<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 2, 1999
4Front Technologies, Inc.
(Exact name of issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
0-8345 84-0675510
(Commission File Number) (IRS Employer Identification No.)
6300 South Syracuse Way
Suite 293
Englewood, Colorado 80111
(303) 721-7341
<PAGE>
ITEM 2. ACQUISITION OF ASSETS.
On November 2,1999, pursuant to the terms of the Acquisition Agreement,
dated as of September 21, 1999, by and among 4Front Technologies, Inc.
("4Front"), and CVSI, Inc. ("CVSI"), CVSI Acquisition Co., LLC ("Acquisition
Co.") and Computervision Corporation ("Computervision" and, together with CVSI
and Acquisition Co., collectively, the "Sellers"), 4Front completed its
acquisition from the Sellers of all of the stock of CVSI for an aggregate cash
consideration of approximately $25.5 million, including a discharge of debt.
CVSI provides enterprise-wide hardware and software support services,
consulting, and network services. As a result of the transaction, 4Front holds
100% of the ownership of the stock of CVSI.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of CVSI, the acquired business
(b) Pro Forma Financial Statements
(c) Exhibits
1. Form of Share Sale Agreement Relating to CVSI dated November 2, 1999.
(1)
- --------------------------------
(1) Filed as an exhibit to the Company's Form 8-K filed on November 14,
1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
4FRONT TECHNOLOGIES, INC.
(Registrant)
By: /s/ STEPHEN MCDONNELL
--------------------------------------
Stephen McDonnell
Chief Financial Officer
Dated: January 14, 2000
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CVSI, INC.
Independent Auditors' Report F-1
Financial Statements:
Consolidated Balance Sheets
As of June 30, 1998 and 1999 and as of
September 30, 1999 (unaudited) F-2
Consolidated Statements of Operations
For the years ended June 30, 1998 and 1999 and the
3 months ended September 30, 1998 and 1999 (unaudited) F-4
Consolidated Statements of Stockholders' Equity
For the years ended June 30, 1998 and 1999 F-5
Consolidated Statements of Comprehensive (Loss)/Income
For the years ended June 30, 1998 and 1999 F-5
Consolidated Statements of Cash Flows
For the years ended June 30, 1998 and 1999 and the
3 months ended September 30, 1998 and 1999 (unaudited) F-6
Notes to Financial Statements F-7
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL STATEMENTS
Explanatory Headnote F-17
Unaudited Pro Forma Consolidated Financial Statements:
Consolidated Balance Sheet
As of October 31, 1999 F-18
Consolidated Statement of Operations
For the nine month period ended October 31, 1999 F-20
Consolidated Statement of Operations
For the year ended January 31, 1999 F-21
Notes to Unaudited Pro Forma Consolidated Financial Statements F-22
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
CVSI, Inc.:
We have audited the accompanying consolidated balance sheets of CVSI, Inc.,
as of June 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CVSI,
Inc., as of June 30, 1998 and 1999, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 5, 2000
F-1
<PAGE>
CVSI, INC.
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, September 30,
1998 1999 1999
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 8,267 $12,496 $ 6,131
Accounts receivable, net of allowance
for doubtful accounts of $741,
$561 and $530, respectively 23,853 17,732 14,978
Prepaid expenses and other current assets 3,086 2,545 2,686
Receivable from PTC 1,705 331 --
Refundable income taxes 900 -- --
------- ------- -------
Total current assets 37,811 33,104 23,795
------- ------- -------
Property, Plant & Equipment, at cost:
Field spares 59,354 58,267 58,629
Equipment & other 12,755 10,028 10,283
------ ------ ------
Total Property, Plant & Equipment 72,109 68,295 68,912
Less - Accumulated depreciation (67,917) (66,080) (66,563)
-------- -------- -------
Property, Plant & Equipment, net 4,192 2,215 2,349
Deferred financing costs 1,259 943 427
Deferred tax asset 642 482 977
Other long term assets 685 485 546
------- ------- -------
TOTAL ASSETS $44,589 $37,229 $28,094
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-2
<PAGE>
CVSI, INC.
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, SEPTEMBER 30,
1998 1999 1999
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt and
Capital lease obligations (notes 4 and 5) $24,740 $17,829 $11,748
Current portion of loan from CVSI
Acquisition Company (note 5) -- 2,000 --
Accounts payable 8,398 5,196 4,723
Accrued liabilities 14,163 12,231 14,174
Deferred revenue and customer advances 12,872 10,052 9,050
--------- -------- --------
Total current liabilities 60,173 47,308 39,695
LONG TERM LIABILITIES -- 115 --
-------- -------- --------
TOTAL LIABILITIES 60,173 47,423 39,695
-------- -------- --------
COMMITMENTS AND CONTINGENCIES: (Note 4)
STOCKHOLDERS' DEFICIT:
Class A common stock $.00001 par value
Authorized 11,100 and 11,650 respectively
Issued and outstanding 10,000 -- -- --
Class B common stock $.00001 par value
Authorized 15,000
None issues or outstanding -- -- --
Additional paid in capital 100 100 100
Accumulated deficit (16,461) (10,915) (12,078)
Foreign currency translation adjustment 777 621 377
-------- -------- --------
Total stockholders' deficit (15,584) (10,194) 11,601
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 44,589 $ 37,229 $ 28,094
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
CVSI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JULY 18, 1997
TO JUNE 30, 1998 AND THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS $)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE 3 MONTHS ENDED
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
--------- --------- ---------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES $ 119,151 $ 127,216 $ 30,777 $ 19,056
Cost of revenues 95,143 100,645 24,572 15,242
--------- --------- --------- ---------
GROSS PROFIT 24,008 26,571 6,205 3,814
OPERATING EXPENSES
Selling and Marketing expenses 11,249 12,771 4,278 4,093
Research and development 400 286 81 62
General and administrative 8,225 12,008 1,802 426
Non-recurring charge (note 11) 1,944 662 -- --
Gain on sale of subsidiaries (note 8) -- (7,368) -- --
Other income (note 13) (2,500) -- -- --
--------- --------- --------- ---------
Total operating income 4,690 8,212 6,161 4,581
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest (expense) (3,441) (1,632) (452) (277)
Foreign exchange gain/(loss) (1,321) 356 -- --
Other expense (814) (129) -- --
--------- --------- --------- ---------
INCOME/(LOSS) BEFORE INCOME TAXES (886) 6,807 (408) (1,044)
INCOME TAXES 760 1,261 84 119
--------- --------- --------- ---------
NET INCOME/(LOSS) $ (1,646) $ 5,546 $ (492) $ (1,163)
--------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
CVSI, INC.
STATEMENT OF STOCKHOLDERS DEFICIT
FOR THE PERIOD FROM JULY 18, 1997 THROUGH
JUNE 30, 1998 AND FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS $)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TOTAL TOTAL
COMMON STOCK PAID IN ACCUMULATED TRANSLATION STOCKHOLDERS' COMPREHENSIVE
NUMBER OF SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT DEFICIT INCOME/(LOSS)
------------------- ---------- -------- ----------- ----------- ----- ------------
CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 18, 1997 10,000 15,000 $ -- $ 250 $ -- $ -- $ 250 $ --
Dividend to parent (note 1) -- -- -- -- (25,567) -- (25,567) --
Net Loss for period -- -- -- -- (1,646) -- (1,646) (1,646)
Foreign currency translation
adjustment -- -- -- -- -- 777 777 777
Redemption of Class B
common stock -- (15,000) -- (150) 150 -- -- --
Gain on related party
exchange transaction
(note 1) -- -- -- -- 10,602 -- 10,602 --
-------- -------- ---------- -------- -------- -------- -------- -------
Balance, June 30, 1998 10,000 -- $ -- $ 100 $(16,461) $ 777 $(15,584) (869)
=======
Net income for period -- -- -- -- 5,546 -- 5,546 5,546
Foreign currency
translation adjustment -- -- -- -- -- (156) (156) (156)
-------- -------- ---------- -------- -------- -------- -------- -------
Balance, June 30, 1999 10,000 -- $ -- $ 100 $(10,915) $ 621 $(10,194) $ 5,390
======== ======== ========== ======== ======== ======== ======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
CVSI, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JULY 18, 1997 THROUGH
JUNE 30, 1998 AND FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS $)
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE 3 MONTHS
ENDED JUNE 30, ENDED SEPTEMBER 30,
1998 1999 1998 1999
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net (loss)/income $ (1,646) $ 5,546 $ (492) $ (1,163)
Adjustments to reconcile net income/(loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 5,368 3,054 1,802 462
Provision for accounts receivable reserve 741 -- -- --
Non cash interest expense 1,002 -- -- --
(Gain) on sale of subsidiary -- (7,368) -- --
Changes in Assets and Liabilities:
(Increase) decrease in accounts receivable (9,242) 849 (4,669) 2,754
Decrease in other long term assets -- 200 175 556
(Increase) decrease in prepaid expenses and other (2,036) 1,070 1,943 951
(Increase) decrease in refundable income taxes (900) -- 648 --
(Increase) decrease in receivable from PTC (1,705) 1,374 234 331
Increase (decrease) in accrued expenses and other
liabilities 14,907 (1,296) 2,567 1,943
Decrease (increase) in deferred tax asset 258 160 (642) --
Increase (decrease) in accounts payable 8,620 (781) 104 (473)
(Decrease) increase in deferred revenue (2,665) (497) 663 (1,002)
-------- -------- -------- --------
Net cash provided by operating activities 12,702 2,311 2,333 3,247
CASH FLOWS (FOR) FROM INVESTING ACTIVITIES:
Purchase of equipment, net (2,776) (1,918) (1,100) (1,688)
Acquisition of assets from parent (8,799) -- -- --
Proceeds from sale of subsidiaries -- 8,902 -- --
Other (1,085) (41) -- --
-------- -------- -------- --------
Net cash provided by/used in Investing Activities (12,660) 6,943 (1,100) (1,688)
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Repayment of notes payable to bank (2,625) (4,625) (2,886) (6,081)
Proceeds from (repayment of) revolving line of credit 2,150 (2,150) -- --
Payments of capital lease obligations -- (136) (110) (115)
Deferred financing fees (1,262) -- 34 516
Proceeds from issuance of notes payable to bank 25,000 -- -- --
Dividend to parent (16,201) -- -- --
Borrowing from CVSI Acquisition Company -- 2,000 -- (2,000)
-------- -------- -------- --------
Net Cash Provided/(used) by Financing Activities 7,062 (4,911) (1,729) (6,121)
Foreign exchange impact on cash and cash equivalents 913 (114) (304) (244)
-------- -------- -------- --------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 8,017 4,229 (2,033) (6,365)
Cash at beginning of period 250 8,267 8,267 12,496
-------- -------- -------- --------
Cash at end of period $ 8,267 $ 12,496 6,234 6,131
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense $ 3,345 1,999 452 277
======== ======== ======== ========
Cash paid for income taxes $ 900 (376) -- --
======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of equipment through capital lease $ 215 -- -- --
======== ======== ======== ========
Dividend to Parent through issuance of note
payable to Parent $ 10,000 -- -- --
======== ======== ======== ========
Accrual of interest paid in kind 1,002 -- -- --
======== ======== ======== ========
Redemption of note payable to PTC, plus accrued
interest, in exchange for certain intangibles $ 11,002 -- -- --
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
1. ORGANIZATION AND OPERATIONS:
CVSI, Inc. (the Company), provides services that include system hardware and
operating system service/maintenance of proprietary systems of third-party
vendors, network design and implementation, systems integration, hardware and
software product resale, and database support and consulting for enterprise-wide
systems and networks. On May 27, 1997, the Company was incorporated in the state
of Delaware as a wholly owned subsidiary of Computervision Corporation (the
Parent). On July 11, 1997, the Company amended its articles of incorporation to
recapitalize the Company with 10,000 shares of Class A voting common stock and
15,000 shares of Class B nonvoting common stock.
On July 18, 1997, the Company entered into an agreement to purchase the assets
of the Open Service Solutions business unit from the Parent (the Asset Purchase
Agreement) for $35,000. The Company financed the acquisition through a note
payable to a bank of $25,000 and a note payable to the Parent of $10,000. Since
the parties to the transaction were under common control, the assets acquired
were accounted for on a carryover historical cost basis. The excess purchase
price over the carryover basis in the assets acquired in the amount of $26,201
has been recorded as a dividend to the Parent. Additionally this amount was
subsequently adjusted to $25,567 to properly reflect an adjustment to the net
assets acquired.
Simultaneously with the above transaction, MD Sass Investor Services, Inc.
(Sass), which owned 17 percent of the Parent at the time of the transaction,
acquired, through CVSI Acquisition Co., LLC (a wholly owned subsidiary of
Resurgence Asset Management, LLC), 76 percent of the Company's outstanding Class
A voting common stock for $7,600. Additionally, Sass entered into an option
agreement with the Parent that entitled Sass to purchase up to 1,000 additional
shares of Class A common stock from the Parent for $1.00 per share (the Class A
Option Agreement) which was exercised on June 30, 1998.
In connection with the above transactions, the Parent granted the Company an
option (the Sun Option) to purchase, at $.0001 per share, some or all of the
outstanding Class A common stock held by the Parent if the Company does not
achieve certain specified levels of product revenues and operating margins from
referrals initiated by the Parent (Targeted Referral Revenue).
During January 1998, the Parent was acquired by Parametric Technology
Corporation (PTC).
On June 30, 1998, the Company entered into an agreement with
PTC to exchange certain intangibles that were acquired as part of the Asset
Purchase Agreement with the Parent in return for 15,000 shares of Class B
nonvoting common stock and the cancellation of the $10,000 note payable to the
Parent plus accrued interest of $1,002. The net gain on the exchange of the note
of $11,002, which resulted in part from the exchanged intangibles having an
historical cost of zero on the Company's books, had been recorded directly to
equity in the period ended June 30, 1998, consistent with the original
transaction, net of costs associated with the exit of certain activities
associated with the intangibles of $400. Subsequent to this transaction, Sass
owned approximately 86 percent of the Company.
As part of the agreement with PTC, the Company amended the terms of the Sun
Option agreement to reset the amount of Targeted Referral Revenue (the Amended
Sun Option Agreement). Additionally, under the Amended Sun Option Agreement, the
Company received $375 as a result of certain levels of referral revenue not
being achieved in the first quarter of fiscal 1999. Thereafter, failure to
achieve referral revenue levels would result in the transfer of Company stock
from PTC to the Company. In addition, as a result of PTC not achieving certain
Targeted Referral Revenue levels in the year ended June 30, 1999, the Company
received 800 shares from PTC in August 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-7
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
MANAGEMENT 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized as the related services are provided or upon shipment of
the product. Deferred revenue consists primarily of unearned revenue on service
contracts. Substantially all of the deferred revenue is expected to be
recognized within one year.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at the period-end exchange rates, while equity accounts are
translated at historical rates. Revenues and expenses are translated at the
average exchange rates during the period. The resultant translation
adjustment is reflected as a separate component of stockholders' deficit.
During the period ended June 30, 1998 and the year ended June 30,1999, the
Company incurred a net foreign exchange loss of $1,321 and a net foreign
exchange gain of $356, respectively, primarily resulting from intercompany
loans to foreign subsidiaries and U.S. dollar-denominated debt at the foreign
subsidiaries. This amount has been recorded in the consolidated statement of
operations. As of June 30, 1998 and 1999, the Company had not entered into any
foreign currency contracts to hedge this exposure.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and short-term interest-bearing
instruments purchased with remaining maturities of three months or less. The
June 30, 1998 balance includes approximately $645 of restricted cash. The
restrictions pertain primarily to lease deposits and customer contract
deposits.
CREDIT RISK
The Company's financial instruments that are exposed to credit risk consist
primarily of cash and cash equivalents and accounts receivable. The Company
believes it has mitigated the risk related to cash and cash equivalents by
maintaining its accounts in major financial institutions. For accounts
receivable, the Company does not have any significant exposure with any
individual customers, and it closely monitors the exposure for credit losses.
PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization by charges to operations
on the straight-line method over their estimated useful lives as follows:
<TABLE>
<CAPTION>
USEFUL
------------
LIVES
<S> <C>
Field spares 2 to 5 years
Equipment and other 2 to 5 years
</TABLE>
Maintenance and repairs are charged to operations as incurred. When property and
equipment are sold or otherwise disposed of, the asset cost and accumulated
depreciation are removed from the accounts and the resulting gain or loss, if
any, is included in the results of operations.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." This
statement determines deferred income taxes based on the estimated future income
tax effects of differences between the financial statement and tax bases of
assets and liabilities based on the provisions of enacted tax laws. In
estimating future tax consequences, SFAS No. 109 generally takes into account
all expected future events other than enactments of changes in tax laws or
rates. Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and operating loss and credit carryforwards, if
any.
F-8
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
START-UP COSTS
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities." SOP 98-5 provides guidance on the financial
reporting of start-up and organization costs and requires that such costs be
expensed as incurred. SOP 98-5 is effective for the Company's fiscal year
beginning July 1, 1999. This SOP could result in certain costs previously
capitalized by the Company to be written off in the fiscal 2000 financial
statements. The Company is currently assessing the impact of this SOP, and
adjustments will be reported in the fiscal 2000 financial statements as the
cumulative effect of a change in accounting principle, as required by SOP 98-5.
COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Under SFAS 130, comprehensive income includes net income
plus certain terms designated as "other comprehensive income." For the Company,
other comprehensive income is composed entirely of foreign currency translation
adjustments. SFAS 130 requires the Company to classify items of other
comprehensive income by their nature in the consolidated financial statements
and to display the accumulated balance of other comprehensive income separately
from retained earnings in the consolidated balance sheet. The Company has
chosen to present other comprehensive income items in the accompanying
consolidated statement of stockholders' deficit and display the accumulated
balances as foreign currency translation adjustment in the accompanying
consolidated balance sheets.
UNAUDITED FIRST QUARTER INFORMATION
The unaudited financial statements as of and for the three month periods ended
September 30, 1998 and 1999 reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the financial position, results of operations and cash flows
as of and for the periods presented. The results for the interim periods
presented are not necessarily indicative of results to be expected for the
full year.
3. FINANCIAL INSTRUMENTS
The fair value of all financial instruments of the Company, which consists
primarily of cash and cash equivalents, accounts payable, debt, and interest
rate caps approximates their carrying values as of June 30, 1998 and 1999,
due to the relatively short maturities of these instruments.
4. COMMITMENTS AND CONTINGENCIES
The Company conducts its operations primarily in leased facilities under
operating lease arrangements expiring on various dates through 2004. Many of the
facility leases are with PTC.
Future minimum lease payments under capital and operating leases with initial
terms of one year or more are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
YEAR ENDING ---------- --------
JUNE 30
- ------------------
<S> <C> <C>
2000 $1,769 $ 87
2001 1,247 --
2002 614 --
2003 207 --
Thereafter 4 --
------ ------
Total minimum lease payments $3,841 87
======
Less- Amount representing interest on
capital leases 8
------
Present value of minimum lease payments at
June 30, 1999 $ 79
======
</TABLE>
Total rent expense for the Company for the years ended June 30, 1998 and 1999,
was $2,354 and $3,323 respectively.
LITIGATION
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect upon the financial position or future operating
results of the Company, and adequate provision for any potential losses has been
made in the accompanying consolidated financial statements.
F-9
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
MANAGEMENT RETENTION AGREEMENTS
In December 1998, the Company entered into Management Retention Agreements (the
"Agreements") with nine members of the management team. These Agreements were
put in place to provide certain severance benefits to the executive level
management team should there be a change in control of the Company, so as to
encourage continued attention and dedication to the Company in the face of a
potential change in control. These Agreements extend through December 31, 2000,
with two automatic one-year renewals. Under the terms of these Agreements, if an
employee is terminated without cause within 12 months of a change in control, he
or she is eligible to receive severance compensation equal to one year's worth
of salary and bonus and all life, dental, and group health insurance benefits
for a period of one year from the date of termination.
EMPLOYMENT CONTRACTS
The Company entered into employment contracts with two key executives. Upon
closure of the Company's purchase by 4 Front Technologies Inc. (see Note 12) the
Company paid these executives a total of $1,560.
5. DEBT:
Debt at June 30, 1999, consisted of the following:
<TABLE>
<CAPTION>
JUNE 30
1998 1999
------- -------
<S> <C> <C>
Notes payable to bank $22,375 $17,750
Revolving credit facility 2,150 --
Note payable to CVSI Acquisition Company -- 2,000
Capital lease obligations 215 79
------- -------
Total debt $24,740 $19,829
------- -------
------- -------
</TABLE>
NOTES PAYABLE TO BANK
Notes payable to bank at June 30, 1998 and 1999, consisted of borrowings by
the Company and its international subsidiaries under a term loan agreement
for an original aggregate principal amount of $25,000 with Bank Boston, N.A.
Borrowings under this term loan agreement are subject to interest either at
the base rate plus 1.50 percent or at LIBOR (4.92 percent at June 30, 1999)
plus 2.75 percent. The base rate of (5.72% and 7.75% at June 30, 1998 and
1999) is the higher of the annual rate announced from time to time by Bank
Boston, N.A. or 1/2 percent above the federal funds effective rate. The notes
payable are secured by substantially all of the Company's assets.
In connection with the notes payable to the bank, the Company entered into an
interest rate cap agreement with a notional amount of $15,000. The interest rate
cap agreement will pay the Company the difference between LIBOR and 7.5 percent
if LIBOR exceeds the cap levels at each quarterly reset date. If LIBOR remains
below 7.5 percent, no payment is made to the Company. The transaction fee of $70
for the interest cap agreement is being amortized over the term of the
agreement.
The notes payable to the bank require the Company to satisfy certain
financial and other covenants. As of June 30, 1998 and 1999, the Company was
not in compliance with certain of these covenants. Because of these covenant
violations, all amounts under the notes payable to the bank are due on demand
and as a result are classified as current at June 30, 1999. Subsequent to
June 30, 1999, all such balances were repaid as part of the sale of the
Australian and Singapore subsidiaries and the sale of the Company to 4Front
(see Notes 9 and 13).
REVOLVING CREDIT ARRANGEMENTS
On July 18, 1997, the Company entered into a five-year short-term credit
facility (the Revolving Credit Facility) with Bank Boston, N.A. for a base
amount of $2,500. The Revolving Credit Facility accrues interest at either a
base rate plus 3 percent or at LIBOR plus 3 percent. During fiscal year 1999,
the outstanding balance of $2,150 was repaid in full, and this revolving credit
arrangement was terminated.
F-10
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
NOTE PAYABLE TO CVSI ACQUISITION COMPANY
In February 1999, CVSI Acquisition Company provided line-of-credit financing to
CVSI, Inc, in the amount of $2,000 payable on demand and accruing interest at
the rate of 8 percent per annum.
6. PROVISION FOR INCOME TAXES:
The components of the income (loss) from operations before income taxes for
the period ended June 30, 1998 and the year ended June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1999
------------ -------------
<S> <C> <C>
Domestic $(1,005) $(1,419)
Foreign 119 8,226
------- -------
Total income (loss) before tax
provision $ (886) $ 6,807
======= =======
</TABLE>
Included in foreign income from operations for the year ended June 30, 1999, is
a gain on sale of the Australia and Singapore subsidiaries of $7,368.
Significant components of the provision for income taxes for the period
ended June 30, 1998 and the year ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
FEDERAL STATE FOREIGN TOTAL FEDERAL STATE FOREIGN TOTAL
------- ------ ------- ----- ------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ -- $ -- $502 $502 $ -- $ -- $1,101 $1,101
Deferred $ -- $ -- 258 258 -- -- 160 160
------ ------ ----- ----- ------- ------- ------- ------
$ -- $ -- $760 $760 $ -- $ -- $1,261 $1,261
====== ====== ===== ===== ======= ======= ======= ======
</TABLE>
The following table summarizes the significant differences between the U.S.
federal statutory tax rate and the Company's effective tax rate for financial
statement purposes:
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Statutory federal income tax rate 34.0% 34.0%
Tax effect of the sale of Australian and Singapore subsidiaries -- (42.3)
Increase in valuation allowance 116.1 29.0
Other 3.7 (2.2)
------ -------
85.8% 18.5%
------ -------
------ -------
</TABLE>
The approximate tax effect of each type of temporary difference and carryforward
as of June 30, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Tax basis in excess of book basis from original capitalization $ 10,136 $ 8,941
-------- --------
Net operating loss carryforwards 4,572 3,396
Other 14 227
Valuation allowance (14,085) (12,082)
-------- --------
Total net deferred tax asset $ 642 $ 482
-------- --------
-------- --------
</TABLE>
F-11
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
SFAS No. 109 requires the recognition of income tax benefits for loss
carryforwards, credit carryforwards, and certain temporary differences. The
majority of the deferred tax assets that have been included in the accompanying
consolidated balance sheet have been reduced by a valuation allowance, as they
do not satisfy the recognition criteria set forth in SFAS No. 109. The tax basis
in excess of book is primarily a result of the Company recognizing a step-up in
the tax basis of assets acquired from the Parent, which were recognized at
carryover basis for financial reporting purposes.
As of June 30, 1999, the Company had available, subject to review and possible
adjustment, federal and foreign net operating loss carryforwards of
approximately $4,970 and $3,471, which are subject to expiration starting in
2003. The Internal Revenue Code (the IRC) contains provisions that may limit the
federal net operating loss carryforward available to be used in any given year
in the event of significant changes in ownership interest.
7. EMPLOYEE RETIREMENT PLANS:
The Company maintains various employee retirement plans and salary continuation
programs for the benefit of the Company's personnel, as discussed below. The
Company does not, however, maintain any post-employment benefit plans.
EMPLOYEE 401(K) SAVINGS PLAN
The Company provides pension benefits to eligible U.S. employees through a
401(k) plan sponsored by the Company, which is intended to qualify under Section
401(k) of the IRC. The Plan covers substantially all U.S. employees, and each
eligible employee may elect to contribute to the Plan, subject to certain
limitations. The Company makes a matching contribution up to the first 6 percent
of total employee compensation, based on the number of years of service to the
Company. The Company's employer matching contribution to this 401(k) plan
approximated $284 and $278 for the year ended June 30, 1998 and 1999.
INTERNATIONAL DEFINED CONTRIBUTION PLANS
In most other countries, the Company has adopted defined contribution plans.
Contributions vary by country, ranging from 5 to 22 percent of annual
compensation. The expense for the period ended June 30, 1998 and 1999, for
the international defined contribution plans was $1,008 and $1,351. The
Company maintains defined benefit plans for its subsidiaries in Japan, the
Netherlands, and Germany. The Company's funding policy is to contribute
annually the minimum amount required by the laws of the governing country.
In February 1998, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits," to revise and clarify the financial statement disclosures required
for pensions and other post-retirement benefit plans. The Company has adopted
SFAS No. 132 for its consolidated financial statements as of, and for the year
ended, June 30, 1999. The required disclosures are presented below. The
Company did not complete the acquisition of the Assets in Japan until June
30, 1998. Therefore the required disclosures are included below only for the
year ended June 30, 1999.
F-12
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
For the years ended June 30, 1998 and 1999, the change in the benefit
obligations and the plan assets and the resulting accrued benefit cost are
summarized below:
<TABLE>
<CAPTION>
NETHERLANDS GERMANY JAPAN
------------------- ----------------- -------
1998 1999 1998 1999 1999
<S> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,045 $ 1,519 $ 660 $ 671 $ --
Service cost 63 135 63 27 85
Interest cost 60 83 43 38 32
Plan participants' contributions 47 71 -- 1 --
Amendments/actuarial gain (loss) 311 88 (95) (3) 421
Acquisitions -- -- -- -- 311
Foreign exchange -- (12) -- (3) (2)
Benefits paid (7) (17) -- (3) (35)
------- ------- -------- ------- -------
Benefit obligation at end of year $ 1,519 1,867 671 728 812
------- ------- -------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 512 723 26 28 --
Actual return on plan assets 57 -- -- 6 12
Acquisitions -- -- -- -- 311
Employer contribution 114 106 1 2 108
Plan participants' contributions 47 71 1 1 --
Foreign exchange -- (7) -- -- (1)
Benefits paid (7) (17) -- (3) (35)
------- ------- -------- ------- -------
Fair value of plan assets at end of year 723 876 28 34 395
------- ------- -------- ------- -------
Funded status (796) (991) (643) (694) (417)
Unrecognized net actuarial loss (gain) 243 136 (90) (67) --
Unrecognized prior service cost 553 753 -- -- 397
------- ------- -------- ------- -------
Accrued benefit cost $ 0 $ (102) $ (733) $ (761) $ (20)
------- ------- -------- ------- -------
------- ------- -------- ------- -------
</TABLE>
For the years ended June 30, 1998 and 1999, the assumptions used in
calculating the above amounts were as follows:
<TABLE>
<CAPTION>
NETHERLANDS GERMANY JAPAN
----------------- ------------------ -----
1998 1999 1998 1999 1999
<S> <C> <C> <C> <C> <C>
Discount rate 6.0% 5.0% 5.75% 6.0% 4.5%
Expected long-term rate of return on plan assets 6.0% 6.0% 7.0 % 7.0 % 3.5%
Increase in the level of future compensation compounded
annually 4.5% 4.0% 3.0 % 3.25% 2.5%
</TABLE>
For the years ended June 30, 1998 and 1999, the components of the net
periodic benefit cost are summarized below:
<TABLE>
<CAPTION>
NETHERLANDS GERMANY JAPAN
---------------- --------------- -----
1998 1999 1998 1999 1999
<S> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 63 $ 135 $ 63 $ 27 $ 85
Interest cost 60 83 43 38 32
Expected return on plan assets (34) (48) -- (2) (12)
Amortization of unrecognized net transition obligation 25 39 -- -- --
Amortization of prior service cost -- -- -- -- 23
------ ------ ----- ----- -----
Net periodic benefit cost $ 114 $ 209 $ 106 $ 63 $ 128
====== ====== ===== ===== =====
</TABLE>
F-13
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
8. STOCKHOLDERS DEFICIT:
(A) CLASS A VOTING STOCK AND CLASS B NON-VOTING STOCK
The Class A voting stockholders (Class A stockholders) and the Class B
non-voting stockholders (Class B stockholders) have the following rights and
privileges:
VOTING
The Class A stockholders are entitled to one vote for each share
held. The Class B stockholders have no voting rights.
DIVIDENDS
The Class A stockholders and Class B stockholders have identical
rights to dividends if and when declared by the Board of Directors.
LIQUIDATION
In the event of liquidation, the Class A stockholders and Class B
stockholders shall have equal rights to all assets of the Corporation
available for distribution to its stockholders.
(B) STOCK OPTIONS
In July 1997, the Company adopted the 1997 stock option plan (the 1997 Plan),
which provided for the granting of 500 incentive stock options and nonqualified
stock options through July 2007. In 1998, the 1997 Plan was amended to increase
the shares reserved to 750. Under the 1997 Plan, the Board of Directors
determines the term of each option, the option price, the number of shares for
which options are granted, and the vesting period. The term of the options
granted cannot exceed ten years, and the options generally vest ratably over the
first two years as determined by the Board of Directors.
<TABLE>
<CAPTION>
RESERVED OPTIONS WEIGHTED- AVERAGE
SHARES OUTSTANDING EXERCISE PRICE
-------- ------- ----------------
<S> <C> <C> <C>
Balance, July 18, 1997 -- -- $ --
Reserved 500 -- --
Granted -- 750 1.50
Canceled -- (24) (1.50)
-------- ------- --------
Balance, June 30, 1998 500 726.0 $ 1.50
Reserved 250 -- --
Granted -- 38.5 1.50
Canceled -- (111.0) 1.50
-------- ------- --------
Balance, June 30, 1999 750 653.5 $ 1.50
-------- ------- --------
-------- ------- --------
</TABLE>
At June 30, 1998 and 1999, options to purchase 242 and 422.8 shares were
exercisable, and there were zero and 96.5 shares available for future option
grants. The options exercisable at June 30, 1998 and 1999, ranging in price
from $1.00 to $1.50, had a weighted-average exercise price of $1.00 and
$1.24. The weighted-average contractual life of options outstanding at June
30, 1998 and 1999 were 9.37 and 8.48 years, respectively. The Company
accounts for the 1997 Plan in accordance with Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," under which
no compensation costs have been recognized.
The Company's net income (loss) would have been decreased (increased) to the
following amounts had compensation costs for options granted under the 1997
Plan been determined based on the fair value at the grant dates for the
awards under the 1997 Plan consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation":
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED JUNE 30,
JUNE 30, 1998 1999
------------- -------------------
<S> <C> <C>
Net income (loss): $(1,646) $5,546
As reported (1,734) 5,542
Pro forma
</TABLE>
The fair value of each option granted during 1998 and 1999 were estimated on
the date of the grant using the minimum value method with the following
weighted-average assumptions: risk free interest rates ranging from 4.3 to
4.9 percent; expected dividend yield of zero; and expected lives of seven
years. The weighted-average fair value of options granted was $0.12 and $0.27
for options granted during fiscal years 1998 and 1999.
9. SALE OF AUSTRALIAN AND SINGAPORE SUBSIDIARIES:
On June 30, 1999, the Company sold its Australian and Singapore operations to
Solution 6 Holdings Ltd. for cash consideration of $8.9 million, net of
transaction costs, subject to a minimum working capital requirement. The
transaction, including the working capital adjustment, resulted in a pretax gain
of $6,978, which is recorded in the accompanying consolidated statement of
operations. The results of operation of the Australian and Singapore
subsidiaries for the year ended June 30, 1999, were as follows:
<TABLE>
<S> <C>
Revenues $27,324
Loss before tax provision (1,279)
Net loss (1,279)
</TABLE>
10. RELATED PARTIES:
To facilitate the transition of the business from being a wholly owned
subsidiary of the Parent to a standalone company, the Company entered into an
operating agreement with the Parent on July 18, 1997. The agreement included
the provision of certain services to the Company by the Parent, the provision
of certain services to the Parent by the Company and also the distribution of
the Parent's products by the Company.
Significant services provided by the Parent to the Company included the
subleasing of various facilities, the provision of telecommunication and
computer network services and general and administrative services. Total 1998
and 1999 rent expense on facilities sublet from the Parent was $966 and $991.
Total 1998 expense related to telecommunications and computer network
services provided by the Parent was $150 and $275, respectively.
Services provided to the Parent by the Company included primarily system
maintenance and system integration and networking services. The total of
those services included as revenue in the accompanying consolidated statement
of operations was approximately $3,071 for the period ended June 30, 1998.
The net receivable due from PTC as of June 30, 1998 and 1999 related to the
various services was $1,705 and $331.
F-14
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
11. NONRECURRING CHARGE:
A nonrecurring charge of $662 related to the restructuring of the Company was
recorded during the year ended June 30, 1999. The restructuring charges
relate to the closure of certain locations and the reorganization of certain
functions throughout the Company. During fiscal year 1998, the Company also
recorded a $656 restructuring charge that had a balance of approximately $402
at June 30, 1998. The elements of the nonrecurring charge and the reserve
balance as of June 30, 1999, are detailed in the table below:
<TABLE>
<CAPTION>
AMOUNT UTILIZED AMOUNT UTILIZED RESERVE
AMOUNT OF CHARGE IN PERIOD ENDED RESERVE BALANCE AMOUNT OF CHARGE IN PERIOD ENDED BALANCE AT
1998 JUNE 30, 1998 AT JUNE 30, 1998 1999 JUNE 30, 1999 JUNE 30, 1999
---------------- ---------------- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Restructuring:
People related $469 $138 $331 $713 $923 $121
Facilities 114 63 51 (51) -- --
Other 73 53 20 -- -- 20
---- ---- ---- ---- ---- ----
Total $656 $254 $402 $662 $923 $141
==== ==== ==== ==== ==== ====
</TABLE>
12. GEOGRAPHIC REPORTING:
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which established standards for the way
business enterprises report information about operating segments in the
annual financial statements. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company operates in one business segment. The following
information for fiscal years 1998 and 1999 is presented in accordance with
SFAS No. 131 based on the Company's locations throughout the world:
<TABLE>
<CAPTION>
FISCAL 1998 ASIA AUSTRALIA EUROPE NORTH AMERICA COMPANY-WIDE
- ----------- ---- --------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $3,797 $21,290 $52,093 $41,971 $119,151
Long-lived assets 833 1,409 744 1,890 4,876
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 ASIA AUSTRALIA EUROPE NORTH AMERICA COMPANY-WIDE
- ----------- ---- --------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $13,181 $23,496 $54,337 $36,202 $127,216
Long-lived assets 522 - 857 1,321 2,700
</TABLE>
13. DEFERRED CLOSING OF FOREIGN SUBSIDIARY
Due to local statutory requirements, the acquisition of the assets of the
operations in Japan from the Parent was not completed until June 30, 1998. In
accordance with the asset purchase agreement, the Company was entitled to
payments equal to the economic benefit, as defined, as if the Company had closed
the transaction on July 18, 1997 (Economic Benefit Payments). These Economic
Benefit Payments, totaling $2,500 during 1998, are separately stated in the
accompanying consolidated statement of operations. The Economic Benefit Payments
were calculated by adjusting
F-15
<PAGE>
CVSI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
subsidiary net income for depreciation and capital expenditures. All
intercompany transactions between CVSI, Inc. and Japan were billed as if Japan
were a distributor for the Company during this period.
The results of the operations of the Parent in Japan for the year ended June 30,
1998 were as follows (unaudited):
<TABLE>
<S> <C>
Revenue $ 10,564
Cost of sales (7,161)
Selling, general and administrative expense (700)
Other expense (41)
-----------
Pre-tax income $ 2,662
===========
</TABLE>
14. SUBSEQUENT EVENT:
On November 2, 1999, all outstanding shares of CVSI, Inc., were purchased by
4Front Technologies Inc. for a cash consideration of $25.5 million. Simultaneous
with the transaction, the notes payable to the bank and to the CVSI Acquisition
Company were settled in full.
F-16
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
EXPLANATORY HEADNOTE
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
=================================================
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information gives
effect to the acquisition by 4Front Technologies, Inc. of CVSI, Inc. in a
business combination accounted for by the purchase method of accounting. The
unaudited pro forma condensed combined financial information is derived from the
historical financial statements of 4Front Technologies, Inc. and CVSI, Inc.
The unaudited pro forma condensed combined statement of operations for the nine
months ended October 31, 1999, and for the years ended January 31, 1999 and 1998
give effect to the acquisition of CVSI, Inc. as if it had occurred at the
beginning of the indicated period. The unaudited pro forma condensed combined
balance sheets for October 31, 1999, and January 31, 1999 and 1998 give effect
to the acquisition of CVSI, Inc. as if it had occurred on the last day of the
indicated period.
The pro forma adjustments are based on certain assumptions that 4Front
Technologies, Inc.'s management believes are reasonable under the circumstances
and do not reflect any potential cost savings. The pro forma information is not
necessarily indicative of the results that would have been reported if such
events had occurred on the date specified nor is it intended to project 4Front
Technologies, Inc.'s results of operations or financial position for any future
period or date. The information set forth should be read in conjunction with
4Front Technologies, Inc.'s audited financial statements for the year ended
January 31, 1999 and the unaudited financial statements of 4Front Technologies,
Inc. for the nine months ended October 31, 1999, which have previously been
filed with the Securities and Exchange Commission.
F-17
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
AS AT OCTOBER 31, 1999
(UNAUDITED)
(IN THOUSANDS $)
ASSETS
<TABLE>
<CAPTION>
4FRONT
TECHNOLOGIES
INC. AND
SUBSIDIARIES CVSI, INC. PRO FORMA PRO FORMA
OCTOBER 31, 1999 SEPTEMBER 30, 1999 ADJUSTMENTS CONSOLIDATED
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,971 $ 6,131 $ (2,300)(4) $ 26,802
Accounts receivable, net 63,572 14,978 -- 78,550
Inventories 31,328 -- -- 31,328
Prepaid expenses and other 8,122 2,686 -- 10,808
Income tax receivable 17 -- -- 17
--------- --------- --------- ---------
Total Current Assets 126,010 23,795 (2,300) 147,505
PROPERTY AND EQUIPMENT, net 9,699 2,349 -- 12,048
DEFERRED INCOME TAX 1,686 977 -- 2,663
DEFERRED FINANCING COSTS -- 427 -- 427
SOFTWARE DEVELOPMENT COSTS 498 -- -- 498
INTANGIBLE ASSETS 28,082 -- 27,909 (9) 55,991
OTHER 40 546 -- 586
--------- --------- --------- ---------
$ 166,015 $ 25,609 $ 25,609 $ 219,718
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND
EXPLANATORY HEADNOTE
F-18
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
AS AT OCTOBER 31, 1999
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
4FRONT
TECHNOLOGIES
INC. AND
SUBSIDIARIES CVSI, INC. PRO FORMA PRO FORMA
OCTOBER 31, 1999 SEPTEMBER 30, 1999 ADJUSTMENTS CONSOLIDATED
----------------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 44,376 $ 4,723 $ 700(5) $ 49,799
Accrued liabilities 17,146 14,174 -- 31,320
Shareholders advances 23 -- -- 23
Lines of credit-bank 10,315 11,692 5,000(1) 15,315
(11,692)(2)
Notes payable 5,922 -- -- 5,922
Capital lease obligations,
current portion 678 56 -- 734
Income taxes payable 6,942 -- -- 6,942
Deferred revenue and customer
advances 11,061 9,050 -- 20,111
--------- --------- --------- ---------
Total Current Liabilities 96,463 39,695 (5,992) 130,166
CAPITAL LEASE OBLIGATIONS,
less current portion 1,308 -- -- 1,308
LONG TERM LIABILITIES -- -- 20,000(1) 20,000
--------- --------- --------- ---------
Total Liabilities 97,771 39,695 14,008 151,474
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, no par value 11 -- -- 11
Additional paid in capital 59,500 100 (100)(3) 59,500
Accumulated (deficit) 9,145 (12,078) 12,078(3) 9,145
Accumulated comprehensive deficit (412) 377 (377)(3) (412)
--------- --------- --------- ---------
Total Stockholders' Equity 68,244 (11,601) 11,601 68,244
--------- --------- --------- ---------
$ 166,015 $ 28,094 25,609 $ 219,718
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AND EXPLANATORY HEADNOTE
F-19
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE 9 MONTHS TO OCTOBER 31, 1999
(IN THOUSANDS $)
<TABLE>
<CAPTION>
4FRONT
TECHNOLOGIES, INC. CVSI, INC.
AND SUBSIDIARIES 9 MONTHS
9 MONTHS ENDED ENDED
OCTOBER 31, SEPTEMBER 30, PRO FORMA PRO FORMA
1999 1999 ADJUSTMENTS CONSOLIDATED
-------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
REVENUES $ 181,710 $ 79,617 $ -- $ 261,327
COST OF REVENUES 109,204 61,853 -- 171,057
--------- --------- --------- ---------
GROSS PROFIT 72,506 17,764 -- 90,270
OPERATING EXPENSES:
Selling, general and
administrative expenses 57,171 13,956 -- 71,127
Research and Development -- 186 -- 186
Non-recurring charge -- 662 -- 662
Gain on sale of subsidiary -- (7,368) -- (7,368)
Depreciation and amortization 3,721 1,911 1,047(6) 6,679
--------- --------- --------- ---------
Total operating expenses 60,892 9,347 1,047 71,286
INCOME (LOSS) BEFORE INTEREST,
AND INCOME TAXES 11,614 8,417 (1,047) 18,984
INTEREST INCOME (EXPENSE):
Interest income 683 -- -- 683
Interest expense (746) (1,113) (590)(7) (2,449)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES 11,551 7,304 (1,637) 17,218
INCOME TAXES 5,074 985 (177)(8) 5,882
--------- --------- --------- ---------
NET INCOME (LOSS) $ 6,477 $ 6,319 (1,460) $ 11,336
========= ========= ========= =========
NET INCOME (LOSS) PER
COMMON SHARE (BASIC) $ 0.60 $ 631.9 -- $ 1.03
========= ========= ========= =========
NET INCOME (LOSS) PER
COMMON SHARE (DILUTED) $ 0.55 $ 631.9 -- $ 0.96
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND
EXPLANATORY HEADNOTE
F-20
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JANUARY 31, 1999
(IN THOUSANDS $)
<TABLE>
<CAPTION>
4FRONT
TECHNOLOGIES, INC.
AND SUBSIDIARIES CVSI, INC.
YEAR ENDED YEAR ENDED
JANUARY 31, DECEMBER 31, PRO FORMA PRO FORMA
1999 1998 ADJUSTMENTS CONSOLIDATED
------------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES $ 148,897 $ 128,218 -- $ 277,115
COST OF REVENUES 90,302 104,013 -- 194,315
---------- --------- ---------- -----------
GROSS PROFIT 58,595 24,205 -- 82,800
OPERATING EXPENSES:
Selling, general and
administrative expenses 45,775 23,509 -- 69,284
Research and Development -- 325 -- 325
Depreciation and amortization 3,427 3,078 1,296(6) 7,801
---------- --------- ---------- -----------
Total operating expenses 49,202 26,912 1,296 77,410
INCOME (LOSS) BEFORE INTEREST,
AND INCOME TAXES 9,393 (2,707) (1,296) 5,390
INTEREST INCOME (EXPENSE):
Interest income 837 -- -- 837
Interest expense (842) (1,898) (790)(7) (3,530)
---------- --------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 9,388 (4,605) (2,086) 2,697
INCOME TAXES 3,566 316 236(8) (3,646)
---------- --------- ---------- -----------
NET INCOME (LOSS) $ 5,822 $ (4,921) $ (1,850) $ (949)
========== ========= ========== ===========
NET INCOME (LOSS) PER
COMMON SHARE (BASIC) $ 0.64 $ 492.1 $ -- $ (0.10)
========== ========= ========== ===========
NET INCOME (LOSS) PER
COMMON SHARE (DILUTED) $ 0.56 $ 492.1 $ -- $ (0.10)
========== ========= ========== ===========
DILUTED SHARES OUTSTANDING 10,484,300 10,000 -- 10,484,300
========== ========= ========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND
EXPLANATORY HEADNOTE
F-21
<PAGE>
4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
NOTE 1
To recognize the $25 million bank loan incurred to finance the acquisition.
NOTE 2
To reflect the repayment of CVSI bank borrowings.
NOTE 3
To eliminate Stockholders Equity/(Deficit) in CVSI.
NOTE 4
To reflect the additional $500,000 of cash for the acquisition price paid and
the $1.8 million paid to settle financial obligations to outgoing directors.
NOTE 5
To account for the legal and professional costs incurred in the acquisition.
NOTE 6
To record the amortization of goodwill over 20 years.
NOTE 7
To record the interest on the $25 million borrowing in (1)
NOTE 8
To reflect the tax benefit on the interest
NOTE 9
To reflect goodwill on acquisition.
F-22
