10-Q 1 a2025645z10-q.txt 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q MARK ONE [1] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............. to ........... Commission File Number 0-8345 --------------------------- 4FRONT TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 84-0675510 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6300 South Syracuse Way, Suite 293 Englewood, Colorado 80111 (Address of principal executive offices) Registrant's telephone number, including area code: (303) 721-7341 --------------------------- Securities registered pursuant to Section 12(b) of the Act: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO The number of shares outstanding of each of the Registrant's classes of Common Stock at September 4, 2000 was 12,506,312 shares of Common Stock, $.001 par value. ================================================================================ ITEM 1. FINANCIAL STATEMENTS 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES SIX AND THREE MONTH PERIODS ENDED JULY 31, 2000 TABLE OF CONTENTS

4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -1- 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - 2 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - 3 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - 4 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - 5 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS 4Front Technologies, Inc. and subsidiaries (the "Company" or "4 Front") is a leading provider of information technology solutions, which consist of specialized computer services and complementary products, primarily to blue chip corporations and government authorities in the United Kingdom and in Continental Europe. The Company's solutions include hardware maintenance, help desk support, network servers, specialized software services and products and the supply of high-end storage systems. NOTE 2 - BASIS OF PRESENTATION The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying interim unaudited condensed consolidated financial statements contain all material adjustments consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations, the changes in stockholders' equity and cash flows of 4Front Technologies, Inc. for the interim periods presented. The results of the six months ended July 31, 2000 are not necessarily indicative of the results of operations for the full year. These interim unaudited condensed consolidated financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended January 31, 2000. - 6 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - EARNINGS PER SHARE

NOTE 4 - INVENTORIES

- 7 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - INCOME TAXES The Company files a separate U.S. federal income tax return for its domestic operations and a local income tax return for its foreign operations. The foreign subsidiaries compute taxes at rates in effect in that country and become payable when assessed by the Inland Revenue. Deferred federal income taxes are not provided on the undistributed earnings of its foreign subsidiaries to the extent the Company intends to permanently reinvest such earnings in the United Kingdom. The Company has provided income tax for the six months ended July 31, 2000 of $408,000 on the profits of its operations, and for the six months to July 31, 1999 $2.98 million. NOTE 6 - RESTRUCTURING AND REORGANIZATION During the quarter ended April 30, 2000, the Company took a charge of $5.02 million in relation to the restructuring and reorganization program of the business. This program resulted in the involuntary termination of 46 positions across the Company, and the vacating and closure of 2 properties. During the quarter ended July 31, 2000, the Company released a provision of $2,424,000 in relation to a property it had made a provision for in the fiscal year 2000. It had been the belief that this property would be vacant through the remainder of the lease. However, a sub-let was initiated on the 30th July for 50% of the property at the same level of rent as the Company is being charged. This sub-let is for the remaining duration of the lease. During the quarter, the Company initiated some of its Q2 restructuring plans. The element completed involved the involuntary redundancy of 71 people across the Company. In the same period, the Company announced the intended merger between the Company and NCR. All further execution of reorganization and restructuring plans have been halted pending the outcome of these talks. The following tables depicts the activity for both the Q4 fiscal 2000 and the Q1 and Q2 fiscal 2001 restructuring programs through July 31, 2000:-

- 8 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading provider of information technology solutions, which consist of specialized computer services and complementary products primarily to blue chip corporations and government authorities in the United Kingdom and in Continental Europe. The Company's solutions include hardware maintenance, help desk support, network services, specialized software services and products and the supply of high-end storage systems. The Company has grown rapidly due, in large part, to acquisitions. Datapro Computers Group Limited ("Datapro") was acquired in fiscal 1997 with Firstpoint Limited ("Firstpoint") and Eurosystems France S.A. ("Eurosystems") being acquired in fiscal 1998. Decision Systems ("DS"), Memorex Telex Italia ("Memorex"), Penagen Training Ltd ("Penagen") and I-NEA S.A. ("I-NEA") were acquired in fiscal 1999. The SIL Group of companies ("SIL") and CVSI, Inc. ("CVSI") were acquired in fiscal 2000. These acquisitions have been accounted for under the purchase method of accounting and are included on a consolidated basis in the Company's financial statements for periods ending after the effective date of such acquisitions. As used herein, references to a "fiscal year" refer to January 31 of such year. For example, fiscal 2000 refers to the year ended January 31, 2000. Because of the effect upon the Company's results of operations for the year ended January 31, 2000 of acquisitions made during that period, direct comparison of the Company's results of operations for the periods ended July 31, 1999 and July 31, 2000 will not, in the view of management of the Company, prove meaningful. Instead, a summary of the elements which management of the Company believes essential to an analysis of the results of operations for such periods is presented below. Just after the close of the second quarter we announced that we had entered into a definitive agreement to merge with NCR, a leading US technology solutions provider. Under the terms of the agreement, NCR will pay each 4Front Technologies stockholder $18.50 per share in cash for each outstanding share of common stock held. This transaction was being negotiated with NCR during the second quarter, and hence impacted the management of our operations, particularly with regard to our reorganisation plans. As a result of the ongoing negotiations with NCR, we decided to postpone the implementation of a large part of the final stages of the planned reorganisation. RESULTS OF OPERATIONS THREE MONTHS ENDED JULY 31, 2000 COMPARED WITH THE THREE MONTHS ENDED JULY 31, 1999 REVENUES Revenues for the three months ended July 31, 2000 were $60.7 million, an increase of $2.4 million, or approximately 4.1% compared to $58.3 million for the three months ended July 31, 1999. This growth arose principally from the acquisitions of CVSI and SIL and from organic growth of the services business. Revenues from services were $57.2 million, or 94.2% of the total revenue, with revenues from the supply of products at $3.5 million, or 5.8% of the total revenues. In the comparable period of the prior year, Service revenues were 67.2% of the total revenues and Products revenues were 32.8% of total revenues. In the quarter, the acquisition of CVSI and SIL contributed $17.9 million and $5.0 million of services revenues respectively. Our UK product business, "Hammer", which was sold in the last quarter of fiscal 2000, contributed $14.7 million of product revenue in the quarter to July 31, 1999 and $0 in the quarter to July 31, 2000. - 9 - GROSS PROFIT Gross profit for the three months ended July 31, 2000 was $25.3 million, an increase of $2.2 million, or 9.5% compared to $25.3 million for the three months ended July 31, 1999. Gross margin increased from 39.6% for the three months ended July 31, 1999 to 41.7% for the three months ended July 31, 2000. Gross profit for services increased 21.8% from $20.5 million for the three months ended July 31, 1999 to $25.0 million for the three months ended July 31, 2000. Gross profit for products decreased 8.8% from $2.6 million for the three months ended July 31, 1999 to $0.3 million for the three months to July 31, 2000. This decrease was due to the sale of the "Hammer" product business. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $25.7 million, an increase of $7.5 million, or 40.8% compared to $18.2 million for the three months ended July 31, 1999. As a percentage of revenues, selling, general and administrative expenses increased to 42.4% from 31.3% in the three months ended July 31, 2000. Selling general and administrative expenses increased primarily as a result of a growth in infrastructure necessary to support the expansion of the Company's businesses and the cessation of restructuring and reorganization plans pending the outcome of the NCR merger talks.. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the three months ended July 31, 2000 was $2.3 million, an increase of $1.1 million, or 91.67% compared to $1.2 million for the three months ended July 31, 1999. This increase arose principally from the acquisitions of CVSI and SIL. Depreciation was $824,000, an increase of $420,000 or 105.0%, from $404,000 for the prior period. Amortization of goodwill from acquisitions was $1,476,00, an increase of $678,000, or 84.96%, from $798,000 for the prior period. An amortization period of between five and fifteen years is utilized with respect to acquisitions. REORGANIZATION AND RESTRUCTURING In our press release of March 29, 2000, we stated that we would expect to take up to $15.0 million in charges within the first half of 2001. During the first half of 2001, we have taken $6.5 million as part of the restructuring and reorganization. $3.0 million of this charge relates to severance and termination costs with regards to involuntary termination of employees and $3.5 million relates to the lease termination and costs associated with the vacating of duplicate leased premises. During the second quarter, the Company entered into negotiations with NCR regarding a proposed merger. Pending the outcome of these talks, the restructuring and reorganization plans were stopped. During the quarter ended July 31, 2000, the Company released a provision of $2,424,000 with regards to a property it had made a provision for in the fiscal year 2000. It had been the belief that this property would be vacant through the remainder of the lease. However, a sub-let was initiated on the 30th July for 50% of the property at the same level of rent as the Company is being charged. This sub-let is for the remaining duration of the lease. EARNINGS BEFORE INTEREST AND INCOME TAXES Earnings before interest and income taxes ("EBIT") for the three months ended July 31, 2000 was a loss of $2.2 million, a decrease of $5.7 million, or 160.0%, as compared to $3.6 million for the three months ended July 31, 1999. As a percentage of revenues, income before interest expense and income taxes decreased to 3.56% in the three months ended July 31, 2000 as compared to 6.2% for the three months ended July 31, 1999. - 10 - INTEREST Interest expense for the three months ended July 31, 2000 was $456,000, an increase of $210,000 or 85.4% compared to $246,000 for the three months ended July 31, 1999, arising from higher utilization of bank lines of credit during the period. Interest income decreased from $220,000 for the three months ended July 31, 1999 to $120,000 a decrease of $100,000, arising from lower cash balances on hand during the quarter. SIX MONTHS ENDED JULY 31, 2000 COMPARED WITH THE SIX MONTHS ENDED JULY 31, 1999 REVENUES Revenues for the six months ended July 31, 2000 were $118.8 million, an increase of $3.1 million, or approximately 2.7% compared to $115.6 million for the six months ended July 31, 1999. This increase arose principally from the acquisitions of CVSI and SIL. Revenues from services were $112.4 million, or 94.5% of the total revenue, with revenues from the supply of products at $6.4 million, or 5.4% of the total revenues. In the comparable period of the prior year, Service revenues were 67.1% of the total revenues and supply of products were 32.9% of the total revenues. In the six months the acquisition of CVSI and SIL contributed $35.1 million and $10.0 million of services, respectively. Our UK products business "Hammer", which was sold in the last quarter of fiscal 2000, contributed $28.9 million of product in the six months to July 31, 1999 and $0 in the six months to July 31, 2000. GROSS PROFIT Gross profit for the six months ended July 31, 2000 was $50.3 million, an increase of $4.6 million, or 10.1% compared to $45.7 million for the six months ended July 31, 1999. This increase arose principally from the acquisitions in fiscal 1999. Gross margin increased to 42.3% for the six months ended July 31, 2000 from 39.5% for the six month period to July 31, 1999. Gross profit for services increased 22.9% from $40.5 million for the six months ended July 31, 1999 to $49.7 million for the six months to July 31, 2000. Gross profit for products decreased 88.8% from $5.2 million for the six months ended July 31, 1999 to $0.6 million for the six months ended July 31, 2000. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $47.2 million, an increase of $10.9 million, or 30.1% compared to $36.2 million for the six months ended July 31, 1999. As a percentage of revenues, selling, general and administrative expenses increased to 39.8% from 31.4% in the six months ended July 31, 1999. Selling general and administrative expenses increased primarily as a result of the acquisitions in 1999. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the six months ended July 31, 2000 was $4.6 million, an increase of $2.2 million or 91.7% compared to $2.4 million for the six months ended July 31, 1999. This increase arose principally from the acquisitions of CVSI and SIL in fiscal 2000. Depreciation was $1,705, an increase of $867 or 103.5%, from $838,000 for the prior period. Amortization of goodwill from acquisitions was $2,907,000, an increase of $1,349,000, or 86.6%, from $1,558,000 for the comparable period. An amortization period of between five and fifteen years is utilized with respect to acquisitions. - 11 - EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES Earnings before interest expense and income taxes ("EBIT") for the six months ended July 31, 2000 was $(6.5) million, a decrease of $13.5 million, or (91.9)%, as compared to $7.0 million for the six months ended July 31, 1999. As a percentage of revenues, EBIT decreased to (5.43)% in the six months ended July 31, 2000 as compared to 6.1% for the six months ended July 31, 1999. INTEREST Interest expense for the six months ended July 31, 2000 was $1,169,000, an increase of $701,000 or 49.8% compared to $468,000 for the six months ended July 31, 1999, arising from higher utilization of bank lines of credit during the period. Interest income decreased from $484,000 for the six months ended July 31, 1999 to $383,000 arising from lower cash balances on hand during the period. LIQUIDITY AND CAPITAL RESOURCES From inception until June 1996, the Company's sources of capital had been cash flows from operations, private placements of securities, primarily from its controlling stockholders and related parties, and borrowings from banks. On June 19, 1996, the Company completed a public offering (the "Offering") of 3,000,000 shares of the Company's Common Stock at a price of $5.75 per share. On July 2, 1998, the Company completed a secondary public offering through a further sale of 2.9 million shares of Common Stock. As a result of this offering, the Company raised net proceeds of $31.0 million. As of July 31, 2000, the Company had lines of credit with UK, French, Italian, Japanese, Dutch and Belgian banks in the aggregate amount of L12.5 million. As of July 31, 2000 $7.2 million was outstanding. In November 1999, we borrowed $25.0 million to assist us in the purchase of CVSI. This money was borrowed from a UK Bank at an average rate of 7.62% interest. Capital repayments of $2.5 million, plus any accrued interest, are to be made at 6 month intervals starting March 31, 2000. The first repayment was made on March 31, 2000 as at July 31, 2000, $5.6 million (including $0.6 million interest) of this loan is recorded as a current liability with the remaining $17.5 million as a long-term debt. The outstanding credit facilities are secured by the assets of the Company and are periodically reviewed by the issuing institution. Management expects to be able to maintain these credit arrangements for the foreseeable future, although no assurance can be given. The Company's Italian subsidiary "Memorex" discounts invoices with various Italian banks. These amounts vary during the year and are subject to interest rates ranging from 4% to 8.5%. The amounts discounted are secured by the related receivables of "Memorex". At July 31, 2000, $4.4 million under these agreements were outstanding. The Company's working capital decreased from $7.1 million surplus at January 31, 2000 to a surplus of $3.2 million at July 31, 2000. Net cash used by operating activities during the six months ended July 31, 2000 was $15.7 million, which reflected the net effect of a decrease in net accounts payable, and deferred revenues and an increase in accounts receivable. Net cash used by investing activities was $1.4 million, for the six months ended July 31, 2000, primarily reflecting cash used for the purchase of equipment. Net cash provided by financing activities was $3.9 million for the six months ended July 31, 2000, resulting primarily from increase of bank lines of credit and payments of outstanding obligations and the receipts from stock options which were exercised during the period. - 12 - The Company believes that the net cash flows from operations and borrowing availability under its credit facilities, will satisfy the Company's anticipated working capital requirements through at least the next twelve months. To the extent the Company raises additional capital by issuing equity or convertible debt securities, ownership dilution to the Company's stockholders will result. In the event that adequate funds are not available, the Company's business may be adversely affected. INFLATION Inflation has not had a material effect upon the Company's results of operations to date. In the event the rate of inflation should accelerate in the future, it is expected that costs in connection with the provision by the Company of its services and products will increase, and, to the extent such increased costs are not offset by increased revenues, the operations of the Company may be adversely affected. - 13 - PART II - OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Change In Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 (b) Reports on Form 8-K Not Applicable - 14 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized. September 9, 2000 4FRONT TECHNOLOGIES, INC. By: /s/ Stephen McDonnell ------------------------- Stephen McDonnell Chief Financial Officer - 15 -

4FRONT TECHNOLOGIES INC 10-Q