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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 30, 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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1360 POST OAK BLVD., SUITE 2050
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER: (713) 961-1101
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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
--- ---
The number of shares of the issuer's Common Stock, par value $.01 per
share, outstanding as of November 12, 1997: 6,629,926
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THE FOREFRONT GROUP, INC.
FORM 10-QSB
SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations. . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
i
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 6,204,213 $ 4,934,480
Accounts receivable, net of allowance of
$138,600 and $313,890 1,450,241 1,124,613
Inventory, net 340,163 170,821
Prepaid expenses and other 429,957 394,240
------------ ------------
Total current assets 8,424,574 6,624,154
FURNITURE AND EQUIPMENT, net of accumulated
depreciation of $346,726 and $579,392 1,063,976 1,142,252
PURCHASED SOFTWARE, net of accumulated
amortization of $53,490 and $ -- 84,520 330,000
OTHER ASSETS, net 60,864 443,238
------------ ------------
Total assets $ 9,633,934 $ 8,539,644
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 857,780 $ 502,263
Accrued liabilities 1,393,519 2,194,085
Current portion of deferred revenue 349,391 686,089
------------ ------------
Total current liabilities 2,600,690 3,382,437
DEFERRED REVENUE, NET OF CURRENT PORTION 16,660 5,783
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 6,587,999
shares issued; 6,182,031 and 6,405,726 shares
outstanding 62,641 64,877
Additional paid-in capital 19,594,230 22,436,897
Deferred compensation (369,336) (127,181)
Cumulative translation adjustment -- 13,575
Accumulated deficit (12,269,101) (17,234,894)
Treasury stock, 82,145 shares at cost (1,850) (1,850)
------------ ------------
Total stockholders' equity 7,016,584 5,151,424
------------ ------------
Total liabilities and stockholders' equity $ 9,633,934 $ 8,539,644
------------ ------------
------------ ------------
The accompanying notes are an integral part of
these consolidated financial statements.
3
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
---- ---- ---- ----
NET REVENUES:
Licenses $ 3,578,786 $ 4,715,218 $ 9,386,290 $12,998,533
Maintenance and services 14,964 8,193 71,244 43,532
----------- ----------- ----------- -----------
Total revenues 3,593,750 4,723,411 9,457,534 13,042,065
COST OF PRODUCT LICENSES 707,275 795,607 1,778,603 2,502,318
----------- ----------- ----------- -----------
Gross profit 2,886,475 3,927,804 7,678,931 10,539,747
OPERATING EXPENSES:
Research and development 1,215,853 164,399 2,202,013 1,355,977
Selling and marketing 2,013,049 2,586,069 5,331,499 9,057,841
General and administrative 2,455,167 618,896 3,417,293 3,039,098
Acquired research and
development costs -- 3,650,000 2,798,604 4,097,251
----------- ----------- ----------- -----------
Operating loss (2,797,594) (3,091,560) (6,070,478) (7,010,420)
OTHER INCOME:
Interest income 111,790 49,670 432,422 176,127
Gain on sale of assets -- 1,868,500 -- 1,868,500
----------- ----------- ----------- -----------
Net loss $(2,685,804) $(1,173,390) $(5,638,056) $(4,965,793)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE $ (.44) $ (.18) $ (.95) $ (.78)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SHARES USED IN COMPUTING
NET LOSS PER SHARE 6,119,516 6,491,014 5,949,484 6,337,113
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
4
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,638,056) $(4,965,793)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 196,120 392,489
Non-cash acquired research and development costs 2,798,604 4,097,251
Compensation expense and amortization of deferred
compensation related to certain stock options 167,276 66,100
Gain on sale of assets -- (1,868,500)
Changes in operating assets and liabilities
(Net of asset acquisitions):
(Increase) decrease in receivables (1,025,181) 367,247
(Increase) decrease in inventory (164,521) 169,342
Increase in prepaid expenses (126,955) (49,981)
Increase in other assets (322,048) (104,068)
Increase in accounts payable and accrued
liabilities 1,250,418 76,312
Increase in deferred revenue 232,492 325,821
----------- -----------
Net cash used by operating activities (2,631,851) (1,493,780)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for Blue Squirrel asset acquisition (128,018) --
Net cash received from BookMaker asset acquisition 77,234 --
Proceeds from sale of held to maturity securities 7,998,417 --
Net cash paid for LanTec acquisition -- (1,803,228)
Purchase of furniture and equipment (746,669) (107,740)
Net proceeds from sale of assets -- 1,868,500
----------- -----------
Net cash provided (used) by investing activities 7,200,964 (42,468)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 34,617 252,940
Distributions to stockholders (1,504,962) --
----------- -----------
Net cash provided (used) by financing activities (1,470,345) 252,940
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 13,575
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,098,768 (1,269,733)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,502,223 6,204,213
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,600,991 $ 4,934,480
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
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THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 note
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 Annual Report on Form 10-KSB. All intercompany accounts and transactions
have been eliminated in consolidation. 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.
NOTE 2. COMPUTATION OF NET LOSS PER SHARE AND COMMON EQUIVALENT SHARES
The Company's net loss per share is based on the weighted average
number of common shares outstanding. Common equivalent shares are excluded
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".
For periods ending after December 15, 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.
NOTE 3. ACQUIRED RESEARCH AND DEVELOPMENT
BOOKMAKER CORPORATION
In May 1997, the Company entered into Amendment No. 1 to the Asset
Purchase Agreement and Escrow Agreement ("Purchase and Escrow Agreement")
with the principals of and successors to BookMaker Corporation ("BookMaker"),
6
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
terminating the remaining earnout provisions of the Asset Purchase Agreement
relating to the acquisition 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 were returned to the Company for
cancellation and the remaining earnout shares (100,128) will continue to be
held in escrow until April 1998, at which time they will be delivered to
BookMaker's assigns. In connection with this Amendment, the Company recorded
a non-cash charge of $447,251 for acquired research and development costs
primarily related to the 100,128 shares that will be released in April 1998.
LAN PROFESSIONAL INC.
On September 29, 1997, the Company acquired Lan Professional Inc., an
Ottawa, Canada based Company (LanTec, now Fore Front Canada) in exchange for
$1.8 million in cash and 557,413 shares of the Company's Common Stock which
are issuable upon exchange of an equivalent number of Exchangeable Shares of
LanTec retained by the LanTec shareholders at closing. The holders of the
Exchangeable Shares of LanTec signed a lockup agreement with respect to the
Exchangeable Shares held by them and the 557,413 shares of ForeFront Common
Stock which may be acquired by them upon exchange of the Exchangeable Shares,
prohibiting their sale or transfer of the Exchangeable Shares of LanTec and
the shares of ForeFront Common Stock which may be acquired upon exchange
thereof for a one year period following the acquisition. A total of 81,687
Exchangeable Shares and $50,000 of the purchase price was deposited and is
held in escrow for one year from the closing date to cover losses due to
breach of representations and warranties.
The shares of the Company's Common Stock issuable upon exchange of the
Exchangeable Shares are reserved for issuance by ForeFront and its transfer
agent. Holders of the Exchangeable Shares are also entitled to dividend
rights on the same basis as holders of the Company's Common Stock. The
Company agreed to register the shares of ForeFront Common Stock issuable upon
the exchange of the Exchangeable Shares prior to the expiration of the one
year lockup agreement, unless an exemption from registration is available at
such time.
The acquisition has been accounted for under the purchase method and,
accordingly, the operating results of LanTec have been included in the
operating results since the date of acquisition. The purchase price has been
allocated to the assets purchased and liabilities assumed based upon fair
values at the date of acquisition. The value of the shares issued in
conjunction with the acquisition was determined by independent appraisal
resulting in a total purchase price of $4,521,040. The purchase price was
allocated as follows:
Working capital --
Furniture and Equipment $ 208,647
Purchased software $ 330,000
Goodwill and other intangibles $ 332,393
Acquired research and development $3,650,000
----------
Purchase price, net of cash received $4,521,040
7
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THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Additionally, the Company entered into employment and non-competition
agreements with the two employee shareholders of LanTec and each received an
option to purchase shares of the Company's Common Stock at fair market value
on the date of acquisition.
The following pro forma information has been prepared assuming that this
acquisition had taken place at the beginning of the period.
Nine Months Ended
September 30
------------
(unaudited)
1996 1997
---- ----
Net Revenues $ 9,757,535 $13,394,276
Operating Loss (6,024,258) (6,806,464)
Net Loss (5,591,836) (4,761,837)
Net Loss Per Share (0.94) (0.75)
Net Income (Loss) (824,460) (1,389,226)
(excluding one time charges)
Net Income (Loss) Per Share (0.14) (0.22)
(excluding one time charges)
The pro forma financial information is not necessarily indicative of the
results of operations if the Company and LanTec had been a single entity for
the entire period.
NOTE 4. RESTRUCTURING
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 recorded a one-time restructuring charge of
approximately $1,144,000 in the second quarter of 1997 that primarily relates
to lease terminations, relocation costs and severance and termination costs.
8
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NOTE 5. COMMITMENTS AND CONTINGENCIES
In connection with the Company's acquisition of ForeFront Canada,
the Company assumed an operating lease for its Ottawa, Canada location for
approximately 6,000 square feet of office space beginning September 1997 and
expiring May 2002, with an option to terminate in May 2000. The minimum
commitment for this office space is approximately $65,000 annually. The
lessor of the office space is a corporation owned by the former shareholders
of LanTec.
NOTE 6. GAIN ON SALE OF ASSETS
In September 1997, the Company sold certain of its Internet printing
technologies under development to Hewlett-Packard Company and licensed
additional technologies to be used in connection with ongoing development
efforts of Hewlett-Packard, and recorded a one-time gain of $1.89 million
(net of closing costs). The sale proceeds consisted entirely of cash which
was received by the Company in September 1997.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933,
AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. PREDICTION OF FUTURE RESULTS ARE INHERENTLY UNCERTAIN. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
CONDITIONS IN THE GENERAL ECONOMY OR THE SOFTWARE INDUSTRY; CONTINUED DEMAND
FOR THE COMPANY'S CBT AND UTILITY PRODUCTS; THE CONTINUED RAPID GROWTH OF THE
CBT MARKET; THE TIMELY DEVELOPMENT, LICENSING, ACQUISITION, RELEASE AND
MARKET ACCEPTANCE OF NEW PRODUCTS; THE MANAGEMENT OF GROWTH AND INTEGRATION
OF ACQUISITIONS; THE ABILITY TO ADJUST SPENDING IN A TIMELY MANNER IN THE
EVENT OF ANY UNEXPECTED SHORTFALL IN REVENUE; AND OTHER RISKS DESCRIBED FROM
TIME TO TIME IN FOREFRONT'S SEC REPORTS AND FILINGS. READERS ARE ALSO
ENCOURAGED TO REFER TO THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-KSB AND
QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDING JUNE 30, 1997 FOR
FURTHER DISCUSSION OF THE COMPANY'S BUSINESS AND THE RISKS AND OPPORTUNITIES
ATTENDANT THERETO.
OVERVIEW
The ForeFront Group, Inc. ("ForeFront" or the "Company") is a
leading provider of educational products for the information technology
("IT") industry. The IT market is comprised of network and personal computer
engineers, IT managers, network administrators, and software developers.
ForeFront's principal educational products consist of high-quality,
cost effective Computer Based Training ("CBT") products, and give technical
professionals a high-retention, comprehensive and convenient method of
preparing for technical certification exams. These certifications enable
technical professionals to advance in their careers and support overall
quality assurance within corporate IT departments. ForeFront's current CBT
titles include the MCSE SELF-STUDY COURSE and CNE SELF-STUDY
9
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COURSE, programs which provide training for certification to manage Microsoft
Windows NT and Novell NetWare, today's dominant operating systems; and the A+
CERTIFICATION SELF-STUDY COURSE, which provides training for the
most-recognized certification for PC technicians.
In addition to the CBT titles, ForeFront publishes and markets a
line of PC/Network utilities which enable technical professionals to diagnose
problems, manage systems, and enhance the performance of networks and
personal computers quickly and easily. This line of more than a dozen
products includes THE TROUBLESHOOTER, a comprehensive diagnostic tool for
PC's and file servers, and RESCUE PROFESSIONAL, a popular data recovery
solution.
ForeFront also develops and markets a number of innovative Content
Management Products which enable users to be more productive on the Internet.
This product line includes CLICKBOOK and WEBPRINTER, two unique printing
technologies; WEBWHACKER, the original off-line browsing utility; WEBSEEKER,
a meta searching utility; and ROUNDTABLE, a real-time multimedia conferencing
application.
During the third quarter of 1997, the Company's CBT products
accounted for 70% of the Company's total revenues with PC/Network utilities
representing 21% of total revenues. Content Management Products accounted
for the remaining 9% of total Company revenues. The Company derives the
majority of its revenue from its telemarketing operation in Clearwater
Florida, which currently employs over 120 commission-only sales
representatives. In addition, ForeFront also distributes its products
through its proprietary electronic storefront system, internally referred to
as INSTANTX, and other online resellers over the Internet, international
resellers and distributors and original equipment manufacturers ("OEMs").
The Company also markets certain of its products through alliances with other
computer software companies and publishers that incorporate bundled versions
of the Company's products with the products of such other companies.
The Company's product strategy going forward will be largely focused
on developing and delivering educational products for the IT industry.
Following the acquisition of LanTec, the Company's primary supplier of CBT
titles, in September 1997, product direction and development will be centered
out of LanTec's (now ForeFront Canada's) Ottawa, Canada office. Approximately
25 developers are currently employed at this facility, and the Company
anticipates increasing this number significantly in the future. Recognizing
the increasing contribution of the CBT products to the Company's total
revenues and the rapid adoption of CBT as the training method of choice
for technical professionals and corporate IT departments, the Company is
targeting opportunities in the CBT field and plans to expand its CBT product
offering. In addition, the Company is aggressively pursuing obtaining
additional educational titles through exclusive and non-exclusive licensing
arrangements as well as complementary businesses and technologies.
10
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NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
RESULTS OF OPERATIONS
The Company's revenues increased $3,584,531 or 38% from $9,457,534
in the nine months ended September 30, 1996 to $13,042,065 in the comparable
1997 period. For the nine months ended September 30, 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 $4,164,000 or 58%, while revenues from the remaining channels
decreased approximately $580,000 or 26%, primarily reflecting the Company's
increased focus on the Technical Professional Products which are primarily
sold through the direct telesales channel and overall lower sales of the
Content Management Products which were traditionally sold through the retail,
OEM and electronic storefront channels.
The Company's research and development expenses decreased $846,036
or 38% from $2,202,013 in the nine months ended September 30, 1996 to
$1,355,977 in the comparable 1997 period. Compared to the same quarter in
the prior year, expenses increased $325,646 in the first three months of
1997 due to continued research and development in the Content Management
Products Division but declined $120,229 during the quarter ended June 30,
1997 and declined an additional $1,051,453 during the quarter ended September
30, 1997. The decline in 1997 was primarily due to the Company's
reorganization in April 1997, which included a reduction in personnel and
related expenses for the Company's Content Management Products Division as
opposed to the increase in personnel the Company experienced during the same
period in 1996 when the Company was making significant investments in
research and development efforts of the Content Management Products Division.
In addition, 1996 expenses include a one-time charge of approximately
$410,000 due to the purchase of several software licenses intended for future
development. The Company expects to decrease its future research and
development expenses in the Content Management Products Division, but will
incur additional research and development expenses in the Technical
Professional Products Division as a result of the Company's acquisition of
LanTec, which will serve as the hub of the Company's research and development
operations to develop new products, primarily computer based training
software applications.
Selling and marketing costs increased $3,726,342 or 70% from
$5,331,499 in the nine months ended September 30, 1996 to $9,057,841 in the
comparable 1997 period. The increase was primarily due to increased sales
personnel, sales commissions, and advertising within the Technical
Professional Products Division as well as pre-committed advertising contracts
within the Content Management Products Division that were entered into prior
to the Company's reorganization in April 1997. Future selling and marketing
costs within the Content Management Products Division will be reduced as a
result of the Company's reorganization; however, the Company expects to
increase its sales and marketing staff and related expenses in the Technical
Professional Products Division in accordance with the targeted revenue goals
and expectations of management. This increase will include expenses for
ForeFront Europe Limited, the Company's Dublin, Ireland based business unit
that initiated sales, marketing and technical support operations in October
1997.
11
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General and administrative costs decreased $378,195 or 11% from
$3,417,293 in the nine months ended September 30, 1996 to $3,039,098 in the
comparable 1997 period. Excluding the one-time charge of $1,558,772 for
transaction costs associated with the merger with AllMicro, Inc. (now
ForeFront Direct, Inc.) in July 1996 and the one time restructuring charge of
$1,143,860 incurred in connection with the Company's reorganization in April
1997, general and administrative expenses increased $36,717 or 2% from
$1,858,521 in the nine months ended September 30, 1996 to $1,895,238 in the
comparable 1997 period. The increase was primarily due to increased
personnel costs resulting from expanded operations in the Technical
Professional Products Division.
In May 1997, the Company executed the Amendment No. 1 to the Asset
Purchase Agreement and Escrow Agreement with BookMaker and agreed to release
100,128 shares of the Company's Common Stock in April 1998. As a result, the
Company recorded additional acquired research and development costs of $447,251
during the second quarter of 1997.
During September 1997, the Company acquired LanTec in exchange for
$1.8 million in cash and 557,413 shares of the Company's Common Stock. The
Company recorded the fair market value of net assets acquired, which resulted
in a one-time charge of $3,650,000 for acquired research and development
costs.
During September 1997, the Company also sold certain of its
Internet-printing technology to Hewlett-Packard and recorded a one-time gain
of $1.89 million (net of closing costs).
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
RESULTS OF OPERATIONS
The Company's revenues increased $1,129,661 or 31% from $3,593,750
in the three months ended September 30, 1996 to $4,723,411 in the comparable
1997 period. For the three months ended September 30, 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 and to a lesser degree through
the Company's electronic storefront. Revenues from the direct telesales
channel increased approximately $1,877,000 or 73%, while revenues from the
remaining channels decreased approximately $747,000 or 73% reflecting the
Company's increased focus on the Technical Professional Products which are
primarily sold through the direct telesales channel and overall lower sales
of the Content Management Products which were traditionally sold through the
retail, OEM and electronic storefront channels.
The Company's research and development expenses decreased $1,051,454
or 86% from $1,215,853 in the three months ended September 30, 1996 to
$164,399 in the comparable 1997 period. The decrease was primarily due to
the Company's reorganization in April 1997 which included a reduction in
personnel and related expenses for the Company's Content Management Products
Division and a one-time charge incurred in August 1996 of approximately
$410,000 due to the purchase of several software licenses intended for future
product development. The Company expects to decrease its future research and
development expenses in the Content Management Products Division, but will
incur additional research and development expenses in the Technical
Professional Products Division as a result of the Company's acquisition of
LanTec, which will serve as the hub of the Company's research and development
operations to develop new products, primarily computer based training
software applications.
12
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Selling and marketing costs increased $573,020 or 28% from
$2,013,049 in the three months ended September 30, 1996 to $2,586,069 in the
comparable 1997 period. The increase was primarily due to increased sales
personnel, sales commissions, and advertising within the Technical
Professional Products Division. Future selling and marketing costs within
the Content Management Products Division will be reduced as a result of the
Company's reorganization; however, the Company expects to increase its sales
and marketing staff and related expenses in the Technical Professional
Products Division in accordance with the targeted revenue goals and
expectations of management. This increase will include expenses for
ForeFront Europe Limited, the Company's Dublin, Ireland based business unit
that initiated sales, marketing and technical support operations in October
1997.
General and administrative costs decreased $1,836,271 or 75% from
$2,455,167 in the three months ended September 30, 1996 to $618,896 in the
comparable 1997 period. Excluding the one time charge of $1,558,772 incurred
in connection with the Company's merger with AllMicro, Inc. in July 1996,
general and administrative expenses decreased $277,499 or 31% from $896,395
in the three months ended September 30, 1996 to $618,896 in the comparable
1997 period. The decrease is primarily due to the reduction in overhead
within the Content Management Products Division. In addition, the growth
within the Company has been in the sales and marketing functions of the
Technical Professional Products Division while general and administrative
staff have not increased significantly.
During September 1997, the Company acquired LanTec, in exchange for
$1.8 million in cash and 557,413 shares of the Company's common stock. The
Company recorded the fair market value of net assets acquired, which resulted
in a one-time charge of $3,650,000 for acquired research and development
costs.
During September 1997, the Company also sold certain of its
Internet-printing technology to Hewlett-Packard and recorded a one-time gain
of $1.89 million (net of closing costs).
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had cash and cash equivalents of
$4,934,480 and working capital of $3,241,717. The Company has continued to
finance its operating activities during the nine months ended September 30,
1997 with proceeds from its initial public offering of common stock in
December 1995, together with revenues from sales of product licenses. A
total of approximately $1,300,000 of cash was used during the nine months
ended September 30, 1997, net of proceeds from the sale of certain Internet
printing technology to Hewlett-Packard (approximately $1,900,000) and the
cash portion of the purchase price paid to the LanTec shareholders
($1,800,000). Most of this $1,300,000 decrease was attributable to the costs
associated with the reorganization by the Company in the second quarter of
1997. During the quarter ended September 30, 1997, the Company experienced
positive cash flow on an operating basis, excluding the effect of acquired
research and development. As a result, the Company believes that its
available funds will be sufficient to meet its cash requirements for the
foreseeable future. The Company may from time to time consider the
acquisition of complementary businesses, products or technologies, which may
require additional financing.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
NONE.
ITEM 2. CHANGES IN SECURITIES
On September 29, 1997, the Company acquired Lan Professional Inc.
("LanTec") an Ottawa, Canada based CBT development Company, in exchange for
cash and 557,413 shares of the Company's Common Stock issuable upon exchange
of 557,413 shares of Exchangeable Shares of LanTec retained by the
stockholders of LanTec. Reference is made to the Company's Current Report on
Form 8-K filed October 14, 1997, incorporated herein by reference as if set
forth fully herein.
In August 1997, the Company engaged Capital West Securities Inc.
("Capital West") as an advisor in connection with the Hewlett-Packard and
LanTec transactions completed during the quarter, in exchange for a flat fee
of $15,000 and an agreement to reduce the exercise price of outstanding
warrants to purchase an aggregate of 54,673 shares of ForeFront Common Stock
held by certain persons associated with Capital West to $5.00 per share (from
$9.00 per share) and to reduce the exercise period of the warrants by one
year (to December 1999). The Company also issued Capital West an option to
purchase 10,000 shares of ForeFront Common Stock at $5.00 per share as part
of the agreement.
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) Exhibits
Number Exhibit
------ -------
10.1 Asset Purchase Agreement by and between
Hewlett-Packard Company and The ForeFront Group,
Inc., dated September 22, 1997 (incorporated
by reference to the exhibit attached to the
Company's Current Report on Form 8-K as Exhibit
10.1 as filed with the Securities and Exchange
Commission on October 7, 1997).
10.2 Acquisition Agreement between The ForeFront Group,
Inc., LanProfessional, Inc. and Sunil K. Sethi,
Naveen Seth, Sukhdev Walia, Sunita Uppal and
Jang Bhadhur Sethi dated September 29, 1997,
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
Exhibit 10.1 as filed with the Securities and
Exchange Commission on October 17, 1997).
10.3 Escrow Agreement between The ForeFront Group, Inc.,
LanProfessional, Inc. and Sunil K. Sethi, Naveen
Seth, Sukhdev Walia, Sunita Uppal and Jang Bhadhur
Sethi dated September 29, 1997 (incorporated by
reference to the exhibit attached to the Company's
Current Report on Form 8-K as Exhibit 10.2 as filed
with the Securities and Exchange Commission on
October 17, 1997).
10.4 Lockup Agreement between The ForeFront Group, Inc.
and Sunil K. Sethi, Naveen Seth, Sukhdev Walia,
Sunita Uppal and Jang Bhadhur Sethi dated
September 29, 1997 (incorporated by reference to
the exhibit attached to the Company's Current
Report on Form 8-K as Exhibit 10.3 as filed with
the Securities and Exchange Commission on
October 17, 1997).
10.5 Support Agreement between The ForeFront Group, Inc.
and LanProfessional, Inc. dated September 29, 1997
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
Exhibit 10.4 as filed with the Securities and
Exchange Commission on October 17, 1997).
10.6 Exchange Rights Agreement between The ForeFront
Group, Inc., LanProfessional, Inc. and Sunil K.
Sethi, Naveen Seth, Sukhdev Walia, Sunita Uppal
and Jang Bhadhur Sethi dated September 29, 1997
(incorporated by reference to the exhibit
attached to the Company's Current Report on
Form 8-K as Exhibit 10.5 as filed with
the Securities and Exchange Commission on
October 17, 1997).
10.7 Employment Agreement between LanProfessional,
Inc. and Sunil K. Sethi dated September 29, 1997
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
Exhibit 10.6 as filed with the Securities and
Exchange Commission on October 17, 1997).
10.8 Additional Escrow Agreement between The ForeFront
Group, Inc., McCarthy Tetrault, Sunil K. Sethi,
Naveen Seth, Sukhdev Walia, Sunita Uppal and
Jang Bhadhur Sethi dated September 29, 1997
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
Exhibit 10.7 as filed with the Securities and
Exchange Commission on October 17, 1997).
10.9 Registration Rights Agreement between The ForeFront
Group, Inc., and Sunil K. Sethi, Naveen Seth,
Sukhdev Walia, Sunita Uppal and Jang Bhadhur Sethi
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
Exhibit 10.8 as filed with the Securities and
Exchange Commission on October 17, 1997).
27 Financial Data Schedule
(b) Reports on Form 8-K
14
<PAGE>
A report was filed on October 7, 1997 in connection with the
Company's sale of certain intellectual property to Hewlett-Packard Company on
September 22, 1997.
A report was filed on October 14, 1997 in connection with the
Company's acquisition of LanProfessional Inc. on September 29, 1997.
15
<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: November 14, 1997 By: /s/ David Sikora
--------------------------------
David Sikora
President and Chief Executive
Officer
Date: November 14, 1997 By: /s/ Ernest D. Rapp
--------------------------------
Ernest D. Rapp
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,934,480
<SECURITIES> 0
<RECEIVABLES> 1,438,503
<ALLOWANCES> 313,890
<INVENTORY> 170,821
<CURRENT-ASSETS> 6,624,154
<PP&E> 1,721,644
<DEPRECIATION> 579,392
<TOTAL-ASSETS> 8,539,644
<CURRENT-LIABILITIES> 3,382,437
<BONDS> 0
0
0
<COMMON> 64,877
<OTHER-SE> 5,086,547
<TOTAL-LIABILITY-AND-EQUITY> 8,539,644
<SALES> 13,042,065
<TOTAL-REVENUES> 13,042,065
<CGS> 2,502,318
<TOTAL-COSTS> 2,502,318
<OTHER-EXPENSES> 17,550,167
<LOSS-PROVISION> 35,040
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,965,793)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,965,793)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (4,965,793)
<EPS-PRIMARY> (.78)
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