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, 1997
|_| 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
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THE FOREFRONT GROUP, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0365256
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1330 POST OAK BLVD., SUITE 1300
HOUSTON, TEXAS 77056
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(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 April 30, 1997:
6,201,498
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated 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 consolidated 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 consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 1996 included in the Company's 1996 Form 10-KSB filed pursuant to
Section 15(d) of the Securities Exchange Act of 1934.
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<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
ASSETS (unaudited)
------------------ -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 6,204,213 $ 4,756,727
Accounts receivable, net of allowance of $138,600 and
$105,600................................................ 1,450,241 1,568,656
Inventory, net............................................... 340,163 277,593
Prepaid expenses and other .................................. 429,957 417,340
------------------ -------------------
Total current assets 8,424,574 7,020,316
FURNITURE AND EQUIPMENT, net of
accumulated depreciation of $346,726, and $421,467 1,063,976 1,143,839
OTHER ASSETS, net 145,384 138,347
------------------ -------------------
Total assets $ 9,633,934 $ 8,302,502
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $ 857,780 $ 867,437
Accrued liabilities.......................................... 1,393,519 1,136,896
Current portion of deferred revenue ......................... 349,391 471,424
------------------ -------------------
Total current liabilities 2,600,690 2,475,757
Deferred revenue, net of current portion........................ 16,660 11,783
------------------ -------------------
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
shares authorized, 6,488,275 and 6,507,742 shares
issued; 6,182,031 and 6,201,498 shares outstanding...... 62,641 62,835
Additional paid-in capital................................... 19,594,230 19,694,191
Deferred compensation........................................ (369,336) (291,486)
Cumulative translation adjustment............................ -- 4,995
Accumulated deficit.......................................... (12,269,101) (13,653,723)
Treasury stock, 82,145 shares at cost........................ (1,850) (1,850)
------------------ --------------------
Total stockholders' equity 7,016,584 5,814,962
------------------ -------------------
Total liabilities and stockholders' equity $ 9,633,934 $ 8,302,502
================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1996 1997
--------------- ---------------
<S> <C> <C>
NET REVENUES:
Licenses............................................................ $ 2,735,875 $ 4,133,847
Maintenance and services............................................ 17,288 18,060
--------------- ---------------
Total revenues 2,753,163 4,151,907
COST OF PRODUCT LICENSES 506,087 883,284
--------------- ---------------
Gross profit 2,247,076 3,268,623
OPERATING EXPENSES:
Research and development............................................ 361,976 687,622
Selling and marketing............................................... 1,435,370 3,392,405
General and administrative.......................................... 436,967 641,429
Acquired research and development costs............................. 439,881 --
--------------- --------------
Operating loss (427,118) (1,452,833)
INTEREST INCOME........................................................ 164,717 68,211
--------------- ---------------
Net loss $ (262,401) $ (1,384,622)
=============== ===============
NET LOSS PER SHARE $ (.05) $ (.22)
=============== ===============
SHARES USED IN COMPUTING NET LOSS PER SHARE 5,787,695 6,199,504
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1996 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................. $ (262,401) $ (1,384,622)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization..................................... 24,134 157,278
Non-cash acquired research and development costs.................. 439,881 --
Compensation expense and amortization of deferred
compensation related to certain stock options................... 71,605 31,100
Changes in operating assets and liabilities
(Net of asset acquisition in 1996):
Increase in receivables......................................... (249,330) (118,415)
(Increase) decrease in inventory................................ (19,243) 62,570
Increase in prepaid expenses.................................... (98,393) (49,883)
Increase in other assets........................................ -- (13,000)
Decrease in accounts payable and accrued
liabilities................................................... (18,440) (107,464)
Increase in deferred revenue.................................... 9,768 117,156
-------------- --------------
Net cash used by operating activities.................................. (102,419) (1,305,280)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for asset acquisition........................................ (100,000) --
Purchase of furniture and equipment.................................... (173,663) (154,604)
--------------- ---------------
Net cash used by investing activities.................................. (273,663) (154,604)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ............................... -- 7,403
Distributions to stockholders.......................................... (373,110) --
--------------- --------------
Net cash provided (used) by financing activities....................... (373,110) 7,403
--------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 4,995
NET DECREASE IN CASH AND CASH EQUIVALENTS (749,192) (1,447,486)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,502,223 6,204,213
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,753,031 $ 4,756,727
============== =-------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The consolidated balance sheet at March 31, 1997 and the related
consolidated statements of operations and cash flows for the three month periods
ended March 31, 1997 and 1996 are unaudited. All intercompany accounts and
transactions have been eliminated in consolidation.
These unaudited interim consolidated financial statements should be
read in conjunction with the December 31, 1996 consolidated financial statements
and related notes. The unaudited interim consolidated 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.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of 3
months or less when purchased to be cash equivalents. At March 31, 1997, the
Company's entire investment portfolio consisted of U.S. government debt
securities which mature from April 3, 1997 to May 29, 1997 and are classified as
cash and cash equivalents.
PURCHASED SOFTWARE
Purchased software results from the acquisition of the assets of Blue
Squirrel, Inc. in March 1996 and BookMaker Corporation in June 1996 and is
recorded at cost. Amortization is calculated on the straight-line method over
the estimated lives of the products, which in these instances are 18-24 months.
REVENUES
Revenue from the sale of software products is recognized upon shipment,
net of allowances for estimated future returns and for excess quantities in
distribution channels, provided that no significant vendor obligations exist and
collections of accounts receivable are probable. Estimates of returns and
exchanges may change in the future based upon future facts and circumstances.
For sales which provide for upgrades, the portion of the sale associated with
the upgrade is unbundled 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.
COST OF PRODUCT LICENSES
The cost of product licenses primarily includes costs associated with
product packaging, documentation, software duplication and shipping as well as
royalties paid to third parties. Commissions on product sales are included in
selling and marketing expenses. At the initial license date, the Company
recognizes the liability for the estimated cost of warranties and insignificant
postdelivery obligations.
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<PAGE>
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.
NET LOSS PER SHARE
The Company's net loss per share is based on the weighted average
number of common shares outstanding, and excludes common equivalent shares from
the per share calculations, as the effect of their inclusion is antidilutive.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
Effective October 1, 1997, the Company will adopt the provisions of the new
statement, changing from its current method of accounting for net loss per share
as set forth in APB Opinion No. 15. Adoption of Statement No. 128 will require
retroactive presentation of net loss per share in historical consolidated
financial statements. The Company's net loss per share presented in the
accompanying consolidated financial statements as calculated under the
provisions of APB Opinion No. 15 is the same as if the basic net loss per share
under Statement No. 128 had been presented. Additionally, net loss per share as
presented herein is also the same as if the diluted net loss per share under the
provisions of Statement No. 128 had been presented, since the Company's
outstanding stock options would not have been included in the calculation
because their effect would have been anti-dilutive.
2. SUBSEQUENT EVENT
In April 1997, the Board of Directors approved management's plan to
reorganize the Company into two divisions: Technical Professional Products and
Content Management Products and to focus more of its resources on its Technical
Professional Products division, as well as its direct sales channels, both
telemarketing and online. In connection with the reorganization, the Company
expects to record a one-time restructuring charge between $700,000 and $900,000
in the second quarter of 1997.
In May 1997, the Company entered into Amendment No. 1 to Asset
Purchase Agreement and Escrow Agreement with the principals of and successors to
BookMaker Corporation (BookMaker), terminating the remaining earnout provisions
of the Asset Purchase Agreement relating to the aquisition of the BookMaker
assets by the Company, and releasing the escrow shares (24,837 shares) to the
successors and assigns of BookMaker. In connection therewith, a total of 99,134
earnout shares deposited in escrow at the closing will be returned to the
Company for cancellation and the remaining earnout shares (100,128) will
continue to be held in escrow until April 15, 1998, at which time they will be
delivered to BookMaker's assigns.
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
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<PAGE>
Company's 1996 Annual Report on Form 10-KSB for further discussion of the
Company's business and the risks and opportunities attendant thereto.
Formed in 1992 and headquartered in Houston, ForeFront (NASDAQ: FFGI)
(http://www.ffg.com) develops and markets Internet, Intranet and PC/Network
software applications for a variety of market segments including PC/Network
professionals, mobile computing, education, telecommunications, groupware and
small office/home office (SOHO). ForeFront's Internet products include
WebWhacker, the first offline browser and recently named by Internet World
magazine as the premium product in its category, and WebPrinter, a leading
product that allows printing of HTML pages in booklet format. The Company's
worldwide customer base includes industry leaders such as Microsoft, Apple,
Mitsubishi, Verity, Brother International and McGraw-Hill CEC, among others. The
Company distributes its software products in over 600 retail stores in the
United States, as well as internationally, in Europe through its sales offices
and in Japan through AISoft, Inc., a wholly owned subsidiary of Seiko-Epson.
ForeFront Direct, the Company's wholly owned direct sales channel based in
Clearwater, Florida also markets the Company's Internet and Intranet software,
and is a leading publisher of PC/Network software.
The Company delivers its products through multiple distribution
channels, including its proprietary electronic storefront and other online
resellers over the Internet, original equipment manufacturers ("OEMs"), system
integrators, value added resellers ("VARs"), catalogs, and direct telemarketing.
The Company introduced its Internet products for purchase from traditional
software retailers in the fourth quarter of 1996. The Company also markets its
Internet products through alliances with other computer software companies that
incorporate bundled versions of the Company's Internet products with the
products of such other companies.
The Company is continuing to develop additional productivity
applications for the Internet, Intranet and PC/Network markets internally, and
will continue to seek to acquire additional technologies from outside the
Company, via licensing or acquisition, to accelerate the market entry of the
Company's products.
REORGANIZATION
In April 1997 the Company announced that it had reorganized its
operations to focus more of its resources on its Technical Professional Products
division, as well as its direct sales channels, both telemarketing and online.
The Company is now organized into two product divisions: Technical Professional
Products and Content Management Products. The Technical Professional Products
division based in Clearwater, Florida, licenses and markets software to Network
Managers, Network Administrators, PC and Network Technicians, WebMasters and
WebManagers. This includes a line of system management and diagnostic software,
as well as a line of technical computer-based training (CBT) software programs.
The Company is also planning to introduce several new products in 1997 which
enable more effective utilization and management of corporate intranets. The
Content Management Products division based in Palo Alto, California, and Salt
Lake City, Utah develops and markets ForeFront's desktop Internet productivity
products, including WebWhacker(TM), WebSeeker(TM), WebPrinter(TM), and
GrabNet(TM) as well as ClickBook(R), ForeFront's proprietary booklet printing
technology. Corporate operations will continue to be managed from ForeFront's
headquarters in Houston, with certain administrative functions being moved to
Clearwater, Florida.
The announcement reflects a strategic decision by ForeFront's board
and executive management team to focus more of its corporate resources toward
expanding its profitable Technical Professional Products division, which
continues to grow at an annual rate exceeding 35%. In connection with the
reorganization, the Company expects to record a one-time restructuring charge
between $700,000 and $900,000 in the second quarter of 1997.
-8-
<PAGE>
RESULTS OF OPERATIONS
The Company's revenues increased 51% from $2,753,163 in the three
months ended March 31, 1996 to $4,151,907 in the comparable 1997 period. For the
three months ended March 31, 1996, the Company's revenues were derived primarily
through its direct telesales channel and through OEM agreements. For the same
period in 1997, revenues were generated primarily from the direct telesales
channel, the Company's electronic storefront, retail channels in the United
States and Europe and through OEM agreements. Revenues from the direct telesales
channel increased approximately $990,000 or 43%, while revenues from the
remaining channels increased approximately $400,000 or 86%.
The Company's research and development expenses increased by 90% from
$361,976 in the three months ended March 31, 1996 to $687,622 in the comparable
1997 period. The increase is primarily due to additional research and
development on the Company's Internet line of products. Future research and
development expenses will be reduced as a result of the Company's reorganization
which includes a reduction in personnel and related expenses for the Company's
Content Management Products Division.
Selling and marketing costs increased by 136% from $1,435,370 in the
three months ended March 31, 1996 to $3,392,405 in the comparable 1997 period.
The increase is primarily due to increased sales personnel, sales commissions,
and the continued establishment and expansion of various distribution channels.
The Company expects to increase its sales and marketing staff in the Technical
Professional Products Division in accordance with the targeted revenue goals and
expectations of management.
General and administrative costs increased by 47% from $436,967 in
the three months ended March 31, 1996 to $641,429 in the comparable 1997 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company had cash and cash equivalents of
$4,756,727 and working capital of $4,544,559. The Company has financed
approximately $6.3 million of cash used in operating activities from 1992
through March 1997, 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 its available funds will be sufficient to
meet its anticipated cash needs for operations, working capital and capital
expenditures through mid 1998. 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
expansion of sales and marketing activities and the implementation of its
reorganization plan. 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,
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<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 related to sales and
marketing efforts in the Technical Professional Products division. 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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number
27 Financial Data Schedule
(b) None.
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<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.
Date: May 15, 1997 By: /s/ David Sikora
--------------------------------
David Sikora
President and Chief Executive Officer
Date: May 15, 1997 By: /s/ Ernest D. Rapp
--------------------------------
Ernest D. Rapp
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002040
<NAME> THE FOREFRONT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,756,727
<SECURITIES> 0
<RECEIVABLES> 1,674,256
<ALLOWANCES> 105,600
<INVENTORY> 277,593
<CURRENT-ASSETS> 417,340
<PP&E> 1,565,306
<DEPRECIATION> 421,467
<TOTAL-ASSETS> 8,302,502
<CURRENT-LIABILITIES> 2,475,757
<BONDS> 0
0
0
<COMMON> 62,835
<OTHER-SE> 5,752,127
<TOTAL-LIABILITY-AND-EQUITY> 8,302,502
<SALES> 4,151,907
<TOTAL-REVENUES> 4,151,907
<CGS> 883,284
<TOTAL-COSTS> 883,284
<OTHER-EXPENSES> 4,721,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,384,622)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,384,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,384,622)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
