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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
MARK ONE |1|
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................... to ........................
Commission File Number 0-8345
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4FRONT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0675510
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
6300 South Syracuse Way, Suite 293
Englewood, Colorado 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 721-7341
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |x| No |_|
The number of shares outstanding of each of the Registrant's classes of Common
Stock at November 30, 1999 was 11,540,216 shares of Common Stock, $.001 par
value.
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<PAGE>
Item 1. Financial Statements
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
Nine and Three Month Periods Ended October 31, 1999
TABLE OF CONTENTS
Page
Number
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 1999 and
October 31, 1999 (unaudited) 1
Condensed Consolidated Statements of Operations for the nine and
three month periods ended October 31, 1998 and 1999 (unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended October 31, 1999 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income (loss)
for the nine and three months periods ended October 31, 1998 and
1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine and
three month periods ended October 31, 1998 and 1999 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 31, October 31,
1999 1999
----------- -----------
$ `000's $ `000's
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $26,162 $22,971
Accounts receivable, net of allowance
for doubtful accounts of $642,000 and
$751,000 respectively 54,910 63,572
Deposits 51 53
Inventories 23,840 31,328
Prepaid expenses 4,130 7,723
Income taxes receivable 16 17
Other current assets 487 346
-------- --------
Total current assets 109,596 126,010
PROPERTY AND EQUIPMENT, net 5,899 9,699
INTANGIBLE ASSETS, net 26,573 28,082
DEFERRED INCOME TAX 3,354 1,686
SOFTWARE DEVELOPMENT COSTS 757 498
OTHER ASSETS 93 40
-------- --------
TOTAL ASSETS $146,272 $166,015
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 31, October 31,
1999 1999
------------ -----------
$ `000's $ `000's
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $37,384 $44,376
Accrued liabilities 16,734 17,146
Stockholder advances 23 23
Lines of credit-bank 5,180 10,315
Notes payable 5,393 5,922
Capital lease obligations, current portion 608 678
Income taxes payable 2,159 6,942
Deferred revenue 19,334 11,061
--------- ---------
Total current liabilities 86,815 96,463
CAPITAL LEASE OBLIGATIONS, less current portion 780 1,308
--------- ---------
TOTAL LIABILITIES 87,595 97,771
--------- ---------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001, 5,000,000
shares authorized. No shares issued or
outstanding -- --
Common stock, par value $.001, 30,000,000
shares authorized 10,628,067 and 11,540,216
shares issued and outstanding, respectively 11 11
Additional paid-in capital 56,123 59,500
Retained earnings 2,668 9,145
Cumulative foreign currency translation adjustment (125) (412)
--------- ---------
Total stockholders' equity 58,677 68,244
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $146,272 $166,015
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For The Nine Months Ended
October 31, October 31, October 31, October 31,
1998 1999 1998 1999
----------- ----------- ----------- -----------
$ `000's $ `000's $ `000's $ `000's
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Services $22,982 $46,142 $56,096 $123,737
Products 14,664 19,926 35,669 57,973
--------- --------- --------- ---------
37,646 66,068 91,765 181,710
--------- --------- --------- ---------
Cost of Services 10,423 21,880 25,723 59,025
Cost of Products 12,332 17,353 29,786 50,179
--------- --------- --------- ---------
22,755 39,233 55,509 109,204
--------- --------- --------- ---------
GROSS PROFIT
Services 12,559 24,262 30,373 64,712
Products 2,332 2,573 5,883 7,794
--------- --------- --------- ---------
14,891 26,835 36,256 72,506
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative expenses 11,550 20,898 27,628 57,171
Depreciation 411 451 997 1,289
Amortization 538 874 1,388 2,432
--------- --------- --------- ---------
Total operating expenses 12,499 22,223 30,013 60,892
--------- --------- --------- ---------
INCOME BEFORE INTEREST AND INCOME TAXES: 2,392 4,612 6,243 11,614
Interest income 351 199 527 683
Interest expense (186) (278) (605) (746)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES: 2,557 4,533 6,165 11,551
INCOME TAXES 939 2,091 2,219 5,074
--------- --------- --------- ---------
NET INCOME $1,618 $2,442 $3,946 $6,477
--------- --------- --------- ---------
NET INCOME PER COMMON SHARE (Basic) $0.15 $0.22 $0.46 $0.60
NET INCOME PER COMMON SHARE (Diluted) $0.14 $0.20 $0.39 $0.55
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Currency
Common Stock Retained Translation
Shares Amount Earnings Adjustment Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1999 10,628,067 $56,134,228 $2,668,256 $(125,070) $58,677,414
Net income for
period (unaudited) -- -- 1,985,092 -- 1,985,092
Share options exercised 99,940 404,976 -- -- 404,976
Other comprehensive Income (loss) -- -- -- (20,519) (20,519)
------------ ------------ ------------ ------------ ------------
Balance, April 30, 1999 10,728,007 56,539,204 4,653,348 (145,589) 61,046,963
(unaudited)
------------ ------------ ------------ ------------ ------------
Net income for
period (unaudited) -- -- 2,049,819 -- 2,049,819
Share options exercised 49,083 242,263 -- -- 242,263
Shares issued to acquire SIL 60,000 611,250 -- -- 611,250
Other comprehensive Income (loss) -- -- -- (62,646) (62,646)
------------ ------------ ------------ ------------ ------------
Balance, July 31, 1999 10,837,090 $57,392,717 $6,703,167 $(208,235) $63,887,649
(unaudited)
------------ ------------ ------------ ------------ ------------
Net income for
period (unaudited) -- -- 2,442,227 -- 2,442,227
Share options exercised 703,126 2,118,463 -- -- 2,118,463
Foreign currency
translation adjustment -- -- -- (203,887) (203,987)
------------ ------------ ------------ ------------ ------------
Balance, October 31, 1999 11,540,216 $59,511,180 $9,145,394 $(412,222) $68,244,352
(unaudited)
============ ============ ============ ============ ============
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Three Months Ended For The Nine Months Ended
October 31, 1998 October 31, 1999 October 31, 1998 October 31, 1999
---------------- ---------------- ---------------- ----------------
$ `000's $ `000's $ `000's $ `000's
<S> <C> <C> <C> <C>
Net income $1,618 $2,442 $3,946 $6,477
Foreign currency translation adjustment 159 (204) (23) (287)
------- ------- ------- -------
Comprehensive income $1,777 $2,038 $3,923 $6,190
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
October 31, October 31, October 31, October 31,
1998 1999 1998 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,618 $2,442 $3,946 $6,477
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 411 451 997 1,289
Amortization 538 874 1,388 2,432
Loss (gain) on disposal of fixed assets 27 (11) 47 (104)
Decrease in deferred income tax 484 533 1,181 1,668
(Increase) in accounts receivable (9,640) (1,263) (10,290) (4,424)
(Increase) decrease in inventories (2,502) 2,110 (4,737) (6,693)
(Increase) in prepaid expenses (358) (636) (664) (2,516)
Increase in income taxes 597 2,079 1,192 4,215
(Increase) decrease in other current assets (50) (8) (173) 141
(Decrease) increase in accounts payable 1,824 (6,978) 1,530 3,019
(Decrease) increase in accrued liabilities 1,976 (1,021) 1,765 (1,046)
Increase (decrease) in deferred revenue 1,915 (3,147) 264 (8,806)
-------- -------- -------- --------
Net cash (used) by operating activities (3,163) (4,575) (3,558) (4,348)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (266) (747) (897) (2,712)
Proceeds from disposal of equipment 27 2 75 109
Acquisition of subsidiaries (2,717) (628) (3,653) (3,875)
Capitalization of software development costs -- (10) -- (145)
(Increase) decrease in other assets (2) (33) 13 53
-------- -------- -------- --------
Net cash used by investing activities (2,958) (1,416) (4,462) (6,570)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in lines of credit-bank -- 3,530 (2,309) 5,135
Proceeds from notes payable 1,708 31 1,329 529
Payments of capital lease obligations (200) 216 (517) (416)
Net proceeds from issuance of common stock -- -- 29,232 --
Net proceeds from exercise of warrants/options -- 2,118 2,462 2,766
-------- -------- -------- --------
Net cash from financing activities 1,508 5,895 30,197 8,014
-------- -------- -------- --------
Effect of exchange rate changes on cash 159 (204) 23 (287)
-------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH (4,454) (300) 22,000 (3,191)
Cash at beginning of period 31,240 23,271 4,586 26,162
-------- -------- -------- --------
Cash at end of period $26,786 $22,971 $26,786 $22,971
======== ======== ======== ========
Cash paid for interest expense $186 $278 $605 $746
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
4Front Technologies, Inc. and subsidiaries (the "Company" or "4 Front")
is a leading provider of information technology solutions, which consist of
specialized computer services and complementary products, primarily to blue chip
corporations and government authorities in the United Kingdom and, to a growing
extent, in Continental Europe. The Company's solutions include hardware
maintenance, help desk support, network servers, specialized software services
and products and the supply of high-end storage systems.
NOTE 2 - BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, the accompanying interim unaudited
condensed consolidated financial statements contain all material adjustments
consisting only of normal recurring adjustments necessary to present fairly the
financial condition, the results of operations, the changes in stockholders'
equity and cash flows of 4Front Technologies, Inc. for the interim periods
presented.
The results of the three and nine months ended October 31, 1999 are not
necessarily indicative of the results of operations for the full year. These
interim unaudited condensed consolidated financial statements and related
footnotes should be read in conjunction with the financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended January
31, 1999.
6
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
October 31, October 31, October 31, October 31,
1998 1999 1998 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net income $1,618,087 $2,442,227 $3,945,478 $6,477,138
------------ ------------ ------------ ------------
Weighted Average Number of Common Shares
outstanding 10,593,067 11,081,348 8,631,206 10,841,527
------------ ------------ ------------ ------------
Net income per Common Share Basic $0.15 $0.22 $0.46 $0.60
============ ============ ============ ============
Diluted Earnings Per Share
Net income $1,618,087 $2,442,227 $3,945,478 $6,477,138
------------ ------------ ------------ ------------
Weighted Average Number of Common Shares
outstanding 10,593,067 11,081,348 8,631,206 10,841,527
Additional Shares to be Issued upon Assumed
Exercise of Options and Warrants 3,269,705 2,435,095 3,269,705 2,435,095
Shares Hypothetically Repurchased at the Average
Market Price with the Proceeds of Exercise (2,045,750) (1,181,960) (1,907,612) (1,456,834)
------------ ------------ ------------ ------------
Adjusted Shares for Dilution 11,817,022 12,334,483 9,993,299 11,819,788
------------ ------------ ------------ ------------
Net income per Common Share Diluted $0.14 $0.20 $0.39 $0.55
============ ============ ============ ============
</TABLE>
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: January 31, 1999 October 31, 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Computer hardware $23,678 $31,132
Computer software 7 11
Work in progress 155 185
------- -------
$23,840 $31,328
======= =======
</TABLE>
7
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES
The Company files a separate U.S. federal income tax return for its
domestic operations and a UK income tax return for its foreign operations. The
United Kingdom subsidiaries compute taxes at rates in effect in that country and
become payable when assessed by the Inland Revenue. Deferred federal income
taxes are not provided on the undistributed earnings of its foreign subsidiaries
to the extent the Company intends to permanently reinvest such earnings in the
United Kingdom.
The Company has provided income tax for the nine months ended October
31, 1999 of $5.1 million on the profits of its operations, and for the nine
months to October 31, 1998 $2.2 million.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company is a leading provider of information technology solutions,
which consist of specialized computer services and complementary products
primarily to blue chip corporations and government authorities in the United
Kingdom and, to a growing extent, in Continental Europe. The Company's solution
include hardware maintenance, help desk support, network services, specialized
software services and products and the supply of high-end storage systems.
The Company has grown rapidly due, in large part, to acquisitions.
Compass Computer Group ("Compass") was acquired in fiscal 1996, Hammer
Distribution Limited ("Hammer") and Datapro Computers Group Limited ("Datapro")
were acquired in fiscal 1997 and Firstpoint Limited ("Firstpoint") and
Eurosystems France S.A. ("Eurosystems") were acquired in fiscal 1998. Decision
Systems ("DS"), Memorex Telex Italia ("Memorex"), Penagen Training Ltd
("Penagen") and I-NEA S.A. ("I-NEA") were acquired in fiscal 1999. On July 28,
1999, the Company entered into an agreement to acquire the SIL ("SIL") group of
companies. These acquisitions have been accounted for under the purchase method
of accounting and on a consolidated basis in the Company's financial statements
for periods ending after the effective date of such acquisitions. On November 1,
1999, the Company acquired 100% of CVSI and subsidiaries none of whose results
or operations were consolidated in the quarter. On December 3, 1999, the Company
disposed of its principal Products Distribution subsidiary "Hammer" to its
management for $8.7 million cash. As used herein, references to a "fiscal year"
refer to January 31 of such year. For example, fiscal 1999 refers to the year
ended January 31, 1999.
Because of the effect upon the Company's results of operations for the
year ended January 31, 1999 of acquisitions made during that period, direct
comparison of the Company's results of operations for the periods ended July 31,
1998 and July 31, 1999 will not, in the view of management of the Company, prove
meaningful. Instead, a summary of the elements which management of the Company
believes essential to an analysis of the results of operations for such periods
is presented below.
Results of Operations
Three months ended October 31, 1999 compared with the three months ended October
31, 1998
Revenues
Revenues for the three months ended October 31, 1999 were $66.1
million, an increase of $28.5 million, or approximately 75.8% compared to $37.6
million for the three months ended October 31, 1998. This growth came primarily
from the acquisitions of Memorex, I-NEA and SIL and from organic growth of the
services and products businesses. Revenues from services were $46.1 million, or
70% of the total revenue, with revenues from the supply of products at $19.9
million, or 30% of the total revenues. In the comparable period of the prior
year, Service revenues were 61% of the total revenues and Products revenues were
39% of total revenues. During the quarter revenues from the SIL acquisition
contributed $4.9 million to service revenues and $NIL to product revenues.
Gross Profit
Gross profit for the three months ended October 31, 1999 was $26.8
million, an increase of $11.9 million, or 80.2% compared to $14.9 million for
the three months ended October 31, 1998. This growth came primarily from the
acquisitions of Memorex, I-NEA and SIL and from organic growth of the services
and products businesses. Gross margin increased from 39.6% for the three months
ended October 31, 1998 to 40.6% for the three months ended October 31, 1999.
Gross profit for services increased 93.2% from $12.6 million for the three
months ended October 31, 1998 to $24.3 million for the three months ended
October 31, 1999. Gross profit for products increased 10.3% from $2.3 million
for the three months ended October 31, 1998 to $2.6 million for the three months
to October 31, 1999.
9
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses were $20.9 million, an
increase of $9.3 million, or 80.9% compared to $11.6 million for the three
months ended October 31, 1998. As a percentage of revenues, selling, general and
administrative expenses increased to 31.6% from 30.7% for the three months ended
October 31, 1999. Selling general and administrative expenses increased
primarily as a result of a growth in infrastructure necessary to support the
expansion of the Company's businesses.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended
October 31, 1999 was $1.3 million, an increase of $375.000, or 39.4% compared to
$949,000 for the three months ended October 31, 1998. This increase arose
principally from the acquisitions of Memorex acquired in the quarter to October
31, 1998, I-NEA acquired in the fourth quarter and SIL completed in the most
recent quarter. Depreciation was $451,000, an increase of $40,000 or 9.7%, from
$411,000 for the prior period. Amortization of goodwill from acquisitions was
$874,000, an increase of $336,000, or 62.5%, from $538,000 for the prior period.
An amortization period of between ten and fifteen years is utilized with respect
to acquisitions.
Income (Loss) Before Interest Income and Expense and Income Taxes
Income before interest expense and income taxes ("IBIT") for the three
months ended October 31, 1999 was $4.6 million, an increase of $2.2 million, or
91.7%, as compared to $2.4 million for the three months ended October 31, 1998.
As a percentage of revenues, income before interest expense and income taxes
increased to 6.9% in the three months ended October 31, 1999 as compared to 6.4%
for the three months ended October 31, 1998.
IBIT before depreciation and amortization ("IBITDA") increased for the
three months ended October 31, 1999 to $5.9 million from $3.3 million for the
three months ended October 31, 1998 an increase of $2.6 million or 78.8%. As a
percentage of revenues, IBITDA increased to 9.0% for the three month period
ended October 31, 1999 from 8.9% for the comparable period ended October 31,
1998.
Interest
Interest expense for the three months ended October 31, 1999 was
$278,000, an increase of $92,000 or 49.5% compared to $186,000 for the three
months ended October 31, 1998, arising from higher utilization of bank lines of
credit during the period. Interest income decreased from $351,000 for the three
months ended October 31, 1998 to $199,000 a decrease of $152,000, arising from
lower cash balances on hand during the quarter.
Nine months ended October 31, 1999 compared with the nine months ended October
31, 1998
Revenues
Revenues for the nine months ended October 31, 1999 were $181.7
million, an increase of $89.9 million, or approximately 98.0% compared to $91.8
million for the nine months ended October 31, 1998, this growth came from the
acquisitions of Memorex, I-NEA and SIL and the remainder from organic growth of
the services and products businesses. Revenues from services were $123.7
million, or 68.1% of the total revenue, with revenues from the supply of
products at $57.9 million, or 31.9% of the total revenues. In the comparable
period of the prior year, Service revenues were 61.1% of the total revenues and
supply of products were 38.9% of the total revenues.
10
<PAGE>
Gross Profit
Gross profit for the nine months ended October 31, 1999 was $72.5
million, an increase of $36.2 million, or 99.7% compared to $36.3 million for
the nine months ended October 31, 1998, this growth came from the acquisitions
of Memorex, I-NEA and SIL and from organic growth of the services and products
businesses. Gross margin increased from 39.5% for the nine months ended October
31, 1998 to 39.9% for the nine months ended October 31, 1999. Gross profit for
services increased 113.1% from $30.4 million for the nine months ended October
31, 1998 to $64.7 million for the nine months to October 31, 1999. Gross profit
for products increased 32.5% from $5.9 million for the nine months ended October
31, 1998 to $7.8 million for the nine months ended October 31, 1999.
Selling, General and Administrative
Selling, general and administrative expenses were $57.2 million, an
increase of $29.5 million, or 106.9% compared to $27.6 million for the nine
months ended October 31, 1998. As a percentage of revenues, selling, general and
administrative expenses increased to 31.5% from 30.1% in the nine months ended
October 31, 1998. Selling general and administrative expenses increased
primarily as a result of the acquisitions of Memorex, I-NEA and SIL.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended October
31, 1999 was $3.7 million, an increase of $1.3 million, or 54.2% compared to
$2.4 million for the nine months ended October 31, 1998. This increase arose
principally from the acquisitions of Memorex, I-NEA and SIL. Depreciation was
$1.3 million, an increase of $301,000 or 30.2%, from $997,000 for the prior
period. Amortization of goodwill from acquisitions was $2.4 million, an increase
of $1.0 million, or 75.2%, from $1.4 million for the comparable period.
Income Before Interest Expense and Income Taxes
Income before interest expense and income taxes ("IBIT") for the nine
months ended October 31, 1999 was $11.6 million, a increase of $5.4 million, or
87.1%, as compared to $6.2 million for the nine months ended October 31, 1998,
the majority of this growth came from the acquisitions of Memorex, I-NEA and SIL
and the remainder from organic growth of the services business. As a percentage
of revenues, IBIT decreased to 6.4% in the nine months ended October 31, 1999 as
compared to 6.8% for the nine months ended October 31, 1998.
IBIT before depreciation and amortization increased for the nine months
ended October 31, 1999 to $15.3 million from $8.6 million for the nine months
ended October 31, 1998 an increase of $6.7 million or 77.9%, the majority of
this growth came from the acquisitions of Memorex, I-NEA and SIL and the
remainder from organic growth of the services business. As a percentage of
revenues, IBITDA decreased to 8.4% for the nine month period ended October 31,
1999 from 9.4% for the comparable period ended October 31, 1998.
Interest
Interest expense for the nine months ended October 31, 1999 was
$746,000, an increase of $141,000 or 23.3% compared to $605,000 for the nine
months ended October 31, 1998, arising from higher utilization of bank lines of
credit during the period. Interest income increased from $527,000 for the nine
months ended October 31, 1998 to $683,000 due to the increased cash on hand
resulting from the Company's offering in July 1998.
11
<PAGE>
Liquidity and Capital Resources
From inception until June 1996, the Company's sources of capital had
been cash flows from operations, private placements of securities, primarily
from its controlling stockholders and related parties, and borrowings from
banks. On June 19, 1996, the Company completed a public offering (the
"Offering") of 3,000,000 shares of the Company's Common Stock at a price of
$5.75 per share. On July 2, 1998, the Company completed a secondary public
offering through a further sale of 2.9 million shares of Common Stock. As a
result of this offering, the Company raised net proceeds of $31.0 million.
As of October 31, 1999, the Company had lines of credit with UK,
French, Italian and Belgian banks in the aggregate amount of (pound)15 million
($24 million). As of October 31, 1999 $10.3 million was outstanding.
The outstanding credit facilities are secured by the assets of the
Company and are periodically reviewed by the issuing institution. Management
expects to be able to maintain these credit arrangements for the foreseeable
future, although no assurance can be given.
The Company maintains a facility with a UK factoring company, pursuant
to which it borrows against eligible trade receivables. The Company pays the
factoring company an administrative fee of 0.075% of eligible trade receivables
and interest of 9% per annum. At October 1999, $1.6 million under this agreement
was outstanding. The Company also maintains a facility with Italian banks for
factoring trade receivable agreed on an adhoc basis. This is secured against
eligible trade receivables of Memorex. As at October 31, 1999, $4.3 million was
outstanding under this agreement.
Outstanding advances from stockholders are shown on the Company's
balance sheet as stockholder advances. Outstanding advances as of October 31,
1999 were $23,000. These outstanding advances do not bear interest, and are
payable on demand.
The Company's working capital increased from $22.8 million surplus at
January 31, 1999 to a surplus of $29.5 million at October 31, 1999.
Net cash provided by operating activities during the nine months ended
October 31, 1999 was $4.3 million, which reflected the net effect of an increase
in net accounts payable, accounts receivable, and inventories and a decrease in
deferred revenues. Net cash used by investing activities was $6.6 million, for
the nine months ended October 31, 1999, primarily reflecting cash used for the
purchase of equipment and the cost of acquisitions. Net cash provided by
financing activities was $8.1 million for the nine months ended October 31,
1999, resulting primarily from increase of bank lines of credit and payments of
outstanding obligations and the receipts from stock options which were exercised
during the period.
The Company believes that the net cash flows from operations and
borrowing availability under its credit facilities, will satisfy the Company's
anticipated working capital requirements through at least the next twelve
months. To the extent the Company raises additional capital by issuing equity or
convertible debt securities, ownership dilution to the Company's stockholders
will result. In the event that adequate funds are not available, the Company's
business may be adversely affected.
On November 1, 1999, the Company secured a bank facility of $25.0
million from Barclays Bank in the United Kingdom for the purposes of acquiring
CVSI and subsidiaries. This facility is charged interest at 6.75% and has
capital repayments every 6 months of $2.5 million, starting May 1, 2000.
Inflation
Inflation has not had a material effect upon the Company's results of
operations to date. In the event the rate of inflation should accelerate in the
future, it is expected that costs in connection with the provision by the
Company of its services and products will increase, and, to the extent such
increased costs are not offset by increased revenues, the operations of the
Company may be adversely affected.
12
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Change In Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on
September 7, 1999.
(b) The following directors were re-elected at the
Annual General Meeting of Stockholders and
received the vote indicated:
FOR WITHHELD
--------- --------
Anil Doshi 7,340,041 13,067
Mark Ellis 7,340,677 12,791
Terence Burt 7,340,377 13,091
Kenneth Newell 7,340,477 12,991
Craig Kleinman 7,340,477 12,991
Brian Murray 7,343,012 10,456
Arthur K. Ross 7,343,412 10,056
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, dated
November 2, 1999, with respect to the Company's
acquisition of CUSI, Inc.
13
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4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
December 8, 1999 4FRONT TECHNOLOGIES, INC.
By: /s/ Stephen McDonnell
Stephen McDonnell
Chief Financial Officer
14
