
average of the last reported sales prices of the Common Stock on such Market
over the 30-day period ending five business days prior to the Net Issuance
Exercise Date;
(C) If traded over-the-counter other than on the Nasdaq National
Market or the Nasdaq SmallCap Market, the fair market value of the Common Stock
shall be deemed to be the average of the closing bid prices of the Common Stock
over the 30-day period ending five business days prior to the Net Issuance
Exercise Date; and
(D) If there is no public market for the Common Stock, then fair
market value shall be determined by mutual agreement of the Warrantholder and
the Company, and if the Warrantholder and the Company are unable to so agree, at
the Company's sole expense, by an investment banker of national reputation
selected by the Company and reasonably acceptable to the Warrantholder.
2.4 RESERVATION OF SHARES
The Company hereby agrees that at all times there shall be reserved for
issuance and delivery upon exercise of this Warrant such number of shares of
Common Stock or other shares of capital stock of the Company from time to time
issuable upon exercise of this Warrant. All such shares shall be duly
authorized, and when issued upon such exercise, shall be validly issued, fully
paid and non-assessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale (except as contemplated
by Sections 2.2(b) and 5.2) and free and clear of all preemptive and other
similar rights.
2.5 FRACTIONAL SHARES
The Company shall not be required to issue any fraction of a share of its
capital stock in connection with the exercise of this Warrant, and in any case
where the Warrantholder would, except for the provisions of this Section 2.5, be
entitled under the terms of this Warrant to receive a fraction of a share upon
the exercise of this Warrant, the Company shall, upon the exercise of this
Warrant, pay to the Warrantholder an
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amount in cash equal to the fair market value of such fractional share as of the
exercise date (or, if applicable and a later date, the Net Issuance Exercise
Date).
2.6 LISTING
Prior to the issuance of any shares of Common Stock upon exercise of this
Warrant, the Company shall secure the listing of such shares of Common Stock
upon each national securities exchange or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, and shall maintain such listing of, any other shares of
capital stock of the Company issuable upon the exercise of this Warrant if and
so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
ARTICLE 3
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events as
provided in this Article 3.
3.1 MECHANICAL ADJUSTMENTS
(a) If at any time prior the exercise of this Warrant in full, the
Company shall (i) declare a dividend or make a distribution on the Common
Stock payable in shares of its capital stock (whether shares of Common Stock
or of capital stock of any other class); (ii) subdivide, reclassify or
recapitalize its outstanding Common Stock into a greater number of shares;
(iii) combine, reclassify or recapitalize its outstanding Common Stock into a
smaller number of shares; or (iv) issue any shares of its capital stock by
reclassification of its Common Stock (including any such reclassification in
connection with a consolidation or a merger in which the Company is the
continuing corporation), the number of Warrant Shares issuable upon exercise
of the Warrant and/or the Exercise Price in effect at the time of the record
date of such dividend, distribution, subdivision, combination,
reclassification or recapitalization shall be adjusted so that the
Warrantholder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised in full immediately prior to
such event, the Warrantholder would have owned upon such exercise and been
entitled to receive by virtue of such dividend, distribution, subdivision,
combination, reclassification or recapitalization. Any adjustment required
by this Section 3.1(a) shall be made successively immediately after the
record date, in the case of a dividend or distribution, or the effective
date, in the case of a subdivision, combination,
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reclassification or recapitalization, to allow the purchase of such aggregate
number and kind of shares.
(b) If any time prior to the exercise of this Warrant in full, the
Company shall fix a record date for the issuance or making of a distribution to
all holders of the Common Stock (including any such distribution to be made in
connection with a consolidation or merger in which the Company is to be the
continuing corporation) of evidences of its indebtedness, any other securities
of the Company or any cash, property or other assets (excluding a combination,
reclassification or recapitalization referred to in Section 3.1(a), regular cash
dividends or cash distributions paid out of net profits legally available
therefor and in the ordinary course of business if the full amount thereof,
together with the value of other dividends and distributions made substantially
concurrently therewith or pursuant to a plan which includes payment thereof, is
equivalent to not more than 5% of the Company's net worth, or subscription
rights, options or warrants for Common Stock or Common Stock Equivalents
(excluding those referred to in Section 3.1(b)) (any such nonexcluded event
being herein called a "Special Dividend")), the Exercise Price shall be
decreased immediately after the record date for such Special Dividend to a price
determined by multiplying the Exercise Price then in effect by a fraction, the
numerator of which shall be the then current market price of the Common Stock
(as defined in Section 3.1(e)) on such record date less the fair market value
(as determined by the Company's Board of Directors) of the evidences of
indebtedness, securities or property, or other assets issued or distributed in
such Special Dividend applicable to one share of Common Stock or of such
subscription rights or warrants applicable to one share of Common Stock and the
denominator of which shall be the then current market price per share of Common
Stock (as so determined). Any adjustments required by this Section 3.1(b) shall
be made successively whenever such a record date is fixed and in the event that
such distribution is not so made, the Exercise Price shall again be adjusted to
be the Exercise Price that was in effect immediately prior to such record date.
(c) If at any time prior to the exercise of this Warrant in full, the
Company shall make a distribution to all holders of the Common Stock of stock of
a subsidiary or securities convertible into or exercisable for such stock, then
in lieu of an adjustment in the Exercise Price or the number of Warrant Shares
purchasable upon the exercise of this Warrant, each Warrantholder, upon the
exercise hereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary or both, as the Company shall
determine, the stock or other securities to which such Warrantholder would have
been entitled if such Warrantholder had exercised this Warrant immediately prior
thereto, all subject to further adjustment as provided in this Article 3, and
the Company shall reserve, for the life of the Warrant, such securities of such
subsidiary or other corporation; provided, however, that no adjustment in
respect of dividends or interest on such stock or other securities shall be made
during the term of this Warrant or upon its exercise.
(d) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to one or more of paragraphs (a) and (b) of this Section
3.1, the
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Warrant Shares shall simultaneously be adjusted by multiplying the number of
Warrant Shares initially issuable upon exercise of each Warrant by the Exercise
Price in effect on the date thereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(e) For the purpose of any computation under this Section 3.1, the
current market price per share of Common Stock at any date shall be deemed to be
the average of the daily closing prices for 20 consecutive trading days
commencing 30 trading days before such date. The closing price for each day
shall be the last sale price regular way or, in case no such reported sales take
place on such day, the average of the last reported bid and asked prices regular
way, in either case on the principal national securities exchange on which the
Common Stock is admitted to trading or listed, or if not listed or admitted to
trading on such exchange, the representative closing bid price as reported by
Nasdaq, or other similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price as determined in good
faith by the Board of Directors of the Company.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($.05)
in such price; provided, however, that any adjustments which by reason of this
paragraph (f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
3.1 shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be. Notwithstanding anything in this Section 3.1 to the
contrary, the Exercise Price shall not be reduced to less than the then existing
par value of the Common Stock as a result of any adjustment made hereunder.
(g) In the event that at any time, as a result of any adjustment made
pursuant to Section 3.1(a), the Warrantholder thereafter shall become entitled
to receive any shares of the Company other than Common Stock, thereafter the
number of such other shares so receivable upon exercise of any Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in this Section 3.1.
(h) In case any event shall occur as to which the other provisions of
this Article 3 are not strictly applicable but as to which the failure to make
any adjustment would not fairly protect the purchase rights represented by this
Warrant in accordance with the essential intent and principles hereof then, in
each such case, the Warrantholders representing the right to purchase a majority
of the Warrant Shares subject to all outstanding Warrants may appoint a firm of
independent public accountants of recognized national standing reasonably
acceptable to the Company, which shall give their opinion as to the adjustment,
if any, on a basis consistent with the essential intent and principles
established herein, necessary to preserve the purchase rights represented by the
Warrants. Upon receipt of such opinion, the Company will promptly mail a copy
thereof to the Warrantholder and shall make the
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adjustments described therein. The fees and expenses of such independent public
accountants shall be borne by the Company.
(i) If, as a result of an adjustment made pursuant to this Article 3,
the Holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock or shares of
Common Stock and other capital stock of the Company, the Board of Directors
(whose determination shall be conclusive and shall be described in a written
notice to the Holder of any Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Exercise Price between or among shares
or such classes of capital stock or shares of Common Stock and other capital
stock.
3.2 NOTICES OF ADJUSTMENT
Whenever the number of Warrant Shares or the Exercise Price is adjusted as
herein provided, the Company shall prepare and deliver forthwith to the
Warrantholder a certificate signed by its President, and by any Vice President,
Treasurer or Secretary, setting forth the adjusted number of shares purchasable
upon the exercise of this Warrant and the Exercise Price of such shares after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which adjustment was made.
3.3 NO ADJUSTMENT FOR DIVIDENDS
Except as provided in Section 3.1 of this Agreement, no adjustment in
respect of any cash dividends shall be made during the term of this Warrant or
upon the exercise of this Warrant.
3.4 PRESERVATION OF PURCHASE RIGHTS IN CERTAIN TRANSACTIONS
In case of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock (other than a subdivision or combination of
the outstanding Common Stock and other than a change in the par value of the
Common Stock) or in case of any consolidation or merger of the Company with or
into another corporation (other than merger with a subsidiary in which the
Company is the continuing corporation and that does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in the
case of any sale, lease, transfer or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety, the Holder of this Warrant shall have the right thereafter to receive
on the exercise of this Warrant the kind and amount of securities, cash or other
property which the Holder would have owned or have been entitled to receive
immediately after such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate
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adjustment shall be made in the application of the provisions set forth in this
Article 3 with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth in this Article 3 shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock or other securities or property thereafter
deliverable on the exercise of this Warrant. The provisions of this Section 3.4
shall similarly apply to successive reorganizations, reclassifications,
consolidations, mergers, statutory exchanges, sales or conveyances. The issuer
of any shares of stock or other securities or property thereafter deliverable on
the exercise of this Warrant shall be responsible for all of the agreements and
obligations of the Company hereunder. Notice of any such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and of said provisions so proposed to be made, shall be mailed to the Holders of
the Warrants not less than 30 days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
3.5 FORM OF WARRANT AFTER ADJUSTMENTS
The form of this Warrant need not be changed because of any adjustments in
the Exercise Price or the number or kind of the Warrant Shares, and Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in this Warrant, as initially issued.
3.6 TREATMENT OF WARRANTHOLDER
Prior to due presentment for registration of transfer of this Warrant, the
Company may deem and treat the Warrantholder as the absolute owner of this
Warrant (notwithstanding any notation of ownership or other writing hereon) for
all purposes and shall not be affected by any notice to the contrary.
ARTICLE 4
OTHER PROVISIONS RELATING TO RIGHTS OF WARRANTHOLDER
4.1 NO RIGHTS AS SHAREHOLDERS; NOTICE TO WARRANTHOLDERS
Nothing contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Company or of any
other matter, or any rights whatsoever as shareholders of the Company. The
Company shall give notice to the Warrantholder by registered mail if at any time
prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of any dividend payable
in any securities upon shares of Common Stock or authorize the making of
any
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distribution (other than a cash dividend subject to the parenthetical set
forth in Section 3.1(b)) to all holders of Common Stock;
(b) the Company shall authorize the issuance to all holders of Common
Stock of any additional shares of Common Stock or Common Stock Equivalents
or of rights, options or warrants to subscribe for or purchase Common Stock
or Common Stock Equivalents or of any other subscription rights, options or
warrants;
(c) a dissolution, liquidation or winding up of the Company shall be
proposed; or
(d) a capital reorganization or reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock
and other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the
continuing corporation and that does not result in any reclassification or
change of Common Stock outstanding) or in the case of any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety.
Such giving of notice shall be initiated (i) at least 10 Business Days
prior to the date fixed as a record date or effective date or the date of
closing of the Company's stock transfer books for the determination of the
shareholders entitled to such dividend, distribution or subscription rights, or
for the determination of the shareholders entitled to vote on such proposed
merger, consolidation, sale, conveyance, dissolution, liquidation or winding up.
Such notice shall specify such record date or the date of closing the stock
transfer books, as the case may be. Failure to provide such notice shall not
affect the validity of any action taken in connection with such dividend,
distribution or subscription rights, or proposed merger, consolidation, sale,
conveyance, dissolution, liquidation or winding up.
4.2 LOST, STOLEN, MUTILATED OR DESTROYED WARRANTS
If this Warrant is lost, stolen, mutilated or destroyed, the Company may,
on such terms as to indemnity or otherwise as it may in its reasonable judgment
impose (which shall, in the case of a mutilated Warrant, including the surrender
thereof), issue a new Warrant of like denomination and tenor as, and in
substitution for, this Warrant.
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ARTICLE 5
SPLIT-UP, COMBINATION, EXCHANGE AND
TRANSFER OF WARRANTS AND WARRANT SHARES
5.1 SPLIT-UP, COMBINATION AND EXCHANGE OF WARRANTS
This Warrant may be split up, combined or exchanged for another Warrant or
Warrants containing the same terms to purchase a like aggregate number of
Warrant Shares. If the Warrantholder desires to split up, combine or exchange
this Warrant, he or it shall make such request in writing delivered to the
Company and shall surrender to the Company this Warrant and any other Warrants
to be so split-up, combined or exchanged. Upon any such surrender for a
split-up, combination or exchange, the Company shall execute and deliver to the
person entitled thereto a Warrant or Warrants, as the case may be, as so
requested. The Company shall not be required to effect any split-up,
combination or exchange which will result in the issuance of a Warrant entitling
the Warrantholder to purchase upon exercise a fraction of a share of Common
Stock or a fractional Warrant. The Company may require such Warrantholder to
pay a sum sufficient to cover any tax or governmental charge that may be imposed
in connection with any split-up, combination or exchange of Warrants.
5.2 RESTRICTIONS ON TRANSFER, RESTRICTIVE LEGENDS
Except as otherwise permitted by this Section 5.2, each Warrant shall (and
each Warrant issued upon direct or indirect transfer or in substitution for any
Warrant issued pursuant to Section 5.1 shall) be stamped or otherwise imprinted
with a legend in substantially the following form:
"THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SUCH ACT OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
Except as otherwise permitted by this Section 5.2, each stock certificate
for Warrant Shares issued upon the exercise of any Warrant and each stock
certificate issued upon the direct or indirect transfer of any such Warrant
Shares shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FILED UNDER SUCH ACT OR
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PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
Notwithstanding the foregoing, the Warrantholder may require the Company to
issue a Warrant or a stock certificate for Warrant Shares, in each case without
a legend, if (i) the issuance of such Warrant Shares has been registered under
the Securities Act, (ii) such Warrant or such Warrant Shares, as the case may
be, have been registered for resale under the Securities Act or sold pursuant to
Rule 144 under the Securities Act (or a successor thereto) or (iii) the
Warrantholder has received an opinion of counsel (who may be house counsel for
such Warrantholder) reasonably satisfactory to the Company that such
registration is not required with respect to such Warrant or such Warrant
Shares, as the case may be.
ARTICLE 6
REGISTRATION UNDER THE SECURITIES ACT OF 1933
6.1 PIGGYBACK REGISTRATION
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If at any time or from
time to time prior to the second anniversary of the Expiration Date, the Company
proposes to register any of its securities under the Securities Act on any form
for the registration of securities under such Act, whether or not for its own
account (other than by a registration statement on Form S-8 or other form which
does not include substantially the same information as would be required in a
form for the general registration of securities or would not be available for
the Registrable Securities) (a "Piggyback Registration"), it shall as
expeditiously as possible give written notice to all Holders of its intention to
do so and of such Holders' rights under this Section 6.1. Such rights are
referred to hereinafter as "Piggyback Registration Rights." Upon the written
request of any such Holder made within 20 days after receipt of any such notice
(which request shall specify the Registrable Securities intended to be disposed
of by such Holder), the Company shall include in the Registration Statement the
Registrable Securities which the Company has been so requested to register by
the Holders thereof and the Company shall keep such registration statement in
effect and maintain compliance with each federal and state law or regulation for
the period necessary for such Holder to effect the proposed sale or other
disposition (but in no event for a period greater than 90 days).
(b) WITHDRAWAL OF PIGGYBACK REGISTRATION BY COMPANY. If, at any time
after giving written notice of its intention to register any securities in a
Piggyback Registration but prior to the effective date of the related
Registration Statement, the Company shall determine for any reason not to
register such securities, the Company shall give notice of such determination to
each Holder and, thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such Piggyback Registration. All best
efforts obligations of the Company pursuant to Section 6.4 shall cease if the
Company determines to terminate prior to such effective date any
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registration where Registrable Securities are being registered pursuant to this
Section 6.1.
(c) PIGGYBACK REGISTRATION OF UNDERWRITTEN PUBLIC OFFERING. If a
Piggyback Registration involves an offering by or through underwriters, then (i)
all Holders requesting to have their Registrable Securities included in the
Company's Registration Statement must sell their Registrable Securities to the
underwriters selected by the Company on the same terms and conditions as apply
to other selling shareholders and (ii) any Holder requesting to have his or its
Registrable Securities included in such Registration Statement may elect in
writing, not later than three Business Days prior to the effectiveness of the
Registration Statement filed in connection with such registration, not to have
his or its Registrable Securities so included in connection with such
registration.
(d) PAYMENT OF REGISTRATION EXPENSES FOR PIGGYBACK REGISTRATION. The
Company shall pay all Registration Expenses in connection with each registration
of Registrable Securities requested pursuant to a Piggyback Registration Right
contained in this Section 6.1.
(e) PRIORITY IN PIGGYBACK REGISTRATION. If a Piggyback Registration
involves an offering by or through underwriters, the Company, except as
otherwise provided herein, shall not be required to include Registrable Shares
therein if and to the extent the underwriter managing the offering reasonably
believes in good faith and advises each Holder requesting to have Registrable
Securities included in the Company's Registration Statement that such inclusion
would materially adversely affect such offering; provided that (i) if other
selling shareholders without contractual registration rights have requested
registration of securities in the proposed offering, the Company will reduce or
eliminate such securities held by selling shareholders without registration
rights before any reduction or elimination of Registrable Securities; and
(ii) any such reduction or elimination (after taking into account the effect of
clause (i)) shall be pro rata to all other selling shareholders with contractual
registration rights.
6.2 DEMAND REGISTRATION
(a) REQUEST FOR REGISTRATION. If, at any time prior to the
Expiration Date, any 25% Holders request that the Company file a registration
statement under the Securities Act, as soon as practicable thereafter the
Company shall use its best efforts to file a registration statement with respect
to all Warrant Shares that it has been so requested to include and obtain the
effectiveness thereof, and to take all other action necessary under federal or
state law or regulation to permit the Warrant Shares that are held and/or that
may be acquired upon the exercise of the Warrants specified in the notices of
the Holders or holders hereof to be sold or otherwise disposed of, and the
Company shall maintain such compliance with each such federal and state law and
regulation for the period necessary for such Holders or Holders to effect the
proposed sale or other disposition; provided, however, the Company shall be
entitled to defer such registration for a period of up to 60 days if and to the
extent that its Board of
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Directors shall in good faith determine that such registration would require
disclosure of information not otherwise then required to be disclosed and that
such disclosure would adversely affect any material business situation,
transaction or negotiation then proposed, contemplated or being engaged in by
the Company. The Company shall also promptly give written notice to the Holders
and the holders of any other Warrants and/or the holders of any Warrant Shares
who or that have not made a request to the Company pursuant to the provisions of
this Section 6.2(a) of its intention to effect any required registration or
qualification, and shall use its best efforts to effect as expeditiously as
possible such registration or qualification of all such other Warrant Shares
that are then held and/or that may be acquired upon the exercise of the
Warrants, the Holder or holders of which have requested such registration or
qualification, within 15 days after such notice has been given by the Company,
as provided in the preceding sentence. The Company shall be required to effect
a registration or qualification pursuant to this Section 6.2(a) on one occasion
only.
(b) PAYMENT OF REGISTRATION EXPENSES FOR DEMAND REGISTRATION. The
Company shall pay all Registration Expenses in connection with the Demand
Registration.
(c) SELECTION OF UNDERWRITERS. If any Demand Registration is
requested to be in the form of an underwritten offering, the managing
underwriter shall be Kaufman Bros., L.P. and the co-manager (if any) and the
independent price required under the rules of the NASD (if any) shall be
selected and obtained by the Holders of a majority of the Warrant Shares to be
registered. Such selection shall be subject to the Company's consent, which
consent shall not be unreasonably withheld. All fees and expenses (other than
Registration Expenses otherwise required to be paid) of any managing
underwriter, any co-manager or any independent underwriter or other independent
price required under the rules of the NASD shall be paid for by such
underwriters or by the Holders or holders whose shares are being registered. If
Kaufman Bros., L.P. should decline to serve as managing underwriter, the Holders
of a majority of the Warrant Shares to be registered may select and obtain one
or more managing underwriters. Such selection shall be subject to the Company's
consent, which shall not be unreasonably withheld.
(d) PROCEDURE FOR REQUESTING DEMAND REGISTRATION. Any request for a
Demand Registration shall specify the aggregate number of the Registrable
Securities proposed to be sold and the intended method of disposition. Within
10 days after receipt of such a request the Company will give written notice of
such registration request to all Holders, and, subject to the limitations of
Section 6.2(b), the Company will include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within 15 Business Days after the date on which such notice is
given. Each such request shall also specify the aggregate number of Registrable
Securities to be registered and the intended method of disposition thereof.
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6.3 BUY-OUTS OF REGISTRATION DEMAND
In lieu of carrying out its obligations to effect a Piggyback Registration
or Demand Registration of any Registrable Securities pursuant to this Article 6,
the Company may carry out such obligation by offering to purchase and purchasing
such Registrable Securities requested to be registered in an amount in cash
equal to the difference between (a) 95% of the last sale price of the Common
Stock on the day the request for registration is made and (b) the Exercise Price
in effect on such day; provided, however, that the Holder or Holders may
withdraw such request for registration rather than accept such offer by the
Company.
6.4 REGISTRATION PROCEDURES
If and whenever the Company is required to use its best efforts to take
action pursuant to any Federal or state law or regulation to permit the sale or
other disposition of any Registrable Securities that are then held or that may
be acquired upon exercise of the Warrants in order to effect or cause the
registration of any Registrable Securities under the Securities Act as provided
in this Article 6, the Company shall, as expeditiously as practicable:
(a) prepare and file with the SEC, as soon as practicable within 60
days after the end of the period within which requests for registration may be
given to the Company (but subject to the provision for deferral contained in
Section 6.2(a) hereof) a Registration Statement or Registration Statements
relating to the registration on any appropriate form under the Securities Act,
which form shall be available for the sale of the Registrable Securities in
accordance with the intended method or methods of distribution thereof, and use
its best efforts to cause such Registration Statements to become effective;
provided that before filing a Registration Statement or Prospectus or any
amendment or supplements thereto, including documents incorporated by reference
after the initial filing of any Registration Statement, the Company will furnish
to the Holders of the Registrable Securities covered by such Registration
Statement and the underwriters, if any, copies of all such documents proposed to
be filed, which documents will be subject to the review of such Holders and
underwriters;
(b) prepare and file with the SEC such amendments and post-effective
amendments to a Registration Statement as may be necessary to keep such
Registration Statement effective for 180 days if the offering is not
underwritten, provided, that such 180 day period shall be extended by the number
of days a Prospectus is not available pursuant to Section 6.4(k) because of the
occurrence of an event set forth in Section 6.4(c)(vi); cause the related
Prospectus to be supplemented by any required Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 under the Securities Act; and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such Registration Statement or supplement to such Prospectus;
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(c) notify the selling Holders of Registrable Securities and the
managing underwriters, if any, promptly, and (if requested by any such Person)
confirm such advice in writing, (i) when a Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to a
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the SEC for amendments or supplements to a
Registration Statement or related Prospectus or for additional information;
(iii) of the issuance by the SEC of any stop order suspending the effectiveness
of a Registration Statement or the initiation of any proceedings for that
purpose; (iv) if at any time the representations and warranties of the Company
contemplated by paragraph (m) below ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with
respect to the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purposes; and (vi) of the happening of any event that makes
any statement of a material fact made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement or Prospectus
so that they will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading:
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the earliest
possible moment;
(e) if reasonably requested by the managing underwriters, immediately
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters believe (on advice of counsel) should
be included therein as required by applicable law relating to such sale of
Registrable Securities, including, without limitation, information with respect
to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or
"best-efforts" underwritten) offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(f) furnish to each selling Holder of Registrable Securities and each
managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(g) deliver to each selling Holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Prospectus or
Prospectuses (including each preliminary prospectus) any amendment or supplement
thereto as such Persons may reasonably request; the Company consents to the use
of such Prospectus or any amendment or supplement thereto by each of the selling
Holders of Registrable Securities and the underwriters, if any, in connection
with the offering and sale of the
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Registrable Securities covered by such Prospectus or any amendment or supplement
thereto;
(h) prior to any public offering of Registrable Securities, cooperate
with the selling Holders of Registrable Securities, the underwriters, if any,
and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any selling Holder or underwriter reasonably requests in writing, keep each such
registration or qualification effective during the period such Registration
Statement is required to be kept effective and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of
the Registrable Securities covered by the applicable Registration Statement;
provided that the Company will not be required to qualify to do business in any
jurisdiction where it not then so qualified or to take any action which would
subject the Company to general service of process in any jurisdiction where it
is not at the time so subject;
(i) cooperate with the selling Holders of Registrable Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and enable such Registrable Securities to be in
such denominations and registered in such names as the managing underwriters may
request at least two Business Days prior to any sale of Registrable Securities
to the underwriters;
(j) use its best efforts to cause the Registrable Securities covered
by the applicable Registration Statement to be registered with or approved by
such other governmental agencies or authorities within the United States as may
be necessary to enable the seller or sellers thereof or the underwriters, if
any, to consummate the disposition of such Registrable Securities;
(k) upon the occurrence of any event contemplated by Section
6.4(c)(vi) above, prepare a supplement or post-effective amendment to the
applicable Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(l) with respect to each issue or class of Registrable Securities,
use its best efforts to cause all Registrable Securities covered by the
Registration Statements to be listed on each securities exchange or automated
quotation system, if any, on which similar securities issued by the Company are
then listed if requested by the Holders of a majority of such issue or class of
Registrable Securities;
(m) enter into such agreements (including an underwriting agreement)
and take all such other action reasonably required in connection therewith in
order to
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expedite or facilitate the disposition of such Registrable Securities and in
such connection, if the registration is in connection with an underwritten
offering (i) make such representations and warranties to the underwriters (or
the Holders of the Registrable Securities if such offering is not underwritten),
in such form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions in form, scope and substance shall be reasonably
satisfactory to the underwriters) addressed to the underwriters (or the Holders
of the Registrable Securities if such offering is not underwritten) covering the
matters customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such underwriters (or the
Holders of the Registrable Securities if such offering is not underwritten);
(iii) obtain "cold comfort" letters and updates thereof from the Company's
accountants addressed to the underwriters (or the Holders of the Registrable
Securities if such offering is not underwritten), such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters by underwriters in connection with underwritten offerings; (iv)
set forth in full in any underwriting agreement entered into the indemnification
provisions and procedures of Section 6.5 hereof with respect to all parties to
be indemnified pursuant to said Section; and (v) deliver such documents and
certificates as may be reasonably requested by the underwriters to evidence
compliance with clause (i) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company; the
above shall be done at each closing under such underwriting or similar agreement
or as and to the extent required hereunder;
(n) make available for inspection by one or more representatives of
the Holders of Registrable Securities being sold, any underwriter participating
in any disposition pursuant to such registration, and any attorney or accountant
retained by such Holders or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such representatives, in connection with such; and
(o) otherwise use its best efforts to comply with all applicable
Federal and state regulations; and take such other action as may be reasonably
necessary to or advisable to enable each such Holder and each such underwriter
to consummate the sale or disposition in such jurisdiction or jurisdiction in
which any such Holder or underwriter shall have requested that the Registrable
Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have sole
control in connection with the preparation, filing, withdrawal, amendment or
supplementing of each Registration Statement, the selection of underwriters, and
the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other
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securities for its own account or for the account of one or more of its other
security holders.
The Company may require each Seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such securities and such other information as may
otherwise be required by the Securities Act to be included in such Registration
Statement.
6.5 INDEMNIFICATION
(a) INDEMNIFICATION BY COMPANY. In connection with each Registration
Statement relating to disposition of Registrable Securities, the Company shall
indemnify and hold harmless each Holder, its officers, directors and agents and
each underwriter of Registrable Securities and each Person, if any, who controls
such Holder or underwriter (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement, Prospectus or
preliminary prospectus or any amendment thereof or supplement thereto, or arise
out of or are based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that such indemnity shall not inure
to the benefit of any Holder or underwriter (or any Person controlling such
Holder or underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) on account of any losses, claims, damages or
liabilities arising from the sale of the Registrable Securities if such untrue
statement or omission or alleged untrue statement or omission was made in such
Registration Statement, Prospectus or preliminary prospectus, or such amendment
or supplement, in reliance upon and in conformity with information furnished in
writing to the Company by such Holder or underwriter specifically for use
therein. The Company shall also indemnify selling brokers, dealer managers and
similar securities industry professionals participating in the distribution,
their officers and directors and each Person who controls such Persons (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the Holders of Registrable Securities, if requested. This indemnity agreement
shall be in addition to any liability which the Company may otherwise have.
(b) INDEMNIFICATION BY HOLDER. In connection with each Registration
Statement, each Holder shall indemnify, to the same extent as the
indemnification provided by the Company in Section 6.5(a), the Company, its
directors and each officer who signs the Registration Statement and each Person
who controls the Company
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(within the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act) but only insofar as such losses, claims, damages and liabilities
arise out of or are based upon any untrue statement or omission or alleged
untrue statement or omission which was made in the Registration Statement, the
Prospectus or preliminary prospectus or any amendment thereof or supplement
thereto, in reliance upon and in conformity with information furnished in
writing by such Holder to the Company specifically for use therein. In no event
shall the liability of any selling Holder of Registrable Securities hereunder be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation. The Company shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the same
extent as provided above, with respect to information so furnished in writing by
such Persons specifically for inclusion in any Prospectus, Registration
Statement or preliminary prospectus or any amendment thereof or supplement
thereto.
(c) CONDUCT OF INDEMNIFICATION PROCEDURE. Any party that proposes to
assert the right to be indemnified hereunder will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party or parties
under this Section, notify each such indemnifying party of the commencement of
such action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 6.5(a) or 6.5(b) shall be available to
any party who shall fail to give notice as provided in this Section 6.5(c) if
the party to whom notice was not given was unaware of the proceeding to which
such notice would have related and was prejudiced by the failure to give such
notice, but the omission so to notify such indemnifying party of any such
action, suit or proceeding shall not relieve it from any liability that it may
have to any indemnified party for contribution otherwise than under this
Section. In case any such action, suit or proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and the approval by the indemnified party of such counsel, the indemnifying
party shall not be liable to such indemnified party for any legal or other
expenses, except as provided below and except for the reasonable costs of
investigation subsequently incurred by such indemnified party in connection with
the defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (i) the employment of counsel by
such indemnified party has been authorized in writing by the indemnifying
parties, (ii) the indemnified party shall have reasonably concluded that there
may be a conflict of interest between the indemnifying parties and the
indemnified party in the conduct of the defense of such action (in which case
the indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (iii) the indemnifying parties
shall not have
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employed counsel to assume the defense of such action within a reasonable time
after notice of the commencement thereof, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying parties. An
indemnified party shall not be liable for any settlement of any action, suit,
proceeding or claim effected without its written consent.
(d) CONTRIBUTION. In connection with each Registration Statement
relating to the disposition of Registrable Securities, if the indemnification
provided for in subsection (a) hereof is unavailable to an indemnified party
thereunder in respect to any losses, claims, damages or liabilities referred to
therein, then the indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 6.5 in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. Notwithstanding anything
to the contrary in this Section 6.5(d), no selling Holder of Registrable
Securities shall be required to contribute any amount in excess of the net
proceeds it received in connection with its sale of Registrable Securities.
(e) UNDERWRITING AGREEMENT TO CONTROL. Notwithstanding the foregoing
provisions of this Section 6.5, to the extent that the provisions on
indemnification and contribution contained in any underwriting agreement entered
into in connection with the underwritten public offering of the Registrable
Securities are in conflict with the foregoing provisions, the provisions in such
underwriting agreement shall control.
(f) SPECIFIC PERFORMANCE. The Company and the Holder acknowledge
that remedies at law for the enforcement of this Section 6.5 may be inadequate
and intend that this Section 6.5 shall be specifically enforceable.
(g) SURVIVAL OF OBLIGATIONS. The obligations of the Company and the
Holder under this Section 6.5 shall survive the completion of any offering of
Registrable Securities pursuant to a Registration Statement under this Article
6, and otherwise.
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6.6 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934
With a view to making available to the Holders the benefits of Rule 144
promulgated under the Securities Act and any other rule or regulation of the SEC
that may at any time permit a Holder to sell securities of the Company to the
public without registration or pursuant to a registration on Form S-3, the
Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined us SEC Rule 144, at all times after 90 days after the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company), the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
ARTICLE 7
OTHER MATTERS
7.1 BINDING EFFECTS; BENEFITS
This Warrant shall inure to the benefit of and shall be binding upon the
Company and the Warrantholder and their respective heirs, legal representatives,
successors and assigns. Nothing in this Warrant, expressed or implied, is
intended to or shall confer on any person other than the Company and the
Warrantholder, or their respective heirs, legal representatives, successors or
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Warrant.
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7.2 NO INCONSISTENT AGREEMENTS
The Company will not on or after the date of this Warrant enter into any
agreement with respect to its securities which is inconsistent with the rights
granted to the Holders in this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any
way conflict with and are not inconsistent with the rights granted to holders of
the Company's securities under any other agreements.
7.3 ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES
The Company will not take any action outside the ordinary course of
business, or permit any change within its control to occur outside the ordinary
course of business, with respect to the Registrable Securities which is without
a bona fide business purpose, and which is intended to interfere with the
ability of the Holders of Registrable Securities to include such Registrable
Securities in a registration undertaken pursuant to this Agreement.
7.4 INTEGRATION/ENTIRE AGREEMENT
This Warrant is intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Company with respect to the Warrants.
This Warrant supersedes all prior agreements and understandings between the
parties with respect to such subject matter (other than warrants previously
issued by the Company to the Warrantholder).
7.5 AMENDMENTS AND WAIVERS
The provisions of this Warrant, including the provisions of this sentence,
may not be amended, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given unless the Company has
obtained the written consent of holders of at least a majority of the
outstanding Registrable Securities. Holders shall be bound by any consent
authorized by this Section whether or not certificates representing such
Registrable Securities have been marked to indicate such consent.
7.6 COUNTERPARTS
This Warrant may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
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7.7 GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the laws
of the State of New York.
7.8 SEVERABILITY
In the event that any one or more of the provisions contained herein, or
the application thereof in any circumstances, is held invalid, illegal or
unenforceable, the validity, legality and enforceability of any such provisions
in every other respect and of the remaining provisions contained herein shall
not be affected or impaired thereby.
7.9 ATTORNEYS' FEES
In any action or proceeding brought to enforce any provisions of this
Warrant, or where any provision hereof is validly asserted as a defense, the
successful party shall be entitled to recover reasonable attorneys' fees and
disbursements in addition to its costs and expenses and any other available
remedy.
7.10 COMPUTATIONS OF CONSENT
Whenever the consent or approval of Holders of a specified percentage of
Registrable Securities is required hereunder, Registrable Securities held by the
Company or its affiliates (other than the Warrantholder or subsequent Holders if
they are deemed to be such affiliates solely by reason of their holdings of such
Registrable Securities) shall not be counted in determining whether such consent
or approval was given by the Holders of such required percentage.
7.11 NOTICE
Any notices or certificates by the Company to the Holder and by the
Holder to the Company shall be deemed delivered if in writing and delivered
in person or by registered mail (return receipt requested) to the Holder
addressed to him in care of [Kaufman Bros., L.P., 800 Third Avenue,
New York, New York 10022], or, if the Holder has designated, by notice in
writing to the Company, any other address, to such other address, and if to
the Company, addressed to it at: 5650 Greenwood Plaza Boulevard, Englewood,
CO 80111, Attention: Secretary, with a copy to Miller & Holguin, 1801 Century
Park East, Los Angeles, CA 90067, Attention: Howard Unterberger, Esq. or if
the Company has designated, by notice in writing to the Holder, any other
address, to such other address.
7.12 TRANSFER
Notwithstanding anything to the contrary contained herein, the
Warrantholder will not sell, assign, pledge, or transfer this Warrant, except to
its officers or partners,
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or to the officers or partners of an underwriter of the Offering for a period of
one year from the date hereof.
The Company may change its address by written notice to the Holder and the
Holder may change its address by written notice to the Company.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ____ day of _______________, 1996.
4FRONT SOFTWARE INTERNATIONAL, INC.
By:
-----------------------------
Title:
-----------------------------
Attest:
-----------------------
Secretary
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EXERCISE FORM
(To be executed upon exercise of Warrant)
4Front Software International, Inc.
5650 Greenwood Plaza Boulevard
Englewood, CO 80111
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase Warrant Shares and (check one):
/ / herewith tenders payment for ______________ of the Warrant Shares to
the order of 4Front Software International, Inc. in the amount of
$______ in accordance with the terms of this Warrant; or
/ / herewith tenders this Warrant for ______________ Warrant Shares
pursuant to the net issuance exercise provisions of Section 2.3(b) of
this Warrant.
Please issue a certificate or certificates for such Warrant Shares in the
name of, and pay any cash for any fractional share to:
Name
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
(Please print Name, Address and Social
Security No.)
Signature
----------------------------------------
Note: The above signature should correspond
exactly with the name on the first page
of this Warrant Certificate or with the
name of the assignee appearing in the
assignment form below.
If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder.
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ASSIGNMENT
(To be executed only upon assignment of Warrant)
For value received, ___________________ hereby sells, assigns and transfers
unto __________________ the within Warrant, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
______________________ attorney, to transfer said Warrant on the books of the
within-named Company with respect to the number of Warrant Shares set forth
below, with full power of substitution in the premises:
Name(s) of No. of
Assignee(s) Address Warrant Shares
- ----------- ------- --------------
And if said number of Warrant Shares shall not be all the Warrant Shares
represented by the Warrant, a new Warrant is to be issued in the name of said
undersigned for the balance remaining of the Warrant Shares registered by said
Warrant.
Dated: , 19 Signature
------------ -- -----------------------------------
Note: The above signature should
correspond exactly with the name on
the face of this Warrant
A-30
<PAGE>
EXHIBIT B
FORM OF LOCK-UP AGREEMENT
, 1996
------------------
Kaufman Bros., L.P.
First Albany Corporation
c/d Kaufman Bros., L.P.
As Representatives of the several Underwriters
800 Third Avenue,
New York, New York 10022
Ladies and Gentlemen:
The undersigned understands that you propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") with 4Front Software International,
Inc. (the "Company") and certain shareholders of the Company (the "Selling
Shareholders") providing for the purchase by you and such other firms (the
"Underwriters") of shares (the "Shares") of Common Stock, par value $0.01 per
share (the "Common Stock"), of the Company and that the Underwriters propose to
offer the Shares to the public. The undersigned further understands that the
proposed sale of such Shares is the subject of a Registration Statement on Form
S-1 which will be filed with the Securities and Exchange Commission and which
will include a form of preliminary prospectus to be used in offering such Shares
to the public.
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that without the prior written consent of Kaufman
Bros., L.P. (the "Kaufman"), which consent may be withheld in Kaufman sole
discretion, the undersigned will not offer to sell, contract to sell, sell,
distribute, grant any option to purchase, pledge, hypothecate, or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock for a period of 365 days after the date of the final prospectus
relating to the offering of the Shares to the public by the Underwriter
except for the exercise by the undersigned of outstanding options granted by
the Company or pursuant to any options granted or to be granted pursuant to
employee stock option plans (but not the sale, distribution, pledge,
hypothecation or other disposition of Common Stock received upon such
exercise). After such period, all shares of Common Stock owned by the
undersigned may be sold without restriction hereunder, subject to applicable
securities laws and regulations.
The undersigned agrees that the provisions of this Agreement shall be
binding upon the successors, assigns, heirs and personal representatives of the
undersigned.
B-1
<PAGE>
In furtherance of the foregoing, the undersigned agrees that the Company
and its transfer agent are hereby authorized to decline to make any transfer of
securities if such transfer would constitute a violation or breach of this
Agreement.
It is understood that, if the Underwriting Agreement does not become
effective prior to ________________, or if the Underwriting Agreement (other
than the provisions thereof which survive termination) shall terminate or be
terminated prior to payment for and delivery of the Shares, the undersigned's
obligations under this Agreement shall terminate.
Very truly yours,
By:____________________________
_____________________________________
Print name and title (if applicable)
B-2
<PAGE>
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- --------------------------------------------------------------------------------
4FRONT SOFTWARE INTERNATIONAL, INC.
1996 EQUITY INCENTIVE PLAN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. PURPOSE...................................................................1
2. SHARES SUBJECT TO THE PLAN................................................1
2.1 Number of Shares Available...........................................1
2.2 Adjustment of Shares.................................................1
3. ELIGIBILITY...............................................................2
3.1 Eligibility of Employees, Consultants and Independent Contractors....2
3.2 Eligibility of Directors.............................................2
4. ADMINISTRATION............................................................2
4.1 Committee Authority..................................................2
4.2 Committee Discretion.................................................3
4.3 Exchange Act Requirements............................................3
5. GRANT AND EXERCISE OF OPTIONS.............................................3
5.1 Grant of Options to Persons Other Than Directors.....................3
5.1.2 Date of Grant..............................................4
5.1.3 Exercise Period............................................4
5.1.4 Exercise Price.............................................4
5.1.5 Method of Exercise.........................................5
5.1.6 Termination................................................5
5.1.7 Limitations on Exercise....................................5
5.1.8 Limitations on ISOs........................................5
5.1.9 Modification, Extension or Renewal.........................6
5.1.10 No Disqualification........................................6
5.1.11 Initial Grants to Executive Officers.......................6
5.2 Grant of Options to Directors........................................6
5.2.1 Form of Option Grant.......................................6
5.2.2 Formula for Grant of Options to Directors..................7
5.2.3 Exercise Period............................................7
5.2.4 Exercise Price.............................................7
i
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5.2.5 Method of Exercise.........................................8
5.2.6 Termination................................................8
5.2.7 Limitations on ISOs........................................8
5.2.8 No Disqualification........................................8
5.3 Accelerated Vesting..................................................8
6. PAYMENT FOR SHARE PURCHASES...............................................8
6.1 Payment..............................................................8
7. WITHHOLDING TAXES.........................................................9
7.1 Withholding Generally................................................9
8. PRIVILEGES OF STOCK OWNERSHIP.............................................9
8.1 Voting and Dividends.................................................9
8.2 Financial Statements................................................10
9. TRANSFERABILITY..........................................................10
10. CERTIFICATES.............................................................10
11. EXCHANGE AND BUYOUT OF OPTIONS...........................................10
12. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE...........................10
13. NO OBLIGATION TO EMPLOY..................................................11
14. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE...............................11
15. ADOPTION AND STOCKHOLDER APPROVAL........................................12
16. TERM OF PLAN.............................................................12
17. AMENDMENT OR TERMINATION OF PLAN.........................................13
18. NONEXCLUSIVITY OF THE PLAN...............................................13
19. GOVERNING LAW............................................................13
20. DEFINITIONS..............................................................13
ii
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC.
1996 EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of the Plan is to provide incentives to attract, retain
and motivate eligible persons whose present and potential contributions are
important to the success of the Company and its Subsidiaries and Affiliates, by
offering them an opportunity to participate in the Company's future performance
through awards of Options. The Plan shall be administered as two separate
plans, one for the benefit of Participants who are not Directors of the Company,
which plan shall be governed by the provisions of this Plan excepting Section
5.2 hereof, and one for the benefit of Participants who are Directors of the
Company, which plan shall be governed by the provisions of this Plan, excepting
Section 5.1 hereof.
Capitalized terms not defined in the text are defined in Section 22.
2. SHARES SUBJECT TO THE PLAN
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 16, the
total number of Shares reserved and available for grant and issuance pursuant to
the Plan shall be 200,000 Shares, provided, however, that the maximum number of
Shares that may be issued under the Plan to members of the Board of Directors of
the Company is 10,000 Shares. Subject to Sections 2.2 and 14, Shares reserved
for issuance pursuant to Options granted under this Plan shall again be
available for grant and issuance, in connection with future Options under the
Plan, that: (a) are subject to issuance upon exercise of an Option, but cease to
be subject to such Option for any reason other than exercise of such Option, or
(b) are subject to an Option that otherwise terminates without such Shares being
issued and for which the participant did not receive any benefits of ownership.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding shares of the Company's Common Stock is changed by a stock dividend,
recapitalization, stock split, reverse stock split, subdivision, combination,
reclassification or similar change in the capital structure of the Company
without consideration, then: (a) the number of Shares reserved for issuance
under the Plan, and (b) the Exercise Prices of and number of Shares subject to
outstanding Options, shall be proportionately adjusted, subject to any required
action by the Board or the stockholders of the Company and compliance with
applicable securities laws; provided, however, that fractions of a Share shall
not be issued, but shall either be paid in cash at Fair Market Value or shall be
rounded up to the nearest Share, as determined by the Committee; and
<PAGE>
provided, further, that the Exercise Price of any Option may not be decreased to
below the par value of the Shares.
3. ELIGIBILITY
3.1 ELIGIBILITY OF EMPLOYEES, CONSULTANTS AND INDEPENDENT
CONTRACTORS. ISOs (as defined in Section 5 below) may be granted only to
employees (including officers and directors who are also employees ) of the
Company or of a Subsidiary of the Company. NQSOs may be granted to employees,
officers, consultants, independent contractors and advisers of the Company or
any Subsidiary or Affiliate of the Company; provided, however, that such
consultants, contractors and advisers render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. A person may be granted both ISOs and NQSOs under the Plan.
Additionally, grants of Options to executive officers of the Company who are not
directors during the 1996 calendar year shall be limited to the following
individuals and Options for the respective number of Shares: Joel William
Jervis, 20,000 Shares; Richard Ian Sharpe, 12,000 Shares; Philip Mendonca, 5,000
Shares.
3.2 ELIGIBILITY OF DIRECTORS. No directors of the Company shall be
eligible to be granted Options under this plan, other than Brian Murray, who
shall receive NQSOs for 10,000 Shares pursuant to Section 5.2 hereof.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. The Plan shall be administered by the
Committee or the Board acting as the Committee. Subject to the purposes,
terms and conditions of the Plan, and to the direction of the Board, the
Committee shall have full power to implement and carry out the Plan,
provided, however, that all grants of Options to Directors shall be effected
strictly in accordance with the terms of Section 5.2.2(a) and the next
individual who is neither an officer nor employee of the Company who is to
be appointed to Board of Directors, who shall receive NQSOs for 10,000 shares
pursuant to Section 5.2.2(b). Except as otherwise provided pursuant to
Sections 3.2 or 5 hereof, the Committee shall have the authority to:
(a) construe and interpret the Plan, any Option Agreement and
any other agreement or document executed pursuant to the Plan;
(b) prescribe, amend and rescind rules and regulations relating
to the Plan;
(c) select persons to receive Options;
(d) determine the form and terms of Options;
(e) determine the number of Shares or other consideration
subject to Options;
2
<PAGE>
(f) determine whether Options will be granted singly, in
combination or in tandem with, in replacement of, or as alternatives
to, other Options under the Plan or any other incentive or
compensation plan of the Company or any Subsidiary or Affiliate of the
Company;
(g) grant waivers of Plan or Option conditions;
(h) determine the vesting, exercisability and payment of Options
and to accelerate the vesting and/or exercisability of Options, as
provided herein;
(i) correct, any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Option or any Option Agreement;
(j) determine whether an Option has been earned; and
(k) make all other determinations necessary or advisable for the
administration of the Plan.
4.2 COMMITTEE DISCRETION. Any determination permitted to be made by
the Committee under the Plan with respect to any Option shall be made in its
sole discretion at the time of grant of the Option or, unless in contravention
of any express term of the Plan or Option, at any later time, and such
determination shall be final and binding on the Company and all persons having
an interest in any Option under the Plan.
4.3 EXCHANGE ACT REQUIREMENTS. If two or more members of the Board
are Outside Directors and Disinterested Persons, the Committee shall be
comprised of at least two members of the Board, all of whom are Outside
Directors and Disinterested Persons. It is the intent of the Company that the
Plan and Options hereunder satisfy and be interpreted in a manner, that, in the
case of Participants who are or may be Insiders, satisfies the applicable
requirements of Rule 16b-3 (or its successor) of the Exchange Act. If any
provision of the Plan or of any Option would otherwise conflict with the intent
expressed in this Section 4.3, that provision, to the extent possible, shall be
interpreted and deemed amended so as to avoid such conflict.
5. GRANT AND EXERCISE OF OPTIONS
5.1 GRANT OF OPTIONS TO PERSONS OTHER THAN DIRECTORS. Except as
otherwise limited herein, the Committee may grant Options to eligible persons
who are not Directors of the Company pursuant to this Section 5.1 and shall
determine whether such Options shall be Incentive Stock Options within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
3
<PAGE>
5.1.1 FORM OF OPTION GRANT. Each Option granted shall be
evidenced by an Option Agreement, which shall expressly identify the Option as
an ISO or NQSO ("Stock Option Agreement"), and be in such form and contain such
provisions (which need not be the same for each Participant receiving an Option)
as the Committee shall from time to time approve, and which shall comply with
and be subject to the terms and conditions of the Plan. The Committee may in
its discretion include in any NQSO granted under the Plan a condition that the
Participant shall agree to remain in the employ of, and to render services to,
the Company or any of its Subsidiaries for a period of time (specified in the
agreement) following the date the NQSO is granted.
5.1.2 DATE OF GRANT. The date of grant of an Option shall be
the date on which the Committee makes the determination to grant such Option.
The Stock Option Agreement and a copy of the Plan will be delivered to the
Participant within a reasonable time after the granting of such Option.
5.1.3 EXERCISE PERIOD. Options shall be exercisable within
the times or upon the events determined by the Committee as set forth in the
Stock Option Agreement; provided, however:
(a) no Option shall be exercisable after the expiration of ten
(10) years from the date the Option is granted;
(b) subject to Sections 4.1(h) and 5.3, no Option shall be
exercisable less than six (6) months after the date of grant or prior
to Stockholder approval of the Plan;
(c) with respect to all Participants other than the individuals
named in the last sentence of Section 3.1 hereof, each Option granted
under the Plan shall be exercisable only with respect to one-third of
the total number of Shares subject to such Option upon the expiration
of six (6) months after the date of grant, with the balance being
exercisable, one-half upon the expiration of eighteen (18) months from
the date of such grant, and one-half upon the expiration of thirty
(30) months from the date of such grant; and
(d) no ISO granted to a person who directly or by attribution
owns more than Ten Percent (10%) of the total combined voting power of
all classes of stock of the Company or any Subsidiary of the Company
("Ten Percent Stockholder") shall be exercisable after the expiration
of five (5) Years from the date the Option is granted.
5.1.4 EXERCISE PRICE. The Exercise Price shall be determined
by the Committee when an Option is granted and may be not less than 85% of the
Fair Market Value of the Shares on the date of grant; provided, however, that:
4
<PAGE>
(i) the Exercise Price of an ISO shall be not less than
100% of the Fair Market Value of the Shares on the date of grant,
and
(ii) the Exercise Price of any ISO granted to a Ten Percent
Stockholder shall not be less than 110% of the Fair Market Value
of the Shares on the date of grant.
Payment for the Shares purchased may be made in accordance with Section 6 of the
Plan.
5.1.5 METHOD OF EXERCISE. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"Exercise Agreement") in a form approved by the Committee (which need not be the
same for each Participant receiving an Option pursuant to the Plan), stating the
number of Shares being purchased, the restrictions imposed on the Shares, if
any, and such representations and agreements regarding Participant's investment
intent, access to information and other matters, if any, as may be required or
desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.1.6 TERMINATION. Notwithstanding the exercise periods set
forth in the Stock Option Agreement, exercise of an Option shall always be
subject to the following:
(a) If the Participant is Terminated for any reason except death
or Disability, then the Participant may exercise such Participant's
Options, only to the extent that such Options would have been
exercisable upon the Termination Date, no later than thirty (30) days
after the Termination Date, but in any event, no later than the
expiration date of the Options.
(b) If the Participant is terminated because of death or
Disability, then the Participant's Options which are ISO's may be
exercised, only to the extent that such Options would have been
exercisable by Participant on the Termination Date, and must be
exercised by Participant (or Participant's legal representative or
authorized assignee) no later than one hundred eighty (180) days after
the Termination Date, but in any event no later than the expiration
date of the Options.
5.1.7 LIMITATIONS ON EXERCISE. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.1.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year (under
the Plan or under any other incentive stock option plan of the Company or any
Affiliate or Subsidiary of the Company) shall not exceed $100,000.
5
<PAGE>
If the Fair Market Value of Shares on the date of grant with respect to which
ISOs are exercisable for the first time by a Participant during any calendar
year exceeds $100,000, the Options for the first $100,000 worth of Shares to
become exercisable in such calendar year shall be ISOs and the Options for the
amount in excess of $100,000 that become exercisable in that calendar year shall
be NQSOs. In the event that the Code or the regulations promulgated thereunder
are amended after the Effective Date of the Plan to provide for a different
limit on the Fair Market Value of Shares permitted to be subject to ISOs, such
different limit shall be automatically incorporated herein and shall apply to
any Options granted after the effective date of such amendment.
5.1.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not, without
the written consent of a Participant, impair any of such Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered shall be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected, by a written
notice to them; provided, however, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.1.4 or
5.2.3 of the Plan for Options granted on the date the action is taken to reduce
the Exercise Price; provided, further, that the Exercise Price shall not be
reduced below the par value of the Shares.
5.1.10 NO DISQUALIFICATION. Notwithstanding any other
provision in the Plan, no term of the Plan relating to ISOs shall be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be exercised, so as to disqualify the Plan under Section 422 of
the Code or, without the consent of the Participant affected, to disqualify any
ISO under Section 422 of the Code.
5.2 GRANT OF OPTIONS TO DIRECTORS.
Notwithstanding the provisions of Section 5.1, the Committee
shall not have discretion to grant Options, either as ISOs or NQSOs, to
Directors of the Company, but instead, all such Options shall be granted
pursuant to this Section 5.2.
5.2.1 FORM OF OPTION GRANT. Section 5.1.1 shall apply to
grants of Options to Directors.
6
<PAGE>
5.2.2 FORMULA FOR GRANT OF OPTIONS TO DIRECTORS. Options
shall be granted solely to the following Directors on the following basis:
(a) Brian Murray shall be granted NQSOs for
10,000 shares upon approval of the Plan by the Board of Directors.
(b) Upon the appointment of one additional Director
to the Board of Directors, which Director shall be granted NQSOs for 10,000
shares following approval of the Plan by the Board of Directors.
5.2.3 EXERCISE PERIOD. Options granted under this Section
5.2 shall be exercisable within the times and upon the events determined by the
committee as set forth in the Stock Option Agreement, provided, however:
(a) no Option shall be exercisable after the expiration of ten
(1) years from the date the Option is granted;
(b) subject to Sections 4.1(h) and 5.3, no Option shall be
exercisable less than six (6) months after the date of grant or prior
to Stockholder approval of the Plan;
(c) each Option granted to Directors under the Plan shall be
exercisable only with respect to one-third of the total number of
Shares subject to such Option upon the expiration of six (6) months
after the date of grant, with the balance being exercisable, one-half
upon the expiration of eighteen (18) months from the date of such
grant, and one-half upon the expiration of thirty (30) months from the
date of such grant; and
(d) no ISO granted to a person who directly or by attribution
owns more than Ten Percent (10%) of the total combined voting power of
all classes of stock of the Company or any subsidiary of the Company
("Ten Percent Stockholder") shall be exercisable after the expiration
of five (5) years from the date the Option is granted.
5.2.4 EXERCISE PRICE. The Exercise Price for Director Options
shall be as follows:
(a) the Exercise Price of an ISO shall be 100% of the Fair
Market Value of the Shares on the date of grant, provided, however,
that the Exercise Price of any ISO granted to a Ten Percent
Stockholder shall be 110% of the Fair Market Value of the Shares on
the date of grant;
(b) the Exercise Price of a NQSO shall be 100% of the Fair
Market Value of the Shares on the date of grant; and
7
<PAGE>
(c) payment for the Shares purchased may be made in accordance
with Section 6 of the Plan.
5.2.5 METHOD OF EXERCISE. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement as provided
under Section 5.1.5.
5.2.6 TERMINATION. Section 5.1.6 hereof shall apply to grants of
Options to Directors.
5.2.7 LIMITATIONS ON ISOS. Section 5.1.8 hereof shall apply to
Options granted to Directors.
5.2.8 NO DISQUALIFICATION. Section 5.1.10 shall apply to all ISOs
granted to Directors hereunder.
5.3 ACCELERATED VESTING.
5.3.1 Notwithstanding Sections 5.1.3(b) and 5.2.2(b), the
Committee shall have the authority to accelerate the exercisability of Options
granted pursuant to the terms of this Plan, provided however, that the
acceleration of exercisability shall be conditioned upon inclusion in the Option
agreements with Participants of such provisions and restrictions as are
necessary to permit stock issued upon exercise of such Options to continue to
qualify for the exception from Section 16(b) of the Securities Act of 1933 as is
provided under Rule 16(b)(3)(a),(b) and (c).
5.3.2 Notwithstanding anything herein to the contrary, if a Change
in Control of the Company occurs or if the Committee determines in its sole
discretion that an Acceleration Event has occurred, then all Options shall
become fully exercisable as of the date such Change in Control occurred or the
Committee determines that an Acceleration Event has occurred, provided however,
that the acceleration of exercisability shall be subject to the imposition of
such restrictions on transferability of shares of Common Stock subject to such
Options, as are necessary to permit stock issued upon exercise of such Options
to continue to qualify for the exception from Section 16(b) of the Securities
Act of 1933 as is provided under Rule 16(b)(3)(a),(b) and (c).
6. PAYMENT FOR SHARE PURCHASES
6.1 PAYMENT. Payment for Shares purchased pursuant to the Plan may
be made in cash (by check) or, where expressly approved by the Committee and
permitted by law by:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares of the Company's Common Stock that
either: (1) have been owned by Participant for more than six (6)
months and have been paid for within the meaning of SEC Rule 144; or
were obtained by Participant in
8
<PAGE>
the public market; and, (2) are clear of all liens, claims,
encumbrances or security interests;
(c) by waiver of compensation due or accrued to Participant for
services rendered;
(d) provided that a public market for the Company's stock exists
and subject to the ability of the Participant to sell Shares in
compliance with applicable securities laws:
(1) through a "same day sale" commitment from the
Participant and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby the
Participant irrevocably elects to exercise the Option and to sell
a portion of the Shares so purchased in order to pay the Exercise
Price, and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the Exercise Price directly to
the Company; or
(2) through a "margin" commitment from the Participant and
an NASD Dealer whereby Participant irrevocably elects to exercise
the Option and to pledge the Shares so purchased to the NASD
Dealer in a margin account as security for a loan from the NASD
Dealer in the amount of the Exercise Price, and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares to forward
the Exercise Price directly to the Company; or
(e) by any combination of the foregoing.
Notwithstanding the foregoing, the Exercise Price of an Option held by
a director who is not an employee shall be paid either (i) in cash; or (ii)
pursuant to subsection (a) of this Section 6.1, or (iii) by any combination of
the foregoing (i) and (ii).
7. WITHHOLDING TAXES
7.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in
satisfaction of Options granted under the Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares.
8. PRIVILEGES OF STOCK OWNERSHIP
8.1 VOTING AND DIVIDENDS. No Participant shall have any of the
rights of a stockholder with respect to any Shares until the Shares are issued
to the Participant. After Shares
9
<PAGE>
are issued to the Participant, the Participant shall be a stockholder and have
all the rights of a stockholder with respect to such Shares, including the right
to vote and receive all dividends or other distributions made or paid with
respect to such Shares.
8.2 FINANCIAL STATEMENTS. The Company shall provide financial
statements to each Participant annually during the period such Participant has
Options outstanding, provided, however, that the Company shall not be required
to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
9. TRANSFERABILITY
Options granted under the Plan, and any interest therein, shall not be
transferable or assignable by Participant, and may not be made subject to
execution, attachment or similar process, otherwise than by will or by the laws
of descent and distribution or as consistent with the specific Plan and Option
Agreement provisions relating thereto. During the lifetime of the Participant
an Option shall be exercisable only by the Participant, and any elections with
respect to an Option, may be made only by the Participant.
10. CERTIFICATES
All certificates for Shares or other securities delivered under the
Plan shall be subject to such stock transfer orders, legends and other
restrictions as the Committee may deem necessary or advisable, including
restrictions under any applicable federal, state or foreign securities law, or
any rules, regulations and other requirements of the SEC or any stock exchange
or automated quotation system upon which the Shares may be listed.
11. EXCHANGE AND BUYOUT OF OPTIONS
The Committee may, at any time or from time to time, authorize the
Company, with the consent of the respective Participants, to issue new Options
in exchange for the surrender and cancellation of any or all outstanding Options
(other than Options granted to Directors pursuant to Section 5.2). The Committee
may at any time buy from a Participant an Option previously granted with payment
in cash, Shares or other consideration, based on such terms and conditions as
the Committee and the Participant shall agree.
12. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE
An Option shall not be effective unless such Option is in compliance
with all applicable federal and state securities laws, rules and regulations of
any governmental body, and the requirements of any stock exchange or automated
quotation system upon which the Shares may then be listed, as they are in effect
on the date of grant of the Option and also on the date of exercise or other
issuance. Notwithstanding any other provision in the Plan, the Company shall
10
<PAGE>
have no obligation to issue or deliver certificates for Shares under the Plan
prior to: (a) obtaining any approvals from governmental agencies that the
Company determines are necessary or advisable, and/or (b) completion of any
registration or other qualification of such Shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company shall be under no obligation to register
the Shares with the SEC or to effect compliance with the registration,
qualification or listing requirements of any state securities laws, stock
exchange or automated quotation system, and the Company shall have no liability
for any inability or failure to do so.
13. NO OBLIGATION TO EMPLOY
Nothing in the Plan or any Option granted under the Plan shall confer
or be deemed to confer on any Participant any right to continue in the employ
of, or to continue any other relationship with, the Company, or any Subsidiary
or Affiliate of the Company or limit in any way the right of the Company or any
Subsidiary or Affiliate of the Company to terminate Participant's employment or
other relationship at any time, with or without cause.
14. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
The existence of outstanding Options shall not affect in any way the
right or power of the Company or its stockholders to make or authorize all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any other corporate act or
proceeding, whether of a similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares
or other capital readjustment, the payment of a stock dividend, or other
increase or reduction of the number of shares of its Common Stock outstanding,
without receiving compensation therefor in money, services or property, then (i)
the number, class, and per share price of Shares subject to outstanding Options
hereunder shall be appropriately adjusted in such a manner as to entitle a
Participant to receive upon exercise thereof (and, if relevant, for the same
aggregate cash consideration), the same total number and class of shares as such
Participant would have received had such Participant exercised such Option in
full immediately prior to such event; and (ii) the number and class of shares
with respect to which Options may be granted under the Plan shall be adjusted by
substituting for the total number of shares of Common Stock then reserved that
number and class of shares of stock that would have been received by the owner
of an equal number of outstanding shares of Common Stock as the result of the
event requiring the adjustment.
After a merger of one or more corporations into the Company, or after
a consolidation of the Company and one or more corporations in which the Company
shall be the
11
<PAGE>
surviving corporation, each holder of an outstanding Option shall, at no
additional cost, be entitled to receive upon exercise of such Option (subject to
any required action by stockholders of the Company) in, lieu of the number of
Shares as to which such Option shall then be so exercisable, the number and
class of shares of stock or other securities to which such holder would have
been entitled pursuant to the terms of the agreement of merger or consolidation
if, immediately prior to such merger or consolidation, such holder had been the
holder of record of a number of shares of Common Stock equal to the number of
shares as to which such Option shall be so exercised.
If the Company is merged into or consolidated with another corporation
under circumstances where the Company is not the surviving corporation, or if
the Company is liquidated, or sells or otherwise disposes of substantially all
its assets to another corporation while unexercised Options remain outstanding
under the Plan, (i) subject to the provisions of clause (ii) below, after the
effective date of such merger, consolidation or sale, as the case may be, each
holder of an outstanding Option shall be entitled to receive upon exercise of
such Option in lieu of shares of Common Stock, shares of such stock or other
securities, cash or property as the holders of shares of Common Stock received
pursuant to the terms of the merger, consolidation or sale; or (ii) all
outstanding Options may be canceled by the Board as of the effective date of any
such merger, consolidation, liquidation or sale provided that: (x) notice of
such cancellation shall be given to each holder of an Option, and (y) each
holder of an Option shall have the right to exercise such Option to the extent
that the same is then exercisable or, if the Board shall have accelerated the
time for exercise of all unexercised and unexpired Options, in full during the
30-day period preceding the effective date of such merger, consolidation,
liquidation or sale.
Except as expressly provided above, the issue by the Company of shares
of stock of any class, securities convertible into shares of stock of any class,
for cash, property or services, either upon direct sale or upon the exercise of
rights or warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other securities,
shall not affect, and no adjustment by reason thereof shall be made with respect
to, the number or price of Shares then subject to outstanding Options.
15. ADOPTION AND STOCKHOLDER APPROVAL
The Plan shall become effective on the date that it is adopted by the
Board (the "Effective Date"). The Company shall submit the Plan for approval by
the stockholders of the Company at the next annual meeting of stockholders of
the Company to obtain the advantages under NASD, IRS, Securities and Exchange
Commission and other regulations that approval of stockholders may bestow,
provided however, that Options granted under the Plan shall be conditioned upon
stockholder approval of the Plan within one year of adoption by the Board.
16. TERM OF PLAN
The Plan will terminate ten (10) years from the Effective Date.
12
<PAGE>
17. AMENDMENT OR TERMINATION OF PLAN
The Board may at any time terminate or amend the Plan in any respect,
including without limitation amendment of any form of Option Agreement or
instrument to be executed pursuant to the Plan; provided, however, that:
(a) the Board shall not, without the approval of the stockholders of
the Company, amend the Plan in any manner that requires such stockholder
approval pursuant to the Code or the regulations promulgated thereunder as
such provisions apply to ISO plans or pursuant to the Exchange Act or Rule
16b-3 (or its successor), as amended, thereunder; and
(b) the terms and conditions of any awards of Options to Directors
and the category of persons eligible to be awarded such shares under the
Plan shall not be amended more than once every six months, other than to
comply with changes in the Code or ERISA, or the rules and regulations
thereunder.
18. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board, the submission of the
Plan to the stockholders of the Company for approval, nor any provision of the
Plan shall be construed as creating any limitations on the power of the Board to
adopt such additional compensation arrangements as it may deem desirable,
including, without limitation, the granting of stock options and bonuses
otherwise than under the Plan, and such arrangements may be either generally
applicable or applicable only in specific cases.
19. GOVERNING LAW
The Plan and all agreements, documents and instruments entered into
pursuant to the Plan shall be governed by and construed in accordance with the
internal laws of the State of Colorado, excluding that body of law pertaining to
conflict of laws.
20. DEFINITIONS
As used in the Plan, the following terms shall have the following
meanings:
"ACCELERATION EVENT" means but is not limited to, any Change of
Control of the Company or other event determined in the discretion of the
Committee.
"AFFILIATE" means any corporation that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with" means the possession, direct or
indirect, of the power to cause the direction of the management and
13
<PAGE>
policies of the corporation, whether through the ownership of voting securities,
by contract or otherwise.
"BOARD" means the Board of Directors of the Company.
"CHANGE IN CONTROL" means the occurrence of any of the following
events:
(A) when the Company acquires actual knowledge that any person (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then-outstanding securities;
(B) upon the first purchase of Common Stock pursuant to a tender or
exchange offer (other than a tender or exchange offer made by the Company);
(C) upon the approval by the Company's shareholders of: (i) a merger
or consolidation of the Company with or into another corporation, which does not
result in any capital reorganization or reclassification or other change in the
Company's then-outstanding shares of Common Stock), (ii) a sale or disposition
of all or substantially all of the Company's assets, or (iii) a plan of
liquidation or dissolution of the Company;
(D) if during any period of two consecutive years, the individuals
who at the beginning of such period constitute the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof, unless
the election, or the nomination for election by the Company's shareholders, of
each new director is approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period; or
(E) if the Board of Directors or any designated committee determines,
in its sole discretion, that any person (such as that term is used in Sections
13(d) and 14(d) of the Exchange Act) directly or indirectly exercises a
controlling influence over the management or policies of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer
the Plan, or if no committee is appointed, the Board.
"COMPANY" means 4Front Software International, Inc., a corporation
organized under the laws of the State of Colorado, or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
14
<PAGE>
"DISINTERESTED PERSON" means a Director who has not, during the period
that person is a member of the Committee and for one year prior to service as a
member of the Committee, been granted Options pursuant to the Plan or any other
plan of the Company, any Subsidiary or Affiliate of the company, except in
accordance with the requirements set forth in rule 16b-3(c)(2)(i) (and any
successor regulation thereto) as promulgated by the SEC under Section 16(b) of
the Exchange Act, as such rule is amended from time to time and as interpreted
by the SEC.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market System, its last reported sale price on the Nasdaq National
Market or, if no such reported sale takes place on such date, the
average of the closing bid and asked prices;
(b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, the last reported sale price or, if
no such reported sale takes place on such date, the average of the
closing bid and asked prices on the principal national securities
exchange on which the Common Stock is listed or admitted to trading;
(c) if such Common Stock is publicly traded but is not quoted on
the Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and asked
prices on such date, as reported by the Wall Street Journal, for the
over-the-counter market; or
(d) if none of the foregoing is applicable, by the Board of
Directors of the Company in good faith.
"INSIDER" means an officer or director of the Company or other person
whose transactions in the Company's Common Stock are subject to Section 16 of
the Exchange Act.
"OPTION" means an option to purchase Shares of Common Stock of the
Company pursuant to Section 5.
"OPTION AGREEMENT" means, with respect to each Option, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Option.
15
<PAGE>
"OUTSIDE DIRECTOR" means any outside director as defined in Section
162(m) of the Code and the regulations issued thereunder.
"PARTICIPANT" means a person who receives an Option under the Plan.
"PLAN" means this 4Front Software International, Inc., 1996 Equity
Incentive Plan, as amended from time to time.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock, without par
value, reserved for issuance under the Plan, as adjusted pursuant to Sections 2
and 16, and any security issued in respect thereto or in replacement therefor.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
"TERMINATION" or "TERMINATED" means, for purposes of the Plan with
respect to a Participant, that the Participant has ceased to provide services as
an employee, director, consultant, independent contractor or adviser, to the
Company or a Subsidiary or Affiliate of the Company, except in the case of sick
leave, military leave, or any other leave of absence approved by the Committee,
provided, that such leave is for a period of not more than ninety (90) days, or
reinstatement upon the expiration of such leave is guaranteed by contract or
statute. The Committee shall have sole discretion to determine whether a
Participant has ceased to provide services and the effective date on which the
Participant ceased to provide services (the "Termination Date").
16
<PAGE>
Exhibit 23.1
[KPMG Letterhead]
THE BOARD OF DIRECTORS AND STOCKHOLDERS
4FRONT SOFTWARE INTERNATIONAL, INC AND SUBSIDIARIES
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Consolidated Financial
Information" in our prospectus.
/s/ KPMG
KPMG
CHARTERED ACCOUNTANTS
REGISTERED AUDITORS
LONDON, ENGLAND
MAY 21, 1996
<PAGE>
Exhibit 23.2
[A.J. ROBBINS PC LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use or our
report dated April 24, 1995 on the financial statements of 4Front Software
International, Inc. and Subsidiaries, and to the reference made to our firm
under the caption "Experts" included in or made part of this Registration
Statement.
/s/ AJ Robbins PC
Denver, Colorado
May 20, 1996
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<PERIOD-END> JAN-31-1996 APR-30-1996
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<RECEIVABLES> 7612188 8011124
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<INVENTORY> 3339998 3838941
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<PP&E> 2103370 1841268
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