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

PAGE NUMBER ~~------~~ CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of January 31, 2000 and ~~April~~July 3031, 2000 (unaudited) 1 Condensed Consolidated Statements of Operations for the six and three ~~months~~month periods ended ~~April~~July 3031, 1999 and 2000 (unaudited) 3 Condensed Consolidated Statements of Changes in Stockholders' Equity for the ~~three~~six months ended ~~April~~July 3031, 2000 (unaudited) 4 Condensed Consolidated Statements of Comprehensive Income (loss) for the six and three months periods ended ~~April~~July 3031, 1999 and 2000 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six and three ~~months~~month periods ended ~~April~~July 3031, 1999 and 2000 (unaudited) 5 Notes to the Condensed Consolidated Financial Statements 6

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

JANUARY 31, ~~APRIL~~JULY 3031, 2000 2000 ---------------- --------- $ `000'S $ `000'S (UNAUDITED) CURRENT ASSETS: Cash $ 23,086 $ 158,~~427~~791 Accounts receivable, net of allowance for doubtful accounts of $1,047 and $1,~~082~~063 respectively 64,495 6869,~~019~~769 Deposits 51 51 Inventories 30,101 30,~~759~~706 Prepaid expenses 7,728 8,~~674~~941 Income taxes receivable 17 17 Other current assets 2,244 2,~~299~~383 -------- -------- Total current assets 127,722 ~~125~~120,~~246~~658 PROPERTY AND EQUIPMENT, net 12,801 12,~~401~~671 INTANGIBLE ASSETS, net 63,027 6260,~~007~~643 DEFERRED INCOME TAX 4,901 4,~~882~~843 OTHER ASSETS 557 ~~565~~618 -------- -------- TOTAL ASSETS $ 209,008 $~~205~~ 199,~~101~~433 ======== ========

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

JANUARY 31, ~~APRIL~~JULY 3031, 2000 2000 ----------------- ----------- $ `000'S $ `000'S (UNAUDITED) CURRENT LIABILITIES: Accounts payable $ 55,509 ~~$ 50~~52,~~643~~831 Accrued liabilities 17,889 1819,~~253~~117 Lines of credit-bank 11,288 1612,~~707~~868 Notes payable 3,195 54,~~133~~442 Capital lease obligations, current portion 697 ~~679~~829 Income taxes payable 8,801 8,~~324~~709 Deferred revenue 23,199 2018,~~954~~649 --------- ----------- Total current liabilities 120,578 ~~120~~117,~~693~~445 CAPITAL LEASE OBLIGATIONS, less current portion 873 ~~879~~1,049 LONG TERM LIABILITIES 25,103 2522,~~115~~407 --------- ----------- TOTAL LIABILITIES 146,554 ~~146~~140,~~687~~901 --------- ----------- COMMITMENTS AND CONTINGENCIES: STOCKHOLDERS' EQUITY: Common stock, par value $.001, 30,000,000 shares authorized 11,765,602 and 1112,~~958~~493,~~448~~338 shares issued and outstanding, respectively 12 12 Additional paid-in capital 60,435 6164,~~567~~374 Retained earnings (deficit) 2,716 (14,~~812~~144) Other accumulated comprehensive loss (709) (1,~~353~~710) --------- ----------- Total stockholders' equity 62,454 58,~~414~~532 --------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 209,008 $ ~~205~~199,~~101~~433 ========= ==========

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

FOR THE THREE MONTHS ENDED ~~APRIL~~FOR 30THE SIX MONTHS ENDED JULY 31, ~~APRIL~~1999 30JULY 31, 2000 JULY 31, 1999 JULY 31, 2000 ------------- ------------- ------------- ------------- $ `000'S $ `000'S $ `000'S $ `000'S (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) REVENUES Services $ 3839,~~429~~166 $ 5557,~~199~~167 $ 77,595 $ 112,366 Products 1819,~~897~~150 23,~~880~~514 38,047 6,394 ------ ------- -------- ~~57,326~~--------- 58,~~079~~316 60,681 115,642 118,760 ------ ------ ------- ------- Cost of Services 18,~~486~~659 3032,~~475~~184 37,145 62,659 Cost of Products 16,~~242~~584 23,~~594~~217 32,826 5,811 ------ ------- -------- 34------- 35,~~728~~243 3335,~~069~~401 69,971 68,470 ------ ------ -------- ------ GROSS PROFIT Services 1920,~~943~~507 24,~~724~~983 40,450 49,707 Products 2,~~655~~566 ~~286~~297 5,221 583 ------- -------- --------- 22-------- 23,~~598~~073 25,~~010~~280 45,671 50,290 ------ ------ -------- ------ OPERATING EXPENSES Selling, general and administrative expenses 18,~~024~~249 2125,~~520~~702 36,273 47,222 Depreciation ~~434~~404 ~~881~~824 838 1,705 Amortization ~~760~~798 1,~~431~~476 Re1,558 2,907 Reorganization and restructuring costs 2001 -~~organization~~ 1,527 - 6,545 Reorganization and restructuring costs 2000 - (2,424) - 5(2,~~018~~424) ------ -------- -------- ------ Total operating expenses 19,~~218~~451 28(27,~~850~~105) 38,669 55,955 ------ -------- -------- ~~INCOME~~------ INCOME/(LOSS) BEFORE INTEREST, INCOME TAXES: 3,~~380~~622 (31,~~840~~825) 7,002 (5,665) Interest income ~~264~~220 ~~263~~120 484 383 Interest expense (~~222~~246) (~~713~~456) (468) (1,169) -------- ------- ---------- ~~INCOME~~------- INCOME/(LOSS) BEFORE INCOME TAXES: 3,~~422~~596 (42,~~290~~161) 7,018 (6,451) INCOME TAXES 1,~~437~~546 ~~238~~171 2,983 409 ----- ------- --------- ------- NET INCOME /(LOSS) $ 12,~~985~~050 $ (2,332) $ 4,~~528~~035 $ (6,860) ----- ------- ----- ------- NET INCOME /(LOSS) PER COMMON SHARE (BASIC) $ 0.19 $ (0.19) $ 0.38 $ (0.57) NET INCOME /(LOSS) PER COMMON SHARE (DILUTED) $ 0.17 $ (0.3819) $ 0.34 $ (0.57)

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

~~Other~~ACCUMULATED ~~Retained~~OTHER ~~Accumulated~~COMMON ~~Earnings~~STOCK ~~Comprehensive~~COMPREHENSIVE ~~Shares Amount (Deficit) (Loss) Total~~ ---------- -- ACCUMULATED INCOME SHARES AMOUNT RESERVES (DEFICIT) TOTAL -------- ------ ---- ------- --- ------ ----- ~~$'000's $'000's $'000's $'000's~~ BALANCE, JANUARY 31, 2000 11,765,602 $ 60,447 $ 2,716 $ (709) $ 62,454 Exercise of warrants and stock options 192,846 1,132 -- -- 1,132 Net income (loss) for the period -- -- (4,528) -- (4,528) Other comprehensive loss -- -- -- (644) (644) ---------- ---------- ---------- ---------- ---------- ~~BALANCE~~Balance, ~~APRIL~~April 30, 2000 11,958,448 $ 61,579 $ (1,812) $ (1,353) $ 58,414 ---------- ---------- ---------- -------- ---------- Exercise of warrants and stock options 534,890 2,807 - - 2,807 Net income for the period - - (2,332) - (2,332) Other comprehensive loss - - - (357) (357) ---------- ---------- ---------- -------- ---------- BALANCE, JULY 31, 2000 12,493,338 $ 64,386 $ (4,144) $ (1,710) $ 58,532 (UNAUDITED) ~~==========~~---------- ~~==========~~---------- ~~==========~~---------- ~~==========~~-------- ~~==========~~---------- ---------- ---------- ---------- -------- ----------

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

~~APRIL~~FOR 30THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JULY 31, ~~APRIL~~1999 30JULY 31, 2000 JULY 31, 1999 JULY 31, 2000 ------------- ------------- ------------- ------------- $ `000'S $ `000'S $ `000'S $ `000'S Net income/ $ 2,050 $ (~~loss~~2,332) $ 14,~~985~~035 $ (46,~~528~~860) Foreign currency translation adjustment (2063) (~~644~~357) (83) (1,001) ------------ ---------- ----------- ------- Comprehensive income/ $ 1,987 $ (~~loss~~2,689) $ 13,~~965~~952 $ (57,~~172~~861) ~~=======~~------------ ~~=======~~---------- ----------- ------- ------------ ---------- ----------- -------

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

FOR THE THREE MONTHS ENDED ~~APRIL~~FOR 30THE SIX MONTHS ENDED JULY 31, ~~APRIL~~1999 30JULY 31, 2000 JULY 31, 1999 JULY 31, 2000 ------------- ------------- $------------- ~~`000'S~~------------- $(UNAUDITED) ~~`000'S~~(UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,~~985~~050 $ (2,332) $ 4,~~528~~035 $ (6,859) Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation ~~434~~404 ~~881~~824 838 1,705 Amortization ~~760~~798 1,~~431~~476 1,558 2,907 Non-cash restructuring ~~charges~~ -- 3(2,~~227~~424) ~~Gain~~- (803) Loss (gain) on disposal of fixed assets (2172) (1019) (93) (29) Decrease in deferred income tax 572 39 1,135 58 Change in accounts receivable (4,349) (1,~~188~~750) (3,~~524~~161) (5,274) Change in inventories (53,~~549~~254) 53 (~~657~~8,803) (604) Change in prepaid expenses (~~319~~1,561) (~~946~~267) (1,880) (1,213) Change in income taxes 1,~~046~~090 385 2,136 (~~477~~92) Change in other current assets ~~190~~(41) (5584) ~~Change~~149 in(139) ~~deferred income tax 563 19~~ Change in accounts payable 8,989 1,~~008~~968 (59,~~645)~~997 3,677 Change in accrued liabilities ~~326~~(351) ~~364~~864 (25) 1,228 Change in deferred revenue (2,~~914~~745) (2,~~245~~305) (5,659) (4,550) --------- -------- -------- ------- Net cash provided (used) by operating activities (1,~~303~~530 (3,570) 227 (1215,~~165~~736) --------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment (604) (573) (1,~~361~~965) (~~325~~898) Proceeds from disposal of equipment 3176 3641 107 77 Acquisition of subsidiaries (~~475~~2,772) (~~346~~177) (3,247) (523) Capitalization of software development costs (~~105~~30) - (135) - Change in other assets - (53) 86 (861) --------- -------- -------- ------- Net cash used by investing activities (13,~~824~~330) (~~643~~762) (5,154) (1,405) --------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in lines of credit-bank ~~535~~1,070 5(3,~~419~~839) ~~Changes~~1,605 1,580 Change in notes payable 953 (~~455~~689) 498 1,~~936~~247 ~~Repayment~~Payments of ~~loan~~capital ~~for~~lease ~~CVSI~~obligations ~~acquisition~~(322) --(225) (~~2,500~~632) ~~Payments~~(419) Repayment of ~~capital~~CVSI ~~lease~~loan ~~obligations~~- ~~(310)~~- - (~~194~~2,500) Net proceeds from exercise of ~~share~~ warrants/options ~~405~~243 12,~~132~~807 648 3,939 --------- -------- -------- ------- Net cash from financing activities ~~175~~1,944 5(1,~~793~~946) 2,119 3,847 --------- -------- -------- ------- Effect of exchange rate changes on cash (2063) (~~644~~357) (83) (1,001) --------- -------- -------- ------- NET (DECREASE) INCREASE IN CASH 81 (6,636) (2,~~972~~891) (714,~~659~~295) Cash at beginning of period 23,190 15,427 26,162 23,086 ------ ------ ------ ------ Cash at end of period $ 23,~~190~~271 8,791 $ 1523,~~427~~271 ~~========~~$ ~~========~~8,791 --------- -------- -------- ------- --------- -------- -------- ------- Cash paid for interest expense $ ~~222~~220 $ ~~713~~456 ~~========~~$ ~~========~~484 $ 1,169 --------- -------- -------- ------- --------- -------- -------- ------- Cash paid for taxes $ - $ 165 $ - $ ~~696~~861 ~~========~~--------- ~~========~~-------- -------- ------- --------- -------- -------- -------

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

FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JULY 31, 1999 JULY 31, 2000 JULY 31,1999 JULY 31, 2000 ------------- -------------~~--------~~ ~~APRIL 30, 1999 APRIL 30, 2000~~ -------------- -------------- (UNAUDITED) (UNAUDITED) ~~BASIC~~(UNAUDITED) ~~EARNINGS~~ (~~LOSS~~UNAUDITED) BASIC EARNINGS PER SHARE Net income/(loss) $ 12,~~985~~049,~~092~~819 $ (2,331,945) $ 4,~~527~~034,~~803~~911 $ (6,859,748) ------------- ------------- ------------- ------------ Weighted Average Number of Common Shares outstanding 10,~~665~~781,~~743~~746 1112,~~858~~125,~~418~~277 7,650,276 12,044,163 ------------- ------------- ------------- ------------ Net income /(loss) per Common Share (Basic) $ 0.19 $ (0.3819) ~~============~~$ ~~============~~0.30 ~~DILUTED~~$ ~~EARNINGS~~ (~~LOSS~~0.57) ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ DILUTED EARNINGS PER SHARE Net income/(loss) $ 12,~~985~~049,~~092~~819 $ (42,~~527~~331,~~803~~945) $ 2,327,391 $ (6,859,748) ------------- ------------- ------------- ------------ Weighted Average Number of Common Shares outstanding 10,~~665~~781,~~743~~746 1112,~~858~~125,~~418~~277 10,723,744 12,044,163 Additional Shares to be Issued upon Assumed Exercise of Options and Warrants 3,~~134~~207,~~765~~682 - 3,207,682 - Shares Hypothetically Repurchased at the Average Market Price with the Proceeds of Exercise (1,~~914~~970,~~273~~098) - (1,988,781) - ------------- ------------- ------------- ------------ Adjusted Shares for Dilution 1112,~~886~~019,~~235~~330 1112,~~858~~125,~~418~~277 9,202,154 12,044,163 ------------- ------------- ------------- ------------ Net income/(loss) per Common Share (Diluted) $ 0.17 $ (0.3819) ~~============~~$ ~~============~~0.34 $ (0.57) ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------

NOTE 4 - INVENTORIES

Inventories consist of the following: JANUARY 31, 2000 ~~APRIL~~JULY 3031, 2000 ------------------ ----------------- (UNAUDITED) Computer hardware $ 30,095 $ 30,~~759~~706 Computer software 6 -- ------- --------- $ 30,101 $ 30,~~759~~706 ======= =========

- 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:-

ACCRUED RELEASE ACCRUED BALANCE CASH OF BALANCE AT JAN 31, 2000 PAYMENTS ~~APR~~PROVISION 30JUL 31, 2000 Q4 FISCAL 2000 PLAN $'000'S $'000'S $'000'S $'000'S Severance and related charges 350 (350) - - Lease termination costs 5,103 (~~128~~255) 4(2,~~975~~424) 2,424 ------- ----- -- --- ----- $ 5,453 $ (~~478~~605) $ ~~4,975 ======= ======= ======= CHARGED ACCRUED IN APR 30 CASH BALANCE AT QUARTER PAYMENTS APR 30, 2000 Q1 FISCAL 2001 PLAN $'000'S $'000'S $'000'S Severance and related charges 1,468~~ (12,~~340~~424) ~~128 Lease termination costs 3,550 (323) 3,227 ------- ------- -------~~ $ 52,~~018~~424 ~~$(1,663) $ 3,355~~ ======= ===== == === =====

- 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 -

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