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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM______________ TO ______________
Commission File Number 0-8345
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4FRONT TECHNOLOGIES, INC.
[LOGO]
(Exact name of registrant as specified in its charter)
DELAWARE 84-0675510
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6300 SOUTH SYRACUSE WAY, SUITE 293
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 721 7341
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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 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. / /
As of April 27, 1999, the registrant had 10,708,483 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
nonaffiliates as of April 27, 1999, was approximately $89,787,000 as of the
close of business on that date.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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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 REFER TO THE TWELVE
MONTH PERIOD ENDING ON JANUARY 31 OF THAT YEAR. THEREFORE, FISCAL 1999 REFERS TO
THE TWELVE MONTH PERIOD ENDING JANUARY 31, 1999.
4Front Technologies, Inc., ("4Front" or "the Company") is a leading European
provider of information technology ("IT") and outsourcing solutions, which
consist of a range of specialized computer services and complementary products,
primarily to blue chip corporations and government authorities in the United
Kingdom ("UK") and in Continental Europe. 4Front's services and solutions
include hardware maintenance, help desk support, training, network services,
specialized software solutions and the supply of high-end storage systems.
4Front's customers include British Petroleum, British Telecom, Telecom Italia,
Computer Sciences Corporation, Dupont, IBM, Cegedim, Renault, Energis, Pfizer,
Cariplo, JP Morgan and the UK Ministry of Defence.
The Company's revenues have grown from approximately $11.2 million in fiscal
1995 to over $148 million in fiscal 1999, principally through strategic
acquisitions that have furthered the expansion of its existing operations,
complemented by organic growth. During that period, pre-tax income increased
from $645,000 to $9.4 million.
Accelerating technological advancement, migration of organizations toward
multivendor distributed networks, and increased globalization of corporate
activity 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, together with increasing
skill shortages within the IT industry, have led them increasingly to rely upon
specialist outsourcing service organizations such as the Company to support the
development and maintenance of their IT systems.
The UK computer services market, the fastest growing in Europe, is currently
estimated at $22 billion annually, according to the 1999 Holway Report on
Software and Computing Services in Europe (the "Holway Report"). The UK market
grew by an estimated 24% in 1998. The Western European computer services market
is currently estimated at $110 billion, according to the Holway Report. This
market grew by an estimated 13% between 1998 and 1999. Both the UK and the
Western European computer services markets remain highly fragmented, with no
single company serving more than 6% of the respective markets.
The Company's objective is to leverage its existing position in the UK and
Continental Europe to become one of the major independent providers of IT and
outsourcing solutions in Europe. The key elements of the Company's strategy are
to (i) leverage and promote the "4Front" brand, (ii) increase client
penetration, (iii) further expand the range of services and products offered,
(iv) continue to build and expand the Company's market position in the UK and
Continental Europe and (v) pursue strategic acquisitions and alliances.
OVERVIEW OF THE UK AND EUROPEAN INFORMATION TECHNOLOGY MARKET
Historically, large UK and European organizations satisfied IT requirements
through mainframe or stand-alone midrange systems utilizing hardware and
software produced by a single original equipment manufacturer ("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, developments over recent years have resulted
in a movement by many organizations away from this traditional reliance on OEMs
and in-house technical support staff towards outsourced solutions
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provided by independent suppliers of multivendor computer hardware maintenance
and technology support services.
European computing environments have become increasingly complex primarily
as a result of the migration of large organizations from centralized computing
environments characterized by single vendor 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 introduction of the Euro, E-Commerce and the problems posed by the
need for Year 2000 compliance, are further factors which add to this growing
complexity.
As a result of these factors, organizations are increasingly turning towards
outsourced IT solutions. Historically, some customers sought the help of OEMs to
address their computer service needs. The Company believes that customers are
now reluctant to outsource computer services directly to OEMs, which may be
perceived as favoring the OEMs' respective product lines. In addition, the
complexity and customization of mission critical corporate computing systems
typically exceed the expertise of most horizontal integrators and value added
resellers ("VARs").
As a result, business and government organizations are increasingly looking
to third-party vendors employing skilled IT professionals to develop, install
and manage complex customized information and communication systems and to
provide applications software and comprehensive solutions for 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. In addition, the personal computer market is growing
rapidly throughout Europe and home computer users are increasingly looking for
sources of support and advice.
THE 4FRONT SOLUTION
The Company is a leading provider of a wide range of IT and outsourcing
solutions and services and complementary products which are not typically
offered together by most VARs and horizontal distributors. 4Front's solutions
include hardware maintenance, help desk support, training, network services,
specialized software services and products and the supply of high-end storage
systems. In addition, because it is independent, 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, innovation and "best of breed"
products in order to design and implement customized IT solutions.
The Company reviews its service and product offerings on a continuous basis
in order to ensure that it is able to provide the most advanced and
cost-effective solutions. The services and products offered by the Company are
designed primarily to enhance the effectiveness of, rather than replace,
in-house MIS departments, thereby creating a partnership approach and an
incentive to utilize the services and products of the Company. The partnership
principle is a key aspect of the Company's working relationship with its
customers.
SERVICE AND PRODUCTS
4Front is a leading provider of IT and outsourcing solutions, which consist
of a range of specialized computer services and complementary products,
primarily to blue chip corporations and government authorities in the UK and in
Continental Europe. Although the Company's solutions support a broad range of
computing environments, the Company's main area of focus is the network and
distributed
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computing market. The Company customizes its solutions to meet its clients'
needs. The services and products that the Company provides are as follows:
<TABLE>
<CAPTION>
STORAGE
HARDWARE HELP DESK MANAGED NETWORK SOFTWARE SYSTEMS AND
MAINTENANCE SERVICES SERVICES SERVICES SOLUTIONS PRODUCTS
- ------------------- ------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
- - Repair Services - Software Support - Consulting/Project - Design - Financial - Mass Storage
- Client Server Management Packages - Disk
- Desktop - Network Support - LAN and Server - Custom
Computers - Software Upgrade/ Implementation - Customized - RAID
- Storage Systems - Internet Support Integration Solutions - Tape
- Peripherals Integration
- Network Devices - Intranet Support - Asset Management - Project Costing - Build to Order
- Point of Sale - Storage Software PCs and Storage
Equipment - Corporate - Education Management
Services
- On-site - E-Commerce &
- - On-site - Remote - Install/Roll Out - Remote Internet
Engineering Management Sourcing
- Retail - Business
Continuity/
Disaster
Recovery
</TABLE>
HARDWARE MAINTENANCE
The Company is the fourth largest independent hardware maintenance company
in the UK, the second largest in France and is in the top ten in both Italy and
Belgium. 4Front provides full on-site multivendor maintenance and support
services through a team of field service engineers supported by technical repair
specialists. The Company's maintenance services focus primarily on the server,
desktop and EPOS (Electronic Point of Sale) markets. Unlike most in-house IT
departments, 4Front can service mission critical installations by providing
guaranteed response times and 24 hours a day support, 7 days a week. Services
are co-ordinated from national call centers in London, Paris, Milan and
Brussels.
4Front is ISO 9002 certified and supports the majority of the industry
leading hardware platforms including IBM, Compaq, Siemens, Sun, Hewlett-Packard,
Dell, as well as networking products and associated peripherals from suppliers
such as Bay Networks and Cisco. The Company provides maintenance and support
under service contracts with terms ranging typically from one to three years.
During fiscal 1999, these contracts had renewal rates of approximately 85%.
Customers that the Company currently provides hardware maintenance services to
include IBM, Computer Sciences Corporation, Halliburton, Brown & Root and
Cegedim, among others. The Company also repairs and refurbishes computer parts
and assemblies for service customers and for OEMs, VARs and other third-party
maintenance companies.
HELP DESK SERVICES
4Front provides a range of help desk services both to corporate customers,
and through alliances with major retailers, to the retail PC market. The
Company's principal help desk operations are provided and directed from the
Company's National Call Centers in North and West London. Services are provided
in English, French and German and include web-based problem resolution.
For corporate customers, 4Front provides help desk services which are
tailored to the specific requirements of the customer. The service can range
from a remote off-site help desk support service for a designated number of
corporate users to a complete "Enterprise Help Desk" providing a single point of
contact for all computer problems. Depending on the customer's requirements, the
help desk service can be run from the Company's own offices or can be located
on-site at the customer's premises. The Company's help desk services can provide
call response and logging, fault diagnosis, first line support, call priority,
liaison with in-house services or third party sources, back up from 4Front's own
centralized support staff, and management of the call to final resolution.
Because the Company is not tied to a specific vendor, the Company makes
recommendations without the limitations imposed by close affiliation to a
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particular manufacturer. The Company's customers for this service include London
Borough of Tower Hamlets, N.M. Rothschild and Pfizer, among others.
The Company provides telephonic help desk services on behalf of its retail
clients directly to individual home computer users 24 hours a day, 7 days a
week. The service is offered either under the Company's "4Help" brand or under
the name of the Company's corporate customer. The Company typically provides
services to end-users for periods ranging from 90 days to one year and typically
charges retailers a price per unit basis. The Company currently has agreements
to provide help desk services to customers of leading UK service providers and
computer retailers including British Telecom, Tiny, the leading UK computer
retailer, PC World Direct, the leading UK catalog retailer, and John Lewis, a
leading UK private department store chain.
NETWORK SERVICES
4Front offers its corporate and government customers a comprehensive range
of enterprise-wide network solutions and services encompassing network design,
installation, integration, monitoring and support, remote network management and
network training. The Company offers web sourcing services to its clients. In
addition to offering complete solutions, 4Front may supply specific individual
network services, including cabling. The Company is one of a limited number of
companies approved by British Telecom as a Category 5 and 6 installer and is a
British Telecom cabling and installation partner. 4Front has expertise in a
diverse range of specialized areas of wide and local area networking, including
network communications (voice and data) and interconnectivity, remote access,
multi-platform integration, Internet and Intranet technology, and
enterprise-wide storage solutions. In meeting its customers' network
requirements the Company supplies both network services and network products.
These include hardware, software, network computers, cabling and storage
products. 4Front has a wide range of network product and service accreditations
from vendors such as British Telecom, Compaq, IBM, Intel, Microsoft, Cisco,
Novell, Shiva, Sun and 3Com. The Company provides these services under contracts
which vary in length and content depending on the services provided. Customers
that utilize these services include Dupont, Energis and Royal Sun Alliance,
among others.
MANAGED SERVICES
4Front also provides a range of managed services to its corporate customers.
These services include training, special project management, enterprise-wide
roll-out programs, system and software upgrades, Year 2000 consultation and
business continuity/disaster recovery services. The Company provides these
services under contracts which vary in length and content depending on the
services provided. The Company provides these services to the French Ministry of
Agriculture, HM Treasury and JP Morgan, among others.
SOFTWARE SOLUTIONS
The Company supplies and supports financial application software for
corporate and government customers. The software is either proprietary to the
Company or is a customized version of software produced by outside vendors. The
Company's proprietary software products include a specialized project accounting
product for the construction industry, an asset and property management product
used by health trusts and municipalities and a project costing product used by
corporations and municipalities. The Company is expanding its product range with
particular focus on web-based and E-Commerce products.
The sale of software involves a substantial service element, consequently,
the Company typically provides its customers with pre-sales software and
technical consultation, business analysis, software specification, software
development and supply, implementation, training, project management and
software support and upgrades.
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The Company also supplies products by Sage Tetra, a UK software company,
which specializes in software for accounting, distribution and inventory
control. This software is typically customized by the Company for specific
vertical markets, including the telesales, technology distribution and
government markets.
The Company typically licenses software and provides integration services to
its clients, which include Alcatel Data Networks, DTZ Debenham Thorpe, one of
the UK's leading chartered surveyors, and Discovery Channel.
STORAGE SYSTEMS AND PRODUCTS
4Front is one of the UK's leading distributors of high-end storage systems.
The Company is the leading distributor of Seagate Technology's high capacity
disc drives in Europe, IBM's high capacity disc drives in the UK and Sony's high
capacity tape products in the UK. The Company has also developed a focused range
of its own brand products which are marketed under the V2 brand name. These
include a complete range of build to order or customized PCs as well as a range
of storage subsystems. The Company markets these products to OEMs, system
integrators and VARs in the UK.
CUSTOMERS
The Company's customers are mainly large and medium sized national and
multinational companies and government authorities. The following is a
representative list of the Company's customers, each of which contributed in
excess of $100,000 in revenues for fiscal 1999:
<TABLE>
<S> <C> <C>
FINANCE INDUSTRIAL RETAIL
Societe Generale Pfizer Tiny Computers
Credit Agricole Renault John Lewis
Cariplo ENI Disney Stores
TELECOMMUNICATIONS CONSTRUCTION/ENGINEERING POINT OF SALE
British Telecom Halliburton, Brown & Root Asda
Energis Costain House of Fraser
Telecom Italia Taylor Woodrow Alldays
INSURANCE OEM/OUTSOURCERS GOVERNMENT
Legal & General Misys French Ministry of
Royal Sun Alliance Computer Sciences Agriculture
Sedgwicks Corporation Italian Ministry of Justice
IBM UK Ministry of Defence
</TABLE>
No single customer accounted for more than 5% of the Company's revenues in
any of the last three fiscal years.
SALES AND MARKETING
The Company markets services and products as part of a systems solution to
its clients and emphasizes its ability to provide highly qualified personnel to
implement these solutions cost effectively. Sales of services are predominantly
made directly to the corporate and government markets, while the sales of
storage systems are predominantly made through sub-distributors and VARs where
the Company's products are typically used as elements of a VARs overall
solutions.
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 services and products and also increasingly on a corporate account
basis in the case of larger customers. Direct sales channels include field
sales, telemarketing and direct mail. At April 27, 1999, the Company had
approximately 256 sales and marketing personnel.
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The Company's sales representatives are focused on developing
cross-marketing opportunities. The Company promotes activities by scheduling
internal sales conferences, paying a portion of compensation based on internal
business referrals and maintaining a formal corporate accounts structure.
COMPETITION
The overall computer services industry is intensely competitive and is
composed of hundreds of companies, many of whom have capital, marketing
expertise and personnel resources far superior to that of 4Front. The Company
competes primarily with a wide range of companies of varying sizes that operate
both in the niche markets which the Company serves and in the computer services
industry generally. 4Front also competes with larger European computer service
and consulting 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
specialized 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 consulting 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 and leadership position in specialist
markets.
EMPLOYEES
As of April 27, 1999, the Company employed a total of 1,258 employees
consisting of 256 in sales and marketing, 396 in engineering, 334 in technical
support and 272 in logistics, management and administration. The Company's
French and Italian employees are in some cases represented by a labor union. The
Company has not had any work stoppages, strikes, or organization attempts. The
Company believes that its employee relations are good.
RISK FACTORS
FUTURE OPERATING RESULTS UNCERTAIN. Although the Company had net income of
$3,069,000 and $5,822,000 in the fiscal years ended January 31, 1998 and 1999,
respectively, the Company had a net loss of $2,344,000 in the fiscal year ended
January 31, 1997, primarily due to the write down of goodwill in connection with
acquisitions, reorganization costs and the write down of the Company's
investment in the ActionTrac International partnership. As of January 31, 1999,
the Company had accumulated reserves of approximately $2,668,000. The revenue
growth rates and profitability experienced by the Company in recent periods may
not be indicative of its future growth and profitability and there can be no
assurances that the Company will remain profitable. The Company plans to
continue to expand its level of operations, resulting in increased fixed costs
and operating expenses. The Company's operating results and net income will be
adversely affected to the extent that net sales and gross profits do not
increase sufficiently to offset such increased expenses, of which there can be
no assurance.
FLUCTUATIONS IN QUARTERLY AND ANNUAL OPERATING RESULTS. The Company's
quarterly and annual operating results have in the past varied and may in the
future vary significantly depending on factors such as the effect of Company
acquisitions, the size, timing and recognition of revenue from significant
orders, increased competition, the timing of new product releases by the Company
and its competitors, market acceptance of the Company's products, changes in the
Company's and its competitors' pricing policies, budgeting cycles of its
customers, seasonality, changes in operating expenses, changes in Company
strategy, personnel changes, foreign currency exchange rates, changes in the
outlook for new products and services and general economic factors. In addition,
because the gross margins of the Company's services and
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products have varied in the past and may vary in the future both among
themselves and over time, changes in the revenue mix from services and products
may affect quarterly operating results. The Company therefore believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and that such comparisons should not be relied upon as indications of
future performance. Further, it is possible that in some future quarter the
Company's revenue or operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock could be materially adversely affected.
GROWTH STRATEGY; ACQUISITION OF COMPLEMENTARY BUSINESSES. A significant
component of the Company's growth strategy depends on the Company's ability to
acquire complementary businesses. The Company faces increasing competition from
other potential purchasers when seeking to acquire computer services companies.
Although the Company has been successful in acquiring computer services
companies, there can be no assurance that suitable additional acquisitions can
be identified, consumated or successfully integrated into the Company's
operations. The Company has used a combination of cash and Common Stock for
acquisitions. In the event that potential acquisition candidates are unwilling
to accept the Company's securities as consideration, the Company will be
required to use more cash resources to continue its acquisition program. In
addition, if sufficient financing is not available as needed on terms acceptable
to the Company, the Company's acquisition program could be adversely affected.
INTEGRATION OF NEW ACQUISITIONS; ABILITY TO MANAGE GROWTH. As a result of
both acquisitions and internal growth, the Company has recently experienced a
period of rapid growth and expansion. The Company's growth and expansion has
placed, and could continue to place, a significant strain on the Company's
personnel and other resources. The Company expects to continue to grow primarily
by the acquisition of service companies which are complementary to the Company's
existing business operations. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations of the acquired companies,
the diversion of management's attention from other business concerns, risks of
entering markets in which the Company has limited or no direct experience and
the potential loss of key employees of the acquired companies. There can be no
assurance that any acquisition will result in long-term benefits to the Company
or that the Company's management will be able to effectively manage the
resulting businesses. In addition, the Company's future success will depend in
part on its ability to manage potentially rapid growth as it makes additional
acquisitions. To accommodate this recent growth and to compete effectively and
manage future growth, if any, the Company will be required to continue to
implement and improve its operational, financial and management information
systems, procedures and controls on a timely basis and to expand, train,
motivate and manage its workforce. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations. The failure to implement and improve
the Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company's recent growth can be sustained.
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGE. The market for computer systems
and products is characterized by constant technological change, frequent new
product introductions and evolving industry standards. The Company's future
success is dependent upon the continuation of a number of trends in the computer
industry, including the migration by IT end-users to multivendor and multisystem
computing environments, the overall increase in the sophistication and
interdependency of computing technology, and a focus by IT managers on
cost-efficient management. The Company believes these trends have resulted in a
movement by both end-users and original equipment manufacturers toward
outsourcing and an increased demand for product and support services providers
that have the ability to provide a broad range of multivendor product and
support services. There can be no assurance these trends will continue into the
future. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements could have a material
adverse effect on the Company's business, operating results
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and financial condition. There can be no assurance that the Company will be able
to achieve these objectives.
COMPETITION; LIMITED BARRIERS TO ENTRY. The computer services industry is
intensely competitive and is composed of literally hundreds of companies, many
of which have capital, marketing expertise and personnel resources far superior
to that of the Company. There can be no assurance that the Company will be able
to compete successfully in the future or that competitive pressures will not
result in price reductions or other developments in the Company's market which
could have a material adverse effect on the Company. In addition, barriers to
entry in the markets in which the Company operates are limited, and there can be
no assurance that existing or new competitors will not develop products or
provide services that are superior to the Company's products or services or
achieve greater market acceptance.
EXPANSION OF OPERATIONS WITHIN EUROPE. The Company has recently expanded
its geographic market beyond the UK by selling its products and services in
Europe and is currently generating approximately 45% of its revenue from
Continental Europe. The Company's operations within Europe are subject to
additional risks associated with international operations such as increased
difficulties in protecting intellectual property and application of the rules
and regulations of additional jurisdictions. The Company seeks, where
appropriate, to enter into relationships with local partners as a way of
mitigating the risks of operating in these additional countries. There can be no
assurance, however, of the Company's ability to identify prospective local
partners or to otherwise overcome the risks associated with geographic
expansion.
DEPENDENCE ON AVAILABILITY, RECRUITMENT AND RETENTION OF TECHNICAL
PERSONNEL. The Company depends upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet the
Company's own personnel needs and the staffing requirements of its clients.
Competition for individuals with proven technical skills is intense. The IT
industry in general experiences a high rate of attrition of such personnel. The
Company competes for such individuals with systems integrators, providers of
outsourcing services, temporary personnel agencies, computer systems
consultants, clients and potential clients. Many large competitors have recently
announced extensive campaigns to hire additional technical personnel.
Competition for quality technical personnel has continued to intensify,
resulting in increased personnel costs for many IT service providers. Failure to
attract and retain sufficient technical personnel would have a material adverse
effect on the Company's business, operating results and financial condition.
FOREIGN EXCHANGE AND RELATED RISKS. The Company markets its products to
European and other foreign countries but conducts its business primarily in
pounds sterling, French francs and Italian lira. The purchase prices received by
the Company for its products will be affected by the foreign exchange rate
fluctuations. Changes in the exchange rates between local currencies (in which
the Company's business is conducted) and U.S. dollars (in which the Company's
financial statements are presented) may significantly affect the results of
operations and other financial information concerning the Company as presented
in the Company's financial statements. The Company monitors exchange rate
fluctuations between local currencies and U.S. dollars and will seek to minimize
the risk of such fluctuations when deemed appropriate by entering into hedge
transactions in which dollars are bought forward to match obligations as they
come due.
FOREIGN TAX RATES. The Company is subject to taxation in a number of
different jurisdictions, including the U.S., the UK, France, Italy and Belgium
and, if the Company is successful in further expanding its market in Europe, it
may become subject to taxation in additional jurisdictions. In addition,
transactions among the Company and its foreign subsidiaries may become subject
to U.S. and foreign withholding taxes. Applicable tax rates in foreign
jurisdictions differ from those of the U.S. and are subject to periodic change.
The extent, if any, to which the Company will receive credit in the U.S. for
taxes paid in foreign jurisdictions will depend upon the application of
limitations set forth in the Internal Revenue Code of 1986, as amended, as well
as provisions of any tax treaties which may exist between the U.S. and such
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foreign jurisdiction. To the extent that the Company expands further into
Continental Europe, the effective tax rate on income may increase, due to the
higher tax rates in force in many European jurisdictions.
INTELLECTUAL PROPERTY. Certain of the Company's operations are dependent in
part upon their software development methodology and other proprietary
intellectual property rights. The Company relies upon a combination of trade
secret, non-disclosure and other contractual arrangements, technical measures
and copyright and trademark laws to protect its proprietary rights. The Company
holds no patents or registered copyrights. The Company generally enters into
confidentiality agreements with its employees, consultants, clients and
potential clients and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
that regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights. In addition,
although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that such
a claim will not be asserted against the Company in the future.
DEPENDENCE ON CONTINUED AUTHORIZATION TO RESELL AND PROVIDE
MANUFACTURER-AUTHORIZED SERVICES. The Company's future success with IT services
and product sales depends in part on its continued authorization as a service
provider and its continued status as a certified reseller of certain hardware
and software products. Without such sales and service authorizations, the
Company would be unable to provide the range of services and products currently
offered by the Company. In general, the agreements between the Company and such
manufacturers include termination provisions, some of which are immediate. There
can be no assurance that such manufacturers will continue to authorize the
Company as an approved reseller or service provider, and the loss of one or more
of such authorizations could have a material adverse effect on the Company's
business, operating results or financial condition.
DEPENDENCE ON SUPPLIERS. Although the Company has not experienced
significant problems with its suppliers of hardware, software and peripherals,
there can be no assurance that such relationships will continue or that, in the
event of a termination of its relationships with any given supplier, it would be
able to obtain alternative sources of supply without a material disruption in
the Company's ability to provide products and services to its clients.
Furthermore, as is typical in the industry, the Company receives credits or
allowances from many manufacturers for market development which are used to
offset a portion of the Company's cost of products sold. Changes in the
availability, structure or timing of these credits or allowances or any material
disruption in the Company's supply of products could have a material adverse
effect on the Company's business, operating results or financial condition.
PROJECT RISKS. The nature of the Company's engagements exposes the Company
to a variety of risks. Many of the Company's engagements involve projects that
are critical to the operations of its clients' businesses. The Company's failure
or inability to meet a client's expectations in the performance of its services
or to do so in the time frame required by such client, could result in a claim
for substantial damages against the Company, regardless of whether the Company
was responsible for such failure. Service providers, such as the Company, are in
the business of employing people and placing them in the workplace of other
businesses. Therefore, the Company is also exposed to liability with respect to
actions taken by its employees while on assignment, such as damages caused by
employee errors and omissions, misuse of client proprietary information,
misappropriation of funds, discrimination and harassment, theft of client
property, other criminal activity or torts and other claims. Although the
Company maintains general liability insurance coverage, there can be no
assurance that such coverage will continue to be available on reasonable terms
or in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could have a material adverse effect on the Company's business, operating
results and financial condition.
9
<PAGE>
In addition, the Company has a number of fixed price contracts. If the
Company experiences cost overruns and it is not able to pass along such cost
overruns to its clients, the Company's business, operating results and financial
condition could be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's continued success will depend to
a significant extent upon its senior management, including Anil J. Doshi, the
Company's Chairman of the Board and Chief Executive Officer, and Mark Ellis, its
Vice Chairman and President. The loss of the services of one or more key
employees could have a material adverse effect on the Company's business,
financial condition or operating results. In addition, although the Company has
employment agreements with its key employees which contain non-solicitation
provisions, if one or more key employees join a competitor or form a competing
company, the resulting loss of existing or potential clients could have a
material adverse effect on the Company's business, financial condition or
operating results. In the event of the loss of any key employee, there can be no
assurance that the Company would be able to prevent the unauthorized disclosure
or use of its procedures, practices, new product development or client lists.
CONCENTRATED OPERATIONS; PROPERTY DAMAGE. The Company operates primarily
out of its facilities located in England, France, Italy and Belgium. The Company
currently maintains property damage insurance covering its inventory, furniture,
equipment, machinery and building, it also maintains business interruption
insurance for losses relating to its facilities. Material damage to, or the loss
of, the Company's facilities due to fire, severe weather, flood or other acts of
God, even if insured against, would have a material adverse effect on the
Company's business, results of operations and financial condition.
10
<PAGE>
ITEM 2. PROPERTIES
The Company does not own any real property. The Company leases its principal
office and warehouse space as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
- --------------------------------------------------------- -------------- -------------------
<S> <C> <C>
UNITED KINGDOM
Basingstoke.............................................. 14,100 September, 1999
Brighton................................................. 5,340 February, 2002
Bristol.................................................. 9,800 September, 2006
London................................................... 5,935 April, 2002
Newbury.................................................. 7,110 September, 2002
Ruislip.................................................. 13,100 February, 2002
Slough................................................... 17,242 December, 2010
Watford.................................................. 9,500 August, 2013
FRANCE
Paris (5 locations)...................................... 126,950 July, 1999 to
August, 2001
Nantes................................................... 3,320 November, 2001
Lille.................................................... 3,180 November, 2001
Lyon..................................................... 2,970 November, 1999
ITALY
Milan.................................................... 23,000 December, 2003
Rome..................................................... 7,700 September, 2004
Turin.................................................... 3,000 March, 2000
Padova................................................... 2,500 January, 2003
BELGIUM
Brussels................................................. 8,980 March, 2002
UNITED STATES
Englewood, Colorado...................................... 500 January, 2004
</TABLE>
The Company's aggregate property lease payments are currently $2.3 million
per annum and are subject to reviews during the terms of the various leases.
The Company's principal corporate offices are located at 6300 South Syracuse
Way, Suite 293, Englewood, Colorado 80111, telephone (303) 721-7341. The
Company's principal operational offices are located at 57A Hatton Garden,
London, EC1N 8JG, England, telephone 011-44-171-269-5800.
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.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq National Market under the symbol
"FFTI". From January 3, 1996 to June 15, 1996, the Common Stock was traded on
the Nasdaq SmallCap Market. The following table sets forth for the periods
indicated the high and low reported sale prices per share of the Common Stock as
reported by the Nasdaq National Market since June 16, 1996. From July 8, 1998,
the Company's Common Stock is also quoted on the Easdaq market.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter............................................................ $ 4.38 $ 2.75
Second Quarter........................................................... 5.38 2.63
Third Quarter............................................................ 6.94 3.63
Fourth Quarter........................................................... 12.75 5.38
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter............................................................ $ 11.25 $ 6.88
Second Quarter........................................................... 14.75 11.25
Third Quarter............................................................ 12.50 5.19
Fourth Quarter........................................................... 11.06 5.63
</TABLE>
The number of stockholders of record on April 27, 1999, was 1,487. On April
27, 1999, the last reported sale price of the Common Stock, as reported by the
Nasdaq National Market, was $9.38 per share.
DIVIDEND POLICY
4Front has never declared or paid any dividends on its Common Stock. The
Company currently anticipates that all future earnings will be retained by the
Company to support its growth strategy. Accordingly, 4Front does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. The payment
of any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings, operations,
capital requirements, the general financial condition of the Company,
contractual restrictions and general business conditions. See Item
7.-"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The Company's operating subsidiaries conduct their operations in British
pounds sterling (L), French francs (FFR), Belgian francs (BFR) and Italian lira
(LIR). For financial reporting purposes, foreign currencies 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 foreign currencies into U.S. dollars referenced in this Annual
Report on Form 10-K have been converted using a conversion rate of 1.643 and
1.660 dollars per British pound in respect of operations during the year ended
January 31, 1998 and 1999, respectively, and at a rate of 1.633 and 1.646
dollars per British pound in respect of the January 31, 1998 and 1999, balance
sheets, respectively, at a conversion rate of 5.90 and 5.86 French francs per
U.S. dollar in respect of operations for the years ended January 31, 1998 and
1999, respectively, and of 5.94 and 5.66 for the January 31, 1998 and 1999,
balance sheets, respectively, and at a conversion rate of 36.52 and 36.08
Belgian francs per U.S. dollar in respect of operations for the years ended
January 31, 1998 and 1999, and 36.52 and 34.78 for the January 31, 1998 and
1999, balance sheets, respectively. Italian lira was converted at a rate of
1,652 and 1,669 per U.S. dollar in respect of operations for the period ended
January 31, 1999, and the January 31, 1999, balance sheets, respectively.
12
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues...................................... $ 11,240 $ 32,249 $ 53,015 $ 84,145 $ 148,897
Cost of revenues.............................. 6,814 20,808 36,018 54,662 90,302
Write down of software development costs...... -- 755 -- -- --
--------- --------- --------- --------- ---------
Gross profit.................................. 4,426 10,686 16,997 29,483 58,595
--------- --------- --------- --------- ---------
Selling general and administrative............ 3,565 9,566 13,792 22,796 45,775
Depreciation and amortization................. 216 560 976 2,213 3,427
Write down of goodwill........................ -- -- 552 -- --
Reorganization and restructuring costs (2).... -- -- 2,286 -- --
Income (loss) before interest income and
expense, income taxes, share of results in
equity investee and write down of
investments................................. 645 559 (609) 4,474 9,393
Write down of investments..................... -- -- 500 -- --
Share of results in equity investee (3)....... -- (761) (799) -- --
Net income (loss)............................. $ 355 $ (652) $ (2,344) $ 3,069 $ 5,822
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share
(Basic)..................................... $ 0.20 $ (0.24) $ (0.45) $ 0.47 $ 0.64
Net income (loss) per share
(Diluted)................................... $ 0.20 $ (0.24) $ (0.45) $ 0.43 $ 0.56
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of shares:
Basic....................................... 1,813 2,743 5,170 6,589 9,131
Diluted..................................... 1,813 2,743 5,170 7,129 10,484
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................. $ 6,588 $ 13,464 $ 30,349 $ 36,915 $ 109,596
Current liabilities......................... 7,008 14,750 24,763 35,974 86,815
Total assets................................ 9,887 17,943 42,021 59,208 146,272
Long-term debt (including capital lease
obligations).............................. 74 93 489 497 780
Total stockholders' equity.................. $ 2,805 $ 3,101 $ 16,769 $ 21,594 $ 58,677
</TABLE>
13
<PAGE>
- ------------------------
(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
acquisitions which were acquired effective January 1994, November 1994,
April 1995, August 1996, October 1996, September 1997, October 1997, August
1998, September 1998, November 1998 and December 1998, 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) Reflects a non-recurring charge which related to the Company's
reorganization and restructuring of its maintenance and support services
businesses, including the reduction of employee headcount.
(3) 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.
14
<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 statements 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. See "Item 1--Business--Risk
Factors".
OVERVIEW
The Company has grown rapidly due, in large part, to acquisitions. 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 Limited
("Penagen") and I-NEA S.A. ("I-NEA") were acquired in fiscal 1999. 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.
In the fourth quarter of fiscal 1997, the Company took a charge of $2.3
million which related to the Company's reorganization and restructuring of its
maintenance and support services businesses including the reduction of employee
headcount. In addition, in the fourth quarter of fiscal 1997, the Company
recorded a charge of $552,000, which related to the write down of goodwill
resulting from the Xanadu acquisition due to 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 represented the Company's investment in the ActionTrac Joint Venture, a
help desk joint venture with ActionTrac Inc., and $500,000, which represented
the Company's investment in ActionTrac Inc.
The Company's operating expenses have increased significantly since fiscal
1997, primarily due to headcount increases as a result of acquisitions and
hiring to support revenue growth. Office and general expenses have also
increased since fiscal 1997, primarily due to increased expenditures required to
support the increased revenues and the expansion through acquisitions in the
Company's markets. This category includes expenses for salaries and related
costs and associated benefits as well as payroll taxes, sales commission,
recruitment fees, training costs, business promotion, market research,
advertising and professional fees.
Because of the effect upon the Company's results of operations for the years
ended January 31, 1997, 1998 and 1999, of acquisitions made during those
periods, 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.
15
<PAGE>
FISCAL YEAR ENDED JANUARY 31, 1999, COMPARED WITH FISCAL YEAR ENDED JANUARY 31,
1998
REVENUES
Revenues for fiscal 1999 were $148.9 million, an increase of $65 million, or
approximately 77.0% compared to $84.1 million for fiscal 1998. Approximately
$26.9 million of this increase resulted from the Company's acquisitions during
fiscal 1999, none of which revenues were included in the Company's results for
fiscal 1998. The remaining $37.9 million of this increase came from the growth
of the Company's existing businesses, principally in the services division.
Services revenues were $93.8 million or 63.0% of total revenues for fiscal 1999,
an increase of $48.5 million compared to $45.3 million for fiscal 1998. Products
revenues were $55.1 million or 37.0% of total revenues for fiscal 1999, a
decrease from 46.2% of total revenues for fiscal 1998.
GROSS PROFIT
Gross profit for fiscal 1999 was $58.6 million, an increase of $29.1
million, or 98.6% compared to $29.5 million for fiscal 1998. Gross margin
increased to 39.4% for fiscal 1999, from 35.0% for fiscal 1998. This increase in
gross margin arose primarily as a result of the significant internal growth of
the services business which has higher margins than the products business and
the inclusion of the Company's 1999 acquisitions. Gross profit for services for
fiscal 1999 increased by $26.9 million to $49.7 or 117.9% from $32.8 million for
fiscal 1998. Gross margins for services increased in fiscal 1999 to 52.9% from
50.2% in fiscal 1998, resulting from the growth of the Company's existing
service business. Gross profit for products increased by $2.2 million or 32.8%
to $8.9 million for fiscal 1999 compared to $6.7 million for fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for fiscal 1999 were $45.8
million, an increase of $23.0 million, or 100.8% compared to $22.8 million for
fiscal 1998. As a percentage of revenues, selling, general and administrative
expenses increased to 30.7% in fiscal 1999, from 27.1% in fiscal 1998. Selling
expenses increased to $12.8 million from $8.3 million in line with the expansion
of the Company's business. General and administrative expenses increased to $33
million from $14.5 million primarily as a result of the growth in infrastructure
necessary to support the expansion of the Company's business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for fiscal 1999 was $3.4 million, an
increase of $1.2 million, or 54.5% compared to $2.2 million for fiscal 1998.
This increase arose principally from the acquisitions during the year.
Depreciation for fiscal 1999 was $1.5 million, an increase of $0.4 million or
36.4%, from $1.1 million for fiscal 1998. Amortization of goodwill from
acquisitions for fiscal 1999 was $1.9 million, an increase of $0.8 million, or
72.7%, from $1.1 million for fiscal 1998.
INCOME (LOSS) BEFORE INTEREST INCOME AND EXPENSE, INCOME TAXES ("IBIT")
IBIT for fiscal 1999 was $9.4 million, an increase of $4.9 million, as
compared to $4.5 million for fiscal 1998. As a percentage of revenues, IBIT
increased to 6.3% in fiscal 1999 as compared to 5.3% for fiscal 1998. The
increase results primarily from the overall improvement in operating
performances by the Company.
INTEREST
Interest expense for fiscal 1999 was $0.8 million, an increase of $0.2
million, or 33.3% compared to $0.6 million for fiscal 1998. This increase
resulted primarily for the increased use of bank lines of credit during fiscal
1999, which were not utilized to the same extent in fiscal 1998. Interest income
for fiscal 1999 was $0.8 million, an increase of $0.5 million from $0.3 million
in fiscal 1998, due to increased cash on hand due to the Company's public
offering.
16
<PAGE>
FISCAL YEAR ENDED JANUARY 31, 1998, COMPARED WITH FISCAL YEAR ENDED JANUARY 31,
1997
REVENUES
Revenues for fiscal 1998 were $84.1 million, an increase of $31.1 million,
or approximately 58.7% compared to $53.0 million for fiscal 1997. Approximately
$11.7 million of this increase resulted from the Company's acquisitions of
Firstpoint, effective September 8, 1997, and of Eurosystems, effective October
28, 1997, none of which revenues were included in the Company's results for
fiscal 1997. The remaining $19.4 million of this increase came from the growth
of the Company's existing businesses, principally in the services division.
Services revenues were $45.3 million or 53.8% of total revenues for fiscal 1998,
an increase of $26.3 million compared to $19.0 million for fiscal 1997. Products
revenues were $38.8 million or 46.2% of total revenues for fiscal 1998, a
decrease from 64.1% of total revenues for fiscal 1997.
GROSS PROFIT
Gross profit for fiscal 1998 was $29.5 million, an increase of $12.5
million, or 73.5% compared to $17.0 million for fiscal 1997. Gross margin
increased to 35.0% for fiscal 1998 from 32.1% for fiscal 1997. This increase in
gross margin arose primarily as a result of the significant internal growth of
the services business which has higher margins than the products business and
the inclusion of Firstpoint's business in the final five months of fiscal 1998.
Gross profit for services for fiscal 1998 increased by $10.4 million to $22.8
million or 83.7% from $12.4 million for fiscal 1997. Gross margins for services
decreased in fiscal 1998 to 50.2% from 65.1% in fiscal 1997 resulting from the
acquisitions of Firstpoint and Datapro, whose margins were historically lower
overall than the Company's margins for services. Gross profit for products
increased by $2.1 million or 45.9% to $6.7 million for fiscal 1998 compared to
$4.6 million for fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for fiscal 1998 were $22.8
million, an increase of $9.0 million, or 65.3% compared to $13.8 million for
fiscal 1997. As a percentage of revenues, selling, general and administrative
expenses increased to 27.1% in fiscal 1998, from 26.0% in fiscal 1997. Selling
expenses increased to $8.3 million from $6.6 million in line with the expansion
of the Company's business. General and administrative expenses increased to
$14.5 million from $7.2 million primarily as a result of the growth in
infrastructure necessary to support the expansion of the Company's business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for fiscal 1998 was $2.2 million, an
increase of $1.2 million, or 126.7% compared to $1.0 million for fiscal 1997.
This increase arose principally from the acquisitions of Hammer, Datapro and
Firstpoint. Depreciation for fiscal 1998 was $1.1 million, an increase of
$574,000 or 110.8%, from $518,000 for fiscal 1997. Amortization of goodwill from
acquisitions for fiscal 1998 was $1.1 million, an increase of $663,000, or
144.8%, from $458,000 for fiscal 1997.
INCOME (LOSS) BEFORE INTEREST INCOME AND EXPENSE, INCOME TAXES AND SHARE OF
RESULTS IN EQUITY INVESTEE ("IBITI")
IBITI for fiscal 1998 was $4.5 million, an increase of $5.1 million, as
compared to a loss of $609,000 for fiscal 1997. As a percentage of revenues,
IBITI increased to 5.3% in fiscal 1998 as compared to a negative 1.1% for fiscal
1997. The increase results primarily from the inclusion in fiscal 1997 of a
goodwill write down of $552,000, a charge for reorganization and restructuring
of $2.3 million, and from the overall improvement in operating performances by
the Company. There were no such similar charges in fiscal 1998. IBITI (excluding
write downs and reorganization and restructuring costs) for fiscal 1997 was $2.2
million. As a percentage of revenue, IBITI (excluding write downs and
reorganization and restructuring costs) was 4.2% in fiscal 1997.
17
<PAGE>
INTEREST
Interest expense for fiscal 1998 was $632,000, an increase of $335,000, or
112.8% compared to $297,000 for fiscal 1997. This increase resulted primarily
for the increased use of bank lines of credit during fiscal 1998, which were not
utilized to the same extent in fiscal 1997. Interest income for fiscal 1998 and
1997 was approximately $276,000.
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 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 the Offering the Company
raised net proceeds of $16.0 million. In July 1998, the Company successfully
completed a secondary public offering for the sale of 3,425,000 shares of the
Company's Common Stock. As a result of this Offering, the Company raised $31
million net proceeds.
The Company maintains a revolving line of credit with a UK bank. This line
of credit provides for borrowings of up to L3.0 million ($4.9 million) and bore
interest at 6.75% per annum on utilized amounts at January 31, 1999. At January
31, 1999, $2.4 million was outstanding under this facility. Management expects
to be able to retain this facility for the foreseeable future, although no
assurances can be given.
The Company's French and Belgium subsidiaries maintain revolving credit
facilities in the aggregate amount of $5.5 million. Interest was charged at
rates of between 3.36% and 8.55% on utilized amounts during fiscal 1999. At
January 31, 1999, no amount was outstanding under these facilities.
The Company's Italian subsidiary maintains facilities with Italian banks in
the aggregate amount of $4.1 million. Interest was charged at rates of between
4.5% and 8.33% on utilized amounts. At January 31, 1999, $2.8 million of these
facilities were utilized.
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 7% per annum at January 31, 1999. At January 31, 1999, $5.4
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 January 31, 1999 and
1998, were $23,000 and $18,000, respectively. 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 $22.2 million at January 31, 1999, an increase of $21.2 million. This
increase arose primarily as a result of the net cash generated from the
Company's offering in July 1998.
Net cash used by operating activities during fiscal 1999 was $5.3 million,
an increase of $6.7 million from the net cash provided by operations of $1.4
million in fiscal 1998. The net cash provided reflects primarily the additional
working capital necessary for Decision Systems and Memorex Italia which were
acquired during fiscal 1999, and the net effect of a decrease in accounts
payable, increase in accrued liabilities, accounts receivable, deferred revenues
and inventories.
Net cash used by investing activities in fiscal 1999 was $7.8 million, an
increase of $0.6 million from the $7.2 million net cash used in fiscal 1998. The
net cash used primarily reflects the cash paid to acquire Memorex Italia and
I-NEA during fiscal 1999.
Net cash provided by financing activities was $34.7 million for fiscal 1999,
an increase of $30.9 million from the $3.8 million provided in fiscal 1998. The
cash provided in fiscal 1999 reflects primarily the proceeds from this offering
and from the exercise of warrants and proceeds from notes payable and payments
of outstanding obligations.
18
<PAGE>
The Company believes that the 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. In
addition, if the Company deems it financially attractive, the Company may seek
to raise additional funds through increased bank borrowings or through the sale
of its equity securities. To the extent the Company raises additional capital
through the sale of its equity securities, ownership dilution to the Company's
stockholders will result.
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.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
During fiscal 1999 the Company developed certain proprietary software
products, Shortlands, Pharoah and Contender. The developments included enhancing
product functionality to incorporate Graphical User Interfaces ("GUI") and web
enabling these products. The work was carried out during fiscal 1999 in
accordance with the Company's accounting policy on software development costs. A
total of $850,000 has been capitalized. At January 31, 1999 $93,000 of this has
been amortized leaving a total net capitalized amount of $757,000.
YEAR 2000
The Year 2000 issue stems from the use of a two-digit date to represent the
year in computer software and firmware. This has meant that many currently
installed electronic systems are not capable of distinguishing dates beginning
with the year 2000. As a result, computer systems and applications may
experience operating difficulties unless those systems or applications are
modified to correctly process information related to date. The Year 2000 issue
creates risk for the Company from unforeseen problems in its products, the
services it provides to its clients, or its own computer and embedded systems.
In addition, the Company is at risk from third parties with which it deals to
the extent that they experience failure of their own computer systems or
products upon which they rely. The Company's business could be materially
adversely affected by the direct cost of dealing with the Year 2000 issue and
further, any costs of defending and resolving any Year 2000 disputes and any
liability to damages, including consequential damage, could have a material
adverse effect upon the Company.
The Company recognizes the need to minimize the impact of Year 2000 issues
on its operations. It has put in place a comprehensive Year 2000 Risk Management
initiative that it believes is adequately funded, staffed and controlled. The
initiative covers both Information Technology (IT) systems and non-IT systems
and seeks to address all the Year 2000 issues affecting the Company. The
initiative is ongoing and is planned to continue to include the February 29,
2000 Leap Year. It is on schedule and expected to complete the final phase of
monitoring checks during July 1999. Thereafter the focus will switch to
re-evaluating the position and confirming that all systems remain compliant, and
include testing to ensure that no non-compliant systems are introduced.
The Company has established procedures for evaluating and managing the risks
and costs associated with this issue. Funding and execution of this initiative
is within the existing business units and operating budgets and is not viewed as
material. Based on the current assessment, the Company believes that the cost to
resolve Year 2000 issues, other than unanticipated liabilities, should not
exceed $400,000 in the year to January 31, 2000. The costs incurred to January
31, 1999, were $200,000. However, should the Company encounter significant
unforeseen Year 2000 problems, either in it's products or internal business
systems or
19
<PAGE>
in relation to third party vendors, manufacturers or suppliers, actual costs
could materially exceed this budget.
In addition the Company may acquire businesses or assets which contain
systems which are themselves subject to Year 2000 issues. As part of the
acquisition process, the Company employs a comprehensive due diligence checklist
which is designed, among other matters, to identify such exposures. Any
identified exposure is then subject to inclusion in the Company's Year 2000
initiative and the cost is included as part of the acquisition budget.
As a key part of the Year 2000 initiative the Company has and will continue
to upgrade, replace and test components in its networks, IT systems and non-IT
systems. The Company believes that it has allocated adequate resources for this
purpose and it expects that the final phase of its Year 2000 initiative will
complete on schedule by July 1999. However should it for any reason fail to do
so, Year 2000 problems could have an adverse material impact the Company's
operations.
The Company has incomplete information concerning the Year 2000 compliance
status of its customers. If for any reason their own preparedness is
insufficient, this could adversely affect the Company's ability to supply them
with products and services as part of its ongoing business.
The Company is also in the process of contacting it's critical suppliers,
manufacturers, distributors and other vendors to determine that their operations
and the products and services, that they provide are Year 2000 compliant. Where
practicable, the Company will attempt to mitigate its risks with respect to the
failure of third parties to be Year 2000, ready including developing contingency
plans. However, such failures, including any failures of any contingency plan,
remains a possibility and could have a material adverse impact upon the
Company's results of operations or financial condition.
The Company has established a business continuity plan to deal with normal
day to day failures. This is being extended to encompass, where possible,
difficulties arising from date related issues. The Year 2000 contingency plan
incorporates all the resilience utilized in the established business continuity
plan and in the worst case scenario realizes the possibility of operation
without computer equipment. The contingency plan in the event of failure of
non-IT technology, where this affects building access, will involve disabling
such equipment to allow occupation. However, external forces that might
generally affect industry and commerce, such as interruption of service from
utilities or disruption of transportation, may exceed the scope of the Company's
contingency planning.
INTRODUCTION OF SINGLE EUROPEAN CURRENCY ("EURO")
On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted the euro as their common legal currency and established fixed
conversion rates between their existing sovereign currencies and the euro. The
euro trades on currency exchanges and is available for non-cash transactions.
Based on its preliminary assessment, the Company does not believe the conversion
will have a material impact on the competitiveness of its service offerings in
Europe, as substantial price transparency already exists.
The Company expects that modifications to comply with euro requirements have
been and will continue to be made to its business operations and systems on a
timely basis and does not believe that the cost of such modifications will have
a material adverse impact on the Company's results of operations or financial
condition. There can be no assurance, however, that the Company will be able to
continue to complete such modifications on a timely basis; any failure to do so
could have a material adverse effect on the Company's results of operations or
financial condition. In addition, the Company faces risks to the extent that
suppliers, manufacturers, distributors and other vendors upon whom the Company
relies and their suppliers, are unable to make appropriate modifications to
support euro transactions. The inability of such third parties to support euro
transactions could have a material adverse effect on the Company's results of
operations or financial condition.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK
The Company conducts business on a Pan-European basis through subsidiaries
in various countries utilizing major international currencies. The Company is,
therefore, exposed to movement in currency exchange rates. The Company continues
to maintain a program, which monitors exchange rate fluctuations, and will
utilize forward foreign exchange contracts, designed to hedge currency exposures
related to certain non-functional assets and liabilities resulting from
inter-company balances when deemed necessary. By written policy, the Company
generally does not enter into any type of foreign exchange contract for
speculative purposes. The Company has not entered into any type of foreign
exchange contract during fiscal 1999.
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.
21
<PAGE>
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 J. Doshi 54 Chairman of the Board, Chief Executive Officer and Director
Mark Ellis 45 Vice Chairman of the Board, President and Director
Terence W. Burt 42 Vice President, Chief Operating Officer and Director
Kenneth J. Newell 55 Vice President of Corporate Affairs and Director
Stephen McDonnell 36 Chief Financial Officer
Craig Kleinman 43 Secretary and Director
Brian V. Murray 51 Director
Arthur Keith Ross 47 Director
</TABLE>
ANIL J. 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 Chartered Institute of Taxation. From January 1988 until 1990,
Mr. Doshi was a consultant to and then Deputy Chairman of PPI Enterprises, Inc.,
a New York based holding company ("PPI").
MARK ELLIS is Vice Chairman of the Board of Directors since April 1998 and
President 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 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 was
graduated from 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.
TERENCE W. BURT has been a Vice President and Chief Operating Officer since
April 1998 and a Director since April 1997. He was a co-founder of K2 Group Plc,
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
Managing Director of 4Front Group in 1997. Mr. Burt was graduated from the
University of Hertfordshire and is a member of the Chartered Institute of
Management Accountants.
KENNETH J. NEWELL has been Vice President of Corporate Affairs of the
Company since April 1998 and a Director of the Company since April 1996. He was
a co-founder of K2 Group Plc in 1988, which was acquired by the Company in
January 1994, and was 4Front Group plc's Chief Executive until 1997. Mr. Newell
is a Fellow of the Institute of Chartered Secretaries and Administrators
following study at the City of London College.
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 UK
public company. Mr. McDonnell was graduated from the College of Commerce in
Dublin, Ireland.
CRAIG KLEINMAN is Secretary and a Director of the Company since April 1993.
Mr. Kleinman served as Chief Financial Officer of the Company from April 1993
until April 1996. During the past ten 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.
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.
22
<PAGE>
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
was graduated from 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 and during fiscal 1999 met once. 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, Ross and Kleinman. The Compensation Committee
was formed in fiscal 1997 and during fiscal 1999 met two times. 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 1999,
the Executive Committee did not meet. Each director attended at least 75% of the
meetings of the Board of Directors and of all committees of the Board of
Directors on which he served.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act, as amended (the "Exchange
Act") requires the Company's executive officers and directors, and persons who
beneficially own more than ten percent of the Company's Common Stock, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than ten
percent beneficial owners are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Based upon on a review of the copies of such forms furnished to the Company
and written representations from the Company's executive officers and directors,
the Company believes that during fiscal 1999 all Section 16(a) filing
requirements applicable to its executive officers, directors and greater than
ten percent beneficial owners were complied with, except that Messrs. Burt,
Newell and Ross each reported a transaction late on Form 5.
23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The tables and discussion below sets forth information about the
compensation awarded to, earned by, or paid to the Company's chief executive
officer and the four other most highly compensated executive officers during the
fiscal years indicated. Except as noted below, no other executive officer of the
Company earned compensation in excess of $100,000 during any of such periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- ---------------------------
FISCAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS COMPENSATION(2)
- --------------------------------------------------- ----------- ---------- ---------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Anil J. Doshi...................................... 1999 $ 259,375 $ 136,120 100,000 $ 71,406
Chairman of the Board and Chief Executive 1998 205,375 90,365 -0- 65,857
Officer(3) 1997 169,821 24,105 -0- 19,631
Mark Ellis......................................... 1999 228,250 104,580 90,000 39,810
Vice Chairman of the Board and President(3) 1998 180,730 65,720 -0- 43,918
1997 158,336 24,105 -0- 15,260
Terence W. Burt.................................... 1999 191,816 76,360 80,000 27,836
Vice President and Chief Operating Officer 1998 149,239 36,968 10,000 25,424
1997 110,080 44,996 -0- 21,526
Kenneth J. Newell.................................. 1999 187,976 68,890 60,000 47,901
Vice President for Corporate Affairs 1998 152,663 32,860 -0- 37,934
1997 129,902 24,105 -0- 25,604
Stephen McDonnell.................................. 1999 89,640 49,800 15,000 18,945
Chief Financial Officer 1998 71,950 24,645 10,000 10,246
1997 56,212 16,070 4,000 9,481
</TABLE>
- ------------------------
(1) Represents the period beginning February 1 of the prior year and ending
January 31 of the year indicated.
(2) Represents contributions made by the Company to Executive Pension Plans, of
$43,625, $16,285, $9,856, $9,856 and $7,470 for the year ended January 31,
1999, for Messrs. Doshi, Ellis, Burt, Newell and McDonnell, respectively,
the remainder being car allowances and insurance benefits.
(3) Messrs. Doshi and Ellis entered into employment agreements with the Company
in November 1995, which provide for annual base salaries of $296,000 and
$260,000 as of February 1, 1999, respectively. See "--Employment
Arrangements." Prior to November 1995, Messrs. Doshi and Ellis did not
receive any salary compensation for services to the Company.
24
<PAGE>
STOCK OPTIONS
The following table sets forth certain summary information concerning
individual grants of stock options made during the year ended January 31, 1999,
to each of the Company's executive officers named in the Summary Compensation
Table.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
---------------------------------------
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE
OPTIONS IN FISCAL PRICE PER EXPIRATION
NAME GRANTED 1999(1) SHARE(2) DATE(3) 5% 10%
- ------------------------------------- ----------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Anil J. Doshi........................ 40,000 7.3% $ 8.75 3/23/08 $ 270,400 $ 593,200
60,000 10.9% 5.625 10/6/08 593,100 1,077,300
Mark Ellis........................... 40,000 7.3% 8.75 3/23/08 270,400 593,200
50,000 9.1% 5.625 10/6/08 494,250 897,750
Terence W. Burt...................... 40,000 7.3% 8.75 3/23/08 270,400 593,200
40,000 7.3% 5.625 10/6/08 395,400 718,200
Kenneth J. Newell.................... 40,000 7.3% 8.75 3/23/08 270,400 593,200
20,000 3.6% 5.625 10/6/08 197,700 359,100
Stephen McDonnell.................... 5,000 0.9% 8.75 3/23/08 33,800 74,150
10,000 1.8% $ 5.625 10/6/08 $ 98,850 $ 179,550
</TABLE>
- ------------------------
(1) Based on an aggregate of 550,360 options which were granted during fiscal
1999.
(2) All options were granted at fair market value on the date of grant.
(3) All options have a fixed term of ten years and vest in full over 30 months
from the date of grant, at a rate of 33 1/3% after 6 months, a further
33 1/3% after 18 months and the remainder at 30 months.
(4) Potential gains are reported net of the option exercise price, but before
taxes associated with exercise. These amounts represent certain assumed
rates of appreciation only in the price of the Company's Common Stock during
the terms of the options in accordance with rates specified in applicable
federal securities regulations. Actual gains on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in this table may not necessarily
be achieved. The Company's Common Stock price, as reported by the Nasdaq
National Market on January 30, 1999, was $10.00 per share.
The following table sets forth at January 31, 1999, the number of options
and the value of unexercised options held by each of the executive officers
named in the Summary Compensation Table. During fiscal year ended January 31,
1999, Messrs. Burt and Newell exercised 7,500 options each and Mr. McDonnell
exercised 10,000 options.
25
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED
OPTIONS AT YEAR END IN-THE-MONEY
-------------------------- OPTIONS AT
NAME EXERCISABLE UNEXERCISABLE YEAR END(1)
- ---------------------------------------------------- ----------- ------------- ------------
<S> <C> <C> <C>
Anil J. Doshi....................................... 303,333 66,667 $1,604,166
Mark Ellis.......................................... 300,000 60,000 1,589,584
Terence W. Burt..................................... 190,834 56,666 966,118
Kenneth J. Newell................................... 212,500 40,000 1,049,866
Stephen McDonnell................................... 27,834 14,166 137,833
</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 30, 1999
($10.00).
EMPLOYMENT ARRANGEMENTS
Messrs. Doshi and Ellis entered into employment agreements with the Company
which commenced November 1, 1995. These agreements are terminable at any time
after an initial term of three years on one years' notice. Under such agreements
at February 1, 1999, Messrs. Doshi and Ellis are entitled to base annual
salaries of L179,687 ($296,000) and L158,125 ($260,000), respectively. 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. Burt and Newell entered into employment agreements with the Company
at salaries as at February 1, 1999 of L136,562 ($225,000), and L136,562
($225,000).
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
The Company maintains contributory, non-defined pension plans for the
benefit of Messrs. Doshi and Ellis to which it makes contributions of
approximately L36,000 ($60,000) per annum. The Company also maintains
contributory, non-defined pension plans for the benefit of Messrs. Burt and
Newell to which it makes contributions of approximately L11,875 ($20,000) per
annum.
1996 EQUITY INCENTIVE PLAN
In May 1996, the Company, adopted the 1996 4Front Technologies, Inc. Equity
Incentive Plan (the "Plan"), which, as amended, 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 1,100,000 shares of the Common Stock of the Company. The
Plan permits the granting of options to officers, employees, directors and
consultants of the Company. This Plan was initially 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 or above market
value at time of grant, have been granted to employees and to two directors. In
November 1997, a total of 87,500 options, exercisable at $8.75, being at or
above market value at the time of grant, were granted to employees. During 1998,
the Board granted 40,000 options each to Messrs. Doshi, Ellis, Burt and Newell
and 6,000 options each to Messrs. Kleinman, Ross and Murray, each at an exercise
price of $8.75 per share, equal to the fair market value of the Common Stock on
the date of grant. During the year, the Board also granted 60,000 options to Mr.
Doshi, 50,000 options to Mr. Ellis, 40,000 options to Mr. Burt, 20,000 options
to Mr. Newell and 6,000 options each to Messrs. Kleinman, Ross and Murray, each
at an exercise price of $5.625 per share, equal to the fair market value of the
Common Stock on the date of grant.
26
<PAGE>
COMPENSATION OF DIRECTORS
Messrs. Murray and Ross each received compensation of $20,000 in the fiscal
year 1999. In February 1999, their compensation was increased to $23,000 per
year. No other director receives any compensation for services as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Doshi, Ellis,
Murray, Ross and Kleinman. Messrs. Doshi and Ellis abstain from votes on their
compensation. See "--Employment Arrangements."
27
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 23, 1999 (except as
otherwise noted in the footnotes), regarding the beneficial ownership determined
in accordance with the rules of the Securities and Exchange Commission, which
generally attribute beneficial ownership of securities to persons who possess
sole or shared voting power and/or investment power with respect to those
securities, of the Company's Common Stock by: (i) each person known by the
Company to own beneficially more than five percent of the Company's outstanding
Common Stock; (ii) each director of the Company; (iii) each executive officer
named in the Summary Compensation Table (see "Executive Compensation"); and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise specified, the named beneficial owner has the sole voting and
investment power over the shares listed.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED OWNERSHIP
- ---------------------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Anil J. Doshi (1)................................................................. 993,545 9.09%
Mark Ellis (2).................................................................... 555,312 5.08%
Terence W. Burt (3)............................................................... 233,416 2.16%
Kenneth J. Newell (4)............................................................. 255,078 2.35%
Stephen McDonnell (5)............................................................. 27,834 *
Craig Kleinman (6)................................................................ 53,750 *
Brian V. Murray (7)............................................................... 16,500 *
Arthur Keith Ross (8)............................................................. 171,350 1.60%
FMR Corp. (9)..................................................................... 1,059,000 9.96%
Putnam Investments (10)........................................................... 610,076 5.74%
All Directors and Executive Officers as a Group (8 persons) (11).................. 2,561,273 21.79%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 45,512 shares owned by Aliki Financial Corp., in which Mr. Doshi
has a 65% interest. Also includes 303,333 shares purchasable pursuant to
immediately exercisable options.
(2) Includes 45,512 shares owned by Aliki Financial Corp., in which Mr. Ellis
has a 35% interest. Also includes 300,000 shares purchasable pursuant to
immediately exercisable options.
(3) Includes 27,744 shares owned by Mr. Burt's wife and 14,397 shares held by
Lex Nominees International as nominee for a Jersey resident settlement
established for the benefit of Mr. Burt and his wife and children. Also
includes 190,834 shares purchasable pursuant to immediately exercisable
options. Mr. Burt disclaims beneficial ownership of the shares held by his
wife.
(4) Includes 4,551 shares owned by Mr. Newell's wife and 14,395 shares held by
Lex Nominees International as nominee for a Jersey resident settlement
established for the benefit of Mr. Newell and his wife and children. Also
includes 212,500 shares purchasable pursuant to immediately exercisable
options. Mr. Newell disclaims beneficial ownership of the shares held by his
wife.
(5) Consists of 27,834 shares purchasable pursuant to immediately exercisable
options.
(6) Includes 8,000 shares owned by Belaire Business Group, in which Mr. Kleinman
has a 50% interest. Also includes 4,000 shares purchasable pursuant to
immediately exercisable options.
(7) Includes 14,000 shares purchasable pursuant to immediately exercisable
options.
(8) Includes 72,500 shares purchasable pursuant to immediately exercisable
options.
(9) Based on information in an amended Schedule 13G filed February 10, 1999, by
the beneficial owner. The amended Schedule 13G states that such beneficial
owner has sole power to dispose of all of, and shared power to vote, such
shares. The address of such beneficial owner is 82 Devonshire Street,
Boston, MA 02109.
28
<PAGE>
(10) Based on information in an amended Schedule 13G filed February 5, 1999, by
the beneficial owner. The amended Schedule 13G states that such beneficial
owner has shared voting and dispositive power of the shares. The address of
such beneficial owner is One Post Office Square, Boston, MA 02109.
(11) Includes 1,125,001 shares subject to options which are immediately
exercisable. Does not include 261,499 shares subject to options which are
not exercisable within 60 days of April 27, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADVANCES FROM AFFILIATES AND RECEIVABLE FROM RELATED PARTY
As of January 31, 1999, a total of $23,000 remained outstanding from the
Company to Mr. Doshi primarily representing expenses due for fiscal 1999. As at
January 31, 1997, a receivable of $644,356 was due from Mr. Anthony Malpas, a
related party. During fiscal 1998, Mr. Malpas invoiced the Company $198,250 for
consultancy services. The remaining receivable from Mr. Malpas of $446,106 was
settled on September 30, 1997. At January 31, 1999, all receivables from related
parties have been settled and there is nothing owed to the Company.
During the periods ended January 31, 1997, 1998 and 1999 the Company
compensated one of its officers/stockholders for accounting, investor relations
and administration services in the amount of approximately $47,286, $64,868 and
$69,009, respectively. At January 31, 1998 and 1999, $0 and $0 respectively, was
owed to this related party.
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.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) 1. Financial Statements. See Index to Consolidated Financial Statements commencing on
page F-1 of the Report.
2. Financial Statement Schedules. See Index to Consolidated Financial Statements
commencing on page F-1 of the Report.
3. Exhibits
(b) The following exhibits are filed or incorporated by reference as part of this Report
(Exhibit Nos. 10.01, 10.2, 10.5, 10.6, 10.10, 10.11, 10.12, 10.14, 10.19, 10.20 and
10.21 management contracts, compensation plans or arrangements):
3.1 Certificate of Incorporation of the Company, as amended to date.(1)
3.2 Bylaws of the Company, as amended to date.(1)
4.1 Specimen Form of Stock Certificate for the Company's Common Stock.(4)
10.1 1996 Equity Incentive Plan.(1)
10.2 Indemnity Agreement between the Company and Craig Kleinman dated October 27, 1987.(2)
10.3 Share Sale Agreement Relating to K2 Group Plc dated March 7, 1994 by and among Lex
Nominees International Limited and ORS, Peter Leith Wellings and 4Front Technologies,
Inc.(3)
10.4 Form of Option to Purchase Shares in 4Front Technologies, Inc. dated as of March 7,
1994 by and among 4Front Technologies, Inc. and shareholders of K2 Group Plc.(3)
10.5 Form of Executive Pension Plan for the benefit of Anil J. Doshi.(4)
10.6 Form of Executive Pension Plan for the benefit of Mark Ellis.(4)
10.7 Form of 4Front Executive Officer Service Agreement.(4)
10.8 Lease Agreement dated September 7, 1988 for lease by K2 Group Plc of premises at Unit
4, Colonial Business Park, Colonial Way, Watford England, as amended.(4)
10.9 Lease Agreement dated April 28, 1992 for lease by K2 Group Plc of premises at Units 5
and 6, Colonial Business Park, Colonial Way, Watford England.(4)
10.10 Form of Executive Officer Service Agreement (K2).(4)
10.11 K2 Systems Group Pension Scheme effective March 6, 1991.(4)
10.12 Form of Executive Pension Plan for the benefit of Kenneth J. Newell.(4)
10.13 Form of Amendment dated October 21, 1994 to Option to Purchase Shares in 4Front
Technologies, Inc. dated as of March 7, 1994 by and among 4Front Technologies, Inc.
and shareholders of K2 Group Plc.(5)
10.14 Form of November 1, 1994 Option Agreement for Employees and Consultants.(5)
10.15 Share Sale Agreement Relating to CI Support Limited effective November 1, 1994 by and
among Burnaby Investments Limited and K2 Group plc.(5)
10.16 Share Sale Agreement Relating to CCG Holdings Limited dated May 11, 1995 by and among
Richard Ian Sharpe & ORS and the Company.(5)
10.17 Facility Letter dated May 25, 1994 from Barclays Bank Plc to Compass Computer Group
Limited.(5)
10.18 Facility Letter dated April 12, 1995 from Barclays Bank Plc to Compass Computer Group
Limited.(5)
10.19 Form of Employment Agreement effective as of November 1, 1995 between the Company and
Anil J. Doshi.(6)
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
10.20 Form of Employment Agreement effective as of November 1, 1995 between the Company and
Mark Ellis.(6)
10.21 Form of August 1995 Option Agreement for Employees and Consultants.(5)
10.22 Share Sale Amendment Agreement dated December 13, 1995, between Richard Ian Sharpe &
ORS, the Company, Joel Jervis, CCG Holdings Limited and 4Front Group Plc.(6)
10.23 Put Option Agreement dated December 13, 1995, between Richard Ian Sharpe & ORS and
the Company.(6)
10.24 Factoring Agreement with Kellock Limited, dated October 23, 1997.(1)
10.25 Credit Facility with Midland Bank, dated August 28, 1997.(1)
10.26 Lease for Slough Property, as amended, dated as of December 29, 1989, as amended.(1)
10.27 Lease for Hatton Garden Property, dated as of July 15, 1997.(1)
10.28 Lease for Ruislip Property, dated as of February 21, 1997.(1)
10.29 Amendment to Factoring Agreement with Kellock Limited, dated May 23, 1998.(7)
10.30 Letter of Intent between 4Front Group Plc and Barclays Bank, dated May 7, 1998.(7)
21.1 List of Subsidiaries.
23.1 Consent of KPMG.
27.0 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1998
(2) Previously filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1987.
(3) Previously filed as Exhibit to the Company's Report on Form 8-K dated March
7, 1994.
(4) Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1994.
(5) Previously filed as Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1995.
(6) Previously filed as Exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal period ended October 31, 1995.
(7) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1, File No. 333-53867, filed June 5, 1998.
(b) Reports on Form 8-K.
None.
31
<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.
4FRONT TECHNOLOGIES, INC.
By: /s/ ANIL J. DOSHI
-----------------------------------------
Anil J. Doshi, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Date: April 27, 1999
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.
NAME AND POSITION DATE
- ------------------------------ -------------------
/s/ ANIL J. DOSHI
- ------------------------------
Anil J. Doshi, Chairman of the
Board, April 27, 1999
Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ MARK ELLIS
- ------------------------------
Mark Ellis, Vice Chairman of April 27, 1999
the Board,
President and Director
/s/ TERENCE W. BURT
- ------------------------------
Terence W. Burt, Vice April 27, 1999
President, Chief
Operating Officer and Director
/s/ KENNETH J. NEWELL
- ------------------------------
Kenneth J. Newell, Vice April 27, 1999
President for
Corporate Affairs and Director
/s/ STEPHEN MCDONNELL
- ------------------------------
Stephen McDonnell, Chief
Financial Officer April 27, 1999
(Principal Financial and
Accounting Officer)
/s/ CRAIG KLEINMAN
- ------------------------------
Craig Kleinman, Secretary and April 27, 1999
Director
/s/ BRIAN V. MURRAY
- ------------------------------ April 27, 1999
Brian V. Murray, Director
/s/ ARTHUR KEITH ROSS
- ------------------------------ April 27, 1999
Arthur Keith Ross, Director
32
<PAGE>
4FRONT TECHNOLOGIES, 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, 1998 and 1999................................................................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 31, 1998 and 1999................................................ F-3
Consolidated Statements of Operations for the years ended January 31, 1997, 1998 and 1999.................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended January 31, 1997, 1998 and
1999..................................................................................................... F-5
Consolidated Statements of Comprehensive Income (loss) for the years ended January 31, 1997, 1998 and
1999..................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1997, 1998 and 1999.................. F-6
Notes to the Consolidated Financial Statements............................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
4Front Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of 4Front
Technologies, Inc. and Subsidiaries as of January 31, 1999 and 1998 and the
related consolidated statements of operations, comprehensive income (loss),
changes in stockholders' equity and cash flows for each of the years in the
three year period ended January 31, 1999. 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
Technologies, Inc. and Subsidiaries as of January 31, 1999 and 1998 and the
results of their operations and their cash flows for the years in the three year
period ended January 31, 1999, in conformity with United States generally
accepted accounting principles.
KPMG
Chartered Accountants
Registered Auditors
London, England
April 29, 1999
F-2
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1998 1999
----------- -----------
$'000'S $'000'S
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................... $ 4,586 $ 26,162
Accounts receivable, net of allowance for doubtful accounts of $452,000
and $642,000, respectively........................................... 18,357 54,910
Deposits............................................................... 49 51
Inventories............................................................ 11,852 23,840
Prepaid expenses....................................................... 1,835 4,130
Income taxes receivable................................................ 17 16
Other current assets................................................... 219 487
----------- -----------
Total current assets............................................... 36,915 109,596
PROPERTY AND EQUIPMENT, net............................................ 2,855 5,899
INTANGIBLE ASSETS, net................................................. 16,935 26,573
DEFERRED INCOME TAX.................................................... 2,402 3,354
SOFTWARE DEVELOPMENT COSTS............................................. -- 757
OTHER ASSETS........................................................... 101 93
----------- -----------
TOTAL ASSETS........................................................... $ 59,208 $ 146,272
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................... $ 16,279 $ 37,384
Accrued liabilities.................................................... 4,027 16,734
Stockholder advances................................................... 18 23
Lines of credit--bank.................................................. 2,309 5,180
Notes payable.......................................................... 2,858 5,393
Capital lease obligations, current portion............................. 482 608
Income taxes payable................................................... 1,273 2,159
Deferred revenue....................................................... 8,728 19,334
----------- -----------
Total current liabilities.......................................... 35,974 86,815
CAPITAL LEASE OBLIGATIONS, less current portion........................ 497 780
LONG TERM LIABILITIES.................................................. 1,143 --
----------- -----------
TOTAL LIABILITIES...................................................... 37,614 87,595
----------- -----------
----------- -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 value, 30,000,000 shares authorized, 7,051,317 and
10,628,067 shares issued and outstanding, respectively............... 7 11
Additional paid-in capital............................................. 24,870 56,123
Accumulated (deficit) reserves......................................... (3,154) 2,668
Accumulated other comprehensive deficit................................ (129) (125)
----------- -----------
Total stockholders' equity......................................... 21,594 58,677
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 59,208 $ 146,272
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
--------------------------------
1997 1998 1999
--------- --------- ----------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
REVENUES:
Services................................................ $ 19,032 $ 45,302 $ 93,849
Products................................................ 33,983 38,843 55,048
--------- --------- ----------
53,015 84,145 148,897
--------- --------- ----------
Cost of Services........................................ 6,642 22,541 44,171
Cost of Products........................................ 29,376 32,121 46,131
--------- --------- ----------
36,018 54,662 90,302
--------- --------- ----------
GROSS PROFIT
Services................................................ 12,391 22,761 49,678
Products................................................ 4,606 6,722 8,917
--------- --------- ----------
16,997 29,483 58,595
OPERATING EXPENSES:
Selling, general and administrative expenses............ 13,792 22,796 45,775
Depreciation............................................ 518 1,092 1,494
Amortization............................................ 458 1,121 1,933
Write down of goodwill.................................. 552 -- --
Reorganization and restructuring costs.................. 2,286 -- --
--------- --------- ----------
Total operating expenses............................ 17,606 25,009 49,202
INCOME (LOSS) BEFORE INTEREST, INCOME TAXES, AND SHARE
OF RESULTS IN EQUITY INVESTEE......................... (609) 4,474 9,393
Interest income....................................... 277 276 837
Interest expense...................................... (297) (632) (842)
Write down of investments............................. (500) -- --
--------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND SHARE OF RESULTS
IN EQUITY INVESTEE.................................... (1,129) 4,118 9,388
SHARE OF OPERATING (LOSS) OF EQUITY INVESTEE............ (799) -- --
--------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....................... (1,928) 4,118 9,388
INCOME TAXES............................................ 416 1,049 3,566
--------- --------- ----------
NET INCOME (LOSS)....................................... $ (2,344) $ 3,069 $ 5,822
--------- --------- ----------
--------- --------- ----------
NET INCOME (LOSS) PER COMMON SHARE (Basic).............. $ (0.45) $ 0.47 $ 0.64
--------- --------- ----------
--------- --------- ----------
NET INCOME (LOSS) PER COMMON SHARE (Diluted)............ $ (0.45) $ 0.43 $ 0.56
--------- --------- ----------
--------- --------- ----------
DILUTED SHARES OUTSTANDING.............................. 5,170,254 7,129,307 10,484,300
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
SHARES AMOUNT RESERVES INCOME/(DEFICIT) TOTAL
------------ ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
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)
Other comprehensive deficit.......... -- -- -- (3,868) (3,868)
------------ ------------- ------------- --------------- -------------
BALANCE, JANUARY 31, 1997............ 6,514,747 22,988,088 (6,222,386) 2,833 16,768,535
Stock issued to acquire
Eurosystems........................ 58,896 600,000 -- -- 600,000
Exercise of warrants and stock
options............................ 477,674 1,289,298 -- -- 1,289,298
Net income for the year.............. -- -- 3,068,620 -- 3,068,620
Other comprehensive deficit.......... -- -- -- (132,270) (132,270)
------------ ------------- ------------- --------------- -------------
BALANCE, JANUARY 31, 1998............ 7,051,317 24,877,386 (3,153,766) (129,437) 21,594,183
Exercise of warrants and stock
options............................ 621,458 2,612,207 -- -- 2,612,207
Stock issued in offering, net of
offering costs..................... 2,955,292 28,644,635 -- -- 28,644,635
Net income for the year.............. -- -- 5,822,022 -- 5,822,022
Other comprehensive income........... -- -- -- 4,367 4,367
------------ ------------- ------------- --------------- -------------
BALANCE, JANUARY 31, 1999............ 10,628,067 $ 56,134,228 $ 2,668,256 $ (125,070) $ 58,677,414
------------ ------------- ------------- --------------- -------------
------------ ------------- ------------- --------------- -------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Net income (loss).................................................. $ (2,344) $ 3,069 $ 5,822
Foreign currency translation adjustment............................ (4) (132) 4
--------- --------- ---------
Comprehensive income (loss)........................................ $ (2,348) $ 2,937 $ 5,826
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss)............................................................... $ (2,344) $ 3,069 $ 5,822
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities
Depreciation.................................................................... 518 1,092 1,494
Amortization.................................................................... 458 1,121 1,933
Write down of goodwill.......................................................... 552 -- --
Write down of investments....................................................... 500 -- --
Share of results in equity investee............................................. 799 -- --
(Gain) on disposal of fixed assets.............................................. (152) (54) (36)
Decrease (increase) in accounts receivable...................................... (2,850) 2,234 (17,908)
Decrease (increase) in deposits................................................. 6 (18) (2)
(Increase) in inventories....................................................... (1,162) (2,432) (5,200)
(Increase) in prepaid expenses.................................................. (119) (171) (850)
Decrease in deferred income tax................................................. -- 725 1,875
Increase in income taxes........................................................ 188 256 595
Decrease (increase) in other current assets..................................... 37 11 (268)
Increase in receivable--related party........................................... 47 -- 5
Increase (decrease) in accounts payable......................................... 529 (1,783) (162)
Increase (decrease) in accrued liabilities...................................... 429 (263) 3,052
Increase (decrease) in deferred revenue......................................... 499 (2,402) 4,335
--------- --------- ---------
Net cash provided (used) by operating activities................................ (2,065) 1,385 (5,315)
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment........................................................... $ (608) $ (880) $ (1,956)
Proceeds from disposal of equipment............................................. 186 164 167
Acquisition of subsidiaries, including related expenses, net of cash acquired... (3,840) (6,574) (5,199)
Capitalization of software development costs.................................... -- -- (850)
Investment in and advances to equity investee................................... (551) 143 --
Increase (decrease) in other assets............................................. 23 (17) 8
--------- --------- ---------
Net cash (used) by investing activities......................................... (4,790) (7,164) (7,830)
--------- --------- ---------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Decrease (increase) in lines of credit-bank..................................... (1,053) 468 1,741
Proceeds from notes payable..................................................... -- 2,858 2,536
Repayment of notes payable...................................................... (2,849) -- --
Proceeds from (repayment of) stockholders' advances............................. 112 (40) 5
Decrease (increase) in deferred offering costs.................................. 339 -- --
Payments of capital lease obligations........................................... (445) (731) (822)
Net proceeds from issuance of common stock...................................... 16,015 1,289 31,257
--------- --------- ---------
Net cash provided by financing activities....................................... 12,119 3,844 34,717
--------- --------- ---------
Effect of exchange rate changes on cash......................................... (3) (132) 4
Net increase (decrease) in cash................................................. 5,261 (2,067) 21,576
--------- --------- ---------
Cash at beginning of period..................................................... 1,392 6,653 4,586
Cash at end of period........................................................... $ 6,653 $ 4,586 $ 26,162
Supplemental disclosure of cash flow information:
Cash paid for interest expense.................................................. $ 297 $ 632 $ 842
Cash paid for income taxes...................................................... $ 547 $ 42 $ 486
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 AND 1999
1. NATURE OF BUSINESS
4Front Technologies, Inc. and subsidiaries (the "Company" or "4Front") is a
UK based specialized computer services company. The Company provides key
elements of distributed computing, including systems development and
integration, storage and 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.
3. USE OF ESTIMATES
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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Actual amounts could differ from those estimates. Significant assets
and liabilities with reported amounts based on estimates include accounts
receivable, inventories and deferred revenues.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) REVENUE RECOGNITION
Revenue from the sale of computer hardware is recognized when the product is
shipped. 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.
SOFTWARE REVENUE RECOGNITION
On February 1, 1998, the Company adopted AICPA Statement of Position ("SOP")
97-2, "Software Revenue Recognition," which specifies the criteria that must be
met for recognizing revenues from software sales. The adoption of SOP 97-2 in
fiscal 1999 has not had a material impact on the Company's financial position or
results of operations.
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.
F-7
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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) 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.
E) 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.
F) FOREIGN CURRENCY TRANSLATION
The Company considers the pound sterling to be the functional currency of
its UK operations, the French franc to be the functional currency of its French
operations and Italian lira to be the functional currency of its Italian
operations. The reporting currency of the Company is the U.S. dollar;
accordingly, all amounts included in the consolidated financial statements have
been translated into U.S. dollars.
All assets and liabilities of the non-U.S. operations are translated into
U.S. dollars using the exchange rates in effect on reporting dates for assets
and liabilities. Income and expenses are translated at averaged rates in effect
for the periods presented. The cumulative currency translation adjustment is
reflect as a separate component of stockholders' equity on the consolidated
balance sheet.
Foreign currency transaction gains and losses are included in the
consolidated results of operations for the periods presented. During the fiscal
years ended January 31, 1997, 1998 and 1999, the Company had operating foreign
exchange gains of $339,000, $611,000 and $664,000, respectively.
G) INTANGIBLE ASSETS
In connection with acquisitions accounted for under the purchase method (see
note 9), 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 between five and fifteen years.
Accumulated amortization at January 31, 1997, 1998 and 1999 is $1.3 million,
$2.4 million and $4.3 million, respectively.
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.
F-8
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
H) PURCHASED AND DEVELOPED SOFTWARE
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs associated
with the planning and designing phase of software development, including coding
and testing activities necessary to establish technological feasibility, are
classified as product development and expensed as incurred. Once technological
feasibility has been determined, additional costs incurred in development,
including coding, testing and documentation, are capitalized.
Amortization of purchased and developed software is provided on a
product-by-product basis over the estimated economic life of the software,
generally three years, using the straight-line method. Amortization commences
when a product is available for general release to customers. Unamortized
capitalized costs determined to be in excess of the net realizable value of a
product are expensed at the date of such determination.
I) 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 be realized. Income tax expense is tax payable for the
current period and the change during the year in deferred tax assets and
liabilities.
J) 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.
K) NET INCOME (LOSS) PER COMMON SHARE
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.
F-9
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L) CONCENTRATION OF CREDIT RISK
At January 31, 1998 and 1999, cash includes L2,137,939 ($3,491,254) and
L2,987,508, ($4,916,840), respectively, held in demand deposit accounts in
United Kingdom and French banks where deposits are not insured by their
respective governments. These balances are subject to foreign currency
fluctuations, which in the past have not been material.
M) STOCK-BASED COMPENSATION
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 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 was effective in 1996 and the Company 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 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.
N) LONG-LIVED ASSETS
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.
O) ADOPTION OF NEW STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") was issued. Under SFAS 130 all
items that meet the definition of comprehensive income will be reported in a
financial statement for the period in which they are recognized. Comprehensive
income will include changes in the balances of items that are reported directly
in a separate component of Stockholders' equity on the Consolidated Balance
Sheets.
F-10
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") was also issued
in June 1997 and is effective for fiscal years beginning after December 31,
1997. SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis used internally
for evaluating segment performance and resource allocation.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", (SFAS 133) was
issued. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivatives instruments embedded in other
contracts, (collectively referred to as derivatives), and for hedging
transactions. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheets and measure those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company is currently
assessing the effects of SFAS 133 but does not expect this standard to have a
significant impact on the Company's financial condition.
5. PURCHASED AND DEVELOPED SOFTWARE
Purchased and developed software consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
Purchased software........................................................... $ -- $ --
Software development costs................................................... -- 850
Less accumulated amortization................................................ -- (93)
--------- ---------
$ -- $ 757
--------- ---------
--------- ---------
</TABLE>
6. SEGMENT INFORMATION
Effective February 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing their performance. The Company's chief
operating decision maker is the Chief Executive Officer (CEO).
The Company provides information technology and outsourcing solutions and
has two industry segments which are categorized as "Products" and "Services".
The Company uses gross profit as its measure of segmental performance.
The Company has always disclosed revenues and gross profits for Products and
Services within its Consolidated Statement of Operations.
F-11
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
6. SEGMENT INFORMATION (CONTINUED)
The Company operates solely in Europe and hence all of its revenues are
derived from this region. Inter-company transfers between the Company's
subsidiaries are transacted at prices intended to allow the subsidiaries'
earnings to be comparable to unaffiliated distributors.
Geographic area information for the years ended January 31, 1997, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
UNITED KINGDOM
OF GREAT OTHER
U.S.A. BRITAIN INTERNATIONAL CONSOLIDATED
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
$'000'S $'000'S $'000'S $'000'S
Year ended January 31, 1999
Net revenues............................................. $ -- $ 113,664 $ 35,233 $ 148,897
Net income after taxes................................... 133 4,697 992 5,822
Long life assets......................................... $ -- $ 3,293 $ 2,606 $ 5,899
Year ended January 31, 1998
Net revenues............................................. $ -- $ 81,478 $ 2,667 $ 84,145
Net income/(loss) after taxes............................ (304) 3,373 -- 3,069
Long life assets......................................... $ -- $ 2,715 $ 140 $ 2,855
Year ended January 31, 1997
Net revenues............................................. $ -- $ 53,015 $ -- $ 53,015
Net income/(loss) after taxes............................ (318) (2,026) -- (2,344)
Long life assets......................................... $ -- $ 2,051 $ -- $ 2,051
</TABLE>
No single customer represented more than 10% of total sales during the years
ended January 31, 1997, 1998 or 1999.
7. 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.
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.
8. 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, $1.3 million 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, and this was fully utilized by January 31, 1998.
F-12
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
9. BUSINESS ACQUISITIONS
Effective August 15, 1996, the Company acquired Hammer Distribution Limited
("Hammer") for L1.1 million cash ($1.7 million) plus an agreement to pay an
additional maximum of L750,000 cash ($1.2 million) 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. An amortization
period of ten years is used in relation to this acquisition.
Effective October 11, 1996, 4Front Technologies 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. An amortization period of ten years is used in relation to this
acquisition.
Effective September 8, 1997, the Company acquired 100% of the issued and
outstanding shares of Firstpoint Limited. The Company paid approximately $4.45
million in cash, net of cash received in the acquisition. In addition to the
amount paid at the closing of the transaction, the Company will be paid a
further $1.8 million as deferred consideration in equal quarterly instalments to
February 1999. An amortization period of fifteen years is used in relation to
the Firstpoint acquisition.
Effective October 28, 1997, the Company acquired 100% of the issued and
outstanding shares of Eurosystems France S.A. which included the wholly-owned
subsidiaries Netix S.A. and Eurosystems Belgium. The Company issued 58,896
($600,000) in shares of its Common Stock to the former shareholders and $530,000
cash as consideration on acquisition. There is no deferred consideration. An
amortization period of ten years is used in relation to the Eurosystems
acquisition.
Effective August 1, 1998, the Company acquired some assets and assumed
liabilities of $4.0 million in relation to Decision Systems International
(France) from the official receiver in France. An amortization period of ten
years is used in relation to this acquisition.
Effective September 28, 1998, the Company acquired 100% of the shares of
Memorex Telex Italia for a consideration of $1.1 million plus an agreement to
pay an additional $750,000, based on the profits of Memorex to July 31, 1999. An
amortization period of fifteen years is used in relation to this acquisition.
Effective November 9, 1998, the Company acquired 100% of the share capital
of Penagen Training Limited for a total consideration of $370,000. A period of
five years amortization is used in relation to this acquisition.
Effective December 1, 1999, the Company acquired 100% of the shares of
I-NEA, a French subsidiary of Siemens for a total sum of $4.0 million. An
amortization period of five years is used in relation to this acquisition.
All acquisitions in fiscal years ended January 31, 1997, 1998 and 1999 have
been accounted for under the purchase method. The results of all companies
acquired have been consolidated in the Company's figures from date of
acquisition.
F-13
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
10. EARNINGS PER SHARE
The computation for basic earnings per share is based on the net income
divided by the weighted average number of common shares outstanding for the
period.
The Computation for diluted earnings per share is based on the Treasury
Stock Method as per the requirements of SFAS No. 128. When Common Stock
equivalents have an anti-dilutive effect on earnings (loss) per share, they are
excluded from the calculation.
The calculation for earnings per share is shown below for the years ended
January 31,
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income/(loss).................................................... $ (2,343,787) $ 3,068,620 $ 5,822,022
------------- ------------- -------------
Weighted Average Number of Common Shares outstanding................. 5,170,254 6,588,911 9,130,824
------------- ------------- -------------
Net income/(loss) per Common Share Basic............................. $ (0.45) $ 0.47 $ 0.64
------------- ------------- -------------
------------- ------------- -------------
DILUTED EARNINGS PER SHARE
Net income/(loss).................................................... $ (2,343,787) $ 3,068,620 $ 5,822,022
------------- ------------- -------------
Weighted Average Number of Common Shares outstanding................. 5,170,254 6,588,911 9,130,824
Additional Shares to be Issued upon Assumed Exercise of Options and
Warrants........................................................... -- 2,556,925 3,132,840
Shares Hypothetically Repurchased at the Average Market Price with
the Proceeds of Exercise........................................... -- (2,016,529) (1,779,364)
------------- ------------- -------------
Adjusted Shares for Dilution......................................... 5,170,254 7,129,307 10,484,300
------------- ------------- -------------
Net income/(loss) per Common Share Diluted........................... $ (0.45) $ 0.43 $ 0.56
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-14
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
11. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
Computer hardware......................................... $ 11,702 $ 23,678
Computer software......................................... 20 7
Work in progress.......................................... 130 155
--------- ---------
$ 11,852 $ 23,840
--------- ---------
--------- ---------
</TABLE>
12. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
Vehicles.................................................. $ 1,327 $ 1,363
Furniture, fixtures and equipment......................... 2,767 3,741
Computer equipment........................................ 3,168 6,589
--------- ---------
7,262 11,693
Less accumulated depreciation............................. (4,407) (5,794)
--------- ---------
$ 2,855 $ 5,899
--------- ---------
--------- ---------
</TABLE>
13. ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
Value Added Tax............................................ $ 1,876 $ 10,567
Payroll taxes.............................................. 1,866 6,044
Other...................................................... 285 123
--------- ---------
$ 4,027 $ 16,734
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
14. LINES OF CREDIT BANK
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
The Company has a L3.0 million (approximately $4.9 million) line of credit
(overdraft protection) with a United Kingdom bank. Interest is charged at
1.25% above bank base rates. Bank base interest rate was 5.50% at January
31, 1999.................................................................. $ -- $ 2,386
The Company had a L650,000 (approximately $1.1 million) line of credit
(overdraft protection) with a United Kingdom bank. Interest was charged at
2.75% above bank base rates. Bank base rates were 7.25% at January 31,
1998. The Company closed this facility during fiscal 1999................. 943 --
The Company had a L997,000 (approximately $1.6 million) line of credit
(overdraft protection) with a United Kingdom bank which includes L200,000
($0.3 million approximately) VAT and duty deferment on the import of goods
into the United Kingdom. Interest was charged at 2.5% above bank base rate
of 7.25% at January 31, 1998. This facility was closed by the Company
during fiscal 1999........................................................ 644 --
The Company's French subsidiary's have bank lines of credit with French and
Belgium banks for $5.5 million. Interest is charged at rates between 3.36%
and 8.55% on utilized amounts. The lines of credit are secured on the
assets of these companies................................................. 722 --
The Company's Italian subsidiary has bank lines of credit with Italian banks
for $4.1 million. Interest is charged at rates between 4.5% and 8.3% on
utilized amounts.......................................................... -- 2,794
--------- ---------
$ 2,309 $ 5,180
--------- ---------
--------- ---------
</TABLE>
15. NOTES PAYABLE
Notes payable are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<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 0.075% of the receivable balance and interest at
1.5% above bank base rates. Bank base rate was 5.5% at January 31, 1999.
The facility is secured by a fixed and floating charge over the trade
receivable of the Hammer subsidiary....................................... $ 2,858 $ 5,393
--------- ---------
$ 2,858 $ 5,393
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 AND 1999
16. INCOME TAXES
The Company files a separate U.S. federal income tax return for its domestic
operations and a Local income tax return for each of its foreign subsidiaries.
The foreign subsidiaries compute taxes at rates in effect in their respective
locations. 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 its foreign operations.
At January 31, 1999, the Company has available for future use approximately
$2.2 million of net operating loss carryforwards expiring from 2005 through
2019, related to its U.S. operations and $12.4 million related to its foreign
operations of which $0.7 million can be carried forward indefinitely. The tax
benefits of acquired net operating loss carry forwards will be recorded as
decreases to goodwill when realized.
The provision for income taxes (benefit) is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Current:
U.S. Federal...................................... $ -- $ -- $ --
U.S. State........................................ -- -- --
Foreign........................................... 526 625 1,656
----- --------- ---------
526 625 1,656
Deferred:
U.S. Federal...................................... -- (467) 97
U.S. State........................................ -- (71) 15
Foreign........................................... (110) 962 1,798
----- --------- ---------
(110) 424 1,910
----- --------- ---------
Total provision for income taxes.................. $ 416 $ 1,049 $ 3,566
----- --------- ---------
----- --------- ---------
</TABLE>
The Company computes income tax expense based on the foreign statutory
rates. Income tax expense for the years ended January 31, 1997, was computed by
applying the UK statutory rate of 33% to pre-tax income (loss). During the year
ended January 31, 1998, the UK statutory rate was reduced from 33% to 31%. For
the year ended January 31, 1998, the Company computed income tax expense at a
rate of 33% for 2 months and 31% for 10 months resulting in a blended tax rate
of 31.33% for the year. For the year ended January 31, 1999, the Company
computed income tax expense for the year at statutory rates applicable to its
European subsidiaries, ranging from 31% to 40%.
F-17
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
16. INCOME TAXES (CONTINUED)
Income tax expense for the years ended January 31, 1997, 1998 and 1999
differed from the amounts computed by applying the appropriate UK statutory tax
rate to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Expected tax at UK rate........................... $(636) $ 1,290 $ 2,910
Effect of write downs and amortization of
goodwill........................................ 395 351 598
Change in valuation allowance..................... 452 (418) (111)
Utilization of net operating losses for which no
benefit was previously recognized............... -- (289) --
Effect of UK statutory rate change on deferred tax
assets and liabilities.......................... -- 59 --
Effect of foreign profits taxed at non-UK rates... 333
Non deductible items and other.................... 205 56 (164)
--------- --------- ---------
Actual tax charge................................. $ 416 $ 1,049 $ 3,566
--------- --------- ---------
--------- --------- ---------
</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>
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
Net operating loss carryforwards.................................... $ 2,041 $ 5,447
Other deferred tax assets........................................... 662 724
--------- ---------
Total deferred tax assets........................................... 2,703 6,171
Valuation allowance................................................. (301) (2,817)
--------- ---------
Deferred tax assets, net............................................ $ 2,402 $ 3,354
--------- ---------
--------- ---------
</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 $7.0
million. 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.
At January 31, 1998 and 1999, the Company had established a valuation
allowance against its otherwise recognizable deferred tax assets of its domestic
operations due to uncertainty surrounding the ability of the Company, to
generate taxable income in future periods in its U.S. operations. For the year
ended January 31, 1999, the valuation allowance decreased by $111,000 because
management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize $886,000 of
deferred tax assets of its domestic operations.
F-18
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
17. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases vehicles under capital leases which expire over the next
three years. The gross amount of these capital leases is as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
Vehicles, gross............................................. $ 1,025 $ 2,272
Less accumulated depreciation............................... (499) (914)
--------- ---------
Net......................................................... $ 526 $ 1,358
--------- ---------
--------- ---------
</TABLE>
The total charge for depreciation for assets under capital leases for the
year to January 31, 1999, was $415,000.
Future minimum lease payments including payments for rental inventories with
a net book value of $88,500, under capital leases together with the present
value of net minimum lease payments at January 31, 1999, are as follows:
<TABLE>
<CAPTION>
$'000'S
-------
<S> <C>
2000.............................................. $ 700
2001.............................................. 475
2002.............................................. 362
2003.............................................. 27
2004.............................................. --
-------
Total minimum lease payments...................... 1,564
Less amount representing interest................. (176)
-------
Present value of net minimum lease payments....... 1,388
Less current portion.............................. (608)
-------
$ 780
-------
-------
</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, 1997, 1998 and 1999, amounted to $1.1 million,
$2.4 million and $2.8 million, respectively.
F-19
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The principal lease commitments for premises are as follows:
- the Company's K2 subsidiary leases an office facility in Watford, England
for $204,000 (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 $144,000 (L87,000) per year expiring
February 2002.
- the Company's Firstpoint subsidiary leases an office/warehouse facility in
Slough, England for $469,000 (L285,000) per year. The lease which expires
in December 2010 is subject to periodic reviews.
- the Company's Datapro subsidiary leases an office/warehouse facility in
Brighton, England for $58,000 (L35,000) per year, expiring in February
2002.
- the Company's 4Front Products subsidiary leases an office/warehouse
facility in Newbury, England for $61,000 (L37,000) per year. The lease
expires in September 2002.
- the Company's Hammer subsidiary leases office/warehouse facilities in
Basingstoke, England for $110,000 (L67,000) per year. The leases expire in
September 1999 and March 2000.
- the Company's 4Front Group subsidiary leases offices in London, England
for $61,000 (L37,000) per year. The lease expires in April 2002.
- the Company's Italian subsidiary leases offices in Milan, Italy for
$332,000 (Lira 585 million) per year. The leases expire in January and
December 2003.
- the Company's French subsidiary leases offices in Paris, France for
$250,000 (French Franc 1.5 million) per year. The lease expires in
September 1999 and is renewable at the Company's discretion.
- the Company's French subsidiary leases further offices in Paris, France
for $580,000 (French Franc 3.4 million) per year. The lease expires in
July 1999 and is renewable at the Company's discretion.
Obligations under operating leases are as follows for each of the years
ending January 31:
<TABLE>
<CAPTION>
$'000'S
---------
<S> <C>
2000............................................................................... $ 3,671
2001............................................................................... 2,722
2002............................................................................... 2,076
2003............................................................................... 1,461
2004............................................................................... 1,193
Thereafter......................................................................... 6,261
---------
Total.............................................................................. $ 17,384
---------
---------
</TABLE>
F-20
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
18. STOCKHOLDERS' EQUITY
RECENT STOCK TRANSACTIONS
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 overallotment option under which an additional 450,000 shares of
Common Stock were sold.
Pursuant to the Offering of the Company's Common Stock completed in June
1996, 300,000 warrants to purchase Common Stock were granted to the underwriters
at an exercise price of $9.49.
In the fiscal year ended January 31, 1997, 6,000 warrants at $2.00 were
exercised.
During fiscal 1998, 407,774 of the $2.00 warrants were exercised, 69,900 of
the $7.50 warrants were exercised and all remaining $2.00, $7.50 and $4.00
warrants expired.
During fiscal 1999, 18,750 of the $4.50 warrants were exercised.
During fiscal 1999, 602,708 options were exercised, 387,708 of which were
exercised as part of the Company's public offering and the remainder during the
year.
In July 1998, the Company sold 2,955,292 new shares of Common Stock at
$11.00 in a public offering of shares.
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 1998 1999
- ---------------------------------------------------------------- ----------------- --------- ---------
<S> <C> <C> <C>
Prior to January 31, 2000....................................... $ 4.50 197,500 197,500
September 1996 to June 2000..................................... $ 4.50 257,500 238,750
Prior to May 2000............................................... $ 6.50 150,457 150,457
October 1996 to October 2001.................................... $ 7.50 113,333 113,333
June 1996 to June 2001.......................................... $ 9.49 300,000 300,000
</TABLE>
19. 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.
F-21
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
19. STOCK OPTIONS (CONTINUED)
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 Technologies, 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. The
stockholders on September 4, 1998, approved an increase in the amount of options
available for grant under the plan to 1,100,000.
Pursuant to the Plan, in February 1997, 122,000 options were issued by the
Company to management and employees to purchase Common Stock at an exercise
price of $5.75. These options are exercisable through February 2007. As at
January 31, 1999, 74,000 of these options expired due to the grantees no longer
working for the Company.
Pursuant to the Plan, in February 1997, 125,000 options were issued by the
Company to management and employees to purchase Common Stock at an exercise
price of $3.38. These options are exercisable through February 2007. As at
January 31, 1999, 30,000 of these options expired due to the grantees no longer
working for the Company.
Pursuant to the Plan, in November 1997, 87,500 options were issued by the
Company to management and employees to purchase Common Stock at an exercise
price of $8.75. These options are exercisable through November 2007. As at
January 31, 1999, 4,750 of these options expired due to the grantees no longer
working for the Company.
Pursuant to the Plan, in April 1998, 283,840 options were issued by the
Company to management and employees to purchase Common Stock at an exercise
price of $8.75. These options are exercisable through April 2008.
Pursuant to the Plan, in October 1998, 266,520 options were issued by the
Company to management and employees to purchase Common Stock at an exercise
price of $5.625. These options are exercisable through October 2008.
F-22
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
19. STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock option plans as of January
31, 1997, 1998 and 1999 and changes during the years ended on those dates are
presented below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------ -----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES
('000'S) PRICE ('000'S) PRICE ('000'S)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year............................. 2,010 $ 4.37 1,985 $ 4.36 2,185
Granted...................................................... -- -- 335 5.65 550
Exercised.................................................... -- -- -- -- (602)
Forfeited.................................................... (25) 5.00 (135) 4.90 --
----- ----- -----
Outstanding at end of year................................... 1,985 $ 4.36 2,185 $ 4.52 2,133
----- ----- -----
----- ----- -----
Options exercisable at year end.............................. 1,985 1,983 1,872
----- ----- -----
----- ----- -----
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE
-----------
<S> <C>
Outstanding at beginning of year............................. $ 4.52
Granted...................................................... 7.24
Exercised.................................................... 4.19
Forfeited.................................................... --
Outstanding at end of year................................... $ 5.31
Options exercisable at year end..............................
</TABLE>
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.
STOCKHOLDERS ADVANCES
As of January 31, 1998 and 1999, the Company's majority stockholders were
owed $18,000 and $23,000, respectively, in non-interest, unsecured advances, due
on demand.
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.
21. PENSION PLANS
The Company sponsors, through its 4Front Group subsidiary, a money purchase
pension plan (voluntary) covering its Chairman and Chief Executive Officer and
President. The Company made contributions of approximately $54,000 (L32,000) and
$60,000 (L36,000) in the years ended January 31, 1998 and 1999, respectively per
year under this plan. The Company through its subsidiaries also sponsor money
purchase pension plans (voluntary) covering certain directors and employees.
There are no accrued pension contributions at January 31, 1997, 1998 and 1999,
under any plan. The Company and its subsidiaries contributed $382,000 under all
pension plans for other employees in the fiscal year ended January 31, 1999.
F-23
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
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 1997, 1998 and 1999. 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>
AS REPORTED PRO FORMA
---------------------------------- ----------------------------------
1997 1998 1999 1997 1998 1999
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) (in thousands)............ $ (2,344) $ 3,069 $ 5,822 $ (2,995) $ 2,155 $ 4,380
Income (loss) per share..................... $ (0.45) $ 0.47 $ 0.64 $ (0.58) $ 0.31 $ 0.45
Average shares outstanding.................. 5,170,254 6,588,911 9,130,824 5,170,254 6,851,253 9,681,784
Average fair value of grants during the
year......................................
Black-Scholes option pricing model
assumptions:
Risk-free interest rate................... 5.2% 5.2% 4.5%
Expected life (years)..................... 3.6 10 10
Volatility................................ 70.9% 66.9% 65.7%
</TABLE>
23. FOREIGN OPERATIONS
Included in the accompanying consolidated financial statements are the
following amounts for the United Kingdom and Continental Europe operations at:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
$'000'S $'000'S
<S> <C> <C>
Cash...................................................... $ 3,491 $ 4,918
Accounts receivable....................................... 18,357 54,910
Inventories............................................... 11,852 23,840
Deposits.................................................. 49 51
Other current assets...................................... 1,936 4,104
Income taxes receivable................................... 6 16
Property and equipment, net............................... 2,855 5,899
Other assets.............................................. 101 93
--------- ---------
$ 38,647 $ 93,831
--------- ---------
--------- ---------
</TABLE>
F-24
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998 AND 1999
23. FOREIGN OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Revenues................................................ $ 53,015 $ 84,145 $ 148,897
--------- --------- ---------
Cost of revenues........................................ 36,018 54,662 90,302
Expenses................................................ 18,607 25,061 49,340
Income taxes............................................ 416 1,049 3,566
--------- --------- ---------
Net income (loss)....................................... $ (2,026) $ 3,373 $ 5,689
--------- --------- ---------
--------- --------- ---------
</TABLE>
During the year ended January 31, 1997, 1998 and 1999, 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,
-------------------------------
1997 1998 1999
--------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Purchase of equipment financed with capital lease
obligations........................................... $ 398 $ 675 $ 1,476
Stock issued to acquire Eurosystems..................... $ -- $ 600 $ --
</TABLE>
25. VALUATION AND QUALIFYING ACCOUNTS
The following is a summary of the change in the allowance for doubtful
accounts for each of the years in the three year period ended January 31, 1999:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Balance at the beginning of the year.................... $ 79 $ 273 $ 452
Provision............................................... 349 518 626
Charges................................................. (155) (339) (436)
--------- --------- ---------
Balance at the end of the year.......................... $ 273 $ 452 $ 642
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
Exhibit 21.1
4Front Technologies
4Front Group PLC.
4Front Group (UK) Limited
Penegan Training Limited
K2 Systems PLC
4Front Services Limited
4Front Networks Limited
Hammer Distribution Limited
4Front Software Limited
Datapro Computers Group Limited
Firstpoint Limited
4Front Products Limited
Datapro Computers Limited
Allied Business Systems Limited
Shortlands Computing Services Limited
Xanadu Systems Limited (Dormant)
V2 Electronics Limited (Dormant)
Mitre Technology Limited (Dormant)
4Help Software Support Limited (Dormant)
Eurosystems G.A. France S.A.
Nettix S.A.
Eurosystems G.A. Belgium NV
4Front Technologies France S.A.
Decision Systems S.A.
I-NEA S.A.
Labfire Limited
Memoriex Telex Italia
<PAGE>
Exhibit 23.1
The Board of Directors
4Front Technologies, Inc.
We consent to incorporation by reference in the registration statements (No.
333-27905) and (no. 333-43813) on Forms S-8 of 4Front Technologies, Inc.
("4Front") of our report dated April 29, 1999, relating to the consolidated
balance sheets of 4Front and subsidiaries as of January 31, 1999, and 1998,
and the related consolidated statements of operations, changes in
Stockholders' equity, comprehensive income (loss), and cash flows for each of
the years in the three-year period ended January 31, 1999, and all related
schedules, which report appears in the January 31, 1999 annual report on
Form 10-K of 4Front.
KPMG
London
29 April 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 26162000
<SECURITIES> 0
<RECEIVABLES> 26804000
<ALLOWANCES> 642000
<INVENTORY> 23840000
<CURRENT-ASSETS> 109596000
<PP&E> 11693000
<DEPRECIATION> 5794000
<TOTAL-ASSETS> 146272000
<CURRENT-LIABILITIES> 86815000
<BONDS> 0
0
0
<COMMON> 56134000
<OTHER-SE> 2543000
<TOTAL-LIABILITY-AND-EQUITY> 146272000
<SALES> 148897000
<TOTAL-REVENUES> 148897000
<CGS> 90302000
<TOTAL-COSTS> 90302000
<OTHER-EXPENSES> 47929000
<LOSS-PROVISION> 436000
<INTEREST-EXPENSE> 842000
<INCOME-PRETAX> 9388000
<INCOME-TAX> 3566000
<INCOME-CONTINUING> 5822000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5822000
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.56
</TABLE>
