<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 October 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from..................... to .....................
Commission File Number 0-8345
-----------------------------
4FRONT SOFTWARE INTERNATIONAL, INC.
(Exact name of registrant specified in its charter)
COLORADO 84-0675510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5650 Greenwood Plaza Blvd., Suite 107
Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 721-7341
-------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NINE AND THREE MONTH PERIODS ENDED OCTOBER 31, 1996
TABLE OF CONTENTS
Page
----
Number
------
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 1996
and October 31, 1996 (unaudited) 1
Condensed Consolidated Statements of Operations for the
nine and three month periods ended October 31, 1995 and 1996
(unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended October 31, 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine and three month periods ended October 31, 1995 and 1996
(unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
SUPPLEMENTARY INFORMATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Other Information 14
Signatures 15
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JANUARY 31, OCTOBER 31,
1996 1996
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash $ 1,391,644 $ 7,270,465
Accounts receivable, net of allowance
for doubtful accounts of $79,000 and
$329,000 respectively 7,533,188 16,757,599
Deposits 37,250 31,565
Inventories 3,339,998 8,969,788
Prepaid expenses 396,623 943,329
Deferred offering costs 338,595 -
Income taxes receivable 160,166 26,470
Other current assets 266,582 219,555
------------ ------------
Total current assets 13,464,046 34,218,771
PROPERTY AND EQUIPMENT, net 905,976 2,247,627
INVESTMENT IN AND ADVANCES
TO EQUITY INVESTEES 248,048 665,305
RECEIVABLE, RELATED PARTY 644,356 644,356
INTANGIBLE ASSETS, net 2,074,400 7,267,413
DEFERRED TAXATION - 787,200
OTHER ASSETS 606,594 585,280
------------ ------------
TOTAL ASSETS $ 17,943,420 $ 46,415,952
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-1-
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
JANUARY 31, OCTOBER 31,
1996 1996
------------ ------------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 6,644,065 $ 13,306,511
Accrued liabilities 1,559,673 2,262,680
Stockholder advances 391,842 391,842
Lines of credit-bank 1,482,763 1,206,259
Notes payable (including amounts with related
party of $980,000 and $0 respectively) 1,695,403 -
Capital lease obligations, current portion 54,888 646,049
Income taxes payable 374,688 509,505
Deferred revenue 2,546,604 7,075,295
------------ ------------
Total current liabilities 14,749,926 25,398,141
CAPITAL LEASE OBLIGATIONS, less current
portion 92,718 502,531
------------ ------------
TOTAL LIABILITIES 14,842,644 25,900,672
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, no par value 30,000,000
shares authorized 3,005,108 and 6,508,747
shares issued and outstanding, respectively 6,972,674 23,164,689
Accumulated (deficit) (3,878,599) (2,908,428)
Cumulative foreign currency translation
adjustment 6,701 259,019
------------ ------------
Total stockholders' equity 3,100,776 20,515,280
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 17,943,420 $ 46,415,952
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, 1995 OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1996
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES $ 9,314,659 $ 13,905,937 $ 22,602,763 $ 34,516,600
Cost of revenues 5,934,452 9,398,533 14,176,280 23,333,230
------------ ------------ ------------ ------------
GROSS PROFIT 3,380,207 4,507,404 8,426,483 11,183,370
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative
expenses 2,836,524 3,661,985 6,970,318 9,206,179
Depreciation 118,496 126,799 269,038 281,195
Amortization 54,028 110,879 132,933 234,619
------------ ------------ ------------ ------------
Total operating expenses 3,009,048 3,899,663 7,372,289 9,721,993
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST EXPENSE,
INCOME TAXES, AND SHARE OF
RESULTS IN EQUITY INVESTEE: 371,159 607,741 1,054,194 1,461,377
INTEREST INCOME (EXPENSE)
Interest income - 140,371 - 221,959
Interest expense (51,693) (55,594) (238,091) (184,530)
------------ ------------ ------------ ------------
Total interest income (expense) (51,693) 84,777 (238,091) 37,429
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
SHARE OF RESULTS IN EQUITY
INVESTEE: 319,466 692,518 816,103 1,498,806
SHARE OF OPERATING (LOSS) OF
EQUITY INVESTEE (83,860) (80,853) (156,807) (205,245)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 235,606 611,665 659,296 1,293,561
INCOME TAXES 70,298 152,916 189,787 323,390
------------ ------------ ------------ ------------
NET INCOME $ 165,308 $ 458,749 $ 469,509 $ 970,171
------------ ------------ ------------ ------------
NET INCOME PER COMMON SHARE
(NOTE 4) $ 0.06 $0.07 $ 0.18 $0.19
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Currency
Common Stock 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 3,058,747 6,973,210 (3,680,416) (30,284) 3,262,510
--------- ----------- ------------- ----------- -----------
Net income for
period (unaudited) - - 313,239 - 313,239
Foreign currency
translation adjustment - - - 100,114 100,114
Stock issued in offering
net of offering costs 3,450,000 16,191,479 - - 16,191,479
--------- ----------- ------------- ----------- -----------
Balance, July 31, 1996 6,508,747 $ 23,164,689 $ (3,367,177) $ 69,830 $ 19,867,342
--------- ----------- ------------- ----------- -----------
Net income for
period (unaudited) - - 458,749 - 458,749
Foreign currency
translation adjustment - - - 189,189 189,189
--------- ----------- ------------- ----------- -----------
BALANCE, OCTOBER 31, 1996 6,508,747 $ 23,164,689 $ (2,908,428) $ 259,019 $ 20,515,280
(UNAUDITED)
--------- ----------- ------------- ----------- -----------
--------- ----------- ------------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, 1995 OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1996
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING
ACTIVITIES:
Net income $ 165,308 $ 458,749 $ 469,509 $ 970,171
Adjustments to reconcile net income to
net cash provided (used) by operating
activities
Depreciation 118,496 126,799 269,038 281,195
Amortization 54,028 110,879 132,933 234,619
Share of operating (loss) of equity investee 83,860 80,853 156,807 205,245
Loss (gain) on disposal of fixed assets 15,600 (501) 22,048 (37,183)
Decrease (increase) in accounts receivable (489,654) (3,641,385) 136,567 (4,152,990)
Decrease (increase) in deposits (12,627) (1,595) 7,521 5,685
Decrease (increase) in inventories 67,938 (1,089,659) (897,154) (1,847,761)
Decrease (increase) in prepaid expenses 105,571 (128,804) (58,862) (161,854)
Increase in income taxes 67,267 244,568 184,634 136,196
Decrease (increase) in other current assets 41,777 55,715 (78,247) 47,495
Decrease in account receivable related party 9,196 46,800 3,999 46,800
Increase in accounts payable and accrued
liabilities 420,354 4,271,450 1,397,417 1,823,337
Increase in deferred revenue 69,497 197,918 807,908 44,634
---------- ------------ ---------- -----------
Net cash provided (used) by operating
activities 716,511 731,787 2,554,118 (2,404,411)
---------- ------------ ---------- -----------
CASH FLOWS (TO) INVESTING ACTIVITIES:
Purchase of equipment (24,007) (57,831) (89,410) (353,146)
Proceeds from disposal of equipment 6,390 2,525 27,035 114,339
Acquisition of subsidiaries (128,126) (3,844,395) (1,357,435) (3,844,395)
Investment in and advances to equity
investee (45,965) (187,725) (193,347) (403,489)
Software development costs 6,054 - (205,787) -
(Increase) decrease in other assets 7,513 31,248 (91,875) 21,314
---------- ------------ ---------- -----------
Net Cash (Used) by investing activities (178,141) (4,056,178) (1,910,819) (4,465,377)
---------- ------------ ---------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Increase (decrease) in lines of credit-bank (164,064) 468,736 (838,878) (1,014,027)
Repayment of notes payable (182,042) (1,146,460) (1,063,161) (2,841,863)
Issuance of notes payable 411,933 - 1,023,429 -
Repayment of stockholders' advances (12,407) - (240,163) -
(Increase) decrease in deferred offering
costs (169,396) - (150,000) 338,595
Payments of capital lease obligations (31,092) (115,579) (118,273) (178,429)
Decrease in amounts due to related party - - (7,000) -
Net proceeds from exercise of share options - - - 536
Net proceeds from issuance of common stock - - 396,931 16,191,479
---------- ------------ ---------- -----------
Net Cash provided (used) by financing
activities (147,068) (793,303) (997,115) 12,496,291
---------- ------------ ---------- -----------
Effect of exchange rate changes on cash (59,204) 189,189 (27,196) 252,318
------ ------- ------- -------
NET INCREASE (DECREASE) IN CASH 332,198 (3,928,505) (381,012) 5,878,821
Cash at beginning of period 529,039 11,198,970 1,242,249 1,391,644
------- ---------- ---------- ---------
Cash at end of period $ 816,237 $ 7,270,465 $ 861,237 $ 7,270,465
---------- ------------ ---------- -----------
---------- ------------ ---------- -----------
Cash paid for interest expense $ 51,693 $ 55,594 $ 141,816 $ 184,530
---------- ------------ ---------- -----------
---------- ------------ ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<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 nine months ended October 31, 1996 are not necessarily
indicative of the results of operations for the full year. These interim
unaudited condensed consolidated financial statements and related footnotes
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's Form 10-K and its Annual Report to
Shareholders for the year ended January 31, 1996.
NOTE 3 - ADOPTION OF NEW STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, accounting for Stock-Based Compensation.
The Statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Statement defines a fair value
based method of accounting for stock option plans whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. Under the new Statement, companies may continue to
measure compensation cost of stock-based plans using the current accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
issued to Employees. Companies electing to remain with the accounting in Opinion
No. 25 must make pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting defined if the Statement were
applied. The Statement is effective in 1996 and the Company has adopted its
provisions as of February 1, 1996. The Company has adopted the alternative
accounting treatment allowed by the Standard and measures compensation cost in
accordance with the provisions in Opinion No. 25. The adoption of the Statement
has no effect on the Company's results of Operations, financial position or cash
flow.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed. The Statement establishes
accounting standards for the determination of impairment of long-lived assets,
certain identifiable intangibles and goodwill. The Statement requires the long-
lived assets and certain intangibles be reviewed for impairment using an
estimate of future undiscounted cash flows compared to the carrying amount of
the assets. If impaired, an impairment loss shall be recognized for the amount
which the carrying amount exceeds the fair value of the assets. The Statement is
effective in 1996 and the Company has adopted its provisions as of February 1,
1996. The adoption of the Statement has no material impact on the results of
operations, financial position or cash flows of the Company.
- 6 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - EARNINGS PER SHARE
The computation of earnings per share is calculated based on the Treasury Stock
Method.
For the nine month period ended October 31, 1995 the effect of Stock Options and
Warrants was anti-dilutive. For the nine month period to October 31, 1996 the
Treasury Stock method of calculating earnings per share was utilized to reflect
the dilutive effect of stock options and warrants.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, 1995 OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1996
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 2,764,752 6,508,747 2,672,909 4,703,271
Net income per common share $ 0.06 $ 0.07 $ 0.18 $ 0.19
</TABLE>
NOTE 5 - INVENTORIES
Inventories consist of the following: JANUARY 31, 1996 OCTOBER 31, 1996
---------------- ----------------
(UNAUDITED)
Computer hardware $ 2,823,753 $ 8,397,518
Computer software 374,341 469,672
Work in progress 141,904 102,598
----------- -----------
$ 3,339,998 $ 8,969,788
----------- -----------
----------- -----------
NOTE 6 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following: JANUARY 31, 1996 OCTOBER 31, 1996
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Vehicles $ 337,282 $ 1,635,369
Furniture, fixtures and equipment 349,309 1,096,138
Leasehold - 49,202
Computer equipment 1,416,779 2,808,148
----------- -----------
2,103,370 5,588,857
Less accumulated depreciation (1,197,394) (3,341,230)
----------- -----------
$ 905,976 $ 2,247,627
----------- -----------
----------- -----------
</TABLE>
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<PAGE>
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31. 1996 OCTOBER 31. 1996
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Investment in ActionTrac Inc., at cost $ 500,000 $ 500,000
Other 106,594 85,280
------------- -----------
$ 606,594 $ 585,280
------------- -----------
------------- -----------
</TABLE>
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31. 1996 OCTOBER 31. 1996
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Value Added Tax (VAT) liability $ 1,011,989 $ 1,536,613
Payroll taxes 523,811 651,474
Other 23,873 74,593
------------ ------------
$ 1,559,673 $ 2,262,680
------------ ------------
------------ ------------
</TABLE>
NOTE 9 - INCOME TAXES
The Company files a separate U.S. federal income tax return for its domestic
operations and a UK income tax return for its foreign operations. The United
Kingdom subsidiaries compute taxes at rates in effect in that country and become
payable when assessed by the Inland Revenue. Deferred federal income taxes are
not provided on the undistributed earnings of its foreign subsidiaries to the
extent the Company intends to permanently reinvest such earnings in the United
Kingdom.
The Company has provided income tax for the nine months ended October 31, 1996
of $323,390 on the profits of its operations, and for the nine months to October
31, 1995 of $189,787.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company is a UK based specialized computer services company which
provides a wide range of high-end information technology solutions and services,
principally to Financial Times UK Top 500 companies and government authorities.
The Company provides key elements of distributed computing, including systems
development and integration, storage and client-server solutions and products,
as well as extensive hardware and software support services. In addition, in
1995 the Company began providing corporate Internet access, website development
and related services, and commenced offering global help desk outsourcing for
desktop software through a partnership named ActionTrac, International (the
"ActionTrac Joint Venture"). The Company believes it has a competitive
advantage as a single-source, multivendor, multiple service solution provider to
a broad range of corporate computing needs.
The Company's main operating subsidiaries K2 Systems Plc ("K2"), Xanadu
Systems Ltd ("Xanadu"), and CI Support Limited ("CI"), were acquired in 1994 and
Compass Computer Group ("Compass") was acquired in 1995. The K2, Xanadu, CI and
Compass acquisitions have been accounted for under the purchase method of
accounting and on a consolidated basis in the Company's financial statements for
periods ending after the effective date of such acquisitions. K2 and Xanadu
were acquired effective January 14, 1994. These acquisitions accelerated the
development of the Company's systems integration activities and network
computing activities, respectively. Effective November 1, 1994, the Company
acquired all of the assets of CI. This acquisition allowed the Company to
directly provide hardware maintenance services which had previously been
contracted out by the Company to third parties. The CI acquisition also
expanded the Company's support services. In February 1996 CI changed its name
to 4Front Services Limited, ("4Front Services").
Effective April 6, 1995, The Company acquired Compass. Compass is a
supplier of high-end information storage solutions. The acquisition of Compass
has enabled the Company to become one of the leading suppliers within the UK of
high capacity storage solutions and multi-processor servers to corporate and
government users. The Compass acquisition also expanded the Company's systems
integration and support business and provided the basis for the Company's
corporate Internet services.
Effective August 15, 1996, the Company acquired Hammer Distribution
Limited. Hammer is a supplier of storage solutions and computer sub-systems.
The Company believes that the acquisition of Hammer will help the Company to
secure a significant percentage of the UK market for storage solution and sub-
systems.
Effective October 11, 1996 the Company acquired Datapro Computers Group
Limited. Datapro is a supplier of specialized services including systems
integration, hardware and software maintenance and systems support, and other
technology enabling services. The Company believes that the acquisition of
Datapro will help the Company to secure a leading position in the independent
hardware maintenance industry. It is currently anticipated that no further
acquisitions will be made during the current financial year, pending the
assimulation of the acquisitions completed in August and October 1996.
Digestion of the Datapro acquisition in particular invites a major restructuring
and reorganisation of the service division, while in the product division ways
of further streamlining the overall operation are currently being evaluated.
A substantial part of the Company's growth in the past three years has been
achieved through acquisitions. Accordingly the results of operations from
period to period are not necessarily comparable.
- 9 -
<PAGE>
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' and now Hammer's 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 OCTOBER 31, 1996 COMPARED WITH THE THREE MONTHS ENDED OCTOBER
31, 1995
REVENUES
Revenues for the three months ended October 31, 1996 were $13.9 million, an
increase of $4.6 million, or approximately 49.5% compared to $9.3 million for
the three months ended October 31, 1995. Revenue growth reflects in particular
rapid expansion of the service division as well as the impact of companies
acquired during the quarter. Networking revenues continued to be held back by
changes in the product set.
GROSS PROFIT
Gross profit for the three months ended October 31, 1996 was $4.5 million,
an increase of $1.1 million, or 32.4% compared to $3.4 million for the three
months ended October 31, 1995. Gross margin decreased from 36.3% for the three
months ended October 31, 1995 to 32.4% for the three months ended October 31,
1996. This percentage decrease in gross margin arose primarily from the
expansion of the Company's information storage business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $3.66 million, an
increase of $830,000, or 29.1% compared to $2.84 million for the three months
ended October 31, 1995. As a percentage of revenues, selling, general and
administrative expenses decreased to 26.3% from 30.5% in the three months ended
October 31, 1995. This decrease reflects the beneficial impact of fixed
expenses as a percentage of increasing sales volume.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended October
31, 1996 was $238,000, an increase of $65,000, or 37.5% compared to $173,000 for
the three months ended October 31, 1995. This increase arose principally from
the increased amortization of goodwill from acquisitions. Depreciation was
$127,000, an increase of $9,000 or 7.6%, from $118,000 for the prior period.
Amortization of goodwill from acquisitions was $111,000, an increase of $57,000,
or 105.6%, from $54,000 for the prior period. An amortization period of ten
years is utilized with respect to acquisitions.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND SHARE OF RESULTS IN EQUITY
INVESTEE
Income before interest expense, income taxes and share of results in equity
investee ("IBITI") for the three months ended October 31, 1996 was $608,000, an
increase of $237,000, or 63.9%, as compared to $371,000 for the three months
ended October 31, 1995. As a percentage of revenues, IBITI increased to 4.37%
in the three months ended October 31, 1996 as compared to 3.98% for the three
months ended October 31, 1995.
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<PAGE>
NET INCOME
Net income for the three months ended October 31, 1996 was $459,000 an
increase of $294,000 or 178.2%, as compared to $165,000 for the three months
ended October 31, 1995. As a percentage of revenues net income increased to
3.29% in the three months ended October 31, 1996 as compared to 1.77% for the
three months ended October 31, 1995.
EQUITY INVESTEE LOSS
Equity investee loss was $81,000 for the three months ended October 31,
1996 reflecting the Company's proportion attributable to the ActionTrac Joint
Venture as compared to a loss during the three months ended October 31, 1995 of
$84,000.
INTEREST
Net interest income for the three months ended October 31,1996 was $85,000
compared to interest expense of $52,000 for the three months ended October 31,
1995. This change arose as a result of the receipt of proceeds from the
Company's secondary offering in the second quarter. See "-Liquidity and Capital
Resources".
NINE MONTHS ENDED OCTOBER 31, 1996 COMPARED WITH THE NINE MONTHS ENDED OCTOBER
31, 1995.
REVENUES
Revenues for the nine months ended October 31, 1996 were $34.5 million, an
increase of $11.9 million, or approximately 52.7% compared to $22.6 million for
the nine months ended October 31, 1995. Revenue growth reflects in particular
rapid expansion of the service division as well as the impact of companies
acquired during the third quarter. Networking revenues were held back by
changes in the product set.
GROSS PROFIT
Gross profit for the nine months ended October 31, 1996 was $11.2 million,
an increase of $2.8 million, or 33.3% compared to $8.4 million for the nine
months ended October 31, 1995. Gross margin decreased from 37.3% for the nine
months ended October 31, 1995 to 32.4% for the nine months ended October 31,
1996. This percentage decrease in gross margin arose primarily from the
expansion of the Company's storage business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $9.2 million, an increase
of $2.2 million, or 31.4% compared to $7 million for the nine months ended
October 31, 1995. As a percentage of revenues, selling, general and
administrative expenses decreased to 26.7% from 30.8% in the nine months ended
October 31, 1995. This decrease reflects the beneficial impact of fixed
expenses as a percentage of increasing sales volume.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the nine months ended October 31,
1996 was $516,000, an increase of $114,000, or 28.4% compared to $402,000 for
the nine months ended October 31, 1995. This increase arose principally from
the increased amortization of goodwill from acquisitions. Depreciation was
$281,000, an increase of $12,000 or 4.5%, from $269,000 for the prior period.
Amortization of goodwill from acquisitions was $235,000, an increase of
$102,000, or 76.7%, from $133,000 for the prior period. An amortization period
of ten years is utilized with respect to goodwill arising from acquisitions.
- 11 -
<PAGE>
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 nine months ended October 31, 1996 was
$1,461,000, an increase of $407,000, or 38.6%, as compared to $1,054,000 for the
nine months ended October 31, 1995. As a percentage of revenues, IBITI
decreased to 4.23% in the nine months ended October 31, 1996 as compared to
4.66% for the nine months ended October 31, 1995.
NET INCOME
Net income for the nine months ended October 31, 1996 was $970,000 an
increase of $500,000 or 106%, as compared to $470,000 for the nine months ended
October 31, 1995. As a percentage of revenues net income increased to 2.81% for
the nine months ended October 31, 1996 as compared to 2.07% for the nine months
ended October 31, 1995.
EQUITY INVESTEE LOSS
Equity investee loss was $205,000 for the nine months ended October 31,
1996 reflecting the Company's proportion attributable to the ActionTrac Joint
Venture as compared to a loss during the nine months ended October 31, 1995 of
$157,000.
INTEREST
Net interest income for the nine months ended October 31, 1996 was $37,000
compared to interest expense of $238,000 for the nine months ended October 31,
1995. This change arose principally as a result of the receipt of proceeds from
the Company's secondary offering in the second quarter. See "-Liquidity and
Capital Resources".
LIQUIDITY AND CAPITAL RESOURCES
Until June 1996, the Company's principal sources of capital have been cash
flow generated from operations, private placements of equity and notes payable
(bridge loans), primarily from its controlling stockholders and related parties,
and borrowings from banks. On June 19, 1996, the Company completed a public
offering (the "Offering") of 3,000,000 shares of the Company's Common Stock at a
price of $5.75 per share. On July 9, 1996 the Company completed the sale of a
further 450,000 shares, pursuant to the underwriters' over-allotment option. As
a result of this offering the Company raised net proceeds of $16.2 million.
As of October 31, 1996, the Company had a line of credit with a commercial
lending institution in the amount of L650,000 ($1 million). As of October 31,
1996 $625,000 was outstanding. 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. This term loan
was repaid in full in the period to July 31, 1996. The outstanding credit
facility is secured by the assets of the Company and are periodically reviewed
by the issuing institution. Management expects to be able to maintain these
credit arrangements for the foreseeable future, although no assurances may be
given.
During the nine months to October 31, 1996 cash generated by operations has
been sufficient to satisfy the Company's internal working capital needs.
Management believes that the Company will continue to generate cash in amounts
sufficient to both conduct operations at their current level and to fund
internal growth. However, the proceeds of the Offering, after repayment of
debt, are available to fund further additional expansion and growth by
acquisition.
The Company's Compass subsidiary has a L997,000 ($1.64 million) line of
credit (overdraft protection) with a UK bank with no balance outstanding as of
October 31, 1996.
- 12 -
<PAGE>
The Company's Datapro subsidiary has a L700,000 ($1.15 million) line of
credit (overdraft protection) with a UK bank of which (giving effect to
applicable exchange rates then in effect) $581,000 was outstanding as of October
31, 1996.
Outstanding advances from stockholders are shown on the Company's balance
sheet as stockholder advances. Outstanding advances as of October 31, 1996 were
$391,842. These outstanding advances do not bear interest, and are payable on
demand.
The Company's working capital deficit decreased from $1.3 million at
January 31, 1996 to a working capital surplus of $8.8 million at October 31,
1996.
Net cash used by operating activities during the nine months ended October
31, 1996 was $2.4 million, which reflected the net effect of an increase in
accounts payable, deferred revenues, accrued liabilities, and an increase in
inventories and accounts receivable combined with depreciation and amortization.
Net cash used by investing activities was $4.5 million, for the nine months
ended October 31, 1996, primarily reflecting cash used for the acquisitions of
Hammer Distribution and Datapro Computers Group and for the investment in the
ActionTrac Joint Venture, and the purchase of equipment. Net cash provided by
financing activities was $12.5 million for the nine months ended October 31,
1996, resulting primarily from repayment of bank lines of credit and payments of
outstanding obligations and the net proceeds from the issuance of common stock.
The Company monitors exchange rate fluctuations between the British pound
(in which form approximately 90% of the Company's revenues are received) and
U.S. dollars (which are used for approximately 30%-40% of the Company's
purchases) and will seek to minimize the risk of such fluctuations by entering
into hedge transactions in which dollars are bought forward to match obligations
as they come due.
The Company believes that the proceeds from the sale by the Company of the
Common Stock in the Offering, together with cash flow from operations and
borrowing availability under its credit facilities, will satisfy the Company's
anticipated working capital requirements through at least the next twelve
months. To the extent the Company raises additional capital by issuing equity
or convertible debt securities, ownership dilution to the Company's shareholders
will result. In the event that adequate funds are not available, the Company's
business may be adversely affected.
INFLATION
Inflation has not had a material effect upon the Company's results of
operations to date. In the event the rate of inflation should accelerate in the
future, it is expected that costs in connection with the provision by the
Company of its services and products will increase, and, to the extent such
increased costs are not offset by increased revenues, the operations of the
Company may be adversely affected.
- 13 -
<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
(a) Reports on Form 8-K
Report on Form 8-K filed 9/5/96 describing the acquisition of the
Hammer subsidiary
Report on Form 8-K filed 12/6/96 describing the acquisition of
the Datapro subsidiary
Exhibits
Exhibit 27 Financial Data Schedule
-14-
<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.
December 11, 1996 4FRONT SOFTWARE
INTERNATIONAL, INC.
By: /s/ Stephen McDonnell
-------------------------
Stephen McDonnell
Chief Financial Officer
- 15 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarterly period ended October 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 7,270,465
<SECURITIES> 0
<RECEIVABLES> 17,086,599
<ALLOWANCES> 329,000
<INVENTORY> 8,969,788
<CURRENT-ASSETS> 34,218,771
<PP&E> 5,588,857
<DEPRECIATION> 3,341,230
<TOTAL-ASSETS> 46,415,952
<CURRENT-LIABILITIES> 25,398,141
<BONDS> 0
0
0
<COMMON> 23,164,689
<OTHER-SE> (2,649,409)
<TOTAL-LIABILITY-AND-EQUITY> 20,515,280
<SALES> 34,516,600
<TOTAL-REVENUES> 34,516,600
<CGS> 23,333,230
<TOTAL-COSTS> 23,333,230
<OTHER-EXPENSES> 9,927,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,429)
<INCOME-PRETAX> 1,293,561
<INCOME-TAX> 323,390
<INCOME-CONTINUING> 970,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 970,171
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.19
</TABLE>
