<PAGE>
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NO. 0-27438
THE FOREFRONT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0365256
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
THE FOREFRONT GROUP, INC.
1360 POST OAK BLVD., SUITE 2050
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 961-1101
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 18, 1998 was $65,528,663, based on the closing sales
price of the registrant's common stock on the Nasdaq National Market on such
date of $14.813 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent or more
of the common stock are assumed to be affiliates. As of March 18, 1998,
6,819,902 shares of the registrant's common stock were outstanding.
- ------------------------------------------------------------------------------
<PAGE>
INTRODUCTORY STATEMENT
WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "EXPECT,"
"ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, BELIEVED,
EXPECTED, ESTIMATED OR PROJECTED. FOR ADDITIONAL DISCUSSION OF SUCH RISKS,
UNCERTAINTIES AND ASSUMPTIONS, SEE "BUSINESS - INTELLECTUAL PROPERTY AND
LICENSES," "-COMPETITION," "- ADDITIONAL BUSINESS RISKS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
INCLUDED ELSEWHERE IN THIS REPORT.
REFERENCES MADE IN THIS ANNUAL REPORT ON FORM 10-K TO "FOREFRONT," THE
"COMPANY" OR THE "REGISTRANT" REFER TO THE FOREFRONT GROUP, INC. AND ITS WHOLLY
OWNED SUBSIDIARIES. FOREFRONT-TM-, THE COMPANY'S LOGOS, MCSE SELF STUDY COURSE,
CNE SELF STUDY COURSE, A+ CERTIFICATION SELF STUDY COURSE, WEBWHACKER,
WEBSEEKER, WEBPRINTER, TROUBLESHOOTER, RESCUE PROFESSIONAL, STUDENT MANAGER AND
INSTANTX ARE TRADEMARKS OF THE FOREFRONT GROUP, INC., WHICH MAY BE REGISTERED IN
SOME JURISDICTIONS.
PART I
ITEM 1. BUSINESS.
Overview
The Company is a leading provider of interactive software designed to
meet the information technology (" IT") education and training needs of
network professionals, personal computer ("PC") technicians, Web
masters/managers and other IT professionals. The Company develops and
markets high-quality, cost-effective Computer-Based Training (" CBT")
products on CD-ROMs which enable IT professionals to conveniently prepare for
technical certification exams. Each of the Company's products is designed to
provide comprehensive training in the subject matter necessary to obtain
technical certifications. In addition to CBT products, ForeFront publishes
and markets a line of PC/Network utilities which enable technical
professionals to diagnose problems quickly and easily, manage systems, and
enhance the performance of networks and PCs. The Company also develops and
markets off-line browsing and metasearching products for use on the Internet.
The Company sells its CBT products through telesales marketing primarily
to individual IT professionals as career advancement tools. The Company
believes that its highly-refined prospecting and telesales marketing strategy
provides it with a significant competitive advantage in selling products to
its targeted customers. ForeFront employs a proprietary direct marketing
program to generate customer prospects for its more than 165 full-time
telesales representatives. The Company has increased its telesales force by
200% in the past 18 months and in October 1997, it expanded from its original
base in Florida serving North American markets to a second telesales
operation in Dublin, Ireland serving European markets. The Company has sold
its CBT and PC/Network products to more than 60,000 customers and has
generated over 600,000 customer prospects from its marketing efforts to date.
Recent Developments
On March 16, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with CBT Group PLC ("CBT Group") and
Rockets Acquisition Corp., a wholly-owned subsidiary of CBT Group ("Merger
Sub"), pursuant to which the parties agreed that the Merger Sub will, as of
the Effective Time (as defined in the Merger Agreement) merge with and into
the Company. The terms of the Merger Agreement provide that the Company's
stockholders will receive .3137 American Depositary Shares of CBT Group in
exchange for each share of the Company's Common Stock. The obligations of the
parties to consummate the merger contemplated by the Merger Agreement are
subject to certain conditions, including the approval of the merger and the
Merger Agreement by the stockholders of the Company. No assurance can be made
that the merger will be consummated.
-2-
<PAGE>
INDUSTRY BACKGROUND
Business organizations and individuals are becoming increasingly
dependent on computer systems in order to remain competitive. This trend has
resulted in significant growth in IT education and training. According to
International Data Corporation ("IDC"), the 1996 worldwide and U.S. markets
for IT education and training were approximately $16.4 billion and $7.1
billion, respectively, as compared with $11.0 billion and $4.4 billion in
1992, respectively. The factors driving these markets include: (i) the lack
of trained individuals in the IT marketplace; (ii) the continuous
introduction and evolution of client/server technologies; (iii) corporate
requirements that IT professionals be certified in certain technologies in
order to assure performance and productivity; (iv) corporate downsizing,
resulting in increased training requirements for employees and consultants
who perform multiple job tasks that require knowledge of varied software
applications and technologies; and (v) the proliferation of computers and
networks throughout all levels of organizations.
Traditionally, organizations and IT professionals have fulfilled their
requirements for IT education and training through instructor-led training
from internal training departments or seminars. Instructor-led training,
however, has a number of limitations. Instructor-led training typically
requires individuals to attend classes at scheduled times and often at
off-site locations, limiting their flexibility and their availability to
satisfy on-going work-related demands during training. Such training is also
difficult to tailor to individuals' training needs, often is not accompanied
by proficiency and assessment and may not offer a cost-effective training
solution. The limitations of instructor-led training, combined with the
previously described factors driving growth in the IT education and training
market, have prompted IT professionals and corporate information systems
("IS") departments to seek alternative training methodologies. IDC has
estimated that while instructor-led training represented 80% of the U.S. IT
education and training market in 1996, the market share of instructor-led
training is expected to decline to 63% by 2001 as alternative forms of
training gain greater acceptance. IDC estimates that technology- and
Web-based training will increase by 30% from 1996 to 2001, as compared with
an estimated 7% increase in traditional instructor-led training during the
same time period.
The proliferation of computers throughout organizations and their
increasing capabilities, coupled with the emergence of the Internet and
intranet as a delivery platform, are supporting the emergence of interactive
CBT IT education and training software. According to IDC, within the
technology-based training category, CBT (self-paced, non-multimedia
computer-based training) was the largest segment in 1996, with $524 million
in total U.S. training revenues. This segment represented 47% of the U.S.
total of $1.1 billion for technology-based training in 1996. The Company
believes that as businesses and IT professionals seek alternative methods of
training, there is a significant market opportunity to provide high-quality
CBT software that can meet business needs for productive, flexible and
cost-effective IT education and training.
The need for IT professionals is substantial and continues to grow. The
Information Technology Association of America estimated that 350,000 job
openings for qualified IT professionals remained unfilled in 1997. The
Bureau of Labor Statistics ("BLS") projects that the United States will
require more than 1,000,000 new IT workers between 1994 and 2005 to fill
newly-created jobs and replace workers leaving as a result of retirement,
change of profession or for other reasons. Additionally, as a result of the
corporate IT skills imbalance, qualified IT professionals are seeking to
augment their existing knowledge and skill base in order to provide them with
the means to seek job opportunities that offer increased compensation,
responsibilities and opportunities for career advancement.
-3-
<PAGE>
THE FOREFRONT SOLUTION
ForeFront provides a range of software-based solutions to meet the
education and training needs of IT professionals. ForeFront's solution
consists of interactive CD-ROM software products designed for network
professionals, PC technicians, Web masters/managers and other IT
professionals. The Company believes that its CBT products offer advantages
to IT professionals seeking technical certification for career advancement by
offering a comprehensive solution to their needs in preparing for technical
certification exams at a lower total cost than the modular offerings of other
CBT software publishers.
The Company's CBT titles offer many advantages over traditional
instructor-led training. ForeFront's products allow IT professionals to
tailor training to their work schedules, begin training at a level which is
suitable to their needs, integrate training with on-the-job practice, train
in only those topics that are relevant to their needs, and access training
materials on an ongoing basis as reference tools. In general, ForeFront's
courseware includes a graphically sophisticated interface that leads students
through the subject software, simulating the technology and requiring
students to respond actively to the course. The Company's courses also
contain test questions designed to permit users to assess their capabilities
and review their progress.
The Company's CBT product library currently consists of nine
intermediate and advanced level certification programs for IT professionals,
encompassing over 1,000 hours of IT education and training, as well as
introductory-level courses that do not lead to certification. ForeFront's
comprehensive technical certification products provide IT professionals with
approximately 25 to 200 hours of instruction per title. The Company believes
that its products significantly reduce the costs to its customers of
obtaining technical certification in comparison to traditional instructor-led
formats and to other competing CBT products.
FOREFRONT'S GROWTH STRATEGY
ForeFront's growth strategy incorporates the following elements:
BROADEN CBT PRODUCT LINE. The Company currently offers IT professionals
a variety of CBT products designed to offer a convenient, comprehensive and
interactive method of facilitating training and performance enhancement in
key segments of the IT market. The Company intends to broaden its line of
CBT products to provide additional career development and enhancement
resources for both novice and experienced IT professionals by (i) expanding
its advanced-level IT product offerings to cover additional technical
certification exams in additional technical fields, (ii) adding introductory
and intermediate-level IT education and training products, (iii) creating
products geared to non-IT professionals, (iv) segmenting its current and
future comprehensive product offerings into focused, subject-specific
sub-units for use in corporate IT training, and (v) developing foreign
language versions of its CBT products.
LEVERAGE PROPRIETARY DIRECT MARKETING AND SALES SYSTEMS. The Company
has created and refined proprietary direct marketing and sales processes to
maximize the sale of its CBT and PC/Network products. Currently, the
Company's primary telesales operation in Clearwater, Florida employs 136
direct sales representatives responsible for generating U.S. sales. In
October 1997, the Company opened its European telesales operation in Dublin,
Ireland, which currently employs 28 direct sales representatives and provides
evidence of the Company's ability to replicate its proprietary sales and
marketing methodologies in other markets. The Company intends to further
leverage these methodologies through: (i) expansion of its telesales force in
both Clearwater, Florida and Dublin, Ireland; (ii) establishment of its
telesales operations in additional international markets; and (iii) the
addition of new products and services, capitalizing on the Company's
relationships with its existing customers and customer prospects.
-4-
<PAGE>
EXPAND INTO NEW RELATED MARKETS. The Company currently sells products to
individual IT professionals (including IT services managers, PC technicians,
MIS managers and network professionals, among others) and to small
businesses. The Company's strategy is to expand into related markets by (i)
establishing a direct sales force targeted at the IT education and training
needs of small to mid-size businesses, (ii) leveraging new product
development by expanding into segments of the IT professional market that are
not served by the Company's current products, such as computer programmers,
database managers, enterprise application managers, and general computer
users, and (iii) expanding its product offerings and distribution to reach
individuals who are seeking to become IT professionals.
PURSUE STRATEGIC ACQUISITION AND LICENSE AGREEMENTS. Historically, the
Company has obtained new products primarily through acquiring development
companies and negotiating license agreements. In September 1997, the Company
acquired Lan Professional Inc. ("LanTec") in order to own the titles it had
previously been licensing and to enable it to develop CBT products
internally. The Company intends to seek strategic acquisitions of companies
and negotiate new license agreements to complement its existing line of CBT
products, accelerate time to market, and expand its research and development
capabilities.
BUILD ALLIANCES WITH KEY IT VENDORS. The Company intends to pursue and
enter into development and marketing alliances with key IT vendors to produce
and distribute vendor-specific authorized training programs. The Company
believes such alliances could provide a number of competitive advantages,
including access to the partner's product development plans and source
material, facilitating the launch of CBT products concurrently with the
launch of new IT applications, and access to additional distribution channels.
SERVE EMERGING INTERNET/INTRANET MARKET OPPORTUNITIES. As individuals
and companies increasingly utilize the Internet and intranet, the Company
believes that new education and training needs will emerge. The Company will
seek to use its Internet expertise to capitalize on expanding Internet and
intranet education opportunities.
There can, however, be no assurance that the Company will be successful
in implementing any of the foregoing elements of its growth strategy. See
"--Additional Business Risks--Growth Strategy; Dependence on New Products,"
"--Developing Market for IT Education and Training," "--Rapid Technological
Change," "--Management of Expanding Operations and Acquisitions," and
"--Risks of Telesales Marketing."
-5-
<PAGE>
PRODUCTS
CBT PRODUCTS. The following table outlines the nine separate
certification programs for IT professionals currently marketed and sold by
the Company, and the subject matter of the various modules incorporated in
each:
<TABLE>
<CAPTION>
Certification Modules
- ---------------------------- ---------------------------------------------
<S> <C>
MCSE 4.0 Self-Study Course - Networking Essentials
- Implementing and Supporting Microsoft
Windows 95
- Implementing and Supporting Microsoft
Windows NT Server 4.0
- Implementing and Supporting Microsoft
Windows NT Server 4.0 in the Enterprise
- Internetworking Microsoft TCP/IP on
Microsoft Windows NT 4.0 (MCSE Elective)
- Implementing and Supporting Microsoft
Exchange Server 5.0 (MCSE Elective)
- Microsoft Mail 3.2 for PC Network
Enterprise (MCSE Elective)
- ------------------------------------------------------------------------------
MCP Self-Study Course - Implementing and Supporting Microsoft
Windows 95
- ------------------------------------------------------------------------------
MCP Self-Study Course - Implementing and Supporting Microsoft
Windows NT Workstation 3.51
- ------------------------------------------------------------------------------
MCP Self-Study Course - Implementing and Supporting Microsoft
Windows NT Server 3.51
- ------------------------------------------------------------------------------
MCP Self-Study Course - Implementing and Supporting Microsoft
Windows NT Server 4.0
- ------------------------------------------------------------------------------
CNE 4.1 Self-Study Course - Administration 4.11
- Advanced Administration 4.11
- 4.1x Installation and Configuration
- Service and Support for NetWare
- Networking Technologies
- Design and Implementation
- Building Intranets with IntranetWare
- ------------------------------------------------------------------------------
CNA Self-Study Course - NetWare Administrator 3.x
- ------------------------------------------------------------------------------
CNA Self-Study Course - NetWare Administrator 4.11 (Internetware)
- ------------------------------------------------------------------------------
A+ Certification Self-Study - Core Module (Hardware)
Course - Win/DOS Specialty Module
- ------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
In general, ForeFront's courseware includes a graphically sophisticated
interface that leads students through the subject software, simulating the
technology and requiring students to respond actively to the course. The
Company's courses also contain test questions designed to permit users to
assess their capabilities and review their progress.
Each of the Company's CBT products can be integrated and managed with
its new STUDENT MANAGER system. This network-based administrative software
program, introduced in 1998, is designed to allow an administrator to audit
and control the use of each course, track employee performance and create
specialized curricula for employees by granting access to selected courses.
STUDENT MANAGER enables the Company to offer a fully-integrated product to
small to mid-sized companies, with centralized reporting, monitoring and
evaluation. The Company intends to develop selected of its future CBT
products around the STUDENT MANAGER architecture and to make modifications to
selected products licensed or acquired as may be necessary to integrate such
CBT products with the STUDENT MANAGER system.
The Company's current CBT products are focused on the following
categories of IT professionals: network professionals and PC technicians.
The Company intends to develop, license or acquire additional products aimed
at the intermediate and advanced level IT professionals. In addition, the
Company plans to expand, develop, license or acquire products for other IT
professionals not presently fully served: Web masters/managers, database
managers, computer programmers, enterprise application managers and general
end-users. The Company plans to prioritize its development, licensing or
acquisition of new products based on its customers' needs, marketing
opportunities and availability and timing of development, license and
acquisition opportunities. There can be no assurance that the Company will
be able to successfully develop or negotiate the license or acquisition of
new products on a timely basis and on terms satisfactory to the Company, if
at all. See "--Additional Business Risks--Growth Strategy; Dependence on
New Products."
The Company's courses are generally compatible with Windows-based
desktop PCs and LANs. At present, all of the Company's courses are
available exclusively on CD-ROM and are sold individually or on a
site-license basis. Over the long term, however, ForeFront intends to explore
the use of new delivery techniques through on-line services and the Internet.
The Company believes that its future success will depend in large part on
its ability to enhance its existing courses and to develop, license or
acquire and introduce new courses on a timely basis. New courses and
enhancements to existing courses must keep pace with rapidly changing,
vendor-specific certification standards and competitive offerings and adapt
to new hardware platforms and emerging industry standards and provide
additional functionality. See "--Additional Business Risks--Growth Strategy;
Dependence on New Products" and "--Rapid Technological Change."
PC/NETWORK PRODUCTS
In addition to CBT titles, ForeFront publishes and markets a line of
PC/Network utilities which enable technical professionals to quickly and
easily diagnose problems, manage systems, and enhance the performance of
networks and PCs. This line of more than a dozen products includes: (i) THE
TROUBLESHOOTER, a comprehensive diagnostic tool for PCs and file servers; and
(ii) RESCUE PROFESSIONAL, a data recovery solution.
INTERNET CONTENT MANAGEMENT PRODUCTS
The Company also continues to develop and market its line of Internet
content management products, including WEBWHACKER, WEBSEEKER and WEBPRINTER.
Following the Company's 1997 repositioning of its business to focus on CBT
applications, the Company consolidated all Internet product development,
sales and marketing at its Blue Squirrel division located in Salt Lake City,
Utah. The Company sold the rights to certain Internet printing technology in
September 1997 to Hewlett-Packard Company for a net gain of approximately
$1.87 million, and may out-license or sell some or all of its remaining
Internet content management products in the future. However, the Company
intends to retain the rights to use the technology to develop methods of
delivering education and training products over the Internet.
-7-
<PAGE>
PRODUCT DEVELOPMENT
The Company believes that it must continue to invest in product
development to remain competitive in the CBT marketplace. ForeFront believes
that the development of an effective training product requires the
convergence of source material, instructional design and computer technology.
The development of an effective training product involves a three-step
process: (i) obtaining or developing source material; (ii) utilizing
instructional design methodologies; and (iii) deploying computer technology.
The first step in developing a new training program is to obtain content
through subject matter experts, existing courses, product reference manuals
and other materials. The Company is currently evaluating potential licensing
agreements to obtain additional source material. There can be no assurance
that the Company will be able to obtain such source material on a timely
basis or on terms satisfactory to the Company, if at all. The development
team then structures a program template which covers all of the relevant
concepts, tasks to be completed, interactive features and tests to measure
achievement. Concurrently, the Company's developers, working with animators,
simulation programmers and graphic designers, simultaneously plan and develop
graphics, animations and simulations.
The Company develops substantially all of its internally-developed
courses at its development facility in Ottawa, Canada. From time to time,
the Company contracts with third parties to develop portions of particular
courses, although the Company retains complete control over all phases of
such development. All products produced by outside developers remain the
sole property of ForeFront. The Company is exploring the possibility of
licensing content from publishers of text-based training material to shorten
the development cycle for its CBT products. If the Company is successful in
doing so, the Company would likely be required to pay royalties to the
publishers of such content. There can be no assurance, however, that the
Company will be successful in acquiring such content on favorable terms or at
all or that such an arrangement would in fact expedite development of CBT
products. See "--Additional Business Risks--Growth Strategy; Dependence on
New Products" and "--Management of Expanding Operations and Acquisitions."
DEVELOPMENT AND MARKETING ALLIANCES
The Company's strategy is to expand its position in the IT education and
training market by forming development and marketing alliances with leading
IT software vendors and publishers of text-based training products. The
Company believes such development and marketing alliances could offer it a
number of competitive advantages, including: (i) early access to the
software vendors' engineers and technical advisors for assistance in
developing courses on new products; (ii) increased access to product vendors'
content to drive the Company's internal development cycles; (iii) the
ability to designate those products developed in concert with reputable
vendors as "authorized" by that vendor; and (iv) expanded distribution
channels through cross-marketing arrangements. The Company believes that
these alliances also provide significant benefits to software vendors by
allowing them to achieve additional market penetration generated by
increasing the overall number of trained users. The Company has not entered
into an alliance with an IT software vendor or publisher of text-based
training materials at this time, and there can be no assurance that the
Company will be able to do so on terms acceptable to the Company, on a timely
basis, if at all, or that any such alliances would be successful. See
"--Additional Business Risks--Risks of Development and Marketing Alliances."
-8-
<PAGE>
CUSTOMERS
The Company licenses its CBT products primarily to individual IT
professionals (including IT services managers, PC Technicians, MIS Managers
and network professionals, among others) and to small businesses. No
customer accounted for more than 10% of revenues in 1997. The Company has
over 60,000 customers, representing thousands of corporations, and
approximately 600,000 customer leads in its database, substantially all of
which have been generated through its direct marketing operations. The
Company plans that its course curricula will enable its customers to
periodically enhance their career development by acquiring new, or improving
on existing, knowledge and skills. The Company anticipates that many of its
customers will become "repeat" customers, purchasing successively
advanced-level products, and progressing from one course curriculum to
another over time.
The Company has also recently commenced site licenses of its CBT titles
for use by a specified number of users. With the introduction of the STUDENT
MANAGER product, the Company is endeavoring to capitalize on the substantial
opportunity to sell site licenses to small to mid-size organizations.
SALES, MARKETING AND CUSTOMER SUPPORT
SALES. The Company's direct sales and support organization, which
includes personnel responsible for new sales as well as personnel responsible
for follow-up support efforts, generated approximately 74% and 90% of the
Company's revenues in 1996 and 1997, respectively. The Company also
distributes its courses through a small number of resellers and international
distributors. The Company's direct sales telemarketing operation is composed
of teams of sales representatives, each of which is led by a sales manager
who is responsible for managing the needs of the sales representatives,
assisting them in individual sales calls, and supporting and motivating them.
As of January 31, 1998, the Company employed 136 direct sales representatives
and 14 customer and technical support representatives in the United States
and 28 direct sales representatives and one customer and technical support
representative in Ireland.
The Company's telesales operation in Clearwater, Florida is a
world-class system developed and refined over a seven-year period from the
inception of AllMicro. ForeFront employs a variety of training, sales and
performance-tracking methodologies designed to monitor and optimize sales
performance. In addition to the close monitoring of the Company's direct
sales campaign, the sales force employs highly-refined, proprietary training
methodologies and systems that enhance the likelihood of building a
successful customer relationship.
The opening of the Company's sales office in Dublin, Ireland in October
1997 has demonstrated the Company's ability to replicate this system and the
more than doubling of the sales force in 1997 (from 65 to 136
representatives) in the U.S. demonstrates the Company's ability to grow the
system.
MARKETING. The Company believes that the success of its telesales
operation is, in large part, attributable to its highly-refined marketing
systems and methodologies. Using a targeted marketing and lead-based system,
the Company employs a variety of direct marketing activities to generate
leads, including direct mail, advertising and related activities such as
trade shows.
CUSTOMER SUPPORT. The Company currently provides e-mail and telephone
support to its customers, and is evaluating a fee-based support system for
customers who purchase CBT products to support their efforts to obtain
certification.
-9-
<PAGE>
COMPETITION
The IT education and training market is highly fragmented, extremely
competitive, and lacks meaningful barriers to entry. The Company competes
primarily with third-party suppliers of CBT products, instructor-led IT
education and training, internal training departments and other suppliers of
IT education and training, including several other companies that produce
interactive software training products. To a lesser extent, the Company also
competes with consultants, value-added resellers, network integrators,
applications software vendors and publishing companies.
Many of the Company's current and potential competitors have
substantially greater financial, technical, sales, marketing and other
resources as well as greater name recognition than the Company. Certain of
the Company's competitors in the CBT market possess comprehensive libraries
of CBT products that have substantially greater scope than the Company's line
of CBT products. In addition, the IT education and training market is
characterized by significant price competition, and the Company expects that
it will face increasing price pressures from competitors in the future.
Accordingly, there can be no assurance that the Company will be able to
provide products that compare favorably with new instructor-led techniques,
on-line training or other interactive training software or that competitive
pressures will not require the Company to reduce its prices significantly.
INTELLECTUAL PROPERTY AND LICENSES
The Company regards its software as proprietary and relies primarily on
a combination of statutory and common law copyright, trademark and trade
secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's courseware or technology without
authorization or to develop similar courseware or technology independently.
Furthermore, the laws of certain countries in which the Company sells its
products do not protect the Company's software and intellectual property
rights to the same extent as do the laws of the United States. The Company
generally does not include in its software any mechanisms to prevent or
inhibit unauthorized use, and relies primarily on "shrink wrap" licenses that
are not signed by the user and therefore may be unenforceable in some
jurisdictions. If unauthorized copying or misuse of the Company's products
were to occur to any substantial degree, the Company's business and results
of operations could be materially and adversely affected. There can be no
assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology. There can be no assurance that third parties will not
claim that the Company's current or future products infringe the proprietary
rights of others. The Company expects that software developers will
increasingly be subject to such claims as the number of products and
competitors in the IT education and training industry grows and the
functionality of products in the industry overlaps. Any such claim, with or
without merit, could result in costly litigation or might require the Company
to enter into license agreements under which the Company would pay royalties
or fees to third parties or modify or discontinue sales of products subject
to such claim, at costs to the Company which could be substantial.
EMPLOYEES
As of January 31, 1998, the Company had a total of 267 full-time
employees, of whom 203 were engaged in sales, marketing and customer support,
36 in management, administration and finance and 28 in product development.
On January 31, 1998, 207 employees were located in the United States, 34 in
the Republic of Ireland and 26 in Canada. None of the Company's employees is
subject to a collective bargaining agreement, and the Company has not
experienced any work stoppages. The Company believes that its employee
relations are good.
-10-
<PAGE>
ADDITIONAL BUSINESS RISKS
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT
The Company commenced operations in 1992 and completed an initial public
offering of its Common Stock in December 1995. The Company's initial
business was the development and sale of a content management and
productivity software application designed to enable information sharing and
collaboration over computer networks, which was subsequently adapted and
segmented with the emergence of the World Wide Web to create a line of
Internet content management products. The Company made several acquisitions
in 1996 to supplement its line of Internet content management products and to
expand its sales and marketing capabilities. In mid-1997, the Company
repositioned its business to focus on the marketing and sale of CBT products
to IT professionals through the telesales organization it acquired in 1996.
Accordingly, the Company has only a limited operating history on which an
evaluation of its business and prospects can be based. Although the Company
was profitable in its fiscal quarters ended September 30, 1997 (excluding
one-time charges) and December 31, 1997, it incurred losses in each of its
fiscal periods prior thereto. There can be no assurance that profitability
will continue in the future or that levels of profitability, if any, will not
vary significantly among fiscal periods. As of December 31, 1997, the
Company had an accumulated deficit of approximately $16.4 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FLUCTUATIONS IN OPERATING RESULTS
ForeFront 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. The Company's
operating results may fluctuate as a result of many factors, including: the
size and timing of orders and shipments; the mix of sales between products
developed solely by ForeFront and products licensed from third parties;
royalty rates; the announcement, introduction and acceptance of new products,
product enhancements and technologies by the Company and its competitors;
competitive conditions in the industry; delays in availability of existing or
new products; spending patterns of the Company's customers; the number of
selling days in each quarter; 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 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GROWTH STRATEGY; DEPENDENCE ON NEW PRODUCTS
The Company's growth strategy is dependent on a program of: (i)
licensing new products from others for distribution; (ii) developing new
products internally; and (iii) acquiring companies with attractive products
and product development capabilities. There can be no assurance that the
Company will be able to enter into product license agreements on acceptable
terms, develop products internally in sufficient quantity or identify
attractive acquisition candidates and negotiate acquisition terms acceptable
to the Company. There can be no assurance that the Company will be able to
successfully implement its growth strategy, and the failure to do so would
have a material adverse effect on the Company's business and results of
operations.
The Company presently maintains a relatively limited library of CBT
products and believes that its future success will depend in large part on
its ability to develop, acquire or in-license new products to enable it to
offer a more complete library of CBT products. Furthermore, the subject
matter of the Company's courseware is influenced by rapidly changing
technology, evolving industry standards, changes in customer needs and
frequent introductions of new products by software vendors. Accordingly, the
Company believes that its future success will depend in large part on its
ability to meet these changes by enhancing its existing courses and
developing and introducing new courses on a timely basis. There can be no
assurance that the Company will be successful in addressing the changing
needs of the marketplace by developing and marketing new products or
enhancing its existing products on a timely basis. If the
-11-
<PAGE>
Company were unable, due to resource, technological or other constraints, to
anticipate and respond adequately to changes in customers' software
technology and preferences, the Company's business and results of operations
would be materially adversely affected. See "Business--ForeFront's
Strategy," "--Products" and "--Product Development."
DEVELOPING MARKET FOR IT EDUCATION AND TRAINING
The market for IT education and training is rapidly evolving. New
methods of delivering interactive education software are being developed,
including intranet and Internet deployment systems. Many of these systems
will involve new and different methodologies and business models and may
include multimedia and other product features. The Company's future success
will depend on, among other factors, its ability to develop and distribute
products that address the changing market needs for IT education and
training. There can be no assurance that the Company will be successful in
meeting the changing market needs.
RAPID TECHNOLOGICAL CHANGE
The Company's development or acquisition of new training courses, or
enhancements to existing courses, must keep pace with the introduction in the
marketplace of new and evolving hardware platforms, operating systems
software, applications and computer industry standards. Therefore, the
Company must continually anticipate and adapt its products to emerging
desktop and computer network platforms and environments. The Company
believes that its ability to compete in the future will depend significantly
on its ability to adapt to emerging technologies and to include those
technologies in its courses. If the Company were unable to anticipate and
respond to changes in computer technology, its business and results of
operations would be materially and adversely affected. See "Business
- --Product Development."
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 and adversely
affected.
As a result of LanTec Acquisition in September 1997, the Company's
operating expenses have increased. There can be no assurance that the
integration of LanTec can be successfully completed in a timely fashion, or at
all, or that the revenues from products under development by LanTec will be
sufficient to support the costs associated with its development efforts without
adversely affecting the Company's operating margins. Any failure to
successfully complete integration in a timely fashion or to generate sufficient
revenues from the acquired business could have a material adverse effect on the
Company's business and results of operations.
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
from other business concerns, risks of entering markets in which the Company
has no or limited prior experience and the loss of key employees of acquired
companies. In addition, the Company could encounter unanticipated business
risks or liabilities with respect to acquired businesses, and substantial
write-offs of acquired research and development costs may be required in
connection with such acquisitions. 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 of
businesses 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>
RISKS OF TELESALES MARKETING
Although telesales as a form of direct marketing 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
effectiveness of telemarketing. In addition, telemarketing's effectiveness
as a direct marketing tool also may decrease as a result of consumer
saturation and consumer resistance to telemarketing in general. Although the
Company attempts to monitor marketing trends and respond accordingly, the
Company may not be able to anticipate and successfully respond to such trends
on a timely basis. Furthermore, the Company obtains leads for its telesales
marketing through responses to advertising in trade publications and direct
mail. Any material decline in the effectiveness of such advertisements in
reaching the Company's targeted market or in generating responses from
prospective customers would have a material adverse effect on the Company's
business and results of operations.
The success of the Company's telemarketing activities is dependent on
its ability to attract, train and retain an increasing number of sales and
customer and technical support personnel. Should the Company be unable to
attract a sufficient number of new employees, or if the Company's turnover
rate among new and/or experienced telesales employees were to increase
materially, its business, financial condition, results of operations and
growth prospects could be materially and adversely affected.
RISKS OF DEVELOPMENT AND MARKETING ALLIANCES
The Company has not entered into an alliance with an IT software
vendor or publisher of text-based training materials at this time, and there
can be no assurance that the Company will be able to do so on terms
acceptable to the Company, on a timely basis, if at all, or that any such
alliances would be successful. In addition, the Company's alliance partners
could pursue their existing or alternative training programs in preference to
and in competition with those being developed with the Company or licensing
arrangements with competitors of the Company. Furthermore, the Company could
be required to pay royalties to any such alliance partners on products
developed with or licensed from them, which would reduce the Company's gross
margins. Finally, the collaborative nature of the development process under
such alliances may result in longer development periods and less control over
the timing of product introductions than for courses developed solely by the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued
service of its key management, sales, product development and operational
personnel, and on its ability to continue to attract, motivate and retain
highly qualified employees and management personnel. In particular, the loss
of certain senior management personnel or other key employees could have a
material adverse effect on the Company's business and results of operations.
INTERNATIONAL OPERATIONS
The Company presently has operations in Canada and Ireland.
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, currency
fluctuations and political and economic instability.
-13-
<PAGE>
ITEM 2. PROPERTIES.
The Company's executive offices are located in Houston, Texas, where the
Company leases approximately 2,800 square feet of office space. All of the
Company's sales and marketing activities are conducted at its Clearwater,
Florida and Dublin, Ireland locations, where it leases approximately 16,000 and
2,300 square feet, respectively. The Company's research and development
activities are conducted in Ottawa, Canada, where it leases approximately 6,000
square feet. The Company also leases approximately 2,400 square feet in Salt
Lake City, Utah, where the Company's Internet product efforts are directed. The
Company's leases expire or are terminable at the Company's option at varying
times through 2002.
The Company believes that its current facilities are adequate to meet its
needs for the foreseeable future. Management does not anticipate any major
problems in negotiating new leases on expiration of any existing leases.
Further, management also believes that additional space is available at
satisfactory rates for expansion beyond the current space should that be
necessary.
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, 1997.
-14-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company completed the initial public offering of its Common Stock in
December 1995. The Common Stock is traded on the Nasdaq National Market under
the symbol "FFGI." The following table sets forth the high and low sale prices
for the Common Stock as reported by the Nasdaq National Market for the periods
indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
Fourth Quarter (from December 18, 1995). . . . . . $8.63 $8.25
1996
First Quarter. . . . . . . . . . . . . . . . . . . $10.09 $6.50
Second Quarter . . . . . . . . . . . . . . . . . . 20.75 7.50
Third Quarter. . . . . . . . . . . . . . . . . . . 13.88 8.94
Fourth Quarter . . . . . . . . . . . . . . . . . . 10.88 5.00
1997
First Quarter. . . . . . . . . . . . . . . . . . . $7.00 $2.88
Second Quarter . . . . . . . . . . . . . . . . . . 4.25 2.00
Third Quarter. . . . . . . . . . . . . . . . . . . 8.88 2.13
Fourth Quarter . . . . . . . . . . . . . . . . . . 10.75 4.75
1998
First Quarter (through March 18, 1998) . . . . . . $14.81 $7.13
</TABLE>
On March 18, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $14.81 per share. As of March 11, 1998, there were
approximately 205 holders of record of the Common Stock.
The Company has never declared or paid a cash dividend on its Common
Stock. It is the present policy of the Board of Directors to retain all
earnings to support operations and to finance expansion of the Company's
business; therefore, the Company does not anticipate declaring or paying
dividends on the Common Stock in the foreseeable future. The declaration and
payment of cash dividends in the future will be at the Board of Directors'
discretion and will depend on the Company's earnings, financial condition,
capital needs and other factors deemed pertinent by the Board of Directors,
including limitations, if any, on the payment of dividends under state law
and any then-existing credit agreement.
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not sell any unregistered securities during the fourth
quarter of the Company's fiscal year ended December 31, 1997.
-15-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of the Company for each of the
three years in the period ended December 31, 1997 are derived from the audited
consolidated financial statements of the Company. The selected consolidated
financial data of the Company for each of the two years in the period ended
December 31, 1994 are derived from the unaudited consolidated financial
statements of the Company. In the opinion of management, the unaudited
consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary for the fair presentation of the financial
condition and results of operations for these periods. The following data
should be read in conjunction with "Management's Discussion and Analysis of the
Financial Condition and Results of Operations" and the consolidated financial
statements, including the notes thereto, included in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ----------- ------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $ 3,714 $ 4,689 $ 6,053 $ 13,798 $ 18,408
Cost of product licenses......................... 1,641 1,058 1,217 2,675 3,027
--------- --------- ---------- ----------- -----------
Gross profit..................................... 2,073 3,631 4,836 11,123 15,381
Operating expenses:
Selling and marketing.......................... 1,100 2,516 3,246 8,906 12,125
General and administrative..................... 563 1,243 1,159 4,255 3,589
Research and development....................... 333 748 888 3,021 1,810
Acquired research and
development................................... -- -- -- 2,799 4,097
--------- --------- ---------- ---------- ----------
Operating income (loss).......................... 77 (876) (457) (7,858) (6,240)
Interest income, net............................. 21 36 5 525 243
Gain on sale of assets........................... -- -- -- -- 1,869
--------- --------- ---------- ---------- ----------
Net income (loss)................................ $ 98 $ (840) $ (452) $ (7,333) $ (4,128)
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Basic and diluted income (loss) per
share(1)......................................... $ 0.03 $ (0.24) $ (0.12) $ (1.22) $ (0.63)
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Shares used in computing
basic and diluted income (loss) per
share(1).................................... 3,135,538 3,548,967 3,647,930 6,002,427 6,547,041
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ----------- ------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $1,959 $254 $12,575 $5,824 $4,880
Total assets..................................... 2,386 991 13,994 9,634 10,008
Stockholders' equity............................. 2,125 477 12,786 7,017 6,700
</TABLE>
- -----------------------
(1) Net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the year.
Common equivalent shares are excluded from the per share calculations
because the effect of their inclusion would be antidilutive. See the
Company's Consolidated Financial Statements and Note 2 thereto.
-16-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS ANNUAL REPORT ON FORM 10-K INCLUDES "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. THE WORDS
"ANTICIPATE," "BELIEVE," "EXPECT," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF
THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, BELIEVED,
EXPECTED, ESTIMATED OR PROJECTED. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THE ASSUMPTIONS COULD BE INACCURATE, AND THEREFORE, THERE CAN
BE NO ASSURANCES THAT THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS ANNUAL
REPORT ON FORM 10-K WILL PROVE TO BE ACCURATE. IN LIGHT OF THE SIGNIFICANT
UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE
INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE
COMPANY THAT THE OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED. THE
FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING
THE NOTES THERETO, AND SELECTED CONSOLIDATED FINANCIAL DATA INCLUDED ELSEWHERE
IN THIS ANNUAL REPORT ON FORM 10-K. HISTORICAL RESULTS ARE NOT NECESSARILY
INDICATIVE OF TRENDS IN OPERATING RESULTS FOR ANY FUTURE PERIOD.
OVERVIEW
The Company is a leading provider of interactive software designed to meet
the IT education and training needs of network professionals, PC technicians,
Web masters/managers and other IT professionals. The Company develops and
markets high-quality, cost-effective CBT products on CD-ROMs. These products
enable IT professionals to conveniently prepare for technical certification
exams on the leading network operating systems, Microsoft Windows NT and Novell
NetWare. Each of the Company's products is designed to provide comprehensive
training in the subject matter necessary to obtain technical certifications.
In addition to CBT products, ForeFront publishes and markets a line of
PC/Network utilities which enable technical professionals to diagnose problems
quickly and easily, manage systems, and enhance the performance of networks and
PCs. The Company also develops and markets off-line browsing and metasearching
products for use on the Internet.
During 1997, the Company's CBT products accounted for 61% of the Company's
revenues and PC/Network utilities represented 25% of revenues. The Company's
Internet content management products accounted for the remaining 14% of the
Company's 1997 revenues. The CBT products represented 43% of revenues in the
first quarter of 1997 and increased to 72% during the fourth quarter of 1997.
No customer accounted for more than 10% of the Company's net revenues during the
year ended December 31, 1996 or 1997. The Company derived approximately 90% of
its 1997 revenue from its telesales operations in Clearwater, Florida and
Dublin, Ireland which currently employ more than 160 sales representatives. In
addition, ForeFront also distributes its products through its proprietary
INSTANTX electronic storefront system and other online resellers over the
Internet, international resellers, distributors and original equipment
manufacturers ("OEMs"). To a lesser extent, the Company also markets certain of
its products through alliances with other computer software companies and
publishers that incorporate bundled versions of the Company's PC/Network utility
products and Internet content management products with the products of such
other companies.
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. Since the Company's acquisition of LanTec in
September 1997, the Company no longer pays royalties on its CBT Products.
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 operating expense as they are
incurred. 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. General and administrative
expenses consist primarily of salaries of administrative and executive
personnel, expenses associated with merger and acquisition activity, and other
professional services.
-17-
<PAGE>
Interest income consists primarily of interest earned on cash and cash
equivalents. The gain on sale of assets is attributable to the Company's sale of
certain Internet-printing technology during 1997.
ForeFront acquired AllMicro, Inc. ("AllMicro") on July 22, 1996 pursuant to
a merger in which the Company issued 1,056,152 shares of its Common Stock. The
AllMicro merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements of the Company give retroactive effect to the
merger and are presented as if ForeFront and AllMicro had been combined for all
periods presented. On September 29, 1997, the Company acquired LanTec for $1.8
million in cash and securities exchangeable for 557,413 shares of the Company's
Common Stock. The acquisition was accounted for under the purchase method and,
accordingly, the operating results of LanTec are included in the Company's
operating results since the date of acquisition.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data for the Company expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: . . . . . . .
Net revenues. . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of product licenses. . . . . . . . . . 20.1% 19.4% 16.4%
Gross profit. . . . . . . . . . . . . . . . 79.9% 80.6% 83.6%
Operating Expenses: . . . . . . . . . . . .
Selling and marketing . . . . . . . . . . 53.6% 64.5% 65.9%
General and administrative. . . . . . . . 19.1% 30.8% 19.5%
Research and development. . . . . . . . . 14.7% 21.9% 9.8%
Acquired research and development . . . . - 20.3% 22.3%
Operating loss. . . . . . . . . . . . . . . (7.5%) (56.9%) (33.9%)
Net loss. . . . . . . . . . . . . . . . . . (7.5%) (53.1%) (22.4%)
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES. The Company's revenues increased $4,610,000, or 33%, from
$13,798,000 in 1996 to $18,408,000 in 1997. For the year ended December 31,
1996, the Company's revenues were derived primarily through its direct sales
channel and through OEM agreements. For 1997, revenues were generated primarily
from the Company's direct sales channels and its electronic storefront.
Revenues from the direct sales channels increased approximately $6,261,000, or
61%, while revenues from the remaining channels decreased approximately
$1,651,000, or 46%. This change in revenue sources reflects the Company's
increased focus on CBT products, which are primarily sold through the direct
sales channel, and its decreased focus on the Internet content management
products, which were traditionally sold through the retail, OEM and electronic
storefront channels.
COST OF PRODUCT LICENSES. The Company's cost of product licenses
increased $352,000, or 13%, from $2,675,000 in 1996 to $3,027,000 in 1997 due to
the increase in revenue, but decreased as a percentage of revenue from 19% in
1996 to 16% in 1997. The decrease in the cost of product licenses as a
percentage of revenue is attributable to the change in the mix of distribution
channels used by the Company and the mix of products sold. As a result of the
LanTec acquisition in September 1997, the Company no longer pays royalties on
all of its CBT products acquired from LanTec and expects to continue to
increase its gross margins in the future; however, to the extent the Company
licenses additional products from third parties, the margins may decline due to
royalties paid to the licensors of such products.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$3,219,000, or 36%, from $8,906,000 in 1996 to $12,125,000 in 1997. The
increase was primarily due to increased sales personnel, sales commissions, and
advertising relating to CBT products as well as pre-committed advertising
contracts for Internet content management products that were entered into prior
to the Company's reorganization in April 1997. Future selling
-18-
<PAGE>
and marketing costs relating to the Company's Internet products 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
relating to CBT products in accordance with the targeted revenue goals and
expectations of management. This increase will include expenses for
ForeFront Europe Limited, the Company's Ireland-based business unit that
initiated sales, marketing and technical support operations in October 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative costs
decreased $666,000, or 16%, from $4,255,000 in 1996 to $3,589,000 in 1997.
Excluding the one-time charge of $1,559,000 for transaction costs associated
with the merger with AllMicro in July 1996 and the one-time restructuring charge
of $1,144,000 incurred in the second quarter of 1997, general and administrative
costs declined $251,000 or 9% from $2,696,000 in 1996 to $2,445,000 in 1997.
The decrease is primarily due to the reduction in personnel relating to Internet
content management products. In addition, the increase in personnel and related
costs within the Company has been in the sales and marketing functions relating
to CBT and PC/Network utility products while general and administrative
personnel costs have not increased significantly.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development
expenses decreased $1,211,000, or 40%, from $3,021,000 in 1996 to $1,810,000 in
1997. Compared to the prior year, expenses increased $326,000 in the first
three months of 1997 due to continued research and development relating to
Internet content management products but declined $1,537,000 during the
remainder of 1997. The decline in 1997 was primarily due to the Company's
reorganization in April 1997, which included a reduction in personnel and
related expenses for the Company's Internet content management products as
contrasted with an increase in such personnel during the same period in 1996
when the Company was making significant investments in research and development
efforts relating to Internet content management products. In addition, 1996
expenses include a one-time charge of approximately $410,000 for the purchase of
several software licenses intended for development. The Company expects to
incur fewer research and development expenses in the Internet content management
products division, but will incur additional research and development expenses
relating to CBT products as a result of the Company's acquisition of LanTec,
which will serve as the center of the Company's research and development
operations to develop new products.
ACQUIRED RESEARCH AND DEVELOPMENT EXPENSES. Total expenses for acquired
research and development in 1996 were $2,799,000 compared to $4,097,000 in
1997. In May 1997, the Company agreed to issue 100,128 shares of its Common
Stock in termination of an earn-out obligation relating to a 1996 acquisition.
As a result, the Company recorded additional acquired research and development
expenses of $447,000 during the second quarter of 1997. During September 1997,
the Company acquired LanTec in exchange for $1.8 million in cash and securities
exchangeable for 557,413 shares of the Company's Common Stock. The Company
recorded the fair value of net assets acquired, which resulted in a one-time
charge of $3,650,000 for acquired research and development expenses. The
acquired research and development expenses in 1996 relate to the Company's
acquisitions of Blue Squirrel, Inc. ("Blue Squirrel") and BookMaker Corporation
("BookMaker"). The Company recorded the fair value of net assets acquired,
which resulted in a non-cash charge of $440,000 and $2,359,000, respectively,
for acquired research and development expenses.
INTEREST INCOME. Interest income decreased $282,000, or 54%, from $525,000
in 1996 to $243,000 in 1997. The decrease is attributable to the Company's
continued use of cash proceeds during 1997 that were raised in December 1995 on
the completion of the Company's initial public offering.
GAIN ON SALE OF ASSETS. During September 1997, the Company sold
certain Internet printing technology to Hewlett-Packard and recorded a
one-time gain of $1,869,000 (net of closing costs).
INCOME TAXES. The Company has incurred losses since inception (excluding
the pro forma effects of the pooling with AllMicro in July 1996), except for the
fourth quarter ended December 31, 1997, and therefore, has not been subject to
federal income taxes. A valuation allowance was applied to fully offset the
Company's net deferred tax assets of $2.9 million at December 31, 1997. See
Note 3 of Notes to Consolidated Financial Statements. The net deferred tax
asset (before applying the valuation allowance) is comprised primarily of the
estimated tax effect of tax net operating loss ("NOL") carryforwards and other
temporary differences. Management believes it is not appropriate to record a
-19-
<PAGE>
deferred tax asset until the Company can establish that it becomes more likely
than not that the Company will realize some or all of the benefits of the net
deferred tax assets. The net deferred tax assets, prior to the application of
valuation allowances, for fiscal 1997 was $2.9 million and for fiscal 1996 was
$2.2 million. Federal tax laws provide for a limitation on the use of NOL tax
credit carryforwards following certain ownership changes that could limit the
Company's ability to use its NOL and tax credit carryforwards. Certain
transactions during 1996 resulted in an ownership change for federal income tax
purposes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET REVENUES. Net revenues increased $7,745,000, or 128%, from $6,053,000
in 1995 to $13,798,000 in 1996, primarily due to 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.
The merger with AllMicro, 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 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 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 due to increased price competition, the mix of
distribution channels used by the Company and the mix of products sold.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$5,660,000, or 174%, from $3,246,000 in 1995 to $8,906,000 in 1996. The
increase reflected increased sales personnel and commissions as a result of
higher revenues, the establishment and expansion of various distribution
channels in the United States and Europe for the Internet content management
products, as well as increased marketing activities, including trade show
participation, advertising and promotions.
GENERAL AND ADMINISTRATIVE EXPENSES. 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 $1,559,000
for transaction costs related to the merger with AllMicro, as well as higher
administrative costs as a result of becoming a public company. Excluding the
one-time charges, general and administrative expenses increased $1,538,000 or
133%, from $1,158,000 in 1995 to $2,696,000 in 1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $2,133,000, or 240%, from $888,000 in 1995 to $3,021,000 in 1996. The
increase was attributable to the additional research and development personnel
for the Internet content management products and the purchase of two software
licenses for $410,000 used for development for the Internet content management
products.
ACQUIRED RESEARCH AND DEVELOPMENT EXPENSES. 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 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
expenses.
INTEREST INCOME, NET. Net interest income increased $520,000 from $5,000
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 in December 1995 and resulting cash proceeds.
-20-
<PAGE>
INCOME TAXES. The Company has incurred losses since inception (excluding
the pro forma effects of the pooling with AllMicro in July 1996) and therefore,
has not been subject to federal income taxes. A valuation allowance was applied
to fully offset the Company's net deferred tax assets of $2.2 million at
December 31, 1996 (see Note 3 of Notes to the Company's Consolidated Financial
Statements). The net deferred tax asset (before applying the valuation
allowance) is composed primarily of the estimated tax effect of tax net
operating loss ("NOL") carryforwards and other temporary differences.
Management believes it is not appropriate to record a deferred tax asset until
the Company can establish that it becomes more likely than not that the Company
will realize some or all of the benefit of the net deferred tax assets. The net
deferred tax assets, prior to the application of valuation allowances, for
fiscal 1996 and fiscal 1995 were $2.2 million and $1.3 million, respectively.
Federal tax laws provide for a limitation on the use of NOL tax credit
carryforwards following certain ownership changes that could limit the Company's
ability to use its NOL and tax credit carryforwards. Certain transactions
during 1996 resulted in an ownership change for federal income tax purposes.
UNAUDITED SELECTED QUARTERLY OPERATING RESULTS (DOLLARS IN THOUSANDS)
The following table sets forth certain unaudited quarterly operating
information for the eight quarters ended December 31, 1997. This data has been
prepared on the same basis as the audited consolidated financial statements
contained elsewhere herein and includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of this
information for the periods presented, when read in conjunction with the
Company's consolidated financial statements and notes thereto contained
elsewhere herein. The operating results for any previous quarter are not
necessarily indicative of results of any future period.
<TABLE>
<CAPTION>
1996 1997
--------------------------------------------- --------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................... $ 2,753 $ 3,110 $ 3,594 $ 4,341 $ 4,152 $ 4,167 $ 4,723 $ 5,366
Gross Profit................ 2,247 2,545 2,887 3,444 3,269 3,343 3,928 4,841
Operating income (loss)..... (427) (2,846) (2,798) (1,787) (1,453) (2,466) (3,091)(1) 770
Net income (loss)........... (262) (2,690) (2,686) (1,695) (1,384) (2,408) (1,173)(2) 837
</TABLE>
(1) Includes the effects of a charge for acquired research and development
expenses of $3,650,000 incurred in connection with the LanTec acquisition.
Excluding the effects of such charge, the Company would have had operating
income of $559,000 for the third quarter of 1997.
(2) Includes the effects of a charge for acquired research and development
expenses of $3,650,000 incurred in connection with the LanTec acquisition
and of a gain of $1,869,000 on the sale of certain technology to
Hewlett-Packard Company. Excluding the effects of such charge and gain,
the Company would have had net income of $608,000 for the third quarter of
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $5,824,000 and $4,880,000 as of December
31, 1996 and December 31, 1997, respectively. During 1997, net cash used in
operating activities was $472,000 as compared to $4,785,000 in 1996. The
reduction in cash used by operating activities is a result of the decrease in
net loss. Cash used in investing activities in 1997 totaled $66,000 compared to
cash provided by investing activities of $6,938,000 in 1996. The cash used in
investing activities in 1997 was primarily for the LanTec Acquisition offset by
the proceeds from the sale of assets to Hewlett-Packard. Cash provided by
investing activities in 1996 primarily consisted of the sale of marketable
securities. Cash provided by financing activities in 1997 was $974,000 compared
to cash used in financing activities of $1,451,000 in 1996. The 1997 primary
source of cash from financing activities was proceeds from the exercise of stock
options while the primary use of cash used in financing activities in 1996 was
the payment of distributions to the former shareholder of AllMicro.
The Company believes that funds provided by operations will be sufficient
to meet its needs for working capital and capital expenditures and the Company's
anticipated needs to fund growth for the foreseeable future. An element
-21-
<PAGE>
of the Company's growth strategy is to pursue strategic acquisitions. The
Company may be required to seek external financing sources to pursue such
acquisitions. There can be no assurance that the Company would be able to
obtain such financing on reasonable or attractive terms, if at all.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
statement establishes standards for computing and presenting earnings per
share. The Company adopted the provisions of SFAS No. 128 in 1997. Such
adoption did not have an effect on the Company's financial position or
results of operations; however, the effect on net loss per share is disclosed
in the Company's Consolidated Financial Statements set forth herein.
In March, 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. The Company adopted the
provisions of SFAS No. 129 in 1997. Such adoption did not have a material
impact on the Company's financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information required
to be filed under this Item are presented on pages F-1 through F-17 of this
Annual Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-22-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
G. Anthony Gorry(1)............. 57 Chairman of the Board of
Directors
David Sikora.................... 36 President, Chief Executive
Officer and Director
Ernest D. Rapp.................. 36 Chief Financial Officer
Jeffrey R. Harder............... 45 Vice President-Corporate
Development and
General Counsel
Sunil Sethi..................... 36 Vice President and Chief
Technology Officer
Michael Kaplan.................. 41 President, ForeFront Direct,
Inc.
Stephen J. Banks(1)(2).......... 57 Director
Terry W. Ward(1)................ 48 Director
Grant Dove(2)................... 69 Director
</TABLE>
- ---------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
G. ANTHONY GORRY. Dr. Gorry is a founder of the Company and has been a
director of the Company since inception. Dr. Gorry has been Professor of
Computer Science at Rice University since April 1992 and is presently Vice
President of Information Technology. Dr. Gorry served as Vice President for
Information Technology and Professor of Medical Informatics and Neuroscience at
Baylor College of Medicine from 1975 to 1992 and as Director of the W. M. Keck
Center for Computational Biology and Adjunct Professor of Computer Science at
Rice University. From 1970 to 1975, he was Associate Professor of Management
and Computer Science at Massachusetts Institute of Technology. From 1967 to
1973, Dr. Gorry was Assistant Professor of Management at Massachusetts Institute
of Technology. Dr. Gorry currently serves as a director of Gene Logic, Inc., a
Maryland-based genomic and bioinformatics company. Dr. Gorry received a
Bachelor of Engineering degree from Yale University, a M.S. in Chemical
Engineering from the University of California at Berkeley and a Ph.D. in
Computer Science from Massachusetts Institute of Technology.
DAVID SIKORA. Mr. Sikora joined the Company as Vice President, Sales in
October 1992 and was elected President in October 1994. He was elected a
Director in January 1995 and Chief Executive Officer in June 1995. Mr.
Sikora was General Manager and Vice President for ComputerLand, Texas
(formerly Techtron Corporation) from 1989 to 1992. From 1982 through 1986,
Mr. Sikora operated a computer networking and systems integration company
which he co-founded. Mr. Sikora received a B.S. in Electrical Engineering
Technology from the University of Houston and a M.B.A. from Harvard Graduate
School of Business Administration.
ERNEST D. RAPP. Mr. Rapp joined the Company as Chief Financial Officer in
April 1996. From 1994 to April 1996, he was Chief Financial Officer of
MultiMedia Publishing Corporation, a publishing and instructor-led
conference/exposition management firm. From 1988 to 1992, Mr. Rapp operated
Information Publishing Corporation ("IPC"), an international educational
conference and exposition marketing firm. In September 1992, Mr. Rapp sold
IPC's assets to Advanstar Communications, Inc. ("Advanstar") and continued to
operate and transition the business to Advanstar through 1994. From 1983 to
1988, Mr. Rapp was employed with Arthur Andersen LLP, and Mann Frankfort Stein &
Lipp, CPAs. Mr. Rapp received a B.B.A. in Accounting from The University of
Texas at Austin and is a Certified Public Accountant.
JEFFREY R. HARDER. Mr. Harder joined the Company as Vice
President-Corporate Development and General Counsel in July 1996. Mr. Harder
was a partner at Andrews & Kurth L.L.P. from March 1993 until June 1996,
where
-23-
<PAGE>
he opened and managed its office in The Woodlands, Texas, representing
high-technology companies. From 1988 to 1993, Mr. Harder was engaged in the
private practice of law with a focus on venture capital transactions and
emerging growth companies. Prior thereto, Mr. Harder was Vice President and
Regional Counsel for E.F. Hutton and worked as in-house counsel for several
Fortune 500 companies. Mr. Harder received a B.A. degree from Valparaiso
University and his J.D. from the University of Illinois.
SUNIL K. SETHI. Mr. Sethi joined the Company as Vice President and Chief
Technology Officer in September 1997 in connection with the LanTec Acquisition.
Mr. Sethi co-founded and managed LanTec from its inception in 1992 until its
sale to ForeFront. Prior thereto, he was an independent consultant, providing
IT consulting services to the Canadian government and various Norwegian
companies. Mr. Sethi received a B.S. in Information and Computer Science from
the University of Bergen in Norway and a M.S. in economics from GND University
in India.
MICHAEL KAPLAN. Mr. Kaplan joined the Company as President of ForeFront
Direct, Inc., the Company's direct marketing subsidiary, in July 1996 in
connection with the Company's acquisition of AllMicro. Mr. Kaplan founded and
managed AllMicro as its President and Chief Executive Officer from 1991 until
its acquisition by the Company. Prior thereto, he was past-owner and Vice
President of Sales for Sales Hotlines, Inc. and Landmark Research International.
STEPHEN J. BANKS. Mr. Banks has been a Director of the Company since its
inception. He has served as President of BCM Technologies, Inc. ("BCMT"), a
technology transfer subsidiary of Baylor College of Medicine, since
January 1988. Mr. Banks was employed with The Hillman Company from 1969 to
1987, serving as its Vice President (with responsibility for venture capital
activities) from 1980 to 1987. He is a director of BCMT, several private
companies and Lark Technologies, Inc. He serves as a volunteer director of the
MIT Enterprise Forum of Texas, the Washington Research Foundation and as an
Adjunct Professor of Administration at Rice University. Mr. Banks received a
B.S. in Physics from Massachusetts Institute of Technology and a M.B.A. from
Harvard Graduate School of Business Administration.
TERRY W. WARD. Mr. Ward has been a Director of the Company since
October 1993. Since 1979, Mr. Ward has served as Chief Financial Officer of
W.S. Farish & Company, a company engaged in investments, venture capital and
other activities. He is a director of Meretek Diagnostics, Inc. and
California Microwave, Inc., a communications company based in Redwood,
California. Mr. Ward received a B.A. degree from Rice University. He is a
Certified Public Accountant.
GRANT DOVE. Mr. Dove was elected as a director of the Company in
February 1996. Since 1992, Mr. Dove has been Managing Partner at Technology
Strategies & Alliances. From 1987 to 1992, Mr. Dove was Chairman and Chief
Executive Officer of Microelectronics and Computer Technology Corporation
("MCC"), an industry-sponsored research and development consortium based in
Austin, Texas. Prior to joining MCC in 1987, Mr. Dove spent 28 years with
Texas Instruments, retiring as an Executive Vice President. He is former
Chairman for the National Security Industrial Association. Currently, he
serves as Director and Chairman of OPTEC Technology and as a Director of
Cooper Cameron Corporation, US WEST, Inc. and InterVoice, Inc., which are
public companies, and several privately-held corporations, including MCC.
Mr. Dove holds a B.S. in Electrical Engineering from Virginia Tech and was
named its Distinguished Engineering Alumnus for 1995.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than 10% of the
Common Stock, to file initial reports of ownership and reports of changes in
ownership (Forms 3, 4, and 5) of Common Stock with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than 10% stockholders
are required by SEC regulation to furnish the Company with copies of all such
forms that they file.
To the Company's knowledge, based solely on the Company's review of the
copies of such reports received by the Company and on written representations by
certain reporting persons that no reports on Form 5 were required,
-24-
<PAGE>
the Company believes that during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
10% stockholders were complied with in a timely manner, with the exception of
one late filing on Form 4 by Stephen J. Banks.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The Summary Compensation Table sets forth the compensation earned by or
paid to the Company's Chief Executive Officer and the other executive officers
whose salary and bonus exceeded $100,000 during the years ended December 31,
1995, 1996 and 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS(1)
----------------------------------- -------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS COMPENSATION OPTIONS(#) COMPENSATION
--------------------------- ---- ---------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David Sikora............................. 1997 $ 200,000 $ 7,200 (3) -- 125,000 $ 5,152
President and Chief Executive Officer 1996 155,000 49,250 -- 225,000 4,891
1995 91,859 50,000 -- 345,372 --
Ernest D. Rapp........................... 1997 $ 150,000 $ 28,750(4) -- 98,438 --
Chief Financial Officer 1996 84,375 21,094 -- 100,000 --
1995 -- -- -- -- --
Jeffrey R. Harder........................ 1997 $ 150,000 $ 26,160(5) -- 66,875 --
Vice President-Corporate Development 1996 60,000 27,716 -- 125,000 --
and General Counsel 1995 -- -- -- -- --
Michael Kaplan........................... 1997 $ 244,932 $ 3,195 $ 30,465 200,000 $ 145,831(6)
President of ForeFront Direct, Inc. 1996 195,754 -- -- -- 1,619,327(7)
1995 175,500 -- -- -- 854,620(8)
</TABLE>
- -----------------
(1) The Company has not granted any stock appreciation rights or made any
long-term incentive plan payouts.
(2) Includes amounts deferred by the employee under the Company's 401(k) plan.
(3) Mr. Sikora elected to receive a stock option grant in lieu of payment of
a portion of his 1997 cash bonus award.
(4) Mr. Rapp agreed to receive a stock option to purchase 23,438 shares of the
Company's Common Stock in lieu of payment of 50% of his 1997 cash bonus
award.
(5) Mr. Harder elected to receive a stock option to purchase 46,875 shares of
the Company's Common Stock in lieu of payment of his 1997 cash bonus award.
(6) Represents payments made under a non-competition agreement entered into by
the Company and Mr. Kaplan in connection with the AllMicro acquisition.
(7) Represents (i) payments of $104,169 made under a non-competition agreement
entered into by the Company and Mr. Kaplan in connection with the AllMicro
acquisition and (ii) dividends of $1,515,158 paid by AllMicro prior to its
acquisition by the Company.
(8) Represents dividends paid by AllMicro prior to its acquisition by the
Company.
-25-
<PAGE>
OPTION GRANTS
The following table provides information concerning stock options granted
during the year ended December 31, 1997 to each of the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERMS
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME (#) 1997 ($/SHARE) DATE 5% ($) 10% ($)
- --------------------------------- ---------- ------------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
David Sikora.................... 125,000 9.72% $ 2.25 08/18/07 $ 1,284,318 $ 2,175,103
Ernest D. Rapp.................. 25,000 1.94% $ 3.00 04/30/07 $ 233,063 $ 400,918
23,438 1.82% $ 2.25 08/18/07 $ 240,815 $ 407,840
50,000 3.89% $ 8.00 11/21/07 $ 233,803 $ 605,569
Jeffrey R. Harder............... 20,000 1.55% $ 3.00 04/30/07 $ 186,451 $ 320,735
46,875 3.64% $ 2.25 08/18/07 $ 481,619 $ 815,664
Michael Kaplan.................. 200,000 15.55% $ 3.00 04/30/07 $ 1,864,507 $ 3,207,347
</TABLE>
The following table provides information concerning the value of
unexercised options held as of December 31, 1997 by the Named Executive Officers
(no options were exercised during such year). The fair market value of the
shares of Common Stock underlying such options was $7.81 per share as of
December 31, 1997.
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 (1)($)
----------------------------------- -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------------- ---------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
David Sikora .............................. 629,959 92,054 $ 2,858,277 $ 297,917
Ernest D. Rapp ............................ 97,152 101,286 372,157 133,478
Jeffrey R. Harder ......................... 106,422 85,453 421,330 253,196
Michael Kaplan ............................ 200,000 -- 962,600 --
</TABLE>
- -------------
(1) These values have been calculated based on the last sales price of $7.81
per share on December 31, 1997, less the applicable exercise price.
COMPENSATION OF DIRECTORS
Each of the Company's non-employee directors receives $1,000 per meeting
attended and reimbursement of reasonable expenses incurred in attending
meetings. In addition, each of the Company's non-employee directors receives
an annual grant of a stock option to purchase 10,000 shares of Common Stock
under the Company's 1996 Non-Employee Director Stock Option Plan. All stock
options granted to the non-employee directors in the fiscal year ended December
31 1997 were exercisable at $3.063 per share, with vesting over the succeeding
twelve months of service.
-26-
<PAGE>
Dr. Gorry performed consulting services to the Company during 1997, for
which he received compensation of $10,000.
EMPLOYMENT AGREEMENTS WITH KEY PERSONNEL
In December 1996, the Company entered into an employment agreement with
Mr. Sikora which, as amended, provides for a base salary of $200,000 and an
annual bonus of up to 75% of his base salary, subject to agreed-on performance
milestones. In the event that Mr. Sikora's employment is terminated (except for
cause) or the agreement is not renewed on its expiration on December 31, 1998,
Mr. Sikora shall be entitled to a continuation of salary for a twelve-month
period. The agreement also provides for a "Change in Control Payment" to Mr.
Sikora in an amount equal to his base salary for one year and the maximum bonus
payable under the agreement, in the event that a change in ownership of a
majority of the outstanding stock or a change in the majority membership with
the Board occurs. In addition, the Company agreed to continue to pay the
applicable premium for health insurance for Mr. Sikora and his family and the
premium on a $1,000,000 life insurance policy on Mr. Sikora's life, with the
proceeds payable to his designated beneficiary.
In connection with the acquisition of AllMicro in July 1996, the Company
entered into an employment agreement with Michael Kaplan, currently the
President of ForeFront Direct, Inc. Pursuant to the terms of such agreement,
Mr. Kaplan and the Company have agreed to a two-year employment agreement, which
provides for a base salary of $250,000 per year. In addition, the Company paid
Mr. Kaplan the sum of $250,000 in twelve equal monthly installments following
the closing of the acquisition in exchange for his agreement not to compete with
the Company or AllMicro until the earlier of July 17, 1999 or one year after the
termination of his employment with the Company.
In connection with the acquisition of LanTec, the Company entered into a
two-year employment agreement with Sunil K. Sethi, President of LanTec, pursuant
to which the Company agreed to employ Mr. Sethi as Chief Technology Officer of
the Company at an annual base salary of $140,000. Mr. Sethi is eligible to
receive a bonus of up to 25% of his base salary based on achievement of certain
product development milestones. In the event that the Company terminates Mr.
Sethi's employment without cause prior to expiration of the two-year term, Mr.
Sethi is entitled to receive a severance payment of six months' base salary. In
addition, the Company awarded Mr. Sethi a nonqualified stock option to purchase
75,000 shares of the Company's Common Stock at an exercise price of $6.875,
which vests over four years and on completion of certain product development
milestones, as additional consideration for his employment services.
Finally, the Company has agreements to pay Messrs. Rapp and Harder a
continuation of their base salary and benefits for six months in the event of
termination of their employment by the Company without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Each of Messrs. Gorry, Banks and Ward served as a member of the
Compensation Committee of the Company's Board of Directors during the fiscal
year ended December 31, 1997. None of the Messrs. Gorry, Banks and Ward is a
current or former executive officer of the Company.
Terry Ward serves as a director and executive officer of W.S. Farish &
Company. In 1995, W. S. Farish & Company and certain of its affiliates
purchased an aggregate of 902,000 shares of Series B Convertible Preferred Stock
(which amount includes 832,000 shares purchased by W.S. Farish & Company, 40,000
shares purchased by William S. Farish and 30,000 shares purchased by William S.
Farish, Jr.), and received stock purchase warrants to acquire an aggregate of
51,772 shares of Common Stock (which includes warrants to purchase 48,664 shares
of Common Stock issued to W.S. Farish & Company, warrants to purchase 1,776
shares of Common Stock issued to William S. Farish and warrants to purchase
1,332 shares of Common Stock issued to William S. Farish, Jr.). In addition,
Terry W. Ward purchased 300,000 shares of Series B Preferred Stock and was
issued stock purchase warrants to acquire 1,332 shares of common stock in the
1995 private placement.
-27-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 18, 1998 by
(i) each director of the Company, (ii) each person known to the Company to be
the beneficial owner of more than 5% of the Common Stock of the Company,
(iii) the executive officers named in the Summary Compensation Table, and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
MANAGEMENT AND FIVE PERCENT BENEFICIAL OWNERS NUMBER PERCENT(1)
--------------------------------------------- --------- ---------
<S> <C> <C>
William S. Farish(2) ...................... 645,323 9.46%
William S. Farish & Company
1100 Louisiana, Suite 1200
Houston, Texas 77002
Evan B. Pappas ............................ 383,744 5.63%
938 Brunswick Dr.
Sugar Land, Texas 77478
David Sikora(3) ........................... 660,607 9.69%
Ernest D. Rapp(4) ......................... 107,453 1.58%
Jeffrey R. Harder(5) ...................... 125,750 1.84%
Michael Kaplan(6) ......................... 847,052 12.42%
G. Anthony Gorry(7) ....................... 224,030 3.28%
Stephen J. Banks(8) ....................... 112,868 1.65%
Grant Dove(9) ............................. 49,166 *
Terry W. Ward(10) ......................... 650,633 9.54%
All directors and executive officers as a
group (8) persons)(11) ............... 2,777,559 40.73%
</TABLE>
- ----------------
* Represents less than 1% of the Common Stock outstanding.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants held by that person
that are currently exercisable or exercisable within 60 days of March 9,
1998 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership for each
other person. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, each stockholder named in
the table has sole voting and investment power with respect to the shares
set forth opposite such stockholder's name.
(2) Consists of (i) 544,763 shares owned by W.S. Farish & Company, of which Mr.
Farish is a principal stockholder, director and executive officer, (ii)
35,491 shares owned by Mr. Farish, and (iii) 13,297 shares owned by William
S. Farish, Jr. Also includes warrants to purchase 48,664 shares of Common
Stock held by W.S. Farish & Company, warrants to purchase 1,776 shares of
Common Stock held by Mr. Farish, and warrants to purchase 1,332 shares of
Common Stock held by William S. Farish, Jr.
(3) Includes 633,406 shares which may be acquired by Mr. Sikora on exercise of
outstanding stock options.
(4) Includes 107,013 shares which may be acquired by Mr. Rapp on exercise of
outstanding stock options.
(5) Includes 119,061 shares which may be acquired by Mr. Harder on exercise of
outstanding stock options.
(6) Includes 200,000 shares which may be acquired by Mr. Kaplan on exercise of
outstanding stock options.
(7) Includes 38,868 shares which may be acquired by Dr. Gorry on exercise of
outstanding stock options.
(8) Includes (i) 93,152 shares owned by BCM Technologies, Inc., of which Mr.
Banks is President and a director, as to which he disclaims beneficial
ownership, and (ii) 14,166 shares which may be acquired by Mr. Banks on
exercise of outstanding stock options.
(9) Includes (i) 9,700 shares owned by Mr. Dove, (ii) 300 shares held by a
trust established for the benefit of Mr. Dove's grandchildren, as to which
Mr. Dove disclaims beneficial ownership, and (iii) 39,166 shares which may
be acquired by Mr. Dove on exercise of outstanding stock options.
-28-
<PAGE>
(10) Includes (i) 554,763 shares owned by W.S. Farish & Company, of which Mr.
Ward is Financial Vice President, Chief Trust Officer and a director, as to
which Mr. Ward disclaims beneficial ownership, (ii) 41,708 shares owned
by Mr. Ward, and (iii) 14,166 shares which may be acquired by Mr. Ward on
exercise of outstanding stock options. Also includes warrants to purchase
48,664 shares of Common Stock held by W.S. Farish & Company, as to which
Mr. Ward disclaims beneficial ownership, and a warrant to purchase 1,332
shares of Common Stock held by Mr. Ward.
(11) Includes (i) 544,763 shares owned by W.S. Farish & Company, (ii) 93,152
shares owned by BCM Technologies Inc., and (iii) an aggregate of 1,215,842
shares which may be acquired on exercise of outstanding stock options and
stock purchase warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the first and second quarter of 1995, the Company issued notes to
certain principal stockholders and directors of the Company, among others, in
the aggregate principal amount of $660,705, which notes were secured by a
security interest in all assets of the Company. In September 1995, all
outstanding notes issued to such investors were retired or exchanged for shares
of the Company's Series B Convertible Preferred Stock in connection with a
private placement of 1,304,000 shares of Series B Convertible Preferred Stock.
Warrants to purchase 85,664 shares of Common Stock at an exercise price of $2.82
per share were issued in connection with the sale of the shares of Series B
Convertible Preferred Stock and the repayment of such notes. The Series B
Convertible Preferred Stock converted into an aggregate of 578,014 shares of
Common Stock upon the closing of the Company's initial public offering in
December 1995. The holders of such converted shares of Common Stock are
entitled to certain registration rights with respect to the Common Stock issued
upon conversion thereof.
W. S. Farish & Company and certain of its affiliates purchased an aggregate
of 902,000 shares of Series B Convertible Preferred Stock (which amount includes
832,000 shares purchased by W.S. Farish & Company, 40,000 shares purchased by
William S. Farish and 30,000 shares purchased by William S. Farish, Jr.), in the
above-referenced offering and received stock purchase warrants to acquire an
aggregate of 51,772 shares of Common Stock (which includes warrants to purchase
48,664 shares of Common Stock issued to W.S. Farish & Company, warrants to
purchase 1,776 shares of Common Stock issued to William S. Farish and warrants
to purchase 1,332 shares of Common Stock issued to William S. Farish, Jr.). In
addition, Terry W. Ward, a director and executive officer of W.S. Farish &
Company, purchased 300,000 shares of Series B Preferred Stock and was issued
stock purchase warrants to acquire 1,332 shares of common stock.
In July 1996, the Company acquired all of the stock of AllMicro in exchange
for the issuance of 1,056,152 shares of Common Stock of the Company. Michael
Kaplan, who became President of ForeFront Direct, Inc. as a result of the
acquisition, was President and sole stockholder of AllMicro. As part of the
acquisition, Mr. Kaplan entered into an employment agreement and noncompetition
agreement with the Company. See "-- Executive Compensation--Employment
Agreements with Key Personnel."
In September 1997, the Company acquired all of the common stock of LanTec
in exchange for securities exchangeable for 557,413 shares of Common Stock of
the Company. Sunil K. Sethi, who became the Vice President and Chief Technology
Officer in connection with the acquisition, was President and co-founder of Lan
Professional, and received a stock option to purchase 75,000 shares of Company
Common Stock in the transaction. As part of the acquisition, Mr. Sethi also
entered into an employment agreement with the Company. See "-- Executive
Compensation--Employment Agreements with Key Personnel."
In December 1996, the Company entered into an employment agreement with
David Sikora. See "-- Executive Compensation--Employment Agreements with Key
Personnel."
In August 1995, each non-employee director was granted a non-qualified
stock option under the 1992 Plan to purchase 5,550 shares of Common Stock at
$1.13 per share, except for Dr. Gorry who was granted a non-qualified stock
option to purchase 22,201 shares at $1.13 per share. All shares subject to the
director options vest over the twelve months of service as a director following
the date of grant.
-29-
<PAGE>
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the members of the Board of
Directors, including a majority of the independent and disinterested directors
of the Board of Directors, and will be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(1) FINANCIAL STATEMENTS
The Financial Statements included in this Annual Report on Form 10-K
are set forth on the Index to Financial Statements on page F-1 hereof.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II Page S-2
All other financial statement schedules are either inapplicable
or included in the Financial Statements or Notes thereto filed as
a part of this Annual Report on Form 10-K.
(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
-------- --------------------------
<S> <C> <C>
3.1 -- Amended and Restated Certificate of Incorporation (Exhibit 3.1
to the Company's Registration Statement on Form SB-2
(Registration Number 33-97798-D) (the "Form SB-2") is hereby
incorporated by reference in its entirety).
3.2 -- Amended and Restated Bylaws (Exhibit 3.2 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
June 30, 1996 (File Number 000-27438) is hereby incorporated by
reference in its entirety).
4.1 -- Specimen Common Stock Certificate (Exhibit 4.1 to Amendment No.
2 to the Company's Form SB-2 is hereby incorporated by
reference in its entirety).
10.1 -- Amended and Restated 1992 Stock Option Plan (Exhibit 10.1 to
the Company's Form SB-2 is hereby incorporated by reference in
its entirety).
10.2 -- 1996 Non-Employee Directors' Stock Option Plan (Exhibit 99.3 to
the Company's Registration Statement on Form S-8 (Registration
Number 333-07721), as filed with the Commission on July 5, 1996
(the "Form S-8") is hereby incorporated in its entirety by
reference).
10.3 -- 1996 Employee Stock Purchase Plan (Exhibit 99.2 to the Form S-8
is hereby incorporated by reference in its entirety).
10.4 -- Asset Purchase Agreement dated June 12, 1996, between the
Company and BookMaker Corporation (Exhibit 2.2 to the Company's
Current Report on Form 8-K, as filed with the Commission on
June 27, 1996 (the "BookMaker Form 8-K"), is hereby
incorporated by reference in its entirety).
-30-
<PAGE>
10.5 -- Agreement and Plan of Reorganization dated July 19, 1996, among
the Company, AllMicro Acquisition Corporation, AllMicro, Inc.
and the shareholders listed on the execution pages thereto
(Exhibit 2.1 to the Company's Current Report on Form 8-K, as
filed with the Commission on August 6, 1996 (the "AllMicro
Form 8-K"), is hereby incorporated by reference in its entirety).
10.6 -- Employment Agreement dated July 22, 1996, between the Company and
Michael Kaplan (Exhibit 10.1 to the Company's September 1996
Form 10-QSB is hereby incorporated by reference in its entirety).
10.7 -- Employment Agreement dated December 23, 1996, between the Company
and David Sikora (Exhibit 10.7 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1996
(File Number 0-27438) (the "1996 10-KSB") is hereby incorporated
by reference in its entirety).
10.8 -- Amended and Restated 1996 Stock Option Plan (Exhibit 10.8 to the 1996 Form
10-KSB is hereby incorporated by reference in its entirety).
10.9 -- Employment and Stock Purchase Agreement dated June 12, 1992, between the
Company and Evan B. Pappas, as amended by that certain First Amendment dated
October 25, 1994, between the Company and Mr. Pappas, and that certain Cross
Receipt dated March 16, 1995 (Exhibit 10.7 to the Form SB-2 is hereby
incorporated by reference in its entirety).
10.10 -- Registration Rights Agreement dated September 1995, between the Company and
certain holders of the Company's common and preferred stock (Exhibit 10.10
to the Company's Form SB-2 is hereby incorporated by reference in its
entirety).
10.11 -- Registration Rights Agreement dated June 12, 1996, between the Company and
BookMaker Corporation (Exhibit 99.3 to the Company's BookMaker Form 8-K is
hereby incorporated by reference in its entirety).
10.12 -- Registration Rights Agreement dated July 19, 1996, between the Company and
the shareholders of AllMicro, Inc. set forth on the signature pages thereto
(Exhibit 99.3 to the Company's AllMicro Form 8-K is hereby incorporated by
reference in its entirety).
10.13 -- Form of Warrant Agreement issued to the Representatives of the several
Underwriters in connection with the Company's initial public offering
of shares of common stock (Exhibit 10.11 to the Company's Form SB-2 is
hereby incorporated by reference in its entirety).
10.14 -- Form of Stock Purchase Warrant issued in September 1995 (Exhibit 10.9
to the Company's Form SB-2 is hereby incorporated by reference in its
entirety).
10.15 -- Asset Purchase Agreement dated September 22, 1997, between the Company
and Hewlett-Packard Company (Exhibit 10.1 to the Company's Current
Report on Form 8-K, as filed with the Commission on October 7, 1997
(the "HP Form 8-K"), is hereby incorporated by reference in its entirety).
10.16 -- Acquisition Agreement dated September 29, 1997, between the Company,
LanProfessional, Inc. ("LanProfessional") and Sunil Sethi, Naveen Seth,
Sukhdev Walia, Sunita Uppal and Jang Bhadhur Sethi (collectively, the
"LanProfessional Shareholders") (Exhibit 10.1 to the Company's
Current Report on Form 8-K, as filed with the Commission on October 14,
1997 (the "LanProfessional Form 8-K"), is hereby incorporated by
reference in its entirety).
10.17 -- Escrow Agreement dated September 29, 1997, between the Company,
LanProfessional and the LanProfessional Shareholders (Exhibit 10.2
to the Company's LanProfessional Form 8-K is hereby incorporated by
reference in its entirety).
10.18 -- Lockup Agreement dated September 29, 1997, between the Company and
the LanProfessional Shareholders (Exhibit 10.3 to the Company's
LanProfessional Form 8-K is hereby incorporated by reference in
its entirety).
10.19 -- Support Agreement dated September 29, 1997, between the Company and
LanProfessional (Exhibit 10.4 to the Company's LanProfessional
Form 8-K is hereby incorporated by reference in its entirety).
10.20 -- Exchange Rights Agreement dated September 29, 1997, between the
Company, LanProfessional and the LanProfessional Shareholders
(Exhibit 10.5 to the Company's LanProfessional Form 8-K is hereby
incorporated by reference in its entirety).
-31-
<PAGE>
10.21 -- Employment Agreement dated September 29, 1997, between
LanProfessional and Sunil K. Sethi (Exhibit 10.6 to the Company's
LanProfessional Form 8-K is hereby incorporated by reference in its
entirety).
10.22 -- Additional Escrow Agreement dated September 29, 1997, between the
Company, McCarthy Tetrault, and the LanProfessional Shareholders
(Exhibit 10.7 to the Company's LanProfessional Form 8-K is hereby
incorporated by reference in its entirety).
10.23 -- Registration Rights Agreement dated September 29, 1997, between the
Company and the LanProfessional Shareholders (Exhibit 10.8 to the
Company's LanProfessional Form 8-K is hereby incorporated by reference
in its entirety).
21.1* -- List of Subsidiaries of the Registrant
23.1* -- Consent of Arthur Andersen LLP
27.1* -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(b) REPORTS ON FORM 8-K
None.
-32-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE FOREFRONT GROUP, INC.
By: /s/ David Sikora
-------------------------------------
President and Chief Executive Officer
Date: March 16, 1998
-----------------------------------
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 16, 1998 /s/ David Sikora
-------------- --------------------------------------
David Sikora, President and Chief
Executive Officer (Principal
Executive Officer and Director)
Date: March 16, 1998 /s/ Ernest D. Rapp
-------------- --------------------------------------
Ernest D. Rapp, Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
Date: March 16, 1998 /s/ G. Anthony Gorry
-------------- --------------------------------------
G. Anthony Gorry, Chairman of the
Board of Directors
Date: March 16, 1998 /s/ Stephen J. Banks
-------------- --------------------------------------
Stephen J. Banks, Director
Date: March 16, 1998 /s/ Grant Dove
-------------- --------------------------------------
Grant Dove, Director
Date: March 16, 1998 /s/ Terry Ward
-------------- --------------------------------------
Terry Ward, Director
-33
<PAGE>
THE FOREFRONT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for Each of the Three Years in the Period Ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997. . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The ForeFront Group, Inc.:
We have audited the accompanying consolidated balance sheets of The ForeFront
Group, Inc., and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
F-2
<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
ASSETS 1996 1997
------ ---------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,204,213 $ 6,628,628
Accounts receivable, net of allowance of $138,600 and 319,500 1,450,241 1,045,379
Inventory 340,163 168,664
Prepaid expenses and other 429,957 341,133
-------------- -------------
Total current assets 8,424,574 8,183,804
NOTES RECEIVABLE, related parties -- 99,078
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $346,726 and $677,912 1,063,976 1,067,111
PURCHASED SOFTWARE, net of accumulated
amortization of $53,490 and $165,510 84,520 302,500
OTHER ASSETS, net of accumulated amortization
of $0 and $12,620 60,864 355,618
-------------- -------------
Total assets $ 9,633,934 $ 10,008,111
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 857,780 $ 713,376
Accrued liabilities 1,393,519 1,889,682
Deferred revenue 349,391 700,789
-------------- ------------
Total current liabilities 2,600,690 3,303,847
DEFERRED REVENUE 16,660 4,658
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 6,760,586 shares issued, 6,182,031 and
6,578,313 shares outstanding 62,641 66,605
Additional paid-in capital 19,594,230 23,156,442
Deferred compensation (369,336) (112,181)
Cumulative translation adjustment -- (11,738)
Accumulated deficit (12,269,101) (16,397,672)
Treasury stock, 82,145 shares at cost (1,850) (1,850)
-------------- --------------
Total stockholders' equity 7,016,584 6,699,606
-------------- --------------
Total liabilities and stockholders' equity $ 9,633,934 $ 10,008,111
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------
1995 1996 1997
-------------- ---------------- ---------------
<S> <C> <C> <C>
NET REVENUES $ 6,052,786 $ 13,798,466 $ 18,407,770
COST OF PRODUCT LICENSES 1,217,182 2,675,434 3,027,289
------------- --------------- ---------------
Gross profit 4,835,604 11,123,032 15,380,481
OPERATING EXPENSES:
Selling and marketing 3,246,174 8,906,307 12,125,070
General and administrative 1,158,406 4,254,646 3,589,088
Research and development 887,717 3,021,318 1,809,567
Acquired research and development -- 2,798,604 4,097,251
------------- --------------- ---------------
Operating loss (456,693) (7,857,843) (6,240,495)
OTHER:
Interest income, net 4,862 525,255 243,424
Gain on sale of assets -- -- 1,868,500
------------- --------------- ---------------
Net loss $ (451,831) $ (7,332,588) $ (4,128,571)
------------- --------------- ---------------
------------- --------------- ---------------
BASIC AND DILUTED LOSS PER SHARE $ (.12) $ (1.22) $ (.63)
------------- --------------- ---------------
------------- --------------- ---------------
SHARES USED IN COMPUTING BASIC
AND DILUTED LOSS PER SHARE 3,647,930 6,002,427 6,547,041
------------- --------------- ---------------
------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- ------------------------- ------------------------
Par
Shares Par Value Shares Par Value Shares Value
---------- ------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........................ 2,000,000 $ 20,000 -- $ -- 2,670,853 $ 26,708
EXERCISE OF STOCK OPTIONS......................... -- -- -- -- 4,440 44
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 -- --
ISSUANCE OF PREFERRED STOCK IN
SEPTEMBER 1995 AT $1.25 PER SHARE
FOR CONVERSION OF NOTES
PAYABLE..................................... -- -- 464,000 4,640 -- --
DEFERRED COMPENSATION
RELATING TO ISSUANCE OF
CERTAIN STOCK OPTIONS........................ -- -- -- -- -- --
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
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
ISSUANCE OF COMMON STOCK PURCHASE
WARRANTS UPON CLOSING OF
INITIAL PUBLIC OFFERING...................... -- -- -- -- -- --
DISTRIBUTIONS TO STOCKHOLDERS..................... -- -- -- -- -- --
NET LOSS.......................................... -- -- -- -- -- --
-------- -------- -------- -------- ---------- ---------
BALANCE, December 31, 1995........................ -- -- -- -- 5,838,246 58,382
ISSUANCE OF COMMON STOCK FOR BLUE
SQUIRREL ACQUISITION......................... -- -- -- -- 125,000 1,250
ISSUANCE OF COMMON STOCK FOR
BOOKMAKER ACQUISITION........................ -- -- -- -- 223,538 2,235
AMORTIZATION OF DEFERRED COMPENSATION............. -- -- -- -- -- --
EXERCISE OF STOCK OPTIONS......................... -- -- -- -- 77,392 774
DISTRIBUTIONS TO STOCKHOLDERS..................... -- -- -- -- -- --
NET LOSS.......................................... -- -- -- -- -- --
-------- -------- -------- -------- ---------- ---------
BALANCE, December 31, 1996........................ -- -- -- -- 6,264,176 62,641
AMORTIZATION OF DEFERRED COMPENSATION............. -- -- -- -- -- --
EXERCISE OF STOCK OPTIONS......................... -- -- -- -- 358,528 3,587
ISSUANCE OF COMMON STOCK FOR
BOOKMAKER ACQUISITION.......................... -- -- -- -- 37,754 377
ISSUANCE OF COMMON STOCK FOR LANTEC ACQUISITION... -- -- -- -- -- --
CUMULATIVE TRANSLATION ADJUSTMENT................. -- -- -- -- -- --
NET LOSS.......................................... -- -- -- -- -- --
-------- -------- -------- -------- ---------- ---------
BALANCE, December 31, 1997........................ -- $ -- -- $ -- 6,660,458 $ 66,605
-------- -------- -------- -------- ---------- ---------
-------- -------- -------- -------- ---------- ---------
<CAPTION>
Additional Cumulative
Paid-In Deferred Translation Accumulated Treasury
Capital Compensation Adjustment Deficit Stock Total
-------------- --------------- --------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............ $ 2,557,221 $ -- $ -- $(2,125,100) $ (1,850) $ 476,979
EXERCISE OF STOCK OPTIONS............. 956 -- -- -- 1,000
ISSUANCE OF SERIES B PREFERRED STOCK
IN SEPTEMBER 1995 AT $1.25 PER
SHARE, net of offering
costs of $10,000................. 1,031,600 -- -- -- -- 1,040,000
ISSUANCE OF PREFERRED STOCK IN
SEPTEMBER 1995 AT $1.25 PER
SHARE FOR CONVERSION OF NOTES
PAYABLE........................ 575,360 -- -- -- -- 580,000
DEFERRED COMPENSATION
RELATING TO ISSUANCE OF
CERTAIN STOCK OPTIONS........... 726,375 (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. 11,837,522 -- -- -- -- 11,854,522
CONVERSION OF ALL PREFERRED
STOCK UPON CLOSING OF
INITIAL PUBLIC OFFERING......... 18,410 -- -- -- -- --
ISSUANCE OF COMMON STOCK PURCHASE
WARRANTS UPON CLOSING OF
INITIAL PUBLIC OFFERING......... 170 -- -- -- -- 170
DISTRIBUTIONS TO STOCKHOLDERS........ -- -- -- (854,620) -- (854,620)
NET LOSS............................. -- -- -- (451,831) -- (451,831)
----------- ---------- -------- ------------ ------- ----------
BALANCE, December 31, 1995........... 16,747,614 (586,105) -- (3,431,551) (1,850) 12,786,490
ISSUANCE OF COMMON STOCK FOR BLUE
SQUIRREL ACQUISITION............ 397,188 -- -- -- -- 398,438
ISSUANCE OF COMMON STOCK FOR
BOOKMAKER ACQUISITION........... 2,411,975 -- -- -- 2,414,210
AMORTIZATION OF DEFERRED
COMPENSATION.................... (15,719) 216,769 -- -- -- 201,050
EXERCISE OF STOCK OPTIONS............ 53,172 -- -- -- -- 53,946
DISTRIBUTIONS TO STOCKHOLDERS........ -- -- -- (1,504,962) -- (1,504,962)
NET LOSS............................. -- -- -- (7,332,588) -- (7,332,588)
----------- ---------- -------- ------------ ------- ----------
BALANCE, December 31, 1996........... 19,594,230 (369,336) -- (12,269,101) (1,850) 7,016,584
AMORTIZATION OF DEFERRED
COMPENSATION.................... (176,055) 257,155 -- -- -- 81,100
EXERCISE OF STOCK OPTIONS............ 970,626 -- -- -- -- 974,213
ISSUANCE OF COMMON STOCK FOR
BOOKMAKER ACQUISITION........... 215,202 -- -- -- -- 215,579
ISSUANCE OF COMMON STOCK FOR
LANTEC ACQUISITION.............. 2,552,439 -- -- -- -- 2,552,439
CUMULATIVE TRANSLATION ADJUSTMENT.... -- -- (11,738) -- -- (11,738)
NET LOSS............................. -- -- -- (4,128,571) -- (4,128,571)
----------- ---------- -------- ------------ ------- ----------
BALANCE, December 31, 1997........... $23,156,442 $ (112,181) $(11,738) $(16,397,672) $(1,850) $6,699,606
----------- ---------- -------- ------------ ------- ----------
----------- ---------- -------- ------------ ------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------
1995 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss................................................................ $ (451,831) $ (7,332,588) $ (4,128,571)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization...................................... 65,526 354,503 378,724
Amortization of deferred compensation related
to certain stock options...................................... 140,270 201,050 81,100
Non-cash acquired research and development......................... -- 2,798,604 4,097,251
Gain on sale of assets............................................. -- -- (1,868,500)
Changes in operating assets and liabilities
(Net of asset acquisitions):
(Increase) decrease in receivables................................. 61,006 (1,157,170) 347,403
(Increase) decrease in inventory................................... (91,899) (161,407) 171,499
(Increase) decrease in prepaid expenses and other current assets... (7,821) (476,049) 88,824
(Increase) decrease in other assets................................ (6,093) (51,621) 37,639
Increase (decrease) in accounts payable and accrued liabilities.... 653,411 808,655 (16,978)
Increase (decrease) in deferred revenues........................... (3,382) 230,970 339,396
------------ ---------------- ------------
Net cash provided (used) by operating activities.............. 359,187 (4,785,053) (472,213)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment..................................... (56,166) (1,009,574) (131,119)
(Purchase) sale of marketable securities................................ (7,998,417) 7,998,417 --
Net cash paid for Blue Squirrel acquisition............................. -- (128,018) --
Net cash received from BookMaker acquisition............................ -- 77,234 --
Net proceeds from sale of assets........................................ -- -- 1,868,500
Net cash paid for LanTec acquisition.................................... -- -- (1,803,228)
------------ ---------------- ------------
Net cash provided (used) by investing activities.............. (8,054,583) 6,938,059 (65,847)
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 53,946 974,213
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) 974,213
EFFECT OF EXCHANGE RATES ON CASH............................................. -- -- (11,738)
------------ ---------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... 4,968,676 701,990 424,415
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................... 533,547 5,502,223 6,204,213
------------ ---------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................................... $ 5,502,223 $ 6,204,213 $ 6,628,628
------------ ---------------- ------------
------------ ---------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE FOREFRONT GROUP, INC.
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. ForeFront is a leading provider
of interactive software designed to meet the IT education and training needs of
network professionals, personal computer technicians, Webmasters/managers and
other IT professionals. The Company develops and markets high-quality, cost
effective Computer Based training (CBT) products, which enable IT professionals
to conveniently prepare for technical certification exams. These certifications
enable technical professionals to advance in their careers and support overall
quality assurance within corporate IT departments. ForeFront's current CBT
titles include the MCSE SELF-STUDY COURSE and CNE SELF-STUDY COURSE, programs
which provide training for certification to manage Microsoft Windows NT and
Novell NetWare, today's dominant network operating systems, and the A+
CERTIFICATION SELF-STUDY COURSE, which provides training for the most-recognized
certification for PC technicians.
In addition to CBT titles, ForeFront publishes and markets a line of
PC/Network utilities which enable technical professionals to quickly and easily
diagnose problems, manage systems, and enhance the performance of networks and
personal computers. This line of more than a dozen products, which address
needs of the same IT professionals to which the Company sells CBT products,
includes THE TROUBLESHOOTER, a comprehensive diagnostic tool for PCs and file
servers, and RESCUE PROFESSIONAL, a data recovery solution. The Company also
develops and markets offline browsing and metasearching products for use on the
Internet.
The Company sells its products primarily through its direct sales
operations in Clearwater, Florida and Dublin, Ireland, as well as through other
distribution channels, including its electronic storefront and original
equipment manufacturers (OEMs). The Company also has alliances with other
computer software companies to incorporate bundled versions of the Company's
Internet content management products with the products of such other companies.
As of December 31, 1997, the Company had an accumulated deficit of
approximately $16.4 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 technological change and risk of
obsolescence, its ability to develop, acquire or in-license new products to
offer a more complete library of CBT products, increased competition due to lack
of significant barriers to entry into this rapidly evolving market, the
Company's ability to attract and retain key personnel and the successful
integration of the operations and businesses of acquired companies, including
its international operations.
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.
F-7
<PAGE>
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 and
1997, 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.
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
and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Furniture $ 215,332 $ 334,163
Computer software and hardware 1,170,753 1,349,147
Leasehold improvements 24,617 61,713
----------- ------------
1,410,702 1,745,023
Less - Accumulated depreciation (346,726) (677,912)
----------- ------------
Property and equipment, net $ 1,063,976 $ 1,067,111
----------- ------------
----------- ------------
</TABLE>
F-8
<PAGE>
OTHER ASSETS
Other assets is primarily composed of goodwill and other intangibles
related to the acquisition of Lan Professional, Inc. (see Note 8). Such assets
will be amortized to expense over 3-10 years. Accumulated amortization at
December 31, 1996 and 1997 was $-0- and $12,620, respectively.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Professional Fees $ 258,113 $ 221,344
Salaries/benefits 606,637 624,781
Marketing 34,585 272,327
Acquisition costs -- 306,692
Insurance 130,719 --
Other 363,465 464,538
---------- ----------
Total accrued liabilities $1,393,519 $1,889,682
---------- ----------
---------- ----------
</TABLE>
NET REVENUES
Revenue from the sale of software products is recognized upon shipment, net
of allowances for estimated future returns and for excess quantities in
distribution channels, provided that no significant vendor obligations exist and
collections of accounts receivable are probable. Provisions for sales returns
and exchanges were $0, $124,000 and $208,000 in fiscal 1995, 1996 and 1997,
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. As a result of the LanTec acquisition in September
1997, the Company no longer pays royalties on the CBT products previously
licensed from LanTec.
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 has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," that requires a presentation of basic
earnings per share (basic EPS) and diluted earnings per share (diluted EPS).
Basic EPS excludes dilution and is determined by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if securities and other contracts to issue common stock were
exercised or converted into common stock. There are no differences in basic
EPS and diluted EPS for all periods presented due to the Company incurring net
losses for each of the periods. In February 1998, the Securities and Exchange
Commission issued a Staff Accounting Bulletin revising the guidance on computing
earnings (loss) per share in initial public offerings and other situations.
Accordingly, the Company's historical earnings (loss) per share for 1995
and prior years has been adjusted retroactively.
F-9
<PAGE>
CAPITAL STRUCTURE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information About Capital
Structure." This statement establishes standards for disclosing information
about an entity's capital structure. The Company adopted the provisions of SFAS
No. 129 in 1997. Such adoption did not have a material impact on the Company's
financial position, results of operations or cash flows.
3. FEDERAL INCOME TAXES:
The Company has incurred losses since inception and, therefore, has not
been subject to U.S. federal income taxes. As of December 31, 1997, the Company
has net operating loss carryforwards (NOLs) of approximately $6.5 million
available to reduce future income taxes. These carryforwards begin to expire in
2007. Federal tax laws provide for a limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that could limit
ForeFront's ability to use its NOL and tax credit carryforwards. Certain
transactions during 1996 resulted in an ownership change for federal income tax
purposes.
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 no
assurance of future taxable income, a valuation allowance has been established
to fully offset the deferred tax asset at December 31, 1996 and 1997. The
valuation allowance increased approximately $700,000 over the prior year. The
components of the Company's deferred tax assets as of December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Net operating loss carryforwards $ 1,886,443 $ 2,197,672
Research and development tax credit carryforwards 80,925 170,998
Allowance for returns/deferred revenue/depreciation 209,078 493,369
-------------- --------------
Total deferred tax assets 2,176,446 2,862,039
Less - Valuation allowance (2,176,446) (2,862,039)
-------------- --------------
Net deferred tax asset $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
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
F-10
<PAGE>
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
purchase an aggregate of 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. Through December 31, 1997,
certain warrant holders exercised their rights to purchase 7,104 shares netting
4,878 shares on the execution of a cashless exercise.
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. In July 1997, warrants to purchase
54,673 shares were repriced to have an exercise price of $5.00 per share.
F-11
<PAGE>
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 were 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. In May 1997, the stockholders approved the Amended and
Restated 1996 Stock Option Plan (the "Amended 1996 Plan"), which amended the
1996 Plan by increasing the number of shares subject to the Amended 1996 Plan
to 2,000,000, and authorizing the issuance of up to 750,000 incentive stock
options under Section 422 of the Internal Revenue Code. At December 31, 1996
and 1997, options to purchase 182,407 and 236,604 shares, respectively, were
available for future grants under the Amended 1996 Plan.
In 1996, the stockholders approved the 1996 Non-Employee 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 non-employee director receives an option to purchase 20,000
shares of common stock upon election to the Board of Directors. Each subsequent
year, each non-employee director receives an option to purchase 10,000 shares of
common stock. These 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. 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, 1996
and 1997, options to purchase 488,014, 70,176 and 129,265 shares, respectively,
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 of the Company's Common
Stock 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, $201,050 and $81,100 of this amount as
compensation expense for the years ended December 31, 1995, 1996 and 1997,
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 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:
F-12
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss: As reported $ (451,831) $ (7,332,588) $ (4,128,571)
Pro Forma (376,388) (8,476,163) (5,816,370)
Net loss per share: As reported $ (0.12) $ (1.22) $ (0.63)
Pro Forma (0.10) (1.41) (0.89)
</TABLE>
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 costs to be expected in future
years.
The weighted average fair value of options granted was $2.34, $5.21 and
$4.48 for the years ended December 31, 1995, 1996 and 1997, 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:
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------------- ---------------
<S> <C> <C> <C>
Stock volatility 73% 73% 65%
Risk-free interest rate 6% 6% 6%
Option term 4 years 4 years 4 years
Stock dividend yield -- -- --
</TABLE>
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 $ 8.63
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
Granted 367,000 3.00 919,347 $ 5.14 40,000 $ 3.06
Canceled (426,084) 4.12 (223,544) 4.95 -- --
Exercised (272,467) 2.21 (67,208) 5.00 -- --
----------- ---------- --------
Balance at December 31, 1997 1,016,441 3.64 1,696,188 $ 5.26 60,000 $ 4.92
Exercisable at December 31,
1995 346,784 $1.87 -- --
----------- ---------- --------
----------- ---------- --------
1996 651,463 $3.22 130,531 $ 5.30 11,664 $8.63
----------- ---------- --------
----------- ---------- --------
1997 775,651 $3.55 800,652 $ 4.21 43,332 $5.63
----------- ---------- --------
----------- ---------- --------
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------
Weighted-Avg
Range of Average Weighted-Avg Remaining
Exercise Prices At December 31, 1997 Exercise Price Contractual Life
------------------------------- ------------------------------------------ --------------------- ------------------
<S> <C> <C> <C>
$0.23 22,201 $0.23 4.8 years
$1.13 - 2.63 481,206 $1.74 8.1 years
$3.00 - 7.20 1,953,951 $4.86 8.6 years
$8.00 - 9.50 315,271 $8.17 8.9 years
<CAPTION>
Options Exercisable
------------------------------------------
Range of Average Weighted-Avg
Exercise Prices At December 31, 1997 Exercise Price
------------------------------ ------------------------------------------ ----------------------
<S> <C> <C>
$0.23 22,201 $0.23
$1.13 - 2.63 424,326 $1.67
$3.00 - 7.20 1,134,559 $4.69
$8.00 - 9.50 38,549 $8.67
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In November 1996, 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 were 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 were reserved for issuance during the 1997 offering
period, of which 24,794 shares were issued and 100,000 shares have been
reserved for issuance under the 1998 offering period. 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. COMMITMENTS AND CONTINGENCIES:
LEASE AGREEMENTS.
The Company leases facilities and other equipment under operating leases
that expire or are terminable at the Company's option through 2002. Rental
expense for the years ended December 31, 1995, 1996 and 1997 amounted to
approximately $114,000, $233,000 and $495,000, respectively.
Minimum annual rental payments under these leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 398,000
1999 359,000
2000 344,000
2001 66,000
2002 37,000
--------------
Total $ 1,204,000
--------------
--------------
</TABLE>
F-14
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers and employees 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 for the benefit of his
designated beneficiaries.
CLAIMS
The Company is a party to claims arising in the ordinary course of
business. Management does not believe that the ultimate resolution of these
claims will have a material adverse effect on the Company's results of
operations or financial position.
7. 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 stockholder 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. The Company also executed a note receivable totaling
$54,078 and maturing June 1, 2001 from this unrelated corporation for its
purchase of certain furniture and equipment from the Company.
Receivables also include $45,000 loaned to two officers of the Company.
The notes are due March 31, 2000, are unsecured and bear interest at 6.1%.
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 milestones for the remainder of 1996 and 1997. 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 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. Holders of the Earnout Shares
and Escrow Shares are entitled to voting and dividend rights during the
period such shares are held in escrow. In addition, the Company issued
12,917 shares of the Company's Common Stock to a consultant for services
rendered in connection with the acquisition. 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 was allocated as follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
--------------
--------------
</TABLE>
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 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 of the Company, 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
were released upon the filing of audited financial statements for 1996 by
ForeFront.
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.
LAN PROFESSIONAL, INC.
On September 29, 1997, the Company acquired Lan Professional Inc., an
Ottawa, Canada based Company (LanTec, now ForeFront Canada) in exchange for
$1.8 million in cash and 557,413 shares of the Company's Common Stock which
are issuable upon exchange of an equivalent number of Exchangeable Shares of
LanTec retained by the LanTec shareholders at closing. The holders of the
Exchangeable Shares of LanTec signed a lockup agreement with respect to the
Exchangeable Shares held by them and the 557,413 shares of ForeFront Common
Stock which may be acquired by them upon exchange of the Exchangeable Shares,
prohibiting the sale or transfer of the Exchangeable Shares of LanTec and the
shares of ForeFront Common Stock which may be acquired upon exchange thereof
for a one-year period following the acquisition. A total of 81,687
Exchangeable Shares and $50,000 of the purchase price were deposited and are
held in escrow for one year from the closing date to cover losses due to
breach of representations and warranties.
The shares of the Company's Common Stock issuable upon exchange of the
Exchangeable Shares are reserved for issuance by ForeFront and its transfer
agent. Holders of the Exchangeable Shares are also entitled to dividend rights
on the same basis as holders of the Company's Common Stock. The Company agreed
to register the shares of Common Stock issuable on the exchange of the
Exchangeable Shares prior to the expiration of the one year lockup agreement,
unless an exemption from registration is available at such time.
The acquisition has been accounted for under the purchase method and,
accordingly, the operating results of LanTec have been included in the operating
results since the date of acquisition. The purchase price has been allocated to
the assets purchased and liabilities assumed based upon fair values at the date
of acquisition. The value of the shares
F-16
<PAGE>
issued in conjunction with the acquisition was determined by independent
appraisal resulting in a total purchase price of $4,521,040. The purchase
price was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture and equipment $ 208,647
Purchased software 330,000
Goodwill and other intangibles 332,393
Acquired research and development 3,650,000
------------
Purchase price, net of cash received 4,521,040
------------
------------
</TABLE>
9. GAIN ON SALE OF ASSETS
In September 1997, the Company sold certain of its Internet printing
technologies under development to Hewlett-Packard Company and licensed
additional technologies to be used in connection with ongoing development
efforts of Hewlett-Packard, and recorded a one-time gain of $1.87 million (net
of closing costs). The sale proceeds consisted entirely of cash which was
received by the Company in September 1997.
10. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On March 16, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with CBT Group PLC ("CBT Group") and
Rockets Acquisition Corp., a wholly-owned subsidiary of CBT Group ("Merger
Sub"), pursuant to which the parties agreed that the Merger Sub will, as of
the Effective Time (as defined in the Merger Agreement) merge with and into
the Company. The terms of the Merger Agreement provide that the Company's
stockholders will receive .3137 American Depositary Shares of CBT Group in
exchange for each share of the Company's Common Stock. The obligations of the
parties to consummate the merger contemplated by the Merger Agreement are
subject to certain conditions, including the approval of the merger and the
Merger Agreement by the stockholders of the Company. No assurance can be made
that the merger will be consummated.
F-17
<PAGE>
REPORT OF PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of The ForeFront Group, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
January 30, 1998. Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. This Schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This Schedule has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
S-1
<PAGE>
SCHEDULE II
THE FOREFRONT GROUP, INC.
VALUATION ACCOUNT
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Additions
--------------------------------
Balance at Charged Charged to Balance at
Beginning of (Credited) to Other End of
Year Description Year Expenses Accounts Deduction Year
- ------ ------------------------- --------------- ---------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1995 Allowance for doubtful $ -- $ -- $ -- $ -- $ --
accounts
1996 Allowance for doubtful $ -- $ 138,600 $ -- $ -- $ 138,600
accounts
1997 Allowance for doubtful $ 138,600 $ 267,700 $ -- $ (86,800) $ 319,500
accounts
</TABLE>
S-2
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE FOREFRONT GROUP, INC.
<TABLE>
<CAPTION>
NAMES UNDER
WHICH IT DOES
NAME AND ADDRESS JURISDICTION OF ORGANIZATION BUSINESS
---------------- ----------------------------- ---------------
<S> <C> <C>
1. ForeFront Direct, Inc. Florida
25400 U.S. Highway 19 North, Suite 285
Clearwater, Florida 33763
2. ForeFront Europe Limited Ireland
6-8 Wicklow Street
Dublin 2
Ireland
3. ForeFront Europe LTD United Kingdom
c/o Protege
Kinetec Centre
Theobald Street
Borehamwood, Hertfordshire, UK
4. ForeFront Canada, Inc. Ontario
2285 St. Laurent Blvd., Unit A-7
Ottawa, Ontario K1G 4Z4
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated January 30, 1998 included in
this Annual Report on Form 10-K of The ForeFront Group, Inc. for the year
ended December 31, 1997 in the previously-filed Registration Statements of
The ForeFront Group, Inc. on Form S-8 (Registration Nos. 333-07721, 333-19147
and 333-33995) and Form S-3 (Reg. No. 333-18491).
ARTHUR ANDERSEN LLP
Houston, Texas
March 17, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,628,628
<SECURITIES> 0
<RECEIVABLES> 1,364,879
<ALLOWANCES> (319,500)
<INVENTORY> 168,664
<CURRENT-ASSETS> 8,183,804
<PP&E> 1,745,023
<DEPRECIATION> (677,912)
<TOTAL-ASSETS> 10,008,111
<CURRENT-LIABILITIES> 3,303,847
<BONDS> 0
0
0
<COMMON> 66,605
<OTHER-SE> 6,633,001
<TOTAL-LIABILITY-AND-EQUITY> 10,008,111
<SALES> 18,407,770
<TOTAL-REVENUES> 18,407,770
<CGS> 3,027,289
<TOTAL-COSTS> 24,648,265
<OTHER-EXPENSES> 2,111,924
<LOSS-PROVISION> 267,700
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,128,571)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,128,571)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,128,571)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
