SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 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
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THE FOREFRONT GROUP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 76-0365256
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1330 POST OAK BOULEVARD, SUITE 1300
HOUSTON, TEXAS 77056 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (713) 961-1101
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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
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SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF EACH CLASS)
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Check whether the Registrant (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 |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Registrant's revenues for its most recent fiscal year: $13,798,466
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on March 20, 1997 was $16,859,805 based on the closing sales
price of the Registrant's common stock on the Nasdaq National market on such
date of $3.75 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent of the common
stock are assumed to be affiliates.
The number of shares of the Registrant's Common Stock outstanding as
of March 20, 1997: 6,424,597.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive proxy statement to the
Registrant's 1997 annual meeting of stockholders, which proxy statement will be
filed under the Securities Exchange Act of 1934 within 120 days of the end of
the Registrant's fiscal year ended December 31, 1996, are incorporated by
reference into Part III of this Form 10-KSB.
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INTRODUCTORY STATEMENT
REFERENCES MADE IN THIS ANNUAL REPORT ON FORM 10-KSB TO "FOREFRONT,"
THE "COMPANY" OR THE "REGISTRANT" REFER TO THE FOREFRONT GROUP, INC. AND ITS
WHOLLY OWNED SUBSIDIARIES. FOREFRONT, THE FOREFRONT LOGO, WEBWHACKER,
WEBPRINTER, WEBSEEKER, GRABNET, CLICKBOOK INSTANTX, TROUBLESHOOTER, ALLMICRO,
ANTIVIRUS SURVIVAL KIT, DISCOVERY CARD, RESCUE DATA RECOVERY, WINWORKS, CNE SELF
STUDY COURSE, A+ CERTIFICATION COURSE, RAMPLUS, POST PLUS, VIRTUAL NOTEBOOK
SYSTEM AND ROUNDTABLE ARE TRADEMARKS OF THE FOREFRONT GROUP, INC., WHICH MAY BE
REGISTERED IN SOME JURISDICTIONS. ALL OTHER TRADEMARKS ARE OWNED BY THEIR
RESPECTIVE OWNERS. WHEN USED IN THIS REPORT, THE WORDS "PLANS", "BELIEVES" AND
"EXPECTS" AND SIMILAR CONDITIONAL EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. IN ADDITION, THE COMPANY AND ITS REPRESENTATIVES MAY
FROM TIME TO TIME MAKE ADDITIONAL FORWARD-LOOKING STATEMENTS. ALL OF SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED TO, THOSE CONTAINED IN THE
SECTION ENTITLED "RISK FACTORS BEARING ON FUTURE RESULTS."
PART I
ITEM 1. BUSINESS.
OVERVIEW
Formed in 1992 and headquartered in Houston, Texas, 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(TM), the first offline browser and recently named by Internet
World Magazine (April 1997) as the premium product in its category, and
WebPrinter(TM), a leading product that allows printing of HTML pages in booklet
format. The Company's worldwide customer base includes industry leaders such as
Microsoft Corporation ("Microsoft"), Apple Computer, Inc. ("Apple"), Mitsubishi
Chemical America, Inc. ("Mitsubishi"), Verity, Inc. ("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 London-based sales office 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 launched its first two Internet products in 1995:
GrabNet(TM), the first graphical bookmark management tool that enables client
capture and organization of information from the World Wide Web and WebWhacker,
a product that enables the storage of information captured from the Web for
off-line use and distribution. The Company's first Intranet product,
RoundTable(TM), was launched in mid-1996. RoundTable provides realtime,
Web-based multimedia conferencing over standard Internet connections. Through
its acquisition of Blue Squirrel, Inc. ("Blue Squirrel") in March 1996,
ForeFront added WebSeeker(TM), a meta searching program available to Internet
users
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that delivers search reports for over 100 common search engines and the
corresponding Web pages directly to the user's desktop.
The Company's newest Internet product, WebPrinter(TM), is the result
of the acquisition of BookMaker Corporation ("BookMaker") in June 1996.
WebPrinter adds an important dimension to ForeFront's line of content retrieval
and delivery tools, allowing users to print information on the Web in a booklet
format, thereby creating a personalized publication from the Web. The BookMaker
acquisition also added ClickBook(R), a Windows and Macintosh utility program
that turns virtually any laser or inkjet printer into a printing press, enabling
users to transform documents into professional-quality, double-sided booklets.
The merger with AllMicro, Inc. (now ForeFront Direct, Inc.)
established a marketing and distribution channel of over 90 sales professionals
for ForeFront to market its family of Internet and Intranet products to Web
users. ForeFront Direct primarily markets and sells PC/Network software to
computer network administrators and technicians. ForeFront Direct's PC/Network
product line, which includes the ForeFront Anti-Virus(TM), The
Troubleshooter(TM), The Discovery Card(TM), Rescue Data Recovery(R),
RamPlus(TM), PostPlus(TM) and WinWorks(TM), enables computer users And
technicians to troubleshoot, tune and enhance the performance of their networks
and personal computers. Additional products such as the CNE Self-Study
Course(TM) and the A+ Certification Course(TM) provide computer technicians with
training for certification as network administrators.
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"), systems
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 distributes
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's strategy is to leverage its investment in the
distribution infrastructure made in 1996. 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.
INDUSTRY BACKGROUND
THE INTERNET AND WORLD WIDE WEB
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information and conduct business. While the Internet was historically used
by a limited number of academic institutions, defense contractors and government
agencies primarily for remote access to host computers and for sending and
receiving electronic mail, commercial organizations and individuals are
increasingly dominating the use of the Internet. Recent technological advances,
including increases in microprocessor speed and the
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development of easy-to-use graphical user interfaces, combined with cultural and
business changes, have led to the Internet being integrated into the operations
and strategies of commercial organizations and the activities of individuals.
Much of the recent growth in Internet use by businesses and
individuals has been driven by the emergence of a network of servers and
information available on the Internet called the World Wide Web. The Web is a
network medium that is rich in content, activities and format. The Web medium
includes a wide range of content such as magazines, news feeds, radio
broadcasts, and corporate, product, educational, research, and political
information, as well as activities, including customer service, electronic
commerce, reservations, banking, games and discussion groups. International Data
Corporation estimates that by the year 2000, one-third of all businesses and
twenty-five percent (25%) of all households will be on the Internet. The Company
believes that recent trends in the establishment of Internet access services
such as AT&T's WorldNet and America Online ("AOL") will facilitate access to the
Internet and result in a significant increase in the number of users of the
Internet.
The Web can be accessed using software that allows non-technical users
to exploit the capabilities of the Internet easily. Electronic documents or "Web
pages" which may contain textual, audio and video information, are published on
Web sites in a common format. Users can view these Web pages by using widely
available software called "Web browsers" such as the Netscape Navigator or the
Microsoft Internet Explorer. Users specify which electronic documents they wish
to view with their Web browser by entering each document's unique electronic Web
address, or Universal Resource Locator ("URL"). Users can navigate the Web by
making use of the hypertext link capability of Web documents. Hypertext links
are active areas on a Web page which can be located anywhere else on the Web.
This feature enables users to move from one page of content and activity to
another related or "linked" page, without having to know the underlying address
or URL of either document. Further, users can search for URLs through the use of
online search engines, such as Lycos, Inc. ("Lycos") and Yahoo, Inc. ("Yahoo"),
which provide guides to find and access information on the Web.
PRODUCTS
The Company's products consist of client, server and integrated
applications software for use on the Internet, corporate intranets and software
for computer technicians and network administrators. A description of the
Company's products follows.
INTERNET PRODUCTS
To address the need for productivity applications over the Internet,
the Company's family of Internet products includes the following features:
EASE OF USE. The Company builds lightweight, simple tools which can be
used both by novices and experienced on-line users. For example, the Company's
desktop software provides a consistent point and click graphical user interface
that is independent of the server protocol, client operating system or means of
network access.
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MULTI-PLATFORM SUPPORT. The Company's software is designed to operate
on most popular computer platforms including Microsoft Windows 3.1, Windows 95
and Windows NT, and Apple Macintosh operating systems.
STAND-ALONE DESKTOP PRODUCTS. The Company's family of products
consists of desktop products that perform useful functions for Internet users on
a stand-alone basis.
OPEN ARCHITECTURE. The Company's products are compatible with most
applicable industry standards and are built upon an architecture that
facilitates customization and integration with third party applications.
The following is a brief description of the Company's current Internet
desktop products:
Product Version Description
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WebSeeker v3.0 Searches 100 of the most popular search engines at
once. Retrieves and sorts search engine results,
removes duplicates, visits, manipulates, monitors
sites, and more.
WebWhacker v3.0 Downloads single pages, groups of pages, or entire Web
sites. Users can surf from their desktops without an
Internet connection.
WebPrinter v2.0 Dramatically expands the printing capabilities of a
browser by effortlessly turning Web pages into
attractive, paper-saving booklets.
Grabnetv2.0 Helps Internet users visualize URLs. Grabs images and
text from the Web to help users reuse, navigate and
organize bookmarks within a customized collection of
folders.
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The Company's plans for future Internet development currently comprise
the integration of its desktop products for finding, getting and printing
information into a single stand-alone product, targeted for release in mid 1997,
and on additional upgrades to the Company's proprietary printing technology. In
addition, the Company will continue to review complementary new technologies
from outside the Company for licensing or acquisition.
TECHNICIAN /NETWORK ADMINISTRATOR PRODUCTS
In addition to the Internet and Intranet products, ForeFront publishes
and markets 13 software products to computer technicians and network
administrators through its wholly owned subsidiary, ForeFront Direct, Inc.
(formerly AllMicro, Inc.) The merger with AllMicro, Inc. in July 1996 also
established a marketing and distribution channel of over 60 sales professionals
for ForeFront to market its family of Internet and Intranet products to Web
users. In January 1997, ForeFront Direct relocated to larger quarters, with the
result that there are presently over 90 full-time commission-only sales staff,
with room to expand to approximately 150 sales persons.
ForeFront Direct's product line includes an extensive array of
products that enable computer users and technicians to troubleshoot, tune and
enhance the performance of their networks and
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personal computers, including but not limited to the AntiVirus Survival Kit, The
Troubleshooter, the Discovery Card, Rescue Data Recovery, RamPlus, PostPlus and
WinWorks, and products that provide computer technicians with training for
certification as network administrators, such as the CNE Self-Study Course and
the A+ Certification Course. Most of these products have been either licensed to
ForeFront Direct on an exclusive basis or assigned to the Company from third
party developers, in exchange for the payment of royalties.
The PC/Network products sold by ForeFront Direct have historically
grown at a 35% annual rate, and in 1996 accounted for 71% of the Company's total
revenues, or $9.8 million. Due to its historical 20% profit margin on sales,
and its customer base of 45,000 PC technicians and network administrators, the
Company intends to devote additional resources to developing, licensing and/or
acquiring new software products focusing on the technical professional market.
COLLABORATION/INTRANET PRODUCTS
The growth of the Internet has also created market opportunities for
software products enabling workgroup collaboration within and among
organizations over the Internet and private computer networks. The Internet's
e-mail capabilities facilitate the exchange of certain information over the
Internet and Web, and certain Web servers and consumer online services permit
individuals to conduct electronic conversations (or "chat") over the Web or on
the service. Presently available groupware software, such as Lotus Notes, can be
used to facilitate organizational communications and host discussion groups on
private computer networks. In addition, users of Microsoft's NetMeeting can
conduct one-on-one collaborative chat sessions. As individuals and organizations
gain experience with the collaborative capabilities enabled by computer
networks, the Company believes that Internet users will demand software products
with a much greater level of sophistication than those currently available for
the Internet or private computer networks. In particular, the Company believes
that Internet users will demand products that enable "real-time" collaboration
within a multimedia context, capabilities currently incorporated in the
Company's RoundTable(TM) product.
The Company's RoundTable product enables real-time multimedia
collaboration. The basic conferencing function of the product allows a workgroup
to work collectively on one or more canvas pages in real time, such that changes
made to such pages by one workgroup participant are immediately visible to the
other participants. The information that is changed or created during the
conference is retained in object form for later access and retrieval. The tour
function allows an individual to guide other participants through collections of
pages on the Web. The chat function enables private conversations among select
members of the workgroup. RoundTable was derived from the Virtual Notebook
System(TM) ("VNS") technology developed at Baylor College of Medicine and
licensed exclusively to the Company in connection with the formation of the
Company.
The VNS is an integrated applications software system originally based
on an electronic analogy to the laboratory research notebook. The VNS provides
scientific users with a familiar and more versatile metaphor for collecting and
sharing of information than systems based on note, document or file metaphors.
The VNS allows workgroups to create multiple libraries of shared electronic
Virtual Notebooks. Each Virtual Notebook may contain as many pages as the owner
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wishes, with each page containing the user's desired combination of VNS objects,
including text, images, hypertext cross references to other pages, dynamic links
to external programs, and, with appropriate computer hardware, audio and video.
Although it retains the central notebook metaphor, a Virtual Notebook is unlike
an ordinary notebook. It is a distributed multimedia hypertext information
system that, in essence, replicates the World Wide Web on a smaller scale.
The original purpose of the VNS project at Baylor College of Medicine
was to develop a system that would provide researchers at academic institutions
with an electronic version of their paper notebooks, but also provide them new
functionality for accessing and sharing multimedia information with their
colleagues across networks. Company-funded development for commercial users
enhanced the VNS to become a general purpose information management tool that is
presently being used by a variety of industrial and academic groups across
multiple disciplines. Due to the rapid growth of the Internet and the World Wide
Web, the Company has focused its efforts on developing and marketing products
which allow users to be more productive with information from the Web. However,
a number of companies and research centers still use the VNS, and in 1996 the
Company licensed the VNS for redistribution in Europe.
MARKETING AND DISTRIBUTION
TARGET MARKETS
The Company's internet products are targeted to general users of the
World Wide Web and corporate intranets. The PC/Network products are targeted to
the technical professional marketplace which includes PC technicians, network
engineers, network administrators and webmasters.
The Company sells its products through multiple distribution channels
worldwide.
INTERNET DISTRIBUTION. Organizations and individuals have the option
to evaluate and purchase ForeFront software directly from the ForeFront
StoreFront located on the Company's Web site. The Company utilizes its
proprietary InstantX(TM) technology to securely process payment transactions,
and also sells its products through third party online resellers such as c/net,
atOnce.com and Saturn Solutions. The Company has historically made available
free versions of its Internet software for limited trial use via the Internet.
INDIRECT CHANNELS. The Company also distributes its products
indirectly through OEMs, systems integrators, VARs and software retailers. OEMs,
systems integrators and VARs complement the Company's direct sales efforts for
institutional customers and provide sales support and service. The Company
presently has agreements with Microsoft, XcelleNet, Inc., Verity, Apple and
Mitsubishi, among others, to bundle the Company's Internet software with certain
of their product offerings. In addition to the ClickBook and Rescue Data
Recovery products, which have been sold in the software retail channel for
several years, the Company's Internet products also became available for
purchase at traditional software retailers in the fourth quarter 1996.
DIRECT CHANNELS. The Company's direct distribution channel consists of
a direct sales force and telemarketing organization located in Clearwater,
Florida. This organization has historically sold PC/Network software to computer
technicians and network administrators, but following the acquisition of
AllMicro, Inc., the Company's Internet and Intranet software is also sold
through this channel. In cases where customers require industry-specific
applications, the Company also provides
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training, support and consulting. The Company is in the process of expanding the
sales staff at the Clearwater location and expects to have approximately 150
sales persons on staff by year end.
INTERNATIONAL. The Company markets its products in Japan via licensing
agreements with AISoft, Inc., a wholly owned subsidiary of Seiko Epson. AISoft
provides all services necessary to translate the products into Kanji, at its
expense. In September 1996, the Company opened its London, England office for
distribution of the Company's Internet products in the retail and OEM channels
in Europe. A total of seven persons are currently employed by the Company in
European sales and marketing. In addition, the Company is evaluating the opening
of a telemarketing operation in Europe similar to the operation in Clearwater,
Florida for the PC/Network and Internet markets. It is anticipated that
operations will commence by the beginning of the third quarter of 1997, and that
a total of twenty sales persons could be on staff in Europe by year end.
PRODUCT DEVELOPMENT
The Company's current development efforts are focused on new products,
product enhancements and adapting existing products to new operating systems.
The Company believes that its software development team represents a significant
competitive advantage for the Company. The Company's ability to attract and
retain highly qualified employees will be the principal determinant of its
success in maintaining technological leadership.
ForeFront believes that its future success will depend in large part
on its ability to enhance its existing Internet productivity products and to
develop other products complementary to these information management products as
well as being the first to market with critical solutions.
An important factor in the future success of the ForeFront Internet
product suite will be the Company's ability to provide products that have more
features, better scalability, and higher quality than products available from
other vendors. Accordingly, the Company's primary development efforts are
focused on improving the scalability and performance of its productivity
software products.
The Company also plans to continue to license and acquire new products
that are complementary to existing products and that will augment the overall
functionality of its PC/Network and information management product suites.
Because many of the significant technologies in the ForeFront Internet
product suite are implementations of Internet standard protocols which are
constantly evolving, the Company actively participates in a number of Internet
standards-setting groups and technical conferences.
As of March 15, 1997, the Company's research and development staff,
which is responsible for product development, quality assurance, technical
documentation and product coordination, consisted of 27 full-time employees.
From time to time the Company employs independent contractors for software
development, documentation, artistic design and quality reviews. For the fiscal
years ended December 31, 1996 and 1995, research and development expenses,
excluding acquired research and development costs, were $3,021,318 and $887,717,
respectively, which
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represented 22% and 15% of revenues, respectively. The Company has not
capitalized any research and development expenses.
COMPETITION
ForeFront competes in the highly competitive market for computer
software. ForeFront believes that the principal competitive factors are
technical innovation to meet dynamic market needs, marketing strength, features
and performance, customer service and support, reliability, ease of use, price,
and compatibility with browser software and operating systems.
The market for Internet computer software has become increasingly
competitive due to Netscape's and Microsoft's growing presence in all sectors of
the Internet software business. The Company does not have the product breadth
and market advantage of Microsoft and Netscape. Microsoft's dominant position
provides it with competitive advantages, including the ability to unilaterally
determine the direction of future operating systems and to leverage its strength
in one or more product areas to achieve a dominant position in new markets. This
position may enable Microsoft to increase its market position even if the
Company succeeds in introducing products with performance and features superior
to those offered by Microsoft.
Microsoft's ability to offer information management functionality in
future versions of Internet Explorer and in any other Microsoft operating
systems and application software, or to provide incentives to customers to
purchase certain products in order to obtain favorable sales terms or necessary
compatibility or information with respect to other products, may significantly
inhibit the Company's ability to maintain its Internet business. Moreover,
Microsoft's ability to offer products on a bundled basis can be expected to
impair the Company's competitive position with respect to particular products.
In addition, as Microsoft creates new operating systems and applications, there
can be no assurance that ForeFront will be able to ensure that its products will
be compatible with those of Microsoft.
In addition, virtually all of the Company's products compete with one
or more specific products marketed by a variety of companies, ranging from small
privately held companies with limited resources to large companies with
substantially greater financial, technical and marketing resources than the
Company. Major direct competitors to the Company include Microsoft, Netscape,
Symantec Corporation, McAfee Associates, and Novell, Inc. Competitive pressures
could result in reduced market share, price reductions and increased spending on
marketing and product development, which could adversely affect the Company's
financial condition and operating results.
The Company believes that it has established significant brand
awareness with its products, especially WebWhacker, and that this provides it
with a strong competitive advantage to the other
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products in their categories. Furthermore, the Company believes that
its emphasis on products which enable users to more effectively find, get and
print information from the Web provides a solid foundation for future growth.
SUPPORT SERVICES
The Company has made a commitment to provide timely, high quality
technical support to meet the diverse needs of its customers and partners and to
facilitate the adoption and use of its products. The Company offers licensed
users of Internet and PC/Network products 30 to 90 days of technical support via
electronic mail or telephone. The Company offers traditional support contracts
for its server products.
MANUFACTURING SUPPLIERS
The Company's products, which consist primarily of software diskettes
and manuals, are duplicated by outside vendors. This allows the Company to
minimize the need for expensive capital equipment in an industry in which
multiple high-volume manufacturers are available.
BACKLOG
Lead times for the Company's products are typically short.
Consequently, the Company does not believe that backlog is a reliable indicator
of future sales or earnings. The absence of significant backlog may contribute
to unpredictability in the Company's results of operations and to fluctuations
in the Company's stock price.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
the software industry or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, taxes, pricing and characteristics and quality of
products and services. For example, the "Communications Decency Act of 1996,"
included as Title V of the landmark Telecommunications Act of 1996 enacted
January 3, 1996, makes it a crime to use interactive computer services to
knowingly send indecent or obscene messages, images, proposals, or other
communications to a person under 18 years of age. Although there are several
available defenses, including a protection under certain circumstances from
liability for providers of interactive computer services who voluntarily
attempt, in good faith, to restrict access to or availability of such material,
the impact of the Communications Decency Act on the Company's business and the
industry are unknown at this time. Such Act has recently been held
unconstitutional by a U.S. appellate court; however, the decision is being
appealed to the U.S. Supreme Court at this time. As a result, the application of
such Act to the Company's business is far from certain. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products and increase the
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Company's cost of doing business or otherwise have an adverse effect on the
Company's business, operating results or financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, libel and personal privacy is uncertain.
Further, due to the encryption technology contained or anticipated to be
contained in certain of the Company's Internet products, such products could be
subject to U.S. export controls. There can be no assurance that such export
controls, either in their current form or as may be subsequently enacted, will
not limit the Company's ability to distribute products outside of the United
States or electronically. While ForeFront takes precautions against unlawful
exportation, the global nature of the Internet makes it virtually impossible to
effectively control the distribution of the Company's products. In addition,
federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Any such export restrictions, new
legislation or regulation or unlawful exportation could have a material adverse
impact on the Company's business, operating results or financial condition.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon
its proprietary technology. While the Company relies on trademark, trade secret
and copyright law to protect its technology, the Company believes that factors
such as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. The Company presently has no patents or patent
applications pending. There can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology. The
source code for the Company's proprietary software is protected both as a trade
secret and as a copyrighted work. The Company generally enters into
confidentiality or license agreements with its employees, consultants and
vendors, and generally controls access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries, and the
global nature of the Internet makes it virtually impossible to control the
ultimate destination of the Company's products. To license its products, the
Company primarily relies on "shrink wrap" licenses that are not signed by the
end-user and, therefore, may be unenforceable under the laws of certain
jurisdictions. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology or that such agreements will be enforceable. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, operating results or financial condition.
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The Company also relies on certain technology which it licenses from
third parties, and will rely in the future on certain technology which it
intends to license from third parties, including software which is integrated
with internally developed software and used in the Company's products to perform
key functions. There can be no assurance that these third party technology
licenses will continue to be available to the Company on commercially reasonable
terms. The inability to obtain or maintain any of these technology licenses
could result in delays or reductions in product shipments until equivalent
technology could be identified, licensed and integrated. Any such delays or
reductions in product shipments could materially adversely affect the Company's
business, operating results and financial condition.
MATERIAL AGREEMENTS
During 1996, the Company completed the acquisition of three private
companies that delivered complementary technologies, talented development and
marketing teams and immediate revenue channels. In March, the Company acquired
all of the assets of Blue Squirrel, Inc. ("Blue Squirrel"), a Salt Lake City
based development company, pursuant to an Asset Purchase Agreement dated March
8, 1996 in exchange for the assumption of $100,000 of liabilities and the
issuance of 125,000 shares of Common Stock of the Company. As part of the
transaction, the principals of Blue Squirrel entered into agreements not to
compete with the Company for a two year period following the closing.
In June 1996, the Company completed a second acquisition, acquiring
all of the assets of BookMaker Corporation ("BookMaker"), a Palo Alto,
California based development company. Pursuant to an Asset Purchase Agreement
dated June 12, 1996, the Company issued an aggregate of 447,637 shares of Common
Stock in exchange for all of the assets of BookMaker. A total of 24,837 of such
shares are held in escrow until June 12, 1998, to satisfy any post closing
liabilities, and 199,262 of such shares are subject to earn-out by BookMaker
based on the attainment of product revenue and cost goals for 1996 and 1997 by
the BookMaker business. As a result of the earn-out conditions, the Company is
obligated to maintain, through December 31, 1997, the operations of BookMaker in
the manner in which the business was conducted prior to the closing. The
principals of BookMaker have agreed to not compete with the Company until the
later of eighteen months following the closing or one year after termination of
employment.
Pursuant to Registration Rights Agreements entered into with each of
Blue Squirrel and BookMaker, the Company filed an S-3 Registration Statement
with the Securities and Exchange Commission in December 1996, registering the
resale of the shares of Common Stock issued in such transactions. The
Registration Statement was declared effective on January 10, 1997. A total of
698,852 shares of Common Stock are covered by the Registration Statement,
including 103,215 shares which were held by certain pre-IPO stockholders of the
Company who had piggyback registration rights. An additional 4,971 shares of
Common Stock which may be acquired upon exercise of warrants were also included
in such registration. Pursuant to the BookMaker Registration Rights Agreement,
the Company is required to maintain the effectiveness of the S-3 Registration
Statement for thirty months or until all of the shares covered thereby are sold.
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In July 1996, the Company acquired all of the outstanding shares of
capital stock of AllMicro, Inc., through a merger of its wholly owned subsidiary
with and into AllMicro, Inc. Pursuant to the terms of the Agreement and Plan of
Reorganization dated July 19, 1996, the Company issued a total of 1,056,512
shares of Common Stock to Michael and Anita Kaplan, sole stockholders of
AllMicro, Inc. In addition, the Company entered into employment and non-compete
agreements with a number of AllMicro's employees other than Mr. Kaplan, whereby
the Company agreed to employ them for a two year period and pay them aggregate
stay bonuses of $237,500 on each of the first and second anniversary dates of
the closing, in exchange for their services to the Company and their agreement
not to compete with the Company. The Company entered into a two year employment
agreement with Mr. Kaplan, pursuant to which it has agreed to pay Mr. Kaplan a
total of $250,000 per year for two years. An additional $250,000 is payable to
Mr. Kaplan in twelve equal monthly installments following the closing of the
transaction as consideration for his agreement not to compete with the Company
until the expiration of one year after termination of employment, or three years
after the closing, whichever is first. A Registration Rights Agreement was also
entered into with Mr. Kaplan, providing him with piggyback registration rights
on future offerings of equity securities by the Company or other stockholders.
EMPLOYEES
As of March 15, 1997, the Company had a total of 190 employees, all of
whom (except for seven) were based in the United States. Of the total, 27 were
in research and development, 132 were engaged in sales and marketing and 31 were
in administration and finance. The Company's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for highly qualified
personnel is intense and there can be no assurance that the Company will be able
to retain its key managerial and technical employees or that it will be able to
attract and retain additional highly qualified technical and managerial
personnel in the future. None of the Company's employees is represented by a
labor union. The Company has not experienced any work stoppages and considers
its relations with its employees to be good.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED BY ANYONE
CONTEMPLATING AN INVESTMENT IN THE COMPANY'S COMMON STOCK. WHEN USED IN THIS
REPORT, THE WORDS "PLANS", "BELIEVES" AND "EXPECTS" AND SIMILAR CONDITIONAL
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. IN ADDITION,
THE COMPANY AND ITS REPRESENTATIVES MAY FROM TIME TO TIME MAKE ADDITIONAL
FORWARD-LOOKING STATEMENTS. ALL OF SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN ANY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT
LIMITED TO, THE FOLLOWING:
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT. Although ForeFront was
founded in 1990 and commenced shipments of its Virtual Notebook System ("VNS")
product in 1992, it did not commence shipment of its initial Internet products
until July 1995. Accordingly, the Company has only a limited operating history
upon which an evaluation of the Company and its prospects can be based. The
Company's prospects must be considered in light of the risks, expenses and
difficulties
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frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets. To address these
risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified persons, and
continue to upgrade its technologies and commercialize products and services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing such risks. The Company has incurred net losses
since inception and expects to continue to operate at a loss into 1997 and
potentially beyond. As of December 31, 1996, the Company had an accumulated
deficit of approximately $12.3 million. There can be no assurance that the
Company will achieve or sustain profitability.
MARKET RISKS; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS; PRICE
EROSION. The market for the Company's software has only recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed products and services for over
the Internet and private networks. As is typical in the case of a new and
rapidly evolving industry, demand and market acceptance for products and
services are subject to a high level of uncertainty. While the Company believes
that its software products offer advantages for communication and information
management over the Internet and private networks, there can be no assurance
that the Company's products for communication and information management over
the Internet or private networks will become widely adopted for these purposes.
Because the markets for the Company's products and services are new
and evolving, it is difficult to predict the future growth rate, if any, and
size of these markets. There can be no assurance that markets for the Company's
products will develop, that the Company's products or services will be adopted,
or that individual PC users in business or at home will use the Internet or
private networks for communication and information management. If markets fail
to develop, develop more slowly than expected or become saturated with
competitors, or if the Company's products do not achieve market acceptance, the
Company's business, operating results and financial condition will be materially
adversely affected.
In particular, the Company's client/desktop software may be subject to
price erosion due to free client/desktop software distributed by online service
providers, other Internet-related software companies, Internet access providers
and others. In addition, computer operating systems companies and Internet
browser providers such as Microsoft, Netscape and International Business
Machines Corporation ("IBM") are now bundling or are planning to bundle client
software with their operating systems at little or no additional cost to users,
or incorporating features in their browsers which have functionality similar to
the Company's Internet desktop products, all of which may cause the price of the
Company's client/desktop products to decline.
RISKS OF TELESALES MARKETING; HIGH EMPLOYEE TURNOVER. Although the
telemarketing industry has grown significantly in the last ten years, advances
in new forms of direct marketing, such as the development of interactive
commerce through television, computer networks (including the Internet) and
other media, could have an adverse effect on the demand for telesales as a form
of direct marketing. As the industry continues to grow, telemarketing's
effectiveness as a direct marketing tool may also decrease as a result of
consumer saturation and consumer resistance to telemarketing
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generally. Although the Company attempts to monitor industry trends and respond
accordingly, the Company may not be able to anticipate and successfully respond
to such trends in a timely manner.
Telesales are labor-intensive and often characterized by high
personnel turnover. All of the Company's telesales personnel commence employment
on a relatively modest hourly wage, for a short period of time, and graduate to
a commission-only compensation structure after several months. Those who do not
achieve certain sales quotas are unable to continue on a commission-only
structure and leave the Company. Some of the Company's telemarketing activities,
particularly inbound customer service, require highly-trained employees. A high
turnover rate among the Company's employees would increase the Company's
recruiting and training costs, and if the Company were unable to recruit and
retain a sufficient number of employees, it would be forced to limit its growth
or possibly curtail its operations. In certain markets, the Company competes for
qualified personnel with other sales companies, and periodically is required to
pay premium hourly wages to attract and retain personnel. The Company may be
unable to continue to hire and retain a sufficient number of qualified
personnel, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION. The market for Internet-based software and services is
new, intensely competitive, rapidly evolving and subject to rapid technological
change. The Company expects competition to persist, intensify and increase in
the future. Almost all of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger installed customer
bases and significantly greater financial, technical and marketing resources
than the Company. Such competition could materially adversely affect the
Company's business, operating results or financial condition. The Company's
current and potential competitors include browser software vendors, Web server
software and service vendors, PC software vendors and online service providers.
Although many Internet browsers and server products do not currently
provide many features or products for application on the Internet such as those
being marketed or developed by the Company, Netscape and Microsoft have each
recently released or announced new versions of their respective browsers which
incorporate features directly competitive with certain features of the Company's
existing Internet products. It is probable that these products will incorporate
additional functionality competitive with the Company's products at some point
in the future. Both Microsoft and Netscape incorporate this functionality at
little or no additional cost to customers. Additionally, there are a large
number of recent competitive entrants to each of the Company's Internet
products, except WebPrinter, thereby creating the potential for confusion in the
marketplace. Although the Company believes that its products have established a
significant brand awareness in the marketplace, the large number of competitive
products, the accelerated pace of change, and the increasing adoption of
functions similar to the Company's products in browsers by Microsoft and
Netscape provide significant competitive challenges to the Company. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the Company
will not materially adversely affect its business, operating results and
financial condition.
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NEW PRODUCT DEVELOPMENT AND RAPID TECHNOLOGICAL CHANGE. Substantially
all of the Company's revenues have been derived, and substantially all of the
Company's future revenues are expected to be derived, from the license of its
software and sale of its associated services. Accordingly, broad acceptance of
the Company's software products and services by customers is critical to the
Company's future success, as is the Company's ability to design, develop, test
and support new software products and enhancements on a timely basis that meet
changing customer needs and respond to technological developments and emerging
industry standards. There can be no assurance that the Company will be
successful in developing and marketing new software products and enhancements
that meet changing customer needs and respond to such technological changes or
evolving industry standards. In addition, there can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products and
enhancements, or that its new products and enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. Further, there
can be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in the Company's products, or, if
discovered, successfully corrected in a timely manner. If the Company is unable
to develop on a timely basis new software products, enhancements to existing
products or error corrections, or if such new products or enhancements do not
achieve market acceptance, the Company's business, operating results and
financial condition will be materially adversely affected.
The software industry is characterized by rapid technological change
as well as changes in customer requirements and preferences. The Company
believes that its future results will depend largely upon its ability to offer
products that compete favorably with respect to price, reliability, performance,
range of useful features, continuing product enhancements, reputation, and
training. For its PC/Network products, the Company relies on future technology
from third party developers. The Company also relies to some extent on software
from third parties which is integrated with internally developed software and
used in the Company's products to perform key functions. Therefore, the
Company's inability to maintain direct control over the future development of
such products could result in delays or reductions in upgrades or product
shipments. Delays or difficulties may result in the delay or cancellation of
planned development projects and could have a materially adverse effect on the
Company's business, operating results and financial condition.
EVOLVING MULTIPLE DISTRIBUTION CHANNELS; RISK OF ELECTRONIC
DISTRIBUTION. The Company's strategy is to develop multiple distribution
channels. The Company has historically sold its Internet products primarily
through direct sales via the Internet and OEMs. The Company began selling its
Internet products through its direct telemarketing subsidiary in Florida in the
third quarter of 1996, along with its technician and network administrator
products, and introduced its Internet products into retail outlets in the United
States and Europe in the fourth quarter 1996. There can be no assurance that the
Company will be successful in distributing its products through retail channels
or that the Company's telemarketing sales force will be able to market the
Company's Internet products successfully. In addition, the possibility can occur
that conflicts may develop between the Company's multiple distribution channels
over the competitive impact resulting from such multiple channels. The failure
to successfully distribute the Company's Internet products through the retail
channels or by the direct telemarketers, or the development of a channel
conflict, could materially adversely affect the Company's business, operating
results or financial condition.
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The Company intends to pursue additional alliances with Internet
software companies, printer, laptop and other hardware manufacturers, and access
providers and other companies to accelerate the market entry of the Company's
Internet products. There can be no assurance that the Company's existing
strategic alliances will continue or that any future alliances will accelerate
the acceptance of the Company's products or that the Company will be able to
pursue or develop further alliances. The Company plans to expand its field sales
force and its telemarketing organization. There can be no assurance that such
internal expansion will be successfully completed, that the cost of such
expansion will not exceed the revenues generated, or that the Company's sales
and marketing organization will be able to successfully compete against the
significantly more extensive and well-funded sales and marketing operations of
many of the Company's current or potential competitors. The Company's inability
to effectively manage its internal expansion could have a material adverse
effect on the Company's business, operating results or financial condition.
In addition to expanding its direct sales channels, the Company will
continue to distribute its products electronically through the Internet.
Distributing the Company's products through the Internet makes the Company's
software more susceptible than other software to unauthorized copying and use.
The Company has historically allowed and currently intends to continue to allow
potential customers to electronically download its client software for a free
evaluation period. By distributing its products for free evaluation over the
Internet, the Company may have reduced the future demand for its products. If,
as a result of changing legal interpretations of liability for unauthorized use
of the Company's software or otherwise, users were to become less sensitive to
avoiding copyright infringement, the Company's business, operating results and
financial condition would be materially adversely affected.
FLUCTUATIONS IN OPERATING RESULTS. The Company's future operating
results could be subject to significant fluctuations and volatility. The
Company's revenues and quarterly operating results may experience significant
fluctuations and be unpredictable as the result of a number of factors
including, among others, introduction of new or enhanced products by the Company
or its competitors, rapid technological changes in the Company's markets,
seasonality of revenues, changes in operating expenses and general economic
conditions. The Company's pattern of revenues and earnings may also be affected
by the phenomenon known as "channel fill." Channel fill occurs following the
introduction of a new product or a new version of a product as distributors buy
significant quantities of the new product or version in anticipation of sales of
such product or version. Following such purchases, the rate of distributors'
purchases often declines, depending on the rates of purchases by end users or
"sell-through." The phenomenon of "channel fill" may also occur in anticipation
of price increases or in response to sales promotions or incentives, some of
which may be designed to encourage customers to accelerate purchases that might
otherwise occur in later periods. Channels may also become filled simply because
the distributors are unable to, or do not, sell their inventories to retail
distribution or end users as anticipated. If sell-through does not occur at a
sufficient rate, distributors will delay purchases or cancel orders in later
periods or return prior purchases in order to reduce their inventories. In
addition, between the date the Company announces a new version or new product
and the date of release, distributors, dealers and end users often delay
purchases, cancel orders or return products in anticipation of the availability
of the new version of the product. Such order delays or cancellations can cause
material fluctuations in revenues
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from one quarter to the next. Net revenues may be materially affected favorably
or adversely by these effects.
For the quarter ended December 31, 1996, the Company incurred a net
loss of $1.7 million primarily due to continued establishment and expansion of
various distribution channels as well as sales and marketing costs associated
with the expansion of the various distribution channels. There can be no
assurance that the Company will not incur additional losses in the future.
VOLATILITY OF STOCK PRICE. In the past year the market for shares of
technology companies and in particular the Company's Common Stock, have
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors or its customers may have a significant impact on the market price
of the Company's Common Stock. Furthermore, quarter-to-quarter fluctuations in
the Company's results of operations caused by changes in customer demand,
release of competitive products or other factors, may have a significant impact
on the market price of the Company's Common Stock. These conditions, as well as
factors which generally affect the market for stocks of high technology
companies, could cause the price of the Company's stock to fluctuate
substantially over short periods.
MANAGEMENT OF ACQUISITIONS AND GROWTH. Since completion of its initial
public offering in December 1995, the Company has consummated several
acquisitions. The Company may make additional acquisitions in the future. While
these acquisitions have broadened the Company's product portfolio and sales
distribution channels, the acquisitions have resulted in the Company's competing
with companies and in markets where it has not previously competed. As a result,
there is uncertainty regarding customer acceptance of the combined products.
There can be no assurance that the Company will be successful in realizing
benefits from a broadened product portfolio and sales distribution channels. In
addition, it is critical to the Company's success to integrate effectively the
operations and businesses of the acquired companies, and to utilize effectively
acquired intellectual property.
The rapid execution necessary for the Company to fully exploit the
market opportunities for its products and services requires an effective
planning and management process. To manage its growth, the Company must continue
to implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company will also be required to manage
multiple relationships with various customers and other third parties. Although
the Company believes that it has made adequate allowances for the costs and
risks associated with this expansion, there can be no assurance that the
Company's systems, procedures or controls will be adequate to support the
Company's operations or that Company management will be able to achieve the
rapid execution necessary to fully exploit the market for the Company's products
and services. The Company's future operating results will also depend on its
ability to expand its sales and marketing organizations, implement and manage
new distribution channels to penetrate different and broader markets and expand
its support organization commensurate with the increasing base of its installed
products. If the Company is unable to manage growth effectively, the Company's
business, operating results and financial condition will be materially adversely
affected.
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DEPENDENCE ON THE INTERNET. Although some sales of the Company's
products depend upon the growth of private networks and the computer technician
market, sales growth of the Company's products will depend in large part upon a
robust industry and infrastructure for providing Internet access and carrying
Internet traffic. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure,
such as a reliable network backbone or timely development of complementary
products, such as high speed modems. In addition, acceptance of many of the
Company's products, particularly those enabling real-time collaboration, will be
dependent upon the sufficient availability of high-bandwidth on and connections
to the Internet. Because global commerce and online exchange of information on
the Internet and other similar open wide area networks are new and evolving, it
is difficult to predict with any assurance whether the Internet will prove to be
a viable commercial marketplace. There can be no assurance that the
infrastructure of complementary products necessary to make the Internet a viable
commercial marketplace will be developed, or, if developed, that the Internet
will become a viable commercial marketplace.
In order to support the continued growth and popularity of the
Internet, certain infrastructure elements must expand to handle the resulting
increases in Internet demand and traffic. These elements include widespread,
inexpensive Internet access, either through Internet access providers or on-line
services, and widely available high-speed communications channels to accommodate
the increasing number and size of files available for downloading. If the
necessary infrastructure or complementary products are not developed, or if the
Internet does not become a viable commercial marketplace, the Company's
business, operating results and financial condition will be materially adversely
affected.
PRODUCT RETURNS. Like other manufacturers of package software
products, the Company is exposed to the risk of product returns from
distributors and reseller customers. There can be no assurance that actual
returns in excess of recorded allowances will not result in a material adverse
effect on business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on its ability
to retain and motivate high quality personnel, especially its management and
highly skilled development teams. Competition for such personnel is intense, and
there can be no assurance that the Company will be able to attract, assimilate
or retain other highly qualified technical and managerial personnel in the
future. The Company's performance is substantially dependent on the performance
of its executive officers and key employees, and, in particular, David Sikora,
the President and Chief Executive Officer, and Mike Kaplan, President of
ForeFront Direct. Although each such individual has entered into a multi-year
employment agreement with the Company, there can be no assurance that said
individuals will elect to continue to perform services to the Company. The loss
of the services of executive officers or any other key employees and the
inability to attract and retain the necessary technical and managerial personnel
could have a material adverse effect on the business, operating results or
financial condition of the Company.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; THIRD PARTY CLAIMS. See
"-Proprietary Rights" elsewhere in this report for a discussion of the risks
associated with intellectual property rights and third party claims.
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SECURITY RISKS. While the Company has not included any security
protocols in its current Internet products, the Company believes it will be
necessary to incorporate security protocols in certain of its future Internet
products in order to assure the protection of customers' confidential
information. Despite the incorporation of such technology, the Company's
products may be vulnerable to break-ins and similar disruptions that would
jeopardize the security of information stored in and transmitted through the
computer systems of end users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Moreover, the security and privacy concerns of existing and potential customers,
as well as concerns related to computer viruses, may inhibit the growth of the
Internet marketplace generally, and the Company's customer base and revenues in
particular. The Company currently does not have adequate product liability
insurance to protect against these risks and there can be no assurance that such
insurance will be available to the Company on commercially reasonable terms or
at all.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. See "- Government
Regulation" elsewhere in this report for a discussion of the risks associated
with governmental regulation and legal uncertainties.
INTERNATIONAL OPERATIONS. The Company has operations in various
foreign locations. International operations are subject to certain risks common
to international activities, such as changes in foreign governmental
regulations, tariffs and taxes, export license requirements, the imposition of
trade barriers, difficulties in staffing and managing foreign operations, and
political and economic instability.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases facilities in Houston, Texas; Palo Alto,
California; Salt Lake City, Utah; Clearwater, Florida; and London, England. Its
total current rental payments are approximately $43,000 per month.
The Company believes that adequate facilities are available and that
sufficient additional space will be available as needed thereafter.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock (symbol: FFGI) has been traded on the
Nasdaq Stock Market since the Company's initial public offering in December
1995. The following table sets forth the range of high and low sales prices for
each calendar quarterly period through December 31, 1996 as reported on the
Nasdaq National Market:
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
HIGH LOW HIGH LOW
Fourth Quarter 8.625 8.25 10.875 5.00
Third Quarter N/A N/A 13.875 8.938
Second Quarter N/A N/A 20.75 7.50
First Quarter N/A N/A 10.094 6.50
As of March 20, 1997, 6,424,597 shares of Common Stock were
outstanding and the Company had 208 shareholders of record and approximately
2,400 beneficial owners.
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain any earnings to finance the growth and
development of its business and does not anticipate paying cash dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
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 London-based
sales office 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.
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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"), systems
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.
RESULTS OF OPERATIONS
NET REVENUES
Substantially all of the Company's net revenues have been derived from
product license revenues and, to a lesser extent, maintenance and service
revenues which have been primarily attributable to separately-priced maintenance
contracts and consulting. Maintenance contracts are usually for one year and are
recognized ratably over the terms of the contracts. Service revenues include
development and professional fees and are recognized as the services are
rendered.
Net revenues increased $7,745,000, or 128%, from $6,053,000 in 1995 to
$13,798,000 in 1996, primarily due to the three strategic acquisitions, the
introduction of eight additional products into existing and new distribution
channels and increasing market acceptance of the Company's products. No customer
accounted for more than 10% of the Company's net revenues during the years ended
December 31, 1995 and 1996.
As part of its strategy to develop multiple distribution channels, the
Company expects to increasingly utilize its direct sales channel as well as
indirect channels; however, the Company ships products to distributors on a
purchase-order basis and the distributors carry competing product lines.
Therefore, there can be no assurance that any distributor will continue to
represent the Company's products and the inability to recruit or retain
important distributors could adversely affect the Company's results of
operations. Allowances for returns are provided based on historical rates of
return and have not been material to date. Certain of the Company's sales to
distributors are under agreements providing rights of return and price
protection on unsold merchandise. There can be no assurance that actual returns
in excess of recorded allowances will not result in a material adverse effect on
operating results and financial condition.
As described earlier, the merger with AllMicro, Inc., which was
accounted for as a pooling of interests, resulted in the restatement of the
Company's historical consolidated financial statements. The impact of the
pooling of interests resulted in increasing the Company's consolidated net
revenues by approximately $5,800,000 and $4,600,000 for the years ended December
31, 1995 and 1996, respectively. If the Company had accounted for the AllMicro
transaction as a purchase
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instead of a pooling of interests, consolidated net revenues would have
increased from $280,000 in 1995 to $9,198,000 in 1996.
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. The cost of product licenses increased
$1,458,000, or 120%, from $1,217,000 in 1995 to $2,675,000 in 1996. The increase
was due principally to the corresponding 128% increase in product license
revenues during this period. Gross margin as a percentage of net revenues may
fluctuate in the future due to increased price competition, the mix of
distribution channels used by the Company and the mix of products sold. The
Company typically realizes higher gross margins through OEM arrangements, its
electronic storefront and its direct channel than sales through the retail
channel.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel costs
including salaries and benefits, occupancy and travel expenses as well as
outside consultant costs related to the research and development of the
Company's products. These costs are charged to expense as they are incurred.
Research and development expenses increased $2,133,000, or 240% from $888,000 in
1995 to $3,021,000 in 1996. The increase is attributable to the increase in
research and development personnel whose efforts were focused on the Company's
new line of Internet products and the purchase of two software licenses for
$410,000 intended for future development. The Company believes that continued
investment in research and development is required to remain competitive in the
software industry, to enhance the functionality of its existing products and to
develop additional products that complement currently available products. In
addition, the Company expects that research and development expenses as a
percentage of net revenues will fluctuate depending on future revenue growth,
acquisitions and licensing of technology.
In March 1996, the Company acquired the assets of Blue Squirrel, a
Utah based company and during June 1996, the Company acquired the assets of
BookMaker, a California based company. The Company recorded the fair market
value of net assets acquired, which included purchased software of $71,000 and
$67,000, respectively, and recorded a charge of $440,000 and $2,359,000,
respectively for acquired research and development costs.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist primarily of salaries and
commissions of marketing and sales personnel, advertising and promotion expenses
and customer service and support costs. Selling and marketing expenses increased
$5,660,000, or 174%, from $3,246,000 in 1995 to $8,906,000 in 1996. The increase
reflects increased salaries and commissions due to increased staffing and to
increased sales commissions on significantly higher revenues, the continued
establishment and expansion of various distribution channels in the United
States and Europe, as well as increased marketing activities, including trade
show participation, advertising and promotions.
-23-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries of
administrative and executive personnel, merger and acquisition activity and
other professional services. General and administrative expenses increased
$3,097,000, or 267%, from $1,158,000 in 1995 to $4,255,000 in 1996. The increase
is attributable to increased personnel and associated recruiting costs, merger
and acquisition costs, including one-time charges of $1.6 million for
transaction costs related to the merger with AllMicro, Inc., as well as higher
administrative costs as a result of becoming a public company. Excluding the
one-time charges, general and administrative expenses increased $1,497,000, or
129%, from $1,158,000 in 1995 to $2,655,000 in 1996.
Additionally, the Company recorded noncash deferred compensation of
approximately $726,000 in connection with certain options granted during 1995,
of which approximately $140,000 and $201,000 was recognized as an expense in
1995 and 1996, respectively. The remaining deferred compensation will be
amortized ratably over the vesting period of the options and will continue to
impact the Company's results of operations. See Note 5 to the Company's
Consolidated Financial Statements.
INTEREST INCOME
Interest income consists primarily of interest earned on cash and cash
equivalents. Interest income increased $485,000, from $40,000 in 1995 to
$525,000 in 1996. The increase was primarily attributable to the interest income
earned as a result of the completion of the Company's Initial Public Offering
(the "Offering") in December 1995 and resulting cash proceeds.
INTEREST EXPENSE
Interest expense relates to the senior convertible notes payable to
stockholders and others which were issued in 1995. Such notes were exchanged for
shares of the Company's Series B Preferred Stock or repaid in September 1995.
The interest accrued to the date of retirement of such notes of $35,000 was paid
at such time. See "Liquidity and Capital Resources" and Note 4 to the Company's
Consolidated Financial Statements.
INCOME TAXES
The Company has incurred losses since inception and, therefore, has
not been subject to federal income taxes. As of December 31, 1996, the Company
had generated net operating loss carryforwards for financial reporting purposes
of approximately $5.5 million available to reduce future federal income taxes.
These carryforwards will begin to expire in 2007. The Company's ability to
utilize the carryforwards is expected to be limited by "changes in ownership,"
as such term is defined by federal income tax laws and regulations, that
occurred upon the sale of 1,700,000 shares of Common Stock in December 1995, the
acquisitions of Blue Squirrel and BookMaker in March 1996 and June 1996,
respectively, and the merger with AllMicro, Inc. in July 1996. As there
-24-
<PAGE>
is no assurance of future taxable income, a valuation allowance has been
established to fully offset the $2.2 million net deferred tax asset at December
31, 1996.
FACTORS AFFECTING OPERATING RESULTS
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, 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, timing 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. To the extent that any increases in
operating 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company had cash and cash equivalents of
$6,204,000 and working capital of $5,824,000. The Company has financed
approximately $5 million of cash used in operating activities from 1992 through
1996 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. Net cash provided (used) by operating activities was $359,000 and
$(4,785,000) in 1995 and 1996, respectively. Investing activities in 1995
totaled $8,055,000 and related primarily to purchases of securities from the net
proceeds of the Offering. The cash provided by investing activities in 1996 of
$6,900,000 relates primarily to the proceeds from the sale of securities of
$8,000,000 net of purchases of furniture and equipment totaling $1,000,000. Net
cash provided (used) by financing activities was $12,664,000 and $(1,451,000)
for the same periods.
The Company believes that its existing capital resources, together
with anticipated revenues, will be sufficient to meet its anticipated cash needs
for operations, working capital and capital
-25-
<PAGE>
expenditures through mid 1998. Thereafter, if cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
sell additional equity or debt securities or obtain additional 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 additional facilities and equipment or to license or acquire
proprietary technology owned by others or to legally defend its proprietary
technology. Additionally, depending on 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.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements and supplementary financial
information required to be filed under this Item are presented on pages F-1
through F-18 of this Annual Report on Form 10- KSB, and are incorporated herein
by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item as to the directors and
executive officers of the Company is hereby incorporated by reference from the
information appearing under the captions "Election of Directors," "Executive
Compensation" and "Compliance with Section 16(a)" in the Company's definitive
proxy statement which involves the election of directors and is to be filed with
the Securities and Exchange Commission ("Commission") pursuant to the Securities
and Exchange Act of 1934 within 120 days of the end of the Company's fiscal year
on December 31, 1996.
-26-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item as to the management of the
Company is hereby incorporated by reference from the information appearing under
the captions "Executive Compensation" and "Election of Directors - Compensation
of Directors" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities and Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item as to the ownership by
management and others of securities of the Company is hereby incorporated by
reference from the information appearing under the caption "Security Ownership
of Certain Beneficial Owners and Management" in the Company's definitive proxy
statement which involves the election of directors and is to be filed with the
Commission pursuant to the Securities and Exchange Act of 1934 within 120 days
of the end of the Company's fiscal year on December 31, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item as to certain business
relationships and transactions with management and other related parties of the
Company is hereby incorporated by reference from the information appearing under
the captions "Certain Relationships and Related Transactions" in the Company's
definitive proxy statement which involves the election of directors and is to be
filed with the Commission pursuant to the Securities and Exchange Act of 1934
within 120 days of the end of the Company's fiscal year on December 31, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed as part of this report:
Exhibit
NO. DESCRIPTION OF EXHIBITS
- --------------------------------------------------------------------------------
2.1 -- Agreement and Plan of Reorganization among the
Company, AllMicro Acquisition Corporation,
AllMicro, Inc. and the Shareholders listed on the
execution pages thereto, dated July 19, 1996
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission
on August 6, 1996).
2.2 -- Asset Purchase Agreement between the Company and
BookMaker Corporation, dated June 12, 1996
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission
on June 27, 1996).
-27-
<PAGE>
3.1 -- Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form SB-2)
(Registration No. 33-977898-D).
3.2 -- Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Quarterly Report on
Form 10-QSB for the period ended June 30, 1996)
(File No. 000-27438).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to Amendment No. 2 to the
Company's Registration Statement on Form SB-2)
(Registration No. 33-977898-D).
10.1 -- Amended and Restated 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form SB-2)
(Registration No. 33-977898-D).
10.2 -- 1996 Non-Qualified Stock Option Plan (incorporated
by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the period
ended September 30, 1996) (File No. 0-27438).
10.3 -- 1996 Non-Employee Directors' Stock Option Plan
(incorporated by reference to Exhibit 99.3 to the
Company's Registration Statement on Form S-8)
(Registration No. 333-07721).
10.4 -- 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8) (Registration
No. 000-27438).
10.5 -- Employment Agreement between the Company and
Martin Mazner dated June 12, 1996 (incorporated by
reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the period
ended June 30, 1996) (File No. 000-27438).
10.6 -- Employment Agreement between the Company and
Michael Kaplan dated July 22, 1996 (incorporated
by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the period
ended September 30, 1996) (File No. 000-27438).
10.7* -- Employment Agreement between the Company and David
Sikora dated December 23, 1996.
10.8* -- Amended and Restated 1996 Stock Option Plan.
10.9 -- Registration Rights Agreement between the Company
and certain holders of Common and Preferred Stock
dated September 1995 (incorporated by
-28-
<PAGE>
reference to Exhibit 10.10 of the Company's
Registration Statement on Form SB-2) (Registration
No. 33-977898-D).
10.10 -- Registration Rights Agreement, dated as of June
12, 1996, by and among The ForeFront Group, Inc.
and BookMaker Corporation (incorporated by
reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K filed with the Securities and
Exchange Commission on June 27, 1996).
10.11 -- Registration Rights Agreement, dated as of July
19, 1996, by and among The ForeFront Group, Inc.
and the Shareholders of AllMicro, Inc. set forth
on the signature pages thereto (incorporated by
reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K filed with the Securities and
Exchange Commission on July 22, 1996).
10.12 -- Form of Warrant Agreement with the Representatives
of the Underwriters (incorporated by reference to
Exhibit 10.11 to the Company's Registration
Statement on Form SB-2) (Registration No.
33-97798-D).
10.13 -- Form of Stock Purchase Warrant issued in September
1995 (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form SB-2)
(Registration No. 33-97798-D).
10.14 -- Software License Agreement between the Company and
Baylor College of Medicine (incorporated by
reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2) (Registration
No. 33-97798-D).
11.1* -- Statement regarding computation of net loss per
share.
21.1* -- List of subsidiaries of the Company.
23.1* -- Consent of Arthur Andersen LLP, independent public
accountants (incorporated by reference to Exhibit
23.2 to each of the Company's Registration
Statements on Form S-3 and Form S-8) (Registration
No. 333-18491 and Registration No. 333-19147,
respectively).
27* -- Financial Data Schedule.
* Filed herewith.
(b) Reports on Form 8-K.
None.
-29-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on behalf by the undersigned,
thereunto duly authorized.
THE FOREFRONT GROUP, INC.
By: /s/ David Sikora
President and Chief Executive Officer
Date: March 31, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: March 31, 1997 /s/ David Sikora
-------------------------------------
David Sikora, President and Chief
Executive Officer (Principal
Executive Officer and Director)
Date: March 31, 1997 /s/ Ernest D. Rapp
-------------------------------------
Ernest D. Rapp, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: March 31, 1997 /s/ G. Anthony Gorry
-------------------------------------
G. Anthony Gorry, Chairman of the
Board of Directors
Date: March 31, 1997 /s/ Stephen J. Banks
-------------------------------------
Stephen J. Banks, Director
Date: March 31, 1997 /s/ Grant Dove
-------------------------------------
Grant Dove, Director
Date: March 31, 1997 /s/ Terry Ward
-------------------------------------
Terry Ward, Director
30
<PAGE>
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.....................................F-2
Consolidated Balance Sheet...................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity..............................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
<PAGE>
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The ForeFront Group, Inc.:
We have audited the accompanying consolidated balance sheet of The ForeFront
Group, Inc., and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The ForeFront Group,
Inc., and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 18, 1997
F-2
<PAGE>
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET--DECEMBER 31, 1996
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 6,204,213
Accounts receivable, net of allowance of $138,600 ................ 1,450,241
Inventory, net ................................................... 340,163
Prepaid expenses and other ....................................... 429,957
------------
Total current assets ............................... 8,424,574
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $346,726 ......................................... 1,063,976
OTHER ASSETS, net ................................................... 145,384
------------
Total assets ....................................... $ 9,633,934
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................. $ 857,780
Accrued liabilities .............................................. 1,393,519
Deferred revenues ................................................ 349,391
------------
Total current liabilities .......................... 2,600,690
DEFERRED REVENUE, NET OF CURRENT .................................... 16,660
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 shares issued, 6,182,031 shares outstanding ....... 62,641
Additional paid-in capital ....................................... 19,594,230
Deferred compensation ............................................ (369,336)
Accumulated deficit .............................................. (12,269,101)
Treasury stock, 82,145 shares at cost ............................ (1,850)
------------
Total stockholders' equity ......................... 7,016,584
------------
Total liabilities and stockholders' equity ......... $ 9,633,934
============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-3
<PAGE>
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996
------------ ------------
<S> <C> <C>
NET REVENUES:
Licenses ..................................................................... $ 6,000,186 $ 13,725,921
Maintenance and services ..................................................... 52,600 72,545
----------- ------------
Total revenues .......................................................... 6,052,786 13,798,466
COST OF PRODUCT LICENSES ........................................................ 1,217,182 2,675,434
----------- ------------
Gross profit ............................................................ 4,835,604 11,123,032
OPERATING EXPENSES:
Research and development ..................................................... 887,717 3,021,318
Selling and marketing ........................................................ 3,246,174 8,906,307
General and administrative ................................................... 1,158,406 4,254,646
Acquired research and development costs ...................................... -- 2,798,604
----------- ------------
Operating loss .......................................................... (456,693) (7,857,843)
OTHER:
Interest income .............................................................. 39,859 525,255
Interest expense ............................................................. (34,997) --
----------- ------------
Net loss ................................................................ $ (451,831) $ (7,332,588)
=========== ============
NET LOSS PER SHARE .............................................................. $ (.10) $ (1.22)
=========== ============
SHARES USED IN COMPUTING NET LOSS PER SHARE ..................................... 4,383,490 6,002,427
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ------------------------ ------------------------ PAID-IN
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL
----------- ---------- ----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 2,000,000 $ 20,000 -- $ -- 2,670,853 $ 26,708 $ 2,557,221
EXERCISE OF STOCK OPTIONS............ -- -- -- -- 4,440 44 956
ISSUANCE OF SERIES B PREFERRED STOCK
IN SEPTEMBER 1995 AT $1.25 PER
SHARE, net of offering costs of
$10,000.......................... -- -- 840,000 8,400 -- -- 1,031,600
ISSUANCE OF PREFERRED STOCK IN
SEPTEMBER 1995 AT $1.25 PER
SHARE FOR CONVERSION OF NOTES
PAYABLE.......................... -- -- 464,000 4,640 -- -- 575,360
DEFERRED COMPENSATION
RELATING TO ISSUANCE OF
CERTAIN STOCK OPTIONS............ -- -- -- -- -- -- 726,375
AMORTIZATION OF DEFERRED
COMPENSATION..................... -- -- -- -- -- -- --
ISSUANCE OF COMMON STOCK IN
CONJUNCTION WITH INITIAL PUBLIC
OFFERING AT $8.00 PER SHARE, net
of offering costs of $1,745,478.. -- -- -- -- 1,700,000 17,000 11,837,522
CONVERSION OF ALL PREFERRED
STOCK UPON CLOSING OF
INITIAL PUBLIC OFFERING.......... (2,000,000) (20,000) (1,304,000) (13,040) 1,462,953 14,630 18,410
ISSUANCE OF COMMON STOCK PURCHASE
WARRANTS UPON CLOSING OF
INITIAL PUBLIC OFFERING.......... -- -- -- -- -- -- 170
DISTRIBUTIONS TO STOCKHOLDERS........ -- -- -- -- -- -- --
NET LOSS............................. -- -- -- -- -- -- --
----------- ---------- ----------- ---------- ----------- ------------ --------------
BALANCE, December 31, 1995........... -- -- -- -- 5,838,246 58,382 16,747,614
ISSUANCE OF COMMON STOCK FOR BLUE
SQUIRREL ACQUISITION............. -- -- -- -- 125,000 1,250 397,188
ISSUANCE OF COMMON STOCK FOR --
BOOKMAKER ACQUISITION............ -- -- -- -- 223,538 2,235 2,411,975
AMORTIZATION OF DEFERRED
COMPENSATION..................... -- -- -- -- -- -- (15,719)
EXERCISE OF STOCK OPTIONS............ -- -- -- -- 77,392 774 53,172
DISTRIBUTIONS TO STOCKHOLDERS........ -- -- -- -- -- -- --
NET LOSS............................. -- -- -- -- -- -- --
----------- ---------- ----------- ---------- ----------- ------------ --------------
BALANCE, December 31, 1996........... -- $ -- -- $ -- 6,264,176 $ 62,641 $ 19,594,230
=========== ========== =========== ========== =========== ============ ==============
</TABLE>
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED TREASURY
COMPENSATION DEFICIT STOCK TOTAL
--------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994........... $ -- $ (2,125,100) $ (1,850) $ 476,979
EXERCISE OF STOCK OPTIONS............ -- -- -- 1,000
ISSUANCE OF SERIES B PREFERRED STOCK
IN SEPTEMBER 1995 AT $1.25 PER
SHARE, net of offering costs of
$10,000......................... -- -- -- 1,040,000
ISSUANCE OF PREFERRED STOCK IN
SEPTEMBER 1995 AT $1.25 PER
SHARE FOR CONVERSION OF NOTES
PAYABLE......................... -- -- -- 580,000
DEFERRED COMPENSATION
RELATING TO ISSUANCE OF
CERTAIN STOCK OPTIONS............ (726,375) -- -- --
AMORTIZATION OF DEFERRED
COMPENSATION..................... 140,270 -- -- 140,270
ISSUANCE OF COMMON STOCK IN
CONJUNCTION WITH INITIAL PUBLIC
OFFERING AT $8.00 PER SHARE, net
of offering costs of $1,745,478.. -- -- -- 11,854,522
CONVERSION OF ALL PREFERRED
STOCK UPON CLOSING OF
INITIAL PUBLIC OFFERING.......... -- -- -- --
ISSUANCE OF COMMON STOCK PURCHASE
WARRANTS UPON CLOSING OF
INITIAL PUBLIC OFFERING.......... -- -- -- 170
DISTRIBUTIONS TO STOCKHOLDERS........ -- (854,620) -- (854,620)
NET LOSS............................. -- (451,831) -- (451,831)
-------------- ------------- ------------ ------------
BALANCE, December 31, 1995........... (586,105) (3,431,551) (1,850) 12,786,490
ISSUANCE OF COMMON STOCK FOR BLUE
SQUIRREL ACQUISITION............. -- -- -- 398,438
ISSUANCE OF COMMON STOCK FOR
BOOKMAKER ACQUISITION............ -- -- -- 2,414,210
AMORTIZATION OF DEFERRED
COMPENSATION..................... 216,769 -- -- 201,050
EXERCISE OF STOCK OPTIONS............ -- -- -- 53,946
DISTRIBUTIONS TO STOCKHOLDERS........ -- (1,504,962) -- (1,504,962)
NET LOSS............................. -- (7,332,588) -- (7,332,588)
-------------- ------------- ------------ ------------
BALANCE, December 31, 1996........... $ (369,336) $ (12,269,101) $ (1,850) $ 7,016,584
============== ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ..................................................................... $ (451,831) $(7,332,588)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ........................................... 65,526 354,503
Amortization of deferred compensation related to
certain stock options ............................................... 140,270 201,050
Non-cash acquired research and
development costs ................................................... -- 2,798,604
Changes in operating assets and liabilities:
(Net of Blue Squirrel and BookMaker asset acquisitions)
(Increase) decrease in net accounts receivable .......................... 61,006 (1,157,170)
Increase in inventory ................................................... (91,899) (161,407)
Increase in prepaid expenses and other current assets ................... (7,821) (476,049)
Increase in other assets ................................................ (6,093) (51,621)
Increase in accounts payable and accrued liabilities .................... 653,411 808,655
Increase (decrease) in deferred revenues ................................ (3,382) 230,970
---------- ----------
Net cash provided (used) by operating activities .................... 359,187 (4,785,053)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment .......................................... (56,166) (1,009,574)
(Purchase) sale of marketable securities ..................................... (7,998,417) 7,998,417
Cash paid for Blue Squirrel asset acquisition ................................ -- (128,018)
Net cash received from BookMaker acquisition ................................. -- 77,234
---------- ----------
Net cash provided (used) by investing activities .................... (8,054,583) 6,938,059
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....................................... 11,854,522 --
Proceeds from issuance of preferred stock .................................... 1,040,000 --
Proceeds from exercise of stock options ...................................... 1,000 53,946
Proceeds from issuance of warrants ........................................... 170 --
Proceeds from notes payable to stockholders and others ....................... 660,705 --
Repayments of notes payable to stockholders and others ....................... (80,705) --
Distribution payable ......................................................... 43,000 --
Dividend distributions ....................................................... (854,620) (1,504,962)
---------- ----------
Net cash provided (used) by financing activities .................... 12,664,072 (1,451,016)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................................... 4,968,676 701,990
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ...................................................................... 533,547 5,502,223
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................ $5,502,223 $6,204,213
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
The ForeFront Group, Inc. (ForeFront or the Company) is a Delaware
corporation incorporated on December 6, 1990. The Company develops and markets
Internet software which enables individuals and organizations to be more
productive with information. ForeFront's Internet software allows users to
obtain Internet information by providing tools that effectively retrieve, manage
and print information from the World Wide Web. In addition, through its merger
with AllMicro, Inc. (now ForeFront Direct, Inc.), a direct telemarketing
company, the Company republishes a number of software products for personal
computer technicians and network administrators.
In connection with the merger with AllMicro, Inc. on July 22, 1996,
which was accounted for as a pooling of interests, the accompanying consolidated
financial statements give retroactive effect to the merger and, as a result, the
consolidated financial statements are presented as if ForeFront and AllMicro,
Inc. had been combined for all periods presented.
The Company delivers its products through multiple distribution
channels including its electronic storefront and other online resellers over the
Internet, original equipment manufacturers (OEMs), systems integrators,
value-added resellers (VARs), catalogs and direct telemarketing. The Company
also has alliances with other computer software companies to incorporate bundled
versions of the Company's Internet products in the products of such other
companies.
ForeFront is developing products and has received limited revenues to
date from Internet software products developed by the Company. The Company has
incurred net losses since inception and expects to continue to operate at a loss
into 1997 and potentially beyond. As of December 31, 1996, the Company had an
accumulated deficit of approximately $12.3 million and its future operating
results could be subject to significant fluctuations and volatility. The future
success of the Company is dependent upon many factors, including the successful
completion of its product development activities, the development of salable
products, the identification of and penetration of markets for these products
through multiple distribution channels, technological change and risk of
obsolescence, the continued acceptance and use of the Internet as a viable
commercial marketplace, the Company's ability to attract and retain key
personnel and the successful integration of the operations and businesses of
acquired companies.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRESENTATION
The accompanying consolidated financial statements include the
accounts of The ForeFront Group, Inc., and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the current year presentation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are
translated to U.S. dollars at the exchange rate on the balance sheet date.
Revenues, costs and expenses are translated at average rates of exchange
prevailing during the year. Foreign currency transaction gains and losses are
not material and are included in the determination of net loss.
STATEMENT OF CASH FLOWS
The Company considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31,
1996, the Company's entire investment portfolio consisted of U.S. Treasury Bills
and is classified as cash and cash equivalents.
In September 1995, the Company issued 464,000 shares of Series B
preferred stock and warrants to purchase 48,369 shares of common stock in
settlement of notes payable to stockholders and others, aggregating $580,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market. Inventory consists primarily of prepackaged software.
F-8
<PAGE>
PROPERTY AND EQUIPMENT
Furniture and computer software and hardware are carried at cost and
depreciated on the straight-line method using a four-year estimated useful life.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life. Property and equipment as of December 31, 1996 consist of
the following:
Furniture $ 215,332
Computer software and hardware 1,170,753
Leasehold improvements 24,617
-----------------
1,410,702
Less - Accumulated depreciation (346,726)
-----------------
Property and equipment, net $ 1,063,976
=================
ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1996 consist of the following:
Professional Fees $ 258,113
Salaries/benefits 606,637
Insurance 130,719
Other 398,050
-----------------
Total accrued liabilities $ 1,393,519
=================
REVENUE
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.
Provisions for sales returns and exchanges were $0 and $124,000 in fiscal 1995
and 1996, respectively. 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.
F-9
<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, adjusted as described as follows. Common
equivalent shares are generally excluded from the per share calculations, as the
effect of their inclusion is antidilutive. However, 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 as if they were
outstanding for all periods prior to completion of the Company's initial public
offering. Options and warrants granted by the Company prior to September 30,
1994, and not in contemplation of an offering have been excluded from the
calculation of common and common equivalent shares outstanding because such
options and warrants are antidilutive. Shares of convertible preferred stock are
treated as if converted to common stock on the respective dates of original
issuance.
3. FEDERAL INCOME TAXES:
The Company has incurred losses since inception and, therefore, has
not been subject to federal income taxes. As of December 31, 1996, the Company
has generated net operating loss carryforwards (NOLs) of approximately $5.5
million available to reduce future income taxes. These carryforwards begin to
expire in 2007. The Company's ability to utilize the carryforwards is expected
to be limited by "changes in ownership," as such term is defined by federal
income tax laws and regulations, that occurred upon the sale of 1,700,000 shares
of common stock in December 1995, the acquisitions of Blue Squirrel and
BookMaker in March 1996 and June 1996, respectively, and the merger with
AllMicro, Inc. in July 1996.
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized differently
in the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation allowance
should be provided. As the Company has had cumulative losses and there is
F-10
<PAGE>
no assurance of future taxable income, a valuation allowance has been
established to fully offset the deferred tax asset at December 31, 1996. The
valuation allowance increased $905,065 over the prior year. The components of
the Company's deferred tax assets as of December 31, 1996, are as
follows:
Net operating loss carryforwards $1,886,443
Research and development tax credit carryforwards 80,925
Allowance for returns/deferred revenue/depreciation 209,078
-------------
Total deferred tax assets 2,176,446
Less - Valuation allowance (2,176,446)
-------------
Net deferred tax asset $ ---
=============
Prior to the merger, AllMicro, Inc. was an S Corporation for federal
income tax purposes. In accordance with the S Corporation provisions of the
Internal Revenue Code, this company's earnings (losses) are included in the
personal tax returns of its stockholders; therefore, no income tax expense is
recorded in the accompanying consolidated financial statements for the periods
prior to the merger with ForeFront.
4. STOCKHOLDERS' EQUITY:
In October 1995, the board of directors approved a .44403-for-one
reverse stock split. An amount equal to the decreased par value of the common
shares has been reflected as a transfer from common stock to the additional
paid-in capital account. Retroactive effect has been given to the reverse stock
split in stockholders' equity and in all share and per share data in the
accompanying consolidated financial statements.
In September 1995, the Company's board of directors authorized the
management of the Company to file a registration statement with the Securities
and Exchange Commission permitting the Company to sell shares of its common
stock to the public. The offering of 1,700,000 shares at $8.00 per share was
consummated on December 26, 1995, with all of the preferred stock outstanding
automatically converting into 1,462,953 shares of common stock.
CONVERTIBLE NOTES
In March, April and July 1995, the Company issued senior convertible
promissory notes to certain stockholders, institutions and the former chief
executive officer (the Former Officer) totaling $660,705. The note to the Former
Officer was issued for the remaining amount due of his severance pay in the
amount of $30,705. The notes bore interest at prime plus 2 percent and were due
at the earlier of a common stock offering in which the offering raised at least
$1,000,000 in capital or March 31, 1996.
On September 26, 1995, the Company paid $80,705 in principal to two of
the noteholders and paid interest totaling approximately $35,000 to all of the
noteholders. The remaining principal of $580,000 was converted into 464,000
shares of Series B preferred stock at $1.25 per share in conjunction with the
issuance of Series B preferred stock. The noteholders received warrants to
F-11
<PAGE>
purchase 48,369 shares of common stock at $2.82 per share pursuant to the note
subscription agreements.
PREFERRED STOCK
In June 1992 through November 1992, the Company issued 2,000,000
shares of Series A preferred stock in exchange for net proceeds totaling
$986,605. On September 26, 1995, the Company issued 1,304,000 shares of Series B
preferred stock for $1.25 per share. The placement included the conversion of
$580,000 in principal of senior convertible notes payable and net cash proceeds
of approximately $924,000.
In December 1995, concurrent with the closing of the Company's initial
public offering, all shares of Series A and Series B preferred stock were
converted into 1,462,953 shares of 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 and one share of common stock for every 2.256 shares of Series B preferred
stock. Except for certain registration rights, all rights, preferences and
privileges associated with the Company's previously outstanding preferred stock
were terminated upon conversion.
WARRANTS
The Company issued warrants to purchase 37,295 shares of common stock
to the purchasers of the Series B preferred stock. Warrants to purchase 48,369
shares of common stock were also issued to the senior convertible promissory
noteholders that exchanged notes into shares of Series B preferred stock. The
warrants have a five-year term and allow the holders to purchase 85,664 shares
of common stock at a price of $2.82 per share.
The Company issued warrants to purchase 170,000 shares of common stock
to the underwriters upon the closing of the initial public offering. The
purchase price of the warrants was $.001 per warrant. The warrants have a
five-year term from the date of the consummation of the initial public offering
and are exercisable at a price of $9.60 per share.
5. CAPITAL STOCK
STOCK OPTION PLANS
In July, 1996, the Board of Directors approved the 1996 Non-Qualified
Stock Option Plan (the "1996 Plan"). Under the 1996 Plan, 1,250,000 shares of
common stock have been reserved for issuance upon exercise of non-qualified
options. The term of each option is determined by the Board with a maximum term
of 10 years from the date of grant, but the options generally vest over a
four-year period. At December 31, 1996, options to purchase 182,407 shares were
available for future grants under the 1996 Plan. Subsequent to year end, the
Board adopted the Amended and Restated 1996 Stock Option Plan (the "Amended 1996
Plan"), which increased the number of shares subject to the 1996 Plan to
2,000,000, and authorized the issuance of up to 750,000 incentive stock options
F-12
<PAGE>
under Section 422 of the Internal Revenue Code. Both of the above changes to the
1996 Plan are subject to stockholder approval.
In March, 1996, the Board of Directors approved the 1996 Nonemployee
Directors' Stock Option Plan (the "1996 Directors' Plan"). Under the 1996
Directors' Plan, 150,000 shares of common stock have been reserved for issuance
upon exercise of the options. Each nonemployee director shall receive an option
to purchase 20,000 shares of common stock upon election to the Board of
Directors. Each subsequent year, the nonemployee directors shall each receive an
option to purchase 5,000 shares of common stock. The options generally vest over
a one year period.
In June, 1992, the Company's stockholders approved the 1992 Stock
Option Plan (the "1992 Plan"). Under the 1992 Plan, as amended, 1,500,000 shares
of common stock have been reserved for issuance upon exercise of non-qualified
and/or incentive stock options at December 31, 1995. The term of each option is
determined by the board of directors with a maximum term of 10 years from the
date of grant, but the options generally vest over a four-year period. At
December 31, 1995 and 1996, options to purchase 488,014 shares and 65,736 shares
were available for future grants under the 1992 Plan.
In June 1995, the Company amended option agreements providing for the
purchase of 125,630 shares of common stock with an original exercise price of
$2.82. In November 1995, the Company granted options to purchase 352,480 shares
of common stock at $5.60 per share; however, the exercise prices were
subsequently amended to $7.00 per share in December 1995. The revised exercise
prices were equal to management's estimated fair value at the amendment dates.
The Company believes that, at date of grant, the exercise price
approximates fair value except for certain grants in August and September 1995.
For options granted in August and September 1995, the Company recognized
deferred compensation for the excess of the deemed value for accounting purposes
of the common stock on the date the options were granted ($2.82 per share) over
the $1.13 exercise price of such options. Aggregate deferred compensation of
$726,375 resulted from the issuance of these options, and compensation expense
is recognized ratably over the vesting period of each option, generally four
years. The Company recognized $140,270 and $201,050 of this amount as
compensation expense for the years ended December 31, 1995 and 1996,
respectively.
In November 1996, the Compensation Committee of the Board of Directors
approved the repricing of substantially all of the Company's outstanding options
held by the existing employees to the then current fair market value of $5.31
per share (the closing price on the date of such repricing) in order to
incentivize the Company's employees.
In accordance with the terms of APB No.25, the Company records no
compensation expense for its stock option awards with an exercise price equal to
the fair market value on the date of grant. As provided by SFAS No. 123
"Accounting for Stock-Based Compensation," the Company has adopted the
disclosure requirements of SFAS No. 123 and has elected not to record
compensation expense in accordance with this statement. Had compensation expense
for the Company's stock
F-13
<PAGE>
option plans been recorded under the provisions of SFAS No. 123, the Company's
hypothetical net loss and net loss per share would have been as follows:
1995 1996
------------ ------------
Net loss: As reported $ (451,831) $ (7,332,588)
Pro Forma (376,388) (8,476,163)
Net loss per share: As reported $ (0.10) $ (1.22)
Pro Forma (0.09) (1.41)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting hypothetical pro forma
compensation cost may not be representative of that to be expected in future
years.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
1992 STOCK OPTION PLAN 1996 STOCK OPTION PLAN 1996 DIRECTORS' PLAN
-------------------------- ------------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ----------- -------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 151,315 $0.54 -- -- -- --
Granted 1,008,908 2.64 -- -- -- --
Canceled (152,677) 1.13 -- -- -- --
Exercised (4,440) 0.23 -- -- -- --
------------
Balance at December 31, 1995 1,003,106 2.56 -- -- -- --
Granted 1,278,500 5.50 1,912,876 $5.29 20,000 $8.625
Canceled (856,222) 5.36 (845,283) 5.31 -- --
Exercised (77,392) 0.70 -- -- -- --
------------ ----------- -----------
Balance at December 31, 1996 1,347,992 1,067,593 20,000
============ =========== ===========
Exercisable at
December 31, 1995 346,784 -- --
============ =========== ===========
Exercisable at
December 31, 1996 651,463 $3.22 130,531 $5.30 11,664 $8.625
============ =========== ===========
</TABLE>
OPTIONS OUTSTANDING
Range of Average Weighted-Avg Remaining
EXERCISE PRICES AT DECEMBER 31, 1996 CONTRACTUAL LIFE
- ----------------- ----------------------------- ------------------------
$.23 - 2.82 540,808 7.4 years
$5.31 - 7.125 1,860,082 9.0 years
$8.25 - 8.625 34,529 9.0 years
$18.00 166 9.4 years
F-14
<PAGE>
The weighted average remaining contractual lives of the options issued
pursuant to the 1992 Stock Option Plan, the 1996 Stock Option Plan and the 1996
Directors Plan are 8.3, 9.4 and 9.1 years, respectively.
The weighted average fair value of options granted was $2.34 and $5.21
for the years ended December 31, 1995 and 1996, respectively. The fair market
value of each option is estimated on the grant date using the Black-Scholes
option pricing model, with the following assumptions:
1995 1996
----------------- ---------------
Stock volatility 73% 73%
Risk-free interest rate 6% 6%
Option term 4 years 4 years
Stock dividend yield -- --
EMPLOYEE STOCK PURCHASE PLAN
In November 1995, the Board of Directors approved the Employee Stock
Purchase Plan (the "Purchase Plan") for all eligible employees. Under the
Purchase Plan, shares of the Company's common stock may be purchased at
three-month intervals during 1997 at 85% of the lower of the fair market value
on January 1, 1997 or the last day of each three-month period. Employees may
purchase shares having a value not exceeding 15% of their gross compensation
during an offering period. Under the terms of the Purchase Plan 100,000 shares
are reserved for issuance during the 1997 offering period and a total of 500,000
are reserved for issuance for the entire Purchase Plan.
EMPLOYEE BENEFIT PLAN
In October 1996, the Company adopted a defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code. Under the plan,
U.S. employees who work a minimum of 1,000 hours per year, are at least 21 years
of age and have completed at least six consecutive months of service are
eligible for the plan. Participants may contribute 1% to 15% of their
compensation, but not more than statutory limits. At the present time, the
Company does not match employee contributions.
6. LICENSE AND DISTRIBUTION AGREEMENTS:
The Company entered into a technology transfer agreement with Baylor
College of Medicine ("Baylor") whereby the Company has an exclusive
noncancellable worldwide license to use and market the technology related to the
Virtual Notebook System ("VNS"). The Company issued 377,425 shares of its common
stock, $.01 par value, to Baylor in exchange for the grant of the exclusive
license. Baylor then transferred a portion of their shares to the development
team employed by Baylor. This agreement, as amended, provided Baylor the right
to continue to use and improve the VNS and related technology and provided
ForeFront the exclusive rights to all such improvements made by Baylor through
December 31, 1995. Baylor also retains the right to conduct further research and
development using the VNS technology.
F-15
<PAGE>
7. COMMITMENTS AND CONTINGENCIES:
LEASE AGREEMENTS.
The Company leases facilities and other equipment under operating
leases that expire through 2001. Rental expense for the years ended December 31,
1995 and 1996 amounted to approximately $114,000 and $233,000, respectively.
Minimum annual rental payments under these leases are as follows:
1997............................... $ 537,000
1998............................... 523,000
1999............................... 493,000
2000............................... 402,000
2001............................... 297,000
--------------
Total....................... $ 2,252,000
==============
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its executive
officers which provide for annual salaries, bonuses or commissions and incentive
and non-qualified stock options which vest according to continued employment. In
addition, the Company maintains a $1,000,000 life insurance policy for its
president and an executive vice president for the benefit of their designated
beneficiaries.
8. ACQUISITIONS
BLUE SQUIRREL, INC.
On March 8, 1996, the Company acquired the assets of Blue Squirrel,
Inc. 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. 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 were capitalized at their estimated fair market
value of $15,465.
BOOKMAKER CORPORATION
On June 12, 1996, the Company acquired the assets of BookMaker
Corporation. The consideration consisted of 248,375 shares of the Company's
common stock issued at closing (the Closing Shares) and 199,262 shares of the
Company's common stock (the "Earnout Shares") issued at closing and deposited in
escrow to be delivered to BookMaker subject to satisfaction of certain
F-16
<PAGE>
milestones for the remainder of 1996 and 1997. One-third of the Earnout Shares
is subject to release from escrow on or before April 30, 1997, and the remaining
two-thirds of the Earnout Shares are subject to release on or before April 30,
1998, based upon the revenues and gross profit before income tax of BookMaker's
operations after the closing for the 1996 and 1997 periods, respectively. Any
Earnout Shares not earned shall be forfeited. Of the Closing Shares, 10 percent
(the "Escrow Shares") is held in escrow for a period of two years from the
closing to cover losses due to breach of representations and warranties. Holders
of the Earnout Shares and Escrow Shares are entitled to voting and dividend
rights during the period such shares are held in escrow. The acquisition has
been accounted for under the purchase method and, accordingly, the operating
results of BookMaker are included in the operating results since the date of
acquisition. The purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair values at the date of acquisition.
The initial purchase price has been allocated as follows:
Working capital, other than cash $ 81,658
Furniture and equipment 25,528
Purchased software 66,900
Other assets 1,500
Acquired research and development 2,358,723
---------------
Purchase price, net of cash received $ 2,534,309
===============
The following unaudited, pro forma information has been prepared
assuming both acquisitions had taken place at the beginning of the periods.
DECEMBER 31,
1995 1996
----------- -----------
Net Revenues $ 7,753,557 $14,513,485
Operating Loss (510,846) (7,922,771)
Net Loss (504,131) (7,397,526)
Net Loss Per Share ($0.11) ($1.21)
The pro forma financial information is not necessarily indicative of
the results of operations had the entities been combined for the entire periods.
ALLMICRO, INC.
On July 22, 1996, the Company consummated the merger with AllMicro,
Inc. (now ForeFront Direct), pursuant to the terms of the agreement and plan of
reorganization, dated as of July 19, 1996 (the Merger Agreement), by and among
the Company, AllMicro Acquisition Corporation, AllMicro and the stockholders of
AllMicro (the Stockholders). The acquisition was effected by way
F-17
<PAGE>
of a merger (the Merger) of a wholly owned subsidiary of the Company with and
into AllMicro. As a result of the Merger, AllMicro became a wholly owned
subsidiary of the Company. The Merger was treated as a pooling of interests for
accounting purposes. Pursuant to the Merger Agreement, the Stockholders received
an aggregate of 1,056,152 shares of common stock, $.01 par value, of the Company
(ForeFront Common Stock), 10 percent of which was placed in escrow to satisfy
claims of the Company that may arise for any breach of the representations and
warranties made by AllMicro and the Stockholders in the Merger Agreement. The
escrow shares will be released upon the filing of audited financial statements
for 1996 by ForeFront, except for amounts associated with pending claims.
The shares of the Company's common stock were issued to the
Stockholders pursuant to an exemption from registration under Section 3(a)(10)
of the Securities Act of 1933, as amended (the Securities Act). The Stockholders
have also been granted certain other piggyback registration rights under certain
circumstances. In addition, any sales of ForeFront Common Stock by the
Stockholders must be in compliance with the volume limitations of Rule 145 under
the Securities Act.
As a result of the pooling of interests, the accompanying consolidated
financial statements give retroactive effect to the merger and, as a result, the
consolidated financial statements are presented as if ForeFront and AllMicro,
Inc. had been combined for all periods presented.
F-18
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
NO. DESCRIPTION OF EXHIBITS
- --------------------------------------------------------------------------------
2.1 -- Agreement and Plan of Reorganization among the
Company, AllMicro Acquisition Corporation,
AllMicro, Inc. and the Shareholders listed on the
execution pages thereto, dated July 19, 1996
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission
on August 6, 1996).
2.2 -- Asset Purchase Agreement between the Company and
BookMaker Corporation, dated June 12, 1996
(incorporated by reference to the exhibit attached
to the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission
on June 27, 1996).
3.1 -- Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form SB-2)
(Registration No. 33-977898-D).
3.2 -- Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Quarterly Report on
Form 10-QSB for the period ended June 30, 1996)
(File No. 000-27438).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to Amendment No. 2 to the
Company's Registration Statement on Form SB-2)
(Registration No. 33-977898-D).
10.1 -- Amended and Restated 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form SB-2)
(Registration No. 33-977898-D).
10.2 -- 1996 Non-Qualified Stock Option Plan (incorporated
by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the period
ended September 30, 1996) (File No. 0-27438).
10.3 -- 1996 Non-Employee Directors' Stock Option Plan
(incorporated by reference to Exhibit 99.3 to the
Company's Registration Statement on Form S-8)
(Registration No. 333-07721).
10.4 -- 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8) (Registration
No. 000-27438).
10.5 -- Employment Agreement between the Company and
Martin Mazner dated June 12, 1996 (incorporated by
reference to Exhibit 10.1 to the Company's
<PAGE>
Quarterly Report on Form 10-QSB for the period
ended June 30, 1996) (File No. 000-27438).
10.6 -- Employment Agreement between the Company and
Michael Kaplan dated July 22, 1996 (incorporated
by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the period
ended September 30, 1996) (File No. 000-27438).
10.7* -- Employment Agreement between the Company and David
Sikora dated December 23, 1996.
10.8* -- Amended and Restated 1996 Stock Option Plan.
10.9 -- Registration Rights Agreement between the Company
and certain holders of Common and Preferred Stock
dated September 1995 (incorporated by reference to
Exhibit 10.10 of the Company's Registration
Statement on Form SB-2) (Registration No.
33-977898-D).
10.10 -- Registration Rights Agreement, dated as of June
12, 1996, by and among The ForeFront Group, Inc.
and BookMaker Corporation (incorporated by
reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K filed with the Securities and
Exchange Commission on June 27, 1996).
10.11 -- Registration Rights Agreement, dated as of July
19, 1996, by and among The ForeFront Group, Inc.
and the Shareholders of AllMicro, Inc. set forth
on the signature pages thereto (incorporated by
reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K filed with the Securities and
Exchange Commission on July 22, 1996).
10.12 -- Form of Warrant Agreement with the Representatives
of the Underwriters (incorporated by reference to
Exhibit 10.11 to the Company's Registration
Statement on Form SB-2) (Registration No.
33-97798-D).
10.13 -- Form of Stock Purchase Warrant issued in September
1995 (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form SB-2)
(Registration No. 33-97798-D).
10.14 -- Software License Agreement between the Company and
Baylor College of Medicine (incorporated by
reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2) (Registration
No. 33-97798-D).
11.1* -- Statement regarding computation of net loss per
share.
21.1* -- List of subsidiaries of the Company.
23.1* -- Consent of Arthur Andersen LLP, independent public
accountants (incorporated by reference to Exhibit
23.2 to each of the Company's Registration
Statements on Form S-3 and Form S-8) (Registration
No. 333-18491 and Registration No. 333-19147,
respectively).
27* -- Financial Data Schedule.
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
Employment Agreement (the "Agreement"), dated December 23, 1996, by and
between The Forefront Group, Inc., a Delaware corporation (the "Company"), and
David Sikora ("Employee").
In consideration of the mutual premises and conditions contained herein,
the parties hereto agree as follows:
Section 1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth.
Section 2. Duties. Employee shall serve as the President and Chief
Executive Officer of the Company. Employee agrees to devote his full time and
best efforts to the performance of his duties to the Company.
Section 3. Term. Except as otherwise provided in Section 6 hereof, the term
of this Agreement shall commence on October 1, 1996 ("Commencement Date") and
terminate December 31, 1998, and shall be automatically renewed thereafter for
successive one year terms unless either party gives to the other written notice
of termination no fewer than sixty (60) days prior to the expiration of any such
term that it does not wish to extend this Agreement.
Section 4. Compensation and Benefits. In consideration for the services of
the Employee hereunder, the Company will compensate Employee as follows:
(a) Base Salary. Commencing on October 1, 1996 Employee shall be
entitled to receive a salary of $16,667 per month, provided that the
increase in salary as compared to Employee's current salary for the
remainder of 1996 may be withheld and paid as a bonus to Employee in
Employee's discretion.
(b) 1996 Bonus. Employee shall be paid his accrued bonus for the
first nine months of 1996, in the amount of $36,750, upon execution of
this Agreement. In addition, Employee shall be eligible for a bonus of
$25,000 for the fourth quarter of 1996, payable 50% in the sole
discretion of the Compensation Committee of the Board of Directors and
50% on the achievement of $5,000,000 of revenues for the fourth
quarter of 1996.
(c) 1997-1998 Bonus. Commencing on January 1, 1997, Employee
shall be eligible to receive an annual cash bonus in an amount equal
to up to 50% of his base salary payable one-half in the sole
discretion of the Compensation Committee of the Board of Directors,
and one-half based upon the accomplishment, in the Board's reasonable
opinion, of the milestones specified on Exhibit A hereto. Such bonus
shall be
<PAGE>
paid, when and if declared or earned, on a semi-annual basis.
(d) Stock Options.
(i) The Company shall grant Employee an option to purchase
100,000 shares of the Company's Common Stock consistent with the
terms of the 1996 Non-Qualified Stock Option Plan adopted by the
Company and the provisions of Section 7 hereof. Such options will
vest over a period of three years. In addition, fifty percent of
all options currently held by Employee which are unvested shall
be vested.
(ii) Benefits. During the term of this Agreement, the
Company shall continue to pay the entire premium on health
insurance coverage under the Company's sponsored health insurance
plan for the Employee and his family, and the entire premium on a
$1,000,000 life insurance policy on the Employee's life, with
proceeds payable to a beneficiary designated by Employee. In
addition, during the term of this Agreement, Employee shall be
entitled to participate in and receive benefits under any and all
employee benefit plans and programs which are from time to time
generally made available to the executive employees of the
Company, subject to approval and grant by the appropriate Company
committee with respect to programs calling for such approval or
grants.
Section 5. Expenses. It is acknowledged by the parties that Employee, in
connection with the services to be performed by him pursuant to the terms of
this Agreement, will be required to make payments for travel, entertainment of
business associates and similar expenses. The Company will reimburse Employee
for all reasonable expenses of types authorized by the Company and incurred by
Employee in the performance of his duties hereunder. Employee will comply with
such budget limitations and approval and reporting requirements with respect to
expenses as the Company may establish from time to time.
Section 6. Termination. Employee's employment hereunder will commence on
the Commencement Date and continue until the end of the term specified in
Section 3 hereof and any renewals of such term, except that the employment of
Employee hereunder will terminate earlier in the following manner:
(a) Death or Disability. Immediately upon the death of Employee
during the term of his employment or, at the option of the Company, in
the event of Employee's disability, upon 30 days notice to Employee.
Employee will be deemed disabled if, as a result of Employee's
incapacity due to a physical or mental illness, Employee shall have
been absent from his duties with the Company on a full-time basis for
60 consecutive business days;
(b) For Cause. For "Cause" immediately upon written notice by the
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<PAGE>
Company to Employee. For purposes of this Agreement, a termination
will be for Cause if: (i) Employee willfully and continuously fails to
perform his duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness), (ii)
Employee willfully engages in gross misconduct materially and
demonstrably injurious to the Company or (iii) Employee has been
convicted of a felony; or
(c) Without Cause. Subject to the terms provided in the following
paragraph, the Company may terminate Employee's employment for
whatever reason it deems appropriate.
Employee will not be entitled to any severance pay or other compensation
upon termination of his employment pursuant to Subsections 6(a)-(b) or in the
event that Employee voluntarily leaves the employment of the Company except for
any portion of his base salary accrued but unpaid from the last monthly payment
date to the date of termination and expense reimbursements under Section 5
hereof for expenses incurred in the performance of his duties hereunder prior to
termination. In the event Employee's employment with the Company is terminated
by the Company for reasons other than any of the reasons enumerated in
Subsections 6(a)-(b) above, the Company will pay Employee, as Employee's sole
remedy in connection with such termination, severance pay in the amount of
Employee's monthly base salary at the rate in effect immediately preceding the
termination of Employee's employment for 12 months after the termination of
Employee's employment (the "Separation Payment Period"), which severance pay
will be paid by the Company in equal monthly payments in arrears or in full at
time of termination, at Employee's discretion. The Company will also pay
Employee the portion of his base salary accrued but unpaid from the last monthly
payment date to the date of termination and expense reimbursements under Section
5 hereof for expenses incurred in the performance of his duties hereunder prior
to termination.
Section 7. Effect of Termination on Options. If this Agreement is
terminated by the Company pursuant to Section 6(c) above, (i) the options that
are vested as of the date of termination shall remain exercisable for a period
of twelve months after the date of termination or such longer period as is
provided in such agreements and (ii) the options that would have vested during
the twelve months following termination shall vest upon termination, remain
exercisable for a period of twelve months after the date of termination and
expire at the end of such twelve month period or such longer period as is
provided in such agreements. If Employee's employment with the Company ends for
any other reason Employee's options will remain exercisable and will vest and
expire in accordance with the terms of the applicable option agreements.
Section 8. Change in Control Termination Payment.
(a) Change in Control Payment.
(i) Amount. Notwithstanding anything to the contrary
contained in
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Section 7 hereof, in the event of a Change in Control (as
defined in subsection 8(b) hereof) of the Company occurring
among the term of this Agreement regardless of whether
Employee's employment with the Company terminates for any reason
(other than death) following a Change In Control, the Company
will pay Employee a lump sum payment (the "Change in Control
Payment") in cash equal to one times the sum of the items in the
following subsections (I) through (VI):
(I) Employee's annual base compensation determined by
reference to his base salary in effect immediately prior to
the Change In Control;
(II) the maximum bonus that Employee could receive
under any management incentive bonus plan of the Company for
the year in which the Change In Control occurs, assuming all
incentives and financial targets were achieved that are
necessary to require payment of the largest bonus amount by
the Company to Employee; provided that the maximum bonus
under this subsection 8(a)(i)(II) will not be less than 50%
of the amount specified under subsection 8(a)(i)(I) hereof;
(III) the amount of Employee's base salary accrued but
unpaid from the last monthly payment date to the date of the
Change in Control;
(IV) expense reimbursement under Section 5 hereof for
expenses incurred in the performance of his duties hereunder
prior to the Change in Control of his employment with the
Company; and
(V) any other benefits accrued but unpaid as of the
date of such Change in Control.
(ii) Time for Payment Interest. The Company will pay the
Change in Control Payment to the Employee concurrent with the
Change in Control. The Company's obligation to pay to Employee
any amounts under this Section 8, including without limitation
the Change in Control Payment, will bear interest at the maximum
rate allowed by law until paid by the Company, and all accrued
and unpaid interest will bear interest at the same rate, all of
which interest will be compounded daily.
(iii) Payment Authority. Any officer of the Company (other
than Employee) is authorized to issue and execute a check,
initiate a wire transfer or otherwise effect payment on behalf of
the Company to satisfy the Company's obligations to pay all
amounts due to Employee under this Section 8.
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<PAGE>
(iv) Termination. The Company's obligation to pay the Change
in Control Payment will not be affected in the event that or by
the manner in which Employee's employment with the Company is
terminated. Without limiting the generality of the foregoing, the
Company will be obligated to pay the Change in Control Payment
regardless of whether Employee's termination of employment is
voluntary, involuntary, for cause, without cause, in violation of
any employment agreement or other agreement in effect at the time
of the Change In Control, or due to Employee's retirement or
disability. Employee's notice of his termination of employment in
connection with a Change In Control may be made by any means.
(b) Change in Control. A Change In Control will be deemed to have
occurred for purposes hereof (i) when a change of stock ownership of
the Company of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and any
successor Item of a similar nature has occurred; or (ii) upon the
acquisition of beneficial ownership, directly or indirectly, by any
person (as such term is used in Sections 13(d) and 13(d)(2) of the
Exchange Act) of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding
securities; or (iii) a change during any period of two consecutive
years of a majority of the members of the Board of Directors of the
Company for any reason, unless the election, or the nomination for
election by the Company's shareholders, of each director was approved
by a vote of a majority of the directors then still in office who were
directors at the beginning of the period; provided that a Change In
Control will not be deemed to have occurred for purposes hereof with
respect to any person meeting the requirements of clauses (i) and (ii)
of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of
1934, as amended.
(c) Arbitration. Any controversy or claim arising out of or
relating to this Section 8, or the breach thereof, will be settled
exclusively by arbitration in Houston, Texas, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association
then in effect. Judgment upon the award rendered by the arbitrator(s)
may be entered in, and enforced by, any court having jurisdiction
thereof.
(d) No Right to Continued Employment. This Section 8 will not
give Employee any right of continued employment or any right to
compensation or benefits from the Company except the rights
specifically stated herein.
Section 9. Confidential Information. Employee recognizes and acknowledges
that certain assets of the Company and its affiliates, including without
limitation information regarding customers, pricing policies, methods of
operation, proprietary computer programs, sales, products, profits, costs,
markets, key personnel, formulae, product applications, technical processes, and
trade secrets (hereinafter called "Confidential Information") are valuable,
special
5
<PAGE>
and unique assets of the Company and its affiliates. Employee will not,
during or after his term of employment, disclose any of the Confidential
Information to any person, firm, corporation, association, or any other entity
for any reason or purpose whatsoever, directly or indirectly, except as may be
required pursuant to his employment hereunder, unless and until such
Confidential Information becomes publicly available other than as a consequence
of the breach by Employee of his confidentiality obligations hereunder. In the
event of the termination of his employment, whether voluntary or involuntary and
whether by the Company or Employee, Employee will deliver to the Company all
documents and data pertaining to the Confidential Information and will not take
with him any documents or data of any kind or any reproductions (in whole or in
part) of any items relating to the Confidential Information.
Section 10. Noncompetition. Until one year after termination of Employee's
employment hereunder, Employee will not (i) engage directly or indirectly, alone
or as a shareholder, partner, officer, director, employee or consultant of any
other business organization, in any business activities which (A) relate to the
products and business of the Company at the time of the Change In Control (the
"Designated Industry") and (B) were either conducted by the Company prior to
Employee's termination or proposed to be conducted by the Company at the time of
such termination, (ii) divert to any competitor of the Company in the Designated
Industry any customer of Employee, or (iii) solicit or encourage any officer,
employee, or consultant of the Company to leave its employment by or with any
competitor of the Company in the Designated Industry. The parties hereto
acknowledge that Employee's noncompetition obligations hereunder will not
preclude Employee from (i) owning less than 5% of the common stock of any
publicly traded corporation conducting business activities in the Designated
Industry or (ii) serving as an officer or employee of an entity engaged in the
Internet or software industry whose business operations are not competitive with
those of the Company. Employee will continue to be bound by the provisions of
this Section 10 until their expiration and will not be entitled to any
compensation from the Company with respect thereto. If at any time the
provisions of this Section 10 are determined to be invalid or unenforceable, by
reason of being vague or unreasonable as to area, duration or scope of activity,
this Section 10 will be considered divisible and will become and be immediately
amended to only such area, duration and scope of activity as will be determined
to be reasonable and enforceable by the court or other body having jurisdiction
over the matter; and Employee agrees that this Section 10 as so amended will be
valid and binding as though any invalid or unenforceable provision had not been
included herein.
Section 11. General.
(a) Notices. Except as provided in Section 8(a) hereof, all
notices and other communications hereunder will be in writing or by
written telecommunication, and will be deemed to have been duly given
if delivered personally or if mailed by certified mail, return receipt
requested or by written telecommunication, to the relevant address set
forth below, or to such other address as the recipient of such notice
or communication will have specified to the other party hereto in
accordance with this Section 12(a):
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If to the Company, to: with a copy to:
The Forefront Group, Inc. Jeffrey R. Harder,
1330 Post Oak Boulevard VP & General Counsel
Suite 1300 The ForeFront Group, Inc.
Houston, Texas 77056 1330 Post Oak Boulevard,
Suite 1300
Houston, Texas 77056
If to Employee, to:
David Sikora
1102 Glourie Drive
Houston, Texas 77055
(b) Withholding; No Offset. All payments required to be made by
the Company under this Agreement to Employee will be subject to the
withholding of such amounts, if any, relating to federal, state and
local taxes as may be required by law. No payment under this Agreement
will be subject to offset or reduction attributable to any amount
Employee may owe to the Company or any other person.
(c) Equitable Remedies. Each of the parties hereto acknowledges
and agrees that upon any breach by Employee of his obligations under
any of Sections 9 and 10 hereof, the Company will have no adequate
remedy at law, and accordingly will be entitled to specific
performance and other appropriate injunctive and equitable relief.
(d) Severability. If any provision of this Agreement is held to
be illegal, invalid or unenforceable, such provision will be fully
severable and this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision never comprised a part
hereof; and the remaining provisions hereof will remain in full force
and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in
lieu of such illegal, invalid or unenforceable provision, there will
be added automatically as part of this Agreement a provision as
similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
(f) Waivers. No delay or omission by either party hereto in
exercising any right, power or privilege hereunder will impair such
right, power or privilege, nor will any single or partial exercise of
any such right, power or privilege preclude any further exercise
thereof or the exercise of any other right, power or privilege.
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<PAGE>
(g) Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of
which together will constitute one and the same instrument.
(h) Captions. The captions in this Agreement are for convenience
of reference only and will not limit or otherwise affect any of the
terms or provisions hereof.
(i) Reference to Agreement. Use of the words "herein," "hereof,"
"hereto" and the like in this Agreement refer to this Agreement only
as a whole and not to any particular subsection or provision of this
Agreement, unless otherwise noted.
(j) Binding Agreement. This Agreement will be binding upon and
inure to the benefit of the parties and will be enforceable by the
personal representatives and heirs of Employee and the successors of
the Company. If Employee dies while any amounts would still be payable
to him hereunder, such amounts will be paid to Employee's estate. This
Agreement is not otherwise assignable by Employee.
(k) Entire Agreement. This Agreement contains the entire
understanding of the parties, supersedes all prior agreements and
understandings relating to the subject matter hereof and may not be
amended except by a written instrument hereinafter signed by each of
the parties hereto.
(l) Governing Law. This Agreement and the performance hereof will
be construed and governed in accordance with the laws of the State of
Texas, without regard to its choice of law principles.
EXECUTED as of the date and year first above written.
THE FOREFRONT GROUP, INC.
By: /s/ G. Anthony Gorry
Its: Chairman of the Board
EMPLOYEE: /s/ David Sikora
8
EXHIBIT 10.8
THE FOREFRONT GROUP, INC.
AMENDED AND RESTATED 1996
STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Amended and Restated 1996
Stock Option Plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to
Employees and Consultants of the Company and its Subsidiaries and to promote the
success of the Company's business. Options granted under this Plan may be
incentive stock options (as defined under Section 422 of the Code, and limited
to 750,000 shares) or nonqualified stock options, as determined by the
Administrator at the time of grant of an option and subject to the applicable
provisions of Section 422 of the Code, as amended, and the regulations
promulgated thereunder. This Amended and Restated 1996 Stock Option Plan amends
and restates in its entirety the 1996 Nonqualified Stock Option Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees, as
applicable, that is administering the Plan pursuant to Section 4 of the
Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Company" means The ForeFront Group, Inc., a Delaware corporation.
(f) "Consultant" means any consultant or advisor to the Company or any
Parent or Subsidiary and any director of the Company whether compensated
for such services or not, provided that if and in the event the Company
registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the
Company.
(g) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Company
or any Subsidiary. Continuous Status as an Employee shall not be considered
interrupted in the case of: (i) any leave of absence approved by the Board,
including sick leave, military leave, or any other personal leave;
provided, however, that for purposes of Incentive Stock Options, such leave
is for a period of not more than ninety (90) days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or
unless provided otherwise pursuant to
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Company policy adopted from time to time; or (ii) in the case of transfers
between locations of the Company or between the Company, its Subsidiaries
or its successor.
(h) "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" means, as of any date, the value of Stock
determined as follows:
(i) If the Stock is listed on any established stock exchange or a
national market system including without limitation the National
Market System of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be
the closing sales price for such stock (or the closing bid, if no
sales were reported, as quoted on such system or exchange or the
exchange with the greatest volume of trading in Stock for the last
market trading day prior to the time of determination) as reported in
the Wall Street Journal or such other source as the Administrator
deems reliable;
(ii) If the Stock is quoted on the NASDAQ System (but not on the
National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high and low asked prices for the
Stock; or
(iii) In the absence of an established market for the Stock, the
Fair Market Value thereof shall be determined in good faith by the
Administrator.
(k) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(l) "Nonqualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(m) "Option" means a stock option granted pursuant to the Plan.
(n) "Optioned Stock" means the Stock subject to an Option.
(o) "Optionee" means an Employee or Consultant who receives an Option.
(p) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
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(q) "Plan" means this Amended and Restated 1996 Stock Option Plan.
(r) "Share" means a share of the Stock, as adjusted in accordance with
Section 12 of the Plan.
(s) "Stock" means the Common Stock, par value $.01 per share, of the
Company;
(t) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum number of shares of Stock which may be optioned and sold
under the Plan is 2,000,000 shares. The shares may be authorized, but unissued,
or reacquired Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With
respect to grants of Options to Employees who are also officers or
directors of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board to administer the
Plan, which Committee shall be constituted in such a manner as to
permit the Plan to comply with Rule 16b-3 promulgated under the
Exchange Act or any successor thereto ("Rule 16b-3") with respect to a
plan intended to qualify thereunder as a discretionary plan. Once
appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the
Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused,
and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by Rule 16b-3 with
respect to a plan intended to qualify thereunder as a discretionary
plan. Notwithstanding the foregoing, the Plan shall not be
administered by the Board if (a) the Company and its officers and
directors are then subject to the requirements of Section 16 of the
Exchange Act and (b) the Board's administration of the Plan would
prevent the Plan from complying with Rule 16b-3.
(ii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3,
the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither
directors nor officers.
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(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options to Employees or
Consultants who are neither directors nor officers of the Company, the
Plan shall be administered by (A) the Board or (B) a Committee
designated by the Board, which Committee shall be constituted in such
a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of corporate
and securities laws applicable to the Company and of the Code (the
"Applicable Laws"). Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefor,
fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the
extent permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan
and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Stock, in
accordance with Section 2(j) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Stock to be covered by
each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but
not limited to, the per share exercise price for the Shares to be
issued pursuant to the exercise of an Option and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture
restrictions regarding any Option or other award and/or the shares of
Stock relating thereto, based in each case on such factors as the
Administrator shall determine, in its sole discretion);
(vii) to determine whether and under what circumstances an Option
may be bought-out for cash under subsection 9(f);
(viii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining
4
<PAGE>
the amount, if any, of any deemed earnings on any deferred amount
during any deferral period); and
(ix) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Stock
covered by such Option shall have declined since the date the Option
was granted.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options. Neither the Board, the
Committee nor any member thereof shall be liable for any act, omission,
interpretation, construction or determination made in connection with the
Plan in good faith, and the members of the Board and of the Committee shall
be entitled to indemnification and reimbursement by the Company in respect
of any claim, loss, damage or expense (including counsel fees) arising
therefrom to the full extent permitted by law.
5. ELIGIBILITY.
(a) Nonqualified Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees, and
may not be granted for more than 750,000 shares at any time. An Employee or
Consultant who has been granted an Option may, if he is otherwise eligible,
be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonqualified Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair
Market Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company,
nor shall it interfere in any way with his right or the Company's right to
terminate his employment or consulting relationship at any time, with or
without cause, unless otherwise agreed in writing by the Company and such
Optionee.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board of Directors subject only to approval by the holders of a majority of the
outstanding Shares within 12 months after such date. It shall continue in effect
until June 30, 2006 unless extended by the
5
<PAGE>
Board or sooner terminated under Section 14 of the Plan. No grants of Options
will be made pursuant to the Plan after June 30 2006.
7. TERM OF OPTION. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns Stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
In the case of an Incentive Stock Option:
(i) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of
grant.
(ii) granted to any Employee, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall
be determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note, (4) other shares of the Company's capital
stock which (x) in the case of shares of the Company's capital stock
acquired upon exercise of an Option either have been owned by the Optionee
for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (5) authorization for
the Company to retain from the total number of Shares as to which the
Option is exercised that number of Shares having a Fair Market Value on the
date of exercise equal to the exercise price for the total number of Shares
as to which the Option is exercised, (6) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) any combination of the foregoing
methods of payment, or (8) such other consideration and method of payment
for the issuance of Shares to the extent permitted under applicable laws.
6
<PAGE>
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan. An Option may not be exercised for
a fraction of a Share.
An Option shall be deemed to be exercised, and the Optionee deemed to
be a stockholder of the Shares being purchased upon exercise, when written
notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment may, as authorized by the
Board, consist of any consideration and method of payment allowable under
Section 8(b) of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(b) TERMINATION OF EMPLOYMENT. In the event of termination of an
Optionee's relationship as a Consultant (unless such termination is for
purposes of becoming an Employee of the Company) or Continuous Status as an
Employee with the Company (as the case may be), such Optionee may, but only
within ninety (90) days (or such other period of time as is determined by
the Board, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option and not exceeding ninety (90)
days) after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his Option to the extent that Optionee was entitled to
exercise it at the date of such termination. To the extent that Optionee
was not entitled to exercise the Option at the date of such termination, or
if Optionee does not exercise such Option to the extent so entitled within
the time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section
9(b) above, in the event of termination of an Optionee's relationship as a
Consultant or Continuous Status as an Employee as a result of his total and
permanent disability (as defined in Section 22(e)(3) of the Code), Optionee
may, but only within twelve (12) months from the date of such termination
(but in no event later than the expiration date of the term of such Option
as set forth in the Option Agreement), exercise the Option to the extent
otherwise entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
7
<PAGE>
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following
the date of death (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent the Optionee was
entitled to exercise the Option at the date of death. To the extent that
Optionee was not entitled to exercise the Option at the date of
termination, or if the Optionee's estate (or such other person who acquired
the right to exercise the Option) does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall
terminate.
(e) RULE 16B-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose shall
be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
8
<PAGE>
(c) all elections shall be subject to the consent or disapproval of
the Administrator; and
(d) if the Optionee is subject to Rule 16b-3, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such Optionee
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
12. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Stock or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, then (a) the number,
class, and per share price of shares of Stock subject to outstanding Options
hereunder shall be appropriately adjusted in such a manner as to entitle an
Optionee to receive upon exercise of an Option, for the same aggregate cash
consideration, the same total number and class of shares as he would have
received had he exercised his Option in full immediately prior to the event
requiring the adjustment; and (b) the number and class of shares of Stock then
reserved for issuance under the Plan shall be adjusted by substituting for the
total number and class of shares of Stock then reserved that number and class of
shares of stock that would have been received by the owner of an equal number of
outstanding shares of each class of Stock as the result of the event requiring
the adjustment.
Unless otherwise expressly provided in an Option Agreement (as defined in
Section 17), upon a Corporate Change (as defined below), notwithstanding any
other term of this Plan, any and all outstanding Options not fully vested and
exercisable shall vest in full and be immediately exercisable, and any other
restrictions on such Options including, without limitation, requirements
concerning the achievement of specific goals shall terminate.
9
<PAGE>
As used in this Plan, a "Corporate Change" shall be deemed to have occurred
upon, and shall mean (A) the acquisition after July 19, 1996 by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) (a "Person"), of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 80% or more of either (i) the then
outstanding shares of Stock of the Company (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
the following transactions shall not constitute a Corporate Change: (u) any
acquisition by virtue of the conversion of preferred stock of the Company
outstanding on July 19, 1996, (v) customary transactions with and between
underwriters and selling group members with respect to a bona fide public
offering of securities, (w) any acquisition directly from the Company (excluding
an acquisition by virtue of the exercise of a conversion privilege), (x) any
acquisition by the Company, (y) any acquisition by any employee benefit plan(s)
(or related trust(s)) sponsored or maintained by the Company or any corporation
controlled by the Company or (z) any acquisition by any entity pursuant to a
reorganization, merger or consolidation, if, immediately following such
reorganization, merger or consolidation the conditions described in clauses (i),
(ii) and (iii) of clause B of this paragraph are satisfied; or (B) the approval
by the stockholders of the Company of a reorganization, merger or consolidation,
in each case, unless immediately following such reorganization, merger or
consolidation (i) more than 60% of, respectively, the then outstanding shares of
common stock (or other equivalent securities) of the entity resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such entity entitled to vote generally in
the election of directors (or other similar governing body) is then beneficially
owned, directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities immediately
prior to such reorganization, merger or consolidation in substantially the same
proportions as their ownership, immediately prior to such reorganization, merger
or consolidation, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding the
Company, any employee benefit plan(s) (or related trust(s)) of the Company
and/or its subsidiaries or such entity resulting from such reorganization,
merger or consolidation and any Person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 80% or
more of the Outstanding Company Common Stock or Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 80%
or more of, respectively, the then outstanding shares of common stock (or other
equivalent securities) of the entity resulting from such reorganization, merger
or consolidation or the combined voting power of the then outstanding voting
securities of such entity entitled to vote generally in the election of
directors (or other similar governing body) and (iii) at least a majority of the
members of the board of directors (or other similar governing body) of the
entity resulting from such reorganization, merger or consolidation were members
of the Incumbent Board (as defined below) at the time of the execution of the
initial agreement providing for such reorganization, merger or consolidation.
The "Incumbent Board" shall mean individuals who as of July 19, 1996, constitute
the Company's Board of Directors; provided, however, that any individual
becoming a director subsequent to such date whose election, or nomination for
election by the Company's stockholders, was approved by a vote
10
<PAGE>
of at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either (i) an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act), or an actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Company's Board
of Directors or (ii) a plan or agreement to replace a majority of the members of
the Board of Directors then comprising the Incumbent Board.
The Company intends that this Paragraph 12 shall comply with the
requirements of Rule 16b-3 and any future rules promulgated in substitution
therefor under the Exchange Act during the term of the Plan. Should any
provision of this Paragraph 12 not be necessary to comply with the requirements
of Rule 16b-3 or should any additional provisions be necessary for this
Paragraph 12 to comply with the requirements of Rule 16b-3, the Board of
Directors may amend the Plan to add to or modify the provisions of the Plan
accordingly.
Except as hereinbefore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number, class, or price of shares of Stock then
subject to outstanding Options.
13. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act or with Section 422 of the Code (or any other
applicable law or regulation, including the applicable requirements of the
NASD or an established stock exchange), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between
11
<PAGE>
the Optionee and the Board, which agreement must be in writing and signed
by the Optionee and the Company. Adoption of this Plan by the Board of
Directors and stockholders of the Company shall not affect any Options
already granted, and such Options shall remain in full force and effect as
Nonqualified Stock Options as if this Plan had not been adopted.
15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
16. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
17. AGREEMENTS. Options shall be evidenced by written agreements ("Option
Agreement") in such form as the applicable Administrator shall approve from time
to time.
18. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are generally provided
to all stockholders of the Company. The Company shall not be required to provide
such information to persons whose duties in connection with the Company assure
their access to equivalent information.
19. GOVERNING LAW; CONSTRUCTION. All rights and obligations under the Plan
shall be governed by, and the Plan shall be construed in accordance with, the
laws of the State of Delaware without regard to the principles of conflicts of
laws. Titles and headings to Sections herein are for purposes of reference only,
and shall in no way limit, define or otherwise affect the meaning or
interpretation of any provisions of the Plan.
12
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996
--------------- -----------------
<S> <C> <C>
Weighted average shares outstanding 3,647,930 6,002,427
Effect of preferred stock, common stock, options
and warrants issued in twelve months preceding
the Company's initial public offering 735,560 --
--------------- -----------------
Shares used in computing pro forma net loss per share 4,383,490 6,002,427
=============== =================
Net loss $ (451,831) $ (7,332,588)
=============== =================
Net loss per share $ (0.10) $ (1.22)
=============== =================
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE FOREFRONT GROUP, INC.
ForeFront Direct, Inc.
25400 US Highway 19 North
Suite 285
Clearwater, Florida 34623
ForeFront Europe Limited
Kinetic Centre
Theobald Street
Borehamwood, Hertfordshire WD6 4PJ
United Kingdom
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB into the Company's previously filed
Registration Statements on Form S-8 (Registration No. 333-19147) and Form S-3
(Registration No. 333-18491).
ARTHUR ANDERSEN LLP
Houston, Texas
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED DECEMBER 31,
996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001002040
<NAME> THE FOREFRONT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,204,213
<SECURITIES> 0
<RECEIVABLES> 1,588,841
<ALLOWANCES> 138,600
<INVENTORY> 340,163
<CURRENT-ASSETS> 8,424,574
<PP&E> 1,410,702
<DEPRECIATION> 346,726
<TOTAL-ASSETS> 9,633,934
<CURRENT-LIABILITIES> 2,600,690
<BONDS> 0
0
0
<COMMON> 62,641
<OTHER-SE> 6,953,943
<TOTAL-LIABILITY-AND-EQUITY> 9,633,934
<SALES> 13,798,466
<TOTAL-REVENUES> 13,798,466
<CGS> 2,675,434
<TOTAL-COSTS> 2,675,434
<OTHER-EXPENSES> 18,980,875
<LOSS-PROVISION> 133,600
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,332,588)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,332,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,332,588)
<EPS-PRIMARY> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
