<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27438
-------------------
THE FOREFRONT GROUP, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0365256
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1360 POST OAK BLVD., SUITE 1660
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER: (713) 961-1101
-------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Number of shares of the issuer's Common Stock outstanding as of May 2, 1996:
4,824,949
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and notes disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations, although the Company believes that
the disclosures made herein are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
financial statements for the year ended December 31, 1995 included in the
Company's 1995 Form 10-KSB filed pursuant to Section 15(d) of the Securities
Exchange Act of 1934.
2
<PAGE>
THE FOREFRONT GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, MARCH 31,
- - ------ ------------- -------------
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 4,941,188 $ 4,047,993
Securities held to maturity...................... 7,998,417 7,998,417
Accounts receivable.............................. 20,919 172,593
Interest receivable.............................. -- 113,937
Prepaid expenses and other....................... 18,902 12,656
----------- -----------
Total current assets......................... 12,979,426 12,345,596
FURNITURE AND EQUIPMENT, net of
accumulated depreciation of $127,801, and $145,072. 147,861 290,263
PURCHASED SOFTWARE, net of
accumulated amortization of $-0- and $2,294...... -- 68,816
OTHER ASSETS...................................... 4,068 4,068
----------- -----------
Total assets............................... $13,131,355 $12,708,743
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES:
Accounts payable................................... $ 317,201 $ 363,205
Accrued liabilities................................ 348,085 187,322
Current portion of deferred revenue................ 13,081 41,159
----------- -----------
Total current liabilities 678,367 591,686
Deferred revenue, net of current portion........... -- 6,690
----------- -----------
Total liabilities 678,367 598,376
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares -- --
authorized, none outstanding....................
Common stock, $.01 par value, 20,000,000 47,821 49,071
shares authorized, 4,782,094 and 4,907,094 shares
issued.........................................
Additional paid-in capital........................ 16,756,181 17,137,650
Deferred compensation............................. (586,105) (498,781)
Accumulated deficit............................... (3,763,059) (4,575,723)
Treasury stock, 82,145 shares at cost............. (1,850) (1,850)
----------- -----------
Total stockholders' equity........................ 12,452,988 12,110,367
----------- -----------
Total liabilities and stockholders' equity........ $13,131,355 $12,708,743
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE FOREFRONT GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
--------------------------------------
1995 1996
---- ----
REVENUES:
<S> <C> <C>
Licenses...................................... $ 116,171 $ 448,345
Maintenance and services...................... 18,733 17,288
Other......................................... 2,835 6,501
---------- ----------
Total revenues..................... 137,739 472,134
COST OF MAINTENANCE, SERVICES AND PRODUCT
LICENSES 56,238 91,246
---------- ----------
Gross profit....................... 81,501 380,888
OPERATING EXPENSES:
Research and development..................... 221,516 339,200
Selling and marketing........................ 122,858 366,173
General and administrative................... 68,818 205,445
Acquired research and development costs...... -- 439,881
---------- ----------
Operating loss..................... (331,691) (969,811)
OTHER:
Interest income.............................. 1,434 157,147
Interest expense............................. (1,862) --
---------- ----------
Net loss........................... $ (332,119) $ (812,664)
========== ==========
NET LOSS PER SHARE........................... $(.10) $(.17)
========== ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE.. 3,258,923 4,731,543
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE FOREFRONT GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
--------------------------------------
1995 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss......................................................... $(332,119) $ (812,664)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization............................... 13,492 19,565
Non-cash acquired research and development costs............ -- 439,881
Compensation expense and amortization of deferred
compensation related to certain stock options.............. -- 71,605
Changes in operating assets and liabilities
(Net of Blue Squirrel asset acquisition):
(Increase) decrease in receivables........................ 37,997 (265,611)
(Increase) decrease in prepaid expenses................... (17,090) 6,246
Decrease in other assets.................................. 425 --
Decrease in accounts payable and accrued
liabilities.............................................. (65,767) (142,777)
Increase (decrease) in current and long term deferred
revenue.................................................. (14,428) 34,768
-------- ------
Net cash used by operating activities.. ......................... (377,490) (648,987)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for Blue Squirrel asset acquisition.................... -- (100,000)
Purchase of furniture and equipment.............................. (6,568) (144,208)
--------- ----------
Net cash used by investing activities............................ (6,568) (244,208)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.......................... 1,000 --
Proceeds from notes payable to stockholders and others........... 405,705 --
--------- ----------
Net cash provided by financing activities ...................... 406,705 --
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................................... 22,647 (893,195)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 279,407 4,941,188
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 302,054 $4,047,993
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at March 31, 1996 and the related statements of
operations and cash flows for the three month periods ended March 31, 1996 and
1995 are unaudited. These interim financial statements should be read in
conjunction with the December 31, 1995 financial statements and related notes.
The unaudited interim financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of results for
the interim periods presented and all such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of results
for a full year.
REVENUE
Software licensing revenue is recognized upon delivery to the customer
and the receipt and acceptance of a signed contract or order if there are no
significant postdelivery obligations. Maintenance contract revenues are
priced separately and recognized ratably over the terms of the agreements.
Consulting service revenues, which include development and professional fees,
are recognized as the services are rendered.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers highly liquid investments with a maturity of 3
months or less when purchased to be cash equivalents. At March 31, 1996, the
Company's entire investment portfolio consisted of securities held to
maturity. Securities held to maturity are U.S. government debt securities
which mature June 20, 1996. Management estimates that the carrying amount
approximates fair value at March 31, 1996.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as they are incurred.
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have been insignificant.
PURCHASED SOFTWARE
Purchased software results from the acquisition of the assets of Blue
Squirrel, Inc. in March 1996 (See Note 3) and is recorded at cost.
Amortization is calculated on the straight-line method over the estimated
lives of the products, which in this case is 2 years.
6
<PAGE>
NET LOSS PER SHARE
The Company's net loss per share is based on the weighted average number
of common shares outstanding, adjusted as described as follows. With one
exception, common equivalent shares are excluded from the per share
calculations, as the effect of their inclusion is antidilutive. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletins, all common,
preferred and common equivalent shares issued during the twelve months
preceding or in contemplation of the Company's initial public offering (using
the treasury stock method and the initial public offering price of $8 per
share) have been included in the calculation of common and common equivalent
shares outstanding for all periods prior to 1996.
Shares of convertible preferred stock are treated as if converted to
common stock on the respective dates of original issuance. In December 1995,
concurrent with the closing of the Company's initial public offering, all
shares of Series A Preferred Stock were converted into the Company's common
stock at a conversion rate of one share of common stock for every 2.26 shares
of Series A Preferred Stock. All rights, preferences and privileges
associated with the Company's previously outstanding preferred stock were
terminated upon conversion.
2. INITIAL PUBLIC OFFERING
On December 26, 1995, the Company completed an initial public offering of
1,700,000 common shares at $8.00 per share. Proceeds from the IPO were
approximately $11,854,522 of cash, net of underwriting costs and other
offering costs of $1,745,478. The Company issued warrants to purchase 170,000
shares of common stock to the underwriters upon closing of the initial public
offering. The purchase price of the warrants was $.001 per warrant. The
warrants have a five-year term beginning twelve months from the date of the
consummation of the initial public offering at a price of $9.60 per share.
See Liquidity and Capital Resources included elsewhere herein.
3. ACQUISITION
On March 8, 1996, the Company acquired the assets of Blue Squirrel, Inc.
("Blue Squirrel"). The consideration consisted of 125,000 shares of the
Company's common stock and $100,000 in cash to retire debt assumed by the
Company. 10% of the issued shares are held in escrow for a period of 90 days
from March 8, 1996. The Company currently believes that it is probable that
the escrowed shares will be released at the end of the 90 day period. The
acquisition has been accounted for under the purchase method and, accordingly,
the operating results of Blue Squirrel have been included in the operating
results since the date of acquisition. In applying the purchase method, the
Company recorded the fair value of net assets acquired, which included
software costs of $71,110, and recorded a $439,881 charge for acquired
research and development costs. Computer equipment and furniture acquired was
capitalized at its estimated fair market value of $15,465.
Additionally, each of the two shareholders of Blue Squirrel received an
option to purchase 5,000 shares of the Company's common stock at $7.20 per
share, which was in excess of the then current market price of the Company's
common stock. These options were granted in exchange for each of the two
shareholders executing non-competition agreements for a two year period from
the closing date. No value was assigned to the non-competition agreements as
management determined that their value was not significant.
7
<PAGE>
4. LEASE AGREEMENT
The Company's current operating lease for approximately 4,700 feet of
office space was extended through June 30, 1996. The Company executed a
new operating lease for approximately 10,200 feet of office space beginning
July 1, 1996 and expiring June 30, 2001. The minimum commitment for this
office space is approximately $153,000 annually.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
OVERVIEW
The Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result
of a number of important factors. For a discussion of important factors that
could affect the Company's results, please refer to the financial statement
line item discussions below. Readers are also encouraged to refer to the
Company's 1995 Annual Report on Form 10-KSB for further discussion of the
Company's business and the risks and opportunities attendant thereto.
The ForeFront Group, Inc. ("ForeFront" or the "Company") completed its
initial public offering December 26, 1995. ForeFront develops, markets and
supports client server and integrated applications software that enables the
capture, organization and exchange of information over the Internet and
private computer networks. The Company's Virtual Notebook System (the "VNS"),
launched in 1992, is an integrated applications software product which was
licensed exclusively to the Company by Baylor College of Medicine. The
Company intends to expand and further develop its Internet product line based
upon its VNS technology. Currently, ForeFront's products include, but are not
limited to: WebWacker/TM/ - a tool that enables the storage of information
captured from the World Wide Web for off-line use; GrabNet/TM/ - a tool that
enables client capture and organization of information from the World Wide
Web; WebSeeker/TM/ (formerly SqURL/TM/) - a tool to run information queries
through more than 20 Internet search engines simultaneously, and
RoundTable/TM/ - a multimedia group collaboration product commercially
released in May 1996. The Company delivers its products through multiple
distribution channels. The Company currently offers it Internet products via
the Internet, and through original equipment manufacturers ("OEMS"), systems
integrators, and value added resellers ("VARS"). The Company also intends to
make its Internet products available for purchase at traditional software
retailers, and to seek alliances with other computer software companies to
incorporate bundled versions of the Company's Internet products in the
products of such other companies. The Company currently offers its VNS product
via direct marketing.
RESULTS OF OPERATIONS
The Company's revenues increased from $137,739 in the three months ended
March 31, 1995 to $472,134 in the comparable 1996 period. The Company's
revenues for the 1995 period were primarily comprised of licenses revenue and
maintenance and service revenues from the VNS product. During the comparable
period for 1996, the Company's revenues were primarily comprised of license
revenue from its Internet products (WebWacker/TM/ and GrabNet/TM/). The
Company successfully entered into various OEM and other licensing agreements
with several large established industry players. License revenue of $324,930
was recognized in the quarter ended March 31, 1996 from such agreements.
Additionally, $23,070 of revenue related to these agreements has been deferred
in accordance with SOP 91-1 for other insignificant obligations due to the
licensees. This deferred revenue will be recognized over the terms of the
agreements, generally 12-18 months, from the time of execution. Additionally,
$20,000 of revenue has been deferred on certain sales and such revenue will be
recognizable upon completion of certain significant postdelivery obligations.
8
<PAGE>
The Company's research and development expenses increased by 53% from
$221,516 in the three months ended March 31, 1995 to $339,200 in the
comparable 1996 period. The increase is primarily due to additional research
and development on the Company's new Internet line of products. The Company
expects its research and development expense to continue to increase during
1996, reflecting anticipated increased expenses related to increased product
development.
Selling and marketing costs increased by 198% from $122,858 in the three
months ended March 31, 1995 to $366,173 in the comparable 1996 period. The
increase is primarily due to increased sales personnel, sales commission, and
the continual establishment and expansion of various distribution channels.
The Company expects to increase its sales and marketing staff in accordance
with the targeted revenue goals and expectations of management.
General and administrative costs increased by 199% from $68,818 in the
three months ended March 31, 1995 to $205,445 in the comparable 1996 period.
The increase is due to increased personnel and recruiting costs, as well as
higher administrative costs as a result of becoming a public company.
During March 1996, the Company acquired the assets of Blue Squirrel, a
Utah based company. The Company recorded the fair market value of net assets
acquired, which included software costs of $71,110, and recorded a one-time
$439,881 charge for acquired research and development costs. Computer
equipment and furniture acquired was recorded at its estimated fair market
value of $15,465. Any future charges for acquired research and development
costs are subject to transactions the Company may consider from time to time.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 the Company had cash and cash equivalents of
$4,047,993, securities held to maturity of $7,998,417, and working capital of
$11,753,910. The Company has financed approximately $2.8 million of cash used
in operating activities from 1992 through 1995, primarily through the issuance
of approximately $957,000 of preferred stock in 1992, $1.6 million of common
stock in 1993 and $1.6 million of preferred stock and notes payable converted
into preferred stock and $11,855,000 of common stock in 1995.
The Company believes that the net proceeds from the initial public
offering in December 1995, together with available funds and revenues will be
sufficient to meet its anticipated cash needs for operations, working capital
and capital expenditures through 1997. Thereafter, if cash generated by
operations is insufficient to satisfy the Company's liquidity requirements,
the Company may seek to sell additional equity or debt securities or obtain
credit facilities. The sale of additional equity or convertible debt
securities will result in additional dilution to the Company's stockholders.
There can be no assurance that the Company will be able to raise such capital
when needed or on terms favorable to the Company.
The Company's liquidity will be reduced as amounts are expended for
continuing research and development, expansion of sales and marketing
activities and development of its administrative function. While not currently
anticipated, the Company's liquidity could also be reduced if significant
amounts were expended for equipment or to license or acquire proprietary
technology owned by others or to legally defend its proprietary technology.
Additionally, depending upon market conditions or future business
opportunities, the Company may decide to issue additional equity or debt
securities for cash or to acquire assets or technology of others. The working
capital of the Company may also be used to acquire such assets or technology,
reducing the funds available for alternative use.
As a result of the Company's limited operating history, the Company does
not have historical financial data for a significant number of periods on
which to base planned operating expenses. Accordingly,
9
<PAGE>
the Company's expense levels are based in part on its expectations as to
future revenues. However, the Company typically operates with no backlog. As
a result, quarterly sales and operating results generally depend on the volume
and timing of and ability to fulfill orders received within the quarter, which
are difficult to forecast. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenues shortfall.
Accordingly, any significant shortfall of demand for the Company's products
and services in relation to the Company's expectations would have an immediate
adverse impact on the Company's business, operating results and financial
condition. In addition, the Company plans to increase its operating expenses
to fund greater levels of research and development, increase its sales and
marketing operations, develop new distribution channels and broaden its
customer support capabilities. To the extent that such expenses precede or
are not subsequently followed by increased revenues, the Company's business,
operating results and financial condition will be materially adversely
affected.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including
demand for the Company's products, introduction or enhancement of products by
the Company and its competitors, market acceptance of new products, mix of
distribution channels through which products are sold, mix of products and
services sold, and general economic conditions. As a result, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as any indication of
future performance. Due to all of the foregoing factors, it is likely that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock would likely be materially adversely
affected.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been threatened with legal proceedings by Tripos Inc.
seeking to obtain a refund of the $100,000 upfront payment made by Tripos to
the Company in January 1995 in connection with the inception of an exclusive
distribution agreement relating to its VNS product. Tripos alleges that the
Company abandoned the VNS product in 1995 to pursue the Internet market and
that the Company failed to further develop the VNS and support Tripos' efforts
to market. The Company denies the allegations that it has abandoned the VNS
product and that the payment is refundable, and intends to vigorously defend
such claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Number Exhibit
------ -------
11.1 Statement of computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
On March 19, 1996, the Company filed a report on Form 8-K relating to its
acquisition of the assets of Blue Squirrel, Inc.
11
<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, thereunto duly authorized.
The ForeFront Group, Inc.
By: /s/ David Sikora
Date: May 13, 1996 __________________________________
David Sikora
President and Chief Executive Officer
By: /s/ Ernest D. Rapp
Date: May 13, 1996 __________________________________
Ernest D. Rapp
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
EXHIBIT 11.1
THE FOREFRONT GROUP, INC.
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
--------------------------------------
1995 1996
---- ----
<S> <C> <C>
Weighted average shares outstanding 2,417,502 4,731,543
Effect of preferred stock, common stock, options and
warrants issued in twelve months preceding the
Company's initial public offering..................... 841,421 --
---------- ----------
Shares used in computing net loss per share............ 3,258,923 4,731,543
========== ==========
Net loss............................................... $ (332,119) $ (812,664)
========== ==========
Net loss per share..................................... $ (.10) $ (.17)
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,047,993
<SECURITIES> 7,998,417
<RECEIVABLES> 286,530
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,345,596
<PP&E> 435,335
<DEPRECIATION> 145,072
<TOTAL-ASSETS> 12,708,743
<CURRENT-LIABILITIES> 591,686
<BONDS> 0
0
0
<COMMON> 49,071
<OTHER-SE> 12,061,296
<TOTAL-LIABILITY-AND-EQUITY> 12,708,743
<SALES> 472,134
<TOTAL-REVENUES> 472,134
<CGS> 91,246
<TOTAL-COSTS> 1,350,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (812,664)
<INCOME-TAX> 0
<INCOME-CONTINUING> (812,664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812,664)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
