<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27438
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THE FOREFRONT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0365256
(State or other jurisdiction of (IRS Employers Identification No.)
incorporation or organization)
1360 POST OAK BLVD., SUITE 2050
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER: (713) 961-1101
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES /X/ NO / /
The number of shares of the issuer's Common Stock, par value $.01 per
share, outstanding as of April 20, 1998: 6,876,609
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<PAGE>
THE FOREFRONT GROUP, INC.
FORM 10-Q
March 31, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements Of Operations . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements Of Cash Flows . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, March 31,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,628,628 $ 7,999,989
Accounts receivable, net of allowance of $319,500 and 1,045,379 1,001,787
$254,000
Inventory 168,664 88,565
Prepaid expenses and other 341,133 380,239
------------ ------------
Total current assets 8,183,804 9,470,580
NOTES RECEIVABLE, related parties 99,078 95,716
FURNITURE AND EQUIPMENT, net of accumulated
depreciation of $677,912 and $788,241 1,067,111 1,055,416
PURCHASED SOFTWARE, net of accumulated
amortization of $165,510 and $193,010 302,500 275,000
OTHER ASSETS, net of accumulated amortization of $12,620
and $25,240 355,618 712,288
------------ ------------
Total assets $ 10,008,111 $ 11,609,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 713,376 $ 824,359
Accrued liabilities 1,889,682 2,001,064
Current portion of deferred revenue 700,789 396,433
------------ ------------
Total current liabilities 3,303,847 3,221,856
DEFERRED REVENUE 4,658 ---
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none outstanding
Common stock, $.01 par value, 20,000,000
shares authorized, 6,760,586 and 6,917,949
shares issued; 6,578,313 and 6,735,676 shares
outstanding 66,605 68,178
Additional paid-in capital 23,156,442 23,824,586
Deferred compensation (112,181) (97,181)
Other comprehensive income (11,738) (37,278)
Accumulated deficit (16,397,672) (15,369,311)
Treasury stock, 82,145 shares at cost (1,850) (1,850)
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Total stockholders' equity 6,699,606 8,387,144
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Total liabilities and stockholders' equity $ 10,008,111 $ 11,609,000
------------ ------------
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
For the Three Months Ended
March 31,
--------------------------
1997 1998
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<S> <C> <C>
NET REVENUES $ 4,151,907 $5,903,139
COST OF PRODUCT LICENSES 883,284 452,159
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Gross Profit 3,268,623 5,450,980
OPERATING EXPENSES
Selling and marketing 3,392,405 3,349,462
General and administrative 641,429 669,428
Research and development 687,622 460,086
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Operating income (loss) (1,452,833) 972,004
INTEREST INCOME 68,211 80,357
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Net income (loss) before taxes (1,384,622) 1,052,361
PROVISION FOR INCOME TAXES -- 24,000
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Net income (loss) $(1,384,622) $1,028,361
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BASIC INCOME (LOSS) PER SHARE $ (0.22) $ 0 .14
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DILUTED INCOME (LOSS) PER SHARE $ (0.22) $ 0 .12
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SHARES USED IN COMPUTING BASIC
INCOME (LOSS) PER SHARE 6,199,504 7,318,398
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----------- ----------
SHARES USED IN COMPUTING DILUTED
INCOME (LOSS) PER SHARE 6,199,504 8,866,759
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</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
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THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
For the Three Months
Ended March 31,
--------------------------
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,384,622) $1,028,361
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 157,278 150,449
Compensation expense and amortization of deferred compensation
related to certain stock options 31,100 15,000
Changes in operating assets and liabilities:
(Increase) decrease in receivables (118,415) 46,954
Decrease in inventory 62,570 80,099
Increase in prepaid expenses (49,883) (39,106)
Increase in other assets (13,000) (369,290)
Increase (decrease) in accounts payable and accrued
liabilities (107,464) 222,365
Increase (decrease) in deferred revenue 117,156 (309,014)
----------- ----------
Net cash provided (used) by operating activities (1,305,280) 825,818
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (154,604) (98,634)
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Net cash used by investing activities (154,604) (98,634)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 7,403 669,717
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Net cash provided by financing activities 7,403 669,717
EFFECT OF EXCHANGE RATE CHANGES ON CASH 4,995 (25,540)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,447,486) 1,371,361
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,204,213 6,628,628
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,756,727 $7,999,989
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Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ 15,000
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</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
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THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, and pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and note
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made herein are adequate to make
the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 1997 included in the Company's
1997 Annual Report on Form 10-K. All intercompany accounts and transactions
have been eliminated in consolidation. The unaudited interim consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim periods
presented and all such adjustments are of a normal recurring nature. Interim
results are not necessarily indicative of results for a full year.
NOTE 2. COMPUTATION OF EARNINGS PER SHARE AND COMMON EQUIVALENT SHARES
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 the quarter ended March 31, 1997 due to the Company
incurring a net loss in that period.
NOTE 3. 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. At March 31, 1998, other assets
includes approximately $369,000 of deferred merger costs related to the
transaction.
7
<PAGE>
In April, 1998, the Company also entered into a separate license agreement
with CBT USA, a subsidiary of CBT Group, whereby the Company has the right to
market certain CBT products on terms and conditions consistent with CBT USA's
existing reseller agreements.
NOTE 4. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This standard establishes new standards
for the presentation and disclosure of other comprehensive income. The
Company's other comprehensive income consists entirely of cumulative
translation adjustments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. PREDICTION OF
FUTURE RESULTS ARE INHERENTLY UNCERTAIN. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENT. SUCH RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, CONDITIONS IN THE GENERAL
ECONOMY OR THE SOFTWARE INDUSTRY; CONTINUED DEMAND FOR THE COMPANY'S COMPUTER
BASED TRAINING ("CBT") AND UTILITY PRODUCTS; THE CONTINUED RAPID GROWTH OF
THE CBT MARKET; THE TIMELY DEVELOPMENT, LICENSING, ACQUISITION, RELEASE AND
MARKET ACCEPTANCE OF NEW PRODUCTS; THE MANAGEMENT OF GROWTH AND INTEGRATION
OF ACQUISITIONS; THE ABILITY TO ADJUST SPENDING IN A TIMELY MANNER IN THE
EVENT OF ANY UNEXPECTED SHORTFALL IN REVENUE; AND OTHER RISKS DESCRIBED FROM
TIME TO TIME IN THE COMPANY'S SEC REPORTS AND FILINGS FILED WITH THE SEC.
READERS ARE ALSO ENCOURAGED TO REFER TO THE COMPANY'S 1997 ANNUAL REPORT ON
FORM 10-K FOR FURTHER DISCUSSION OF THE COMPANY'S BUSINESS AND THE RISKS AND
OPPORTUNITIES ATTENDANT THERETO.
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 CBT products on CD-ROMs which enable IT
professionals to conveniently prepare for technical certification exams.
Each of the Company's products are 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 the first quarter of 1998, the Company's CBT products accounted
for 75% of the Company's total revenues, with PC/Network utilities
representing 18% of total revenues. Internet products accounted for the
remaining 7% of total Company revenues. The Company derives the majority of
its revenue from its telemarketing operation in Clearwater, Florida, which
currently employs approximately 130 commission-only sales representatives.
In October 1997, the Company opened its European telesales operation in
Dublin, Ireland, which currently employs approximately 36 direct sales
representatives and provides evidence of the Company's ability to replicate
its proprietary sales and marketing methodologies in other markets.
8
<PAGE>
In addition, ForeFront also distributes certain of its products through its
proprietary electronic storefront system, internally referred to as INSTANTX,
and other online resellers over the Internet, international resellers and
distributors and original equipment manufacturers ("OEMs"). The Company also
markets certain of its products through alliances with other computer
software companies and publishers that incorporate bundled versions of the
Company's products with the products of such other companies.
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
RESULTS OF THE OPERATIONS
The Company's revenues increased $1,751,232 or 42% from $4,151,907 in
the three months ended March 31, 1997 to $5,903,139 in the comparable 1998
period. For the three months ended March 31, 1997, the Company's revenues
were derived primarily from its direct telesales channel and through OEM
agreements. For the same period in 1998, revenues were generated primarily
from the direct telesales channel, and to a lesser degree through the
Company's electronic storefront. Revenues from the direct telesales channel
increased approximately $2,300,000 or 70%, while revenues from the remaining
channels decreased approximately $550,000 or 62%, primarily reflecting the
Company's increased focus on the CBT products which are primarily sold
through the direct telesales channel and overall lower sales of the Internet
products which were traditionally sold through the retail, OEM and electronic
storefront channels.
Selling and marketing costs decreased $42,943 or 1% from $3,392,405 in
the three months ended March 31, 1997 to $3,349,462 in the comparable 1998
period. The slight decrease is due to the significant expenses incurred in
the first quarter of 1997 for the Internet products, including pre-committed
advertising costs prior to the Company's reorganization in April 1997, offset
by a corresponding increase for the CBT products for sales personnel, sales
commissions and advertising that rose consistently with the increase in sales
of these products. The Company expects to increase its sales and marketing
staff and related expenses for the CBT products in accordance with the
targeted revenue goals and expectations of management. This expected
increase will include expenses for ForeFront Europe Limited, the Company's
Dublin, Ireland based business unit that initiated sales, marketing and
technical support operations in October 1997.
General and administrative costs increased $27,999 or 4% from $641,429
in the three months ended March 31, 1997 to $669,428 in the comparable 1998
period. The slight increase is due to investment in the infrastructure of the
Company commensurate with expanded operations and revenue growth.
The Company's research and development expenses decreased $227,536 or
33% from $687,622 in the three months ended March 31, 1997 to $460,086 in the
comparable 1998 period. The decrease is due to a shift in the Company's
development efforts from the Internet products to the CBT products, resulting
in a significant reduction in the number of R&D personnel and related
expenses for the Internet products in the second quarter of 1997. The
decrease in expenses from the first quarter of 1997 is offset by the addition
of personnel from the Company's acquisition of LanTec (now ForeFront Canada)
in September 1997. The Company expects to maintain its future research and
development expenses for Internet products at a consistent level, but will
incur additional research and development expenses for the CBT products
through its ForeFront Canada office which serves as the hub of the Company's
research and development operations to develop computer based training
software applications.
The Company uses the liability method of accounting for income taxes. As
of December 31, 1997, the Company had net operating loss carryforwards that
offset income taxes in the first quarter of 1998 and may be available to
reduce future income taxes. For financial reporting purposes, a valuation
allowance has been established as of March 31, 1998 and December 31, 1997 to
fully offset the Company's net deferred tax assets, including those related
to carryforwards.
9
<PAGE>
On March 16, 1998, the Company entered into a Merger Agreement with CBT
Group and Rockets Acquisition Corp., a wholly-owned subsidiary of CBT Group,
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.
In April, 1998, the Company also entered into a separate agreement with
CBT USA, a subsidiary of CBT Group whereby ForeFront has the right to market
certain CBT products on terms and conditions consistent with CBT USA's
existing reseller agreement.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of
$7,999,989 and working capital of $6,248,724. During the quarter ended March
31, 1998, net cash provided by operating activities was $825,818 primarily
resulting from net income of $1,028,361. Cash used in investing activities
totaled $98,634 for capital expenditures and cash provided by financing
activities was $669,717 from the exercise of stock options. The Company
believes that its available funds will be sufficient to meet its cash
requirements for the foreseeable future.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to claims arising in the ordinary course of
business. ForeFront's management does not believe that the ultimate
resolution of these claims will have a material adverse effect on
ForeFront's financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
Exhibit Number
--------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization dated March 16,
1998, among CBT Group, plc, Rockets Acquisition
Corporation and the Company, (Exhibit 2.1 to the
Registration Statement on Form S-4 (No 333-51159)
of CBT Group, plc, filed with the SEC on April 27,
1998 (the "S-4"), is hereby incorporated by reference
in its entirety).
2.2 Form of Voting Agreement (Exhibit 2.2 to the S-4 is
hereby incorporated by reference).
2.3 Form of ForeFront Affiliate Agreement (Exhibit 2.3 to
the S-4 is hereby incorporated by reference).
2.4 Form of Certificate of Merger (Exhibit 2.4 to the S-4
is hereby incorporated by reference.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE FOREFRONT GROUP, INC.
Date: May 14, 1998 By: /s/ David Sikora
---------------------------------
David Sikora
President and Chief Executive Officer
Date: May 14, 1998 By: /s/ Ernest D. Rapp
---------------------------------
Ernest D. Rapp
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
12
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EXHIBIT 11.1
THE FOREFRONT GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
FOR THE THREE
MONTHS ENDED
MARCH 31
------------------------
1997 1998
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<S> <C> <C>
Basic weighted average number of common shares outstanding 6,199,504 7,318,398
Add- Shares of common stock assumed issued upon exercise of
stock options using the "treasury stock" method as it
applies to the computation of diluted net income per share -- 1,548,361
----------- ----------
Shares used in computing diluted net income (loss) per share 6,199,504 8,866,759
----------- ----------
----------- ----------
Net income (loss) per share: $(1,384,622) $1,028,361
----------- ----------
----------- ----------
Basic EPS $ (0.22) $ 0.14
----------- ----------
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Diluted EPS $ (0.22) $ 0.12
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,999,989
<SECURITIES> 0
<RECEIVABLES> 1,255,787
<ALLOWANCES> (254,000)
<INVENTORY> 88,565
<CURRENT-ASSETS> 9,470,580
<PP&E> 1,843,657
<DEPRECIATION> (788,241)
<TOTAL-ASSETS> 11,609,000
<CURRENT-LIABILITIES> 3,221,856
<BONDS> 0
0
0
<COMMON> 68,178
<OTHER-SE> 8,318,966
<TOTAL-LIABILITY-AND-EQUITY> 11,609,000
<SALES> 5,903,139
<TOTAL-REVENUES> 5,903,139
<CGS> 452,159
<TOTAL-COSTS> 4,931,135
<OTHER-EXPENSES> 80,357
<LOSS-PROVISION> 15,300
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,052,361
<INCOME-TAX> 24,000
<INCOME-CONTINUING> 1,028,361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,028,361
<EPS-PRIMARY> .14
<EPS-DILUTED> .12
</TABLE>
