<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE [1]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
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 as specified in its charter)
Delaware 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, PAR VALUE $.001 PER SHARE
(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 December 1, 1997 was 6,604,243 shares of Common Stock, $.001 par value.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NINE AND THREE MONTH PERIODS ENDED OCTOBER 31, 1997
TABLE OF CONTENTS
-----------------
PAGE
NUMBER
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 1997
and October 31, 1997 (unaudited) 1
Condensed Consolidated Statements of Operations for the
nine and three month periods ended October 31, 1996 and 1997
(unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended October 31, 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine and three month periods ended October 31, 1996 and 1997
(unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JANUARY 31, OCTOBER 31,
1997 1997
----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash $ 6,652,888 $ 580,073
Accounts receivable, net of allowance
for doubtful accounts of $273,205 and
$337,654 respectively 15,365,270 19,929,192
Deposits 30,843 32,142
Inventories 7,132,470 10,222,378
Prepaid expenses 904,838 1,664,879
Income taxes receivable 32,122 26,955
Other current assets 230,410 322,440
----------- -----------
Total current assets 30,348,841 32,778,059
PROPERTY AND EQUIPMENT, net 2,050,485 2,554,687
INVESTMENT IN AND ADVANCES
TO EQUITY INVESTEE 143,422 -
RECEIVABLE, RELATED PARTY 644,356 -
INTANGIBLE ASSETS, net 7,777,448 13,568,262
DEFERRED INCOME TAX 973,511 1,687,500
OTHER ASSETS 83,332 86,840
----------- -----------
TOTAL ASSETS $42,021,395 $50,675,348
=========== ===========
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,
1997 1997
----------- -----------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $13,057,511 $15,929,274
Accrued liabilities 2,483,160 2,466,176
Stockholder advances 504,105 57,999
Lines of credit-bank 1,176,848 2,379,193
Capital lease obligations, current
portion 545,903 333,490
Income taxes payable 493,495 838,266
Deferred revenue 6,503,043 8,835,389
----------- -----------
Total current liabilities 24,764,065 30,839,787
CAPITAL LEASE OBLIGATIONS, less current
portion 488,795 238,519
----------- -----------
TOTAL LIABILITIES 25,252,860 31,078,306
----------- -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001, 5,000,000
shares authorized. No shares issued or
outstanding - -
Common stock, par value $.001, 30,000,000
shares authorized 6,514,747 and 6,604,243
shares issued and outstanding,
respectively 22,988,088 23,669,088
Accumulated (deficit) (6,222,386) (4,092,707)
Cumulative foreign currency translation
adjustment 2,833 20,661
----------- -----------
Total stockholders' equity 16,768,535 19,597,042
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $42,021,395 $50,675,348
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, 1996 OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Products $ 8,496,572 $ 8,491,020 $22,692,031 $29,426,034
Services 5,409,365 12,946,678 11,824,569 29,455,956
----------- ----------- ----------- -----------
13,905,937 21,437,698 34,516,600 58,881,990
----------- ----------- ----------- -----------
Cost of Products 7,154,752 6,912,941 18,609,175 24,726,690
Cost of Services 2,243,781 6,623,269 4,724,055 14,561,004
----------- ----------- ----------- -----------
9,398,533 13,536,210 23,333,230 39,287,694
----------- ----------- ----------- -----------
GROSS PROFIT
PRODUCTS 1,341,820 1,578,079 4,082,856 4,699,344
SERVICES 3,165,584 6,323,409 7,100,514 14,894,952
----------- ----------- ----------- -----------
4,507,404 7,901,488 11,183,370 19,594,296
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, general and administrative expenses 3,661,985 6,040,057 9,206,179 15,081,765
Depreciation 126,799 251,182 281,195 668,872
Amortization 110,879 316,958 234,619 758,050
----------- ----------- ----------- -----------
Total operating expenses 3,899,663 6,608,197 9,721,993 16,508,687
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST, INCOME
TAXES, AND SHARE OF RESULTS IN
EQUITY INVESTEE: 607,741 1,293,291 1,461,377 3,085,609
Interest income 140,371 47,140 221,959 209,350
Interest expense (55,594) (244,465) (184,530) (455,387)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
SHARE OF RESULTS IN EQUITY
INVESTEE: 692,518 1,095,966 1,498,806 2,839,572
SHARE OF OPERATING (LOSS) OF
EQUITY INVESTEE (80,853) - (205,245) -
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 611,665 1,095,966 1,293,561 2,839,572
INCOME TAXES 152,916 273,992 323,390 709,893
----------- ----------- ----------- -----------
NET INCOME $ 458,749 $ 821,974 $ 970,171 $ 2,129,679
----------- ----------- ----------- -----------
NET INCOME PER COMMON SHARE
IN ACCORDANCE WITH APB OPINION NO. 15
(NOTE 3) $ 0.07 $ 0.11 $ 0.19 $ 0.29
NET INCOME PER COMMON SHARE
(BASIC) IN ACCORDANCE WITH SFAS NO. 128
(NOTE 4) $ 0.07 $ 0.13 $ 0.21 $ 0.33
NET INCOME PER COMMON SHARE
(DILUTED) IN ACCORDANCE WITH SFAS NO. 128
(NOTE 4) $ 0.07 $ 0.11 $ 0.18 $ 0.31
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Common Stock Currency
------------------------ Accumulated Translation
Shares Amount (Deficit) Adjustment Total
--------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997 6,514,747 $22,988,088 $(6,222,386) $ 2,833 $16,768,535
Net income for
period (unaudited) - - 630,676 - 630,676
Foreign currency
translation adjustment - - - (21,528) (21,528)
--------- ----------- ----------- -------- -----------
Balance, April 30, 1997 6,514,747 22,988,088 (5,591,710) (18,695) 17,377,683
--------- ----------- ----------- -------- -----------
Exercise of warrants 3,000 6,000 - - 6,000
Net income for
period (unaudited) - - 677,029 - 677,029
Foreign currency
translation adjustment - - - 5,069 5,069
--------- ----------- ----------- -------- -----------
Balance, July 31, 1997 6,517,747 22,994,088 (4,914,681) (13,626) 18,065,781
--------- ----------- ----------- -------- -----------
Exercise of warrants 27,600 75,000 - - 75,000
Net income for
period (unaudited) - - 821,974 - 821,974
Stock issued for the acquisition
of Eurosystems France 58,896 600,000 - - 600,000
Foreign currency
translation adjustment - - - 34,287 34,287
--------- ----------- ----------- -------- -----------
BALANCE, OCTOBER 31, 1997 6,604,243 $23,669,088 $(4,092,707) $ 20,661 $19,597,042
(UNAUDITED) ========= =========== =========== ======== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- 4 -
<PAGE>
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, 1996 OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 458,749 $ 821,974 $ 970,171 $ 2,129,679
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 126,799 251,182 281,195 668,872
Amortization 110,879 316,958 234,619 758,050
Share of operating loss of equity investee 80,853 - 205,245 -
Loss (gain) on disposal of fixed assets (501) 22,343 (37,183) 2,748
Decrease (increase) in accounts receivable (3,641,385) (189,545) (4,152,990) 829,418
Decrease (increase) in deposits (1,595) (567) 5,685 (1,299)
Increase in inventories (1,089,659) (509,345) (1,847,761) (1,179,248)
Decrease (increase) in prepaid expenses (128,804) 142,337 (161,854) (147,501)
Increase in income taxes 244,568 102,615 136,196 349,938
Decrease (increase) decrease in other current
assets 55,715 (33,340) 47,495 (92,030)
Decrease in deferred taxation - 119,370 - 282,011
Decrease in account receivable related party 46,800 - 46,800 -
Increase (decrease) in accounts payable 3,605,468 1,313,495 1,658,522 (3,061)
Increase (decrease) accrued liabilities 665,982 (294,022) 164,815 (845,324)
Increase (decrease) in deferred revenue 197,918 (1,325,480) 44,634 (2,216,054)
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities 731,787 737,975 (2,404,411) 536,199
----------- ----------- ----------- -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment (57,831) (65,024) (353,146) (661,015)
Proceeds from disposal of equipment 2,525 67,005 114,339 156,792
Acquisition of subsidiaries (3,844,395) (5,152,423) (3,844,395) (6,380,049)
Investment in and advances to equity investee (187,725) - (403,489) 143,422
(Increase) decrease in other assets 31,248 (1,532) 21,314 (3,508)
----------- ----------- ----------- -----------
Net cash used by investing activities (4,056,178) (5,151,974) (4,465,377) (6,744,358)
----------- ----------- ----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
(Decrease) increase in lines of credit-bank 468,736 (646,556) (1,014,027) 624,665
Repayment of notes payable (1,146,460) - (2,841,863) -
Decrease in deferred offering costs - - 338,595 -
Payments of capital lease obligations (115,579) (199,806) (178,429) (588,149)
Net proceeds from issuance of common stock - - 16,191,479 -
Net proceeds from exercise of warrants - 75,000 - 81,000
Net proceeds from exercise of stock options - - 536 -
----------- ----------- ----------- -----------
Net cash from (used by) financing activities (793,303) (771,362) 12,496,291 117,516
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash 189,189 34,287 252,318 17,828
----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (3,928,505) (5,151,074) 5,878,821 (6,072,815)
Cash at beginning of period 11,198,970 5,731,147 1,391,644 6,652,888
----------- ----------- ----------- -----------
Cash at end of period $ 7,270,465 $ 580,073 $ 7,270,465 $ 580,073
=========== =========== =========== ===========
Cash paid for interest expense $ 55,594 $ 244,465 $ 184,530 $ 455,387
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- 5 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
4Front Software International, Inc. and subsidiaries (the "Company" or "4Front")
is a UK-based specialized computer services company. The Company provides key
elements of distributed computing, including systems development and
integration, storage and client-server solutions and products, as well as
hardware and software support and help desk services.
NOTE 2 - BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements contain all material adjustments consisting
only of normal recurring adjustments necessary to present fairly the financial
condition, the results of operations, the changes in stockholders' equity and
cash flows of 4Front Software International Inc. for the interim periods
presented.
The results of the nine months ended October 31, 1997 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 for the year ended January 31, 1997.
NOTE 3 - EARNINGS PER SHARE
The computation of earnings per share is calculated based on the Treasury Stock
Method in accordance with APB Opinion No. 15.
For the three and nine month periods to October 31, 1996 and 1997 the Treasury
Stock method of calculating earnings per share was utilized to reflect the
dilutive effect of stock options and warrants, there is no material difference
between diluted and primary earnings per share for the periods shown.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
----------- ----------- ----------- -----------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 6,508,747 6,521,734 4,703,271 6,517,620
Net income per common share $0.07 $0.11 $0.19 $0.29
</TABLE>
NOTE 4 - ADOPTION OF NEW STANDARDS
SFAS No. 128, EARNINGS PER SHARE, was issued in February 1997. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings per Share, and makes them more comparable to
international EPS standards. Statement 128 replaces the presentation of primary
EPS with a presentation of basic EPS. In addition, the Statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The Group has adopted Statement 128
for its financial statements for the year ended January 31, 1998, and has begun
disclosing its effects in each of the quarters of the year.
- 6 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ADOPTION OF NEW STANDARDS (CONTD)
The computation for basic earnings per share is based on the net income divided
by the weighted average number of common shares outstanding for the period.
The Computation for diluted earnings per share is based on the Treasury Stock
Method as per the requirements of SFAS No. 128.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
----------- ----------- ----------- -----------
1996 1997 1996 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net income $ 458,749 $ 821,974 $ 970,171 $ 2,129,679
----------- ----------- ----------- -----------
Weighted Average Number of Common Shares
outstanding 6,508,747 6,521,734 4,703,271 6,517,620
----------- ----------- ----------- -----------
Net income per Common Share Basic $ 0.07 $ 0.13 $ 0.21 $ 0.33
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
Net income $ 458,749 $ 821,974 $ 970,171 $ 2,129,679
----------- ----------- ----------- -----------
Weighted Average Number of Common
Shares outstanding 6,508,747 6,521,734 4,703,271 6,517,620
Additional Shares to be Issued upon
Assumed Exercise of Options and
Warrants 2,242,300 3,154,350 2,941,850 1,874,800
Shares Hypothetically Repurchased at
the Average Market Price with the
Proceeds of Exercise (1,715,063) (2,038,658) (2,346,010) (1,453,390)
----------- ----------- ----------- -----------
Adjusted Shares for Dilution 7,035,984 7,637,426 5,299,111 6,939,030
----------- ----------- ----------- -----------
Net income per Common Share Diluted $ 0.07 $ 0.11 $ 0.18 $ 0.31
=========== =========== =========== ===========
<CAPTION>
NOTE 5 - INVENTORIES
Inventories consist of the following: JANUARY 31, 1997 OCTOBER 31, 1997
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Computer hardware $6,949,121 $10,085,842
Computer software 83,097 32,061
Work in progress 100,252 104,475
---------- -----------
$7,132,470 $10,222,378
========== ===========
</TABLE>
- 7 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - 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, 1997
of $709,893 on the profits of its operations, and for the nine months to October
31, 1996 $323,390.
- 8 -
<PAGE>
ITEM 2. 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, including help desk support
services. 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.
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 $16.0 million.
Effective August 15, 1996, the Company acquired Hammer Distribution Limited
("Hammer"). Hammer is a supplier of storage solutions and computer sub-systems.
The Company believes that the acquisition of Hammer will assist the Company in
consolidating a leading position within the UK market for high end storage
solutions and sub-systems.
Effective October 11, 1996, the Company acquired Datapro Computers Group Limited
("Datapro"). 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 assist the Company in strengthening its position in the independent
hardware maintenance industry.
Effective September 8, 1997, the Company acquired Firstpoint Limited
("Firstpoint"). Firstpoint is a supplier of hardware maintenance and services.
The Company believes that the acquisition of Firstpoint strengthens its position
within the UK independent hardware maintenance industry.
Effective October 28, 1997, the Company acquired Eurosystems France
("Eurosystems"). Eurosystems is a maintenance provider with operations in
France and Belgium. The Company believes that this is a strategic acquisition
to enable it to expand into continental Europe.
RESULTS OF OPERATIONS
Because of the effect upon the Company's results of operations for the year
ended January 31, 1997 of acquisitions made during that period and restructuring
and reorganization, direct comparison of the Company's results of operations for
the periods ended October 31, 1996 and October 31, 1997 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.
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH THE THREE MONTHS ENDED OCTOBER
31, 1996
REVENUES
Revenues for the three months ended October 31, 1997 were $21.4 million, an
increase of $7.5 million, or approximately 54.2% compared to $13.9 million for
the three months ended October 31, 1996. The majority of this growth came from
the acquisitions of Datapro and Firstpoint and the remainder from organic growth
of the services business. Revenues from products were $8.5 million, or 39.6% of
the total revenue, with revenues from the supply of services at $12.9 million,
or 60.4% of the total revenues. In the comparable period of the prior year,
Product revenues were 61.1% of the total revenues and supply of services were
38.9% of the total revenues.
- 9 -
<PAGE>
GROSS PROFIT
Gross profit for the three months ended October 31, 1997 was $7.9 million, an
increase of $3.4 million, or 75.3% compared to $4.5 million for the three months
ended October 31, 1996, the majority of this growth came from the acquisitions
of Datapro and Firstpoint and the remainder from organic growth of the services
business. Gross margin increased from 32.4% for the three months ended October
31, 1996 to 36.9% for the three months ended October 31, 1997. Gross profit for
products increased 17.6% from $1.3 million for the three months ended October
31, 1996 to $1.6 million for the three months to October 31, 1997. Gross profit
for services increased 99.8% from $3.2 million for the three months ended
October 31, 1996 to $6.3 million for the three months ended October 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $6.0 million, an increase of
$2.3 million, or 64.9% compared to $3.7 million for the three months ended
October 31, 1996. As a percentage of revenues, selling, general and
administrative expenses increased to 28.2% from 26.3% in the three months ended
October 31, 1996. Selling general and administrative expenses increased
primarily as a result of the acquisition of Datapro and Firstpoint and the
expansion of the services business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended October 31,
1997 was $568,000, an increase of $330,000, or 139.0% compared to $238,000 for
the three months ended October 31, 1996. This increase arose principally from
the acquisitions of Datapro and Firstpoint acquired in October 1996 and
September 1997, respectively. Depreciation was $251,000, an increase of
$124,000 or 98.1%, from $127,000 for the prior period. Amortization of goodwill
from acquisitions was $317,000, an increase of $206,000, or 185.9%, from
$111,000 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, 1997 was $1,293,000,
an increase of $685,000, or 112.8%, as compared to $608,000 for the three months
ended October 31, 1996, the majority of this growth came from the acquisitions
of Hammer and Datapro and the remainder from organic growth of the services
business. As a percentage of revenues, IBITI increased to 6.0% in the three
months ended October 31, 1997 as compared to 4.4% for the three months ended
October 31, 1996.
IBITI before depreciation and amortization increased for the three months ended
October 31, 1997 to $1.86 million from $845,000 for the three months ended
October 31, 1996 an increase of $1.02 million or 120.2%, the majority of this
growth came from the acquisitions of Hammer and Datapro and the remainder from
organic growth of the services business. As a percentage of revenues, IBITIDA
increased to 8.7% for the three month period ended October 31, 1997 from 6.1%
for the comparable period ended October 31, 1996.
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. There was no such loss during the three months ended October 31, 1997
as the Company ceased its participation in the ActionTrac Joint Venture due to
the bankruptcy of the other party to the Joint Venture.
INTEREST
Interest expense for the three months ended October 31, 1997 was $245,000 an
increase of $189,000 compared to $56,000 for the three months ended October 31,
1996, arising from higher utilization of bank lines of credit during the period.
Interest income decreased from $140,000 for the three months ended October 31,
1996 to $47,000, a decrease of $93,000, arising from smaller cash balances on
hand during the quarter.
- 10 -
<PAGE>
NINE MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH THE NINE MONTHS ENDED OCTOBER
31, 1996
REVENUES
Revenues for the nine months ended October 31, 1997 were $58.9 million, an
increase of $24.4 million, or approximately 70.6% compared to $34.5 million for
the nine months ended October 31, 1996, the majority of this growth came from
the acquisitions of Hammer, Datapro and Firstpoint and the remainder from
organic growth of the services business. Revenues from products were $29.4
million, or 50% of the total revenue, with revenues from the supply of services
at $29.5 million, or 50% of the total revenues. In the comparable period of the
prior year, Product revenues were 65.7% of the total revenues and supply of
services were 34.3% of the total revenues.
GROSS PROFIT
Gross profit for the nine months ended October 31, 1997 was $19.6 million, an
increase of $8.4 million, or 75.2% compared to $11.2 million for the nine months
ended October 31, 1996, the majority of this growth came from the acquisitions
of Hammer, Datapro and Firstpoint and the remainder from organic growth of the
services business. Gross margin increased from 32.4% for the nine months ended
October 31, 1996 to 33.3% for the nine months ended October 31, 1997. Gross
profit for products increased 15.1% from $4.1 million for the nine months ended
October 31, 1996 to $4.7 million for the nine months to October 31, 1997. Gross
profit for services increased 109.8% from $7.1 million for the nine months ended
October 31, 1996 to $14.9 million for the nine months ended October 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $15.1 million, an increase of
$5.9 million, or 63.8% compared to $9.2 million for the nine months ended
October 31, 1996. As a percentage of revenues, selling, general and
administrative expenses decreased to 25.6% from 26.7% in the nine months ended
October 31, 1996. Selling general and administrative expenses increased
primarily as a result of the acquisition of Hammer, Datapro and Firstpoint and
the expansion of the services business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the nine months ended October 31, 1997
was $1.4 million, an increase of $911,000, or 176.6% compared to $516,000 for
the nine months ended October 31, 1996. This increase arose principally from
the acquisitions of Hammer, Datapro and Firstpoint. Depreciation was $669,000,
an increase of $388,000 or 137.9%, from $281,000 for the prior period.
Amortization of goodwill from acquisitions was $758,000, an increase of
$523,000, or 223.1%, from $235,000 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 nine months ended October 31, 1997 was $3.1 million,
an increase of $1.6 million, or 111.1%, as compared to $1.5 million for the nine
months ended October 31, 1996, the majority of this growth came from the
acquisitions of Hammer and Datapro, and the remainder from organic growth of the
services business. As a percentage of revenues, IBITI increased to 5.2% in the
nine months ended October 31, 1997 as compared to 4.2% for the nine months ended
October 31, 1996.
IBITI before depreciation and amortization increased for the nine months ended
October 31, 1997 to $4.5 million from $2.0 million for the nine months ended
October 31, 1996 an increase of $2.5 million or 128.2%, the majority of this
growth came from the acquisitions of Hammer and Datapro and the remainder from
organic growth of the services business. As a percentage of revenues, IBITIDA
increased to 7.7% for the nine month period ended October 31, 1997 from 5.7% for
the comparable period ended October 31, 1996.
- 11 -
<PAGE>
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. There was no such loss during the nine months ended October 31, 1997 as
the Company ceased its participation in the ActionTrac Joint Venture due to the
bankruptcy of the other party to the Joint Venture.
INTEREST
Interest expense for the nine months ended October 31, 1997 was $455,000 an
increase of $270,000 or 146.8% compared to $185,000 for the nine months ended
October 31, 1996, arising from higher utilization of bank lines of credit during
the period. Interest income decreased from $222,000 for the nine months ended
October 31, 1996 to $209,000 a decrease of $13,000, arising from smaller cash
balances on hand during the nine months.
LIQUIDITY AND CAPITAL RESOURCES
From inception until June 1996, the Company's sources of capital had been cash
flows from operations, private placements of securities, 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 $16.0 million.
As of October 31, 1997, the Company had lines of credit with UK banks in the
amount of L2.3 million ($3.8 million). As of October 31, 1997 $1.9 million was
outstanding.
As of October 31, 1997, the Company had lines of credit with French and Belgium
banks in the amount of $750,000. As of October 31, 1997 $500,000 was
outstanding.
The outstanding credit facilities are 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 assurance can be given.
Outstanding advances from stockholders are shown on the Company's balance sheet
as stockholder advances. Outstanding advances as of October 31, 1997 were
$58,000. These outstanding advances do not bear interest, and are payable on
demand.
The Company's working capital decreased from $5.6 million surplus at January 31,
1997 to a surplus of $1.9 million at October 31, 1997.
Net cash provided by operating activities during the nine months ended October
31, 1997 was $536,000, which reflected the net effect of a decrease in accounts
payable, accrued liabilities, accounts receivable and deferred revenue and an
increase in inventories. Net cash used by investing activities was $6.7
million, for the nine months ended October 31, 1997, primarily reflecting cash
used for the payment of contingent amounts due on the Hammer acquisition and
the acquisitions of Firstpoint and Eurosystems and for the purchase of
equipment. Net cash provided by financing activities was $0.1 million for the
nine months ended October 31, 1997, resulting primarily from increase of bank
lines of credit and payments of outstanding obligations.
The Company believes that the net cash flows 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 stockholders will result.
In the event that adequate funds are not available, the Company's business may
be adversely affected.
- 12 -
<PAGE>
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 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this
report.
27 Financial Data Schedule
(b) Reports on Form 8-K.
The company did not file any reports on Form 8-K during
the quarter for which this report is filed except for
the Form 8-K dated September 22, 1997, relating to the
acquisition of Firstpoint Liminted and the Form 8-KA
dated November 18, 1997, relating to such acquisition.
All other items of this report are inapplicable.
- 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 3, 1997 4FRONT SOFTWARE
INTERNATIONAL, INC.
By: /s/ Stephen McDonnell
--------------------------------
Stephen McDonnell
Chief Financial Officer
- 15 -
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<PAGE>
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QUARTERLY REPORT FORM 10-Q
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 580,073
<SECURITIES> 0
<RECEIVABLES> 20,266,846
<ALLOWANCES> 337,654
<INVENTORY> 10,222,378
<CURRENT-ASSETS> 32,778,059
<PP&E> 7,484,809
<DEPRECIATION> 4,930,122
<TOTAL-ASSETS> 50,675,348
<CURRENT-LIABILITIES> 30,839,787
<BONDS> 0
0
0
<COMMON> 23,669,088
<OTHER-SE> (4,072,046)
<TOTAL-LIABILITY-AND-EQUITY> 50,675,348
<SALES> 58,881,990
<TOTAL-REVENUES> 58,881,990
<CGS> 39,287,694
<TOTAL-COSTS> 39,287,694
<OTHER-EXPENSES> 16,508,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 246,037
<INCOME-PRETAX> 2,839,572
<INCOME-TAX> 700,893
<INCOME-CONTINUING> 2,129,679
<DISCONTINUED> 0
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<NET-INCOME> 2,129,679
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