10-Q 1 a10-q.txt 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q MARK ONE [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 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 June 13, 2000, was 12,112,596 shares of Common Stock, $.001 par value. ================================================================================ ITEM 1. FINANCIAL STATEMENTS 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES THREE MONTH PERIOD ENDED APRIL 30, 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/(LOSS)

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 "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, Continental Europe and USA. The Company's solutions include hardware maintenance, help desk support, network servers, specialized software services and products. NOTE 2 - BASIS OF PRESENTATION The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying interim unaudited condensed consolidated financial statements contain all material adjustments consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations, the changes in stockholders' equity and cash flows of 4Front Technologies, Inc. for the interim periods presented. The results of the three months ended April 30, 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. NOTE 3 - EARNINGS (LOSS) PER SHARE

- 6 - 4FRONT TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - INVENTORIES

NOTE 5 - INCOME TAXES The Company files a separate U.S. federal income tax return for its domestic operations and a local tax returns for its foreign operations. The non US subsidiaries compute taxes at rates in effect in their local jurisdiction and become payable when assessed by the local tax authorities. 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. The Company has provided income tax for the three months ended April 30, 1999 of $1,437,000 on the profits (loss) of its operations, and for the three months to April 30, 2000 of $238,000. 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. The following tables depicts the activity for both the Q4 fiscal 2000 and the Q1 fiscal 2001 restructuring program through April 30, 2000:-

- 7 - 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 April 30, 1999 and April 30, 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. RESULTS OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2000 COMPARED WITH THE THREE MONTHS ENDED APRIL 30, 1999 REVENUES Revenues for the three months ended April 30, 2000 were $58.1 million, an increase of $0.8 million, or approximately 1.3% compared to $57.3 million for the three months ended April 30, 1999. Revenues from services were $55.2 million, or 95% of the total revenue, with revenues from the supply of products at $2.9 million, or 5% of the total revenues. In the comparable period of the prior year, services' revenues were 67.0% of total revenues and products' revenues were 33.0% of the total revenues. In the quarter, the acquisition of CVSI and SIL contributed $17.2 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 $14.2 million of product revenue in the quarter to April 30, 1999 and $0 in the quarter to April 30, 2000. GROSS PROFIT Gross profit for the three months ended April 30, 2000 was $25.0 million, an increase of $2.4 million, or 10.7% compared to $22.6 million for the three months ended April 30, 1999. Gross margin increased from 39.4% for the three months ended April 30, 1999 to 43.06% for the three months ended April 30, 2000. Gross profit for services increased 24% from $19.9 million for the three months ended April 30, 1999 to $24.7 million for the three months ended April 30, 2000. Gross profit for products decreased $2.4 million from $2.7 million for the three months ended April 30, 1999 to $0.3 million for the three months to April 30, 2000. This decrease was due to the sale of the "Hammer" product business. - 8 - SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $21.5 million, an increase of $3.5 million, or 19.4% compared to $18.0 million for the three months ended April 30, 1999. As a percentage of revenues, selling, general and administrative expenses increased to 37.1% from 31.4% in the three months ended April 30, 2000. Selling general and administrative expenses increased primarily as a result of a growth in infrastructure necessary to support the expansion and integration of the Company's businesses. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the three months ended April 30, 2000 was $2.3 million, an increase of $1.1 million, or 93.6% compared to $1.2 million for the three months ended April 30, 1999. This increase arose principally from the acquisitions of SIL and CVSI. Depreciation was $0.9, an increase of $447,000 or 102.9%, from $434,000 for the prior period. Amortization expense was $1.4 million, an increase of $671,000, or 88.3%, from $760,000 for the prior period. An amortization period of between ten 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 quarter of 2001, we have taken $5.02 million as part of the restructuring and reorganization. $1.0 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. It is anticipated that, if the specific closures which are currently under review happen, approximately $10.0 million will be taken in the second quarter of 2001, resulting in approximately $15.0 million of charges for the first half year to July 31, 2000. EARNINGS (LOSS) BEFORE INTEREST INCOME AND EXPENSE, INCOME TAXES Loss before interest expense and income taxes for the three months ended April 30, 2000 was a loss of $3.8 million, a decrease of $7.2 million, compared to $3.4 million income for the three months ended April 30, 1999. As a percentage of revenues, earnings before interest expense and income taxes decreased from 5.9% in the three months ended April 30, 1999 to a loss of (6.6)% for the three months ended April 30, 2000. INCOME TAXES Income taxes charged for the quarter ended April 30, 2000, was a net charge of $238,000. This is a combination of a tax charge of $646,000 on taxable profits for the quarter and a tax credit of $408,000 taken for the cash element of the restructuring charge. No credit has been taken for the accrued non-cash element of the organization charge. Income taxes charged on profits for the quarter ended April 30, 1999, was $1.4 million, there was no comparative restructuring charge in this quarter. INTEREST Interest expense for the three months ended April 30, 2000 was $713,000 compared to $222,000 for the three months ended April 30, 1999. This increase was primarily on the loan taken in the fourth quarter of fiscal 2000 to assist in the acquisition of CVSI. Interest income for the three months ended April 30, 2000 remained comparable to that for April 30, 1999. - 9 - 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 3.4 million shares of Common Stock. As a result of this offering, the Company raised net proceeds of $31.0 million. As of April 30, 2000, the Company had lines of credit with UK, French, Italian, Japanese, Dutch and Belgian banks in the aggregate amount of $12.5 million. As of April 30, 2000 $11.3 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. $5.4 million (including $0.4 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 April 30, 2000, $5.1 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 $4.5 million at April 30, 2000. Net cash used by operating activities during the three months ended April 30, 2000 was $12.2 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 $0.6 million, for the three months ended April 30, 2000, primarily reflecting cash used for the purchase of equipment. Net cash provided by financing activities was $5.8 million for the three months ended April 30, 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. 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. - 10 - 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 - 11 - 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. June 14, 2000 4FRONT TECHNOLOGIES, INC. BY: /S/ STEPHEN MCDONNELL -------------------------- Stephen McDonnell Chief Financial Officer - 12 -

4FRONT TECHNOLOGIES INC 10-Q