Frontec acquires resources for continued expansion

Frontec acquires resources for continued expansion Frontec is strengthening its capital base in preparation for continued acquisitions of IT business operations. The company has reached an agreement with a consortium of institutional investors that will subscribe for an issue of convertible preferred shares - a new instrument in the Swedish market - for a total of USD 20 M, whereof USD10 M will be provided immediately. The investors will pay SEK 56 per convertible preferred share, corresponding to a 40% premium to the average market price (SEK 40) for Frontec´s Series B shares over a recent period. An additional USD 5 M will be invested in Frontec when the market price reaches SEK 50 and another USD 5 M when the price reaches SEK 65. The total potential increase in Frontec´s share capital, accordingly, is approximately SEK 160 M. Interesting acquisition opportunities - Sharp adjustments in the level of valuations for IT companies during recent months have created interesting opportunities for continued expansion through acquisitions to supplement organic growth, says Bengt Wallentin, CEO and President of Frontec. We are securing a much stronger financial position that will enable Frontec to act quickly in the ongoing process of structural change in the IT industry. The recent acquisitions of UPEC Data and NC Datasupport have underlined the need to act quickly. Frontec, which is listed on the O-List of the Stockholm Stock Exchange, has signed an agreement with a consortium comprising two American institutional investors. According to terms of the agreement, Frontec will issue convertible preferred Series C shares to the American investor group at a premium of 40%, corresponding to SEK 16, in relation to the market price, SEK 40, for Frontec Series B during a recent period. Convertible preferred shares are securities often used in the US, but in Sweden Frontec is the first public company to issue this financial instrument. Several advantages The preferred shares are eligible for conversion into Series B shares within five years of issue. Conversion will be effected through an exchange of convertible preferred shares for an equal number of Series B shares. If the share price for Series B shares is lower than the conversion price, the conversion rate may be changed under certain circumstances, whereby the investors may be entitled to more than one Series B share. If the market price for Series B shares, for example, is 10% lower than the conversion price when conversion is requested, the investors will receive a number of Series B shares, which equalizes the nominal value of the investment. - This is a new financial instrument that creates resources at favorable rates, even during turbulent times on the stock exchange, Bengt Wallentin continues. Equity/assets increased to 53% Based on total assets reported in the interim report for six months ended June 30, 1998, and the present exchange rate (SEK 7.86/USD 1.00) Frontec´s share capital is expected to increase from SEK 188 M to SEK 264 M. The pro forma equity/assets ratio, in turn, will increase from 45% as per June 30, 1998 to 53%. Preferred shares entitle holders to dividends corresponding to 5% of invested capital, calculated in USD. Dividend payments may be made in cash or, at Frontec´s option, in additional Series B shares at the time of conversion. Payment for the Series C shares, totaling USD 10 M, will be made in November 1998, following a Special General Meeting of Frontec shareholders which will be held on November 3. The Special General Meeting is also proposed to authorize the Board of directors to issue new convertible preferred shares of Series D and E. When the market price for Frontec Series B shares reaches SEK 50 for 5 consecutive days and SEK 65 for 15 consecutive days, respectively, under terms of the agreement, the American investor group will invest additional amounts of two times USD 5 M, also at a premium of 40% above the prevailing, higher market values. The authorization will be effective until the next Annual General Meeting. - The agreement reflects the strong confidence of the American investor consortium in Frontec as a company and the potential it sees in the present stock price, says Olof Englund EVP and responsible for Corporate Affairs, who engineered the agreement on Frontec´s behalf. - The investors are two large American institutions that have expressed considerable interest in Frontec. Conversion to Series B shares may be effected not earlier than six months, except at a 40% premium, and not later than five years after the purchase of convertible preferred shares, which lends a long-term perspective to the investment. The new issue of convertible preferred shares is pending approval by a Special General Meeting of Frontec shareholders on November 3, 1998. Detailed information will be available at Frontec`s head office as of October 26, 1998. Frontec is expected to issue 1,403,571 Series C shares at a share price of SEK 56 and an estimated USD/SEK exchange rate of SEK 7.86, corresponding to 5.7% of the total number of Frontec shares. The new number of Frontec shares will under these circumstances be distributed as follows: Share series Number of shares A 3,440,000 B 19,191,445 C 1,403,572 Total 24,035,016 There are also 779,376 outstanding warrants in Frontec. For more information: Bengt Wallentin, CEO and President of Frontec. Tel: +46 8 470 20 00 Olof Englund, Executive Vice President of Frontec Tel: +46 8 470 22 60/+46 70 585 22 60 Tony Sandell, Legal Advisor, Advokatfirman Lindahl. Tel: +46 8 670 5811/+46 70 421 5811 Frontec Frontec provides IT consultancy services and software that help customers shorten lead-times in business processes and projects, trough two divisions: Frontec Nordic and Frontec Software. Frontec, with more than 1,000 employees, had net sales in 1997 of SEK 731 M. Key Points of the Private Equity Financing Terms of the USD 20 M of new preferred shares include: - 5% dividend, which may be either paid in cash or accrued at the option of Frontec. - Of the USD 20 M of new preferred shares, USD 10 M will be funded immediately and USD 5 M will be funded if Frontec´s class B shares trade at or above SEK 50 for 5 consecutive days during the next six months and an additional USD 5 M will be funded if the class B shares trade at or above SEK 65, for 15 consecutive days during the next six months prior to the Annual General Meeting. The conversion price of each additional USD 5 M tranch will be at a 40% premium to that higher market price, and will be subject to the possible adjustments mentioned below. - The initial USD 10 M funding will allow for conversion into class B shares at a 40% premium to the average market price over a recent period. After a six month holding period, the terms of the agreement provide for a possible adjustment to the conversion formula based on changes in the market price of class B shares, subject to certain limitations. Specifically, if the market price of the class B shares is lower than the 40% premium after six months, shares may be issued at the market price at the time of conversion, determined as an average of the highest three of the lowest five trading days during the thirty days prior to conversion.The Swedish instrument for this adjustment is promissory notes with detachable warrants. - Mandatory conversion in 5 years.