<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE [1]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
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.)
6300 South Syracuse Way, Suite 293
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 August 28, 1999 was 10,859,093 shares of Common Stock, $.001 par value.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
SIX AND THREE MONTH PERIODS ENDED JULY 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 1999
and July 31, 1999 (unaudited) 1
Condensed Consolidated Statements of Operations for the six and three
month periods ended July 31, 1998 and 1999
(unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the six months ended July 31, 1999 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income
(loss) for the six and three months periods ended July 31, 1998
and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six and three
month periods ended July 31, 1998 and 1999
(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, JULY 31,
1999 1999
-------- --------
$ '000'S $ '000'S
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 26,162 $ 23,271
Accounts receivable, net of allowance
for doubtful accounts of $642,000 and
$724,000 respectively 54,910 62,309
Deposits 51 51
Inventories 23,840 33,440
Prepaid expenses 4,130 7,087
Income taxes receivable 16 16
Other current assets 487 338
-------- --------
Total current assets 109,596 126,512
PROPERTY AND EQUIPMENT, net 5,899 9,058
INTANGIBLE ASSETS, net 26,573 28,657
DEFERRED INCOME TAX 3,354 2,219
SOFTWARE DEVELOPMENT COSTS 757 521
OTHER ASSETS 93 7
-------- --------
TOTAL ASSETS $146,272 $166,974
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1999 1999
--------- ---------
$ '000'S $ '000'S
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 37,384 $ 52,249
Accrued liabilities 16,734 18,167
Stockholder advances 23 23
Lines of credit-bank 5,180 6,785
Notes payable 5,393 5,891
Capital lease obligations, current portion 608 573
Income taxes payable 2,159 4,863
Deferred revenue 19,334 13,675
--------- ---------
Total current liabilities 86,815 102,226
CAPITAL LEASE OBLIGATIONS, less current
portion 780 860
--------- ---------
TOTAL LIABILITIES 87,595 103,086
--------- ---------
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 10,628,067 and 10,837,090
shares issued and outstanding, respectively 11 11
Additional paid-in capital 56,123 57,382
Accumulated reserves 2,668 6,703
Cumulative foreign currency translation adjustment (125) (208)
--------- ---------
Total stockholders' equity 58,677 63,888
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 146,272 $ 166,974
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31, 1998 JULY 31, 1999
--------- --------- --------- ---------
$ '000'S $ '000'S $ '000'S $ '000'S
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Services $ 16,677 $ 39,166 $ 33,114 $ 77,595
Products 10,738 19,150 21,005 38,047
--------- --------- --------- ---------
27,415 58,316 54,119 115,642
--------- --------- --------- ---------
Cost of Services 7,671 18,659 15,300 37,145
Cost of Products 8,920 16,584 17,454 32,826
--------- --------- --------- ---------
16,591 35,243 32,754 69,971
--------- --------- --------- ---------
GROSS PROFIT
Services 9,006 20,507 17,814 40,450
Products 1,818 2,566 3,551 5,221
--------- --------- --------- ---------
10,824 23,073 21,365 45,671
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative expenses 8,074 18,249 16,078 36,273
Depreciation 292 404 586 838
Amortization 428 798 850 1,558
--------- --------- --------- ---------
Total operating expenses 8,794 19,451 17,514 38,669
--------- --------- --------- ---------
INCOME BEFORE INTEREST, INCOME
TAXES: 2,030 3,622 3,851 7,002
Interest income 108 220 176 484
Interest expense (210) (246) (419) (468)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES: 1,928 3,596 3,608 7,018
INCOME TAXES 693 1,546 1,281 2,983
--------- --------- --------- ---------
NET INCOME $ 1,235 $ 2,050 $ 2,327 $ 4,035
--------- --------- --------- ---------
NET INCOME PER COMMON SHARE (BASIC) $ 0.15 $ 0.19 $ 0.30 $ 0.38
NET INCOME PER COMMON SHARE (DILUTED) $ 0.12 $ 0.17 $ 0.25 $ 0.34
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Comprehensive
------------------------------- Accumulated Income
Shares Amount Reserves (Deficit) Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1999 10,628,067 $ 56,134,228 $ 2,668,256 $ (125,070) $ 58,677,414
Net income for
period (unaudited) -- -- 1,985,092 -- 1,985,092
Share options exercised 99,940 404,976 -- -- 404,976
Other comprehensive Income (loss) -- -- -- (20,519) (20,519)
------------ ------------ ------------ ------------ ------------
Balance, April 30, 1999 10,728,007 56,539,204 4,653,348 (145,589) 61,046,963
(unaudited) ------------ ------------ ------------ ------------ ------------
Net income for
period (unaudited) -- -- 2,049,819 -- 2,049,819
Share options exercised 49,083 242,263 -- -- 242,263
Shares issued to acquire SIL 60,000 611,250 -- -- 611,250
Other comprehensive Income (loss) -- -- -- (62,646) (62,646)
------------ ------------ ------------ ------------ ------------
BALANCE, JULY 31, 1999 10,837,090 $ 57,392,717 $ 6,703,167 $ (208,235) $ 63,887,649
(UNAUDITED) ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31, 1998 JULY 31, 1999
------------- ------------- ------------- -------------
$ '000'S $ '000'S $ '000'S $ '000'S
<S> <C> <C> <C> <C>
Net income $ 1,092 $ 2,050 $ 2,327 $ 4,035
Foreign currency translation adjustment (78) (63) (136) (83)
------- ------- ------- -------
Comprehensive income $ 1,014 $ 1,987 $ 2,191 $ 3,952
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31,1998 JULY 31, 1999
------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,235 $ 2,050 $ 2,327 $ 4,035
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 292 404 586 838
Amortization 428 798 850 1,558
Loss (gain) on disposal of fixed assets 28 (72) 20 (93)
Decrease in deferred income tax 374 572 697 1,135
(Increase) decrease in accounts receivable 1,443 (4,349) (650) (3,161)
(Increase) in inventories (1,017) (3,254) (2,235) (8,803)
(Increase) in prepaid expenses (156) (1,561) (307) (1,880)
Increase in income taxes 353 1,090 595 2,136
(Increase) decrease in other current assets 17 (41) (123) 149
(Decrease) increase in accounts payable (797) 8,989 (294) 9,997
(Decrease) in accrued liabilities (487) (351) (211) (25)
(Decrease) in deferred revenue (1,196) (2,745) (1,651) (5,659)
-------- -------- -------- --------
Net cash provided (used) by operating activities 517 1,530 (396) 227
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (230) (604) (631) (1,965)
Proceeds from disposal of equipment 40 76 48 107
Acquisition of subsidiaries (367) (2,772) (936) (3,247)
Capitalization of software development costs -- (30) -- (135)
(Increase) decrease in other assets 2 -- 16 86
-------- -------- -------- --------
Net cash used by investing activities (555) (3,330) (1,503) (5,154)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in lines of credit-bank (3,762) 1,070 (2,309) 1,605
Increase in notes payable -- 953 -- 953
Repayment of notes payable (374) -- (379) (455)
Payments of capital lease obligations (175) (322) (317) (632)
Net proceeds from issuance of common stock 29,232 -- 29,232 --
Net proceeds from exercise of warrants/options 2,062 243 2,462 648
-------- -------- -------- --------
Net cash from financing activities 26,983 1,944 28,689 2,119
-------- -------- -------- --------
Effect of exchange rate changes on cash (58) (63) (136) (83)
-------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH 26,887 81 26,654 (2,891)
Cash at beginning of period 4,353 23,190 4,586 26,162
-------- -------- -------- --------
Cash at end of period $ 31,240 $ 23,271 $ 31,240 $ 23,271
-------- -------- -------- --------
-------- -------- -------- --------
Cash paid for interest expense $ 210 $ 220 $ 419 $ 484
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<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 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 six months ended July 31, 1999 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, 1999.
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<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31,1998 JULY 31, 1999
------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income $ 1,235,273 $ 2,049,819 $ 2,327,391 $ 4,034,911
----------- ------------ ----------- ------------
Weighted Average Number of Common Shares
outstanding 8,248,129 10,781,746 7,650,276 10,723,744
----------- ------------ ----------- ------------
Net income per Common Share Basic $ 0.15 $ 0.19 $ 0.30 $ 0.38
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
DILUTED EARNINGS PER SHARE
Net income $ 1,235,273 $ 2,049,819 $ 2,327,391 $ 4,034,911
----------- ------------ ----------- ------------
Weighted Average Number of Common Shares
outstanding 8,248,129 10,781,746 7,650,276 10,723,744
Additional Shares to be Issued upon Assumed
Exercise of Options and Warrants 3,113,305 3,207,682 3,113,305 3,207,682
Shares Hypothetically Repurchased at the Average
Market Price with the Proceeds of Exercise (1,451,099) (1,970,098) (1,561,427) (1,988,781)
----------- ------------ ----------- ------------
Adjusted Shares for Dilution 9,910,335 12,019,330 9,202,154 11,942,645
----------- ------------ ----------- ------------
Net income per Common Share Diluted $ 0.12 $ 0.17 $ 0.25 $ 0.34
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: JANUARY 31, 1999 JULY 31, 1999
---------------- -------------
(UNAUDITED)
<S> <C> <C>
Computer hardware $23,678 $33,269
Computer software 7 10
Work in progress 155 161
------- -------
$23,840 $33,440
------- -------
------- -------
</TABLE>
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<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 local income tax return for its foreign operations.
The foreign subsidiaries compute taxes at rates in effect in that country and
become payable when assessed by the Inland Revenue. Deferred federal income
taxes are not provided on the undistributed earnings of its foreign subsidiaries
to the extent the Company intends to permanently reinvest such earnings in the
United Kingdom.
The Company has provided income tax for the six months ended July 31,
1999 of $2.98 million on the profits of its operations, and for the six months
to July 31, 1998 $1.28 million.
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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.
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. Decision
Systems ("DS"), Memorex Telex Italia ("Memorex"), Penagen Training Ltd
("Penagen") and I-NEA S.A. ("I-NEA") were acquired in fiscal 1999. On July 28,
1999, the Company entered into an agreement to acquire the SIL ("SIL") group of
companies. 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. As used
herein, references to a "fiscal year" refer to January 31 of such year. For
example, fiscal 1999 refers to the year ended January 31, 1999.
Because of the effect upon the Company's results of operations for the
year ended January 31, 1999 of acquisitions made during that period, direct
comparison of the Company's results of operations for the periods ended July 31,
1998 and July 31, 1999 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 JULY 31, 1999 COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1998
REVENUES
Revenues for the three months ended July 31, 1999 were $58.3 million,
an increase of $30.9 million, or approximately 112.8% compared to $27.4 million
for the three months ended July 31, 1998. This growth arose principally from the
acquisitions of Decision Systems, Memorex, Penagen and I-NEA and from organic
growth of the services business. Revenues from services were $39.2 million, or
67.2% of the total revenue, with revenues from the supply of products at $19.2
million, or 32.8% of the total revenues. In the comparable period of the prior
year, Service revenues were 60.8% of the total revenues and Products revenues
were 39.2% of total revenues.
GROSS PROFIT
Gross profit for the three months ended July 31, 1999 was $23.1
million, an increase of $12.3 million, or 113.9% compared to $10.8 million for
the three months ended July 31, 1998. This growth arose principally from the
acquisitions of Decision Systems, Memorex, Penagen and I-NEA and from organic
growth of the services business. Gross margin increased from 39.5% for the three
months ended July 31, 1998 to 39.6% for the three months ended July 31, 1999.
Gross profit for services increased 127.7% from $9.0 million for the three
months ended July 31, 1998 to $20.5 million for the three months ended July 31,
1999. Gross profit for products increased 41.1% from $1.8 million for the three
months ended July 31, 1998 to $2.6 million for the three months to July 31,
1999.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $18.2 million, an
increase of $10.1 million, or 124.7% compared to $8.1 million for the three
months ended July 31, 1998. As a percentage of revenues, selling, general and
administrative expenses increased to 31.3% from 29.5% in the three months ended
July 31, 1999. 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 July
31, 1999 was $1.2 million, an increase of $482,000, or 66.9% compared to
$720,000 for the three months ended July 31, 1998. This increase arose
principally from the acquisitions of Decision Systems, Memorex, Penagen and
I-NEA in fiscal 1999. Depreciation was $404,000, an increase of $112,000 or
38.4%, from $292,000 for the prior period. Amortization of goodwill from
acquisitions was $798,000, an increase of $370,000, or 86.5%, from $428,000 for
the prior period. An amortization period of between ten and fifteen years is
utilized with respect to acquisitions.
EARNINGS BEFORE INTEREST AND INCOME TAXES
Earnings before interest and income taxes ("EBIT") for the three months
ended July 31, 1999 was $3.6 million, an increase of $1.6 million, or 78.4%, as
compared to $2.0 million for the three months ended July 31, 1998. As a
percentage of revenues, income before interest expense and income taxes
decreased to 6.2% in the three months ended July 31, 1999 as compared to 7.4%
for the three months ended July 31, 1998.
EBIT before depreciation and amortization ("EBITDA") increased for the
three months ended July 31, 1999 to $4.82 million from $2.75 million for the
three months ended July 31, 1998, an increase of $2.07 million or 75.3%. As a
percentage of revenues, EBITDA decreased to 8.3% for the three month period
ended July 31, 1999 from 10.0% for the comparable period ended July 31, 1998.
INTEREST
Interest expense for the three months ended July 31, 1999 was $246,000,
an increase of $36,000 or 17% compared to $210,000 for the three months ended
July 31, 1998, arising from higher utilization of bank lines of credit during
the period. Interest income increased from $108,000 for the three months ended
July 31, 1998 to $220,000 an increase of $112,000, arising from higher cash
balances on hand during the quarter.
SIX MONTHS ENDED JULY 31, 1999 COMPARED WITH THE SIX MONTHS ENDED JULY 31, 1998
REVENUES
Revenues for the six months ended July 31, 1999 were $115.6 million, an
increase of $61.5 million, or approximately 113.7% compared to $54.1 million for
the six months ended July 31, 1998. This increase arose principally from the
acquisitions of Decision Systems, Memorex, Penagen and I-NEA in 1998. Revenues
from services were $77.6 million, or 67.1% of the total revenue, with revenues
from the supply of products at $38.0 million, or 32.9% of the total revenues. In
the comparable period of the prior year, Service revenues were 61.1% of the
total revenues and supply of products were 38.9% of the total revenues.
- 10 -
<PAGE>
GROSS PROFIT
Gross profit for the six months ended July 31, 1999 was $45.7 million,
an increase of $24.3 million, or 113.7% compared to $21.4 million for the six
months ended July 31, 1998. This increase arose principally from the
acquisitions of Decision Systems, Memorex, Penagen and I-NEA in fiscal 1999.
Gross margin remained unchanged at 39.5% for the six months ended July 31, 1999
and 1998. Gross profit for services increased 127.5% from $17.8 million for the
six months ended July 31, 1998 to $40.5 million for the six months to July 31,
1999. Gross profit for products increased 47.0% from $3.6 million for the six
months ended July 31, 1998 to $5.2 million for the six months ended July 31,
1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $36.2 million, an
increase of $20.1 million, or 124.8% compared to $16.1 million for the six
months ended July 31, 1998. As a percentage of revenues, selling, general and
administrative expenses increased to 31.4% from 29.7% in the six months ended
July 31, 1998. Selling general and administrative expenses increased primarily
as a result of the acquisitions of Decision Systems, Memorex, Penagen and I-NEA
in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the six months ended July 31,
1999 was $2.4 million, an increase of $1.0 million or 71.4% compared to $1.4
million for the six months ended July 31, 1998. This increase arose principally
from the acquisitions of Decision Systems, Memorex, Penagen and I-NEA in fiscal
1999. Depreciation was $838,000, an increase of $252,000 or 43.0%, from $586,000
for the prior period. Amortization of goodwill from acquisitions was $1,558,000,
an increase of $708,000, or 83.3%, from $850,000 for the comparable period. An
amortization period of between five and fifteen years is utilized with respect
to acquisitions.
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
Earnings before interest expense and income taxes ("EBIT") for the six
months ended July 31, 1999 was $7.0 million, a increase of $3.2 million, or
81.8%, as compared to $3.9 million for the six months ended July 31, 1998. This
increase arose principally from the acquisitions of Decision Systems, Memorex,
Penagen and I-NEA in fiscal 1999. As a percentage of revenues, EBIT decreased to
6.1% in the six months ended July 31, 1999 as compared to 7.1% for the six
months ended July 31, 1998.
EBIT before depreciation and amortization increased for the six months
ended July 31, 1999 to $9.4 million from $5.3 million for the six months ended
July 31, 1998 an increase of $4.1 million or 77.4%. This increase arose
principally from the acquisitions of Decision Systems, Memorex, Penagen and
I-NEA in 1998. As a percentage of revenues, EBITDA decreased to 8.1% for the six
month period ended July 31, 1999 from 9.8% for the comparable period ended July
31, 1998.
INTEREST
Interest expense for the six months ended July 31, 1999 was $468,000,
an increase of $49,000 or 1.7% compared to $419,000 for the six months ended
July 31, 1998, arising from higher utilization of bank lines of credit during
the period. Interest income increased from $176,000 for the six months ended
July 31, 1998 to $484,000 arising from higher cash balances on hand during the
period.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From inception until June 1996, the Company's sources of capital had
been cash flows from operations, private placements of securities, primarily
from its controlling stockholders and related parties, and borrowings from
banks. On June 19, 1996, the Company completed a public offering (the
"Offering") of 3,000,000 shares of the Company's Common Stock at a price of
$5.75 per share. On July 2, 1998, the Company completed a secondary public
offering through a further sale of 2.9 million shares of Common Stock. As a
result of this offering, the Company raised net proceeds of $31.0 million.
As of July 31, 1999, the Company had lines of credit with UK, French,
Italian and Belgian banks in the aggregate amount of L15 million ($24 million).
As of July 31, 1999 $6.8 million was outstanding.
The outstanding credit facilities are secured by the assets of the
Company and are periodically reviewed by the issuing institution. Management
expects to be able to maintain these credit arrangements for the foreseeable
future, although no assurance can be given.
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 July 31, 1999, $5.9 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 July 31, 1999
were $23,000. These outstanding advances do not bear interest, and are payable
on demand.
The Company's working capital increased from $22.8 million surplus at
January 31, 1999 to a surplus of $24.3 million at July 31, 1999.
Net cash provided by operating activities during the six months ended
July 31, 1999 was $0.2 million, which reflected the net effect of an increase in
net accounts payable, accounts receivable, and inventories and a decrease in
deferred revenues. Net cash used by investing activities was $5.1 million, for
the three months ended July 31, 1999, primarily reflecting cash used for the
purchase of equipment and the acquisition of SIL. Net cash provided by financing
activities was $2.1 million for the six months ended July 31, 1999, resulting
primarily from increase of bank lines of credit and payments of outstanding
obligations and the receipts from 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, 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.
September 2, 1999 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 COMPANYS
FORM 10Q FOR THE QUARTER ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 23271000
<SECURITIES> 0
<RECEIVABLES> 63033000
<ALLOWANCES> 724000
<INVENTORY> 33440000
<CURRENT-ASSETS> 126512000
<PP&E> 11706000
<DEPRECIATION> 2648000
<TOTAL-ASSETS> 166974000
<CURRENT-LIABILITIES> 102226000
<BONDS> 0
0
0
<COMMON> 57393000
<OTHER-SE> 6495000
<TOTAL-LIABILITY-AND-EQUITY> 166974000
<SALES> 115642000
<TOTAL-REVENUES> 115642000
<CGS> 69971000
<TOTAL-COSTS> 69971000
<OTHER-EXPENSES> 38096000
<LOSS-PROVISION> 105000
<INTEREST-EXPENSE> 484000
<INCOME-PRETAX> 7018000
<INCOME-TAX> 2983000
<INCOME-CONTINUING> 4035000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4035000
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.34
</TABLE>
