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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
<TABLE>
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-8345
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[LOGO]
TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-0675510
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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 25, 2000, the registrant had 11,947,115 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
nonaffiliates as of April 25, 2000, was approximately $174,105,816 as of the
close of business on that date.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART 1
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 2000 REFERS TO
THE TWELVE MONTH PERIOD ENDING JANUARY 31, 2000. "WE", "OUR" AND OTHER SIMILAR
WORDS REFER TO 4FRONT TECHNOLOGIES, INC.
GENERAL
We are a leading provider and integrator of information technology ("IT"),
services and solutions to primarily European customers. Our services and
solutions include corporate help-desks, training, system design and support and
a full range of IT consulting services. Our customers are generally blue-chip
corporations and government authorities and include General Electric, British
Telecom, Telecom Italia, Lucent, Computer Sciences Corporation, IBM, Phillips,
Nokia, Ericsson, Siemens, Sony, Cegedim, Renault, Pfizer, PaineWebber, Societe
Generale and the UK Ministry of Defence.
Since 1996, leveraging our position in the marketplace, we have progressed
from being principally a small provider of support services and specialized
products in the UK to being a provider of a broad range of IT services and
solutions on a European basis and we are now one of the leading independent
providers of IT services in Europe. To further accelerate our move to providing
higher margin IT services, and in light of the rapid development of e-commerce
in the European marketplace, we have recently commenced an initiative to
establish ourselves as a leading provider of e-business solutions and services
and of other higher-value services in Europe. Our revenues have grown from
approximately $84.1 million in fiscal 1998 to over $252.9 million in fiscal
2000.
Our objective is to become the leading independent provider of high margin
IT services and solutions in Europe. The key elements of our strategy are to
(i) leverage and build market position and promote 4Front brand in Europe,
(ii) capitalize on strong blue-chip customer base to increase penetration for
higher margin services through cross-selling, (iii) expand the range of services
with a focus on progressing further up the IT services value chain and
(iv) continue to build and expand our market position in current and new
markets.
In furtherance of our strategy, on November 2, 1999, we acquired CVSI, Inc.
in our largest acquisition to date. CVSI delivers enterprise-wide hardware and
software support services, systems integration and consulting services, and a
full suite of network services to a range of blue-chip customers around the
world. CVSI has operating locations in the United Kingdom, France, Germany,
Italy, Holland, Belgium and Sweden from which it generated approximately 62% of
its revenue for fiscal 2000, and in the United States and Japan.
OVERVIEW OF EUROPEAN INFORMATION TECHNOLOGY MARKET
Historically, large European organizations have satisfied their IT
requirements through mainframe or stand-alone midrange systems produced by a
single original equipment manufacturer or OEM. Either the OEMs or in-house
technical support staff usually provided maintenance, support, and development
of these systems. Today, many organizations have moved away from their reliance
on OEMs and in-house technical support staff, and instead, are outsourcing to
independent suppliers of multivendor computer hardware maintenance and
technology support services.
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These European organizations have migrated from centralized, single vendor
computer systems to decentralized, geographically diverse, multivendor and
multisystem distributed computer environments. This has resulted in the
increased complexity of computer environments, which has caused these
organizations to incur greater expenses and experience substantial
inefficiencies. The introduction of the Euro, e-commerce and the problems that
were posed by the need for Year 2000 compliance have also added to this growing
complexity.
As a result, organizations are increasingly abandoning their original
equipment manufacturer systems and are instead hiring third-parties to perform
IT services. We believe that customers are generally reluctant to outsource
computer services directly to original equipment manufacturers, and that the
complexity and customization of corporate computing systems typically exceeds
the expertise of most horizontal integrators and value-added resellers.
Therefore, 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 within their
organizations, and to provide application software and comprehensive services
and products 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 by allowing them to focus
on their specific duties. Moreover, the personal computer market is growing
rapidly throughout Europe and home computer users are increasingly looking for
support and advice.
OUR SOLUTION
We are a leading provider of several categories of IT services and solutions
which we define as our "lines of business". Our services fall into four "lines
of business". Individually, each line occupies a portion of the IT services
value chain, from lower margin hardware and software support to the highest
margin e-business and network consulting. Taken together, our "lines of
business" enable us to offer customers a wide range of services from a single
supplier. Additionally, because our company is independent, we are able to offer
services and solutions based on a comprehensive range of OEM software or
hardware products, rather than relying on one or two of them. Therefore, we
believe that our customers view us as favoring an OEM's solution strictly on the
basis of quality and are more apt to order them from us. We combine strong
technical expertise, innovation and high quality products in order to design and
implement customized IT solutions.
We continually review our service and solution offerings to ensure that we
are able to provide our customers with the most advanced and cost-effective
solutions. We design our services and solutions primarily to enhance the
effectiveness of, rather than replace, in-house MIS departments. This
cooperative partnership approach provides an incentive for in-house MIS
departments to use our services and products. This partnership principle is a
key aspect of our working relationship with our customers.
Our IT services and solutions consist of a range of specialized IT services
and web-based solutions, which are sold primarily to blue-chip corporations and
government authorities in Europe, but, as a result of our recent acquisition of
CVSI, also in North America and the Far East. We customize our services and
solutions to meet our clients needs. The services and solutions that we provide
are illustrated as follows in accordance with our perception of their positions
on the IT value chain.
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<TABLE>
<S> <C> <C> <C>
E-BUSINESS AND
CONSULTING SERVICES
E-Business and
Internet Consulting
COMPUTER SERVICES MANAGED SERVICES Enterprise
VALUE CHAIN Applications and
Services
Help Desk Services Network Consulting
Education Services ASP
- Internet Training HIGH MARGIN
- Application and
INFRASTRUCTURE Technical Training
SERVICES
Integration Services Network
Management
Migration Services Advanced Network
Solutions
PRODUCT RELATED Infrastructure
SERVICES Solutions
Hardware and Software Configuration Security Solutions
Services
Support MEDIUM / HIGHER
MARGIN
- - Off-Site Application Software
Installation
- - On-Site Installation
Repair Services Project Management
- - Computer Equipment
- - Telecom and Prototyping
Wireless
Equipment
- - Associated
Equipment/
Peripherals LOWER / MEDIUM
MARGIN
Logistics
LOWER / MEDIUM
MARGIN
</TABLE>
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CUSTOMERS
Our customers are mainly large and medium sized national and multi-national
companies and government authorities. The following is a representative list of
our customers, each of which contributed in excess of $100,000 revenues for
fiscal 2000, and the principal services which we supply to them:
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FINANCE INDUSTRIAL RETAIL
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Societe Generale (ii), (iv) Pfizer (ii) Domino's Pizza (iv)
Skandinavia Enskilda Bank (i), Renault (iv) John Lewis (ii)
(ii) Esso (iii), (iv) Disney Stores (iv)
Paine Webber (iv)
</TABLE>
<TABLE>
<CAPTION>
TELECOMMUNICATIONS CONSTRUCTION/ENGINEERING POINT OF SALE
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British Telecom (ii), (iii) Halliburton, Brown & Root(iii), Asda (Wal-Mart) (iv)
Lucent (iv) (iv) House of Fraser (iv)
Telecom Italia (iii) McDonnell Douglas (ii), (iv) Alldays (iii), (iv)
General Electric (iv)
</TABLE>
<TABLE>
<CAPTION>
INSURANCE OEM GOVERNMENT
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<S> <C> <C>
Legal & General (iv) Debis (iii) French Ministry of Agriculture
(iv)
Royal Sun Alliance (iv) CSC (iv) Italian Ministry of Justice
(iii)
Occidental (ii), (iv) IBM (iv) UK Ministry of Defence (iii)
</TABLE>
<TABLE>
<CAPTION>
ELECTRONICS IT
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<S> <C> <C>
Ericsson (i), (ii) Dell (iv)
Nokia (iv) Amazon.com (iii)
Phillips (ii), (iv) Compaq (iv)
</TABLE>
(i) E-Business and Consulting Services
(ii) Managed Services
(iii) Infrastructure Services
(iv) Product Related Services
No single customer accounted for more than 5% of our revenues in any of the
last three fiscal years.
SALES AND MARKETING
We market services and products as part of a systems solution to our
customers and emphasize our ability to provide highly qualified personnel to
implement these solutions cost-effectively. While we predominantly sell services
directly to the corporate and government markets, we sell some services and
storage systems through sub-distributors and value-added resellers, where our
products are typically used as elements of a value-added reseller's overall
solution.
Our direct sales force primarily focuses on large and multi-national
corporate customers and is organized by operating groups based on our services
and products. However, in the case of our larger customers, we are increasingly
organizing our operating groups on a corporate account basis to better market
all of our services. Direct sales channels include field sales, telemarketing
and direct mail. As of January 31, 2000, we had approximately 332 sales and
marketing personnel, working across 9 geographical countries.
Our line of business strategy ensures that we maximise cross-border and
multi-servicing opportunities. We promote activities by scheduling internal
sales conferences, paying a portion of compensation based on internal business
referrals, and operating a corporate account management process.
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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 superior to us. We compete with a wide range
of companies of varying sizes that operate both in the niche markets that we
serve, and also generally in the computer services industry. We also compete
with larger European computer service and consulting firms.
We believe that the principal competitive factors in the industry are
breadth of service offerings, quality of products supplied, expertise in niche
markets, price and service. We believe that our ability to offer specialized
solutions and to remain competitive in these markets will depend largely upon
our ability to make and effectively integrate key acquisitions, continually
enhance and upgrade our services and solutions, expand our operations throughout
Europe and recruit and retain highly skilled personnel.
We believe that we are able to successfully compete with large European
computer service and consulting firms due to our focus and concentration in
specified niche markets and in our high level of specialized skills and
services. We also believe that we are able to obtain a competitive advantage
with respect to both larger and smaller competitors in the niche markets through
our proprietary systems, customized software, and our reputation and leadership
position in specialist markets.
EMPLOYEES
As of April 17, 2000, we employed a total of 1,983 employees consisting of
332 in sales and marketing, 1,065 in engineering, 184 in technical support and
402 in logistics, management and administration. Our French, German and Italian
employees are in some cases represented by a labor union. We have not had any
work stoppages, strikes, or organization attempts. We believe that our employee
relations are generally good.
RISK FACTORS
OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE AND OUR FINANCIAL RESULTS MAY
FLUCTUATE. We had net income of $5,822,000 and $48,000 in the fiscal years ended
January 31, 1999 and 2000, respectively. The decline in net income for fiscal
2000 was primarily due to certain non-recurring charges. We plan to continue to
expand our operations, which will result in increased fixed costs and operating
expenses. Our operating results and net income will be adversely affected to the
extent that our net sales and gross profits do not increase sufficiently to
offset such increased expenses. We cannot assure you that our net sales or our
gross profits will increase sufficiently to offset any increased expenses.
OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE AND THE PRICE OF
OUR COMMON STOCK MAY CHANGE IN RESPONSE TO THOSE FLUCTUATIONS. Our quarterly and
annual operating results have varied in the past and may in the future vary
significantly depending on factors such as:
- the effect of our acquisitions;
- the size, timing and recognition of revenue from significant orders;
- increased competition;
- the timing of new product releases by us or our competitors;
- market acceptance of our products;
- changes in our and our competitors' pricing policies;
- budgeting cycles of our customers;
- changes in operating expenses and personnel changes;
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- changes in our business strategy;
- foreign currency exchange rates; and
- general economic factors.
It is also possible that in some future quarter, our revenues or operating
results will be below the expectations of public market analysts and investors.
In this event, the price of our common stock could be materially adversely
affected.
OUR GROWTH STRATEGY INCLUDES THE ACQUISITION OF COMPLEMENTARY BUSINESSES
WHICH MAY NOT BE AVAILABLE TO ACQUIRE OR, IF ACQUIRED, MIGHT NOT IMPROVE OUR
BUSINESS AND RESULTS. A significant component of our growth strategy depends on
our ability to acquire complementary businesses. We face increasing competition
from other potential purchasers when seeking to acquire computer services
companies. Although we have been able to acquire computer services companies in
the past, we cannot assure you that we will be able to identify additional
suitable acquisitions, or that we will be able to consummate these acquisitions
or successfully integrate those other businesses into our operations. To date,
we have used a combination of cash and common stock for our acquisitions. In the
event that potential acquisition candidates are unwilling to accept our
securities as consideration, we will be required to use more cash resources to
continue our acquisition program and, thus, deplete our working capital. In
addition, we may need additional financing to fund these acquisitions. If
sufficient financing is not available as needed on terms acceptable to us, our
acquisition program could be adversely affected.
THE EXPANSION OF OUR BUSINESS HAS AND WILL STRAIN OUR MANAGEMENT, PERSONNEL
AND OTHER SYSTEMS. We are experiencing a period of rapid growth and expansion
because of both acquisitions and internal growth. Our growth and expansion has
placed, and could continue to place, a significant strain on our management,
personnel and other resources.
To accommodate our recent growth and to compete effectively and manage
future growth, if any, we will be required to continue to implement and improve
our operational, financial and management information systems, procedures and
controls on a timely basis and to expand, train, motivate and manage our
workforce. Our inability to satisfy increased customer orders in a timely
fashion, or at all, could result in termination of customer relationships or
cause customers to seek alternative sources for their products. In addition, our
financial control systems and infrastructure may not be adequate to maintain and
effectively monitor our future growth. We cannot assure you that our personnel,
systems, procedures and controls will be adequate to support our existing and
future operations. The failure to implement and improve our operational,
financial and management systems or to expand, train, motivate or manage
employees could have a material adverse effect on our business, operating
results and financial condition.
WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE NEW ACQUISITIONS. We expect to
continue to grow primarily by acquiring service companies that are complementary
to our 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 we have limited or no direct
experience; and
- the potential loss of key employees of the acquired companies.
On November 2, 1999, we purchased all of the capital stock of CVSI, Inc., a
leading provider of IT services on a worldwide basis. We believe that an
important benefit to be realized from the CVSI acquisition will be the
integration of our respective management personnel, strategies and operations.
Upon consummation of the CVSI acquisition, we also retained a large portion of
CVSI's workforce. However, some or all of these benefits may not be achieved
unless integration is successful and achieved in a timely manner. Integration
may be more difficult to achieve in this transaction because of the need to
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coordinate geographically separated organizations and integrate personnel with
diverse business backgrounds and corporate cultures. We cannot give assurance
that the integration of our business with the business of CVSI will be
successful or that we will be able to achieve the synergies we anticipate.
Failure to successfully do so could have a material adverse effect on our
business and operations.
WE MAY BE UNABLE TO RESPOND EFFECTIVELY TO TECHNOLOGICAL CHANGE. The market
for computer systems and products is characterized by constant technological
change, frequent new product introductions and evolving industry standards. Our
future success is dependent upon the continuation of the move by IT end users to
multivendor and multisystem operating environments. We believe this trend, along
with an emphasis on efficiency, has resulted in a movement by both end users and
original equipment manufacturers toward outsourcing some of their services and
an increased demand for product and support service providers that have the
ability to provide a broad range of multivendor product and support services. We
can give no assurance that this trend will continue into the future. If we fail
to anticipate or respond adequately to technological developments and customer
requirements, that failure could have a material adverse effect on our business
and financial condition.
WE FACE INTENSE COMPETITION AND MAY BE UNABLE TO COMPETE SUCCESSFULLY. The
computer services industry is intensely competitive and is composed of hundreds
of companies, many of which have capital, marketing expertise and personnel
resources superior to ours. We cannot give assurance that we will be able to
compete successfully in the future or that competitive pressures will not result
in price reductions or other developments in our market which could have a
material adverse effect on our business and our ability to attract and retain
customers. In addition, because there are relatively low barriers to entry in
the markets in which we operate, we expect additional competition from other
established and emerging companies as the market for computer services continues
to develop and expand. Existing or new competitors may develop products or
provide services that are superior to our products or services or achieve
greater market acceptance.
WE DEPEND ON THE AVAILABILITY, RECRUITMENT AND RETENTION OF TECHNICAL
PERSONNEL. Our success depends upon our ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet our
own personnel needs and the staffing requirements of our customers. Competition
for individuals with proven technical skills is intense. The IT industry in
general experiences a high rate of attrition of such personnel. We compete 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. Our failure to attract and retain
sufficient technical personnel would have a material adverse effect on our
ability to provide the most effective services and would harm our business.
FOREIGN EXCHANGE AND RELATED RISKS. We market our products to European and
other foreign countries, but we conduct our business primarily in U.S. dollars,
Pounds sterling, Japenese yen and Eurozone currencies such as French francs,
Italian lira, German marks and Dutch guilders. Foreign exchange rate
fluctuations will affect the purchase prices we receive for our products.
Changes in the exchange rates between the local currencies that we conduct our
business in and U.S. dollars, the currency used in our financial statements, may
significantly affect our results of operations and other financial information
as presented in our financial statements. Any measures we take to protect us
from exchange rate fluctuations may not adequately protect us from their
potential harm.
FOREIGN TAX RATES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. We are
subject to taxation in a number of different jurisdictions, including the United
States, the United Kingdom, France, Italy, Germany and Japan and, if we are
successful in further expanding our market in Europe, we may become subject to
taxation in additional jurisdictions. Additionally, transactions between our
company and our foreign subsidiaries may become subject to United States and
foreign withholding taxes. Applicable tax rates in
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foreign jurisdictions differ from those of the United States and are subject to
periodic change. The extent, if any, to which we will receive credit in the
United States 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
United States and such foreign jurisdictions. To the extent that we expand
further into continental Europe, our effective tax rate on income may increase
due to many European jurisdictions' higher tax rates.
WE MAY NOT BE ABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY. Some
of our operations are dependent in part upon our software development
methodology and other intellectual property rights. We rely upon a combination
of trade secret, non-disclosure, and other contractual arrangements, technical
measures, and copyright and trademark laws to protect our intellectual property
rights. We hold no patents or registered copyrights. We generally enter into
confidentiality agreements with our employees, consultants, clients, and
potential clients, and limit access to, and distribution of, our proprietary
information. However, these safeguards may not adequately deter the
misappropriation of our proprietary information. We also may be unable to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights.
IF OUR PRODUCTS INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES, OUR BUSINESS MAY SUFFER IF WE ARE SUED FOR INFRINGEMENT OR CANNOT
OBTAIN LICENSES TO THESE RIGHTS ON COMMERCIALLY ACCEPTABLE TERMS. We are subject
to the risk of adverse claims and litigation alleging infringement by us of the
intellectual property rights of others. Although we believe our services and
products do not infringe the intellectual property rights of others, it is
possible that claims could be asserted against us in the future. Many
participants in the technology industry in general have an increasing number of
patents and patent applications and have frequently demonstrated a readiness to
take legal action based on allegations of patent and other intellectual property
infringement. If we become the subject of a claim for infringement we would have
to expend potentially high funds and resources to defend the claim and, if we
were to be deemed to infringe the intellectual property rights of others, we
could be forced to pay significant license fees or damages for infringement.
WE DEPEND ON CONTINUED AUTHORIZATION FROM THIRD PARTIES TO RESELL AND
PROVIDE MANUFACTURER-AUTHORIZED SERVICES. Our future success with IT services
depends in part on our continued authorization as a service provider of various
vendors. Without such authorizations, we would be unable to provide the range of
services that we currently offer. In general, our agreements with such
manufacturers include termination provisions, some of which are immediate. We
have no assurances that such manufacturers will continue to authorize us as an
approved service provider. If we lose a substantial number of these
authorizations, we would be forced to find alternative sources for them. We may
not be successful in finding these alternative sources on a timely basis. If we
cannot do so on a timely basis, we will experience delays in the provision of
our services. This, in turn, could seriously harm our business.
RISKS RELATED TO THE PROVISION OF OUR SERVICES, IF REALIZED, COULD ADVERSELY
AFFECT OUR BUSINESS. Many of our engagements involve projects that are critical
to the operations of our customers' businesses. Our failure or inability to meet
a customer's expectations in the performance of our services, or our failure to
meet customer expectations in the required time frame could result in a claim
for substantial damages against us, even if we are not at fault. Because we are
a service provider, we are in the business of employing people and placing them
in the workplace of other businesses. Therefore, we are exposed to liability
with respect to actions taken by our employees while on assignment, such as
damages they may cause due to their errors, omissions, misuse of customer
proprietary information, misappropriation of funds, discrimination and
harassment, theft of customer property, other criminal activity, or torts and
other claims. Although we maintain general liability insurance coverage, we have
no assurances 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. One or more
successful claims against us that exceeds available insurance coverage could
have a material adverse effect on our business, operating results and financial
condition. Similarly, any changes in our insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could also have a material adverse effect on our business, operating results and
financial condition.
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ITEM 2. PROPERTIES
We do not own any real property. We lease our principal office and warehouse
space as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
- -------- -------------- ----------------
<S> <C> <C>
UNITED KINGDOM
London........................................ 5,935 April, 2002
Romsey........................................ 56,186 August, 2001
Ruislip....................................... 13,100 February, 2002
Slough........................................ 17,242 December, 2010
Watford....................................... 9,500 August, 2013
FRANCE
Paris (5 locations)........................... 126,950 April, 2000 to
August, 2001
Nantes........................................ 3,320 November, 2001
Lille......................................... 3,180 November, 2001
GERMANY
Braunschweig.................................. 11,256 December, 2002
HOLLAND
Haarlem....................................... 11,959 December, 2000
ITALY
Milan......................................... 23,000 December, 2003
Rome.......................................... 7,700 September, 2004
Turin......................................... 3,000 March, 2000
Padova........................................ 2,500 January, 2003
JAPAN
Tokyo......................................... 1,333 September, 2000
5 other properties............................ 3,708 June, 2000 to
August, 2001
BELGIUM
Brussels...................................... 8,980 March, 2002
SWEDEN
Kista......................................... 4,864 September, 2002
UNITED STATES
Englewood, Colorado........................... 500 January, 2004
12 properties................................. 56,944 June, 2000 to
October, 2001
</TABLE>
Our aggregate property lease payments are currently $5.2 million per annum
and some of which are subject to adjustments during the terms of the various
leases.
Our principal corporate offices are located at 6300 South Syracuse Way,
Suite 293, Englewood, Colorado 80111, telephone (303) 721-7341. Our principal
operational offices are located at 57A Hatton Garden, London, EC1N 8JG, United
Kingdom, telephone 011-44-20-7269-5800.
ITEM 3. LEGAL PROCEEDINGS
We are 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 our
consolidated financial position or consolidated results of our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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. Since July 8, 1998,
our Common Stock is also quoted on the Easdaq market:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
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<S> <C> <C>
First Quarter............................................... $11.19 $ 8.13
Second Quarter.............................................. 10.25 8.38
Third Quarter............................................... 16.50 9.50
Fourth Quarter.............................................. 21.25 12.88
</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 25, 2000, was 1,589. On
April 25, 2000, the last reported sale price of the Common Stock, as reported by
the Nasdaq National Market, was $17.94 per share.
DIVIDEND POLICY
We have never declared or paid any dividends on our Common Stock. We
currently anticipate that all future earnings will be retained by us to support
our growth strategy. Accordingly, we do 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 our Board of Directors and will depend upon, among
other things, future earnings, operations, capital requirements, our general
financial condition, 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."
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Our operating subsidiaries conduct their operations in U.S. dollars, Pounds
sterling, Japanese yen and Eurozone currencies such as French francs, Italian
lira, German marks and Dutch guilders. 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
conversion rates as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------
STATEMENT OF
OPERATIONS BALANCE SHEETS
------------------------------ ------------------------------
1998 1999 2000 1998 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Pounds sterling........................................ 1.643 1.66 1.62 1.633 1.646 1.62
French franc........................................... 5.90 5.86 6.2 5.94 5.66 6.4
Belgium franc.......................................... 36.52 36.08 38.2 36.52 34.78 39.8
Italian lira........................................... -- 1652 1838 -- 1669 1912
German mark............................................ -- -- 1.85 -- -- 1.93
Swedish krone.......................................... -- -- 8.40 -- -- 8.85
Japanese yen........................................... -- -- 104.16 -- -- 107.38
Dutch guilder.......................................... -- -- 2.12 -- -- 2.18
Czech krona............................................ -- -- 34.9 -- -- 35.5
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA (1):
Revenues.................................................... $32,249 $53,015 $84,145 $148,897 $252,878
Cost of revenues............................................ 20,808 36,018 54,662 90,302 151,084
Write down of software development costs.................... 755 -- -- -- --
Gross profit................................................ 10,686 16,997 29,483 58,595 101,794
Selling general and administrative.......................... 9,566 13,792 22,796 45,775 79,342
Depreciation and amortization............................... 560 976 2,213 3,427 6,725
Write down of goodwill (2).................................. -- 552 -- -- --
Reorganization and restructuring costs (2).................. -- 2,286 -- -- 10,530
Income (loss) before interest income and expense, income
taxes, share of results in equity investee profit on
disposal of business and write down of investments(3)..... 560 (609) 4,474 9,393 5,197
Profit on disposal of business.............................. -- -- -- -- 2,284
Write down of investments................................... -- (500) -- -- --
Share of results in equity investee (4)..................... (761) (799) -- -- --
Net income (loss)........................................... $ (652) $(2,344) $ 3,069 $ 5,822 $ 48
Net income (loss) per share
(Basic)................................................... $ (0.24) $ (0.45) $ 0.47 $ 0.64 $ 0.00
Net income (loss) per share
(Diluted)................................................. $ (0.24) $ (0.45) $ 0.43 $ 0.56 $ 0.00
Weighted average number of shares:
Basic..................................................... 2,743 5,170 6,589 9,131 10,967
Diluted................................................... 2,743 5,170 7,129 10,484 11,838
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............................................ $13,464 $30,349 $36,915 $109,596 $127,722
Current liabilities....................................... 14,750 24,763 35,974 86,815 120,578
Total assets.............................................. 17,943 42,021 59,208 146,272 209,008
Long-term debt (including capital lease obligations and
borrowings)............................................. 93 489 497 780 25,976
Total stockholders' equity................................ $ 3,101 $16,769 $21,594 $ 58,677 $ 62,454
</TABLE>
- ------------------------------
(1) We have 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, December 1998, July 1999 and
November 1999 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 non-recurring charges which related to our reorganization and
restructuring of our product, maintenance and support services businesses,
including the reduction of employee headcount.
In the fourth quarter of fiscal 1997, we took a charge of $2.3 million
which related to our reorganization and restructuring of our maintenance
and support services businesses including the reduction of employee
headcount. In addition, in the fourth quarter of fiscal 1997, we 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, we took a charge of $1.3 million, consisting of
$799,000, which represented our investment in the ActionTrac Joint
Venture, a help-desk joint venture with ActionTrac Inc., and $500,000,
which represented our investment in ActionTrac Inc. In the fourth quarter
of fiscal 2000, following the acquisition of CVSI on November 2, 1999, we
took a charge of $10.5 million which related to the first stage of our
restructuring and reorganisation of its services and products business.
See note (7) to the consolidated financial statements.
(3) This is a non-GAAP measure.
(4) Consists of our share of the operating loss of the equity investee (the
"ActionTrac Joint Venture") of $(179,000) and $(205,000) and the write
down of our 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.
12
<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 our 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
We have grown rapidly due, in large part, to acquisitions. Datapro Computers
Group Limited ("Datapro") was acquired in fiscal 1997. Firstpoint Limited
("Firstpoint") and Eurosystems France S.A. ("Eurosystems") were acquired in
fiscal 1998. Decision Systems ("DS"), Memorex Telex Italia Spa ("Memorex"),
Penagen Training Limited ("Penagen") and I-NEA S.A. ("I-NEA") were acquired in
fiscal 1999. The Services Industries Limited Group ("SIL") and CVSI, Inc.
("CVSI) were acquired in fiscal 2000. These acquisitions have been accounted for
under the purchase method of accounting and consolidated in our financial
statements after the effective date of such acquisitions.
In the fourth quarter of fiscal 2000, following the acquisition of CVSI on
November 2, 1999, we took a charge of $10.5 million which related to the first
stage of our restructuring and reorganisation of our services and products
business.
Our 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 our 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 our results of operations for the years ended
January 31, 1998, 1999 and 2000, of acquisitions made during those periods,
write downs of certain asset carrying values and restructuring and
reorganization costs, direct comparison of our results of operations for these
periods will not, in the view of management, prove meaningful. Instead, a
summary of the elements that we believe is essential to an analysis of the
results of operations for such periods is presented below.
FISCAL YEAR ENDED JANUARY 31, 2000, COMPARED WITH FISCAL YEAR ENDED JANUARY 31,
1999
REVENUES
Revenues for fiscal 2000 were $252.9 million, an increase of $104 million,
or approximately 69.8% compared to $148.9 million for fiscal 1999. Approximately
$30.6 million of this increase resulted from our acquisitions during fiscal
2000, none of which revenues were included in our results for fiscal 1999,
$19.8 million from CVSI and $10.8 from SIL. The remaining $73.4 million of this
increase came from the growth of our existing businesses, principally in the
services division. Services revenues were $185.7 million or 73.4% of total
revenues for fiscal 2000, an increase of $91.9 million compared to
$93.8 million for fiscal 1999. Products revenues were $67.2 million or 26.6% of
total revenues for fiscal 2000, a decrease from 37.0% of total revenues for
fiscal 1999. On December 1, 1999, we sold "Hammer", a products business which
had contributed $51.2 million of revenues for fiscal 2000. Hammer contributed
$48.9 million of revenues for fiscal 1999. On December 23, 1999, we sold "K2", a
software services subsidiary, which had contributed $2.1 million of revenues for
fiscal 2000. K2 contributed $3.3 of revenues in fiscal 1999.
13
<PAGE>
GROSS PROFIT
Gross profit for fiscal 2000 was $101.8 million, an increase of
$43.2 million, or 73.7% compared to $58.6 million for fiscal 1999.
$10.3 million of the gross profit increase came from the acquisitions during the
year of SIL and CVSI which contributed $4.2 million and $6.1 million,
respectively. Gross margin increased to 40.25% for fiscal 2000, from 39.4% for
fiscal 1999. 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, partially offset by the inclusion of our fiscal 2000
acquisitions. The gross margins for these acquisitions were lower than that
which we usually achieve through our operations, and gross margins for SIL and
CVSI were 39.15% and 30.72%, respectively. Gross profit for services for fiscal
2000 increased by $43.3 million to $93.0 or 87.2% from $49.7 million for fiscal
1999. Gross margins for services decreased in fiscal 2000 to 50.1% from 52.9% in
fiscal 1999, resulting from the growth of our existing service business and the
inclusion as noted above of our fiscal 2000 acquisitions. Gross profit for
products decreased by $112,000 or 1.3% to $8.8 million for fiscal 2000 compared
to $8.9 million for fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for fiscal 2000 were
$79.3 million, an increase of $33.5 million, or 73.1% compared to $45.8 million
for fiscal 1999. As a percentage of revenues, selling, general and
administrative expenses increased to 31.35% in fiscal 2000, from 30.75% in
fiscal 1999. Selling expenses increased to $23.1 million from $12.8 million in
line with the expansion of our business. General and administrative expenses
increased to $56.2 million from $33.0 million primarily as a result of the
growth in infrastructure necessary to support the expansion of our business.
PROFIT ON DISPOSAL OF BUSINESSES
On December 1, 1999, we disposed of 100% of our shares in Hammer
Distribution Limited, a UK based product distribution business for a sum of
$7.6 million. The pre-tax profit arising from the sale of this business was
$2.3 million. UK taxes in relation to this sale were $1.6 million.
On December 23, 1999, we disposed of 100% of our shares in K2 Systems Plc, a
UK based software services company for a sum of $0.1 million. K2 was sold for
book value and there was no profit arising from the sale of this business. No
taxes are due in relation to this sale.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for fiscal 2000 was $6.7 million, an
increase of $3.3 million, or 97.0% compared to $3.4 million for fiscal 1999.
This increase arose principally from our acquisitions during the year.
Depreciation for fiscal 2000 was $2.7 million, an increase of $1.2 million or
80.0%, from $1.5 million for fiscal 1999. Amortization of goodwill from
acquisitions for fiscal 2000 was $4.0 million, an increase of $2.1 million, or
110.5%, from $1.9 million for fiscal 1999.
INCOME (LOSS) BEFORE INTEREST INCOME AND EXPENSE, INCOME TAXES AND PROFIT ON
DISPOSAL OF
BUSINESSES ("IBIT")
IBIT for fiscal 2000 was $5.1 million, a decrease of $4.3 million, as
compared to $9.4 million for fiscal 1999. As a percentage of revenues, IBIT
decreased to 2.1% in fiscal 2000 as compared to 6.3% for fiscal 1999. This
decrease arose principally from the $10.5 million charge taken for
reorganization and restructuring taken as a result of the actions taken in the
fourth quarter, following our acquisition of CVSI on November 2, 1999.
14
<PAGE>
INTEREST
Interest expense for fiscal 2000 was $2.1 million, an increase of
$1.3 million, or 162.5% compared to $0.8 million for fiscal 1999. This increase
resulted primarily from the increased use of bank lines of credit during fiscal
2000, which were not utilized to the same extent in fiscal 1999. In addition,
$490,000 related to interest on the $25 million facility taken out to assist the
purchase of CVSI in November 1999. Interest income for fiscal 2000 was
$1.0 million, an increase of $0.2 million or 24.4% from $0.8 million in fiscal
1999, due to increased cash on hand due to our public offering.
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 $65.0 million,
or approximately 77.0% compared to $84.1 million for fiscal 1998. Approximately
$26.9 million of this increase resulted from our acquisitions during fiscal
1999, none of which revenues were included in our results for fiscal 1998. The
remaining $37.9 million of this increase came from the growth of our 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 our 1999 acquisitions. Gross profit for services for fiscal
1999 increased by $26.9 million to $49.7 or 117.9% from $22.8 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 our 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 our 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 our 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 our 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 our operating
performances.
15
<PAGE>
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 from 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 our public offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception until June 1996, our sources of capital have been cash flows
from operations, private placements of securities, primarily from our
controlling stockholders and related parties, and borrowings from banks. On
June 19, 1996, we completed a public offering of 3,000,000 shares of our Common
Stock at a price of $5.75 per share. On July 9, 1996, we completed the sale of a
further 450,000 shares pursuant to the underwriters' over-allotment option. As a
result of the offering we raised net proceeds of $16.0 million. In July 1998, we
successfully completed a secondary public offering for the sale of 3,425,000
shares of our Common Stock. As a result of this offering, we raised
$31.0 million net proceeds.
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. $5.5 million (including
$0.5 million interest) of this loan is recorded as a current liability with the
remaining $20.0 million as a long-term debt.
We maintain a revolving line of credit with a UK bank. This line of credit
provides for borrowings of up to L4.0 million ($6.5 million) and bore interest
at an average rate of 7.25% per annum on utilized amounts at January 31, 2000.
At January 31, 2000, $4.9 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.
At January 31, 2000, our Italian subsidiary maintained invoice discount
facilities with Italian banks in the aggregate amount of $3.2 million. Interest
was charged at rates of between 4.0% and 8.5% on utilized amounts.
Outstanding advances from stockholders are shown on our balance sheet as
stockholder advances. Outstanding advances as of January 31, 2000 and 1999, were
$0 and $23,000, respectively. These outstanding advances do not bear interest
and are payable on demand.
Our Japanese subsidiary maintains a 100 million yen ($930,000) short-term
loan facility with a Japanese bank. This loan is repayable in 10 equal monthly
installments of 100,000 yen starting April 2000, and bears interest at 1.375%.
Our working capital decreased from $22.8 million at January 31, 1999, to
$7.1 million at January 31, 2000, a decrease of $15.7 million. This decrease can
be primarily attributed to the non-cash accrual of $5.1 million for
restructuring charges, together with capital expenditure and the short-term
element of the loan regarding the CVSI acquisition.
Net cash used by operating activities during fiscal 2000 was $5.1 million, a
decrease of $0.2 million from the net cash used by operations of $5.3 million in
fiscal 1999. The net cash used reflects primarily the additional working capital
necessary for CVSI and SIL which were acquired during fiscal 2000, and the net
effect of a decrease in deferred revenue and accrued liabilities and an increase
in accounts payable, accounts receivable and inventories
Net cash used by investing activities in fiscal 2000 was $27.2 million, an
increase of $19.4 million from the $7.8 million net cash used in fiscal 1999.
The net cash used primarily reflects the cash paid to acquire CVSI and SIL
during fiscal 2000, and capital expenditure.
16
<PAGE>
Net cash provided by financing activities was $29.8 million for fiscal 2000,
a decrease of $4.9 million from the $34.7 million provided in fiscal 1999. The
cash provided in fiscal 2000 reflects primarily the proceeds from bank financing
for the CVSI acquisition and from the exercise of warrants and options and
repayments of notes payable and payments of outstanding obligations.
We believe that the cash flows from operations and borrowing availability
under our credit facilities will satisfy our anticipated working capital
requirements through at least the next twelve months. In addition, if we deem it
financially attractive, we may seek to raise additional funds through increased
bank borrowings or through the sale of our equity securities. To the extent we
raise additional capital through the sale of our equity securities, ownership
dilution to our stockholders will result.
INFLATION
Inflation has not had a material effect upon our 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 our provision of our services and
products will increase, and, to the extent such increased costs are not offset
by increased revenues, our operations may be adversely affected.
YEAR 2000
We did not experience any significant adverse effects from the Year 2000
change. Our plan and procedures to deal with any probable difficulties arising
from the Year 2000 change ran smoothly and no major problems arose. We do not
foresee any further difficulties arising during the current year in relation to
this change.
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 our preliminary assessment, we do not believe the conversion will have
a material impact on the competitiveness of our service offerings in Europe, as
substantial price transparency already exists.
We expect that modifications to comply with euro requirements have been and
will continue to be made to our business operations and systems on a timely
basis, and do not believe that the cost of such modifications will have a
material adverse impact on our results of operations or financial condition.
There can be no assurance, however, that we 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 our results of operations or financial condition. In addition,
we face risks to the extent that suppliers, manufacturers, distributors and
other vendors upon whom we rely 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 our results of operations or financial condition.
IMPACT OF NEW STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Financial Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or a liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133, as amended by SFAS No. 137, is
effective for years beginning
17
<PAGE>
after June 15, 2000. The Company is currently assessing the impact of adoption
of SFAS No. 133 on its financial statements but does not expect this standard to
have a significant impact on the Company's financial statements. Should the
Company commence using financial instruments particularly to hedge against the
effects of foreign currency fluctuations, then, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" and in March 2000, the SEC staff
issued Staff Accounting Bulletin No. 101A "Implementation Issues Related to SAB
101." These bulletins summarize certain of the staff's views about applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff is providing this guidance due, in part, to the large
number of revenue recognition issues that registrants encounter. The provisions
of these pronouncements are effective for the Company commencing with the second
quarter of 2000. Management is in the process of analyzing the implications of
these bulletins and is anticipating that further implementation guidance will be
forthcoming from the SEC. However, the Company does not anticipate that these
pronouncements will have a significant effect on the Company's financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK
We conduct business on a Pan-European and worldwide basis in the USA and
Japan through subsidiaries in various countries utilizing major international
currencies. We are therefore exposed to movement in currency exchange rates. We
continue 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, we
generally do not enter into any type of foreign exchange contract for
speculative purposes. We have not entered into any type of foreign exchange
contract during fiscal 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements are set forth in Item 14 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers 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............... Chairman of the Board, Chief Executive Officer and
55 Director
Mark Ellis.................. 46 Vice Chairman of the Board, President and Director
Terence W. Burt............. 43 Vice President, Chief Operating Officer and Director
Kenneth J. Newell........... 56 Vice President of Corporate Affairs
Stephen McDonnell........... 37 Chief Financial Officer
Craig Kleinman.............. 44 Secretary and Director
Brian V. Murray............. 52 Director
Arthur Keith Ross........... 48 Director
</TABLE>
ANIL J. DOSHI has been our Chairman of the Board of Directors, Chief
Executive Officer and a Director since April 1993. Mr. Doshi co-founded
Communic8 Software (our predecessor-in-interest) in January 1990 and served as
Communic8's 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 has been Vice Chairman of the Board of Directors since
April 1998 and has been our President and Director since April 1993. Mr. Ellis
co-founded Communic8 Software and served as a director of Communic8 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 our 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 our Vice President of Corporate Affairs since
April 1998 and a Director from April 1996 through April 2000. He was a
co-founder of K2 Group Plc in 1988, which we acquired 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 our Chief Financial Officer since
September 1996. From April 1993 to September 1996, Mr. McDonnell served 4Front
Group plc as a financial accountant. Prior to joining us 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 has been our Secretary and a Director since April 1993.
Mr. Kleinman served as our Chief Financial Officer from April 1993 until
April 1996. During the past ten years, Mr. Kleinman has
19
<PAGE>
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 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.
ARTHUR KEITH ROSS has been a Director 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 B.A. in Law in 1973 and an M.A. in Law in 1976.
All directors hold office until our next meeting of the stockholders and
until their successors are elected and qualified.
The Board of Directors has an Audit Committee which is charged with
reviewing our internal accounting procedures and consulting with and reviewing
the selection of our independent auditors. The Audit Committee currently
consists of Messrs. Doshi, Ross, Murray and Kleinman. The Audit Committee was
formed in fiscal 1997, and during fiscal 2000 met once. The Board of Directors
also has a Compensation Committee charged with recommending to the Board the
compensation for our executives and administering our 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 2000 met once. 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 2000, 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 our executive officers and directors, and persons who
beneficially own more than ten percent of our 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 us with copies of
all Section 16(a) forms they file.
Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that
during fiscal 2000 all Section 16(a) filing requirements applicable to our
executive officers, directors and greater than ten percent beneficial owners
were complied with, except that Messrs. Burt and Newell each reported a
transaction late on Form 4.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The tables and discussion below sets forth information about the
compensation awarded to, earned by, or paid to our 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 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............................ 2000 $284,766 $194,400 70,000 $70,821
Chairman of the Board and Chief
Executive.............................. 1999 259,375 136,120 100,000 71,406
Officer(3)............................... 1998 205,375 90,365 -0- 65,857
Mark Ellis............................... 2000 $250,594 $145,800 60,000 $43,471
Vice Chairman of the Board and........... 1999 228,250 104,580 90,000 39,810
President(3)............................. 1998 180,730 65,720 -0- 43,918
Terence W. Burt.......................... 2000 $217,810 $ 97,200 60,000 $31,776
Vice President and Chief Operating
Officer................................ 1999 191,816 76,360 80,000 27,836
1998 149,239 36,968 10,000 25,424
Kenneth J. Newell........................ 2000 $219,722 $ 72,900 40,000 $28,787
Vice President of Corporate Affairs...... 1999 187,976 68,890 60,000 47,901
1998 152,663 32,860 -0- 37,934
Stephen McDonnell........................ 2000 $ 98,415 $ 72,900 50,000 $17,022
Chief Financial Officer.................. 1999 89,640 49,800 15,000 18,945
1998 71,950 24,645 10,000 10,246
</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 us to Executive Pension Plans, of $43,521,
$21,212, $11,061, $8,424 and $5,030 for the year ended January 31, 2000, 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 us in
November 1995, which provide for annual base salaries of $320,202 and
$281,778 as of February 1, 2000, respectively. See "-Employment
Arrangements." Prior to November 1995, Messrs. Doshi and Ellis did not
receive any salary compensation for services.
21
<PAGE>
STOCK OPTIONS
The following table sets forth certain summary information concerning
individual grants of stock options made during the year ended January 31, 2000,
to each of our 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 2000(1) SHARE(2) DATE(3) 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anil J. Doshi........................ 70,000 8.5% $13.35 12/5/09 $1,088,500 $2,288,300
Mark Ellis........................... 60,000 7.3% 13.35 12/5/09 933,000 1,961,400
Terence W. Burt...................... 10,000 1.2% 8.75 5/24/09 201,500 381,500
50,000 6.1% 13.35 12/5/09 777,500 1,634,500
Kenneth J. Newell.................... 40,000 4.9% 13.35 12/5/09 622,000 1,342,000
Stephen McDonnell.................... 10,000 1.2% 8.75 5/24/09 201,500 381,500
40,000 4.9% 13.35 12/5/09 622,000 1,342,000
</TABLE>
- ------------------------
(1) Based on an aggregate of 820,360 options which were granted during fiscal
2000.
(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 our 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. Our common stock price, as reported by the Nasdaq National Market
on January 31, 2000, was $17.75 per share.
The following table sets forth at January 31, 2000, 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,
2000, Messrs. Doshi, Ellis, Burt and Newell exercised and retained 150,000,
150,000, 43,084 and 60,296, respectively, and Messrs. Burt, Newell and McDonnell
exercised and sold 16,366, 22,904 and 12,500, respectively.
22
<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............................................ 166,667 123,333 $2,925,500
Mark Ellis............................................... 163,334 106,666 2,760,250
Terence W. Burt.......................................... 148,050 90,000 2,421,338
Kenneth J. Newell........................................ 132,634 66,666 2,044,575
Stephen McDonnell........................................ 30,333 49,167 604,750
</TABLE>
- ------------------------
(1) Computed based upon the difference between the stock option exercise price
and the closing price of our Common Stock on January 31, 2000, ($17.75).
EMPLOYMENT ARRANGEMENTS
Messrs. Doshi and Ellis entered into employment agreements with us 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, 2000, Messrs. Doshi and Ellis are entitled to base annual salaries
of L197,655 ($320,202) and L173,937 ($281,778), respectively. Prior to the
execution of such employment agreements, neither Messrs. Doshi nor Ellis had
received salary compensation for services performed for us and our affiliates.
Mr. Burt entered into an employment agreement with us at a salary as at
February 1, 2000, of L150,218 ($243,353).
No other executive officer is currently party to an employment agreement
with us. As appropriate, other employment contracts may be entered into with
other key executives.
STOCK OPTIONS AND BENEFIT PLANS
We maintain contributory, non-defined pension plans for the benefit of
Messrs. Doshi and Ellis to which we make contributions of approximately L39,959
($64,733) per annum. We also maintain contributory, non-defined pension plans
for the benefit of Messrs. Burt and Newell to which it makes contributions of
approximately L12,000 ($19,000) per annum.
In 1999, pursuant to a share option plan, Messrs. Burt and McDonnell were
each awarded options to acquire 10,000 shares of our Common Stock at an exercise
price of $8.75 per share, being equal to the fair market value of the Common
Stock on the date of the grant.
1996 EQUITY INCENTIVE PLAN
In May 1996, we 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 our common stock. The Plan permits the granting of
options to our officers, employees, directors and consultants. 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
23
<PAGE>
grant. During 1999, 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. During 2000, and subject to stockholder approval to amend our
1996 Equity Incentive Plan, the Board granted a further 70,000 options to
Mr. Doshi, 60,000 options to Mr. Ellis, 50,000 options to Mr. Burt, 40,000
options to Mr. Newell, 12,500 options to Mr. Kleinman, and 10,000 options each
to Messrs. Ross and Murray, each at an exercise price of $13.35 per share, equal
to the fair market value of the common stock on the date of the grant.
COMPENSATION OF DIRECTORS
Messrs. Murray and Ross each received compensation of $23,000 in the fiscal
year 2000. In February 2000, their compensation was increased to $25,300 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."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 10, 2000 (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 our common stock by: (i) each person known by us to own
beneficially more than five percent of our outstanding common stock; (ii) each
of our directors; (iii) each executive officer named in the Summary Compensation
Table (see "Executive Compensation"); and (iv) all of our directors and
executive officers 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 PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED OWNERSHIP
- ---------------- ------------------ ----------
<S> <C> <C>
Anil J. Doshi (1)........................................... 1,026,879 8.49%
Mark Ellis (2).............................................. 585,312 4.84%
Terence W. Burt (3)......................................... 242,050 2.01%
Kenneth J. Newell (4)....................................... 197,174 1.64%
Stephen McDonnell (5)....................................... 17,967 *
Craig Kleinman (6).......................................... 40,000 *
Brian V. Murray (7)......................................... 20,500 *
Arthur Keith Ross (8)....................................... 157,850 1.32%
All Directors and Executive Officers as a Group (8 persons)
(9)....................................................... 2,242,220 17.53%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 45,512 shares owned by Aliki Financial Corp., in which Mr. Doshi
has a 65% interest. Also includes 186,667 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 180,000 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
24
<PAGE>
and children. Also includes 161,384 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 139,300 shares purchasable pursuant to immediately exercisable
options. Mr. Newell disclaims beneficial ownership of the shares held by his
wife.
(5) Consists of 17,967 shares purchasable pursuant to immediately exercisable
options.
(6) Includes 8,000 shares purchasable pursuant to immediately exercisable
options.
(7) Includes 18,000 shares purchasable pursuant to immediately exercisable
options.
(8) Includes 8,000 shares purchasable pursuant to immediately exercisable
options and 27,500 warrants.
(9) Includes 719,318 shares subject to options which are immediately
exercisable. Does not include 425,333 shares subject to options which are
not exercisable within 60 days of April 10, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADVANCES FROM AFFILIATES AND RECEIVABLE FROM RELATED PARTY
As at January 31, 1999 and 2000, $23,000 and $0, respectively, were owed to
Mr. Doshi. No other related party receivables or payables existed as at
January 31, 1999 and 2000.
During the periods ended January 31, 1998, 1999 and 2000, we compensated one
of our officers/ stockholders for accounting, investor relations and
administration services in the amount of approximately $64,868, $69,009 and
$74,614, respectively. At January 31, 1999 and 2000, $0 and $0, respectively,
was owed to this related party.
We believe that all transactions with related parties have been upon terms
at least as favorable to us as those which would have been available to us from
unrelated parties.
25
<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. 10.1, 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)
10.20 Form of Employment Agreement effective as of November 1,
1995 betweenthe 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)
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
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)
10.31 Acquisition Agreement, dated as of September 21, 1999, by
and among 4Front Technologies, Inc., CVSI, Inc., CVSI
Acquisition Co., LLC, Computervision Corporation, and the
individuals set forth on Schedule A thereto.(8)
10.32 Sale and Purchase Agreement, dated as of December 1, 1999,
by and among 4Front Group UK Limited, 4Front Group plc, and
Blakedew 181 Limited.(9)
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.
(8) Previously filed as Exhibit to the Company's Report on Form 8-K dated
November 2, 1999.
(9) Previously filed as Exhibit to the Company's Report on Form 8-K dated
December 1, 1999.
(b) Reports on Form 8-K.
(i) On November 15, 1999, we filed a Form 8-K with respect to our
acquisition of CVSI, Inc.
(ii) On December 16, 1999, we filed a Form 8-K with respect to our sale
of Hammer Distribution Limited.
(iii) On January 18, 2000, we amended the Form 8-K indicated in
(i) above to include the requested financial statements of
CVSI, Inc. and the related pro forma financial statements.
27
<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.
<TABLE>
<S> <C> <C>
4FRONT TECHNOLOGIES, INC.
By: /s/ ANIL J. DOSHI
-----------------------------------------
Anil J. Doshi, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Date: April 27, 2000
</TABLE>
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.
<TABLE>
<CAPTION>
NAME AND POSITION DATE
----------------- ----
<S> <C>
/s/ ANIL J. DOSHI
---------------------------------------------
Anil J. Doshi, Chairman of the Board, Chief April 27, 2000
Executive Officer and Director (Principal Executive
Officer)
/s/ MARK ELLIS
---------------------------------------------
Mark Ellis, Vice Chairman of the Board, President April 27, 2000
and Director
/s/ TERENCE W. BURT
---------------------------------------------
Terence W. Burt, Vice President, Chief Operating April 27, 2000
Officer and Director
/s/ STEPHEN MCDONNELL
---------------------------------------------
Stephen McDonnell, Chief Financial Officer April 27, 2000
(Principal Financial and Accounting Officer)
/s/ CRAIG KLEINMAN
--------------------------------------------- April 27, 2000
Craig Kleinman, Secretary and Director
/s/ BRIAN V. MURRAY
--------------------------------------------- April 27, 2000
Brian V. Murray, Director
/s/ ARTHUR K. ROSS
--------------------------------------------- April 27, 2000
Arthur Keith Ross, Director
</TABLE>
28
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of January 31, 1999 and
2000...................................................... F-3
Consolidated Statements of Operations for the years ended
January 31, 1998, 1999 and 2000........................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended January 31, 1998, 1999 and 2000....... F-5
Consolidated Statements of Comprehensive Income (loss) for
the years ended January 31, 1998, 1999 and 2000........... F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1998, 1999 and 2000........................... 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.
We have audited the accompanying consolidated balance sheets of 4Front
Technologies, Inc. and Subsidiaries as of January 31, 1999 and 2000 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, 2000. 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 2000 and the
results of their operations and their cash flows for the years in the three year
period ended January 31, 2000, in conformity with generally accepted accounting
principles in the United States.
KPMG
Chartered Accountants
Registered Auditors
London, England
April 27, 2000
F-2
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1999 2000
----------- -----------
$'000'S $'000'S
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 26,162 $ 23,086
Accounts receivable, net of allowance for doubtful accounts
of $642 and $1,047, respectively.......................... 54,910 64,495
Deposits.................................................... 51 51
Inventories................................................. 23,840 30,101
Prepaid expenses............................................ 4,130 7,728
Income taxes receivable..................................... 16 17
Other current assets........................................ 487 2,244
-------- --------
Total current assets...................................... 109,596 127,722
PROPERTY AND EQUIPMENT, net................................. 5,899 12,801
GOODWILL, net............................................... 26,573 63,027
DEFERRED INCOME TAX......................................... 3,354 4,901
SOFTWARE DEVELOPMENT COSTS.................................. 757 --
OTHER ASSETS................................................ 93 557
-------- --------
TOTAL ASSETS................................................ $146,272 $209,008
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 37,384 $ 55,509
Accrued liabilities......................................... 16,734 17,889
Stockholder advances........................................ 23 --
Lines of credit-bank........................................ 5,180 11,288
Notes payable............................................... 5,393 3,195
Capital lease obligations, current portion.................. 608 697
Income taxes payable........................................ 2,159 8,801
Deferred revenue............................................ 19,334 23,199
Total current liabilities................................. 86,815 120,578
-------- --------
CAPITAL LEASE OBLIGATIONS, less current portion............. 780 873
LONG TERM LIABILITIES....................................... -- 25,103
-------- --------
TOTAL LIABILITIES........................................... 87,595 146,554
======== ========
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 value, 30,000,000 shares authorized,
10,628,067 and 11,765,602 shares issued and outstanding,
respectively.............................................. 11 12
Additional paid-in capital.................................. 56,123 60,435
Retained earnings........................................... 2,668 2,716
Retained comprehensive deficit.............................. (125) (709)
-------- --------
Total stockholders' equity................................ 58,677 62,454
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $146,272 $209,008
======== ========
</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,
--------------------------------------
1998 1999 2000
---------- ----------- -----------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
REVENUES
Services............................................... $ 45,302 $ 93,849 $ 185,722
Products............................................... 38,843 55,048 67,156
---------- ----------- -----------
84,145 148,897 252,878
---------- ----------- -----------
Cost of Services....................................... 22,541 44,171 92,733
Cost of Products....................................... 32,121 46,131 58,351
---------- ----------- -----------
54,662 90,302 151,084
---------- ----------- -----------
GROSS PROFIT
Services............................................... 22,761 49,678 92,989
Products............................................... 6,722 8,917 8,805
---------- ----------- -----------
29,483 58,595 101,794
---------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses........... 22,796 45,775 79,342
Depreciation........................................... 1,092 1,494 2,720
Amortization........................................... 1,121 1,933 4,005
Reorganization and restructuring costs................. -- -- 10,530
---------- ----------- -----------
Total operating expenses............................. 25,009 49,202 96,597
INCOME BEFORE INTEREST, PROFIT ON DISPOSAL OF
BUSINESSES AND INCOME TAXES.......................... 4,474 9,393 5,197
Profit on disposal of business......................... -- -- 2,284
Interest income........................................ 276 837 1,041
Interest expense....................................... (632) (842) (2,128)
---------- ----------- -----------
INCOME BEFORE INCOME TAXES............................. 4,118 9,388 6,394
INCOME TAXES........................................... 1,049 3,566 6,346
---------- ----------- -----------
NET INCOME............................................. $ 3,069 $ 5,822 $ 48
========== =========== ===========
NET INCOME PER COMMON SHARE (Basic).................... $ 0.47 $ 0.64 $ 0.00
========== =========== ===========
NET INCOME PER COMMON SHARE (Diluted).................. $ 0.43 $ 0.56 $ 0.00
========== =========== ===========
BASIC SHARES OUTSTANDING............................... 6,588,911 9,130,824 10,966,598
========== =========== ===========
DILUTED SHARES OUTSTANDING............................. 7,129,307 10,484,300 11,837,964
========== =========== ===========
</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>
RETAINED
RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME/(DEFICIT) TOTAL
---------- -------- -------- ---------------- --------
$'000'S $'000'S $'000'S $'000'S
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1997............... 6,514,747 $22,988 $(6,223) $ 3 $16,768
Stock issued in acquisition of
Eurosystems........................... 58,896 600 -- -- 600
Exercise of warrants and stock
options............................... 477,674 1,289 -- -- 1,289
Net income for the year................. -- -- 3,069 -- 3,069
Other comprehensive deficit............. -- -- -- (132) (132)
---------- ------- ------- ----- -------
BALANCE, JANUARY 31, 1998............... 7,051,317 24,877 (3,154) (129) 21,594
Exercise of warrants and stock
options............................... 621,458 2,612 -- -- 2,612
Stock issued in offering, net of
offering costs........................ 2,955,292 28,645 -- -- 28,645
Net income for the year................. -- -- 5,822 -- 5,822
Other comprehensive income.............. -- -- -- 4 4
---------- ------- ------- ----- -------
BALANCE, JANUARY 31, 1999............... 10,628,067 56,134 2,668 (125) 58,677
Exercise of warrants and stock
options............................... 884,155 3,702 -- -- 3,702
Stock issued upon exercise of options... 193,380 -- -- -- --
Stock issued in acquisition of SIL...... 60,000 611 -- -- 611
Net income for the year................. -- -- 48 -- 48
Other comprehensive deficit............. -- -- -- (584) (584)
---------- ------- ------- ----- -------
BALANCE, JANUARY 31, 2000............... 11,765,602 $60,447 $ 2,716 $(709) $62,454
========== ======= ======= ===== =======
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Net income.................................................. $3,069 $5,822 $ 48
Foreign currency translation adjustment..................... (132) 4 (584)
------ ------ -----
Comprehensive income (loss)................................. $2,937 $5,826 $(536)
====== ====== =====
</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,
------------------------------
1998 1999 2000
-------- -------- --------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $3,069 $ 5,822 $ 48
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Depreciation................................................ 1,092 1,494 2,720
Amortization................................................ 1,121 1,933 4,005
Non-Cash restructuring charges.............................. -- -- 5,103
(Gain) on disposal of fixed assets.......................... (54) (36) (64)
Change in accounts receivable............................... 2,234 (17,908) (5,122)
Change in deposits.......................................... (18) (2) --
Change in inventories....................................... (2,432) (5,200) (8,131)
Change in prepaid expenses.................................. (171) (850) (1,661)
Change in deferred income tax............................... 725 1,875 (1,366)
Change in income taxes...................................... 256 595 5,805
Change in other current assets.............................. 11 (268) 210
Change in accounts payable.................................. (1,783) (162) 398
Change in accrued liabilities............................... (263) 3,057 (3,052)
Change in deferred revenue.................................. (2,402) 4,335 (4,659)
------ ------- -------
Net cash from operating activities.......................... 1,385 (5,315) (5,766)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment....................................... (880) (1,956) (5,740)
Proceeds from disposal of equipment......................... 164 167 402
Acquisition of subsidiaries, including related expenses, net
of cash acquired.......................................... (6,574) (5,199) (28,353)
Proceeds from disposal of business.......................... -- -- 7,614
Capitalization of software development costs................ -- (850) --
Investment in and advances to equity investee............... 143 -- --
Change in other assets...................................... (17) 8 (464)
------ ------- -------
Net cash from investing activities.......................... (7,164) (7,830) (26,541)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in lines of credit-bank.............................. 468 1,741 3,877
Proceeds from loan for acquisition of CVSI.................. -- -- 25,000
Proceeds from notes payable................................. 2,858 2,536 --
Repayment of notes payable.................................. -- -- (2,198)
Proceeds from (repayment of) stockholders' advances......... (40) 5 (23)
Payments of capital lease obligations....................... (731) (822) (542)
Net proceeds from issuance of common stock.................. 1,289 31,257 3,701
------ ------- -------
Net cash from financing activities.......................... 3,844 34,717 29,815
------ ------- -------
Effect of exchange rate changes on cash..................... (132) 4 (584)
------ ------- -------
Net change in cash.......................................... (2,067) 21,576 (3,076)
Cash at beginning of period................................. 6,653 4,586 26,162
------ ------- -------
Cash at end of period....................................... $4,586 $26,162 $23,086
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest expense.............................. $ 632 $ 842 $ 2,128
Cash paid for income taxes.................................. $ 42 $ 486 $ 1,129
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999 AND 2000
1. NATURE OF BUSINESS
4Front Technologies, Inc. and subsidiaries (the "Company" or "4Front") 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.
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.
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
Product revenue is recognized when the product is shipped.
Service revenues from consulting, engineering, implementation and training
are recognized as the services are performed. Revenues from maintenance
agreements are recognized rateably over the term of the agreements.
SOFTWARE REVENUE RECOGNITION
Software sales consist of multi-element contracts which typically include
the delivery of licences, provision of consulting services, and post contract
support (such as on-line support and telephone support) and upgrades.
These multi-element contracts are unbundled into their component elements
and revenue is allocated to the various elements based on vendor-specific
objective evidence of fair value. The price charged for each element when sold
separately is used to determine fair value. Having allocated revenue to the
various elements, each element is then treated separately. Revenue is recognised
when each of the following criteria has been satisfied:
- persuasive evidence of an arrangement
- delivery has occurred
- fee is fixed or determinable
F-7
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- collectibility is probable
As a result, licence fee revenue is typically recognised on delivery as the
software is fully functional at this point in time. The price of support takes
into account the cost of upgrades. The price of upgrades is based on a
reasonable estimate of the percentage of customers that are not expected to
exercise the upgrade right.
b) 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 labor and material costs incurred
for customer software projects.
c) 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. No depreciation
has been charged to cost of sales.
d) 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 deficit reflected
as a separate component of stockholders' equity at January 31, 2000 is $709,000.
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, 1998, 1999 and 2000, the Company had operating foreign
exchange gains of $611,000, $664,000 and $210,000, respectively.
e) GOODWILL
In connection with acquisitions accounted for under the purchase method (see
Note 8), 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, 1998, 1999 and 2000, is $2.4 million,
$4.3 million and $8.3 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
F-8
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
f) 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.
g) 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.
h) 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.
i) NET INCOME PER COMMON SHARE
Basic net income per share is based on the weighted average number of shares
outstanding during the period. Diluted net income per share reflects the
potential dilution from the Company's stock options and warrants.
j) CONCENTRATION OF CREDIT RISK
At January 31, 1999 and 2000, cash includes $4,917,000 and $6,669,000,
respectively, held in demand deposit accounts in non-USA bank accounts 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.
F-9
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
k) 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.
l) LONG-LIVED ASSETS
Long-lived assets and goodwill are 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.
m) ADOPTION OF NEW STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Financial Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or a liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133, as amended by SFAS No. 137, is
effective for years beginning after June 15, 2000. The Company is currently
assessing the impact of adoption of SFAS No. 133 on its financial statements but
does not expect this standard to have a significant impact on the Company's
financial statements. Should the Company commence using financial instruments
particularly to hedge
F-10
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
against the effects of foreign currency fluctuations, then, SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" and in March 2000, the SEC staff
issued Staff Accounting Bulletin No. 101A "Implementation Issues Related to SAB
101." These bulletins summarize certain of the staff's views about applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff is providing this guidance due, in part, to the large
number of revenue recognition issues that registrants encounter. The provisions
of these pronouncements are effective for the Company commencing with the second
quarter of 2000. Management is in the process of analyzing the implications of
these bulletins and is anticipating that further implementation guidance will be
forthcoming from the SEC. However, the Company does not anticipate that these
pronouncements will have a significant effect on the Company's financial
statements.
5. PURCHASED AND DEVELOPED SOFTWARE
Purchased and developed software consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
Software development costs.................................. $850 $ --
Less accumulated amortization............................... (93) --
---- ----
$757 $ --
==== ====
</TABLE>
Development costs are capitalized once technical feasibility has been
established. Only the costs incurred from the date that technical feasibility
had been established to the date the product became available for release are
capitalized.
Appropriate amortization periods are then applied to the costs capitalised.
Given the nature of the niche markets such as the Construction industry,
Government and Emergency services into which the products are sold, three years
is typically used. The Company conducts periodic impairment reviews on the
carrying value of the costs capitalized to ensure that they are still
recoverable.
Software costs capitalized were held within K2 Systems PLC, which was sold
on December 23, 1999.
F-11
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
6. SEGMENT INFORMATION
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.
The Company operated solely in Europe prior to fiscal 2000, and hence all of
its revenues are derived from this region for periods prior to fiscal 2000. In
fiscal 2000, the Company acquired CVSI who had operations in USA and Japan, as
well as European activities. 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, 1998, 1999 and
2000 is as follows:
<TABLE>
<CAPTION>
UNITED KINGDOM
OF GREAT OTHER
U.S.A. BRITAIN INTERNATIONAL CONSOLIDATED
-------- -------------- ------------- ------------
$'000'S $'000'S $'000'S $'000'S
<S> <C> <C> <C> <C>
Year-ended January 31, 2000
Net revenues................................. $5,016 $123,202 $124,660 $252,878
Net income after taxes....................... (2,124) (1,931) 4,103 48
Long life assets............................. $ 968 $ 4,218 $ 7,615 $ 12,801
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
</TABLE>
No single customer represented more than 10% of total sales during the years
ended January 31, 1998, 1999 or 2000.
7. REORGANIZATION AND RESTRUCTURING
On November 2, 1999, the Company acquired 100% of CVSI Inc. for
$25.5 million (Note 8). CVSI, Inc. is a leading provider of IT services and
operates in many of the same territories, particularly in Northern Europe that
4Front's existing operations are located. As a result of the CVSI acquisition,
there were a number of duplicate facilities and personnel particularly those at
management level. During the fourth quarter 2000, the Company implemented a
Board-approved restructuring program. This program
F-12
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
7. REORGANIZATION AND RESTRUCTURING (CONTINUED)
was directly focused on improving the Company's competitive position as well as
enhancing the Company's use of resources, particularly in light of the recent
CVSI acquisition.
The progam resulted in severance and related charges for 107 positions,
across USA, UK, France, Germany, Italy, Netherlands, Belgium and Japan. In
addition, the charge included costs in relation to vacating leased facilities.
These costs focused in eliminating both duplicate facilities and severance costs
in relation to eliminating duplicate administrative functions in each of the
major territories in which 4Front operates.
The following table depicts the activity for the 2000 fourth-quarter
restructuring program through January 31, 2000:
<TABLE>
<CAPTION>
ACCRUED
TOTAL CASH BALANCE AT
CHARGES PAYMENTS JANUARY 31, 2000
-------- -------- ----------------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Severance and related charges.............................. $ 4,236 $3,886 $ 350
Lease termination costs.................................... 6,294 1,191 5,103
------- ------ ------
$10,530 $5,077 $5,453
======= ====== ======
</TABLE>
Severance and related charges include involuntary termination and local
statutory benefits, and payroll taxes for 107 employees, or 5.1% of the
worldwide workforce. The reduction in force consisted of 107 employees from
2,090 across countries.
Lease termination costs of $6.3 million represent remaining lease
liabilities related to 3 of the Company's facilities located within the South
East of England and 1 in Boston, MA, USA.
8. BUSINESS ACQUISITIONS
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 paid a further
$1.8 million as deferred consideration in equal quarterly installments 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.
F-13
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
8. BUSINESS ACQUISITIONS (CONTINUED)
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, 1998, the Company acquired 100% of the shares of
I-NEA, a French subsidiary of Siemens for a total consideration of
$4.0 million. An amortization period of five years is used in relation to this
acquisition.
Effective July 31, 1999, the Company acquired 100% of the SIL group of
companies for a total sum of $2.3 million, which consisted of $1.7 million cash
and $0.6 million in common stock of the Company. An amortization period of
10 years has been used in relation to this acquisition.
Effective November 1, 1999, the Company acquired 100% of CVSI for a cash
consideration of $25.5 million. The Company paid for this acquisition with the
proceeds of a term loan of $25.0 million from Barclays Bank Plc. An amortization
period of 15 years has been used in relation to this acquisition.
The above acquisitions were accounted for under the purchase method, with
the excess of the purchase price over the fair value of the net assets acquired
allocated to goodwill. The consolidated financial statements reflect the
operations of the acquired companies since the dates of their respective
acquisition.
The following table reflects unaudited pro forma combined results of
operations of the Company, as if the acquisitions of CVSI Inc. and the SIL group
of companies had occurred on February 1, 1998:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------
1999 2000
---------- ----------
<S> <C> <C>
Net sales................................................... $292,080 $345,542
Net income.................................................. $ 978 $ (4,798)
Basic earnings per share.................................... $ 0.11 $ (0.44)
Diluted earnings per share.................................. $ 0.09 $ (0.44)
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain pro forma adjustments, including a pro forma
provision for income taxes for CVSI and SIL at 38 and 49 percent for fiscal 1999
and 2000, and the exclusion of a one-off gain made by CVSI in fiscal 2000 of
$7.3 million pre-tax, relating to the disposition of its Australian Business.
Such pro forma amounts are not necessarily indicative of what actual
consolidated results of operations might have been if the acquisitions had been
effective on February 1, 1998.
9. BUSINESS DISPOSALS
On December 1, 1999, the Company disposed of 100% of its shares in Hammer
Distribution Limited, a UK based product distribution business for a sum of
$7.6 million. The pre-tax profit arising from the sale of this business was
$2.3 million. UK taxes in relation to this sale were $1.6 million.
On December 23, 1999, the Company disposed of 100% of its shares in K2
Systems Plc, a UK based software company for a sum of $0.1 million. K2 was sold
for book value and there was no profit arising from the sale of this business.
No taxes are due in relation to this sale.
F-14
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
10. EARNINGS PER SHARE
The calculation for earnings per share is shown below for the years ended
January 31,
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income............................. $ 3,068,620 $ 5,822,022 $ 48,018
----------- ----------- -----------
Weighted Average Number of Common
Shares outstanding................... 6,588,911 9,130,824 10,966,598
----------- ----------- -----------
Net income per Common Share Basic...... $ 0.47 $ 0.64 $ 0.00
=========== =========== ===========
DILUTED EARNINGS PER SHARE
Net income............................. $ 3,068,620 $ 5,822,022 $ 48,018
----------- ----------- -----------
Weighted Average Number of Common
Shares outstanding................... 6,588,911 9,130,824 10,966,598
Additional Shares to be Issued upon
Assumed Exercise of Options and
Warrants............................. 2,556,925 3,132,840 2,838,619
Shares Assumed Repurchased at the
Average Market Price with the
Proceeds of Exercise................. (2,016,529) (1,779,364) (1,967,253)
----------- ----------- -----------
Adjusted Shares for Dilution........... 7,129,307 10,484,300 11,837,964
----------- ----------- -----------
Net income per Common Share Diluted.... $ 0.43 $ 0.56 $ 0.00
=========== =========== ===========
</TABLE>
11. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
Computer hardware......................................... $23,678 $30,095
Computer software......................................... 7 6
Work in progress.......................................... 155 --
------- -------
$23,840 $30,101
======= =======
</TABLE>
F-15
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
12. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
Vehicles................................................. $ 1,363 $ 1,868
Furniture, fixtures and equipment........................ 3,741 12,475
Computer equipment....................................... 6,589 26,342
------- --------
11,693 40,685
Less accumulated depreciation............................ (5,794) (27,884)
------- --------
$ 5,899 $ 12,801
======= ========
</TABLE>
13. ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
Value Added Tax........................................... $10,567 $ 4,751
Payroll taxes............................................. 6,044 12,583
Other..................................................... 123 555
------- -------
$16,734 $17,889
======= =======
</TABLE>
F-16
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
14. LINES OF CREDIT-BANK
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
The Company has a L4.0 million (approximately $6.5 million)
line of credit (overdraft protection) with a United
Kingdom bank. Interest during the year was charged at an
average rate of 7.25%..................................... $2,386 $ 4,890
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 --
The Company borrowed a total $25.0 million from a UK bank to
assist in the purchase of CVSI. The loan is repayable in
$2.5 million equal installments every six months. Interest
during the year was charged at an average rate of 7.62%.
$5.5 million (including interest due) on the loan is
treated as short-term at January 31, 2000, with the
remaining $20.0 million as a long-term (over one year)
liability................................................. -- $ 5,468
The Company's Japanese subsidiary has a 100 million yen
($930,000) facility with a bank in Japan. Interest is
charged at 1.375% per annum. This is a short-term loan
repayable in monthly instalments of 10 million yen
($93,000) starting April 30, 2000......................... -- $ 930
------ -------
$5,180 $11,288
====== =======
</TABLE>
15. NOTES PAYABLE
Notes payable are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
The Company's UK subsidiary "Hammer" maintained a factoring
facility with a UK company which represented 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. This
facility was closed upon completion of the sale of Hammer
in December 1999.......................................... $5,393 --
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".......................... -- $3,195
------ ------
$5,393 $3,195
====== ======
</TABLE>
F-17
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
16. INCOME TAXES
The Company files a consolidated 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, 2000, the Company has available for future use approximately
$7.0 million of net operating loss carryforwards expiring from 2005 through
2020, related to its U.S. operations of which $1.5 million will be recovered
against equity when utilized. The company also has approximately $13.1 million
of net operating losses related to its foreign operations of which
$0.85 million can be carried forward indefinitely. The tax benefits of acquired
net operating loss carryforwards will be recorded as decreases to goodwill when
realized. Utilization of acquired U.S. net operating loss carryforwards may be
subject to limitations pursuant to section 382 of the Internal Revenue code.
The provision for income taxes (benefit) is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Current:
U.S. Federal........................................ $ -- $ -- $ 37
U.S. State.......................................... -- -- 364
Foreign............................................. 625 1,656 7,149
------ ------ ------
625 1,656 7,550
Deferred:
U.S. Federal........................................ (467) 97 217
U.S. State.......................................... (71) 15 25
Foreign............................................. 962 1,798 (1,446)
------ ------ ------
424 1,910 (1,204)
------ ------ ------
Total provision for income taxes.................... $1,049 $3,566 $6,346
====== ====== ======
</TABLE>
The Company computes income tax expense based on the statutory rates in
effect in each local jurisdiction. During the year ended January 31, 1998, the
UK statutory rate was reduced from 33% to 31%. The Company computed UK 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 years ended January 31, 1999 and 2000, the
Company computed income tax expense at the statutory rates applicable to each
local jurisdiction, ranging from 28% to 44%.
F-18
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
16. INCOME TAXES (CONTINUED)
Income tax expense for the years ended January 31, 1998, 1999 and 2000,
differed from the amounts computed by applying the appropriate UK (U.S. for
January 31, 2000) statutory tax rate to pre-tax income (loss) as a result of the
following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Expected tax at UK (U.S.) rate................ $1,290 $2,910 $2,174
Effect of write downs and amortization of
goodwill.................................... 351 598 1,425
Change in valuation allowance................. (418) (111) 79
Utilization of net operating losses for which
no benefit was previously recognized........ (289) -- (510)
Effect of UK/U.S. statutory rate change on
deferred tax assets and liabilities......... 59 -- 5
Effect of foreign profits taxed at non-UK (US)
rates....................................... -- 333 215
Sub-part F income (and other) on disposal of
subsidiary (net of foreign tax credits)..... -- -- 1,854
Non deductible items and other................ 56 (164) 388
State and local tax (net of Federal benefit,
where applicable)........................... -- -- 716
------ ------ ------
Actual tax charge............................. $1,049 $3,566 $6,346
====== ====== ======
</TABLE>
The company has substantially increased its U.S. operations; therefore, for
years ended January 31, 2000, and beyond the expected tax rate is the U.S.
Federal rate of 34%. The revaluation of deferred tax assets and liabilities for
U.S. operations previously valued at UK effective tax rates has been accounted
for as a charge to income.
The tax effects of temporary differences and net operating loss
carryforwards that give rise to deferred tax assets and (liabilities) are as
follows at 31 January:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Net operating loss carryforwards................... $2,041 $5,447 $ 7,524
Other deferred tax assets (principally differences
in depreciation and amortization and accrued
expenses)........................................ 662 724 11,585
------ ------ -------
Total deferred tax assets.......................... 2,703 6,171 19,109
Valuation allowance................................ (301) (2,817) (14,208)
------ ------ -------
Deferred tax assets, net........................... $2,402 $3,354 $ 4,901
====== ====== =======
</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
$10.0 million. Management believe that it is more likely than not
F-19
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
16. INCOME TAXES (CONTINUED)
that the results of future operations will generate sufficient taxable income to
realize the net deferred tax assets.
At January 31, 1999 and 2000, the Company established a valuation allowance
against its otherwise recognizable deferred tax assets of its domestic and
foreign operations due to uncertainty surrounding the ability of the Company to
generate sufficient taxable income in future periods in its operations to fully
utilise its deferred tax assets. For the year ended January 31, 2000, the
valuation allowance increased primarily due to the acquisition of deferred tax
assets with valuation allowances against them.
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,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
Vehicles, gross............................................. $2,272 $1,089
Less accumulated depreciation............................... (914) (638)
------ ------
Net......................................................... $1,358 $ 451
====== ======
</TABLE>
Future minimum lease payments together with the present value of net minimum
lease payments at January 31, 2000, are as follows:
<TABLE>
<CAPTION>
$'000'S
--------
<S> <C>
2001........................................................ $ 883
2002........................................................ 640
2003........................................................ 247
2004........................................................ 8
2005........................................................ 1
------
Total minimum lease payments................................ 1,779
Less amount representing interest........................... (209)
------
Present value of net minimum lease payments................. 1,570
Less current portion........................................ (697)
------
$ 873
======
</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, 1998, 1999 and 2000, amounted to $2.4 million,
$2.8 million and $5.2 million, respectively.
F-20
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The principal lease commitments for premises are as follows:
- the Company's 4Front Group plc 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 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 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 is renewable
at the Company's discretion.
- the Company's CVSI subsidiary leases various properties in the United
States for an aggregate of $135,000. These properties leases expire from
May 2000 through October 2001 and are renewable at the Company's
discretion.
- the Company's CVSI subsidiary leases offices in Camberley, England for
$177,000 (L109,000) per year, expiring in April 2000.
- the Company's CVSI subsidiary leases offices in Holland for $52,000 per
year. The lease expires in October 2000 but is renewable at the Company's
discretion.
- the Company's CVSI subsidiary leases offices in Sweden for $111,000 per
year. The lease expires in September 2000 but is renewable at the
Company's discretion.
- the Company's CVSI subsidiary leases properties in Tokyo, Japan for
$250,000 per year. The lease expires in June 2000 but is renewable at the
Company's discretion.
- The Company's SIL subsidiary leases offices in Braunschweirg, Germany for
$57,000 per year. The lease expires in December 2002.
- The Company's SIL subsidiary leases offices in Haarlem, Holland for
$153,000 per year. The lease expires in December 2000.
- The Company's SIL subsidiary leases offices and warehouse in Romsey,
England for $173,000 per year. The lease expires in September 2001.
F-21
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Obligations under operating leases are as follows for each of the years
ending January 31:
<TABLE>
<CAPTION>
$'000'S
--------
<S> <C>
2001........................................................ $ 5,068
2002........................................................ 3,564
2003........................................................ 1,962
2004........................................................ 1,102
2005........................................................ 984
Thereafter.................................................. 5,015
-------
Total....................................................... $17,695
=======
</TABLE>
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 statements.
18. STOCKHOLDERS' EQUITY
RECENT STOCK TRANSACTIONS
In September 1996 238,750 warrants were granted at an exercise price of
$4.50.
In July 1998, the Company sold 2,955,292 new shares of Common Stock at
$11.00 in a public offering of shares. 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 and 18,750 of the $4.50
warrants were exercised.
During fiscal 2000, 55,000 of the $4.50 warrants were exercised, and 829,155
options were exercised at an average exercise price of $4.17.
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 1999 2000
- ---------------- ---------------- -------- --------
<S> <C> <C> <C>
Prior to January 31, 2000................... $4.50 197,500 --
September 1996 to June 2000................. $4.50 238,750 238,750
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>
F-22
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
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.
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
were exercisable through periods ending September and November 1999.
In August and November 1995, the Company through another stock option plan,
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.
In May 1999, options to purchase 123,000 shares of Common Stock at a price
of $8.75 per share (expiring May 2004) were issued to management.
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 U.S. 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. All
options are issued at an exercise price equal to the fair market value at the
date of grant.
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.
F-23
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
19. STOCK OPTIONS (CONTINUED)
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.
Pursuant to the Plan, in December 1999, 697,360 options were issued by the
Company to management and employees to purchase Common Stock at an exercise
price of $13.35. These options are exercisable through December 2009.
A summary of the status of the Company's stock option plans as of
January 31, 1998, 1999 and 2000, and changes during the years ended on those
dates are presented below:
<TABLE>
<CAPTION>
1998 1999 2000
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
('000'S) PRICE ('000'S) PRICE ('000'S) PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.................. 1,985 $4.36 2,185 $4.52 2,133 $4.52
Granted........................................... 335 5.65 550 7.24 820 12.66
Exercised......................................... -- -- (602) 4.19 (829) 4.17
Cancelled in lieu of issuance of new shares....... -- -- -- -- (69) (4.00)
Forfeited......................................... (135) 4.90 -- -- -- --
----- ----- ----- ----- ----- -----
Outstanding at end of year........................ 2,185 $4.52 2,133 $5.31 2,055 $7.93
===== ===== =====
Options exercisable at year-end................... 1,983 1,872 1,051
===== ===== =====
</TABLE>
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 1998, 1999 and 2000. The pro forma data presented below is not representative
of the effects on reported amounts for
F-24
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
19. STOCK OPTIONS (CONTINUED)
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
------------------------------------- ------------------------------------
1998 1999 2000 1998 1999 2000
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) (in
thousands).......... $ 3,069 $ 5,822 $ 48 $ 2,155 $ 4,380 $ (8,291)
Income (loss) per
share............... $ 0.47 $ 0.64 $ 0.00 $ 0.31 $ 0.45 $ (0.70)
Average shares
outstanding......... 6,588,911 9,130,824 10,966,598 6,851,253 9,681,784 11,786,958
Average fair value of
grants during the
year
Black-Scholes option
pricing model
assumptions:
Risk-free interest
rate.............. 5.2% 4.5% 6.4%
Expected life
(years)........... 10 10 10
Volatility.......... 66.9% 65.7% 87.52%
</TABLE>
20. RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the
notes to the consolidated financial statements, the following significant
related party transactions have taken place.
STOCKHOLDERS ADVANCES
As of January 31, 1999 and 2000, the Company's majority stockholders were
owed $23,000 and $ , 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 $60,000 (L36,000) and
$65,000 (L40,000) in the years ended January 31, 1999 and 2000, 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, 1998, 1999 and 2000,
under any plan. The Company and its subsidiaries contributed $628,000 under all
pension plans for other employees in the fiscal year ended January 31, 2000.
F-25
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
22. FOREIGN OPERATIONS
Included in the accompanying consolidated financial statements are the
following amounts for non-United States (domestic) operations at:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1999 2000
-------- --------
$'000'S $'000'S
<S> <C> <C>
Cash..................................................... $ 4,918 $ 5,713
Accounts receivable...................................... 54,910 60,751
Inventories.............................................. 23,840 30,101
Deposits................................................. 51 51
Other current assets..................................... 4,104 4,158
Income taxes receivable.................................. 16 17
Property and equipment, net.............................. 5,899 12,801
Other assets............................................. 93 557
------- --------
$93,831 $114,149
======= ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Revenues....................................... $84,145 $148,897 $247,862
------- -------- --------
Cost of revenues............................... 54,662 90,302 147,212
Expenses....................................... 25,061 49,340 91,252
Income taxes................................... 1,049 3,566 7,487
------- -------- --------
Net income..................................... $ 3,373 $ 5,689 $ 1,911
======= ======== ========
</TABLE>
During the year ended January 31, 1998, 1999 and 2000, no customers
accounted for 10% or more of total revenues.
23. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Purchase of equipment financed with capital lease
obligations......................................... $675 $1,476 $562
Stock issued to acquire Eurosystems................... $600 $ -- $ --
Stock issued to acquire SIL Group..................... $ -- $ -- $611
</TABLE>
F-26
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND 2000
24. 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, 2000:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
$'000'S $'000'S $'000'S
<S> <C> <C> <C>
Balance at the beginning of the year................. $ 273 $ 452 $ 642
Provision............................................ 518 626 594
Charges.............................................. (339) (436) (189)
----- ----- ------
Balance at the end of the year....................... $ 452 $ 642 $1,047
===== ===== ======
</TABLE>
F-27
<PAGE>
Exhibit 21.1
4Front Group Plc
4Front Group UK Ltd
Firstpoint Ltd
4Front Services Ltd
4Front Networks Ltd
4Front Software Ltd
Penagen Training Ltd
Datapro Computers Group Ltd
Eurographics Industries Ltd
CV Services International Ltd
CVSI Holland
CVSI Sweden
CVSI Belgium
CVSI France
CVSI GmbH
CVSI Italia Spa
CVSI Inc
CVSI BV
Nihon CVSI
SIL SA
SIL Europe Spol
SIL Europe BV
SIL GmbH
Decision Systems SA
I-NEA SA
4Front Technologies SA
Memorex Telex Spa
Eurosystems France
Eurosystems Belgium
Netix
<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 27, 2000, relating to the consolidated
balance sheets of 4Front and subsidiaries as of January 31, 2000, and 1999,
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, 2000, and all related
schedules, which report appears in the January 31, 2000 annual report on Form
10-K of 4Front.
KPMG
London
27 April 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS
COMPANY'S FORM 10K FOR THE YEAR ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2001
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 23086
<SECURITIES> 0
<RECEIVABLES> 65542
<ALLOWANCES> 1047
<INVENTORY> 30101
<CURRENT-ASSETS> 127722
<PP&E> 40685
<DEPRECIATION> 27884
<TOTAL-ASSETS> 12801
<CURRENT-LIABILITIES> 120578
<BONDS> 0
0
0
<COMMON> 60447
<OTHER-SE> 2007
<TOTAL-LIABILITY-AND-EQUITY> 62454
<SALES> 252878
<TOTAL-REVENUES> 252878
<CGS> 151084
<TOTAL-COSTS> 151084
<OTHER-EXPENSES> 96003
<LOSS-PROVISION> 594000
<INTEREST-EXPENSE> 1087
<INCOME-PRETAX> 6394
<INCOME-TAX> 6346
<INCOME-CONTINUING> 48
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
