<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 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)
<TABLE>
<S> <C>
DELAWARE 84-0675510
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
</TABLE>
<TABLE>
<S> <C>
5650 GREENWOOD PLAZA BLVD., SUITE 80111
107 (ZIP CODE)
ENGLEWOOD, COLORADO
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>
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
------------------------
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K (Section220.405 of this chapter) is not contained herein,
and will not be contained to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of April 15, 1997, the registrant had 6,514,747 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
nonaffiliates as of April 15, 1997, was approximately $16,502,000 based on the
most recent sales price prior to that date.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
PART I
ITEM 1. BUSINESS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING CONSOLIDATED FINANCIAL STATEMENTS, AND THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. REFERENCES IN THIS
ANNUAL REPORT ON FORM 10-K TO A FISCAL YEAR OF THE COMPANY SHALL REFER TO THE
TWELVE MONTH PERIOD COMMENCING FEBRUARY, AND ENDING ON JANUARY 31 OF THE
FOLLOWING YEAR, THE FISCAL YEAR. THEREFORE THE YEAR ENDING JANUARY 31, 1997 IS
FISCAL YEAR 1997.
4Front Software International, Inc. (the "Company" or "4Front"), a United
Kingdom ("UK") based specialized computer services company, provides a wide
range of high-end information technology solutions and services, principally to
Financial Times UK Top 500 companies and government authorities. The Company
provides key elements of distributed computing, including systems development
and integration, storage and networking solutions and products, as well as
extensive hardware and software support, including help desk support services.
The Company believes it has a competitive advantage through its ability to
provide a single-source solution to a broad range of corporate computing needs.
Since 1992, 4Front's revenues have grown from approximately $895,000 to over
$53 million in the fiscal year ended January 31, 1997 principally through
strategic acquisitions that furthered the expansion of its existing operations.
During that period pre-tax income (excluding write downs and reorganization and
restructuring costs) increased from a loss of $536,000 to $2.2 million. The
Company's customers include Mobil Oil, Royal Dutch/Shell Group, Alcatel Data
Networks, GEC/Marconi, JP Morgan, Fujitsu, Dupont, Reuters, Brown & Root and the
British Ministry of Defense.
The Company seeks to capitalize on technological change in the computer
services industry by providing a single source for specialized high-end
solutions to information systems problems that are beyond the expertise of most
in-house management information systems ("MIS") departments. The UK computer
services market, the fastest growing in Europe, is currently estimated at $16
billion annually, according to the 1996 Holway Report on Software and Computing
Services in Europe. This market grew by an estimated 17% in 1996 and is highly
fragmented, with no single company serving more than 5% of the UK.
The Company believes that the demand for its products and services will
continue to grow in the UK and Europe due to a number of factors that reflect
recent worldwide industry trends. Historically, corporations satisfied
information technology ("IT") requirements through mainframe or stand-alone
midrange systems utilizing hardware and software provided by a single original
equipment manufacturer ("OEM"). Design and development as well as maintenance
and support of these systems could be provided directly by such single-source
OEMs in conjunction with a corporate in-house information technology staff.
Accelerating technological advancement, migration of organizations toward
multivendor distributed networks, and globalization of IT needs have contributed
to a significant increase in the sophistication and interdependency of corporate
computing systems. The Company believes that the desire by corporations to focus
upon their core activities while enjoying the benefits of such multivendor
distributed networks has led them increasingly to rely upon specialist service
organizations such as the Company to support the development and maintenance of
their computing strategy.
The Company intends to continue providing a single source for a wide array
of corporate network and computing services through an operating and growth
strategy that consists of the following principal elements: (i) further
penetration of the growing UK and European computer services market; (ii)
identification and acquisition of complementary businesses in order to expand
its product offerings and geographic reach; (iii) expansion of its hardware and
software maintenance and support capabilities; and (iv) leverage of its existing
infrastructure and customer relationships in order to further develop new
business lines.
The Company's principal corporate offices are located at 5650 Greenwood
Plaza Blvd., Suite 107, Englewood, Colorado 80111, and its phone number is (303)
721-7341. The Company's operational head
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offices are located at 4Front House, Colonial Business Park, Colonial Way,
Watford, Hertfordshire, England, WD2 4PR, telephone +44 (0) 1923-294555.
OVERVIEW OF THE UK AND EUROPEAN INFORMATION TECHNOLOGY MARKET
Historically, the large UK and European organizations satisfied IT
requirements through mainframe or stand-alone midrange systems utilizing
hardware and software produced by a single OEM. Maintenance, support and
development of these systems were usually provided directly by the OEMs or, in
certain instances, by an organization's in-house technical support staff.
However, a number of recent developments have resulted in a movement by many
organizations away from this traditional reliance on OEMs and in-house technical
support staff toward global independent providers of multivendor computer
hardware maintenance and technology support services.
European computing environments have become increasingly complex as a result
of rapid worldwide changes in technology. The principal factor contributing to
the growing complexity has been the migration of large organizations from
centralized computing environments characterized by single vendor mainframe or
stand-alone systems to a decentralized, geographically diverse environment
characterized by multivendor and multisystem distributed networks. This has
resulted in greater expense and substantial inefficiencies for organizations in
developing and supporting their computer systems.
The Company believes that, as a result of these factors, the complexity of
system development as well as the breadth of corporate computing needs have
surpassed the abilities and the available time of many in-house MIS departments,
and have led to a greater acceptance of outsourcing. The Company also believes
that customers are reluctant to outsource computer services directly to OEMs,
which may be perceived by customers as favoring the OEMs' own product line.
Meanwhile, the increased corporate use of IT for operational as well as mission
critical applications has increased the use of complex, customized corporate
computing systems that are beyond the expertise of most horizontal integrators
and value added resellers ("VARs"). Furthermore, many OEMs now rely on
independent service organizations such as the Company to provide distribution,
integration and warranty/post warranty maintenance and support services.
As a result, business and government organizations must increasingly look to
multiple third-party vendors employing skilled IT professionals to define,
develop and install complex customized information systems and to provide
applications software and comprehensive solutions to their information systems
needs. These organizations are also turning to third-party vendors to provide IT
services in order to maximize the effectiveness of their in-house systems and
personnel.
THE 4FRONT SOLUTION
The Company has positioned itself as a single source for a wide range of
specialized high-end information technology solutions and services which its
customers cannot readily obtain from their in-house MIS departments and which
are not ordinarily offered together by most value added resellers and horizontal
distributors. In addition, as an independent provider of solutions and services,
the Company is able to offer products from a range of OEMs and is therefore not
viewed by its customers as favoring one OEM's product over another, except on
the basis of quality. The Company combines strong technical expertise and "best
of breed" products in order to design and implement customized IT solutions and
to improve the productivity of its customers' existing IT assets.
The Company reviews its product offerings on a continuous basis in order to
ensure that it is able to provide the most advanced and cost-effective
solutions. The Company believes that the European and UK markets are highly
receptive to new technologies developed in the U.S. which the Company seeks to
identify and offer. By providing advanced, high-end solutions to a broad base of
customers, the Company is able to offer cost-efficient integrated systems
solutions utilizing knowledge and expertise which the Company believes cannot be
effectively maintained by an in-house MIS department. The products and services
offered by the Company are designed primarily to enhance the effectiveness of,
rather than
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replace, in-house MIS departments, thereby creating a partnership approach for
the managers of such departments and an incentive to utilize the products and
services of the Company.
PRODUCTS AND SERVICES
The Company provides a comprehensive array of products and services to
customers across a broad range of computing environments, including mainframes,
midrange and distributed systems, workgroups, PCs and related peripherals. The
Company prices its products and services on either a fixed fee or per incident
basis. Pricing is based on the Company's cost and the existing competitive
environment. The Company customizes its contracts to the individual customer
based generally on the nature of the customer's requirements, the term of the
contract and the combination of services that are provided. Products and
services are also bundled to match the requirements of customers, and can
include hardware and software sales and support, help desk services, network
support, management information services, services management, planning and
implementation, training and ancillary support services.
In choosing the products which it offers, the Company uses the expertise of
its management to identify desirable new or technologically innovative products
which fit its business model and then seeks rights to market them throughout
Europe. The majority of these products originate in the U.S., and are almost
always sourced directly from the hardware manufacturer or software author. In
such circumstances the Company seeks the right to both market and support the
product within the territory it serves. These distribution agreements are
typically non-exclusive and of one year's duration and automatically renew at
the end of that term.
PRODUCTS DIVISION
INFORMATION STORAGE SYSTEMS
The Products Division is a leading supplier within the UK of high capacity
storage solutions and multi-processor servers to corporate and government users.
It sells both direct to the corporate marketplace and through a well established
reseller channel. The storage operation offers products which range from the
straightforward supply of magnetic discs to high capacity subsystems, RAID
arrays, magnetic tape drives and autoloaders, optical storage devices including
high capacity drives and autochangers. All products are available with the
appropriate enabling software. The Products Division sells products from, among
others, Seagate, IBM, Sony, Micropolis and Fujitsu, and has a reputation for
offering high quality products featuring the leading available technology.
Other products supplied include high performance servers and local and wide
area networking components such as bridges, routers, gateways and ISDN
(Integrated Services Digital Networks), with the associated network software
protocols such as TCP/IP, NFS and IPX/SPX.
The Company began providing information storage systems in 1995 with its
acquisition of Compass Computer Group. This activity was expanded with the
acquisition of Hammer Distribution in 1996. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-- Overview."
NETWORK COMPUTING
The Products Division provides sophisticated enterprise wide network
computing solutions to its customers. For example, it provides high-end display
terminal systems used on brokerage trading desks. The Company is also a leading
supplier in the UK market for "network computers", which are used as an
alternative to desktop PC networks to link to a shared internal computing
system, or to an external network such as the Internet.
The product range also includes connectivity and communication hardware and
software, terminal emulation software, electronic mail, workstations, super file
and database servers. The Division's leading supplier for network computing is
HDS Inc., one of the leading network computer manufacturers in the US. Other
product suppliers include US Robotics, Hewlett Packard and Data General. The
Company's
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product line is interrelated and compatible, and many of the Company's customers
will purchase the Company's entire product line.
SERVICES DIVISION
HARDWARE AND SOFTWARE MAINTENANCE AND SUPPORT
The Company's Services Division is one of the leading independent hardware
maintenance suppliers in the UK. It provides full on-site maintenance and
support services through a team of field service engineers supported by
technical repair specialists, all tailored to the customers' requirements.
Unlike most in-house information technology departments, the Company can service
mission critical installations by providing guaranteed response times and up to
24 hour a day support, seven days a week. The Company also provides a
board-level repair service from its test center and main offices. The Company's
technical specialists also offer consulting services to advise clients of the
most effective ways to enhance the performance of their systems, and to
recommend appropriate upgrades and additions where necessary.
The Company, which is ISO9002 certified, supports the majority of the
industry leading hardware platforms including IBM, Sun, DEC and Hewlett-Packard,
as well as networking products and associated peripherals such as printers and
storage devices. The Company typically provides maintenance and support under
service contracts with terms ranging from one month to three years. During the
past year, these contracts have had renewal rates of approximately 80%, giving
the Company a consistent level of recurring revenues in this area. The Company
also repairs and refurbishes computer parts and assemblies. These services are
provided not only for services customers but also OEMs, distributors and other
third-party maintenance companies on a limited basis.
The hardware maintenance and support services provided by the Company are
viewed as complementary to the Company's other operational areas, and the
Company believes they are an important element in attracting customers for its
other products and services.
HELP DESK SERVICES
The Company provides help desk services to a broad spectrum of computer
users both under its own name and under the name of other providers. The
Company's branded help desk service, "4Help", provides telephonic software
support on a wide range of desktop software products 24 hours a day, seven days
a week. The Company tailors the level of support given, ranging from unlimited
telephone support and on-site visits for corporate customers to more basic
telephonic support services for home computer users. The Company also provides
help desk services which carry the name of other vendors. For example, the
Company provides the support for Bytecall, the help desk service of Byte, one of
the largest computer retailers in the UK.
The Company's help desk operations are provided and directed from its new
National Call Center which also provides the call control and spares management
service for the Company's hardware maintenance business. This grouping of the
Company's help desk and hardware and software maintenance services enables the
Company to offer a comprehensive support package to its customers, which it
believes helps give it a competitive advantage while minimizing overhead.
SYSTEMS INTEGRATION AND DEVELOPMENT
The Company offers open systems based development services for distinct
markets and applications, with particular expertise in the accounting,
distribution and local authority software areas. Using its technical expertise,
the Company analyzes systems integration problems faced by its customers, and
recommends and implements solutions to these problems. The solutions offered by
the Company combine the high value technical skills of the Company's personnel
with a wide range of specialized software and hardware products. These products
include both shrink-wrapped and custom application software together with file
servers, computer operating systems, network operating systems, display
stations, printers, local and wide area networking components, and storage and
archiving devices. The Company packages groups
4
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of products, including its own proprietary software, in order to provide
integrated turnkey systems for a number of distinct markets and applications.
The Company creates custom software for use by the individual customer if
required to meet the business need. By offering this service the Company is able
to attract customers for whom shrink-wrapped software is inadequate and, in the
course of developing such software, is able to create proprietary packages which
can be used to attract future customers seeking similar solutions. This also
strengthens the Company's ability to increase and retain a greater flow of
recurring support revenue.
Following the acquisition of Datapro Computers Group in October 1996 the
Company has moved further into the provision of proprietary package software
with the addition of two software products. The first of these, Shortlands, is
used in the construction industry both in the UK and overseas where its strong
project accounting function is attractive. The second, Pharaoh, is a full asset
and property management package. The Company's proprietary software products are
offered either as "stand alone" products or as part of a total systems
integration project.
CABLING AND NETWORKING
The cabling and networking operations, which became another area of services
provided by the Company following the Datapro Computers Group acquisition, is a
growing area of activity for the Company, and one which had previously been sub
contracted to third parties. A full service is offered including planning and
design, equipment selection, installation and training together with ongoing
support for customers local and wide area networks. The cabling and network
services business adds a further dimension to the broad range of design, supply,
support, integration and maintenance services offered by the Company.
CUSTOMERS
The Company's customers consist mainly of large and medium sized businesses,
divisions of larger corporations, and government authorities. The following is a
representative list of customers of the Company:
<TABLE>
<CAPTION>
PRODUCTS DIVISION SERVICES DIVISION
<S> <C>
Alcatel Data Networks
British Ministry of Defense Ltd.
Dupont UK Ltd. Brown & Root Ltd.
Fujitsu Telecommunications
Ltd. GEC/Marconi Ltd.
Reuters Ltd. J P Morgan Ltd.
Royal Dutch/Shell Group plc Mobil Oil Ltd.
</TABLE>
During the fiscal year ended January 31, 1997, no single customer accounted
for 5% or more of the Company's total revenues.
SALES AND MARKETING
Using its technical expertise and access to new technology developed
primarily in the U.S., the Company identifies products and services which it
believes would be of interest to its customer base and markets these products
and services to current and prospective customers as part of a systems solution.
The Company emphasizes its ability to provide highly qualified locally based
personnel to implement cost-effective solutions which it supplies. The Company
also contrasts the specialized niche focus of its operations to the generalist
focus of the largest firms.
The Company sells its services through both direct and indirect sales
channels. The Company's direct sales force is primarily focused on large and
multinational corporate customers and is organized by operating groups based on
the Company's products and services. Direct sales channels include field sales,
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telemarketing and direct mail. Indirect sales channels include sales through
subdistributors and VARs where the Company's products are constituent parts of
the VARs' overall solutions.
The Company's sales representatives focus on providing technology solutions,
which include meeting the hardware maintenance, software support and network
component needs of customers, OEMs or software developers, and delivering
solutions to the broader IT requirements of the Company's customers.
PRODUCT DEVELOPMENT
The Company engages in development activities primarily in connection with
the creation of software products and applications and maintains a staff of
computer engineers for this purpose. The Company develops products on its own to
meet a perceived market need as well as on a custom basis for a particular
customer. The Company will also create custom software for use by the individual
customer, if required to meet the business need. By offering this service the
Company is able to attract customers for whom shrink-wrapped software is
inadequate and, in the course of developing such software, is able to create
proprietary packages which can be used to attract future customers seeking
similar solutions. The Company is also able to provide recurring revenues
through support services for its proprietary products.
EMPLOYEES
As of January 31, 1997 the Company employed a total of 367 employees
consisting of 81 in sales and marketing, 55 in engineering, 117 in technical
support and 114 in logistics, management and administration. The Company's
employees are not represented by a labor union, and the Company has not had any
work stoppages, strikes, or organization attempts. The Company believes that its
employee relations are good.
COMPETITION
The overall computer services industry is intensely competitive and is
composed of literally hundreds of companies, many of whom have capital,
marketing expertise and personnel resources far superior to that of the Company.
The Company competes primarily with a wide range of small and medium size
companies that operate both in the niche markets which the Company serves and in
the computer services industry generally. The Company also competes with larger
European computer service and consultancy firms.
The Company believes that the principal competitive factors in the industry
are breadth of service offerings, quality of products supplied, expertise in
niche markets, price and service. The Company believes that its ability to offer
single source solutions and to remain competitive in these markets will depend
largely upon its ability to recruit and retain highly skilled personnel.
The Company believes that it is able to successfully compete with large
European computer service and consultancy firms due to its focus and
concentration in specified niche markets and the Company's high level of
specialized skills and services. The Company also believes that it is able to
obtain a competitive advantage with respect to both larger and smaller
competitors in the niche markets which it serves through its proprietary systems
and customized software and its reputation in specialist markets.
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ITEM 2. PROPERTIES
The Company does not own any real property. The Company leases office space
in Englewood, Colorado for its corporate headquarters and in England in several
locations for its operations, as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
- --------------------------------------------------------- --------------- -------------------
<S> <C> <C>
Ruislip.................................................. 13,100 February, 2002
Brighton................................................. 5,340 February, 2002
London................................................... 5,935 April, 2002
Basingstoke.............................................. 4,700 September, 1999
Ipswich.................................................. 2,228 January, 2008
Newbury.................................................. 42,000 September, 2007
Watford.................................................. 9,500 August, 2013
Warrington............................................... 3,500 December, 2012
Aylesbury................................................ 3,000 June, 2000
</TABLE>
The Company's aggregate property lease payments are currently $980,000 and
are subject to reviews during the terms of the various leases.
The Company's principal corporate offices are located at 5650 Greenwood
Plaza Blvd., Suite 107, Englewood, Colorado 80111, and its phone number is (303)
721-7341. The Company's operational head offices are located at 4Front House,
Colonial Business Park, Colonial Way, Watford, Hertfordshire, England, WD2 4PR,
telephone +44 (0) 1923-294555.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal proceedings arising in
the ordinary course of business. In the opinion of management, the ultimate
settlement of these matters will not have a material adverse effect on the
Company's consolidated financial position or consolidated results of its
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 14, 1996, the Company's Common Stock has been quoted on the
Nasdaq National Market under the symbol "FFST". From January 3, 1996 through
June 13, 1996, the Company's Common Stock was quoted on the Nasdaq SmallCap
Market under the symbol "FFST". Between March 1995 and January 1996, the
Company's Common Stock had been traded under the symbol "FFST" on the over-the-
counter Bulletin Board ("OTC"). Prior to March 1995, there had been no active
trading market for the Company's Common Stock.
The following table sets forth, for the periods indicated, the high and low
reported sales prices of shares of the Common Stock as reported by the OTC prior
to January 3, 1996, by the Nasdaq SmallCap Market through June 13, 1996 and by
the Nasdaq National Market thereafter.
<TABLE>
<CAPTION>
1997 HIGH LOW
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<S> <C> <C>
First Quarter.............................................................. $ 6.88 $ 3.12
Second Quarter............................................................. 8.50 4.25
Third Quarter.............................................................. 6.50 3.25
Fourth Quarter............................................................. 5.00 3.00
<CAPTION>
1996 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter (from March 1995)............................................ $ 5.88 $ 5.00
Second Quarter............................................................. 5.88 4.00
Third Quarter.............................................................. 5.00 3.50
Fourth Quarter............................................................. 6.88 3.50
</TABLE>
The number of stockholders of record on April 15, 1997, was 1,617. The
Company has never paid cash dividends on its Common Stock. On April 15, 1997,
the last reported sale price of the Common Stock as reported by the Nasdaq
National Market was $3.19 per share.
ITEM 6. SELECTED FINANCIAL DATA
UNLESS OTHERWISE NOTED, ALL FINANCIAL INFORMATION, SHARE AND PER SHARE DATA
IN THIS ANNUAL REPORT ON FORM 10-K ASSUME NO EXERCISE OF OUTSTANDING WARRANTS
AND OPTIONS. ALTHOUGH THE FINANCIAL RESULTS OF ALL OF THE COMPANY'S SUBSIDIARIES
WILL CONTINUE TO BE REPORTED ON A CONSOLIDATED BASIS, THE COMPANY'S ORDINARY
BUSINESS OPERATIONS ARE DIVIDED AMONG ITS OPERATING SUBSIDIARIES. THE COMPANY'S
OPERATING SUBSIDIARIES CONDUCT THEIR OPERATIONS IN BRITISH POUNDS STERLING (L).
FOR FINANCIAL REPORTING PURPOSES, BRITISH POUNDS ARE CONVERTED INTO U.S. DOLLARS
AT THE PREVAILING RATE AS OF THE DATE OR AT THE WEIGHTED AVERAGE FOR THE PERIOD
COVERED. UNLESS SPECIFICALLY STATED OTHERWISE HEREIN, ALL CONVERSIONS OF BRITISH
POUNDS INTO U.S. DOLLARS REFERENCED IN THIS ANNUAL REPORT ON FORM 10-K HAVE BEEN
CONVERTED USING A CONVERSION RATE OF 1.5751 AND 1.607 DOLLARS PER POUND IN
RESPECT OF OPERATIONS DURING THE YEAR ENDED JANUARY 31, 1996 AND 1997
RESPECTIVELY, AND AT A RATE OF 1.511 AND 1.602 DOLLARS PER POUND IN RESPECT OF
THE JANUARY 31, 1996 AND 1997 BALANCE SHEETS RESPECTIVELY.
8
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<TABLE>
<CAPTION>
THE PREDECESSOR
COMPANY THE COMPANY
---------------------- ------------------------------------------
YEAR ONE MONTH YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31, JAN. 31, JAN. 31, JAN. 31, JAN. 31, JAN. 31,
1992 1993 1994 1995 1996 1997
--------- ----------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................ $ 895 $ 10 $ 2,837 $ 11,240 $ 32,249 $ 53,015
Cost of revenues.................. (341) (3) (1,281) (6,814) (20,808) (36,018)
Write down of software development
costs........................... -- -- -- -- (755) --
--------- ----------- --------- --------- --------- ---------
Gross profit........................ 554 7 1,556 4,426 10,686 16,997
--------- ----------- --------- --------- --------- ---------
Selling general and
administrative.................. (1,031) (97) (1,117) (3,565) (9,566) (13,792)
Depreciation and amortization..... (59) (3) (63) (216) (560) (976)
Write down of goodwill.............. -- -- -- -- -- (552)
Reorganization and restructuring
costs............................. -- -- -- -- -- (2,286)
Income (loss) before interest income
and expense, income taxes share of
results in equity investee and
write down of investments......... (536) (93) 376 645 559 (609)
Write down of investments........... -- -- -- -- -- (500)
Share of results in equity
investee(2)....................... -- -- -- -- (761) (799)
Net income (loss)................... $ (592) $ (98) $ 304 $ 355 $ (652) $ (2,344)
--------- ----------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- ---------
Net income (loss) per share......... $ (1.92) $ (0.10) $ 0.25 $ 0.20 $ (0.24) $ (0.45)
--------- ----------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- ---------
Weighted average number of shares... 309 1,014 1,198 1,813 2,743 5,170
OTHER DATA:
Adjusted net income (loss)(3)....... $ (536) $ (93) $ 376 $ 645 $ 1,314 $ 2,229
Adjusted net income (loss)(4)....... $ (592) $ (98) $ 304 $ 355 $ 685 $ 1,588
Adjusted net income (loss) per
share(4).......................... $ (1.92) $ (0.10) $ 0.25 $ 0.20 $ 0.25 $ 0.29
BALANCE SHEET DATA:
Current assets.................... $ 24 $ 744 $ 5,041 $ 6,588 $ 13,464 $ 30,349
Current liabilities............... 76 1,485 5,892 7,008 14,750 24,764
Total assets...................... 24 844 6,203 9,887 17,943 42,021
Long-term debt (including capital
lease obligations).............. 0 350 403 74 93 489
Stockholders' equity (deficit).... (1,387) (992) (92) 2,805 3,101 16,769
</TABLE>
- ------------------------
(1) The Company has grown substantially through acquisitions, which materially
affect the comparability of the financial data reflected herein. The
Selected Consolidated Financial Data includes the results of operations of
the primary operating divisions of the Company which were acquired effective
January 1994, November 1994, April 1995, August 1996 and October 1996, and
which were accounted for under the purchase method of accounting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(2) Consists of the Company's share of the operating loss of the equity investee
(the "ActionTrac Joint Venture") of $(179,000) and $(205,000) and the write
down of the Company's investment in and advances to the ActionTrac Joint
Venture of $(582,000) and $(594,000) for the years ended January 31, 1996
and 1997, respectively.
9
<PAGE>
(3) Income (loss) before interest income and expense, income taxes and share of
results in the ActionTrac Joint Venture excluding the write down of software
development costs, write down of goodwill, write down of investments and
reorganization and restructuring costs.
(4) Excludes the write downs of investment in and advances to the ActionTrac
Joint Venture of $(582,000) and $(594,000) and the write down of software
development costs of $(755,000) and $(0) for the years ended January 31,
1996 and 1997, respectively. Excludes the reorganization and restructuring
costs of $(2.3 million), write down of goodwill $(552,000) and write down of
investment in ActionTrac Inc. of $(500,000) for the year to January 31,
1997. Includes the share of operating loss of the ActionTrac Joint Venture
of $(179,000) and $(205,000) for the years ended January 31, 1996 and 1997,
respectively.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K CONCERNING THE COMPANY'S
BUSINESS OUTLOOK OR FUTURE ECONOMIC PERFORMANCE, ANTICIPATED PROFITABILITY,
REVENUES, INCOME, EXPENSES OR OTHER FINANCIAL ITEMS, AND STATEMENT CONCERNING
ASSUMPTIONS MADE OR EXCEPTIONS AS TO ANY FUTURE EVENTS, CONDITIONS, PERFORMANCE
OR OTHER MATTER ARE "FORWARD-LOOKING STATEMENTS" AS THAT TERM IS DEFINED UNDER
THE FEDERAL SECURITIES LAWS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH WOULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE STATED IN SUCH STATEMENTS.
OVERVIEW
The Company is a UK based specialized computer services company which
provides a wide range of high-end IT 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.
The Company's operating subsidiaries K2 Systems Plc ("K2"), Xanadu Systems
Ltd ("Xanadu") and CI Support Limited ("CI"), were acquired in fiscal 1995,
Compass Computer Group ("Compass") was acquired in fiscal 1996 and Hammer
Distribution Limited ("Hammer") and Datapro Computers Group Limited ("Datapro")
in fiscal 1997. These 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. In February 1997 Compass changed its name to
4Front Products Limited.
Effective August 15, 1996, the Company acquired 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 in the UK market for high end storage solutions and sub-systems.
Effective October 11, 1996 the Company acquired 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.
A substantial part of the Company's growth in the past four years has been
achieved through acquisitions. Accordingly, the results of operations from
period to period are not necessarily comparable.
In the fourth quarter of fiscal year 1997, the Company took a charge of $2.3
million which relates to the Company's reorganization and restructuring of its
maintenance and support services business to integrate those activities formerly
carried on by 4Front Services, Compass and Datapro. In addition, in the
11
<PAGE>
fourth quarter of fiscal year 1997, the Company recorded a charge of $552,000
which relates to the write down of goodwill resulting from the Xanadu
acquisition. The write down results from Xanadu's loss of several key contracts.
Finally, as a result of the bankruptcy of ActionTrac Inc. on December 24, 1996,
the Company took a charge of $1.3 million, consisting of $799,000 which
represents the Company's investment in the ActionTrac joint venture, a
partnership established by ActionTrac Inc. and the Company to provide help desk
services, and $500,000 which represents the Company's investment in ActionTrac
Inc.
RESULTS OF OPERATIONS
Because of the effect upon the Company's results of operations for the years
ended January 31, 1995, 1996 and 1997 of acquisitions made during those periods
and write downs of certain asset carrying values and restructuring and
reorganization costs, direct comparison of the Company's results of operations
for these periods will not, in the view of management of the Company, prove
meaningful. Instead, a summary of the elements which management of the Company
believes essential to an analysis of the results of operations for such periods
is presented below.
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED WITH FISCAL YEAR ENDED JANUARY 31,
1996
REVENUES
Revenues for the fiscal year ended January 31, 1997 were $53.0 million, an
increase of $20.8 million, or approximately 64.4% compared to $32.2 million for
the year ended January 31, 1996. Approximately $13.8 million of this increase
resulted from the Company's acquisitions of Hammer, effective August 15, 1996,
and of Datapro, effective October 11, 1996, none of which revenues were included
in the Company's results for the fiscal year ended January 31, 1996. The
remaining $7.0 million of this increase came from the growth of the Company's
existing businesses, principally in the services division. Products as a share
of revenues accounted for 64.1% of total revenues for fiscal year ended January
31, 1997, a decrease from 75.6% of total revenues for the fiscal year ended
January 31, 1996. Services as a share of revenues accounted for 35.9% of total
revenues for fiscal year ended January 31, 1997, an increase from 24.4% of total
revenues for the fiscal year ended January 31, 1996.
GROSS PROFIT
Gross profit for the fiscal year ended January 31, 1997 was $17.0 million,
an increase of $6.3 million, or 59.1% compared to $10.7 million for the year
ended January 31, 1996. Gross margin decreased slightly to 32.1% for the fiscal
year ended January 31, 1997 from 33.1% for the fiscal year ended January 31,
1996. This decrease in gross margin arose primarily as a result of the inclusion
for the final six months of the fiscal year ended January 31, 1997 of Hammer's
information storage systems business which has lower gross margins than some
other areas of the Company's operations. As a share of total gross margins,
services' share increased from 46.6% for the fiscal year ended January 31, 1996
to 72.9% for the fiscal year ended January 31, 1997. As a share of total gross
margins, products' share decreased from 53.4% for the fiscal year ended January
31, 1996 to 27.1% for the fiscal year ended January 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the fiscal year ended
January 31, 1997 were $13.8 million, an increase of $4.2 million, or 44.2%
compared to $9.6 million for the fiscal year ended January 31, 1996. As a
percentage of revenues, selling, general and administrative expenses decreased
to 26.0% in the fiscal year ended January 31, 1997, from 29.7% in the fiscal
year ended January 31, 1996. Selling expenses increased to $6.6 million from
$5.9 million in line with the expansion of the Company's business. General and
administrative expenses increased to $7.2 million from $3.7 million primarily as
a result of the growth in infrastructure necessary to support the expansion of
the Company's businesses.
12
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the fiscal year ended January 31,
1997 was $976,000, an increase of $416,000, or 74.2% compared to $560,000 for
the fiscal year ended January 31, 1996. This increase arose principally from the
acquisitions of Hammer and Datapro. Depreciation for the fiscal year ended
January 31, 1997 was $518,000, an increase of $162,000 or 45.4%, from $356,000
for the fiscal year ended January 31, 1996. Amortization of goodwill from
acquisitions for the fiscal year ended January 31, 1997 was $458,000, an
increase of $254,000, or 124.6%, from $204,000 for the fiscal year ended January
31, 1996. An amortization period of ten years is utilized with respect to
goodwill arising from acquisitions.
WRITE DOWN OF GOODWILL
In the fourth quarter of fiscal year 1997, the Company recorded a charge of
$552,000 related to the write down of certain goodwill to estimated recoverable
value. Such goodwill related to the Xanadu acquisition and was determined to
have been impaired as a result of the loss during the year of several key
franchises relating to the operation of this subsidiary. Moreover anticipated
future cash flows of the subsidiary indicate that the recoverability of the
asset is not reasonably assured.
Upon determination that impairment of goodwill had occurred, the amount of
the impairment was calculated by determining that portion of the goodwill which
would not be expected to be recovered against operating income during the
remaining amortization period.
REORGANIZATION AND RESTRUCTURING
In the fourth quarter of fiscal year 1997, the Company incurred $2.3 million
of pre-tax charges associated with the reorganization and restructuring of its
maintenance and support services businesses. The reorganization and
restructuring costs include those amounts that arose as a direct result of
management commitment to strategic plans to integrate the Company's service
operations formerly carried on by 4Front Services, Compass and Datapro. The
reorganization and restructuring costs include $716,000 relating to write down
of fixed assets, $1.25 million relating to property costs and $320,000 relating
to the costs associated with the termination of employees.
WRITE DOWN OF INVESTMENT IN ACTIONTRAC INC.
On December 24, 1996 ActionTrac Inc., the Company's former partner in the
ActionTrac Joint Venture, filed for bankruptcy in the United States. As a result
of the bankruptcy, during the fourth quarter of fiscal year 1997, the Company
reviewed the carrying value of its investment in ActionTrac Inc. It was
concluded that the investment was not recoverable and the Company has therefore
written off its investment in ActionTrac Inc. of $500,000.
INCOME (LOSS) BEFORE INTEREST INCOME AND EXPENSE, INCOME TAXES AND SHARE OF
RESULTS IN EQUITY INVESTEE ("IBITI")
IBITI for the fiscal year ended January 31, 1997 was ($609,000), a decrease
of $1,168,000, as compared to $559,000 for the fiscal year ended January 31,
1996. As a percentage of revenues, IBITI decreased to (1.1%) in the fiscal year
ended January 31, 1997 as compared to 1.7% for the fiscal year ended January 31,
1996.
The above decreases result primarily from a goodwill write down of $552,000
and a charge for reorganization and restructuring of $2.3 million, a total of
$2.8 million. See "--Overview".
IBITI (excluding write-downs and reorganization and restructuring costs) for
the fiscal year ended January 31, 1997 was $2.2 million, which as a percentage
of revenues, was 4.2% for the fiscal year ended January 31, 1997.
13
<PAGE>
INTEREST
Interest expense for the fiscal year ended January 31, 1997 was $297,000, an
increase of $39,000, or 14.8% compared to $258,000 for the fiscal year ended
January 31, 1996.
Interest income for the fiscal year ended January 31, 1997 was $277,000, an
increase of $263,000 compared to $14,000 for the fiscal year ended January 31,
1996, primarily as a result of the cash from the offering in June 1996.
WRITE DOWN OF INVESTMENT IN EQUITY INVESTEE
On December 24, 1996 ActionTrac Inc., the Company's former partner in the
ActionTrac Joint Venture, filed for bankruptcy in the United States. As a result
of the bankruptcy, during the fourth quarter of the fiscal year ended January
31, 1997, the Company reviewed the carrying value of its investment in and
advances to the ActionTrac Joint Venture. It was concluded that these were not
recoverable and the Company has therefore written off its investment in and
advances to the ActionTrac Joint Venture of $798,810.
FISCAL YEAR ENDED JANUARY 31, 1996 COMPARED WITH FISCAL YEAR ENDED JANUARY 31,
1995
REVENUES
Revenues for the fiscal year ended January 31, 1996 were $32.2 million, an
increase of $21.0 million, or approximately 187.5% compared to $11.2 million for
the year ended January 31, 1995. Approximately $17.3 million of this increase
resulted from the Company's acquisition of Compass effective April 6, 1995, none
of which revenues were included in the Company's results for the fiscal year
ended January 31, 1995. The remaining $3.7 million of this increase came from
the expansion of the Company's existing business from $11.2 million for the
fiscal year ended January 31, 1995 to $14.9 million for the fiscal year ended
January 31, 1996, representing an increase of 33.1%.
WRITE DOWN OF SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs relate to the development of the
StreamZ product aimed at providing a cost-effective communication solution for
critical business applications. Due to recent advances in communication software
technology and announcements by major software companies of new products with
enhanced security features, the Company re-evaluated the net realizable value of
its capitalized software development costs. As a result, accelerated
amortization of $755,000 was recorded during 1996 to write down all previously
capitalized software development costs.
GROSS PROFIT
Gross profit for the fiscal year ended January 31, 1996 was $10.7 million,
an increase of $6.3 million, or 143.2% compared to $4.4 million for the year
ended January 31, 1995. Gross margin decreased from 39.4% for the fiscal year
ended January 31, 1995 to 33.2% for the fiscal year ended January 31, 1996. This
decrease in gross margin arose primarily as a result of the inclusion for the
final ten months of the fiscal year ended January 31, 1996 of Compass'
information storage systems business, which generated 53.7% of the Company's
total revenues during the 1995 fiscal year, and which historically has had
significantly lower gross margins than the other areas of the Company's
operations. In addition, the Company was obligated to operate Compass as a stand
alone entity until December 1995, pursuant to the terms of the Compass
acquisition, and could not commence activities related to the full integration
of its and Compass' operations, personnel and business. The decrease also
reflects a reduction of 2.3% as a result of the write down of software
development costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $9.6 million, an increase
of $6.0 million, or 166.7% compared to $3.6 million for the year ended January
31, 1995. As a percentage of revenues, selling, general
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<PAGE>
and administrative expenses decreased to 29.7% from 31.7% in the fiscal year
ended January 31, 1995. Selling expenses increased from $2.6 million to $5.9
million primarily as a result of increased expenses relating to new product
launches. The Company also increased marketing activity for its expanded
maintenance business following the Compass acquisition and in established
product lines. General and administrative expenses increased from $1.0 million
to $3.7 million primarily as a result of a growth in infrastructure necessary to
support the expansion of the Company's businesses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the fiscal year ended January 31,
1996 was $560,000, an increase of $344,000, or 159.3% compared to $216,000 for
the fiscal year ended January 31, 1995. This increase arose principally from the
acquisition of Compass. Depreciation was $356,000, an increase of $223,000 or
167.7%, from $133,000 for the prior period. Amortization of goodwill from
acquisitions was $204,000, an increase of $121,000, or 145.8%, from $83,000 for
the prior period. An amortization period of ten years is utilized with respect
to goodwill arising from acquisitions.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND SHARE OF RESULTS IN EQUITY
INVESTEE
IBITI for the fiscal year ended January 31, 1996 was $559,000, a decrease of
$86,000, or 13.3%, as compared to $645,000 for the fiscal year ended January 31,
1995. As a percentage of revenues, IBITI decreased to 1.8% in the fiscal year
ended January 31, 1996 as compared to 5.8% for the fiscal year ended January 31,
1995.
IBITI (excluding write-downs) for the fiscal year ended January 31, 1996 was
$1.3 million, an increase of $669,000, or 103.7%, as compared to $645,000 for
the fiscal year ended January 31, 1995. As a percentage of revenues, IBITI
(excluding write downs) decreased to 4.1% in the fiscal year ended January 31,
1996 as compared to 5.8% for the fiscal year ended January 31, 1995.
INTEREST
Interest expense for the fiscal year ended January 31, 1996 was $258,000, an
increase of $104,000, or 67.5% compared to $154,000 for the fiscal year ended
January 31, 1995. This increase arose principally as a result of bridge
financing arrangements relating to the acquisition of Compass. See "Liquidity
and Capital Resources."
WRITE DOWN OF INVESTMENT IN EQUITY INVESTEE AND EQUITY INVESTEE LOSS
Due to the accelerated pace of technological change (including recent
advances in telecommunications systems and help desk software technology) and
the increasing diversity in the market for help desk services the Company
re-evaluated the net realizable value of its investment in and advances to the
ActionTrac Joint Venture. As a consequence, during the fiscal year ended January
31, 1996, the Company recognized write downs of $582,000. Equity investee loss
was $179,000 for the fiscal year ended January 31, 1996, reflecting the
Company's proportion attributable to the ActionTrac Joint Venture. There was no
such loss during the prior fiscal year, as the ActionTrac Joint Venture
commenced operations in May 1995.
LIQUIDITY AND CAPITAL RESOURCES
From inception until June 1996, the Company's sources of capital have 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 January 31, 1997, the Company had a line of credit with a UK bank in
the amount of L650,000 ($1 million). As of January 31, 1997 $583,000 was
outstanding. In October 1994, a pre-existing line of credit
15
<PAGE>
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 can be
given.
The Company's Compass subsidiary has a L997,000 ($1.64 million) line of
credit (overdraft protection) with a UK bank, as of January 31, 1997, $296,000
was outstanding.
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) $298,000 (L186,000) was outstanding as
of January 31, 1997.
Outstanding advances from stockholders are shown on the Company's balance
sheet as stockholder advances. Outstanding advances as of January 31, 1997 were
$504,105. These outstanding advances do not bear interest, and are payable on
demand.
The Company's working capital increased from $1.3 million deficit at January
31, 1996 to a surplus of $5.6 million at January 31, 1997.
Net cash used by operating activities during the year ended January 31, 1997
was $2.1 million, which reflected the net effect of an increase in accounts
payable, inventories, accrued liabilities, accounts receivable and an increase
in deferred revenue combined with depreciation and amortization. Net cash used
by investing activities was $4.8 million, for the year ended January 31, 1997,
primarily reflecting cash used for the acquisitions of Hammer and Datapro and
the purchase of equipment. Net cash provided by financing activities was $12.1
million for the year ended January 31, 1997, resulting primarily from the net
proceeds from the issuance of common stock repayment of bank lines of credit and
payments of outstanding obligations.
The Company believes that the net proceeds from the Offering, together with
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are set forth in Item
14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are listed below,
together with brief summaries of their business experience and certain other
information.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Anil Doshi.................. 52 Chairman of the Board, Chief Executive Officer, and Director
Mark Ellis.................. 43 President, Chief Operating Officer and Director
Kenneth Newell.............. 53 Chief Executive Officer of 4Front Group and Director
Terence Burt................ 40 Managing Director, Services Division and Director
Joel William Jervis......... 47 Managing Director, Products Division and Director
Craig Kleinman.............. 41 Secretary and Director
Stephen McDonnell........... 34 Chief Financial Officer
Brian V. Murray............. 49 Director
Arthur Keith Ross........... 45 Director
</TABLE>
ANIL DOSHI is Chairman of the Board of Directors, Chief Executive Officer
and a Director of the Company since April 1993. Mr. Doshi co-founded Communic8
Software (the Company's predecessor-in-interest) in January 1990 and served as
its Chairman from April 1992 to March 1993. Mr. Doshi is a Fellow of the
Institute of Chartered Accountants in England and Wales, and he is also an
Associate of the Institute of Taxation. From January 1990 until October 1990,
Mr. Doshi served as Deputy Chairman of PPI Enterprises, Inc., a New York based
holding company ("PPI"). From 1986 to 1990, Mr. Doshi served as a consultant to
Polly Peck International, PPI's parent company.
MARK ELLIS is President, Chief Operating Officer and Director of the Company
since April 1993. Mr. Ellis co-founded Communic8 Software and served as a
director from January 1992 until March 1993. From September 1988 to January
1991, Mr. Ellis served as the President of PPI. As President of PPI, he managed
that company's American expansion program and negotiated a number of
acquisitions in the U.S., including the $875 million acquisition of Del Monte
Tropical Fruit from RJR Nabisco. Mr. Ellis attended St. John's College at
Cambridge University in England and received a B.A. in Law in 1975, an L.L.B. in
1976, and an M.A. in Law in 1978.
KENNETH NEWELL is a Director of the Company since April 1996 and a
co-founder of K2 Group Plc (now 4Front Group Plc), the Company's wholly-owned
U.K. operating subsidiary in 1988. Mr. Newell has been 4Front Group plc's Chief
Executive since 1990. Prior to establishing K2 he worked for four years at Star
Computer Group, a publicly listed U.K. company, and one of the early
implementers of the open systems computing concept in the U.K., where he held a
number of positions, including Sales Director from 1985 through 1988. Mr. Newell
is a Fellow of the Institute of Chartered Secretaries and Administrators
following study at the City of London College.
TERENCE BURT was a co-founder of K2 Group Plc (now 4Front Group Plc) in
1988, and was Managing Director of the Company's systems integration division
between 1990 and 1996. He became Managing Director of the services division in
1996, and became a Director of the Company in April 1997. Mr. Burt graduated
from the University of Hertfordshire where he qualified as an Associate of the
Association of Cost and Management Accountants.
JOEL WILLIAM JERVIS was the Managing Director of the Company's information
storage systems division between 1994 and 1996 and became Managing Director of
the Products Division in 1996, and became a Director of the Company in April
1997. Prior to joining Compass in July 1994 Mr. Jervis was Executive Chairman of
DCM Holdings Plc during which time it grew from a L1.3 million business in 1989
to a L6 million business in 1992, at which time the business was sold to Kode
International Plc. Mr. Jervis served as a Director of Kode International Plc
prior to joining Compass. Mr. Jervis is an electronics engineer, starting his
career with Burroughs in both Australia and the UK.
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<PAGE>
CRAIG KLEINMAN is Secretary and a Director of the Company since April 1993.
Mr. Kleinman had served as Chief Financial Officer of the Company from April
1993 until April 1996. During the past nine years, Mr. Kleinman has been a
shareholder in the certified public accounting firm Kleinman, Guerra & Company,
P.C. Mr. Kleinman received a B.S. degree in accounting from the University of
Colorado in 1978 and is a member of the American Institute of Certified Public
Accountants.
STEPHEN MCDONNELL has been Chief Financial Officer of the Company since
September 1996. From April 1993 to September 1996, Mr. McDonnell served 4Front
Group plc as a financial accountant. Prior to joining the Company in April 1993,
Mr. McDonnell was Chief Accountant for 5 years to French Connection plc, a L60
million publicly traded company in the UK. Mr. McDonnell graduated from the
College of Commerce in Dublin, Ireland.
BRIAN V. MURRAY has been a Director of the Company since April 1996. Mr.
Murray is President and Chief Executive Officer of B.V. Murray & Co., an
investment banking firm, which he founded in July 1996. Prior thereto, Mr.
Murray held various positions at Bear, Stearns & Co., Inc. from 1976 until July
1996, when he was a Senior Managing Director.
ARTHUR KEITH ROSS has been a Director of the Company since February 1996.
Mr. Ross is currently a private investor and a consultant to the London law
firm, Denton, Hall and Burgin. From 1986 to 1994, Mr. Ross was a partner in the
London law firm Clifford Chance, which he joined in 1984. Mr. Ross headed the
Clifford Chance South East Asian office in Singapore from 1988 to 1991. Mr. Ross
attended Christ's College at Cambridge University in England and received a BA
in Law in 1973 and an MA in Law in 1976.
All directors hold office until the next meeting of the stockholders of the
Company and until their successors are elected and qualified.
The Board of Directors has an Audit Committee which is charged with
reviewing the Company's internal accounting procedures and consulting with and
reviewing the selection of the Company's independent auditors. The Audit
Committee currently consists of Messrs. Doshi, Ross and Murray. The Audit
Committee was formed in fiscal 1997. The Board of Directors also has a
Compensation Committee charged with recommending to the Board the compensation
for the Company's executives and administering the Company's stock option plans.
The Compensation Committee is currently composed of Messrs. Doshi, Ellis, Murray
and Ross. The Compensation Committee was formed in fiscal 1997. The Board of
Directors has also established an Executive Committee charged with exercising
powers of the Board of Directors expressly delegated to it. The Executive
Committee is currently composed of Messrs. Doshi and Ellis. During fiscal 1996,
the Executive Committee met five times. During fiscal 1997, the Executive
Committee met once. Each director attended at least 75% of the meetings of all
committees of the Board of Directors on which he served.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The tables and discussion below set forth information about the compensation
awarded to, earned by, or paid to the Company's chief executive officer and four
other most highly compensated executive officers during the fiscal years ended
January 31, 1997, 1996 and 1995. Except as noted below, no executive officer of
the Company or any of its then existing subsidiaries earned compensation in
excess of $100,000 during any of these periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ---------------------------
FISCAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS COMPENSATION(2)
- ----------------------------------------------------- ----------- ---------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Anil Doshi........................................... 1997 $ 169,821 $ 24,105 0 $ 19,631
Chief Executive Officer(3) 1996 38,196 0 120,000 0
1995 0 0 150,000 0(4)
Mark Ellis........................................... 1997 $ 158,336 $ 24,105 0 $ 15,260
President and Chief Operating Officer 1996 36,158 0 120,000 10,266
1995 0 0 150,000 10,560(4)
Kenneth Newell....................................... 1997 $ 129,902 $ 24,105 0 $ 25,604
Chief Executive--4Front Group 1996 107,107 23,626 109,300 29,580
1995 90,993 0 90,700 28,064
Terence Burt......................................... 1997 $ 110,080 $ 44,996 0 $ 21,526
Managing Director--Services Division 1996 94,506 39,378 98,050 13,368
1995 84,920 11,503 66,950 13,053
Joel Jervis(5)....................................... 1997 $ 110,080 $ 44,996 0 $ 21,809
Managing Director--Products Division 1996 73,946 10,238 0 11,420
1995 0 0 0 0
</TABLE>
- ------------------------
(1) Represents the period beginning February 1 of the prior year and ending
January 31 of the year indicated.
(2) As to Mr. Doshi, represents contributions made by the Company to Mr. Doshi's
Executive Pension Plan and Insurance benefits. As to Messrs. Ellis, Newell,
Burt and Jervis, represents the dollar value of car allowance, insurance
benefits and contributions to voluntary money purchase pensions plans.
(3) Mr. Doshi entered into an employment agreement with the Company in November
1995, which provides for an annual base salary of $200,000 as of February 1,
1997. See "--Employment Agreements." Prior to November 1995, Mr. Doshi did
not receive any salary compensation for services to the Company.
(4) Does not include a consulting fee of $150,000 incurred by the Company to
Aliki Financial Corp., in which Mr. Doshi has a 65% interest and Mr. Ellis
has a 35% interest. Such charge has not yet been paid by the Company. See
"Certain Transactions--Advances from Affiliates."
(5) Compensation received subsequent to April 6, 1995, the effective date of the
Company's acquisition of CCG Holdings Limited.
There were no options granted to any of the Company's executive officers
named in the Summary Compensation Table during the year ended January 31, 1997.
19
<PAGE>
The following table sets forth at January 31, 1997, the number of options
and the value of unexercised options held by each of the executive officers
named in the Summary Compensation Table who held options at January 31, 1997.
Mr. Jervis exercised 53,639 options during the fiscal year 1997, no other
options were exercised in the fiscal year ended January 31, 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT YEAR END VALUE OF
-------------------------------- UNEXERCISED
NAME EXERCISABLE UNEXERCISABLE IN-THE-MONEY
- -------------------------------------------------------------- ----------- ------------------- OPTIONS AT
YEAR END(1)
-----------------
<S> <C> <C> <C>
Anil Doshi.................................................... 270,000 0 0(1)
Mark Ellis.................................................... 270,000 0 0(1)
Kenneth Newell................................................ 200,000 0 0(1)
Terence Burt.................................................. 165,000 0 0(1)
Joel Jervis................................................... 0 0 0(1)
</TABLE>
- ------------------------
(1) Computed based upon the difference between the stock option exercise price
and the closing price of the Company's Common Stock on January 31, 1997
($4.00).
EMPLOYMENT ARRANGEMENTS
Messrs. Doshi and Ellis have entered into employment agreements with the
Company commencing November 1, 1995. These agreements are terminable at any time
after an initial term of three years on one years' notice. Under such
agreements, Messrs. Doshi and Ellis are entitled to base annual salaries of
L125,000 ($200,000) and L110,000 ($176,000), respectively, plus pension
contributions not to exceed 7% of such base salaries. Prior to the execution of
such employment agreements, neither Messrs. Doshi nor Ellis had received salary
compensation for services performed for the Company and its affiliates.
Messrs. Newell, Burt and Jervis entered into employment agreements with
4Front Group at salaries as at January 31, 1997 of L90,000 ($144,225), L85,000
($136,213) and L85,000 ($136,213), respectively.
No other executive officer is currently party to an employment agreement
with the Company. As appropriate, other employment contracts may be entered into
with other key executives.
STOCK OPTIONS AND BENEFIT PLANS
In September and November 1994 the Company issued a total of 1,260,875
options to management, employees and consultants, exercisable for five years at
an exercise price of $4.00 per share.
In August and November 1995 the Company issued a total of 725,463 options to
management, employees and consultants, exercisable for five years at an exercise
price of $5.00 per share. Of the options granted, 120,000, 120,000, 60,000,
20,000, 109,300 and 98,050, were granted to Messrs. Doshi, Ellis, Kleinman,
Ross, Newell, Burt, respectively.
The Company operates contributory, non-defined pension plans for the benefit
of Messrs. Newell, Burt, and Jervis, to which it makes periodic contributions of
approximately L11,000 ($18,000) per annum.
1996 EQUITY INCENTIVE PLAN
In May 1996, the Company, adopted the 1996 4Front Software International,
Inc. Equity Incentive Plan (the "Plan"), which provides for the issuance of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified stock options, to purchase
an aggregate of up to 400,000 shares of the Common Stock of the Company. The
Plan permits the grant of options to officers, employees, directors and
consultants of the Company. This Plan was
20
<PAGE>
approved by stockholders on February 5, 1997 and pursuant to the Plan a total of
247,000 options, exercisable at between $3 3/8 and $5 3/4 per share, being at an
above market value at time of grant, have been granted to employees and to two
directors.
COMPENSATION OF DIRECTORS
Messrs. Murray and Ross each receive compensation of $15,000 per year. No
other director receives any compensation for services as a director. In
addition, the Plan provides for the grant of up to 20,000 options to directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Doshi, Ellis,
Murray and Ross. Messrs. Doshi and Ellis abstain from votes on their
compensation. See "--Compensation of Directors"
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 21, 1997, (i) by each of the
Company's executive officers named in the Summary Compensation Table (ii) by all
executive officers and directors as a group and (iii) by each person who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER--NAME AND ADDRESS BENEFICIALLY OWNED(1) OWNERSHIP
- ------------------------------------------------------------------------- ----------------------- -------------
<S> <C> <C>
Anil Doshi(*)............................................................ 954,700(2) 13.76%
Mark Ellis(*)............................................................ 542,300(3) 7.95%
Kenneth Newell(*)........................................................ 262,578(4) 3.91%
Craig Kleinman(*)........................................................ 82,500(5) 1.25%
Terence Burt(*).......................................................... 237,582(6) 3.55%
Joel William Jervis(*)................................................... 96,139(7) 1.47%
Stephen McDonnell(*)..................................................... 34,500(8) 0.53%
Brian Murray(*).......................................................... 12,500(9) 0.19%
Arthur Keith Ross(*)..................................................... 185,950(10) 2.81%
FMR Corporation(**)...................................................... 435,000(11) 6.68%
Putnam Investments, Inc.(***)............................................ 329,000(12) 5.05%
All Directors and Executive Officers 2,368,749(2)(3)(4)(5)(6) 30.09%
as a Group (9) persons................................................. (7)(8)(9)(10)
</TABLE>
- ------------------------
* Address is 4 Colonial Business Park, Colonial Way, Watford, Herts WD2 4PR
England.
** 82 Devonshire Street, Boston, Massachusetts 02109.
*** One Post Office Square, Boston, Massachusetts 02109.
(1) All shares are beneficially owned, such persons have sole investment and
voting power subject to applicable community property and similar laws,
unless otherwise indicated.
(2) Includes 20,000 shares and 20,000 warrants owned by Aliki Financial Corp.,
in which Mr. Doshi has a 65% interest. Also includes 270,000 shares
purchasable pursuant to immediately exercisable options and 112,000 shares
purchasable pursuant to immediately exercisable warrants.
(3) Includes 20,000 shares and 20,000 warrants owned by Aliki Financial Corp.,
in which Mr. Ellis has a 35% interest. Also includes 270,000 shares
purchasable pursuant to immediately exercisable options.
(4) 26,737 of such shares are held directly by Mr. Newell and 7,051 shares are
held directly by Mr. Newell's wife; Lex Nominees International holds 28,790
shares as nominee for a Jersey resident settlement established for the
benefit of Mr. Newell and his wife and children. Also includes 200,000
shares purchasable pursuant to immediately exercisable options.
(5) Includes 75,000 shares purchasable pursuant to immediately exercisable
options.
(6) 441 of such shares are held directly by Mr. Burt and 33,347 shares are held
directly by Mr. Burt's wife; Lex Nominees International holds the remaining
28,794 shares as nominee for a Jersey resident settlement established for
the benefit of Mr. Burt and his wife and children. Also includes 175,000
shares purchasable pursuant to immediately exercisable options.
(7) Includes 42,500 shares purchasable pursuant to immediately exercisable
options.
(8) Includes 34,500 shares purchasable pursuant to immediately exercisable
options.
(9) Includes 10,000 shares purchasable pursuant to immediately exercisable
options.
(10) Includes 87,100 shares purchasable pursuant to immediately exercisable
options and warrants.
(11) The information is based on information contained in a Schedule 13G filed
by the stockholder.
(12) The information is based on information contained in a Schedule 13F filed
by the stockholder.
22
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITIONS
As part of the acquisition by the Company of Compass in 1995, the Company
agreed to the conditional issuance of (i) a total of 108,836 additional shares
of common stock to Richard Sharpe, until April 1996 the Company's General
Manager of Network Communications and currently a Consultant to the Company, his
wife and two trusts of which the Sharpes are beneficiaries and (ii) options to
purchase an additional 29,959 shares of the Company's Common Stock at $0.01 per
share to Joel Jervis, all based on the post-acquisition earnings of Compass for
the period ending March 31, 1996. In December 1995, the Company entered into an
agreement with the prior shareholders of Compass and Mr. Jervis whereby the
conditions to the issuance of these additional shares were deemed satisfied,
resulting in the immediate issuance of these conditional shares and options.
Such options were exercised by Mr. Jervis in April, 1996.
ADVANCES FROM AFFILIATES AND RECEIVABLE FROM RELATED PARTY
As of January 31, 1997, a total of $504,105 remained outstanding to Mr.
Doshi and Mr. Ellis, primarily representing advances made to fund the operations
of the Company, but also including $150,000 owed to Aliki for payment of
consulting services rendered by Aliki to the Company in 1994 (a corporation in
which Messrs. Doshi and Ellis have interests of 65% and 35% respectively), in
connection with capital raising and acquisitions. These payables are
non-interest bearing and unsecured, due on demand. Repayment is subordinated to
payment by the purchaser (a related party) of DesignBase and CommsWare of all
payables to the Company assumed in connection with the sale by the Company of
DesignBase and CommsWare in 1994 ($644,356 remains outstanding at January 31,
1997). Payment of such assumed payables has been guaranteed by Mr. Doshi and
Aliki.
OTHER TRANSACTIONS
In connection with a bridge financing completed in January 1995, the Company
issued a promissory note in the principal amount of $480,000 bearing interest at
10% per annum to Jayantilal V. Doshi, the father of Anil Doshi. As further
consideration for this loan, Mr. J. V. Doshi received 12,000 shares of Common
Stock and warrants to purchase an additional 120,000 shares at an exercise price
of $4.50 per share. This bridge loan, plus interest, was initially due on May
31, 1995. In June, 1995 the $480,000 principal amount of this loan, plus an
additional $500,000, was exchanged by Mr. J. V. Doshi for a promissory note in
the principal amount of $980,000, bearing interest at 10%, due on or before
December 14, 1995. In connection with this additional loan, Mr. J. V. Doshi was
issued 24,500 shares of Common Stock and warrants to purchase 245,000 additional
shares at an exercise price of $4.50 per share. Effective December 14, 1995,
this promissory note was amended to provide for a maturity date of June 19,
1996, and was fully repaid.
Prior to his appointment as a non-executive director of the Company, Mr.
Ross purchased 15,000 shares of the Company's Common Stock and warrants to
purchase 15,000 shares for total consideration of $66,000 in the Company's May,
1995 private placement of securities. In June, 1995, Mr. Ross loaned $50,000 to
the Company, in consideration of which the Company issued to Mr. Ross 1,250
shares of Common Stock and warrants to purchase 12,500 shares. The $50,000 loan
has been repaid to Mr. Ross, with interest.
The Company believes that all transactions with related parties have been
upon terms at least as favorable to the Company as those which would have been
available to the Company from unrelated parties.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND RESPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a ) 1. Financial Statements. See Index to Consolidated Financial Statements
commencing on page F-1 of this Report
2. Financial Statement Schedules. See Index to Consolidated Financial
Statements commencing on page F-1 of this Report
3. Exhibits
</TABLE>
The following exhibits are filed or incorporated by reference as part of
this Report (Exhibit Nos. 10.01, 10.2, 10.12, 10.13, 10.14, 10.20, 10.21, 10.22,
10.40 and 10.41 are management contracts, compensation plans or arrangements):
<TABLE>
<S> <C> <C>
3.1 -- Articles of Incorporation of the Company, as amended to date.(5)
3.2 -- Bylaws of the Company, as amended to date.(5)
4.1 -- Specimen Form of Stock Certificate for the Company's registered stock.(5)
4.2 -- Warrant Agreement by and between the Company and American Securities
Transfer, Inc. dated February 10, 1993, and Form of Warrant.(5)
4.4 -- 1995 Amendment to Warrant Agreement by and between the Company and American
Securities Transfer, Inc. dated February 10, 1993, and Form of Warrant.(6)
10.1 -- Stock option plan dated July 27, 1989.(2)
10.2 -- Indemnity Agreement between the Company and Craig Kleinman dated October 27,
1987.(1)
10.3 -- Schedule of Indemnity Agreements substantially identical to Exhibit 10.6.(1)
10.4 -- Share Sale Agreement Relating to K-2 Group Plc dated March 7, 1994 by and
among Lex Nominees International Limited and ORS, Peter Leith Wellings and
4Front Software International, Inc.(4)
10.5 -- Form of Securities Purchase Agreement dated as of March 7, 1994, between
each shareholder and 4Front Software International, Inc.(4)
10.6 -- Form of Option to Purchase Shares in 4Front Software International, Inc.
dated as of March 7, 1994 by and among 4Front Software International, Inc.
and shareholders of K-2 Group.(4)
10.7 -- Agreement of Partnership of ActionTrac International, a California general
partnership, dated as of December 7, 1993.(5)
10.8 -- Option Agreement dated as of December 8, 1993 between the Company and
ActionTrac, Inc., as amended.(5)
10.9 -- License and Security Agreement dated as of December 7, 1993 between
ActionTrac International and ActionTrac, Inc.(5)
10.10 -- Limited Territory License and Security Agreement dated as of December 7,
1993 between the Company and ActionTrac, Inc.(5)
10.11 -- Loan agreement with Midland Bank plc dated June 3, 1993.(5)
10.12 -- Form of Executive Pension Plan for the benefit of Anil Doshi.(5)
10.13 -- Form of Executive Pension Plan for the benefit of Mark Ellis.(5)
10.14 -- Form of Executive Officer Service Agreement (the Company).(5)
10.15 -- Agreement between the Company and La Jolla Securities Corporation dated
December 15, 1993.(5)
10.16 -- Midland Bank Loan Agreement with K2 dated February 11, 1994.(5)
10.17 -- Midland Bank Overdraft and Forward Exchange Agreement with K2, Xanadu and
Mitre dated February 14, 1994.(5)
10.18 -- Lease Agreement dated September 7, 1988 for lease by K2 of premises at Unit
4, Colonial Business Park, Colonial Way, Watford England, as amended.(5)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
10.19 -- Lease Agreement dated April 28, 1992 for lease by K2 of premises at Units 5
and 6, Colonial Business Park, Colonial Way, Watford England.(5)
10.20 -- Form of Executive Officer Service Agreement (K2).(5)
10.21 -- K2 Systems Group Pension Scheme effective March 6, 1991.(5)
10.22 -- Form of Executive Pension Plan for the benefit of Ken Newell.(5)
10.23 -- Form of Amendment dated October 21, 1994 to Option to Purchase Shares in
4Front Software International, Inc. dated as of March 7, 1994 by and among
4Front Software International, Inc. and shareholders of K-2 Group.(6)
10.24 -- Facility Letter dated October 3, 1994 from Midland Bank Plc to K2 Group
Plc.(6)
10.25 -- Facility Letter dated April 10, 1995 from Midland Bank Plc to K2 Group
Plc.(6)
10.26 -- Warrant dated August 10, 1994 in favor of La Jolla Securities
Corporation.(6)
10.27 -- Form of November 1, 1994 Option Agreement for Employees and Consultants.(6)
10.28 -- Share Sale Agreement Relating to DesignBase Properties Limited effective
February 1, 1995 by and among 4Front Group Plc, Properties Holding Limited
and Anthony Malpas.(6)
10.29 -- Share Sale Agreement Relating to CommsWare Limited effective February 1,
1995 by and among 4Front Group Plc, Properties Holding Limited and Anthony
Malpas.(6)
10.30 -- Guarantee and Subordination Agreement dated April 24, 1995 between the
Company, Anil Doshi and Aliki Financial Corp.(6)
10.31 -- Share Sale Agreement Relating to CI Support Limited effective November 1,
1994 by and among Burnaby Investments Limited and K2 Group plc.(6)
10.32 -- Share Sale Agreement Relating to CCG Holdings Limited dated May 11, 1995 by
and among Richard Ian Sharpe & ORS and the Company.(6)
10.33 -- Option to Purchase Shares in 4Front Software International, Inc. dated as of
May 11, 1995 by and 4Front Software International, Inc. and Joel William
Jervis.(6)
10.34 -- Service Agreement dated May 11, 1995 between the Company, CCG Holdings Ltd
and Richard Ian Sharpe.(6)
10.35 -- Service Agreement dated May 11, 1995 between the Company, CCG Holdings Ltd
and Joel William Jervis.(6)
10.36 -- Lease Agreement dated September 11, 1992 for lease by Compass of premises at
Unit C, Kennetside Industrial Estate, Bone Lane, Newbury Berkshire
England.(6)
10.37 -- Lease Agreement dated September 11, 1992 for lease by Compass of premises at
Unit C, Kennetside Industrial Estate, Bone Lane, Newbury Berkshire
England.(6)
10.38 -- Facility Letter dated May 25, 1994 from Barclays Bank Plc to Compass
Computer Group Limited.(6)
10.39 -- Facility Letter dated April 12, 1995 from Barclays Bank Plc to Compass
Computer Group Limited.(6)
10.40 -- Form of Employment Agreement effective as of November 1, 1995 between the
Company and Anil Doshi.(7)
10.41 -- Form of Employment Agreement effective as of November 1, 1995 between the
Company and Mark Ellis.(7)
10.42 -- Form of August, 1995 Option Agreement for Employees and Consultants.(7)
10.43 -- Share Sale Amendment Agreement dated December 13, 1995 between Richard Ian
Sharpe & ORS, the Company, Joel Jervis, CCG Holdings Limited and 4Front
Group PLC.(7)
10.44 -- Put Option Agreement dated December 13, 1995 between Richard Ian Sharpe &
ORS and the Company.(7)
10.45 -- Service Agreement dated December 13, 1995 between Richard Ian Sharpe and
4Front Group PLC.(7)
10.46 -- Amendment to Option Agreement dated December 13, 1995 between Joel Jervis
and the Company.(7)
16.1 -- Letter from AJ. Robbins PC regarding change in certifying accountant.(8)
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
16.2 -- Letter from AJ. Robbins PC regarding change in certifying accountant.(9)
21.1 -- List of Subsidiaries.
23.1 -- Consent of KPMG
23.2 -- Consent of AJ. Robbins PC
27.0 -- Financial Data Schedule
</TABLE>
- ------------------------
(1) Previously filed as Exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1987
(2) Previously filed as Exhibits to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1989.
(3) Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1992.
(4) Previously filed as Exhibit to the Company's Report on Form 8-K dated March
7, 1994.
(5) Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1994.
(6) Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1995.
(7) Previously filed as Exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal period ended October 31, 1995.
(8) Previously filed as Exhibit to the Company's Report on Form 8-K dated
January 2, 1996.
(9) Previously filed as Exhibit to the Company's Report on Form 8-K dated
January 23, 1996.
(10) Previously filed as Exhibit to the Company's Report on Form 10-K dated
April 26, 1996.
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
4FRONT SOFTWARE INTERNATIONAL, INC.
By: /s/ ANIL DOSHI
-----------------------------------------
Anil Doshi, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Date: April 28, 1997
</TABLE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND POSITION DATE
- ------------------------------ -------------------
<S> <C>
/s/ ANIL DOSHI
- ------------------------------
Anil Doshi, Chairman of the
Board, April 28, 1997
Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ MARK ELLIS
- ------------------------------
Mark Ellis, President, April 28, 1997
Chief Operating Officer and
Director
/s/ KENNETH NEWELL
- ------------------------------ April 28, 1997
Kenneth Newell, Director,
/s/ CRAIG KLEINMAN
- ------------------------------
Craig Kleinman, Secretary and April 28, 1997
Director
/s/ ARTHUR KEITH ROSS
- ------------------------------ April 28, 1997
Arthur Keith Ross, Director
/s/ BRIAN V. MURRAY
- ------------------------------ April 28, 1997
Brian V. Murray, Director
/s/ TERENCE W. BURT
- ------------------------------ April 28, 1997
Terence W. Burt, Director
/s/ JOEL W. JERVIS
- ------------------------------ April 28, 1997
Joel Jervis, Director
/s/ STEPHEN MCDONNELL
- ------------------------------
Stephen McDonnell, Chief
Financial Officer (Principal April 28, 1997
Financial and Accounting
Officer)
</TABLE>
27
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report Covering the Consolidated Financial Statements as of and for the years ended
January 31, 1996 and 1997................................................................................ F-2
Independent Auditors' Report Covering the Consolidated Financial Statements as of and for the year ended
January 31, 1995......................................................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 31, 1996 and 1997.............................................. F-4
Consolidated Statements of Operations for the years ended January 31, 1995, 1996 and 1997................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended January 31, 1995, 1996 and
1997................................................................................................... F-6
Consolidated Statements of Cash Flows for the years ended January 31, 1995, 1996 and 1997................ F-7
Notes to the Consolidated Financial Statements........................................................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
4Front Software International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of 4Front
Software International, Inc. and subsidiaries as of January 31, 1996 and 1997
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 4Front
Software International, Inc. and Subsidiaries as of January 31, 1996 and 1997
and the results of their operations and their cash flows for the years then
ended, in conformity with United States generally accepted accounting
principles.
KPMG
Chartered Accountants
Registered Auditors
London, England
April 28, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
4Front Software International, Inc. and Subsidiaries
We have audited the related consolidated statements of operations, changes
in stockholders' equity and cash flows of 4Front Software International, Inc.,
for the year ended January 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of 4Front Software International, Inc. and Subsidiaries for the year ended
January 31, 1995, in conformity with generally accepted accounting principles.
[LOGO]
A.J. Robbins PC
Certified Public Accountants
and Consultants
Denver, Colorado
April 24, 1995
F-3
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................ $ 1,391,644 $ 6,652,888
Accounts receivable, net of allowance for
doubtful accounts of $79,000 and $273,205,
respectively.................................. 7,533,188 15,365,270
Deposits........................................ 37,250 30,843
Inventories..................................... 3,339,998 7,132,470
Prepaid expenses................................ 396,623 904,838
Deferred offering costs......................... 338,595 --
Income taxes receivable......................... 160,166 32,122
Other current assets............................ 266,582 230,410
------------ ------------
Total current assets.......................... 13,464,046 30,348,841
PROPERTY AND EQUIPMENT, net....................... 905,976 2,050,485
INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE..... 248,048 143,422
RECEIVABLE, RELATED PARTY......................... 644,356 644,356
INTANGIBLE ASSETS, net............................ 2,074,400 7,777,448
DEFERRED INCOME TAX............................... -- 973,511
OTHER ASSETS...................................... 606,594 83,332
------------ ------------
TOTAL ASSETS.................................. $ 17,943,420 $ 42,021,395
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 6,644,065 $ 13,057,511
Accrued liabilities............................. 1,559,673 2,483,160
Stockholder advances............................ 391,842 504,105
Lines of credit--bank........................... 1,482,763 1,176,848
Notes payable (including amounts with related
party of $980,000)............................ 1,695,403 --
Capital lease obligations, current portion...... 54,888 545,903
Income taxes payable............................ 374,688 493,495
Deferred revenue................................ 2,546,604 6,503,043
------------ ------------
Total current liabilities..................... 14,749,926 24,764,065
CAPITAL LEASE OBLIGATIONS, less current portion... 92,718 488,795
------------ ------------
TOTAL LIABILITIES............................. 14,842,644 25,252,860
------------ ------------
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, no par value, 30,000,000 shares
authorized, 3,005,108 and 6,514,747 shares
issued and outstanding, respectively.......... 6,972,674 22,988,088
Accumulated (deficit)........................... (3,878,599) (6,222,386)
Cumulative foreign currency translation
adjustment.................................... 6,701 2,833
------------ ------------
Total stockholders' equity.................... 3,100,776 16,768,535
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $ 17,943,420 $ 42,021,395
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES............................................................ $ 11,240,081 $ 32,248,697 $ 53,014,923
------------- ------------- -------------
Cost of revenues.................................................... 6,814,383 20,807,858 36,018,074
Write down of software development costs............................ -- 755,184 --
------------- ------------- -------------
GROSS PROFIT........................................................ 4,425,698 10,685,655 16,996,849
OPERATING EXPENSES:
Selling, general and administrative expenses...................... 3,565,063 9,566,257 13,791,615
Depreciation...................................................... 132,743 356,379 518,222
Amortization...................................................... 82,870 203,938 458,016
Write down of goodwill............................................ -- -- 551,696
Reorganization and restructuring costs............................ -- -- 2,286,432
------------- ------------- -------------
Total operating expenses........................................ 3,780,676 10,126,574 17,605,981
------------- ------------- -------------
INCOME (LOSS) BEFORE INTEREST, INCOME TAXES, SHARE OF RESULTS IN
EQUITY INVESTEE AND WRITE DOWN OF INVESTMENTS..................... 645,022 559,081 (609,132)
Interest income..................................................... 11,624 14,189 277,141
Interest expense.................................................... (153,518) (258,421) (296,638)
Write down of investments........................................... -- -- (500,000)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND SHARE OF RESULTS IN EQUITY
INVESTEE.......................................................... 503,128 314,849 (1,128,629)
SHARE OF RESULTS IN EQUITY INVESTEE (INCLUDES WRITE DOWN OF
INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE).................... -- (761,016) (798,810)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES................................... 503,128 (446,167) (1,927,439)
INCOME TAXES........................................................ 148,000 205,784 416,348
------------- ------------- -------------
NET INCOME (LOSS)................................................... $ 355,128 $ (651,951) $ (2,343,787)
------------- ------------- -------------
------------- ------------- -------------
NET INCOME (LOSS) PER COMMON SHARE.................................. $ 0.20 $ (0.24) $ (0.45)
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares outstanding................ 1,812,853 2,742,614 5,170,254
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
ACCUMULATED TRANSLATION
SHARES AMOUNT (DEFICIT) ADJUSTMENT TOTAL
---------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1994............. 1,417,200 $ 3,314,472 $ (3,581,776) $ 174,958 $ (92,346)
Conversion of debenture............... 112,000 350,000 -- -- 350,000
Exercise of stock options............. 57,500 38,352 -- -- 38,352
Stock issued in private placement, net
of offering costs.................... 773,625 1,768,385 -- -- 1,768,385
Stock issued for services............. 18,750 75,000 -- -- 75,000
Additional shares issued to acquire K2
Group................................ 112,500 225,000 -- -- 225,000
Stock issued to bridge loan holders... 19,750 39,500 -- -- 39,500
Net income for the year............... -- -- 355,128 -- 355,128
Foreign currency translation
adjustment........................... -- -- -- 45,912 45,912
---------- ------------- ------------- --------------- -------------
BALANCE, JANUARY 31, 1995............. 2,511,325 5,810,709 (3,226,648) 220,870 2,804,931
Stock issued to acquire Compass....... 192,556 385,112 -- -- 385,112
Stock issued to bridge loan holders... 25,750 51,500 -- -- 51,500
Stock issued in private placement, net
of offering costs.................... 262,144 665,353 -- -- 665,353
Stock issued for services............. 13,333 60,000 -- -- 60,000
Net (loss) for the year............... -- -- (651,951) -- (651,951)
Foreign currency translation
adjustment........................... -- -- -- (214,169) (214,169)
---------- ------------- ------------- --------------- -------------
BALANCE, JANUARY 31, 1996............. 3,005,108 6,972,674 (3,878,599) 6,701 3,100,776
Exercise of stock options............. 53,639 536 -- -- 536
Stock issued in offering, net of
offering costs....................... 3,450,000 16,003,388 -- -- 16,003,388
Exercise of warrants.................. 6,000 11,490 -- -- 11,490
Net (loss) for the year............... -- -- (2,343,787) -- (2,343,787)
Foreign currency translation
adjustment........................... -- -- -- (3,868) (3,868)
---------- ------------- ------------- --------------- -------------
BALANCE, JANUARY 31, 1997............. 6,514,747 $ 22,988,088 $ (6,222,386) $ 2,833 $ 16,768,535
---------- ------------- ------------- --------------- -------------
---------- ------------- ------------- --------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 355,128 $ (651,951) $ (2,343,787)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities
Depreciation.......................................................... 132,743 356,379 518,222
Amortization.......................................................... 82,870 203,938 458,016
Write down of software development costs.............................. -- 755,184 --
Write down of goodwill................................................ -- -- 551,696
Write down of investments............................................. -- -- 500,000
Share of results in equity investee................................... -- 761,016 798,810
Stock issued for services............................................. 75,000 60,000 --
(Gain) on disposal of fixed assets.................................... -- (35,851) (151,839)
(Increase) in accounts receivable..................................... (251,000) (525,404) (2,849,991)
Decrease in deposits.................................................. 232,252 24,533 6,407
Decrease (increase) in inventories.................................... 226,718 (347,923) (1,161,730)
Decrease (increase) in prepaid expenses............................... 63,729 (71,492) (118,797)
Increase in income taxes.............................................. 124,454 204,781 187,739
Decrease (increase) in other current assets........................... (72,369) (78,377) 36,640
Decrease (increase) in receivable-related party....................... (626,890) (9,451) 46,800
Increase (decrease) in accounts payable............................... (597,205) 1,876,174 529,014
Increase (decrease) in accrued liabilities............................ (314,381) 542,589 429,163
Increase in deferred revenue.......................................... 88,572 515,312 498,873
------------ ------------ -------------
Net cash (used) provided by operating activities...................... (480,379) 3,579,457 (2,064,764)
------------ ------------ -------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment................................................. (248,445) (405,634) (607,714)
Proceeds from disposal of equipment................................... 287,069 177,517 185,986
Acquisition of subsidiaries, including related expenses, net of cash
acquired............................................................ (391,280) (1,614,111) (3,840,274)
Investment in ActionTrac, Inc......................................... (500,000) -- --
Investment in and advances to equity investee......................... (410,173) (444,704) (550,762)
Software development costs............................................ (277,792) (383,112) --
Decrease (increase) in other assets................................... 35,924 (24,018) 23,262
------------ ------------ -------------
Net cash (used) by investing activities............................... (1,504,697) (2,694,062) (4,789,502)
------------ ------------ -------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Increase (decrease) in lines of credit-bank........................... 19,568 (653,463) (1,052,834)
Proceeds from notes payable........................................... 1,506,364 500,000 --
Repayment of notes payable............................................ (459,039) (583,744) (2,849,017)
Proceeds from (repayment of) stockholders' advances................... 412,526 (227,830) 112,263
Decrease (increase) in deferred offering costs........................ (25,131) (78,342) 338,595
Payments of capital lease obligations................................. (82,657) (143,805) (445,043)
Net proceeds from issuance of common stock............................ 1,806,737 665,353 16,015,414
------------ ------------ -------------
Net cash provided (used) by financing activities...................... 3,178,368 (521,831) 12,119,378
------------ ------------ -------------
Effect of exchange rate changes on cash............................... 45,912 (214,169) (3,868)
Net increase in cash.................................................. 1,239,204 149,395 5,261,244
------------ ------------ -------------
Cash at beginning of period........................................... 3,045 1,242,249 1,391,644
Cash at end of period................................................. $ 1,242,249 $ 1,391,644 $ 6,652,888
Supplemental disclosure of cash flow information:
Cash paid for interest expense........................................ $ 153,518 $ 258,421 $ 296,638
Cash paid for income taxes............................................ $ -- $ -- $ 546,780
</TABLE>
See accompanying notes to the consolidated financial statements
F-7
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1997
1. NATURE OF BUSINESS
4Front Software International, Inc. and subsidiaries (the "Company" or "4
Front") is a UK based specialized computer services company. The Company
provides key elements of distributed computing, including systems development
and integration, storage and networking solutions and products, as well as
extensive hardware and software support and help desk services.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries from the date of acquisition. All significant
intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
The Company's wholly owned subsidiaries are as follows; all of the
subsidiaries, unless otherwise indicated, are registered in England:
<TABLE>
<S> <C>
ACTIVE SUBSIDIARIES
K2 SYSTEMS PLC DATAPRO COMPUTERS GROUP LIMITED
4FRONT SERVICES LIMITED SHORTLANDS COMPUTING SERVICES LIMITED
(formerly CI Support Limited) A.B.S. COMPUTERS LIMITED
4FRONT GROUP PLC DATAPRO COMPUTERS LIMITED
COMPASS COMPUTER GROUP LIMITED ALLIED BUSINESS SYSTEMS LIMITED
HAMMER DISTRIBUTION LIMITED MULTIBUS LIMITED
XANADU SYSTEMS LIMITED AVEL PIP LIMITED
Closed during fiscal 1997 4FRONT HOLDINGS, INC. (A DELAWARE
CORPORATION)
INACTIVE SUBSIDIARIES
MITRE TECHNOLOGY LIMITED COMMUNIC8 LIMITED
COMMUNIC8 SOFTWARE EUROPE LIMITED K2 DESIGN LIMITED
Closed during fiscal 1995 Sold during fiscal 1995
DESIGN BASE PROPERTIES LIMITED COMMSWARE LIMITED
Sold during fiscal 1995 Sold during fiscal 1995
MORTLAKE SOFTWARE LIMITED CCG HOLDINGS LIMITED
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) REVENUE RECOGNITION
Revenue from the sale of computer hardware and software is generally
recognized when the product is shipped and in the case of software licenses only
after the license has been signed and further obligations are not significant.
Where fixed fee contracts involve significant obligations after shipment of the
product, revenue is recognized on the percentage-of-completion method of
accounting.
Revenues from engineering, implementation and training are recognized as the
services are performed. Revenues from maintenance agreements are recognized
ratably over the terms of the agreements.
F-8
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In all such cases, the Company only recognizes revenue when collection of
the related receivable is probable.
b) DEPOSITS
Amounts paid by the Company as advances against future purchases of software
are recorded as deposits until such time as the software is received.
c) INVENTORIES
Inventories are stated at the lower of cost (first in, first out method) or
market value. Inventories consist primarily of computer hardware, software and
work in progress. Work in progress represents labour and material costs incurred
for customer software projects.
d) DEFERRED OFFERING COSTS
Deferred offering costs represent costs incurred for proposed offerings of
common stock. Costs are charged against the proceeds of the offering, if
successful, or to operations, if unsuccessful.
e) DEPRECIATION
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of minimum lease payments at the inception
of the lease. The Company provides for depreciation of equipment using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to five years. Equipment held under capital leases is
amortized using the straight-line method over the lease term.
f) INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE
The investment in the ActionTrac International partnership has been
accounted for using the equity method under which the Company's results include
its 50% share of the partnership's operating profits or losses in accordance
with the terms of the partnership agreement.
g) FOREIGN CURRENCY TRANSLATION
The Company considers the pound sterling to be the functional currency of
its UK operations. The reporting currency of the Company is the US dollar;
accordingly, all amounts included in the consolidated financial statements have
been translated into US dollars.
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
-------------------------------
EXCHANGE RATES 1995 1996 1997
- --------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Average.............................................................. 1.544 1.575 1.607
Period end........................................................... 1.588 1.511 1.602
</TABLE>
All assets and liabilities of the UK operations are translated into US
dollars using the exchange rates in effect on reporting dates for assets and
liabilities. Income and expenses are translated at average rates in effect for
the periods presented. The cumulative currency translation adjustment is
reflected as a separate component of stockholders' equity on the consolidated
balance sheet.
F-9
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency transaction gains and losses are included in the
consolidated results of operations for the periods presented. During the fiscal
year ended January 31, 1997 the Company had operating foreign exchange gains of
$339,000, in fiscal years ended January 31, 1995 and 1996 gains and losses made
were insignificant.
h) INTANGIBLE ASSETS
In connection with acquisitions accounted for under the purchase method (see
note 6), the Company recorded goodwill based on the excess of the purchase price
paid (cost of the acquisition) over the estimated fair value of the identifiable
tangible assets and liabilities of the acquiree on the date of purchase.
Goodwill is reported at cost, net of accumulated amortization, and is being
amortized over its estimated useful life of ten years.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
In addition, the Company assesses long-lived assets for impairment under
FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under those rules, goodwill associated
with assets acquired in a purchase business combination is included in
impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
i) SOFTWARE DEVELOPMENT COSTS
The Company charges all costs of establishing technological feasibility of
software products to research and development expense as incurred. Thereafter,
software development costs are capitalized and reported at the lower of
unamortized cost or net realizable value. Capitalization of software development
costs ceases and amortization over the estimated useful life (not to exceed
three years) of the product commences when the product is available for general
release to customers. Any write down resulting from the periodic testing of net
realizable value is recorded as accelerated amortization.
The total amounts of software development costs capitalized during the years
ended January 31, 1995, 1996 and 1997, all of which relate to the StreamZ
communication software product, were $277,792, $337,185 and $0 respectively.
j) INCOME TAXES
The company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are recognized for deferred tax assets if
it is considered more likely than not that all or some portion of the deferred
tax assets will not
F-10
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
be realized. Income tax expense is tax payable for the current period and the
change during the year in deferred tax assets and liabilities.
k) DEFERRED REVENUE
Deferred revenue is comprised of maintenance and support fees to be earned
in the future on agreements existing and billed for at the balance sheet date.
l) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common stock and common stock
equivalents outstanding during the period. When common stock equivalents have an
anti-dilutive effect on earnings (loss) per share, they are excluded from the
calculation.
The computation of earnings per share is calculated based on the Treasury
Stock Method.
For the years ended January 31, 1996 and January 31, 1997 the effect of
Stock Options and Warrants was anti-dilutive.
m)CONCENTRATION OF CREDIT RISK
At January 31, 1996 and 1997, cash includes L912,278 ($1,389,030) and
L545,763, ($874,585) respectively held in demand deposit accounts in United
Kingdom banks where deposits are not insured by the government. These balances
are subject to foreign currency fluctuations, which in the past have not been
material.
n) COSTS RELATING TO THE ISSUANCE OF STOCK WARRANTS AND OPTIONS
The cost resulting from the issuance of warrants and options to employees
under a compensatory plan is based on their intrinsic value at the measurement
date, which is equivalent to the excess of the fair market value of the
Company's common stock over the exercise price of the related warrants or
options.
The cost resulting from the issuance of warrants and options to
non-employees as part of transactions involving the exchange of products or
services, or contracts to provide such, is based on their intrinsic value at the
date of grant.
o) RECLASSIFICATIONS
Certain amounts in the prior year consolidated financial statements have
been reclassified for comparative purposes to conform with the current year
presentation. These reclassifications had no effect on results of operations.
p) ADOPTION OF NEW STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. The Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. The Statement defines a
fair value based method of accounting for stock option plans whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period. Under the new
F-11
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement, companies may continue to measure compensation cost of stock-based
plans using the current accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Companies electing to
remain with the accounting in Opinion No. 25 must make pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting defined if the Statement were applied. The Statement is effective in
1996 and the Company has adopted its provisions as of February 1, 1996. The
Company has adopted the alternative accounting treatment allowed by the Standard
and measures compensation cost in accordance with the provisions in Opinion No.
25. The adoption of the Statement has no effect on the Company's results of
operations, financial position or cash flows.
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
February 1, 1996. This Statement required that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Management does not expect that adoption of SFAS No. 125 will have a
material impact on the Company's financial position, results of operations, or
liquidity.
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 not
yet assessed the impact of Statement 128 on its financial statements.
4. WRITE-DOWN OF GOODWILL
In the fourth quarter of fiscal year 1997, the Company recorded a charge of
$552,000 related to the write down of goodwill to estimated recoverable value.
The asset of goodwill related to the Xanadu acquisition was determined to have
been impaired as a result of the loss during the year of several key franchises
relating to the operation of this subsidiary. Anticipated future cash flows of
the subsidiary indicate the recoverability of the asset is not reasonably
assured.
F-12
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
4. WRITE-DOWN OF GOODWILL (CONTINUED)
Upon determination that impairment of goodwill had occurred, the amount of
the impairment was calculated by determining that portion of the goodwill which
would not be expected to be recovered against operating income during the
remaining amortization period.
5. REORGANIZATION AND RESTRUCTURING
In November 1996, the Company integrated its maintenance and support
services businesses, which involved the closure of surplus facilities and
various involuntary redundancies. The reorganization was substantially completed
by February 1997. The reorganization and restructuring costs of $2.3 million
include $716,000 relating to write down of fixed assets, $1.25 million relating
to property costs and $320,000 relating to involuntary redundancy costs of
employees. Of this amount, $1,298,000 relates to the write down and costs paid
during the year to January 31, 1997 and $988,000 has been included as a
liability at January 31, 1997.
6. BUSINESS ACQUISITIONS
In February 1993 CommsWare Limited ("CommsWare") was formed as a
wholly-owned subsidiary and the Company acquired 100% of DesignBase Properties
Limited ("DesignBase") through an internal reorganization of management
shareholdings. During February 1994, the Company sold its investment in
CommsWare and DesignBase to a company controlled by a stockholder for the net
book value of the net assets of approximately $23,613 and the assumption of
$620,743 of liabilities. The resulting receivable is non-interest bearing, due
in 1997, and is guaranteed by another stockholder (see note 20).
Effective January 14, 1994, the Company purchased all of the outstanding
shares of K2 Group Plc and subsidiaries ("K2"), a United Kingdom Company, plus
the 25% minority interest in a 75% owned subsidiary (Xanadu Systems Limited) of
K2. Consideration for the K2 and Xanadu shares consisted of the issuance of
100,000 shares of the Company's common stock and the payment of $156,750
(L105,222) to the selling stockholders (including $15,550 (L10,445) used by K2
to retire all outstanding K2 stock options), plus an agreement to pay an
additional $141,250 (L94,778) to the selling stockholders and to deliver an
additional 62,500 shares of common stock in the event that certain profit
targets were achieved for the six month period ending April 1994 and the year
ending October 31, 1994. These profit targets were met and the Company
accordingly paid the additional amount and issued the additional shares. The
Company also issued a further 50,000 shares of common stock to selling
stockholders in consideration for a waiver by them of certain conditional rights
which might have required the Company to repurchase the shares of common stock
issued in the acquisition in specified circumstances.
K2, through its wholly owned subsidiaries which include K2 Systems Plc,
Mitre Technology Limited, K2 Design Limited, and Xanadu Systems Limited, is a
direct sales company in the United Kingdom that supplies computer solutions for
accounting, distribution and office automation, develops customized software,
provides hardware and software support, distributes X Terminals, workstations
and connectivity software and supplies, and document image processing software
and hardware.
During November 1994 the Company sold its investment in K2 Design Limited to
an unrelated entity for the net book value of the assets of $8,700. In January
1997 Xanadu Systems Limited ceased trading.
Effective November 1, 1994 the Company purchased all of the outstanding
shares of CI Support Limited ("CI"), a specialist hardware maintenance company,
for $159,000 (L102,500) from a company controlled by the stockholders of the
Company. CI is a hardware and network maintenance company which was formed by
three stockholders of the Company ("NBH") to acquire an existing client base
from an
F-13
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
6. BUSINESS ACQUISITIONS (CONTINUED)
affiliated company. CI was operated by NBH for approximately one month prior to
selling all of the outstanding stock in CI to the Company. The Company has
recorded its investment in CI at the historical cost of NBH. On April 1, 1996 CI
changed its name to 4Front Services Limited.
Effective March 31, 1995, 4Front Group Plc changed its name to Mortlake
Software Limited. At the same time, the K2 Group Plc became the principal
holding company of the UK operations and changed its name to 4Front Group Plc.
Effective April 6, 1995, the Company acquired all the common stock of CCG
Holdings Limited ("CCG") for cash consideration of L550,000 ($880,000) together
with the issuance of 83,720 shares of common stock and an agreement to deliver
up to an additional 108,836 shares of common stock valued at $2 per share in the
event that certain profit targets were achieved. In addition, the Managing
Director of CCG received options on 23,680 shares of common stock exercisable at
$0.01 and was also entitled to receive additional options on up to 29,959 shares
of common stock exercisable at $0.01 upon similar terms as to the entitlement of
the CCG sellers to the performance related shares detailed above. On December
13, 1995 the board of directors of the Company deemed that all of the profit
targets had been achieved and additional shares and options were duly issued.
The business of CCG, carried out through its principal and wholly owned
subsidiary, Compass Computer Group Limited (Compass), is the supply of computer
hardware and software products for use within the commercial, industrial,
scientific and government market places. It specializes in data storage systems,
high end computers, networking products and associated technical consultancy and
support together with maintenance services, all provided throughout the UK.
Effective August 15, 1996, the Company acquired Hammer Distribution Limited
("Hammer") for $1.7 million cash (L1.1 million) plus an agreement to pay an
additional maximum of $1.2 million cash (L750,000) based on the profits for
Hammer for the year to January 31, 1997. In April 1997 a final contingent
consideration of L537,000 ($860,000) was paid to the former stockholders of
Hammer based on the profits for the year to January 31, 1997.
Effective October 11, 1996 4Front Software International Inc., acquired all
of the issued and outstanding stock of Datapro Computers Group Limited
("Datapro"), for L1.39 million cash ($2.15 million), plus an agreement to pay an
additional maximum of L135,000 ($200,000) based on the net assets in the Datapro
September 1996 management accounts. The additional L135,000 ($200,000) was paid
in December 1996.
All acquisitions in fiscal year ended January 31, 1997 have been accounted
for under the purchase method. On August 15, 1996, the Company acquired 100% of
the issued and outstanding shares of Hammer Distribution Limited. The
transaction is summarized as follows (in $thousands):
<TABLE>
<CAPTION>
$'000'S
---------
<S> <C>
Assets acquired:
Current assets..................................................................... $ 3,317
Property and equipment............................................................. 126
Goodwill........................................................................... 2,219
Liabilities assumed:
Current liabilities................................................................ (2,908)
---------
Purchase price....................................................................... $ 2,754
---------
---------
</TABLE>
F-14
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
6. BUSINESS ACQUISITIONS (CONTINUED)
The Company paid approximately $1.4 million in cash, net of cash received in
the acquisition. In addition to the amount paid at the closing of the
transaction, the Company paid $860,000 as contingent consideration in April
1997.
On October 11, 1996, the Company acquired 100% of the issued and outstanding
shares of Datapro Computers Group Limited. This transaction is summarized as
follows (in $thousands):
<TABLE>
<CAPTION>
$'000'S
---------
<S> <C>
Assets acquired:
Current assets..................................................................... $ 5,152
Property and equipment............................................................. 1,299
Goodwill........................................................................... 3,616
Deferred taxation.................................................................. 857
Equity Investee.................................................................... 142
Liabilities assumed:
Current liabilities................................................................ (5,188)
Deferred revenue................................................................... (3,458)
---------
Purchase price....................................................................... $ 2,420
---------
---------
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma combined results of operations presents
financial information as if the acquisition had occurred at the beginning of
each fiscal year. In preparing the pro forma data, adjustments have been made
for the amortization of goodwill. The pro forma information is provided for
information purposes only. It is based on historical information and does not
necessarily reflect the actual results that would have occurred had the
acquisition been made as of those dates nor is it necessarily indicative of
results of operations which may occur in the future (in thousands except per
share data):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues................................................................ $ 62,202 $ 72,825
Net earnings (loss)..................................................... (1,409) (4,724)
Net earnings (loss) per common share.................................... $ (0.51) $ (0.91)
</TABLE>
7. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Computer hardware................................................. $ 2,823,753 $ 6,949,121
Computer software................................................. 374,341 83,097
Work in progress.................................................. 141,904 100,252
------------ ------------
$ 3,339,998 $ 7,132,470
------------ ------------
------------ ------------
</TABLE>
F-15
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Vehicles........................................................ $ 337,282 $ 1,323,351
Furniture, fixtures and equipment............................... 349,309 1,245,673
Computer equipment.............................................. 1,416,779 1,508,470
------------- -------------
2,103,370 4,077,494
Less accumulated depreciation................................... (1,197,394) (2,027,009)
------------- -------------
$ 905,976 $ 2,050,485
------------- -------------
------------- -------------
</TABLE>
9. INVESTMENT IN AND ADVANCES TO EQUITY INVESTEE
On December 7, 1993, the Company and ActionTrac, Inc., a United States
corporation specializing in help desk products and services for the computer
software industry, formed a partnership named ActionTrac International
(ActionTrac) which is equally owned by the Company and ActionTrac, Inc.
ActionTrac held the world rights outside the United States, Canada and Mexico to
the proprietary help desk systems, services and software of ActionTrac, Inc. The
purpose of the partnership was to expand ActionTrac, Inc.'s current North
American operations on a worldwide basis. On May 13, 1994 ActionTrac established
ActionTrac UK Limited as a wholly owned UK subsidiary.
Under the terms of the partnership agreement, the Company was required to
make a capital contribution of $500,000, which was used to establish ActionTrac
UK Limited and to develop the UK help desk operations, and ActionTrac, Inc.
contributed a ten year renewable license for the help desk software. During the
years ended January 31, 1996 and 1997, the Company made further advances to the
partnership amounting to $477,664 and $550,762, respectively. In conjunction
with its participation in the ActionTrac partnership the Company acquired
500,000 shares of restricted ActionTrac, Inc. common stock at $1 per share.
Development of the UK help desk was completed and ActionTrac UK Limited
commenced operations on May 1, 1995. The Company's share of the partnership's
operating loss for the period from May 1, 1995 to January 31, 1996 amounted to
$179,246.
Due to the accelerated pace of technological change (including recent
advances in telecommunications systems and help desk software technology) and
the increasing diversity in the market for help desk services the Company
re-evaluated the net realizable value of its investment in and advances to the
ActionTrac International partnership at January 31, 1996. As a result the
Company recorded a write down of $581,770 in the year to January 31, 1996.
On December 24, 1996 ActionTrac Inc., the Company's former partner in the
ActionTrac Joint Venture, filed for bankruptcy in the USA. As a result of the
bankruptcy, the Company reviewed the carrying value of its investment in
ActionTrac Inc. and its advances to the ActionTrac joint venture. It was
concluded that these were not recoverable and the Company has therefore written
off its investment in ActionTrac Inc. of $500,000 and advances to the equity
investee of $798,910.
Further to the acquisition of Datapro in October 1996, the Company has
acquired an investment in a small UK software company called Channel Business
Systems. The Company is actively looking to dispose of this equity investee
which at January 31, 1997 is recorded in the accounts of the Company at
$143,422. The Company believes it will dispose of the equity investee by the end
of the current fiscal year for at least its carrying value. The Company is not
under any obligation to invest or advance any monies to this equity investee.
F-16
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
10. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1996 1997
---------- ---------
<S> <C> <C>
Investment in ActionTrac, Inc., at cost................................ $ 500,000 $ --
Other.................................................................. 106,594 83,332
---------- ---------
$ 606,594 $ 83,332
---------- ---------
---------- ---------
</TABLE>
11. ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Valued Added Tax.................................................. $ 1,011,989 $ 1,741,201
Payroll taxes..................................................... 523,811 686,150
Other............................................................. 23,873 55,809
------------ ------------
$ 1,559,673 $ 2,483,160
------------ ------------
------------ ------------
</TABLE>
12. LINES OF CREDIT BANK
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
The Company has a L650,000 (approximately $1,042,000) line of
credit (overdraft protection) with a United Kingdom bank.
Interest is charged at 2.75% above bank base rates. Bank base
interest rate was 8.25% at January 31, 1997..................... $ -- $ 582,907
The Company has a L997,000 (approximately $1.6 million) line of
credit (overdraft protection) with a United Kingdom bank which
includes L200,000 ($321,000 approximately) VAT and duty
deferment on the import of goods into the United Kingdom.
Interest is charged at 2.5% above bank base rate of 8.25% at
January 31, 1997. The line of credit is secured on all assets of
Compass......................................................... 1,375,156 295,546
The Company has a L700,000 ($1,122,000) line of credit (overdraft
protection) with a United Kingdom bank. Interest is charged on
utilized facilities at 2.5% above bank base rate of 8.25% at
January 31, 1997. The line of credit is secured on the assets of
the company..................................................... -- 298,395
The Company had a bank loan at January 31, 1996 of L71,216
(approximately $108,000).This loan was repaid in June 1996...... 107,607 --
------------ ------------
$ 1,482,763 $ 1,176,848
------------ ------------
------------ ------------
</TABLE>
F-17
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
13. NOTES PAYABLE
Notes payable are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1996 1997
------------ ---------
<S> <C> <C>
Notes payable to a United Kingdom factoring company representing advance
payments on eligible trade receivables. The Company remains liable for
the advance payments in the event the receivables are not collected.
The Company pays the factoring company an administrative fee of 0.22%
of the receivable balance and interest at 2.25% above bank base rates.
Bank base rate was 8.25% at January 31, 1997. This facility was not
utilized at January 31, 1997........................................... $ 715,403 $ --
Notes payable on bridge financing for the Company acquisition program
and working capital (see notes 19 and 20). The notes bear interest at a
rate of 10% per annum.................................................. 980,000 --
------------ ---------
$ 1,695,403 $ --
------------ ---------
------------ ---------
</TABLE>
14. CONVERTIBLE DEBENTURE
In November 1992 the Company's majority stockholder converted $350,000 of
advances to a convertible debenture. The debenture was convertible into 1.6
shares of common stock and 1.6 purchase warrants (of which 62.5% will be
exercisable at $2 per share and the balance will be exercisable at $7.50 per
share) for every $5 converted. The debenture was non-interest bearing through
July 31, 1994 and was converted on July 31, 1994 into 112,000 shares and 112,000
warrants.
15. INCOME TAXES
The Company files a separate US federal income tax return for its domestic
operations and a UK income tax return for each of its foreign subsidiaries. The
United Kingdom subsidiaries compute taxes at rates in effect in that country.
Deferred federal income taxes are not provided on the undistributed earnings of
the Company's foreign subsidiaries to the extent the Company intends to
permanently reinvest such earnings in the United Kingdom.
At January 31, 1997 the Company has available for future use approximately
$2,151,565 of net operating loss carryforwards expiring from 2004 through 2012,
related to its domestic operations and $1,647,024 related to its foreign
operations, which are carry forward indefinitely.
F-18
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
15. INCOME TAXES (CONTINUED)
The provision for income taxes (benefit) is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Current:
US Federal............................................ $ 30,000 $ -- $ --
Foreign............................................... 148,000 205,784 525,964
---------- ---------- -----------
178,000 205,784 525,964
Deferred:
US Federal............................................ (30,000) -- --
Foreign............................................... -- -- (109,616)
---------- ---------- -----------
(30,000) -- (109,616)
---------- ---------- -----------
Total provision for income taxes.................... $ 148,000 $ 205,784 $ 416,348
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Income tax expense for the years ended January 31, 1995, 1996 and 1997
differed from the amounts computed by applying the UK statutory tax rate of 33%
to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Expected tax at UK rate of 33%......................... $ 166,032 $ (147,235) $ (636,055)
Effect of write-downs and amortization of goodwill..... -- 500,346 394,825
Change in valuation allowance.......................... -- (156,000) 452,179
Non deductible items and other......................... (18,032) 8,673 205,399
---------- ----------- -----------
Actual tax charge...................................... $ 148,000 $ 205,784 $ 416,348
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The tax effects of temporary differences and net operating loss
carryforwards that give rise to deferred tax assets and (liabilities) are as
follows at January 31:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Net operating loss carryforwards.................................. $ 366,900 $ 1,361,113
Other deferred tax assets......................................... 188,516 619,993
----------- -------------
Total deferred tax assets......................................... 555,416 1,981,106
Valuation allowance............................................... (555,416) (1,007,595)
----------- -------------
Deferred tax assets, net.......................................... $ -- $ 973,511
----------- -------------
----------- -------------
</TABLE>
In order for the net deferred tax asset to be realized, the Company's
foreign operations will need to earn taxable income of approximately $3 million.
Since the UK net operating loss carryforwards can be carried forward
indefinitely, there is no time limit over the period this income must be earned.
Management believe that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the net deferred
tax assets.
F-19
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
15. INCOME TAXES (CONTINUED)
Due to the uncertainty surrounding the ability of the Company to generate
taxable income in future periods in its domestic operations, the Company has
recorded a valuation allowance against its otherwise recognizable deferred tax
assets of its domestic operations.
16. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases vehicles under capital leases which expire over the next
two years. The gross amount of these capital leases is as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Vehicles, gross...................................................... $ 214,154 $ 937,432
Less accumulated depreciation........................................ (58,678) (347,714)
---------- -----------
Net.................................................................. $ 155,476 $ 589,718
---------- -----------
---------- -----------
</TABLE>
The total charge for depreciation for assets under capital leases for the
year to January 31, 1997 was $253,196.
Future minimum lease payments, including payments for rental inventories
with a net book value of $299,960, under capital leases together with the
present value of net minimum lease payments at January 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 642,489
1999............................................................ 369,509
2000............................................................ 159,078
2001............................................................ 32,168
---------
Total minimum lease payments.................................... 1,203,244
Less amount representing interest............................... (168,546)
---------
Present value of net minimum lease payments..................... 1,034,698
Less current portion............................................ 545,903
---------
$ 488,795
---------
---------
</TABLE>
The Company also has certain non-cancellable operating leases for premises
and various equipment and vehicles. Total rental expenses for operating leases
for the years ending January 31, 1995, 1996 and 1997 amounted to $347,836,
$961,455 and $1,107,086, respectively.
The principal lease commitments for premises are as follows:
- the Company's K2 subsidiary leases an office facility in Watford, England
for $197,000 (L124,000) per year. The lease, on which there are periodic
reviews, expires August 2013.
- the Company's 4Front Services subsidiary leases an office/warehouse
facility in Ruislip, England for $140,000 (L87,410) per year expiring
February 2002.
- the Company's Compass subsidiary leases an office/warehouse facility in
Newbury, England for $390,000 (L258,000) per year. The lease which expires
in September 2007 is subject to periodic
F-20
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
reviews. The Compass subsidiary also leases an office/warehouse in
Warrington England for $22,000 (L13,550) per year. The lease on which
there are periodic reviews expires in December 2012.
- the Company's Datapro subsidiary leases an office/warehouse facility in
Brighton, England for $56,000 (L35,000) expiring in February 2002.
Obligations under operating leases are as follows for each of the years
ending January 31:
<TABLE>
<S> <C>
1998........................................................... $1,830,348
1999........................................................... 1,505,805
2000........................................................... 973,073
2001........................................................... 739,689
2002........................................................... 697,438
Thereafter..................................................... 4,897,294
----------
Total.......................................................... $10,643,647
----------
----------
</TABLE>
LITIGATION
The Company is involved in various claims and legal proceedings arising in
the ordinary course of business. In the opinion of management, the ultimate
settlement of these matters will not have a material adverse effect on the
Company's consolidated financial position or consolidated results of its
operations.
17. STOCKHOLDERS' EQUITY
RECENT STOCK TRANSACTIONS
During 1993 and 1994 the Company received $960,000 ($679,962 net of offering
costs) from the sale of 192,000 shares of common stock and 192,000 common stock
purchase warrants, in a private placement offering. Pursuant to the terms of
this offering, investors subsequently received an additional 115,200 shares of
common stock and 115,200 common stock purchase warrants without payment of
further consideration. The 192,000 common stock purchase warrants are
exercisable through December 31, 1997 at $2.00 per share. The 115,200 common
stock purchase warrants are exercisable through December 31, 1997 at $7.50 per
share. The warrants are redeemable by the Company on 30 days notice to the
warrant holders for $0.01 per warrant if the common stock closes at $9.00 per
share or more for 14 consecutive trading days.
On January 14, 1994 the Company acquired all of the outstanding shares of K2
and subsidiaries, a United Kingdom company, plus the 25% minority interest in a
75% owned subsidiary (Xanadu) of K2 in exchange for 100,000 shares of the
Company's common stock and cash consideration payable to the selling
stockholders.
On July 31, 1994 the Company's Chairman converted a $350,000 convertible
debenture into 112,000 shares and 112,000 warrants (see note 14). Of the common
stock purchase warrants, 70,000 are exercisable at $2.00 per share and 42,000
are exercisable at $7.50 per share and they all expire in December 1997.
On July 31, 1994 the current and former officers and directors of the
Company exercised 57,500 options to purchase common stock of the Company for
$38,352 (see note 18).
F-21
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
17. STOCKHOLDERS' EQUITY (CONTINUED)
During 1994 the Company received $3,094,500 ($1,768,385 net of offering
costs) from the sale of 773,625 shares of common stock in a private placement
offering. In connection with this offering the Company agreed to issue 15,425
underwriter warrants, exercisable until August 1997 at $4.0 per share.
As of January 31, 1995 the Company's counsel, Miller & Holguin, converted
$75,000 of fees into 18,750 shares of the Company's common stock valued at $4.00
per share.
Following the acquisition of K2 Group Plc, the Company issued an additional
112,500 of the Company's common stock to the former owners of K2 Group Plc,
being partly the performance related additional consideration payable in
accordance with the terms of the acquisition and partly consideration for the
waiver of conditional repurchase rights contained in the original acquisition
agreement (see note 6).
On January 31, 1995 the Company issued 19,750 shares of common stock as part
of a bridge financing valued at $2.00 per share (see note 19). In connection
with the bridge financing the Company issued warrants convertible at any time
prior to January 31, 2000 into 197,500 shares of the common stock at $4.50 per
share.
Effective April 6, 1995 the Company acquired all of the outstanding shares
of CCG Holdings Limited (Compass) in exchange for 192,556 shares of the
Company's common stock and cash consideration payable to the selling
stockholders.
During May 1995 the Company issued 25,750 shares of common stock as part of
a bridge financing valued at $2.00 per share. In connection with this bridge
financing the Company issued warrants convertible at any time from September
1996 to June 2000 into 257,500 shares of common stock at $4.50 per share (see
note 19).
During 1995 the Company received $1,166,074 ($665,353 net of offering costs)
from the sale of 262,144 shares of common stock in private placement offerings.
In connection with these placements the Company issued warrants convertible at
any time prior to May 2000 into 150,457 shares of common stock at $6.50 per
share and further warrants convertible between October 1996 and October 2001
into 100,000 shares of common stock at $7.50 a share.
In November 1995, the Company's Counsel, Miller & Holguin, converted $60,000
of fees into 13,333 shares of the Company's common stock valued at $4.50 per
share and were issued with warrants convertible at any time from November 1996
to November 2001 into 13,333 shares of common stock at $7.50 a share.
In June 1996, the Company sold 3,000,000 shares of common stock at $5.75 in
a public offering of shares. Pursuant to this offering the underwriters
exercised the over allotment option under which an additional 450,000 shares of
common stock were sold.
During fiscal year ended January 31, 1997, 25,163 options previously granted
in August and November 1995 at $5.00 lapsed due to the grantees no longer
working for the Company.
In January 1997, 6,000 warrants at $2.00 were exercised.
F-22
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
17. STOCKHOLDERS' EQUITY (CONTINUED)
The number of warrants outstanding are summarized as follows at January 31:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK TO BE
ISSUED ON CONVERSION
--------------------
DATE CONVERTIBLE CONVERSION PRICE 1996 1997
- -------------------------------------------------- ----------------- --------- ---------
<S> <C> <C> <C>
Prior to December 31, 1997........................ $ 2.00 487,000 481,000
Prior to December 31, 1997........................ 7.50 157,200 157,200
Prior to August 9, 1997........................... 4.00 15,425 15,425
Prior to January 31, 2000......................... 4.50 197,500 197,500
September 1996 to June 2000....................... 4.50 257,500 257,500
Prior to May 2000................................. 6.50 150,457 150,457
October 1996 to October 2001...................... 7.50 113,333 113,333
</TABLE>
18. STOCK OPTIONS
Pursuant to a non-qualified plan approved by the Board of Directors in 1989,
all employees of the Company may be granted options to purchase common stock of
the Company at a price not less than the fair market value on the date of grant.
The term of the option shall be no longer than five years from the date the
option is granted. The Company has reserved 75,000 of the authorized but
unissued shares of common stock for issuance upon exercise of the options.
Pursuant to the above plan 57,500 options were granted as of July 27, 1989 to
current and former officers and directors of the Company. The options were
exercised in July 1994 for $38,352.
In September and November 1994 the Company, through another stock option
plan, has issued 1,260,875 options to management, employees and consultants to
purchase common stock at an exercise price of $4.00 per share. These options are
exercisable through periods ending September and November 1999.
In August and November 1995 the Company through another stock option plan
has issued 725,463 options to management, employees and consultants to purchase
common stock at an exercise price of $5.00 per share. These options are
exercisable through August and November 2000.
In August 1995, options to purchase 24,000 shares of common stock at a price
of $4.40 per share (expiring August 2000) were issued to a consultant pursuant
to a contractual obligation.
1996 EQUITY INCENTIVE PLAN
In May 1996, the Company, adopted the 1996 4Front Software International,
Inc. Equity Incentive Plan (the "Plan"), which provides for the issuance of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified stock options, to purchase
an aggregate of up to 400,000 shares of the Common Stock of the Company. The
Plan permits the grant of options to officers, employees, directors and
consultants of the Company. This Plan was approved by stockholders on February
5, 1997 at a Special Meeting and pursuant to the Plan a total of 247,000
options, exercisable at between $3 3/8 and $5 3/4 per share, such value being at
or above market value at time of grant, have been granted to employees and to
three directors of the Company.
F-23
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
18. STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock option plans as of January
31, 1995, 1996 and 1997 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of year........ 58 $ 0.67 1,261 $ 4.00 2,010 $ 4.37
Granted................................. 1,261 4.00 749 4.98 -- --
Exercised............................... (58 ) 0.67 -- -- -- --
Forfeited............................... -- -- -- -- (25 ) 5.00
Outstanding at end of year.............. 1,261 4.00 2,010 4.37 1,985 4.36
------ ------ ------
Options exercisable at year-end......... 1,261 2,010 1,985
------ ------ ------
------ ------ ------
</TABLE>
19. BRIDGE FINANCING
The cash portion of the Compass acquisition was funded primarily from the
proceeds of a $790,000 bridge loan which was completed in January, 1995 and a
private equity placement completed in May, 1995 in which gross proceeds of
approximately $630,000 were raised. This bridge loan, plus interest, fell due on
May 31, 1995. Some of the balance of the May, 1995 placement proceeds were
utilized to repay certain participants in the January, 1995 bridge loan, while
the other participants either converted their bridge loan into equity as offered
in the private equity placement or, in the case of the holders of approximately
$530,000 of the January, 1995 bridge loan amount, chose to extend their
participation into a new bridge loan of $1,030,000 which was completed by the
Company in June, 1995. The proceeds of this June, 1995 bridge loan were used to
fund acquisition costs and to provide additional general working capital for the
Company. This bridge loan, plus interest, was originally due on December 14,
1995. At January 31, 1996 $50,000 of this loan had been repaid, and the
remaining $980,000 was fully repaid in June 1996, following the successful
completion of the sale of common stock in the offering.
20. RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the
notes to the consolidated financial statements, the following related party
transactions have taken place.
CONTROL OF THE COMPANY
Principal ownership and control of the Company rests with the Chairman of
the Board and Chief Executive Officer.
RECEIVABLE-RELATED PARTY
As of January 31, 1996 and 1997 the Company is owed $644,356 and $644,356
respectively by a company controlled by a stockholder. The receivable is
non-interest bearing, due in 1997 and guaranteed by another stockholder (see
Note 6).
F-24
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
20. RELATED PARTY TRANSACTIONS (CONTINUED)
STOCKHOLDERS ADVANCES
As of January 31, 1996 and 1997 the Company's majority stockholders were
owed $391,842 and $504,105 respectively, in non-interest, unsecured advances,
due on demand, subordinated to the collection of a receivable from a company
controlled by a stockholder (see Note 6).
CONSULTING SERVICES
During the periods ended January 31, 1995, 1996, 1997 the Company
compensated one of its officers/ stockholders for services in the amount of
approximately $19,472, $29,818 and $47,286 respectively. At January 31, 1996 and
1997, $0 and $0 respectively, was owed to this related party.
OFFICE SPACE
The Company rents office space in Denver, Colorado provided by an
officer/stockholder of the Company at $500 per month. The lease is on a
month-to-month basis.
PRIVATE PLACEMENT COSTS
During the years ended January 31, 1996 and 1997 the Company's
Chairman/Chief Executive Officer paid offering costs on behalf of the Company of
$0 and $192,613 respectively. As of January 31, 1997 $83,050 was repaid and the
remaining $109,563 has been included in stockholder advances.
BRIDGE LOANS
A relative of the Company's Chairman participated in the bridge financing
arrangements described in note 19 and as of January 31, 1996 and 1997 was owed
$980,000 and $0, respectively. In addition, the relative received a total of
36,500 shares of Common Stock and warrants representing 365,000 shares of Common
Stock in connection with the bridge loan arrangements of January and June 1995.
The $980,000 was repaid in June 1996 following the successful offering of shares
by the Company.
OTHER
Prior to his appointment as a non-executive director of the Company, Mr.
A.K. Ross purchased 15,000 shares of the Company's Common Stock and warrants to
purchase 15,000 shares for total consideration of $66,000 in the Company's May,
1995 private placement of securities. In June, 1995, Mr. Ross loaned $50,000 to
the Company, in consideration of which the Company issued to Mr. Ross 1,250
shares of Common Stock and warrants to purchase 12,500 shares. The $50,000 loan
has been repaid to Mr. Ross, with interest. During the year January 31, 1997 Mr.
Ross was paid $10,000 salary for his duties as non-executive director . This was
increased to $15,000 as of February 1, 1997.
In April 1996 Mr. Brian Murray was appointed as a non-executive director of
the Company. Mr. Murray was paid a salary of $10,000 per annum for his services
as non-executive director for the year to January 31, 1997. This was increased
to $15,000 as of February 1, 1997.
In April 1996 Mr. J. Jervis, the Managing Director of Compass, exercised his
options to purchase 53,639 shares of Common Stock at the exercise price of $0.01
(see note 6).
F-25
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
21. PENSION PLANS
The Company sponsors, through its 4Front Group subsidiary, a money purchase
pension plan (voluntary) covering its Chairman/Chief Executive Officer and Chief
Operating Officer. The Company makes periodic contributions of approximately
$18,000 (L12,000) per year under the plan, although no contribution was made in
the year ended January 31, 1996. The Company, through its Compass, K2 and 4Front
Services subsidiaries, also sponsors money purchase pension plans (voluntary)
covering certain directors and employees. There are no accrued pension
contributions at January 31, 1995, 1996 and 1997 under any plan. The Company and
its subsidiaries contributed $210,000 under all pension plans for other
employees in the fiscal year ended January 31, 1997.
22. STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", (SFAS No. 123), which encouraged the use of a fair value based
method of accounting for compensation expense associated with stock options and
similar plans. However, SFAS No. 123 permits the continued use of the intrinsic
value based method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", but requires additional disclosures,
including pro forma calculations of net earnings and earnings per share as if
the fair value method of accounting prescribed by SFAS No. 123 had been applied
in 1996 and 1997. The pro forma data presented below is not representative of
the effects on reported amounts for future years for SFAS No. 123 does not apply
to awards prior to 1996 and additional awards are expected in the future.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, YEARS ENDED JANUARY 31,
-------------------------- --------------------------
AS REPORTED PRO FORMA
-------------------------- --------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss (in thousands).................................. $ (652) $ (2,343) $ (1,304) $ (2,995)
Loss per share........................................... $ (0.24) $ (0.45) $ (0.48) $ (0.58)
Average shares outstanding............................... 2,742,614 5,170,254 2,742,614 5,170,254
Average fair value of grants during the year............. $ 1.74
Black-Scholes option pricing model assumptions:
Risk-free interest rate................................ 5.2%
Expected life (years).................................. 3.6%
Volatility............................................. 70.9%
</TABLE>
F-26
<PAGE>
4FRONT SOFTWARE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996 AND 1997
23. FOREIGN OPERATIONS
Included in the accompanying consolidated financial statements are the
following amounts for the United Kingdom operations at:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Cash........................................................... $ 1,389,030 $ 874,585
Accounts receivable............................................ 7,533,188 15,365,270
Inventories.................................................... 3,339,998 7,132,470
Deposits....................................................... 37,250 30,843
Other current assets........................................... 620,469 1,098,721
Income taxes receivable........................................ 160,166 32,122
Property and equipment, net.................................... 905,976 2,050,485
Other assets................................................... 106,594 83,332
------------- -------------
$ 14,092,671 $ 26,667,828
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues........................................ $ 11,240,081 $ 32,248,697 $ 53,014,923
------------- ------------- -------------
Cost of revenues................................ 6,814,383 20,807,858 36,018,074
Write down of software development costs........ -- 755,184 --
Expenses........................................ 4,021,652 10,262,447 16,728,536
Income taxes.................................... 148,000 205,784 416,348
------------- ------------- -------------
Net income (loss)............................... $ 256,046 $ 217,424 $ (148,035)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
During the years ended January 31, 1995, 1996 and 1997, no customers
accounted for 10% or more of total revenues.
24. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Stock issued to acquire K2 Group............................................. $ 225,000 $ -- $ --
Debt issued to acquire K2 Group.............................................. -- -- $ --
Total consideration issued to acquire K2 Group............................... $ 225,000 $ -- $ --
Deferred offering costs financed by stockholder advances..................... $ -- $ -- $ --
Convertible debenture exchanged for stock.................................... $ 350,000 $ -- $ --
Stock issued to bridge financing holders..................................... $ 39,500 $ 51,500 $ --
Purchase of equipment financed with capital lease obligations................ $ 120,154 $ 72,294 $ 398,297
Stock issued to acquire Compass.............................................. $ -- $ 385,112 $ --
</TABLE>
F-27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-4 AND F-5 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED JANUARY 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 6652888
<SECURITIES> 0
<RECEIVABLES> 15638475
<ALLOWANCES> 273205
<INVENTORY> 7132470
<CURRENT-ASSETS> 30348841
<PP&E> 4077494
<DEPRECIATION> 2027009
<TOTAL-ASSETS> 42021395
<CURRENT-LIABILITIES> 24764065
<BONDS> 0
0
0
<COMMON> 22988088
<OTHER-SE> (6219553)
<TOTAL-LIABILITY-AND-EQUITY> 42021395
<SALES> 53014923
<TOTAL-REVENUES> 53014923
<CGS> 36018074
<TOTAL-COSTS> 36018074
<OTHER-EXPENSES> 18631586
<LOSS-PROVISION> 273205
<INTEREST-EXPENSE> 19497
<INCOME-PRETAX> (1927439)
<INCOME-TAX> 416348
<INCOME-CONTINUING> (2343787)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2343787)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)<F1>
<FN>
<F1>FOR FISCAL YEAR 1997, THE EFFECT OF STOCK OPTIONS AND WARRANTS WAS
ANTIDILUTIVE.
</FN>
</TABLE>
