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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-27438
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THE FOREFRONT GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 76-0365256
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1360 Post Oak Blvd., Suite 2050
Houston, Texas 77056
(Address of principal executive offices)
Issuer's telephone number: (713) 961-1101
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares of the issuer's Common Stock, par value $.01 per
share, outstanding as of August 12, 1997: 6,480,727
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<PAGE>
THE FOREFRONT GROUP, INC.
FORM 10-QSB
June 30, 1997
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets..................................3
Consolidated Statements of Operations........................4
Consolidated Statements of Cash Flows........................5
Notes to Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis or Plan of Operation........7
PART II OTHER INFORMATION
Item 1. Legal Proceedings...............................................13
Item 2. Changes in Securities...........................................13
Item 3. Defaults Upon Senior Securities.................................13
Item 4. Submission of Matters to a Vote of Security Holders.............13
Item 5. Other Information...............................................14
Item 6. Exhibits and Reports on Form 8-K................................14
SIGNATURES....................................................................15
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
2
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1996 1997
(unaudited)
------------------ -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 6,204,213 $ 3,957,300
Accounts receivable, net of allowance of $138,600
and $278,850.................................................. 1,450,241 1,355,947
Inventory, net..................................................... 340,163 256,863
Prepaid expenses and other ........................................ 429,957 335,393
------------------ -------------------
Total current assets 8,424,574 5,905,503
FURNITURE AND EQUIPMENT, net of
accumulated depreciation of $346,726 and $496,891 1,063,976 1,009,008
OTHER ASSETS, net 145,384 160,055
------------------ -------------------
Total assets $ 9,633,934 $ 7,074,566
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 857,780 $ 488,795
Accrued liabilities................................................ 1,393,519 2,290,098
Current portion of deferred revenue................................ 349,391 636,144
------------------ -------------------
Total current liabilities 2,600,690 3,415,037
DEFERRED REVENUE, NET OF CURRENT PORTION.............................. 16,660 6,908
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none outstanding.................................. -- --
Common stock, $.01 par value, 20,000,000
shares authorized, 6,488,275 and 6,554,125 shares
issued; 6,182,031 and 6,371,852 shares outstanding............ 62,641 64,539
Additional paid-in capital......................................... 19,594,230 19,799,163
Deferred compensation.............................................. (369,336) (142,181)
Cumulative translation adjustment.................................. -- (5,546)
Accumulated deficit................................................ (12,269,101) (16,061,504)
Treasury stock, 82,145 shares at cost.............................. (1,850) (1,850)
------------------ --------------------
Total stockholders' equity 7,016,584 3,652,621
------------------ -------------------
Total liabilities and stockholders' equity $ 9,633,934 $ 7,074,566
================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
1996 1997 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET REVENUES:
Licenses.................................... $ 3,071,629 $ 4,149,468 $ 5,807,504 $ 8,283,315
Maintenance and services.................... 38,992 17,279 56,280 35,339
-------------- -------------- -------------- --------------
Total revenues 3,110,621 4,166,747 5,863,784 8,318,654
COST OF PRODUCT LICENSES 565,241 823,427 1,071,328 1,706,711
-------------- -------------- -------------- --------------
Gross profit 2,545,380 3,343,320 4,792,456 6,611,943
OPERATING EXPENSES:
Research and development.................... 624,184 503,956 986,160 1,191,578
Selling and marketing....................... 1,883,080 3,079,367 3,318,450 6,471,772
General and administrative.................. 525,159 1,778,773 962,126 2,420,202
Acquired research and development
costs.................................. 2,358,723 447,251 2,798,604 447,251
-------------- ------------- -------------- --------------
Operating loss (2,845,766) (2,466,027) (3,272,884) (3,918,860)
OTHER INCOME................................... 155,915 58,246 320,632 126,457
-------------- -------------- -------------- --------------
Net loss $ (2,689,851) $ (2,407,781) $ (2,952,252) $ (3,792,403)
============== ============== ============== ==============
NET LOSS PER SHARE $ (.45) $ (.38) $ (.50) $ (.61)
============== ============== ============== ==============
SHARES USED IN COMPUTING
NET LOSS PER SHARE 5,927,509 6,317,153 5,857,083 6,260,162
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1996 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................................... $ (2,952,252) $ (3,792,403)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization................................................ 69,465 295,203
Non-cash acquired research and development costs............................. 2,798,604 447,251
Compensation expense and amortization of deferred
compensation related to certain stock options.............................. 123,191 51,100
Changes in operating assets and liabilities
(Net of asset acquisitions):
(Increase) decrease in receivables......................................... (775,874) 94,294
(Increase) decrease in inventory........................................... (36,597) 83,300
Increase in prepaid expenses............................................... (49,194) (30,436)
Increase in other assets................................................... -- (99,191)
Increase in accounts payable and accrued
liabilities.............................................................. 374,461 360,404
Increase in deferred revenue............................................... 135,261 277,001
-------------- --------------
Net cash used by operating activities............................................. (312,935) (2,313,477)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for Blue Squirrel asset acquisition................................. (128,018) --
Net cash received from BookMaker asset acquisition................................ 77,234 --
Proceeds from sale of held to maturity securities................................. 7,998,417 --
Purchase of furniture and equipment............................................... (482,770) (95,197)
-------------- --------------
Net cash provided (used) by investing activities.................................. 7,464,863 (95,197)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................................... 10,850 167,307
Distributions to stockholders..................................................... (1,049,962) --
-------------- --------------
Net cash provided (used) by financing activities.................................. (1,039,112) 167,307
-------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (5,546)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,112,816 (2,246,913)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,502,223 6,204,213
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,615,039 $ 3,957,300
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and notes disclosures
normally included in annual consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made herein are adequate to make the information presented
not misleading. These consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 1996 included in the Company's 1996 Annual Report on Form 10-KSB.
All intercompany accounts and transactions have been eliminated in
consolidation. The unaudited interim consolidated financial statements reflect
all adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented and all such adjustments
are of a normal recurring nature. Interim results are not necessarily indicative
of results for a full year.
NOTE 2. COMPUTATION OF NET LOSS PER SHARE AND COMMON EQUIVALENT
SHARES
The Company's net loss per share is based on the weighted average
number of common shares outstanding, adjusted as described as follows. Common
equivalent shares are excluded from the per share calculations, as the effect of
their inclusion is antidilutive.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". For
periods ending subsequent to December 15, 1997, the Company will adopt the
provisions of the new statement, changing from its current method of accounting
for net loss per share as set forth in APB Opinion No. 15. Adoption of Statement
No. 128 will require retroactive presentation of net loss per share in
historical consolidated financial statements. The Company's net loss per share
presented in the accompanying consolidated financial statements as calculated
under the provisions of APB Opinion No. 15 is the same as if the basic net loss
per share under Statement No. 128 had been presented. Additionally, net loss per
share as presented herein is also the same as if the diluted net loss per share
under the provisions of Statement No. 128 had been presented, since the
Company's outstanding stock options would not have been included in the
calculation because their effect would have been anti-dilutive.
NOTE 3. ACQUIRED RESEARCH AND DEVELOPMENT
In May 1997, the Company entered into Amendment No. 1 to the Asset
Purchase Agreement and Escrow Agreement ("Purchase and Escrow Agreement") with
the principals of and successors to BookMaker Corporation ("BookMaker"),
terminating the remaining earnout provisions of the Asset Purchase Agreement
relating to the acquisition of the BookMaker assets by the Company, and
releasing the escrow shares (24,837 shares) to the successors and assigns of
BookMaker. In connection therewith, a total of 99,134 earnout shares deposited
in escrow at the closing were returned to the Company for cancellation and the
remaining earnout shares (100,128) will continue to be held in escrow until
April 1998, at which time they will be
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delivered to BookMaker's assigns. In connection with this Amendment, the Company
recorded a non-cash charge of $447,251 for acquired research and development
costs primarily related to the 100,128 shares that will be released in April
1998.
NOTE 4. RESTRUCTURING
In April 1997, the Board of Directors approved management's plan to
reorganize the Company into two divisions: Technical Professional Products and
Content Management Products and to focus more of its resources on its Technical
Professional Products Division, as well as its direct sales channels, both
telemarketing and online. In connection with the reorganization, the Company
recorded a one-time restructuring charge of approximately $1,144,000 in the
second quarter of 1997. The restructuring charge includes approximately $814,000
in lease terminations, relocation costs and severance and termination benefits.
Additional costs of approximately $330,000 relate to pre-existing contractual
obligations and other exit costs associated with the Company's Content
Management Products Division.
During the second quarter of 1997, the Company's CBT products
accounted for 54% of the Company's total revenues with PC/Network utilities
representing 28% of total revenues. Recognizing the increasing contribution of
the CBT products to the Company's total revenues and the rapid adoption of CBT
as the training method of choice for technical professionals and corporate IT
departments, the Company is targeting opportunities in the CBT field and plans
to expand its CBT product offering. In furtherance of the restructuring, the
Company is actively pursuing the divestiture and/or partnering of its Content
Management Products Division.
NOTE 5. RELATED PARTY TRANSACTIONS
In May 1997, the Company issued a letter of credit for $75,000 to its
landlord secured by a certificate of deposit maturing in August 1998 for the
benefit of an unrelated corporation (which is owned in part by a shareholder of
the Company), in exchange for the corporation assuming the balance of the lease
for the Company's former office space in Houston, Texas. The letter of credit
expires in June 1998.
Item 2. Management's Discussion and Analysis or Plan of Operation.
The Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Prediction of future results are inherently uncertain. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the risks set forth in the following discussion, and in particular,
the risks discussed below under the caption "Additional Risk Factors That Could
Affect Operating Results". Readers are also encouraged to refer to the Company's
1996 Annual Report on Form 10-KSB for further discussion of the Company's
business and the risks and opportunities attendant thereto.
Overview
The ForeFront Group, Inc. ("ForeFront" or the "Company") is a leading
provider of high-quality, cost-effective Computer Based Training ("CBT")
products and PC/Network utilities for technical professionals. The technical
professional market is comprised of network and personal computer engineers,
Information Technology (IT) managers, network administrators, and software
developers.
ForeFront's CBT products give technical professionals a
high-retention, comprehensive and convenient method of preparing for technical
certification exams. These certifications enable technical professionals to
advance in their careers and support overall quality assurance within corporate
IT
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departments. ForeFront's current CBT titles include the MCSE Self-Study Course
and CNE Self-Study Course, programs which provide training for certification to
manage Microsoft Windows NT and Novell NetWare, today's dominant operating
systems; and the A+ Certification Self-Study Course, which provides training for
the most-recognized certification for PC technicians.
ForeFront's PC/Network utilities enable technical professionals to
diagnose problems, manage systems, and enhance the performance of networks and
personal computers quickly and easily. This line of more than a dozen products
includes The Troubleshooter, a comprehensive diagnostic tool for PC's and file
servers; Rescue Professional, a popular data recovery solution; and NetTUNE PRO,
a performance and availability management application for servers running on
Windows NT or NetWare.
ForeFront also develops and markets a number of innovative Content
Management Products, which enable users to be more productive on the Internet.
This product line includes ClickBook and WebPrinter, two unique printing
technologies; WebWhacker, the original off-line browsing utility; WebSeeker, a
meta searching utility; and RoundTable, a real-time multimedia conferencing
application.
The Company derives the majority of its revenue from its telemarketing
operation in Clearwater Florida, which currently employs approximately 120
commission-only sales representatives. In addition, ForeFront also distributes
its products through its proprietary electronic storefront system, internally
referred to as InstantX, and other online resellers over the Internet, original
equipment manufacturers ("OEMs"), traditional retail distribution and catalogs.
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's product strategy going forward will be largely focused
on CBT products for technical professionals. Historically, ForeFront has entered
into long-term (3-5 years) exclusive agreements with authors of the products it
markets, enabling close relationships for future development, while mitigating
speculative research and development risks. As ForeFront solidifies its position
in the CBT marketplace, the Company expects to bring more of the development
in-house. In addition, the Internet and related online technologies that have
been used to create company-wide intranets are radically altering the way that
certain critical computing activities are performed. As current bandwidth
limitations are diminished, ForeFront anticipates that the Internet will be
utilized to deliver interactive education. ForeFront plans to build upon its
existing expertise in Internet-based collaboration (RoundTable), to capitalize
on emerging Internet Based Training ("IBT") opportunities.
Six Months Ended June 30, 1996 and 1997
Results of Operations
The Company's revenues increased $2,454,870 or 42% from $5,863,784 in
the six months ended June 30, 1996 to $8,318,654 in the comparable 1997 period.
For the six months ended June 30, 1996, the Company's revenues were derived
primarily through its direct telesales channel and through OEM agreements. For
the same period in 1997, revenues were generated primarily from the direct
telesales channel, the Company's electronic storefront, retail channels in the
United States and Europe and through OEM agreements. Revenues from the direct
telesales channel increased approximately $2,287,000 or 49%, while revenues from
the remaining channels increased approximately $168,000 or 14%.
The Company's research and development expenses increased $205,418 or
21% from $986,160 in the six months ended June 30, 1996 to $1,191,578 in the
comparable 1997 period. Expenses increased $325,646 in the first three months of
1997 due to continued research and development in the Content Management
Products Division but declined $120,228 during the quarter ended June 30, 1997
due to the Company's reorganization which included a reduction in personnel and
related expenses for the Company's
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Content Management Products Division. The Company expects to decrease its future
research and development expenses in the Content Management Products Division,
but will incur additional research and development expenses in the Technical
Professional Products Division as needed in order to introduce new products,
primarily computer based training software applications.
Selling and marketing costs increased $3,153,322 or 95% from
$3,318,450 in the six months ended June 30, 1996 to $6,471,772 in the comparable
1997 period. The increase is primarily due to increased sales personnel, sales
commissions, and advertising within the Technical Professional Products Division
as well as pre-committed advertising contracts within the Content Management
Products Division that were entered into prior to the Company's reorganization.
Future selling and marketing costs within the Content Management Products
Division will be reduced as a result of the Company's reorganization; however,
the Company expects to increase its sales and marketing staff and related
expenses in the Technical Professional Products Division in accordance with the
targeted revenue goals and expectations of management.
General and administrative costs increased $1,458,076 or 152% from
$962,126 in the six months ended June 30, 1996 to $2,420,202 in the comparable
1997 period. Excluding the one time restructuring charge of $1,143,860 incurred
in connection with the Company's reorganization, general and administrative
expenses increased $314,216 or 33% from $962,126 in the six months ended June
30, 1996 to $1,276,342. The increase is primarily due to increased personnel
costs resulting from expanded operations throughout the Company.
In May 1997, the Company executed the Amendment No. 1 to the Asset
Purchase Agreement and Escrow Agreement with BookMaker and agreed to release
100,128 shares of the Company's Common Stock in April 1998. As a result, the
Company recorded additional acquired research and development costs of $447,251
during the second quarter of 1997.
Three Months Ended June 30, 1996 and 1997
Results of Operations
The Company's revenues increased $1,056,126 or 34% from $3,110,621 in
the three months ended June 30, 1996 to $4,166,747 in the comparable 1997
period. For the three months ended June 30, 1996, the Company's revenues were
derived primarily through its direct telesales channel and through OEM
agreements. For the same period in 1997, revenues were generated primarily from
the direct telesales channel, the Company's electronic storefront, retail
channels in the United States and Europe and through OEM agreements. Revenues
from the direct telesales channel increased approximately $1,297,000 or 55%,
while revenues from the remaining channels decreased approximately $241,000 or
32% primarily related to the lower sales within the Content Management Products
Division.
The Company's research and development expenses decreased $120,228 or
19% from $624,184 in the three months ended June 30, 1996 to $503,956 in the
comparable 1997 period. The decrease is primarily due to the Company's
reorganization which included a reduction in personnel and related expenses for
the Company's Content Management Products Division. The Company expects to
decrease its future research and development expenses in the Content Management
Products Division, but will incur additional research and development expenses
in the Technical Professional Products Division as needed in order to introduce
new products, primarily computer based training software applications.
Selling and marketing costs increased $1,196,287 or 64% from
$1,883,080 in the three months ended June 30, 1996 to $3,079,367 in the
comparable 1997 period. The increase is primarily due to increased sales
personnel, sales commissions, and advertising within the Technical Professional
Products Division as well as pre-committed advertising contracts within the
Content Management Products Division that were entered into prior to the
Company's reorganization. Future selling and marketing costs within the Content
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Management Products Division will be reduced as a result of the Company's
reorganization; however, the Company expects to increase its sales and marketing
staff and related expenses in the Technical Professional Products Division in
accordance with the targeted revenue goals and expectations of management.
General and administrative costs increased $1,253,614 or 239% from
$525,159 in the three months ended June 30, 1996 to $1,778,773 in the comparable
1997 period. Excluding the one time restructuring charge of $1,143,860 incurred
in connection with the Company's reorganization, general and administrative
expenses increased $109,754 or 21% from $525,159 in the three months ended June
30, 1996 to $634,913. The increase is primarily due to increased personnel costs
resulting from expanded operations throughout the Company.
In May 1997, the Company executed the Amendment No. 1 to the Asset
Purchase Agreement and Escrow Agreement with BookMaker and agreed to release
100,128 shares of the Company's Common Stock in April 1998. As a result, the
Company recorded additional acquired research and development costs of $447,251
during the second quarter of 1997.
Liquidity and Capital Resources
At June 30, 1997 the Company had cash and cash equivalents of
$3,957,300 and working capital of $2,490,466. The Company has financed
approximately $7.3 million of cash used in operating activities from 1992
through March 1997, primarily through the issuance of approximately $957,000 of
preferred stock in 1992, $1.6 million of common stock in 1993 and $1.6 million
of preferred stock and notes payable converted into preferred stock and
$11,855,000 of common stock in 1995.
The Company believes that its available funds will be sufficient to
meet its cash requirements through 1998. The Company may from time to time
consider the acquisition of complementary businesses, products or technologies,
which may require additional financing.
Additional Risk Factors That Could Affect Operating Results
In addition to the other factors identified in this report, the
following risk factors could materially and adversely affect the Company's
future operating results and could cause actual events to differ materially from
those predicted in the Company's forward looking statements relating to its
business.
Fluctuations in Operating Results
The Company has in the past experienced fluctuations in its quarterly
operating results and anticipates that such fluctuations will continue and could
intensify in the future. Fluctuations in operating results may result in
volatility in the price of the Company's Common Stock. There can be no assurance
that the Company will achieve profitability by the end of fiscal 1997, as
predicted, or that, once achieved, such profitability will continue in the
future or that the levels of profitability will not vary significantly among
quarterly periods. The Company's operating results may fluctuate as a result of
many factors, including size and timing of orders and shipments, mix of sales
between products developed solely by the Company and products developed through
development and marketing alliances, royalty rates, the announcement,
introduction and acceptance of new products, product enhancements and
technologies by the Company and its competitors, mix of sales between the
Company's sales force, its other direct sales channels and its indirect sales
channels, competitive conditions in the industry, loss of significant customers,
delays in availability of existing or new products, spending patterns of the
Company's customers, currency fluctuations and general economic conditions.
The Company's expense levels are based in significant part on its
expectations regarding future revenues and are fixed to a large extent in the
short term. Accordingly, the Company may be unable to adjust
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spending in a timely manner to compensate for any unexpected revenue shortfall.
Any significant revenue shortfall would therefore have a material adverse effect
on the Company's results of operations. In addition, the Company has taken steps
to open a telemarketing operation in Dublin, Ireland in the fourth quarter of
1997. This increase in expense could have a negative impact on the Company's
operating margins during 1997.
Competition
The markets for CBT products and diagnostic network administration and
management products for technical professionals is highly fragmented and
competitive, and the Company expects this competition to increase. The Company
expects that because of the lack of significant barriers to entry into this
market, new competitors may enter the market in the future. In addition, larger
companies are competing with the Company in the IT education and training
market, and the Company expects this trend to continue. Such competitors may
also include publishing companies and vendors of application software, including
those vendors with whom the Company may be required to form development and
marketing alliances.
In the CBT market, the Company competes with third-party suppliers of CBT
products, instructor-led IT education and training, internal training
departments, consultants, value-added resellers and network integrators. Many of
the Company's current and potential competitors, including CBT Systems, Learning
Tree International, Gartner Group, and Computer Learning Centers, have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition, than the Company. In addition,
the IT education and training market is characterized by significant price
competition and highly rapid change, and the Company expects that it will face
increasing price pressures from competitors as IT managers demand more value for
their training budgets. Accordingly, there can be no assurance that the Company
will be able to provide products that compare favorably with new instructor-led
techniques or other interactive training software or that competitive pressure
will not require the Company to reduce its prices significantly.
Developing Market
The market for IT education and training is new and rapidly evolving.
As a result of the explosion in online technologies, new methods of delivering
interactive education software are being developed and offered in the
marketplace, including intranet and Internet deployment systems. Many of these
new delivery systems will involve new and different business models and
contracting mechanisms. In addition, multimedia and other product functionality
features are being added to the educational software.
Accordingly, the Company's future success will depend upon, among
other factors, the extent to which the Company is able to
develop/license/acquire and implement products which address these emerging
market requirements. Although the Company is actively pursuing opportunities
where it can leverage its existing technologies in online content sharing,
electronic software delivery, and electronic commerce to strengthen its position
in online education, there can be no assurance that ForeFront will be successful
in meeting these changing market needs.
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Reliance on Third Party Developers and Exclusive Licenses
The Company relies to a large extent on third party developers for new
products and product enhancements in its Technical Professional Product
Division. As a result, the Company has less control over the content of the
products in the Technical Professional Products Division as well as its ability
to deliver such new products and product enhancements. Although the Company
intends to develop products targeted to the CBT market and the Technical
Professional Products Division internally, or acquire a development team with
experience in developing such products, there can be no assurance that the
Company will be able to achieve such objectives on favorable terms or at all. In
addition, most of the Company's Technical Professional Products are licensed to
the Company on an exclusive basis for a three to five year term, with an option
to extend the term for additional periods, in some cases. Although the contracts
usually provide for the Company to receive exclusive rights to modifications and
upgrades, there is no obligation for the developers to produce upgrades or
modifications, on a timely basis or at all, nor is there normally any right to
new products. In the event that the Company is unable to develop, license or
acquire necessary upgrades, modifications and new products in the Technical
Professional Products Division on a timely basis and on reasonable terms, the
Company's operating results could be materially and adversely affected.
Management of Expanding Operations and Acquisitions.
The Company has recently experienced rapid expansion of its operations,
which has placed, and is expected to continue to place, significant demands on
the Company's administrative, operational and financial personnel and systems.
The Company's future operating results will substantially depend on the ability
of its officers and key employees to manage changing business conditions and to
implement and improve its operational, financial control and reporting systems.
If the Company is unable to respond to and manage changing business conditions,
its business and results of operations could be materially adversely affected.
The Company regularly evaluates acquisition opportunities and is likely
to make acquisitions in the future. Future acquisitions by the Company could
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, which could materially adversely affect the
Company's results of operations. Product and technology acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has no
or limited prior experience and potential loss of key employees of acquired
companies. The Company's management has had limited experience in assimilating
acquired organizations and products into the Company's operations. No assurance
can be given as to the ability of the Company to integrate successfully any
operations, personnel or products that have been acquired or that might be
acquired in the future, and the failure of the Company to do so could have a
material adverse effect on the Company's results of operations.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 27,
1997. During the Annual Meeting of Stockholders, the following four matters were
voted upon: the election of directors, a proposal to approve the Amended and
Restated 1996 Stock Option Plan, an amendment to the 1996 Non-Employee
Directors' Stock Option Plan, and the ratification of the selection of Arthur
Andersen LLP as the Company's independent public accountants. The following are
the results of the voting for these matters:
1. Election of directors: Shares For Shares Against, or Withheld
G. Anthony Gorry 5,056,216 231,525
David Sikora 5,162,053 125,688
Terry W. Ward 5,162,053 125,688
Stephen J. Banks 5,056,438 231,303
Grant Dove 5,056,438 231,303
2. Proposal to Approve The ForeFront Group, Inc. Amended and Restated 1996
Stock Option Plan.
Shares For Shares Against, or Withheld Abstentions
3,073,807 575,412 1,527,168
3. Proposal to Approve the First Amendment to the 1996 Non-Employee Directors'
Stock Option Plan.
Shares For Shares Against, or Withheld Abstentions
4,376,961 512,645 275,527
4. Selection of Arthur Andersen LLP as independent public accountants of the
Company for fiscal year ending December 31, 1997.
Shares For Shares Against, or Withheld Abstentions
5,255,461 0 697
13
<PAGE>
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended June 30, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE FOREFRONT GROUP, INC.
Date: August 14, 1997 By: /s/ David Sikora
------------------------------
David Sikora
President and Chief Executive
Officer
Date: August 14, 1997 By: /s/ Ernest D. Rapp
------------------------------
Ernest D. Rapp
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001002040
<NAME> THE FOREFRONT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,957,300
<SECURITIES> 0
<RECEIVABLES> 1,634,797
<ALLOWANCES> 278,850
<INVENTORY> 256,863
<CURRENT-ASSETS> 5,905,503
<PP&E> 1,505,899
<DEPRECIATION> 496,891
<TOTAL-ASSETS> 7,074,566
<CURRENT-LIABILITIES> 3,415,037
<BONDS> 0
0
0
<COMMON> 64,539
<OTHER-SE> 3,588,082
<TOTAL-LIABILITY-AND-EQUITY> 7,074,566
<SALES> 8,318,654
<TOTAL-REVENUES> 8,318,654
<CGS> 1,706,711
<TOTAL-COSTS> 1,706,711
<OTHER-EXPENSES> 10,530,803
<LOSS-PROVISION> 173,250
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,792,403)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,792,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,792,403)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
