<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
MARK ONE [ ]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-8345
------------------------
4FRONT SOFTWARE INTERNATIONAL, INC.
(Exact name of registrant specified in its charter)
<TABLE>
<S> <C>
COLORADO 84-0675510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5650 GREENWOOD PLAZA BLVD., SUITE 107 80111
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (303) 721-7341
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of each of the Registrant's classes of
Common Stock at May 22, 1996 was 3,058,747 shares of Common Stock, no par value.
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
THREE MONTH PERIOD ENDED APRIL 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-------------
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 1996 and April 30, 1996 (unaudited)........... 3
Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 1995 and 1996
(unaudited).......................................................................................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended April
30, 1996 (unaudited)................................................................................. 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 1995 and 1996
(unaudited).......................................................................................... 6
Notes to the Condensed Consolidated Financial Statements.............................................. 7
SUPPLEMENTARY INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of Operations................. 9
Other Information..................................................................................... 13
Signatures............................................................................................ 14
</TABLE>
2
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31,
1996
--------------- APRIL 30, 1996
--------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash.......................................................................... $ 1,391,644 $ 561,410
Accounts receivable, net of allowance for doubtful accounts of $79,000 and
$90,000 respectively......................................................... 7,533,188 7,921,124
Deposits...................................................................... 37,250 34,164
Inventories................................................................... 3,339,998 3,838,941
Prepaid expenses.............................................................. 396,623 315,103
Deferred offering costs....................................................... 338,595 571,119
Income taxes receivable....................................................... 160,166 159,064
Other current assets.......................................................... 266,582 287,006
--------------- --------------
Total current assets........................................................ 13,464,046 13,687,931
PROPERTY AND EQUIPMENT, net..................................................... 905,976 917,333
INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE................................... 248,048 239,125
RECEIVABLE, RELATED PARTY....................................................... 644,356 644,356
INTANGIBLE ASSETS, net.......................................................... 2,074,400 2,012,530
OTHER ASSETS.................................................................... 606,594 576,380
--------------- --------------
TOTAL ASSETS.................................................................... $ 17,943,420 $ 18,077,655
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 6,644,065 $ 7,026,679
Accrued liabilities........................................................... 1,559,673 1,406,804
Stockholder advances.......................................................... 391,842 391,842
Lines of credit -- bank....................................................... 1,482,763 2,017,991
Notes payable (including amounts with related party of $980,000 and $980,000
respectively)................................................................ 1,695,403 1,301,234
Capital lease obligations, current portion.................................... 54,888 45,897
Income taxes payable.......................................................... 374,688 427,053
Deferred revenue.............................................................. 2,546,604 2,119,495
--------------- --------------
Total current liabilities................................................... 14,749,926 14,736,995
CAPITAL LEASE OBLIGATIONS, less current portion................................. 92,718 78,150
--------------- --------------
TOTAL LIABILITIES............................................................... 14,842,644 14,815,145
--------------- --------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, no par value 30,000,000 shares authorized 3,005,108 and
3,058,747 shares issued and outstanding, respectively........................ 6,972,674 6,973,210
Accumulated (deficit)......................................................... (3,878,599) (3,680,416)
Cumulative foreign currency translation adjustment............................ 6,701 (30,284)
--------------- --------------
Total stockholders' equity.................................................. 3,100,776 3,262,510
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 17,943,420 $ 18,077,655
--------------- --------------
--------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------
APRIL 30,
1995 APRIL 30, 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenues........................................................................... $ 4,644,935 $ 10,550,238
Cost of revenues................................................................. 2,798,776 7,279,141
------------- --------------
Gross Profit....................................................................... 1,846,159 3,271,097
------------- --------------
Operating Expenses
Selling, general and administrative expenses..................................... 1,502,211 2,712,078
Depreciation..................................................................... 65,551 80,959
Amortization..................................................................... 13,628 61,870
------------- --------------
Total operating expenses....................................................... 1,584,390 2,854,907
------------- --------------
Income Before Interest Expense, Income Taxes, and Share of Results in Equity
Investee.......................................................................... 261,769 416,190
Interest Income (Expense)
Interest income.................................................................. -- 3,841
Interest expense................................................................. (109,386) (103,614)
------------- --------------
Total interest expense......................................................... (109,386) (99,773)
------------- --------------
Income Before Income Taxes and Share of Results in Equity Investee................. 152,383 316,417
Share of Operating (Loss) of Equity Investee....................................... -- (52,173)
------------- --------------
Income Before Income Taxes......................................................... 152,383 264,244
Income Taxes....................................................................... 38,096 66,061
------------- --------------
Net Income......................................................................... $ 114,287 $ 198,183
------------- --------------
------------- --------------
Net Income Per Common Share........................................................ $ 0.05 $ 0.07
------------- --------------
------------- --------------
Weighted average number of common shares outstanding............................... 2,534,580 3,011,068
------------- --------------
------------- --------------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK CURRENCY
-------------------------- ACCUMULATED TRANSLATION
SHARES AMOUNT (DEFICIT) ADJUSTMENT TOTAL
----------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1996.............. 3,005,108 $ 6,972,674 $ (3,878,599) $ 6,701 $ 3,100,776
Exercise of stock options.............. 53,639 536 -- -- 536
Net income for period (unaudited)...... -- -- 198,183 -- 198,183
Foreign currency translation
adjustment............................ -- -- -- (36,985) (36,985)
----------- ------------- -------------- ------------ -------------
Balance, April 30, 1996 (unaudited).... 3,058,747 $ 6,973,210 $ (3,680,416) $ (30,284) $ 3,262,510
----------- ------------- -------------- ------------ -------------
----------- ------------- -------------- ------------ -------------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
APRIL 30, APRIL 30,
1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income.......................................................................... $ 114,287 $ 198,183
Adjustments to reconcile net income to net cash provided (used) by operating
activities
Depreciation...................................................................... 68,551 80,959
Amortization...................................................................... 13,628 61,870
Share of operating (loss) of equity investee...................................... -- 52,173
Loss (gain) loss on disposal of fixed assets...................................... 6,448 (19,448)
Decrease (increase) in accounts receivable........................................ 209,713 (387,936)
Decrease in deposits.............................................................. 1,338 3,086
(Increase) in inventories......................................................... (380,170) (498,943)
(Increase) decrease in prepaid expenses........................................... (63,512) 81,520
Increase in income taxes.......................................................... 33,206 53,467
(Increase) in other current assets................................................ (153,594) (20,424)
Decrease in account receivable related party...................................... 3,199 --
Increase in accounts payable...................................................... 210,129 382,614
Increase (decrease) in accrued liabilities........................................ 148,705 (152,869)
Increase (decrease) in deferred revenue........................................... 131,076 (427,109)
------------- -------------
Net cash provided (used) by operating activities.................................. 343,004 (592,857)
------------- -------------
CASH FLOWS (TO) INVESTING ACTIVITIES:
Purchase of equipment............................................................. (35,736) (101,762)
Proceeds from disposal of equipment............................................... 12,245 28,894
Acquisition of subsidiaries....................................................... (76,735) --
Investment in and advances to equity investee..................................... (109,217) (43,250)
Software development costs........................................................ (97,730) --
Decrease in other assets.......................................................... 416 30,214
------------- -------------
Net Cash (Used) by Investing Activities........................................... (306,757) (85,904)
------------- -------------
CASH FLOWS (TO) FINANCING ACTIVITIES:
(Decrease) increase in lines of credit -- bank.................................... (362,684) 535,228
Repayment of notes payable........................................................ (417,024) (394,169)
Repayment of stockholders' advances............................................... (2,300) --
(Increase) in deferred offering costs............................................. (168,158) (232,524)
Payments of capital lease obligations............................................. (28,578) (23,559)
Net proceeds from exercise of share options....................................... -- 536
Net proceeds from issuance of common stock........................................ 154,760 --
------------- -------------
Net Cash (Used) by Financing Activities........................................... (823,984) (114,488)
------------- -------------
Effect of exchange rate changes on cash............................................. (13,637) (36,985)
------------- -------------
Net (Decrease) In Cash.............................................................. (801,374) (830,234)
Cash at beginning of period......................................................... 1,242,249 1,391,644
------------- -------------
Cash at end of period............................................................... 440,875 561,410
------------- -------------
------------- -------------
Cash paid for interest expense...................................................... $ 90,123 $ 103,614
------------- -------------
------------- -------------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS
4Front Software International, Inc. and subsidiaries (the "Company" or
"4Front") is a UK based specialized computer services company. The Company
provides key elements of distributed computing, including systems development
and integration, storage and client-server solutions and products, as well as
hardware and software support and help desk services.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements contain all material adjustments consisting
only of normal recurring adjustments necessary to present fairly the financial
condition, the results of operations, the changes in stockholders' equity and
cash flows of 4Front Software International Inc. for the interim periods
presented.
The results of the three months ended April 30, 1996 are not necessarily
indicative of the results of operations for the full year. These interim
unaudited condensed consolidated financial statements and related footnotes
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's Form 10-K and its Annual Report to
Shareholders for the year ended January 31, 1996.
The Company acquired its subsidiary Compass Computer Group on April 6, 1995.
Accordingly the results for the three months ended April 30, 1995 are not
directly comparable with the results for the three months ended April 30, 1996.
NOTE 3 -- ADOPTION OF NEW STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, accounting for Stock-Based
Compensation. The Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The Statement defines a
fair value based method of accounting for stock option plans whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period. Under the new Statement, companies
may continue to measure compensation cost of stock-based plans using the current
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock issued to Employees. Companies electing to remain with the accounting
in Opinion No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting defined if the Statement
were applied. The Statement is effective in 1996 and the Company has adopted its
provisions as of February 1, 1996. The Company has adopted the alternative
accounting treatment allowed by the Standard and measures compensation cost in
accordance with the provisions in Opinion No. 25. The adoption of the Statement
has no effect on the Company's results of Operations, financial position or cash
flow.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Statement
establishes accounting standards for the determination of impairment of
long-lived assets, certain identifiable intangibles and goodwill. The Statement
requires the long-lived assets and certain intangibles be reviewed for
impairment using an estimate of future undiscounted cash flows compared to the
carrying amount of the assets. If impaired, an impairment loss shall be
recognized for the amount which the carrying amount exceeds the fair value of
the assets. The Statement is effective in 1996 and the Company has adopted its
provisions as of February 1, 1996. The adoption of the Statement has no material
impact on the results of operations, financial position or cash flows of the
Company.
7
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1996
--------------- APRIL 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Computer hardware............................................ $ 2,823,753 $ 3,341,306
Computer software............................................ 374,341 403,097
Work in progress............................................. 141,904 94,538
--------------- -------------
$ 3,339,998 $ 3,838,941
--------------- -------------
--------------- -------------
</TABLE>
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1996
--------------- APRIL 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Vehicles..................................................... $ 337,282 $ 224,901
Furniture, fixtures and equipment............................ 349,309 305,911
Computer equipment........................................... 1,416,779 1,310,456
--------------- -------------
2,103,370 1,841,268
Less accumulated depreciation................................ (1,197,394) (923,935)
--------------- -------------
$ 905,976 $ 917,333
--------------- -------------
--------------- -------------
</TABLE>
NOTE 6 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1996
--------------- APRIL 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Investment in ActionTrac Inc., at cost....................... $ 500,000 $ 500,000
Other........................................................ 106,594 76,380
--------------- -------------
$ 606,594 $ 576,380
--------------- -------------
--------------- -------------
</TABLE>
NOTE 7 -- ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1996
--------------- APRIL 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Value Added Tax (VAT) liability.............................. $ 1,011,989 $ 1,029,929
Payroll taxes................................................ 523,811 350,927
Other........................................................ 23,873 25,948
--------------- -------------
$ 1,559,673 $ 1,406,804
--------------- -------------
--------------- -------------
</TABLE>
NOTE 8 -- INCOME TAXES
The Company files a separate U.S. federal income tax return for its domestic
operations and a UK income tax return for its foreign operations. The United
Kingdom subsidiaries compute taxes at rates in effect in that country and become
payable when assessed by the Inland Revenue. Deferred federal income taxes are
not provided on the undistributed earnings of its foreign subsidiaries to the
extent the Company intends to permanently reinvest such earnings in the United
Kingdom.
The Company has provided income tax for the three months ended April 30,
1996 of $66,061 on the profits of its operations, and for the three months to
April 30, 1995 $38,096.
NOTE 9 -- SUBSEQUENT EVENTS
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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a UK based specialized computer services company which
provides a wide range of high-end information technology solutions and services,
principally to Financial Times UK Top 500 companies and government authorities.
The Company provides key elements of distributed computing, including systems
development and integration, storage and client-server solutions and products,
as well as extensive hardware and software support services. In addition, in
1995 the Company began providing corporate Internet access, website development
and related services, and commenced offering global help desk outsourcing for
desktop software through a partnership named ActionTrac, International (the
"ActionTrac Joint Venture"). The Company believes it has a competitive advantage
as a single-source, multivendor, multiple service solution provider to a broad
range of corporate computing needs.
The Company's main operating subsidiaries were acquired in 1994 K2 Systems
Plc ("K2"), Xanadu Systems LTD ("Xanadu"), and CI Support Limited ("CI"), and
1995 Compass Computer Group ("Compass"). The K2, Xanadu, CI and Compass
acquisitions have been accounted for under the purchase method of accounting and
on a consolidated basis in the Company's financial statements for periods ending
after the effective date of such acquisitions.
K2 and Xanadu were acquired effective January 14, 1994. These acquisitions
accelerated the development of the Company's systems integration activities and
network computing activities, respectively. Effective November 1, 1994, the
Company acquired all of the assets of CI. This acquisition allowed the Company
to directly provide hardware maintenance services which had previously been
contracted out by the Company to third parties. The CI acquisition also expanded
the Company's support services.
Effective April 6, 1995, the Company completed its most significant
acquisition, Compass. Compass is a supplier of high-end information storage
solutions. The acquisition of Compass has enabled the Company to become one of
the leading suppliers within the UK of high capacity storage solutions and
multi-processor servers to corporate and government users. The Compass
acquisition also expanded the Company's systems integration and support business
and provided the basis for the Company's corporate Internet services.
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.
RESULTS OF OPERATIONS
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
9
<PAGE>
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.
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 BEFORE INTEREST EXPENSE, INCOME TAXES AND SHARE OF RESULTS IN EQUITY
INVESTEE
Income before interest expense, income taxes and share of results in equity
investee ("IBITI") for the three months ended April 30, 1996 was $416,000, a
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 L13,750 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."
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.
10
<PAGE>
On May 21, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for a proposed offering (the "Offering") of
3,000,000 shares of the Company's Common Stock at an anticipated price between
$4.25 and $5.75 per share. The Registration Statement covers an additional
450,000 shares, which are subject to the underwriters' over-allotment option. It
is anticipated that the proposed sale to the public will commence June, 1996,
however there can be no assurances as to the ability of the Company to
successfully consummate the Offering or, if completed, the price at which shares
in the Offering are sold.
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. 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.
Compass has a L997,000 ($1.50 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. Advances are
collateralized by all the assets of Compass. This facility bears interest at
2.5% above the banks' base rate. This line of credit is subject to periodic
review.
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 bank's base rate. The Company retains the
risk of collection under this arrangement.
During the three months to 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 in the Offering, 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 line
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 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 a
successful offering of the Company's shares.
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.
11
<PAGE>
The Company's working capital deficit decreased from $1.3 million at January
31, 1996 to $1.05 million at April 30, 1996.
Net cash used by operating activities 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. Net cash used by
investing activities was $86,000, for the three months ended April 30, 1996,
primarily reflecting cash used for the investment in the ActionTrac Joint
Venture, and the purchase of equipment. Net cash used by financing activities
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.
INFLATION
Inflation has not had a material effect upon the Company's rsults of
operations to date. In the event the rate of inflation should accelerate in the
future, it is expected that costs in connection with the provision by the
Company of its services and products will increase, and, to the extent such
increased costs are not offset by increased revenues, the opertions of the
Company may be adversely affected.
12
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGE IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Form of 1996 Equity Incentive Plan (1)
(b) Reports on Form 8-K
Not Applicable
- ------------------------
(1) Incorporated by reference to Form S-1 Registration Statement No. 333-03594
13
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
May 24, 1996 4FRONT SOFTWARE INTERNATIONAL, INC.
By: ________/s/ Philip Mendonca_______
Philip Mendonca
CHIEF FINANCIAL OFFICER
14
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