<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE [1]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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
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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 September 10, 1997 was 6,517,747 shares of Common Stock, no par value.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
SIX AND THREE MONTH PERIODS ENDED JULY 31, 1997
TABLE OF CONTENTS
Page
Number
------
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 1997
and July 31, 1997 (unaudited) 1
Condensed Consolidated Statements of Operations for the
six and three month periods ended July 31, 1996 and 1997
(unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the six months ended July 31, 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six and three month periods ended July 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, JULY 31,
1997 1997
----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash $ 6,652,888 $ 5,731,147
Accounts receivable, net of allowance
for doubtful accounts of $273,205 and
$333,102 respectively 15,365,270 14,346,307
Deposits 30,843 31,575
Inventories 7,132,470 7,802,373
Prepaid expenses 904,838 1,194,676
Income taxes receivable 32,122 26,479
Other current assets 230,410 289,100
------------ ------------
Total current assets 30,348,841 29,421,657
PROPERTY AND EQUIPMENT, net 2,050,485 2,158,594
INVESTMENT IN AND ADVANCES
TO EQUITY INVESTEE 143,422 -
RECEIVABLE, RELATED PARTY 644,356 644,356
INTANGIBLE ASSETS, net 7,777,448 7,692,646
DEFERRED INCOME TAX 973,511 810,870
OTHER ASSETS 83,332 85,308
------------ ------------
TOTAL ASSETS $ 42,021,395 $ 40,813,431
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 1 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 13,057,511 $ 10,869,619
Accrued liabilities 2,483,160 1,931,858
Stockholder advances 504,105 504,105
Lines of credit-bank 1,176,848 2,448,069
Capital lease obligations, current portion 545,903 323,944
Income taxes payable 493,495 735,175
Deferred revenue 6,503,043 5,612,469
------------ -------------
Total current liabilities 24,764,065 22,425,239
CAPITAL LEASE OBLIGATIONS, less current
portion 488,795 322,411
------------ ------------
TOTAL LIABILITIES 25,252,860 22,747,650
------------ ------------
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 6,517,747
shares issued and outstanding, respectively 22,988,088 22,994,088
Accumulated (deficit) (6,222,386) (4,914,681)
Cumulative foreign currency translation adjustment 2,833 (13,626)
------------ ------------
Total stockholders' equity 16,768,535 18,065,781
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 42,021,395 $ 40,813,431
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 2 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, 1996 JULY 31, 1997 JULY 31, 1996 JULY 31, 1997
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Products $ 6,867,120 $ 10,507,327 $ 14,195,459 $ 20,935,014
Services 3,193,305 8,312,680 6,415,204 16,509,278
--------- --------- --------- ----------
10,060,425 18,820,007 20,610,663 37,444,292
---------- ---------- ---------- ----------
Cost of Products 5,451,628 8,932,880 11,454,423 17,813,749
Cost of Services 1,203,928 3,788,994 2,480,274 7,937,735
--------- --------- --------- ---------
6,655,556 12,721,874 13,934,697 25,751,484
--------- ---------- ---------- ----------
GROSS PROFIT
Products 1,415,492 1,574,447 2,741,036 3,121,265
Services 1,989,377 4,523,686 3,934,930 8,571,543
--------- --------- --------- ---------
3,404,869 6,098,133 6,675,966 11,692,808
--------- --------- --------- ----------
OPERATING EXPENSES
Selling, general and administrative expenses 2,832,116 4,687,082 5,544,194 9,041,708
Depreciation 73,437 222,524 154,396 417,690
Amortization 61,870 230,611 123,740 441,092
------ ------- ------- -------
Total operating expenses 2,967,423 5,140,217 5,822,330 9,900,490
--------- --------- --------- ---------
INCOME BEFORE INTEREST, INCOME
TAXES, AND SHARE OF RESULTS IN
EQUITY INVESTEE: 437,446 957,916 853,636 1,792,318
Interest income 77,747 84,566 81,588 162,210
Interest expense (25,322) (139,777) (128,936) (210,922)
-------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
SHARE OF RESULTS IN EQUITY
INVESTEE: 489,871 902,705 806,288 1,743,606
SHARE OF OPERATING (LOSS) OF
EQUITY INVESTEE (72,219) - (124,392) -
-------- ------- --------- ---------
INCOME BEFORE INCOME TAXES 417,652 902,705 681,896 1,743,606
INCOME TAXES 104,413 225,676 170,474 435,901
------- ------- ------- -------
NET INCOME $ 313,239 $ 677,029 $ 511,422 $ 1,307,705
------- ------- ------- ---------
NET INCOME PER COMMON SHARE
IN ACCORDANCE WITH APB OPINION NO. 15
(NOTE 3) $ 0.06 $ 0.10 $ 0.12 $ 0.19
NET INCOME PER COMMON SHARE (BASIC)
IN ACCORDANCE WITH SFAS NO. 128
(NOTE 4) $ 0.07 $ 0.10 $ 0.14 $ 0.20
NET INCOME PER COMMON SHARE (DILUTED)
IN ACCORDANCE WITH SFAS NO. 128
(NOTE 4) $ 0.06 $ 0.10 $ 0.11 $ 0.19
</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
(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 SIX MONTHS ENDED
JULY 31, 1996 JULY 31, 1997 JULY 31,1996 JULY 31, 1997
------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 313,239 $ 677,029 $ 511,422 $ 1,307,705
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 73,437 222,524 154,396 417,690
Amortization 61,870 230,611 123,740 441,092
Share of operating loss of equity investee 72,219 - 124,392 -
Loss (gain) on disposal of fixed assets (17,234) 3,157 (36,682) (19,595)
(Increase) decrease in accounts receivable (123,669) (426,787) (511,605) 1,018,963
Decrease (increase) in deposits 4,194 (345) 7,280 (732)
(Increase) decrease in inventories (259,159) 23,858 (758,102) (669,903)
(Increase) in prepaid expenses (114,570) (141,895) (33,050) (289,838)
Increase (decrease) in income taxes (161,839) 172,626 (108,372) 247,323
(Increase) decrease in other current assets 12,204 (102,086) (8,220) (58,690)
Decrease in deferred income tax - 26,820 - 162,641
(Decrease) in accounts payable (2,329,560) (697,601) (1,946,946) (1,316,556)
(Decrease) in accrued liabilities (348,298) (157,296) (501,167) (551,302)
Increase (decrease) in deferred revenue 273,825 717,210 (153,284) (890,574)
------------ ------------ ------------ ------------
Net cash provided (used) by operating activities (2,543,341) 547,825 (3,136,198) (201,776)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (193,553) (372,562) (295,315) (595,991)
Proceeds from disposal of equipment 82,920 64,009 111,814 89,787
Acquisition of subsidiaries - (241,074) - (1,227,626)
Investment in and advances to equity investee (172,514) 145,221 (215,764) 143,422
(Increase) in other assets (40,148) (933) (9,934) (1,976)
------------ ------------ ------------ ------------
Net cash used by investing activities (323,295) (405,339) (409,199) (1,592,384)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in lines of credit-bank (2,017,991) (934,966) (1,482,763) 1,271,221
Repayment of notes payable (1,301,234) - (1,695,403) -
Decrease in deferred offering costs 571,119 - 338,595 -
Payments of capital lease obligations (39,291) (191,389) (62,850) (388,343)
Net proceeds from issuance of common stock 16,191,479 - 16,191,479 -
Net proceeds from exercise of warrants - 6,000 - 6,000
Net proceeds from exercise of stock options - - 536 -
------------ ------------ ------------ ------------
Net cash from (used by) financing activities 13,404,082 (1,120,355) 13,289,594 888,878
------------ ------------ ------------ ------------
Effect of exchange rate changes on cash 100,114 5,069 63,129 (16,459)
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH 10,637,560 (972,800) 9,807,326 (921,741)
Cash at beginning of period 561,410 6,703,947 1,391,644 6,652,888
------------ ------------ ------------ ------------
Cash at end of period $ 11,198,970 $ 5,731,147 $ 11,198,970 $ 5,731,147
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash paid for interest expense $ 25,322 $ 139,777 $ 128,936 $ 210,922
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash paid for income taxes $ 332,313 $ - $ 332,313 $ -
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 5 -
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
4Front Software International, Inc. and subsidiaries (the "Company" or "4Front")
is a UK-based specialized computer services company. The Company provides key
elements of distributed computing, including systems development and
integration, storage and client-server solutions and products, as well as
hardware and software support and help desk services.
NOTE 2 - BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements contain all material adjustments consisting
only of normal recurring adjustments necessary to present fairly the financial
condition, the results of operations, the changes in stockholders' equity and
cash flows of 4Front Software International Inc. for the interim periods
presented.
The results of the six months ended July 31, 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 six month periods to July 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 SIX MONTHS ENDED
JULY 31, 1996 JULY 31, 1997 JULY 31, 1996 JULY 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding 4,535,920 6,514,747 3,785,867 6,514,747
Net income per common share $0.06 $0.10 $0.12 $0.19
</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 SIX MONTHS ENDED
JULY 31, 1996 JULY 31, 1997 JULY 31,1996 JULY 31, 1997
------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income 313,239 677,029 511,422 1,307,705
--------- ---------- ---------- ---------
Weighted Average Number of Common Shares
outstanding 4,535,920 6,514,747 3,785,867 6,514,747
--------- ---------- ---------- ---------
Net income per Common Share Basic $0.07 $0.10 $0.14 $0.20
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
DILUTED EARNINGS PER SHARE
Net income 313,239 677,029 511,422 1,307,705
--------- ---------- ---------- ---------
Weighted Average Number of Common Shares
outstanding 4,535,920 6,514,747 3,785,867 6,514,747
Additional Shares to be Issued upon Assumed
Exercise of Options and Warrants 2,941,850 1,880,800 2,941,850 604,500
Shares Hypothetically Repurchased at the Average
Market Price with the Proceeds of Exercise (1,932,463) (1,618,941) (2,029,420) (381,772)
--------- ---------- ---------- ---------
Adjusted Shares for Dilution 5,545,307 6,776,606 4,698,297 6,737,475
--------- ---------- ---------- ---------
Net income per Common Share Diluted $0.06 $0.10 $0.11 $0.19
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
NOTE 5 - INVENTORIES
Inventories consist of the following: JANUARY 31, 1997 JULY 31, 1997
---------------- -------------
(UNAUDITED)
Computer hardware $ 6,949,121 $ 7,668,250
Computer software 83,097 31,493
Work in progress 100,252 102,630
------------ ------------
$ 7,132,470 $ 7,802,373
------------ ------------
------------ ------------
- 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 six months ended July 31, 1997 of
$435,901 on the profits of its operations, and for the six months to July 31,
1996 $170,474.
- 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.
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 July 31, 1996 and July 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. The operations and results
of operations for both Hammer and Datapro were not included in the results for
the three and six month periods to July 31, 1996 as they were effective in the
third quarter of 1996. The Hammer and Datapro acquisitions are now fully
integrated into the Company's operations and reflected as such in the
substantial growth of the Company's operations and results of operations for the
three and six month periods to July 31, 1997.
THREE MONTHS ENDED JULY 31, 1997 COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1996
REVENUES
Revenues for the three months ended July 31, 1997 were $18.8 million, an
increase of $8.8 million, or approximately 87.1% compared to $10.0 million for
the three months ended July 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. Revenues from products were $10.5 million, or 55.8% of the
total revenue, with revenues from the supply of services at $8.3 million, or
44.2% of the total revenues. In the comparable period of the prior year,
Product revenues were 68.3% of the total revenues and supply of services were
31.7% of the total revenues.
- 9 -
<PAGE>
GROSS PROFIT
Gross profit for the three months ended July 31, 1997 was $6.1 million, an
increase of $2.7 million, or 79.1% compared to $3.4 million for the three months
ended July 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. Gross margin decreased from 33.8% for the three months ended July 31,
1996 to 32.4% for the three months ended July 31, 1997. Gross profit for
products increased 11.2% from $1.4 million for the three months ended July 31,
1996 to $1.6 million for the three months to July 31, 1997. Gross profit for
services increased 127.4% from $2.0 million for the three months ended July 31,
1996 to $4.5 million for the three months ended July 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $4.7 million, an increase of
$1.9 million, or 65.5% compared to $2.8 million for the three months ended July
31, 1996. As a percentage of revenues, selling, general and administrative
expenses decreased to 24.9% from 28.2% in the three months ended July 31, 1996.
Selling general and administrative expenses increased primarily as a result of
the acquisition of Hammer and Datapro.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended July 31, 1997
was $453,000, an increase of $318,000, or 234.9% compared to $135,000 for the
three months ended July 31, 1996. This increase arose principally from the
acquisitions of Hammer and Datapro acquired in August 1996 and October 1996,
respectively. Depreciation was $222,000, an increase of $149,000 or 203.0%,
from $73,000 for the prior period. Amortization of goodwill from acquisitions
was $231,000, an increase of $169,000, or 272.7%, from $62,000 for the prior
period. An amortization period of ten years is utilized with respect to
acquisitions.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND SHARE OF RESULTS IN EQUITY
INVESTEE
Income before interest expense, income taxes and share of results in equity
investee ("IBITI") for the three months ended July 31, 1997 was $958,000, a
increase of $520,000, or 119.0%, as compared to $438,000 for the three months
ended July 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 5.1% in the three
months ended July 31, 1997 as compared to 4.3% for the three months ended July
31, 1996.
IBITI before depreciation and amortization increased for the three months ended
July 31, 1997 to $1.4 million from $573,000 for the three months ended July 31,
1996 an increase of $838,000 or 146.4%, 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 7.5%
for the three month period ended July 31, 1997 from 5.7% for the comparable
period ended July 31, 1996.
EQUITY INVESTEE LOSS
Equity investee loss was $72,000 for the three months ended July 31, 1996
reflecting the Company's proportion attributable to the ActionTrac Joint
Venture. There was no such loss during the three months ended July 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 July 31, 1997 was $140,000 an
increase of $115,000 compared to $25,000 for the three months ended July 31,
1996, arising from higher utilization of bank lines of credit during the period.
Interest income increased from $78,000 for the three months ended July 31, 1996
to $85,000 an increase of $7,000, arising from larger cash balances on hand
during the quarter.
- 10 -
<PAGE>
SIX MONTHS ENDED JULY 31, 1997 COMPARED WITH THE SIX MONTHS ENDED JULY 31, 1996
REVENUES
Revenues for the six months ended July 31, 1997 were $37.4 million, an increase
of $16.8 million, or approximately 81.7% compared to $20.6 million for the six
months ended July 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. Revenues from products were $20.9 million, or 55.9% of the
total revenue, with revenues from the supply of services at $16.5 million, or
44.1% of the total revenues. In the comparable period of the prior year,
Product revenues were 68.9% of the total revenues and supply of services were
31.1% of the total revenues.
GROSS PROFIT
Gross profit for the six months ended July 31, 1997 was $11.7 million, an
increase of $5.0 million, or 75.1% compared to $6.7 million for the six months
ended July 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. Gross margin decreased from 32.4% for the six months ended July 31,
1996 to 31.2% for the six months ended July 31, 1997. Gross profit for products
increased 13.9% from $2.7 million for the six months ended July 31, 1996 to $3.1
million for the six months to July 31, 1997. Gross profit for services
increased 117.8% from $3.9 million for the six months ended July 31, 1996 to
$8.6 million for the six months ended July 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $9.0 million, an increase of
$3.5 million, or 63.1% compared to $5.5 million for the six months ended July
31, 1996. As a percentage of revenues, selling, general and administrative
expenses decreased to 24.1% from 26.9% in the six months ended July 31, 1996.
Selling general and administrative expenses increased primarily as a result of
the acquisition of Hammer and Datapro.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the six months ended July 31, 1997 was
$859,000, an increase of $581,000, or 208.8% compared to $278,000 for the six
months ended July 31, 1996. This increase arose principally from the
acquisitions of Hammer and Datapro acquired in August 1996 and October 1996,
respectively. Depreciation was $418,000, an increase of $264,000 or 170.5%,
from $154,000 for the prior period. Amortization of goodwill from acquisitions
was $441,000, an increase of $317,000, or 256.5%, from $124,000 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 six months ended July 31, 1997 was $1.8 million, a
increase of $939,000, or 110.0%, as compared to $854,000 for the six months
ended July 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 4.8% in the six
months ended July 31, 1997 as compared to 4.1% for the six months ended July 31,
1996.
IBITI before depreciation and amortization increased for the six months ended
July 31, 1997 to $2.7 million from $1.2 million for the six months ended July
31, 1996 an increase of $1.5 million or 134.2%, 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 7.1% for the six month period ended July 31, 1997 from 5.5% for the
comparable period ended July 31, 1996.
- 11 -
<PAGE>
EQUITY INVESTEE LOSS
Equity investee loss was $124,000 for the six months ended July 31, 1996
reflecting the Company's proportion attributable to the ActionTrac Joint
Venture. There was no such loss during the six months ended July 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 six months ended July 31, 1997 was $211,000 an increase
of $82,000 or 63.6% compared to $129,000 for the six months ended July 31, 1996,
arising from higher utilization of bank lines of credit during the period.
Interest income increased from $82,000 for the six months ended July 31, 1996 to
$162,000 an increase of $80,000, arising from larger cash balances on hand
during the quarter.
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 July 31, 1997, the Company had lines of credit with UK banks in the amount
of L2.3 million ($3.8 million). As of July 31, 1997 $2.4 million 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 July 31, 1997 were
$504,105. These outstanding advances do not bear interest, and are payable on
demand.
The Company's working capital increased from $5.6 million surplus at January 31,
1997 to a surplus of $7.0 million at July 31, 1997.
Net cash used by operating activities during the six months ended July 31, 1997
was $202,000, 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 $1.6 million, for the
six months ended July 31, 1997, primarily reflecting cash used for the payment
of contingent amounts due on the Hammer acquisition and for the purchase of
equipment. Net cash provided by financing activities was $0.9 million for the
six months ended July 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.
On September 8, 1997, the Company acquired all the shares of Firstpoint Limited
("Firstpoint") for a total consideration of approximately $6.1 million,
including the assumption of $1.4 million of inter-company debt. $3.9 million
(from available cash resources of the Company), including repayment of the
inter-company debt, was paid upon completion of the acquisition and the
remaining balance of the consideration is to be paid in quarterly installments
over the next 18 months. Firstpoint presently has no foreseeable significant
working capital funding requirements from the Company.
- 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.
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.
September 10, 1997 4FRONT SOFTWARE
INTERNATIONAL, INC.
By: /s/ Stephen McDonnell
-------------------------
Stephen McDonnell
Chief Financial Officer
- 15 -
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THIS SCHEDULE CONTRAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 31 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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