<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
MARK ONE [1]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................... to ..............
Commission File Number 0-8345
---------------------------
4FRONT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0675510
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5650 Greenwood Plaza Blvd., Suite 107
Englewood, Colorado 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 721-7341
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the Registrant's classes of Common
Stock at November 30, 1998 was 10,593,067 shares of Common Stock, $.001 par
value.
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<PAGE>
Item 1. Financial Statements
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
Nine and Three Month Periods Ended October 31, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
Number
------
CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Condensed Consolidated Balance Sheets as of January 31, 1998
and October 31, 1998 (unaudited) 1
Condensed Consolidated Statements of Operations for the
nine and three month periods ended October 31, 1997 and 1998
(unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended October 31, 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine and three month periods ended October 31, 1997 and 1998
(unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
</TABLE>
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 31, October 31,
1998 1998
----------- -----------
$ `000's $ `000's
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,586 $ 26,786
Accounts receivable, net of allowance
for doubtful accounts of $452,000 and
$573,000 respectively 18,357 36,714
Deposits 49 53
Inventories 11,852 18,569
Prepaid expenses 1,835 3,832
Income taxes receivable 17 17
Other current assets 219 392
----------- -----------
Total current assets 36,915 86,363
PROPERTY AND EQUIPMENT, net 2,855 3,814
INTANGIBLE ASSETS, net 16,935 21,330
DEFERRED INCOME TAX 2,402 4,272
OTHER ASSETS 101 88
----------- -----------
TOTAL ASSETS $ 59,208 $ 115,867
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 1 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 31, October 31,
1998 1998
----------- -----------
$ `000's $ `000's
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 16,279 $ 26,836
Accrued liabilities 4,027 13,026
Stockholder advances 18 18
Lines of credit-bank 2,309 --
Notes payable 2,858 4,187
Capital lease obligations, current portion 482 470
Income taxes payable 1,273 2,465
Deferred revenue 8,728 10,996
------------ --------------
Total current liabilities 35,974 57,998
CAPITAL LEASE OBLIGATIONS, less current
portion 497 611
long term liabilities 1,143 --
------------ --------------
TOTAL LIABILITIES 37,614 58,609
------------ --------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001, 5,000,000
shares authorized. No shares issued or
outstanding -- --
Common stock, par value $.001, 30,000,000
shares authorized 7,051,317 and 10,593,067
shares issued and outstanding, respectively 7 11
Additional paid-in capital 24,870 56,561
Accumulated (deficit) (3,154) 792
Cumulative foreign currency translation adjustment (129) (106)
------------ --------------
Total stockholders' equity 21,594 57,258
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 59,208 $ 115,867
------------ --------------
------------ --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 2 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For The Nine Months Ended
October 31, October 31, October 31, October 31,
----------- ----------- ----------- -----------
1997 1998 1997 1998
---- ---- ---- ----
$ `000's $ `000's $ `000's $ `000's
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Services $ 12,947 $ 22,982 $ 29,456 $ 56,096
Products 8,491 14,664 29,426 35,669
---------- ---------- ---------- ----------
21,438 37,646 58,882 91,765
---------- ---------- ---------- ----------
Cost of Services 6,623 10,423 14,561 25,723
Cost of Products 6,913 12,332 24,727 29,786
---------- ---------- ---------- ----------
13,536 22,755 39,288 55,509
---------- ---------- ---------- ----------
GROSS PROFIT
Services 6,324 12,559 14,895 30,373
Products 1,578 2,332 4,699 5,883
---------- ---------- ---------- ----------
7,902 14,891 19,594 36,256
---------- ---------- ---------- ----------
OPERATING EXPENSES
Selling, general and administrative expenses 6,041 11,550 15,082 27,628
Depreciation 251 411 669 997
Amortization 317 538 758 1,388
---------- ---------- ---------- ----------
Total operating expenses 6,609 12,499 16,509 30,013
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME
TAXES: 1,293 2,392 3,085 6,243
Interest income 47 351 209 527
Interest expense (244) (186) (455) (605)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES: 1,096 2,557 2,839 6,165
INCOME TAXES 274 939 710 2,219
---------- ---------- ---------- ----------
NET INCOME $ 822 $ 1,618 $ 2,129 $ 3,946
---------- ---------- ---------- ----------
NET INCOME PER COMMON SHARE (Basic) $ 0.13 $ 0.16 $ 0.33 $ 0.46
NET INCOME PER COMMON SHARE (Diluted) $ 0.11 $ 0.14 $ 0.31 $ 0.39
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 3 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Common Stock Currency
------------------- Accumulated Translation
Shares Amount (Deficit) Adjustment Total
------ ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1998 7,051,317 $ 24,877,386 $ (3,153,766) $ (129,437) $ 21,594,183
Net income for
period (unaudited) -- -- 1,092,118 -- 1,092,118
Share options exercised 100,000 400,000 -- -- 400,000
Foreign currency
translation adjustment -- -- -- (77,705) (77,705)
---------- ------------ ------------- ---------- ------------
Balance, April 30, 1998 7,151,317 25,277,386 (2,061,648) (207,142) 23,008,596
(unaudited) ---------- ------------ ------------- ---------- ------------
Net income for
period (unaudited) -- -- 1,235,273 -- 1,235,273
Share options exercised 486,458 2,062,207 -- -- 2,062,207
Net proceeds from issuance
of Common Stock 2,955,292 29,232,116 -- -- 29,232,116
Foreign currency
translation adjustment - -- -- (58,650) (58,650)
---------- ------------ ------------- ---------- ------------
Balance, July 31, 1998 10,593,067 56,571,709 (826,375) (265,792) 55,479,542
(unaudited)
---------- ------------ ------------- ---------- -----------
Net income for
period (unaudited) -- -- 1,618,087 -- 1,618,087
Foreign currency
translation adjustment -- -- -- 159,635 159,635
---------- ------------ ------------- ---------- -----------
Balance, October 31, 1998 10,593,067 $ 56,571,709 $ 791,712 $ (106,157) $ 57,257,264
(unaudited) ---------- ------------ ------------- ---------- ------------
---------- ------------ ------------- ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 4 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
October 31, October 31, October 31, October 31,
----------- ----------- ----------- -----------
1997 1998 1997 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 822 $ 1,618 $ 2,129 $ 3,946
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 251 411 669 997
Amortization 317 538 758 1,388
Loss (gain) on disposal of fixed assets 22 27 3 47
Decrease in deferred income tax 119 484 282 1,181
(Increase) decrease in accounts receivable (190) (9,640) 829 (10,290)
(Increase) in deposits (1) (3) (1) (4)
(Increase) in inventories (509) (2,502) (1,179) (4,737)
(Increase) decrease in prepaid expenses 142 (358) (148) (664)
Increase in income taxes 103 597 350 1,192
(Increase) in other current assets (33) (50) (92) (173)
(Decrease) increase in accounts payable 1,314 1,824 (3) 1,530
(Decrease) increase in accrued liabilities (294) 1,976 (845) 1,765
Increase (decrease) in deferred revenue (1,325) 1,915 (2,216) 264
--------- ---------- ---------- ---------
Net cash provided (used) by operating activities 738 (3,163) 536 (3,558)
--------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (65) (266) (661) (897)
Proceeds from disposal of equipment 67 27 157 75
Acquisition of subsidiaries (5,152) (2,717) (6,380) (3,653)
Investment in and advances to equity investee -- -- 143 --
(Increase) decrease in other assets (2) (2) (4) 13
--------- ---------- ---------- ---------
Net cash used by investing activities (5,152) (2,958) (6,745) (4,462)
--------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in lines of credit-bank (646) -- 625 (2,309)
Proceeds from notes payable - 1,708 -- 1,329
Payments of capital lease obligations (200) (200) (588) (517)
Net proceeds from issuance of common stock -- -- -- 29,232
Net proceeds from exercise of warrants/options 75 -- 81 2,462
--------- ---------- ---------- ---------
Net cash from (used by) financing activities (771) 1,508 118 30,197
--------- ---------- ---------- ---------
Effect of exchange rate changes on cash 34 159 18 23
--------- ---------- ---------- ---------
NET (DECREASE) INCREASE IN CASH (5,151) (4,454) (6,073) 22,000
Cash at beginning of period 5,731 31,240 6,653 4,586
--------- ---------- ---------- ---------
Cash at end of period $ 580 $ 26,786 $ 580 $ 26,786
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Cash paid for interest expense $ 244 $ 186 $ 455 $ 605
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
- 5 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
4Front Technologies, Inc. and subsidiaries (the "Company" or "4 Front")
is a leading provider of information technology solutions, which consist of
specialized computer services and complementary products, primarily to blue chip
corporations and government authorities in the United Kingdom and, to a growing
extent, in Continental Europe. The Company's solutions include hardware
maintenance, help desk support, network servers, specialized software services
and products and the supply of high-end storage systems.
NOTE 2 - BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, the accompanying interim unaudited
condensed consolidated financial statements contain all material adjustments
consisting only of normal recurring adjustments necessary to present fairly the
financial condition, the results of operations, the changes in stockholders'
equity and cash flows of 4Front Technologies, Inc. for the interim periods
presented.
The results of the three and nine months ended October 31, 1998 are not
necessarily indicative of the results of operations for the full year. These
interim unaudited condensed consolidated financial statements and related
footnotes should be read in conjunction with the financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
January 31, 1998.
NOTE 3 - ADOPTION OF NEW STANDARDS
The Company adopted the provisions of SFAS No. 128, Earnings Per Share,
in January 1998. 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. Prior periods are
restated to conform to the new standard.
- 6 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ADOPTION OF NEW STANDARDS (Contd)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
October 31, October 31, October 31, October 31,
----------- ----------- ----------- -----------
1997 1998 1997 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net income $ 821,974 $ 1,618,087 $ 2,129,679 $ 3,945,478
------------ ------------ -------------- -------------
Weighted Average Number of Common Shares
outstanding 6,521,734 10,593,067 6,517,620 8,631,206
------------ ------------ -------------- -------------
Net income per Common Share Basic $0.13 $0.15 $0.33 $0.46
------------ ------------ -------------- -------------
------------ ------------ -------------- -------------
Diluted Earnings Per Share
Net income $ 821,974 $ 1,618,087 $ 2,129,679 $ 3,945,478
------------ ------------ -------------- -------------
Weighted Average Number of Common Shares
outstanding 6,521,734 10,593,067 6,517,620 8,631,206
Additional Shares to be Issued upon Assumed
Exercise of Options and Warrants 3,154,350 3,269,705 1,874,800 3,269,705
Shares Hypothetically Repurchased at the Average
Market Price with the Proceeds of Exercise (2,038,658) (2,045,750) (1,453,390) (1,907,612)
------------ ------------ -------------- -------------
Adjusted Shares for Dilution 7,637,426 11,817,022 6,939,030 9,993,299
------------ ------------ -------------- -------------
Net income per Common Share Diluted $ 0.11 $ 0.14 $ 0.31 $ 0.39
------------ ------------ -------------- -------------
------------ ------------ -------------- -------------
</TABLE>
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: January 31, 1998 October 31, 1998
------------------ ----------------
(unaudited)
<S> <C> <C>
Computer hardware $ 11,702 $ 18,453
Computer software 20 9
Work in progress 130 107
-------- ---------
$ 11,852 $ 18,569
-------- ---------
-------- ---------
</TABLE>
- 7 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES
The Company files a separate U.S. federal income tax return for its
domestic operations and a UK income tax return for its foreign operations. The
United Kingdom subsidiaries compute taxes at rates in effect in that country and
become payable when assessed by the Inland Revenue. Deferred federal income
taxes are not provided on the undistributed earnings of its foreign subsidiaries
to the extent the Company intends to permanently reinvest such earnings in the
United Kingdom.
The Company has provided income tax for the nine months ended
October 31, 1998 of $2.2 million on the profits of its operations, and for
the nine months to October 31, 1997 $0.9 million.
NOTE 6 - COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which establishes standards for the
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income-(loss) generally encompasses
all changes in shareholders' equity (except those arising from transactions with
owners) and includes net income/(loss), net unrealized capital gains or losses
on available for sale securities and foreign currency translation adjustments.
The Company's comprehensive income was $2,147,507 and $3,968,758 for the nine
months ended October 31, 1997 and 1998, respectively.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading provider of information technology solutions,
which consist of specialized computer services and complementary products
primarily to blue chip corporations and government authorities in the United
Kingdom and, to a growing extent, in Continental Europe. The Company's solution
include hardware maintenance, help desk support, network services, specialized
software services and products and the supply of high-end storage systems.
The Company has grown rapidly due, in large part, to acquisitions. K2
Systems Plc, Xanadu Systems Ltd ("Xanadu"), and CI Support Limited, were
acquired in fiscal 1995, Compass Computer Group ("Compass") was acquired in
fiscal 1996, Hammer Distribution Limited ("Hammer") and Datapro Computers Group
Limited ("Datapro") were acquired in fiscal 1997 and Firstpoint Limited
("Firstpoint") and Eurosystems France S.A. ("Eurosystems") were acquired in
fiscal 1998. In the third quarter of fiscal 1999, the Company acquired the 100%
of Memorex Telex Italy ("Memorex") from its then shareholders and Decision
Systems ("Decision Systems") in France from the official receivers in France.
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.
Because of the effect upon the Company's results of operations for the
year ended January 31, 1998 of acquisitions made during that period and the
current fiscal year, direct comparison of the Company's results of operations
for the periods ended October 31, 1997 and October 31, 1998 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.
Results of Operations
Three months ended October 31, 1998 compared with the three months ended
October 31, 1997
Revenues
Revenues for the three months ended October 31, 1998 were $37.6
million, an increase of $16.2 million, or approximately 75.6% compared to $21.4
million for the three months ended October 31, 1997. This growth came from the
acquisitions of Eurosystems, Decision Systems and Memorex and from organic
growth of the services and products businesses. Revenues from services were
$23.0 million, or 61.0% of the total revenue, with revenues from the supply of
products at $14.6 million, or 39.0% of the total revenues. In the comparable
period of the prior year, Service revenues were 60.4% of the total revenues and
Products revenues were 39.6 % of total revenues.
Gross Profit
Gross profit for the three months ended October 31, 1998 was $14.9
million, an increase of $7.0 million, or 88.4% compared to $7.9 million for the
three months ended October 31, 1997. This growth came from the acquisitions of
Eurosystems, Decision Systems and Memorex and from organic growth of the
services and products businesses. Gross margin increased from 36.9% for the
three months ended October 31, 1997 to 39.6% for the three months ended
October 31, 1998. Gross profit for services increased 99.0% from $6.3 million
for the three months ended October 31, 1997 to $12.6 million for the three
months ended October 31, 1998. Gross profit for products increased 47.8% from
$1.6 million for the three months ended October 31, 1997 to $2.3 million for
the three months to October 31, 1998.
- 9 -
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses were $11.6 million, an
increase of $5.5 million, or 91.2% compared to $6.1 million for the three months
ended October 31, 1997. As a percentage of revenues, selling, general and
administrative expenses increased to 30.7% from 28.2% for the three months ended
October 31, 1998. Selling general and administrative expenses increased
primarily as a result of a growth in infrastructure necessary to support the
expansion of the Company's businesses.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended
October 31, 1998 was $950,000, an increase of $380,000, or 66.7% compared to
$570,000 for the three months ended October 31, 1997. This increase arose
principally from the acquisitions of Firstpoint acquired in September 1997,
Decision Systems and Memorex both acquired in the quarter to October 31, 1998.
Depreciation was $411,000, an increase of $160,000 or 63.7%, from $251,000 for
the prior period. Amortization of goodwill from acquisitions was $538,000, an
increase of $221,000, or 69.7%, from $317,000 for the prior period. An
amortization period of between ten and fifteen years is utilized with respect to
acquisitions.
Income (Loss) Before Interest Income and Expense and Income Taxes
Income before interest expense and income taxes ("IBIT") for the three
months ended October 31, 1998 was $2.4 million, an increase of $1.1 million, or
85.0%, as compared to $1.3 million for the three months ended October 31, 1997.
As a percentage of revenues, income before interest expense and income taxes
increased to 6.4% in the three months ended October 31, 1998 as compared to 6.0%
for the three months ended October 31, 1997.
IBIT before depreciation and amortization ("IBITDA") increased for the
three months ended October 31, 1998 to $3.3 million from $1.9 million for the
three months ended October 31, 1997 an increase of $1.48 million or 125.7%. As a
percentage of revenues, IBITDA increased to 8.9% for the three month period
ended October 31, 1998 from 8.7% for the comparable period ended October 31,
1997.
Interest
Interest expense for the three months ended October 31, 1998 was
$186,000, a decrease of $58,000 or 23.8% compared to $244,000 for the three
months ended October 31, 1997, arising from lower utilization of bank lines of
credit during the period. Interest income increased from $47,000 for the three
months ended October 31, 1997 to $351,000 an increase of $304,000, arising from
higher cash balances on hand during the quarter.
Nine months ended October 31, 1998 compared with the nine months ended
October 31, 1997
Revenues
Revenues for the nine months ended October 31, 1998 were $91.8 million,
an increase of $32.9 million, or approximately 55.9% compared to $58.9 million
for the nine months ended October 31, 1997, this growth came from the
acquisitions of Eurosystems, Decision Systems and Memorex and the remainder from
organic growth of the services and products businesses. Revenues from services
were $56.1 million, or 61.1% of the total revenue, with revenues from the supply
of products at $35.7 million, or 38.9% of the total revenues. In the comparable
period of the prior year, Service revenues were 50.0% of the total revenues and
supply of products were 50.0% of the total revenues.
- 10 -
<PAGE>
Gross Profit
Gross profit for the nine months ended October 31, 1998 was $36.3
million, an increase of $16.7 million, or 85.0% compared to $19.6 million for
the nine months ended October 31, 1997, this growth came from the acquisitions
of Eurosystems, Decision Systems and Memorex and from organic growth of the
services and products businesses. Gross margin increased from 33.3% for the nine
months ended October 31, 1997 to 39.5% for the nine months ended October 31,
1998. Gross profit for services increased 103.9% from $14.9 million for the nine
months ended October 31, 1997 to $30.4 million for the nine months to
October 31, 1998. Gross profit for products increased 25.2% from $4.7 million
for the nine months ended October 31, 1997 to $5.9 million for the nine months
ended October 31, 1998.
Selling, General and Administrative
Selling, general and administrative expenses were $27.6 million, an
increase of $12.5 million, or 83.2% compared to $15.1 million for the nine
months ended October 31, 1997. As a percentage of revenues, selling, general and
administrative expenses increased to 30.1% from 25.6% in the nine months ended
October 31, 1997. Selling general and administrative expenses increased
primarily as a result of the acquisition of Firstpoint, Eurosystems, Decision
Systems and Memorex.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended October
31, 1998 was $2.4 million, an increase of $1.0 million, or 67.1% compared to
$1.4 million for the nine months ended October 31, 1997. This increase arose
principally from the acquisitions of Firstpoint, Eurosystems, Decision Systems
and Memorex. Depreciation was $997,000, an increase of $328,000 or 49.0%, from
$669,000 for the prior period. Amortization of goodwill from acquisitions was
$1.4 million, an increase of $630,000, or 83.1%, from $758,000 for the
comparable period. An amortization period of ten years is utilized with respect
to acquisitions.
Income Before Interest Expense and Income Taxes
Income before interest expense and income taxes ("IBIT") for the nine
months ended October 31, 1998 was $6.2 million, a increase of $3.1 million, or
102.4%, as compared to $3.1 million for the nine months ended October 31, 1997,
the majority of this growth came from the acquisitions of Firstpoint,
Eurosystems, Decision Systems and Memorex and the remainder from organic growth
of the services business. As a percentage of revenues, IBIT increased to 6.8% in
the nine months ended October 31, 1998 as compared to 5.2% for the nine months
ended October 31, 1997.
IBIT before depreciation and amortization increased for the nine months
ended October 31, 1998 to $8.6 million from $4.5 million for the nine months
ended October 31, 1997 an increase of $4.1 million or 91.2%, the majority of
this growth came from the acquisitions of Firstpoint, Eurosystems, Decision
Systems and Memorex and the remainder from organic growth of the services
business. As a percentage of revenues, IBITDA increased to 9.4% for the nine
month period ended October 31, 1998 from 7.7% for the comparable period ended
October 31, 1997.
Interest
Interest expense for the nine months ended October 31, 1998 was
$605,000, an increase of $150,000 or 33.0% compared to $455,000 for the nine
months ended October 31, 1997, arising from higher utilization of bank lines of
credit during the period. Interest income increased from $209,000 for the nine
months ended October 31, 1997 to $527,000 due to the increased cash on hand
resulting from the Company's offering in July 1998.
- 11 -
<PAGE>
Liquidity and Capital Resources
On July 2, 1998, the Company completed a secondary public offering (the
"Offering") of 3,425,000 shares of the Company's Common Stock, including
2,955,292 shares which were sold by the Company, at a price of $11.00 per share.
As a result of this offering the Company raised net proceeds of $31.3 million.
As of October 31, 1998, the Company had lines of credit with UK,
French, Belgian and Italian banks in the aggregate amount of (pound)7.6 million
($12.8 million). As of October 31, 1998, these facilities were not utilized by
the Company. The Company repaid $2.3 million of utilized funding during the nine
months ended October 31, 1998 from proceeds from the Offering.
The outstanding credit facilities are secured by the assets of the
Company and are periodically reviewed by the issuing institution. Management
expects to be able to maintain these credit arrangements for the foreseeable
future, although no assurance can be given.
The Company maintains a facility with a UK factoring company, pursuant
to which it borrows against eligible trade receivables. The Company pays the
factoring company an administrative fee of 0.075% of eligible trade receivables
and interest of 9% per annum. At October 31, 1998, $4.2 million under this
agreement was outstanding.
Outstanding advances from stockholders are shown on the Company's
balance sheet as stockholder advances. Outstanding advances as of October 31,
1998 were $18,000. These outstanding advances do not bear interest, and are
payable on demand.
The Company's working capital increased from $1.0 million at
January 31, 1998 to $28.4 million at October 31, 1998. This increase arose
principally from the funds from the Offering, together with the cash received
from exercises of options.
Net cash used by operating activities during the nine months ended
October 31, 1998 was $3.6 million, which reflected the net effect of an increase
in net accounts payable, accrued liabilities, inventories and deferred revenues.
The majority of this utilisation comes from the injection of working capital
into the newly acquired business of Memorex Telex in Italy and Decision Systems
in France where large injection of cash funds were made in keeping with the
Company's acquisition strategy. Net cash used by investing activities was $4.5
million, for the nine months ended October 31, 1998, primarily reflecting cash
used for the purchase of equipment and the acquisitions of Decision Systems and
Memorex. Net cash provided by financing activities was $30.2 million for the
nine months ended October 31, 1998, resulting primarily from decrease of bank
lines of credit and payments of outstanding obligations and the receipts from
the Offering and stock options which were exercised during the period.
The Company believes that the net cash flows from operations and
borrowing availability under its credit facilities and net cash proceeds of the
Company's recent offering, 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.
- 12 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Change In Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27
(b) Reports on Form 8-K
Not Applicable
- 13 -
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
December 2, 1998 4FRONT TECHNOLOGIES, INC.
By: /s/ Stephen McDonnell
-------------------------
Stephen McDonnell
Chief Financial Officer
- 14 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED OCTOBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 26786000
<SECURITIES> 0
<RECEIVABLES> 37287000
<ALLOWANCES> 573000
<INVENTORY> 18569000
<CURRENT-ASSETS> 86363000
<PP&E> 8431000
<DEPRECIATION> 4617000
<TOTAL-ASSETS> 115867000
<CURRENT-LIABILITIES> 57998000
<BONDS> 0
0
0
<COMMON> 56572000
<OTHER-SE> 686000
<TOTAL-LIABILITY-AND-EQUITY> 115867000
<SALES> 91765000
<TOTAL-REVENUES> 91765000
<CGS> 55509000
<TOTAL-COSTS> 55509000
<OTHER-EXPENSES> 29773000
<LOSS-PROVISION> 240000
<INTEREST-EXPENSE> 605000
<INCOME-PRETAX> 6165000
<INCOME-TAX> 2219000
<INCOME-CONTINUING> 3946000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3946000
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.39
</TABLE>
