<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE [1]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............. to ...........
Commission File Number 0-8345
---------------------------
4FRONT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0675510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 South Syracuse Way, Suite 293
Englewood, Colorado 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 721-7341
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares outstanding of each of the Registrant's classes of Common
Stock at September 4, 2000 was 12,506,312 shares of Common Stock, $.001 par
value.
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<PAGE>
ITEM 1. FINANCIAL STATEMENTS
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
SIX AND THREE MONTH PERIODS ENDED JULY 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of January 31, 2000
and July 31, 2000 (unaudited) 1
Condensed Consolidated Statements of Operations for the six and three
month periods ended July 31, 1999 and 2000
(unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the six months ended July 31, 2000 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income
(loss) for the six and three months periods ended July 31, 1999
and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six and three
month periods ended July 31, 1999 and 2000
(unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
</TABLE>
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
2000 2000
---------------- ---------
$ `000'S $ `000'S
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 23,086 $ 8,791
Accounts receivable, net of allowance
for doubtful accounts of $1,047 and
$1,063 respectively 64,495 69,769
Deposits 51 51
Inventories 30,101 30,706
Prepaid expenses 7,728 8,941
Income taxes receivable 17 17
Other current assets 2,244 2,383
------ ------
Total current assets 127,722 120,658
PROPERTY AND EQUIPMENT, net 12,801 12,671
INTANGIBLE ASSETS, net 63,027 60,643
DEFERRED INCOME TAX 4,901 4,843
OTHER ASSETS 557 618
------ ------
TOTAL ASSETS $ 209,008 $ 199,433
======== =======
</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, JULY 31,
2000 2000
----------------- -----------
$ `000'S $ `000'S
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 55,509 52,831
Accrued liabilities 17,889 19,117
Lines of credit-bank 11,288 12,868
Notes payable 3,195 4,442
Capital lease obligations, current portion 697 829
Income taxes payable 8,801 8,709
Deferred revenue 23,199 18,649
--------- -----------
Total current liabilities 120,578 117,445
CAPITAL LEASE OBLIGATIONS, less current portion 873 1,049
LONG TERM LIABILITIES 25,103 22,407
--------- -----------
TOTAL LIABILITIES 146,554 140,901
--------- -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, par value $.001, 30,000,000
shares authorized 11,765,602 and 12,493,338
shares issued and outstanding, respectively 12 12
Additional paid-in capital 60,435 64,374
Retained earnings (deficit) 2,716 (4,144)
Other accumulated comprehensive loss (709) (1,710)
--------- -----------
Total stockholders' equity 62,454 58,532
--------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 209,008 $ 199,433
========= ==========
</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 SIX MONTHS ENDED
JULY 31, 1999 JULY 31, 2000 JULY 31, 1999 JULY 31, 2000
------------- ------------- ------------- -------------
$ `000'S $ `000'S $ `000'S $ `000'S
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Services $ 39,166 $ 57,167 $ 77,595 $ 112,366
Products 19,150 3,514 38,047 6,394
------ ------- -------- ---------
58,316 60,681 115,642 118,760
------ ------ ------- -------
Cost of Services 18,659 32,184 37,145 62,659
Cost of Products 16,584 3,217 32,826 5,811
------ ------- -------- -------
35,243 35,401 69,971 68,470
------ ------ -------- ------
GROSS PROFIT
Services 20,507 24,983 40,450 49,707
Products 2,566 297 5,221 583
------- -------- --------- --------
23,073 25,280 45,671 50,290
------ ------ -------- ------
OPERATING EXPENSES
Selling, general and administrative expenses 18,249 25,702 36,273 47,222
Depreciation 404 824 838 1,705
Amortization 798 1,476 1,558 2,907
Reorganization and restructuring costs 2001 - 1,527 - 6,545
Reorganization and restructuring costs 2000 - (2,424) - (2,424)
------ -------- -------- ------
Total operating expenses 19,451 (27,105) 38,669 55,955
------ -------- -------- ------
INCOME/(LOSS) BEFORE INTEREST, INCOME
TAXES: 3,622 (1,825) 7,002 (5,665)
Interest income 220 120 484 383
Interest expense (246) (456) (468) (1,169)
-------- ------- ---------- -------
INCOME/(LOSS) BEFORE INCOME TAXES: 3,596 (2,161) 7,018 (6,451)
INCOME TAXES 1,546 171 2,983 409
----- ------- --------- -------
NET INCOME/(LOSS) $ 2,050 $ (2,332) $ 4,035 $ (6,860)
----- ------- ----- -------
NET INCOME/(LOSS) PER COMMON SHARE
(BASIC) $ 0.19 $ (0.19) $ 0.38 $ (0.57)
NET INCOME/(LOSS) PER COMMON SHARE
(DILUTED) $ 0.17 $ (0.19) $ 0.34 $ (0.57)
</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>
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
------------ ACCUMULATED INCOME
SHARES AMOUNT RESERVES (DEFICIT) TOTAL
------ ------ ----------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 2000 11,765,602 $ 60,447 $ 2,716 $ (709) $ 62,454
Exercise of warrants and stock
options 192,846 1,132 - - 1,132
Net income (loss) for the period - - (4,528) - (4,528)
Other comprehensive loss - - - (644) (644)
---------- ---------- ---------- -------- ----------
Balance, April 30, 2000 11,958,448 $ 61,579 $ (1,812) $(1,353) $ 58,414
---------- ---------- ---------- -------- ----------
Exercise of warrants and stock
options 534,890 2,807 - - 2,807
Net income for the period - - (2,332) - (2,332)
Other comprehensive loss - - - (357) (357)
---------- ---------- ---------- -------- ----------
BALANCE, JULY 31, 2000 12,493,338 $ 64,386 $ (4,144) $ (1,710) $ 58,532
(UNAUDITED)
---------- ---------- ---------- -------- ----------
---------- ---------- ---------- -------- ----------
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JULY 31, 1999 JULY 31, 2000 JULY 31, 1999 JULY 31, 2000
------------- ------------- ------------- -------------
$ `000'S $ `000'S $ `000'S $ `000'S
<S> <C> <C> <C> <C>
Net income $ 2,050 $ (2,332) $ 4,035 $ (6,860)
Foreign currency translation adjustment (63) (357) (83) (1,001)
------------ ---------- ----------- -------
Comprehensive income $ 1,987 $ (2,689) $ 3,952 $ (7,861)
------------ ---------- ----------- -------
------------ ---------- ----------- -------
</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 SIX MONTHS ENDED
JULY 31, 1999 JULY 31, 2000 JULY 31, 1999 JULY 31, 2000
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,050 $ (2,332) $ 4,035 $ (6,859)
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 404 824 838 1,705
Amortization 798 1,476 1,558 2,907
Non-cash restructuring - (2,424) - (803)
Loss (gain) on disposal of fixed assets (72) (19) (93) (29)
Decrease in deferred income tax 572 39 1,135 58
Change in accounts receivable (4,349) (1,750) (3,161) (5,274)
Change in inventories (3,254) 53 (8,803) (604)
Change in prepaid expenses (1,561) (267) (1,880) (1,213)
Change in income taxes 1,090 385 2,136 (92)
Change in other current assets (41) (84) 149 (139)
Change in accounts payable 8,989 1,968 9,997 3,677
Change in accrued liabilities (351) 864 (25) 1,228
Change in deferred revenue (2,745) (2,305) (5,659) (4,550)
--------- -------- -------- -------
Net cash provided (used) by operating activities 1,530 (3,570) 227 (15,736)
--------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (604) (573) (1,965) (898)
Proceeds from disposal of equipment 76 41 107 77
Acquisition of subsidiaries (2,772) (177) (3,247) (523)
Capitalization of software development costs (30) - (135) -
Change in other assets - (53) 86 (61)
--------- -------- -------- -------
Net cash used by investing activities (3,330) (762) (5,154) (1,405)
--------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in lines of credit-bank 1,070 (3,839) 1,605 1,580
Change in notes payable 953 (689) 498 1,247
Payments of capital lease obligations (322) (225) (632) (419)
Repayment of CVSI loan - - - (2,500)
Net proceeds from exercise of warrants/options 243 2,807 648 3,939
--------- -------- -------- -------
Net cash from financing activities 1,944 (1,946) 2,119 3,847
--------- -------- -------- -------
Effect of exchange rate changes on cash (63) (357) (83) (1,001)
--------- -------- -------- -------
NET (DECREASE) INCREASE IN CASH 81 (6,636) (2,891) (14,295)
Cash at beginning of period 23,190 15,427 26,162 23,086
------ ------ ------ ------
Cash at end of period $ 23,271 8,791 $ 23,271 $ 8,791
--------- -------- -------- -------
--------- -------- -------- -------
Cash paid for interest expense $ 220 $ 456 $ 484 $ 1,169
--------- -------- -------- -------
--------- -------- -------- -------
Cash paid for taxes $ - $ 165 $ - $ 861
--------- -------- -------- -------
--------- -------- -------- -------
</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 in Continental
Europe. The Company's solutions include hardware maintenance, help desk support,
network servers, specialized software services and products and the supply of
high-end storage systems.
NOTE 2 - BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, the accompanying interim unaudited
condensed consolidated financial statements contain all material adjustments
consisting only of normal recurring adjustments necessary to present fairly the
financial condition, the results of operations, the changes in stockholders'
equity and cash flows of 4Front Technologies, Inc. for the interim periods
presented.
The results of the six months ended July 31, 2000 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, 2000.
- 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 SIX MONTHS ENDED
JULY 31, 1999 JULY 31, 2000 JULY 31,1999 JULY 31, 2000
------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income/(loss) $ 2,049,819 $ (2,331,945) $ 4,034,911 $ (6,859,748)
------------- ------------- ------------- ------------
Weighted Average Number of Common Shares
outstanding 10,781,746 12,125,277 7,650,276 12,044,163
------------- ------------- ------------- ------------
Net income/(loss) per Common Share (Basic) $ 0.19 $ (0.19) $ 0.30 $ (0.57)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
DILUTED EARNINGS PER SHARE
Net income/(loss) $ 2,049,819 $ (2,331,945) $ 2,327,391 $ (6,859,748)
------------- ------------- ------------- ------------
Weighted Average Number of Common Shares
outstanding 10,781,746 12,125,277 10,723,744 12,044,163
Additional Shares to be Issued upon Assumed
Exercise of Options and Warrants 3,207,682 - 3,207,682 -
Shares Hypothetically Repurchased at the Average
Market Price with the Proceeds of Exercise (1,970,098) - (1,988,781) -
------------- ------------- ------------- ------------
Adjusted Shares for Dilution 12,019,330 12,125,277 9,202,154 12,044,163
------------- ------------- ------------- ------------
Net income/(loss) per Common Share (Diluted) $ 0.17 $ (0.19) $ 0.34 $ (0.57)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: JANUARY 31, 2000 JULY 31, 2000
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Computer hardware $ 30,095 $ 30,706
Computer software 6 -
------- ---------
$ 30,101 $ 30,706
======= =========
</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 local income tax return for its foreign operations.
The foreign subsidiaries compute taxes at rates in effect in that country and
become payable when assessed by the Inland Revenue. Deferred federal income
taxes are not provided on the undistributed earnings of its foreign subsidiaries
to the extent the Company intends to permanently reinvest such earnings in the
United Kingdom.
The Company has provided income tax for the six months ended July 31,
2000 of $408,000 on the profits of its operations, and for the six months to
July 31, 1999 $2.98 million.
NOTE 6 - RESTRUCTURING AND REORGANIZATION
During the quarter ended April 30, 2000, the Company took a charge of
$5.02 million in relation to the restructuring and reorganization program of the
business. This program resulted in the involuntary termination of 46 positions
across the Company, and the vacating and closure of 2 properties.
During the quarter ended July 31, 2000, the Company released a
provision of $2,424,000 in relation to a property it had made a provision for in
the fiscal year 2000. It had been the belief that this property would be vacant
through the remainder of the lease. However, a sub-let was initiated on the 30th
July for 50% of the property at the same level of rent as the Company is being
charged. This sub-let is for the remaining duration of the lease.
During the quarter, the Company initiated some of its Q2 restructuring
plans. The element completed involved the involuntary redundancy of 71 people
across the Company. In the same period, the Company announced the intended
merger between the Company and NCR. All further execution of reorganization and
restructuring plans have been halted pending the outcome of these talks.
The following tables depicts the activity for both the Q4 fiscal 2000
and the Q1 and Q2 fiscal 2001 restructuring programs through July 31, 2000:-
<TABLE>
<CAPTION>
ACCRUED RELEASE ACCRUED
BALANCE CASH OF BALANCE AT
JAN 31, 2000 PAYMENTS PROVISION JUL 31, 2000
Q4 FISCAL 2000 PLAN $'000'S $'000'S $'000'S $'000'S
<S> <C> <C> <C> <C>
Severance and related charges 350 (350) - -
Lease termination costs 5,103 (255) (2,424) 2,424
----- ----- ----- -----
$5,453 $(605) $(2,424) $ 2,424
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
ACCRUED
CASH BALANCE AT
CHARGED PAYMENTS JUL 31, 2000
Q1/Q2 FISCAL 2001 PLAN $'000'S $'000'S $'000'S
<S> <C> <C> <C>
Q1 Severance and related charges 1,468 (1,468) -
Q1 Lease termination costs 3,550 (645) 2,905
Q2 Severance and related charges 1,527 (644) 883
----- ----- -----
$6,545 $(2,757) $3,788
===== ===== =====
</TABLE>
- 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 in Continental Europe. The Company's solutions 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.
Datapro Computers Group Limited ("Datapro") was acquired in fiscal 1997 with
Firstpoint Limited ("Firstpoint") and Eurosystems France S.A. ("Eurosystems")
being 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. The SIL Group of companies ("SIL") and CVSI, Inc.
("CVSI") were acquired in fiscal 2000. These acquisitions have been accounted
for under the purchase method of accounting and are included on a consolidated
basis in the Company's financial statements for periods ending after the
effective date of such acquisitions. As used herein, references to a "fiscal
year" refer to January 31 of such year. For example, fiscal 2000 refers to the
year ended January 31, 2000.
Because of the effect upon the Company's results of operations for the
year ended January 31, 2000 of acquisitions made during that period, direct
comparison of the Company's results of operations for the periods ended July 31,
1999 and July 31, 2000 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.
Just after the close of the second quarter we announced that we had
entered into a definitive agreement to merge with NCR, a leading US technology
solutions provider. Under the terms of the agreement, NCR will pay each 4Front
Technologies stockholder $18.50 per share in cash for each outstanding share of
common stock held. This transaction was being negotiated with NCR during the
second quarter, and hence impacted the management of our operations,
particularly with regard to our reorganisation plans. As a result of the ongoing
negotiations with NCR, we decided to postpone the implementation of a large part
of the final stages of the planned reorganisation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000 COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1999
REVENUES
Revenues for the three months ended July 31, 2000 were $60.7 million,
an increase of $2.4 million, or approximately 4.1% compared to $58.3 million for
the three months ended July 31, 1999. This growth arose principally from the
acquisitions of CVSI and SIL and from organic growth of the services business.
Revenues from services were $57.2 million, or 94.2% of the total revenue, with
revenues from the supply of products at $3.5 million, or 5.8% of the total
revenues. In the comparable period of the prior year, Service revenues were
67.2% of the total revenues and Products revenues were 32.8% of total revenues.
In the quarter, the acquisition of CVSI and SIL contributed $17.9
million and $5.0 million of services revenues respectively. Our UK product
business, "Hammer", which was sold in the last quarter of fiscal 2000,
contributed $14.7 million of product revenue in the quarter to July 31, 1999 and
$0 in the quarter to July 31, 2000.
- 9 -
<PAGE>
GROSS PROFIT
Gross profit for the three months ended July 31, 2000 was $25.3
million, an increase of $2.2 million, or 9.5% compared to $25.3 million for the
three months ended July 31, 1999. Gross margin increased from 39.6% for the
three months ended July 31, 1999 to 41.7% for the three months ended July 31,
2000. Gross profit for services increased 21.8% from $20.5 million for the three
months ended July 31, 1999 to $25.0 million for the three months ended July 31,
2000. Gross profit for products decreased 8.8% from $2.6 million for the three
months ended July 31, 1999 to $0.3 million for the three months to July 31,
2000. This decrease was due to the sale of the "Hammer" product business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $25.7 million, an
increase of $7.5 million, or 40.8% compared to $18.2 million for the three
months ended July 31, 1999. As a percentage of revenues, selling, general and
administrative expenses increased to 42.4% from 31.3% in the three months ended
July 31, 2000. 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 and the cessation of restructuring and reorganization
plans pending the outcome of the NCR merger talks..
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended July
31, 2000 was $2.3 million, an increase of $1.1 million, or 91.67% compared to
$1.2 million for the three months ended July 31, 1999. This increase arose
principally from the acquisitions of CVSI and SIL. Depreciation was $824,000, an
increase of $420,000 or 105.0%, from $404,000 for the prior period. Amortization
of goodwill from acquisitions was $1,476,00, an increase of $678,000, or 84.96%,
from $798,000 for the prior period. An amortization period of between five and
fifteen years is utilized with respect to acquisitions.
REORGANIZATION AND RESTRUCTURING
In our press release of March 29, 2000, we stated that we would expect
to take up to $15.0 million in charges within the first half of 2001. During the
first half of 2001, we have taken $6.5 million as part of the restructuring and
reorganization. $3.0 million of this charge relates to severance and termination
costs with regards to involuntary termination of employees and $3.5 million
relates to the lease termination and costs associated with the vacating of
duplicate leased premises. During the second quarter, the Company entered into
negotiations with NCR regarding a proposed merger. Pending the outcome of these
talks, the restructuring and reorganization plans were stopped.
During the quarter ended July 31, 2000, the Company released a
provision of $2,424,000 with regards to a property it had made a provision for
in the fiscal year 2000. It had been the belief that this property would be
vacant through the remainder of the lease. However, a sub-let was initiated on
the 30th July for 50% of the property at the same level of rent as the Company
is being charged. This sub-let is for the remaining duration of the lease.
EARNINGS BEFORE INTEREST AND INCOME TAXES
Earnings before interest and income taxes ("EBIT") for the three months
ended July 31, 2000 was a loss of $2.2 million, a decrease of $5.7 million, or
160.0%, as compared to $3.6 million for the three months ended July 31, 1999. As
a percentage of revenues, income before interest expense and income taxes
decreased to 3.56% in the three months ended July 31, 2000 as compared to 6.2%
for the three months ended July 31, 1999.
- 10 -
<PAGE>
INTEREST
Interest expense for the three months ended July 31, 2000 was $456,000,
an increase of $210,000 or 85.4% compared to $246,000 for the three months ended
July 31, 1999, arising from higher utilization of bank lines of credit during
the period. Interest income decreased from $220,000 for the three months ended
July 31, 1999 to $120,000 a decrease of $100,000, arising from lower cash
balances on hand during the quarter.
SIX MONTHS ENDED JULY 31, 2000 COMPARED WITH THE SIX MONTHS ENDED JULY 31, 1999
REVENUES
Revenues for the six months ended July 31, 2000 were $118.8 million, an
increase of $3.1 million, or approximately 2.7% compared to $115.6 million for
the six months ended July 31, 1999. This increase arose principally from the
acquisitions of CVSI and SIL. Revenues from services were $112.4 million, or
94.5% of the total revenue, with revenues from the supply of products at $6.4
million, or 5.4% of the total revenues. In the comparable period of the prior
year, Service revenues were 67.1% of the total revenues and supply of products
were 32.9% of the total revenues.
In the six months the acquisition of CVSI and SIL contributed $35.1
million and $10.0 million of services, respectively. Our UK products business
"Hammer", which was sold in the last quarter of fiscal 2000, contributed $28.9
million of product in the six months to July 31, 1999 and $0 in the six months
to July 31, 2000.
GROSS PROFIT
Gross profit for the six months ended July 31, 2000 was $50.3 million,
an increase of $4.6 million, or 10.1% compared to $45.7 million for the six
months ended July 31, 1999. This increase arose principally from the
acquisitions in fiscal 1999. Gross margin increased to 42.3% for the six months
ended July 31, 2000 from 39.5% for the six month period to July 31, 1999. Gross
profit for services increased 22.9% from $40.5 million for the six months ended
July 31, 1999 to $49.7 million for the six months to July 31, 2000. Gross profit
for products decreased 88.8% from $5.2 million for the six months ended July 31,
1999 to $0.6 million for the six months ended July 31, 2000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $47.2 million, an
increase of $10.9 million, or 30.1% compared to $36.2 million for the six months
ended July 31, 1999. As a percentage of revenues, selling, general and
administrative expenses increased to 39.8% from 31.4% in the six months ended
July 31, 1999. Selling general and administrative expenses increased primarily
as a result of the acquisitions in 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the six months ended July 31,
2000 was $4.6 million, an increase of $2.2 million or 91.7% compared to $2.4
million for the six months ended July 31, 1999. This increase arose principally
from the acquisitions of CVSI and SIL in fiscal 2000. Depreciation was $1,705,
an increase of $867 or 103.5%, from $838,000 for the prior period. Amortization
of goodwill from acquisitions was $2,907,000, an increase of $1,349,000, or
86.6%, from $1,558,000 for the comparable period. An amortization period of
between five and fifteen years is utilized with respect to acquisitions.
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EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
Earnings before interest expense and income taxes ("EBIT") for the six
months ended July 31, 2000 was $(6.5) million, a decrease of $13.5 million, or
(91.9)%, as compared to $7.0 million for the six months ended July 31, 1999. As
a percentage of revenues, EBIT decreased to (5.43)% in the six months ended July
31, 2000 as compared to 6.1% for the six months ended July 31, 1999.
INTEREST
Interest expense for the six months ended July 31, 2000 was $1,169,000,
an increase of $701,000 or 49.8% compared to $468,000 for the six months ended
July 31, 1999, arising from higher utilization of bank lines of credit during
the period. Interest income decreased from $484,000 for the six months ended
July 31, 1999 to $383,000 arising from lower cash balances on hand during the
period.
LIQUIDITY AND CAPITAL RESOURCES
From inception until June 1996, the Company's sources of capital had
been cash flows from operations, private placements of securities, primarily
from its controlling stockholders and related parties, and borrowings from
banks. On June 19, 1996, the Company completed a public offering (the
"Offering") of 3,000,000 shares of the Company's Common Stock at a price of
$5.75 per share. On July 2, 1998, the Company completed a secondary public
offering through a further sale of 2.9 million shares of Common Stock. As a
result of this offering, the Company raised net proceeds of $31.0 million.
As of July 31, 2000, the Company had lines of credit with UK, French,
Italian, Japanese, Dutch and Belgian banks in the aggregate amount of L12.5
million. As of July 31, 2000 $7.2 million was outstanding.
In November 1999, we borrowed $25.0 million to assist us in the
purchase of CVSI. This money was borrowed from a UK Bank at an average rate of
7.62% interest. Capital repayments of $2.5 million, plus any accrued interest,
are to be made at 6 month intervals starting March 31, 2000. The first repayment
was made on March 31, 2000 as at July 31, 2000, $5.6 million (including $0.6
million interest) of this loan is recorded as a current liability with the
remaining $17.5 million as a long-term debt.
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's Italian subsidiary "Memorex" discounts invoices with
various Italian banks. These amounts vary during the year and are subject to
interest rates ranging from 4% to 8.5%. The amounts discounted are secured by
the related receivables of "Memorex". At July 31, 2000, $4.4 million under these
agreements were outstanding.
The Company's working capital decreased from $7.1 million surplus at
January 31, 2000 to a surplus of $3.2 million at July 31, 2000.
Net cash used by operating activities during the six months ended July
31, 2000 was $15.7 million, which reflected the net effect of a decrease in net
accounts payable, and deferred revenues and an increase in accounts receivable.
Net cash used by investing activities was $1.4 million, for the six months ended
July 31, 2000, primarily reflecting cash used for the purchase of equipment. Net
cash provided by financing activities was $3.9 million for the six months ended
July 31, 2000, 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.
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The Company believes that the net cash flows from operations and
borrowing availability under its credit facilities, will satisfy the Company's
anticipated working capital requirements through at least the next twelve
months. To the extent the Company raises additional capital by issuing equity or
convertible debt securities, ownership dilution to the Company's stockholders
will result. In the event that adequate funds are not available, the Company's
business may be adversely affected.
INFLATION
Inflation has not had a material effect upon the Company's results of
operations to date. In the event the rate of inflation should accelerate in the
future, it is expected that costs in connection with the provision by the
Company of its services and products will increase, and, to the extent such
increased costs are not offset by increased revenues, the operations of the
Company may be adversely affected.
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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
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27
(b) Reports on Form 8-K
Not Applicable
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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.
September 9, 2000 4FRONT TECHNOLOGIES, INC.
By: /s/ Stephen McDonnell
-------------------------
Stephen McDonnell
Chief Financial Officer
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